-----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, N6SofNaY36VON6RubnitiCS1i+qReNC8X8CWfxdekHJUMoIPmqVyhSv2tFTBldbb FyqDHlxQF9KculNxvx4geg== 0000925600-98-000014.txt : 19980402 0000925600-98-000014.hdr.sgml : 19980402 ACCESSION NUMBER: 0000925600-98-000014 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980401 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GORAN CAPITAL INC CENTRAL INDEX KEY: 0000925600 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-24366 FILM NUMBER: 98585142 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/A 1 GORAN 1997 AMENDED 10-K FORM 10-K/A 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, 1997. ( ) 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) 259-6400 (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: (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 2,714,062 of the Issuer's Common Stock held by nonaffiliates, as of March 20, 1998 was $77,350,767 (US). The number of shares of Common Stock of the Registrant, without par value, outstanding as of March 20, 1998 was 5,730,276. Documents Incorporated By Reference: Portions of the Annual Report to Shareholders and the Proxy Statement for the 1998 Annual Meeting of Shareholders are incorporated into Parts II and III. Exhibit Index on Page 46. Page 1 of 55 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,
1993 1994 1995 1996 1997 Average .7733 .7322 .7287 .7339 .7222 Period End .7544 .7129 .7325 .7301 .6995 High .8046 .7642 .7465 .7472 .7351 Low .7439 .7097 .7099 .7270 .6938
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, 1997 Page PART I ITEM 1. Business ....................................................... 4 Forward Looking Statements - Safe Harbor Provisions............. 35 ITEM 2. Properties...................................................... 41 ITEM 3. Legal Proceedings............................................... 42 ITEM 4. Submission of Matters to a Vote of Security Holders............. 42 PART II ITEM 5. Market For Registrant's Common Equity And Related Shareholder Matters............................................. 43 ITEM 6. Selected Consolidated Financial Data............................ 44 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 45 ITEM 8. Financial Statements and Supplementary Data..................... 45 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................. 45 PART III ITEM 10. Directors and Executive Officers of the Registrant.............. 45 ITEM 11. Executive Compensation.......................................... 45 ITEM 12. Security Ownership of Certain Beneficial Owners and Management.. 45 ITEM 13. Certain Relationships and Related Transactions.................. 45 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports Form 8-K... 46 SIGNATURES ................................................................ 55 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 subsidiaries 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 IGF and GGS Management Holdings, Inc. ("GGS Holdings") and GGS Management, Inc. ("GGS") which are the holding company and management company for Pafco and Superior. 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. In 1997, the Company discontinued the operations of SIGF with a sale of such operations expected in early 1998. 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. -4- Goran Capital, Inc., a specialty property and casualty insurer, underwrites and markets nonstandard private passenger automobile insurance and crop insurance. Through its Subsidiaries, the Company writes business in the United States exclusively through independent agencies and seeks to distinguish itself by offering high quality, technology based services for its agents and policyholders. The Company had consolidated Gross Premiums Written of approximately $449 million for the twelve months ended December 31, 1997. Based on the Company's Gross Premiums Written in 1997, the Company believes that it is the tenth largest underwriter of nonstandard automobile insurance in the United States. Based on premium information compiled in 1996 by the NCIS, the Company believes that IGF is the fourth largest underwriter of MPCI in the United States. The following table sets forth the premiums written by line of business for the periods indicated (amounts exclude commercial premiums from discontinued operations): GORAN CAPITAL INC. For The Years Ended December 31,
(In Thousands) 1995 1996 1997 Nonstandard Automobile (1) Gross Premiums Written $49,005 $187,176 $323,915 Net Premiums Written 37,302 186,579 256,745 Crop Hail Gross Premiums Written $16,966 $27,957 $38,349 Net Premiums Written 11,608 23,013 20,796 MPCI (2) Gross Premiums Written $53,408 $82,102 $88,052 Net Premiums Written --- --- -- Finite Reinsurance Gross Premiums Written $27,224 $2,141 $(1,334) Net Premiums Written 32,912 4,186 4,355 Total (3) Gross Premiums Written $146,603 $299,376 $448,982 Net Premiums Written $81,822 $213,778 $281,896
(1) Does not reflect net premiums written for Superior for the year ended December 31, 1995 and for the four months ended April 30, 1996. For the year ended December 31,1995, Superior and its subsidiaries had gross premiums written of $94.8 million and net premiums written of $94.1 million. For the four months ended April 30, 1996, Superior and its subsidiaries had gross premiums written of $44.0 million and net premiums written of $43.6 million. (2) 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". (3) 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". -5- Nonstandard Automobile Insurance Industry Background The Company, through its Subsidiaries, Pafco and Superior, is engaged in the writing of insurance coverage on automobile physical damage and liability policies for "nonstandard risks." 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 $19 billion in annual premium volume for 1997. Strategy The Company has multiple strategies with respect to its nonstandard automobile insurance operations, including: o 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. o The Company will seek to expand the multi-tiered marketing approach currently employed in certain states in order to offer to its independent agency network a broader range of products with different premium and commission structures. o 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. o 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. o The Company encourages agencies to place a large share of their profitable business with its subsidiaries by offering, in addition to fixed commissions, a contingent commission based on a combination of volume and profitability. o The Company responds to claims in a manner designed 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. 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 300,218 combined policies of Pafco and Superior in force on December 31, 1997, fewer than approximately 10% had policy limits in excess of these basic limits of coverage. Of the 72,626 policies of Pafco in force on December 31, 1997, approximately 81.9% had policy periods of six months or less. Of the approximately 227,592 policies of Superior in force as of December 31, 1997, approximately 62.5% had policy periods of six months and approximately 37.5% 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 -6- 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 a product similar to the Superior product. Marketing The Company's nonstandard automobile insurance business is concentrated in the states of Florida, California, Virginia, Indiana and Georgia and also writes nonstandard automobile insurance in 14 additional states, with plans to continue to expand selectively into additional states. The Company will select states for expansion based on a number of criteria, including the size of the nonstandard automobile insurance market, state-wide loss results, competition and the regulatory climate. The following table sets forth the geographic distribution of Gross Premiums Written for the Company for the periods indicated including Gross Premiums Written for Superior prior to its acquisition by the Company on April 30, 1996. -7- Goran Capital, Inc. and Superior Insurance Company (Combined) Year Ended December 31, (in thousands)
State 1995 1996 1997 - ----- ---- ---- ---- Arkansas $1,796 $2,004 $1,539 California 15,350 25,131 59,819 Colorado 9,257 10,262 9,865 Florida 54,535 97,659 141,907 Georgia 5,927 7,398 11,858 Illinois 2,483 2,994 3,541 Indiana 13,842 16,599 17,227 Iowa 3,832 5,818 7,079 Kentucky 7,840 11,065 9,538 Mississippi 2,721 2,250 2,830 Missouri 8,513 13,423 9,705 Nebraska 3,660 5,390 6,613 Nevada --- --- 4,273 Ohio 3,164 3,643 3,731 Oklahoma 317 2,559 3,418 Oregon --- --- 2,302 Tennessee 332 (2) --- Texas 3,464 10,122 7,192 Virginia 5,035 14,733 21,446 Washington 1,693 106 32 ------- ------- ------- Total $143,761 $231,154 $323,915 ======= ======= =======
The Company markets its nonstandard products exclusively through approximately 6,000 independent agencies and focuses its 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 provider 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 27 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 completing its development of computer software that will provide on-line communication with its agency force. In addition, to deliver prompt service while ensuring consistent underwriting, the Company offers rating software to its agents in some states which permits them to evaluate risks in their offices. The agent has the authority to sell and bind insurance coverages in accordance with procedures established by the Company, which is a common practice in the nonstandard automobile 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." -8- The Company compensates its agents by paying a commission based on a percentage of premiums produced. The Company 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. The Company believes that the combination of Pafco with Superior and its two Florida-domiciled insurance subsidiaries allows 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 its major states. The Company intends to continue the expansion of 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 integrated its automated underwriting process with the functions performed by its agency force. For example, the Company has a rating software package for use by agents in some states. In many instances, this software package, combined with agent access to the automated retrieval of motor vehicle reports, ensures accurate underwriting and pricing at the point of sale. The Company believes the automated rating and underwriting system provides a significant competitive advantage because it (i) improves efficiencies for the agent and the Company, thereby reenforcing the agents' commitment 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, Expense Ratios and Combined Ratios for the periods indicated for the nonstandard automobile insurance business of the Company. The ratios exclude the effects of Superior prior to the acquisition by the Company on April 30, 1996. The Ratios shown in the table below are computed based upon GAAP. -9- Years Ended December 31, ----------------------------
1995 1996 1997 Loss and LAE Ratio 73.8% 73.7% 78.0% Underwriting Expense Ratio, net of billing fees 32.3% 23.2% 22.7% ----- ----- ----- Combined Ratio 106.1% 96.9% 100.7% ====== ===== ======
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 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. 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 claim-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, appropriate 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. -10- Effective January 1, 1997, Pafco and Superior ceded 20% of its nonstandard automobile business written during the first three quarters of 1997 and 25% during the fourth quarter in accordance with a quota share Reinsurance agreement. 90% of the cession was with Vesta Fire Insurance Company (rated "A" by A.M. Best) and 10% was with Granite Re. Effective January 1, 1998, the cession rate was changed to a minimum of 10% and includes the same reinsurers. In 1997, Pafco and Superior maintained casualty excess of loss reinsurance 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 $5,000,000. Amounts recoverable from reinsurers relating to nonstandard automobile operations as of December 31, 1997 follows:
Reinsurance Recoverables as of A.M. Best December 31, 1997 (1) Reinsurers Rating (in thousands) Everest Reinsurance Company A (2) 1,880 Federal Government A+ (3) 1,248 Sentinel Reinsurance Company, Ltd. 345 Vesta Fire Insurance Company A 12,939
(1) Only recoverable greater than $200,000 are shown. Total third party nonstandard automobile reinsurance recoverables as of December 31, 1997 were approximately $31,932,000. (2) An A.M. Best Rating of "A" is the third highest of 15 ratings. (3) An A.M. Best Rating of "A+" is the second highest of 15 ratings. On April 29, 1996, Pafco retroactively ceded all of its commercial business relating to 1995 and previous years to Granite Re, with an effective date of January 1, 1996. Approximately $3,519,000 and $2,380,000 of loss and loss adjustment expense reserves and unearned premium reserves, respectively, were ceded and no gain or loss recognized. Effective January 1, 1998, Granite Re ceded the 1995 and prior commercial business back to Pafco. Approximately $1,803,000 in loss and loss adjustment expense reserves were ceded back to Pafco and no gain or loss was recognized. On April 29, 1996, Pafco also entered into a 100% quota share reinsurance agreement with Granite Re, whereby all of Pafco's commercial business from 1996 and thereafter was ceded effective January 1, 1996. Neither Pafco nor Superior has any facultative Reinsurance with respect to its nonstandard automobile insurance business. Competition The Company competes with both large national and smaller regional companies in each state in which it operates. The Company's competitors include other companies 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 -11- 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, occasionally been supported by the federal government in the form of ad hoc relief bills providing low interest agricultural loans and direct payments. Prior to 1980, MPCI was available only on major crops in major producing areas. In 1980, Congress expanded the scope and coverage of the MPCI program. In addition, the delivery system for MPCI was expanded to permit private insurance companies and licensed agents and brokers to sell MPCI policies and the FCIC was authorized to reimburse participating companies for their administrative expenses and to provide federal Reinsurance for the majority of the risk assumed by such private companies. Although expansion of the federal crop insurance program in 1980 was expected to make crop insurance the farmer's primary risk management tool, participation in the MPCI program was only 32% of eligible acreage in the 1993 crop year. Due in part to low participation in the MPCI program, Congress provided an average of $1.5 billion per year in ad hoc disaster payments over the six years prior to 1994. In view of the combination of low participation rates in the MPCI program and large federal payments on both crop insurance (with an average loss ratio of 147%) and ad hoc disaster payments since 1980, Congress has, since 1990, considered major reform of its crop insurance and disaster assistance policies. The 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 USDA offices which has been eliminated for the 1998 crop year. The Federal Agriculture Improvement and Reform Act of 1996 ("the 1996 Reform Act"), signed into law by President Clinton in April 1996, limited the role of the USDA offices in the delivery of MPCI coverage beginning in July 1996, which was the commencement of the 1997 crop year, and also eliminated the linkage between CAT Coverage and qualification for certain federal farm program benefits. This limitation should provide the Company with the opportunity to realize increased revenues from the distribution and servicing of its MPCI product. In accordance with the 1996 Reform Act, the USDA announced in July 1996, the following 14 states in which CAT Coverage will no longer be available through USDA offices but rather will be solely available through private companies: Arizona, Colorado, Illinois, Indiana, Iowa, Kansas, Minnesota, Montana, Nebraska, North Carolina, North Dakota, South Dakota, Washington and Wyoming. Through June 1996, the FCIC 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 -12- 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. On June 9, 1997, the Secretary of Agriculture announced that the USDA would no longer provide CAT Coverage through USDA offices in any state effective for the 1998 crop year. This is to be implemented by a transferring of CAT policies to the various members of the crop insurance industry. At this time, the Company has been preliminarily informed that it will receive approximately 17,000 policies that were formerly written by USDA offices, although there can be no assurance that the Company will receive this number of policies. Based on historical, per-policy averages, the Company has preliminarily estimated that it will receive an additional approximate $2 to $3 million in premium from such transferred policies, however, there can be no assurance that this number will be realized. -13- Strategy The Company has multiple strategies for its crop insurance operations, including the following: o The Company seeks 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. o The Company also limits the risks associated with crop insurance through selective underwriting of crop risks based on its historical loss experience data base. o The Company continues to develop and maintain a proprietary knowledge-based underwriting system which utilizes a database of Company-specific underwriting rules. o 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. o Unlike many of its competitors, the Company employs approximately 89 full-time claims adjusters, most of whom are agronomy-trained, to reduce the cost of losses experienced by IGF. o The Company stops selling its crop hail policies after certain selected dates to prevent farmers from adversely selecting against IGF when a storm is forecast or hail damage has already occurred. o The Company continues to explore growth opportunities and product diversification through new specialty coverages, including Crop Revenue Coverage (CRC) and specific named peril crop insurance. Further, IGF is in the initial stages of opening new markets and attracting new customers by developing timber, crop completion and agricultural production interruption coverages. o The Company continues to explore new opportunities in administrative efficiencies and product underwriting made possible 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 MPCI is a federally subsidized program which is designed to provide participating farmers who suffer insured crop damage with funds needed to continue operating and plant crops for the next growing season. All of the material terms of the MPCI program and of the participation of private insurers, such as the Company, in the program are set by the FCIC under applicable law. MPCI provides coverage for insured crops against substantially all natural perils. Purchasing an MPCI policy permits a farmer to insure against the risk that his crop yield for any growing season will be less than 50% to 75% (as selected by the farmer at the time of policy application or renewal) of his historic crop yield. If a farmer's crop yield for the year is greater than the yield coverage he selected, no payment is made to the farmer under the MPCI program. However, if a farmer's crop yield for the year is less than the yield coverage selected, MPCI entitles the farmer to a payment equal to the yield shortfall multiplied by 60% to 100% of the price for such crop (as selected by the farmer at the time of policy application or renewal) for that season as set by the FCIC. In order to encourage farmers to participate in the MPCI program and thereby reduce dependence on traditional disaster relief measures, the 1994 Reform Act established CAT Coverage as a new minimum level of MPCI coverage, which farmers may purchase upon payment of a fixed administrative fee of $50 per policy instead of any premium. CAT Coverage insures 50% of historic crop yield at 60% of the FCIC-set crop price for the applicable commodities standard unit of measure, i.e., bushel, pound, etc. CAT Coverage can be obtained from private insurers such as the -14- Company. In addition to CAT Coverage, MPCI policies that provide a greater level of protection than the CAT Coverage level are also offered ("Buy-up Coverage"). Most farmers purchasing MPCI have historically purchased at Buy-up Coverage levels, with the most frequently sold policy providing coverage for 65% of historic crop yield at 100% of the FCIC-set crop price per bushel. Buy-up Coverages require payment of a premium in an amount determined by a formula set by the FCIC. Buy-up Coverage can only be purchased from private insurers. The Company focuses its marketing efforts on Buy-up Coverages, which have higher premiums and which the Company believes will continue to appeal to farmers who desire, or whose lenders encourage or require, revenue protection. The number of MPCI Buy-up policies written has historically tended to increase after a year in which a major natural disaster adversely affecting crops occurs and to decrease following a year in which favorable weather conditions prevail. The Company, like other private insurers participating in the MPCI program, generates revenues from the MPCI program in two ways. First, it markets, issues and administers policies, for which it receives administrative fees; and second, it participates in a profit-sharing arrangement in which it receives from the government a portion of the aggregate profit, or pays a portion of the aggregate loss, in respect of the business it writes. The Company's share of profit or loss on the MPCI business it writes is determined under a complex profit sharing formula established by the FCIC. Under this formula, the primary factors that determine the Company's MPCI profit or loss share are (i) the gross premiums the Company is credited with having written, (ii) the amount of such credited premiums retained by the Company after ceding premiums to certain federal reinsurance pools and (iii) the loss experience of the Company's insureds. The following discussion provides more detail about the implementation of this profit sharing formula. The Company recently began offering a new product in its crop insurance business called Crop Revenue Coverage ("CRC"). In contrast to standard MPCI coverage, which features a yield guarantee or coverage for the loss of production, CRC provides the insured with a guaranteed revenue stream by combining both yield and price variability protection. CRC protects against a grower's loss of revenue resulting from fluctuating crop prices and/or low yields by providing coverage when any combination of crop yield and price results in revenue that is less than the revenue guarantee provided by the policy. CRC was approved by the FCIC as a pilot program for revenue insurance coverage plans for the 1996 Crop Year and has been available for corn and soybeans in all counties in Iowa and Nebraska since 1996. CRC policies represented approximately 30% of the combined corn policies written by IGF in Iowa and Nebraska since 1996. Since July 1996, CRC was made available for winter wheat in the entire states of Kansas, Michigan, Nebraska, South Dakota, Texas and Washington and in parts of Montana. In May 1997, the FCIC announced that CRC will be expanded to include wheat in twenty-five additional states. Currently, CRC represents approximately 7% of all of the Company's wheat policies. 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. For the 1997 Crop Year, the Company received from the FCIC an expense reimbursement payment equal to 25% of Gross -15- Premiums Written in respect of each CRC policy it writes. The MPCI Buy-up Expense Reimbursement Payment is currently administratively established by FCIC in the absence of a applicable legislation. This expense reimbursement payment was reduced from 27% in 1996 to 23.25% in 1998. 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. 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(R) product which combines the application and underwriting process for MPCI and hail coverages. The HAILPLUS(R) product tends to produce less volatile loss ratios than the stand alone product since the combined product generally insures a greater number of acres, thereby spreading the risk of damage over a larger insured area. Approximately 50% of IGF's hail policies are written in combination with MPCI. Although both crop hail and MPCI provide insurance against hail damage, under crop hail coverages farmers can receive payments for hail damage which would not be severe enough to require a payment under an MPCI policy. The Company believes that offering crop hail insurance enables it to sell more MPCI policies than it otherwise would. 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, sugar cane, sugar beets, citrus, tomatoes and onions and are generally written on terms that are specific to the kind of crops and farming practices 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. IGF is currently in the initial stages of opening new markets and attracting new customers by developing timber, crop completion and agricultural production interruption coverages. 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 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 -16- 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 that emerges from an MPCI Retention is set by the FCIC and generally is adjusted from year to year. For 1995, 1996 and 1997 crop years, the FCIC increased the maximum potential profit share of private insurers for risks allocated to the Commercial Pool above the maximum potential profit share set for 1994, without increasing the maximum potential share of loss for risks allocated to that pool for 1995. This change increased the potential profitability of risks allocated to the Commercial Pool by private insurers. -17- The following table presents MPCI Premiums, MPCI Imputed Premiums and underwriting gains or losses of IGF for the periods indicated: (in thousands) Years Ended December 31, ---------------------------
1995 1996 1997 MPCI premiums $53,408 $82,102 $88,052 MPCI imputed premiums $19,552 $38,944 $33,294 Gross underwriting gain $10,870 $15,801 $30,325 Net private third party reinsurance expense and other (1,217) (3,524) (3,736) ------ ------ ------ Net underwriting gain $9,653 $12,277 $26,589 ===== ====== ======
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. For 1995, 1996 and 1997, the maximum Buy-up Expense Reimbursement Payment was set at 31%, 31% and 29%, respectively, of the MPCI Premium. Historically, the FCIC has paid the maximum MPCI Buy-up Expense Reimbursement Payment rate allowable under law, although no assurance can be given that this practice will continue. 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. For the 1998 crop year, the Buy-up Expense Reimbursement payment has been set at 27%. Farmers are required to pay a fixed administrative fee of $50 per policy (maximum of $100 per county) 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: (in thousands) Years Ended December 31, -------------------------
1995 1996 1997 CAT Coverage Fees (1) $1,298 $1,181 $1,191 Buy-up Expense Reimbursement Payments 16,366 24,971 24,788 CAT LAE Reimbursement Payments and MPCI Excess LAE Reimbursement Payments 3,427 5,753 4,565 ----- ----- ----- Total $21,091 $31,905 $30,544 ====== ====== ======
-18- (1) See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company" for a discussion of the accounting treatment accorded to the crop insurance business. Third-Party Reinsurance In Effect for 1997 In order to reduce the Company's potential loss exposure under the MPCI program, the Company purchases stop loss Reinsurance from other private reinsurers 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 reinsurers 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 40% of business, 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 net losses in excess of an 80% pure Loss Ratio to 130% at 95% coverage with IGF retaining the remaining 5%. 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 160% 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 therefor 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 ceded premiums in excess of $250,000 on crop hail and named perils and for any affiliates. -19- Year Ended December 31, 1997 (1) (in thousands, except footnotes)
A.M. Best Ceded Reinsurers Rating Premiums Folksam International Insurance Co. Ltd. (2) A- $746 Frankona Ruckversicherungs AG (3) A $415 Insurance Corporation of Hannover A- $268 Liberty Mutual Insurance Co. (UK) Ltd. A $433 Monde Re (4) Not Rated $4,213 Munich Re (5) A+ $3,004 National Grange A- $736 Partner Reinsurance Company Ltd. A $1,112 R & V Versicherung AG (4) Not Rated $1,286 Reinsurance Australia Corporation, Ltd. (REAC) (4) Not Rated $4,956 Scandinavian Reinsurance Company Ltd. A+ --- - -------- (1) For the twelve months ended December 31, 1997, total ceded premiums were $17,169. (2) An A.M. Best rating of "A-" is the fourth highest of 15 ratings. (3) An A.M. Best rating of "A" is the third highest of 15 ratings. (4) Monde Re is owned by REAC. (5) An A.M. Best rating of "A+" is the second highest of 15 ratings.
As of December 31, 1997, IGF's Reinsurance recoverables aggregated approximately $268,766 excluding recoverables from the FCIC. Marketing; Distribution Network IGF markets its products to the owners and operators of farms in 42 states through approximately 2,400 agents associated with approximately 925 independent insurance agencies, with its primary geographic concentration in the states of Iowa, Texas, Illinois, Kansas and Minnesota. The Company has, however, diversified outside of the Midwest and Texas in order to reduce the risk associated with geographic concentration. IGF is licensed in 23 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 1997. Through its agencies, IGF targets farmers with an acreage base of at least 1,000 acres. Such larger farms typically have a lower risk exposure since they tend to utilize better farming practices and to have noncontiguous acreage, thereby making it less likely that the entire farm will be affected by a particular occurrence. Many farmers with large farms tend to buy or rent acreage which is increasingly distant from the central farm location. Accordingly, the likelihood of a major storm (wind, rain or hail) or a freeze affecting all of a particular farmer's acreage decreases. -20- The following table presents MPCI and crop hail premiums written by IGF by state for the periods indicated. (in thousands) -----------------------------------------------------------------------
Year Ended Year Ended December 31, 1996 December 31, 1997 -------------------------------- --------------------------------- State Crop Hail MPCI Total Crop Hail MPCI Total - ----- --------- ---- ----- --------- ---- ----- Alabama $97 $2,951 $3,048 $144 $1,707 $1,851 Arkansas 314 1,784 2,098 652 2,270 2,922 California 1,164 1,992 3,156 1,062 4,418 5,480 Colorado 1,651 3,334 4,985 1,309 3,183 4,492 Florida --- 1,738 1,738 19 1,809 1,828 Illinois 526 11,228 11,754 655 12,221 12,876 Indiana 115 3,870 3,985 92 4,540 4,632 Iowa 6,590 15,205 21,795 7,628 12,949 20,577 Kansas 662 5,249 5,911 832 6,278 7,110 Louisiana 28 1,674 1,702 41 856 897 Minnesota 2,300 2,244 4,544 4,405 3,469 7,874 Mississippi 482 2,222 2,704 509 2,711 3,220 Missouri 556 2,427 2,983 383 1,711 2,094 Montana 5,632 1,554 7,186 2,879 1,854 4,733 Nebraska 1,567 3,206 4,773 1,597 3,160 4,757 North Dakota 2,294 2,796 5,090 787 3,014 3,801 Oklahoma 403 1,436 1,839 451 1,127 1,578 South Dakota 1,457 1,106 2,563 932 1,541 2,473 Texas 1,262 12,361 13,623 3,211 1,593 4,804 Wisconsin 370 2,187 2,557 407 1,479 1,886 All Other 487 1,538 2,025 10,354 16,162 26,516 ----- ----- ----- ------ ------ ------ Total $27,957 $82,102 $110,059 $38,349 $88,052 $126,401 ====== ====== ======= ====== ====== =======
-21- 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's regional managers 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, crop hail and named peril 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, most of whom 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 designed 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 available 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. -22- Competition The crop insurance industry is highly competitive. The Company competes against other private companies for MPCI, crop hail and named peril coverage. 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 1997 crop year, the number of insurance companies having agreements with the FCIC to sell and service MPCI policies has declined from fifty to thirty-six. The Company believes that IGF is the fourth largest MPCI crop insurer in the United States based on premium information compiled in 1996 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. 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 Company's reserves are reviewed by independent actuaries on a semi-annual basis. The Company's recorded Loss Reserves are certified by an independent actuary for each calendar year. The following loss reserve development table illustrates the change over time of reserves established for loss and loss expenses as of the end of the various calendar years for the nonstandard automobile segment of the Company. The table includes the loss reserves acquired from the acquisition of Superior in 1996 and the related loss reserve -23- development thereafter. The first section shows the reserves as originally reported at the end of the stated year. The second section, reading down, shows the cumulative amounts paid as of the end of successive years with respect to the reserve liability. The third section, reading down, shows the re-estimates of the original recorded reserve as of the end of each successive year which is a result of sound insurance reserving practices of addressing new emerging facts and circumstances which indicate that a modification of the prior estimate is necessary. The last section compares the latest re-estimated reserve to the reserve originally established, and indicates whether or not the original reserve was adequate or inadequate to cover the estimated costs of unsettled claims. The loss reserve development table is cumulative and, therefore, ending balances should not be added since the amount at the end of each calendar year includes activity for both the current and prior years. The reserve for losses and loss expenses is an accumulation of the estimated amounts necessary to settle all outstanding claims as of the date for which the reserve is stated. The reserve and payment data shown below have been reduced for estimated subrogation and salvage recoveries. The Company does not discount its reserves for unpaid losses and loss expenses. No attempt is made to isolate explicitly the impact of inflation from the multitude of factors influencing the reserve estimates though inflation is implicitly included in the estimates. The Company regularly updates its reserve forecasts by type of claim as new facts become known and events occur which affect unsettled claims. During 1997, the Company, as part of its efforts to reduce costs and combine the operations of the two nonstandard automobile insurance companies, emphasized a unified claim settlement practice as well as reserving philosophy for Superior and Pafco. Superior had historically provided strengthened case reserves and a level of IBNR which reflected the strength of the case reserves. Pafco had historically carried case reserves which generally did not reflect the level of future payments but yet a higher IBNR reserve. This change in claims management philosophy during 1997 coupled with the growth in premium volume produced sufficient volatility in prior year loss patterns to warrant the Company to re-estimate its 1996 reserve for losses and loss expenses and record an additional reserve during 1997. The effects of changes in settlement patterns, costs, inflation, growth and other factors have all been considered in establishing the current year reserve for unpaid losses and loss expenses. -24- Symons International Group, Inc. Nonstandard Automobile Insurance Only For The Years Ended December 31, (in thousands)
1987 1988 1989 1990 1991 1992 1993 1994 1995(A) 1996 1997 ---- ---- ---- ---- ---- ---- ---- ---- ------- ---- ---- Gross reserves for unpaid losses and LAE $25,248 $71,748 $79,551 $101,185 Deduct reinsurance recoverable 10,927 9,921 8,124 16,378 Reserve for unpaid losses and LAE, net of reinsurance $4,687 $10,747 $13,518 $15,923 $15,682 $17,055 $14,822 14,321 61,827 71,427 84,807 Paid cumulative as of: One Year Later 2,708 5,947 7,754 7,695 7,519 10,868 8,875 7,455 42,183 59,410 Two Years Later 4,448 7,207 10,530 10,479 12,358 15,121 11,114 10,375 53,350 -- Three Years Later 4,570 7,635 11,875 12,389 13,937 16,855 13,024 12,040 -- -- Four Years Later 4,310 7,824 12,733 13,094 14,572 17,744 13,886 -- -- -- Five Years Later 4,331 8,009 12,998 13,331 14,841 18,195 -- -- -- -- Six Years Later 4,447 8,135 13,095 13,507 14,992 -- -- -- -- -- Seven Years Later 4,448 8,154 13,202 13,486 -- -- -- -- -- -- Eight Years Later 4,447 8,173 13,216 -- -- -- -- -- -- -- Nine Years Later 4,447 8,174 -- -- -- -- -- -- -- -- Ten Years Later 4,447 -- -- -- -- -- -- -- -- -- Liabilities re-estimated as of: One Year Later 5,352 8,474 13,984 13,888 14,453 17,442 14,788 13,365 59,626 82,011 Two Years Later 4,726 8,647 13,083 13,343 14,949 18,103 13,815 12,696 60,600 -- Three Years Later 4,841 8,166 13,057 13,445 15,139 18,300 14,051 13,080 -- -- Four Years Later 4,474 8,108 13,152 13,514 15,218 18,313 14,290 -- -- -- Five Years Later 4,412 8,179 13,170 13,589 15,198 18,419 -- -- -- -- Six Years Later 4,471 8,165 13,246 13,612 15,114 -- -- -- -- -- Seven Years Later 4,448 8,196 13,260 13,529 -- -- -- -- -- -- Eight Years Later 4,462 8,198 13,248 -- -- -- -- -- -- -- Nine Years Later 4,447 8,199 -- -- -- -- -- -- -- -- Ten Years Later 4,447 -- -- -- -- -- -- -- -- -- Net cumulative (deficiency) or redundancy 240 2,548 270 2,394 568 (1,364) 532 1,241 1,227 (10,584) Expressed as a percentage of unpaid losses and LAE 5.1% 23.7% 2.0% 15.0% 3.6% (8.0%) 3.6% 8.7% 2.0% (14.8%)
(A) Includes Superior loss and loss expense reserves of $44,423 acquired on April 29, 1996 and subsequent development thereon. -25- 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, and the Company's fixed maturity and common equity investments are substantially all in public companies. The Company's investments in real estate and mortgage loans represent 1.1% of the Company's aggregate investments. The investment portfolios of the Company are managed by third-party professional administrators, in accordance with pre-established investment policy guidelines established by the Company. The investment portfolios of the Company at December 31, 1997, consisted of the following: (in thousands)
Cost or Amortized Market Type of Investment Cost Value Fixed maturities: U.S. and Canadian Treasury securities and obligations of U.S. and Canadian government corporation and agencies $84,371 $84,801 Obligations of states, provinces and political subdivisions 1,082 1,082 Corporate securities 86,948 88,332 ------ ------ Total Fixed Maturities 172,401 174,215 Equity Securities: Common stocks 35,446 36,631 Short-term investments 23,233 23,233 Real estate 450 450 Mortgage loans 2,220 2,220 Other loans 50 50 ------ ------ Total Investments $233,800 $236,799 ======= ======= - ---------------
-26- The following table sets forth the composition of the fixed maturity securities portfolio of the Company by time to maturity as of December 31: (in thousands) 1996 1997 -------------------- --------------------
Market Percent Market Percent Time To Maturity Value Market Value Market 1 year or less $9,169 6.6% $3,678 2.1% More than 1 year through 5 years 79,042 57.1% 60,008 34.4% More than 5 years through 10 years 43,404 31.4% 31,599 18.1% More than 10 years 6,768 4.9% 8,390 4.8% ------- ----- ----- ---- 138,383 100.0% 103,675 59.4% Mortgage-backed securities --- --- 70,540 40.6% ------- ----- ------ ----- Total $138,383 100.0% $174,215 100.0% ======= ====== ======= ======
The following table sets forth the ratings assigned to the fixed maturity securities of the Company as of December 31: (in thousands) 1996 1997 -------------------- -------------------
Market Percent Market Percent Rating (1) Value Value Value Value Aaa or AAA $50,444 36.5% $112,920 64.8% Aa or AA 2,976 2.1% 4,145 2.4% A 50,365 36.4% 20,679 11.9% Baa or BBB 11,671 8.4% 19,116 11.0% Ba or BB 2,840 2.1% 16,519 9.5% Other below investment grade 2,091 1.5% 82 0.1% Not rated (2) 17,996 13.0% 754 0.3% ------ ----- --- ---- Total $138,383 100.0% $174,215 100.0% ======= ====== ======= ======
(1) Ratings are assigned by Moody's Investors Service, Inc., and when not available, are based on ratings assigned by Standard & Poor's Corporation. (2) These securities were not rated by the rating agencies. However, these securities are designated as Category 1 securities by the NAIC, which is the equivalent rating of "A" or better. -27- The investment results of the Company for the periods indicated are set forth below: (in thousands) Years Ended December 31, ------------------------
1995 1996 1997 Net investment income (1) $3,868 $7,745 $12,777 Average investment portfolio (2) $45,101 $122,363 $215,694 Pre-tax return on average investment portfolio 8.6% 6.3% 5.9% Net realized gains (losses) ($198) ($637) $9,393 - ---------------
(1) Includes dividend income received in respect of holdings of common stock. (2) Average investment portfolio represents the average (based on amortized cost) of the beginning and ending investment portfolio and excludes cash. For 1996, the average investment portfolio was adjusted for the effect of the Acquisition. Ratings A.M. Best has currently assigned a "B+" rating to Superior and a "B-" rating to Pafco. A.M. Best's ratings are based upon a comprehensive review of a company's financial performance, which is supplemented by certain data, including responses to A.M. Best's questionnaires, phone calls and other correspondence between A.M. Best analysts and company management, quarterly NAIC filings, state insurance department examination reports, loss reserve reports, annual reports, company business plans and other reports filed with state insurance departments. A.M. Best undertakes a quantitative evaluation, based upon profitability, leverage and liquidity, and a qualitative evaluation, based upon the composition of a company's book of business or spread of risk, the amount, appropriateness and soundness of reinsurance, the quality, diversification and estimated market value of its assets, the adequacy of its loss reserves and policyholders' surplus, the soundness of a company's capital structure, the extent of a company's market presence and the experience and competence of its management. A.M. Best's ratings represent an independent opinion of a company's financial strength and ability to meet its obligations to policyholders. A.M. Best's ratings are not a measure of protection afforded investors. "B+" and "B-" ratings are A.M. Best's sixth and eighth highest rating classifications, respectively, out of 15 ratings. A "B+" rating is awarded to insurers which, in A.M. Best's opinion, "have demonstrated very good overall performance when compared to the standards established by the A.M. Best Company" and "have a good ability to meet their obligations to policyholders over a long period of time." A "B-" rating is awarded to insurers which, in A.M. Best's opinion, "have demonstrated adequate overall performance when compared to the standards established by the A.M. Best Company" and "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. Recent Acquisitions 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. for a purchase price of approximately $66.6 million. Simultaneously with the execution of the Superior Purchase Agreement, Goran, SIG, GGS Holdings and the GS Funds, a Delaware limited partnership, entered into an agreement (the "GGS Agreement") to capitalize GGS Holdings and to cause GGS Holdings to issue its capital stock to 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 GGS Holdings (i) all the outstanding common stock of 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 -28- furniture and equipment, having a value of approximately $350,000 and (b) the GS Funds contributed to GGS Holdings $21.2 million in cash. The Formation Transaction and the Acquisition were completed on April 30, 1996. On August 12, 1997, SIG acquired the remaining 48% interest in GGS Holdings that had been owned by the GS funds for $61 million with a portion of the proceeds from the sale of the Preferred Securities. On August 12, 1997, SIG issued $135 million in Trust Originated Preferred Securities ("Preferred Securities"). These Preferred Securities were offered through a wholly-owned trust subsidiary of SIG and are backed by Senior Subordinated Notes to the Trust from SIG. These Preferred Securities were offered under Rule 144A of the SEC ("Offering") and, pursuant to the Registration Rights Agreement executed at closing, SIG filed a Form S-4 Registration Statement with the SEC on September 16, 1997 to effect the Exchange Offer. The S-4 Registration Statement was declared effective on September 30, 1997 and the Exchange Offer successfully closed on October 31, 1997. The proceeds of the Preferred Securities Offering were used to repurchase the remaining minority interest in GGSH for $61 million, repay the balance of the term debt of $44.9 million and SIG expects to contribute the balance, after expenses, of approximately $24 million to the nonstandard automobile insurers of which $10.5 million was contributed in 1997. Expenses of the issue aggregated $5.1 million and will be amortized over the term of the Preferred Securities (30 years). In the third quarter SIG wrote off the remaining unamortized costs of the term debt of approximately $1.1 million pre-tax or approximately $0.09 per share to Goran after income taxes and minority interest. The Preferred Securities have a term of 30 years with semi-annual distribution payments at 9.5% per annum commencing February 15, 1998. The Preferred Securities may be redeemed in whole or in part after 10 years. SIG shall not, and shall not permit any subsidiary, to incur directly or indirectly, any indebtedness unless, on the date of such incurrence (and after giving effect thereto), the Consolidated Coverage Ratio exceeds 2.5 to 1. The Coverage Ratio is the aggregate of net earnings, plus interest expense, income taxes, depreciation, and amortization divided by interest expense for the same period. Regulation General The Company's insurance businesses are subject to comprehensive, detailed regulation throughout the United States, under statutes which delegate regulatory, supervisory and administrative powers to state insurance commissioners. The primary purpose of such regulations and supervision is the protection of policyholders and claimants rather than 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 and its insurance subsidiaries are subject to triennial examinations by state insurance regulators. All of these Companies have been examined through December 31, 1996 and each of the final reports are pending. The Company does not expect any material findings from the examinations of its insurance subsidiaries. Insurance Holding Company Regulation The Company also is subject to laws governing insurance holding companies in Florida and Indiana, where the insurers are domiciled. These laws, among other things, (i) require the Company to file periodic information with state regulatory authorities including information concerning its capital structure, ownership, financial condition and general business operations, (ii) regulate certain transactions between the Company, its affiliates and IGF, Pafco and Superior (the "Insurers"), including the amount of dividends and other distributions , SIG and (iii) restrict the ability of any one person to acquire certain levels of the Company's voting securities without prior regulatory approval. -29- Any purchaser of 10% or more of the outstanding shares of Common Stock of SIG would be presumed to have acquired control of Pafco and IGF unless the Indiana Commissioner, upon application, has determined otherwise. In addition, any purchaser of 5% or more of the outstanding shares of Common Stock of SIG will be presumed to have acquired control of Superior unless the Florida Commissioner, upon application, has determined otherwise. Indiana law defines as "extraordinary" any dividend or distribution which, together with all other dividends and distributions to shareholders within the preceding twelve months, exceeds the greater of: (i) 10% of statutory surplus as regards policyholders as of the end of the preceding year or (ii) the prior year's net income. Dividends which are not "extraordinary" may be paid ten days after the Indiana Department receives notice of their declaration. "Extraordinary" dividends and distributions may not be paid without 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 of funds other than earned surplus without the prior approval of the Indiana Department. "Earned surplus" is defined as the amount of unassigned funds set forth in the insurer's most recent annual statement, less surplus attributable to unrealized capital gains or reevaluation of assets. As of December 31, 1997, IGF and Pafco had earned surplus of $27,952,000 and $(4,713,000), respectively. Further, no Indiana domiciled insurer may make payments in the form of dividends or otherwise to shareholders as such unless it possesses assets in the amount of such payment in excess of the sum of its liabilities and the aggregate amount of the par value of all shares of its capital stock; provided, that in no instance shall such dividend reduce the total of (i) gross paid-in and contributed surplus, plus (ii) special surplus funds, plus (iii) unassigned funds, minus (iv) treasury stock at cost, below an amount equal to 50% of the aggregate amount of the par value of all shares of the insurer's capital stock. Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its stockholders except out of that part of its available and accumulated surplus funds which is derived from realized net operating profits on its business and net realized capital gains. A Florida domestic insurer may not make dividend payments or distributions to stockholders without prior approval of the Florida Department if the dividend or distribution would exceed the larger of (i) the lesser of (a) 10% of surplus or (b) net income, not including realized capital gains, plus a two-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 three-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 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 and realized net capital gains derived during the immediately preceding calendar year; (2) the insurer will have policyholder surplus equal to or exceeding 115% of the minimum required statutory surplus after the dividend or distribution, (3) the insurer files a notice of the dividend or distribution with the department at least ten business days prior to the dividend payment or distribution and (4) the notice includes a certification by an officer of the insurer attesting that, after the payment of the dividend or distribution, the insurer will have at least 115% of required statutory surplus as to policyholders. Except as provided above, a Florida domiciled insurer may only pay a dividend or make a distribution (i) subject to prior approval by the Florida Department 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 Florida Department has prohibited Superior from paying any dividends (whether extraordinary or not) for four years from the date of acquisition without the prior written approval of the Florida Department. Under these laws, the maximum aggregate amounts of dividends permitted to be paid to the Company in 1998 by IGF and Pafco without prior regulatory approval are $13,404,000 and $0, respectively, none of which have been paid. Although the Company believes that amounts required for it to meet its financial and operating obligations will be available, there can be no assurance in this regard. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Liquidity and Capital Resources." Further, there can be no assurance that, if requested, the Indiana Department 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 -30- described above. The maximum dividends permitted by state law are not necessarily indicative of an insurer's actual ability to pay dividends or other distributions to a parent company, which also may be constrained by business and regulatory considerations, such as the impact of dividends on surplus, which could affect an insurer's competitive position, the amount of premiums that can be written and the ability to pay future dividends. Further, state insurance laws and regulations require that the statutory surplus of an insurance company following any dividend or distribution by such company be reasonable in relation to its outstanding liabilities and adequate for its financial needs. While the non-insurance company subsidiaries are not subject directly to the dividend and other distribution limitations, insurance holding company regulations govern the amount which a subsidiary within the holding company system may charge any of the Insurers for services (e.g., management fees and commissions). These regulations may affect the amount of management fees which may be paid by Pafco and Superior to GGS Management. The management agreement between the Company and Pafco has been assigned to GGS Management, Inc. ("GGS Management") and provides for an annual management fee equal to 15% of gross premiums. A similar management agreement with a management fee of 17% of gross premiums has been entered into between GGS Management and Superior. Employees of SIG relating to the nonstandard automobile insurance business and all Superior employees became employees of GGS Management effective April 30, 1996. In the consent order approving the Acquisition, the Florida Department has reserved, for three years, the right to reevaluate the reasonableness of fees provided for in the Superior management agreement at the end of each calendar year and to require Superior to make adjustments in the management fees based on the Florida Department's consideration of the performance and operating percentages of Superior and other pertinent data. There can be no assurance that either the Indiana Department or the Florida Department will not in the future require a reduction in these management fees. Federal Regulation The Company's MPCI program is federally regulated and supported by the federal government by means of premium subsidies to farmers, expense reimbursement and federal reinsurance pools for private insurers. Consequently, the MPCI program is subject to oversight by the legislative and executive branches of the federal government, including the FCIC. The MPCI program regulations generally require compliance with federal guidelines with respect to underwriting, rating and claims administration. The Company is required to perform continuous internal audit procedures and is subject to audit by several federal government agencies. No material compliance issues were noted during IGF's most recent FCIC compliance review. 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, eliminated the linkage between CAT Coverage and qualification for certain federal farm program benefits and also limited 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 the following 14 -31- 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, through June 30, 1996, the FCIC 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 twelve ratios with defined acceptable ranges. They are used as an initial screening process for identifying companies that may be in need of special attention. Companies that have several ratios that fall outside of the acceptable range are selected for closer review by the NAIC. If the NAIC determines that more attention may be warranted, one of five priority designations is assigned and the insurance department of the state of domicile is then responsible for follow-up action. During 1997, Pafco had unusual values for three IRIS tests. These included two-year overall operating ratio where Pafco's ratio was 107 compared to the IRIS upper limit of 100, change in surplus where Pafco's ratio was (26.7%) compared to the IRIS lower limit of (10%) and one year reserve development to surplus where Pafco's ratio was 31.2 compared to the IRIS upper limit of 20. Pafco failed these tests due to the additional reserves of $7.5 million booked in 1997 on accident years 1996 and prior due to deficient reserve development. Pafco does not expect such results to continue. However, reserves are subjective and based on estimates and there is no guarantee such results will not continue. During 1997 IGF had unusual values for three IRIS tests. 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. IGF's investment yield exceeded the upper end of the IRIS range due to the fact the calculation is based on a simple average of beginning and ending investment balances. During 1997, the IRIS ratios for Superior were within the acceptable range. -32- Risk-Based Capital Requirements In order to enhance the regulation of insurer solvency, the NAIC has adopted a formula and model law to implement risk-based capital ("RBC") requirements for property and casualty insurance companies designed to assess minimum capital requirements and to raise the level of protection that statutory surplus provides for policyholder obligations. Indiana and Florida have substantially adopted the NAIC model law, and Indiana directly, and Florida indirectly, have adopted the NAIC model formula. The RBC formula for property and casualty insurance companies measures four major areas of risk facing property and casualty insurers: (i) underwriting, which encompasses the risk of adverse loss developments and inadequate pricing, (ii) declines in asset values arising from credit risk, (iii) declines in asset values arising from investment risks and (iv) off-balance sheet risk arising from adverse experience from non-controlled assets, guarantees for affiliates, contingent liabilities and reserve and premium growth. Pursuant to the model law, insurers having less statutory surplus than that required by the RBC calculation will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. The RBC model law provides for four levels of regulatory action. The extent of regulatory intervention and action increases as the level of surplus to RBC 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, 1997, 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; Residual Markets The Insurers also may be required under the solvency or guaranty laws of most states in which they do business to pay assessments (up to certain prescribed limits) to fund policyholder losses or liabilities of insolvent or rehabilitated insurance companies. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer's financial strength and, in certain instances, may be offset against future premium taxes. Some state laws and regulations further require participation by the Insurers in pools or funds to provide some types of insurance coverages which they would not ordinarily accept. The Company recognizes its obligations for guaranty fund assessments when it receives notice that an amount is payable to the fund. The ultimate amount of these assessments may differ from that which has already been assessed. It is not possible to predict the future impact of changing state and federal regulation on the Company's operations and there can be no assurance that laws and regulations enacted in the future will not be more restrictive than existing laws. 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). 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 -33- and the country of resident of the non-resident. 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%. A purchase for cancellation 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. -34- 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 outstanding 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. corporations. In the case of foreign currency received as a dividend 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 foreign 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 disposition 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, 1997 the Company and its subsidiaries employed approximately 950 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, -35- statements concerning (i) the impact of federal and state laws and regulations, including but not limited to, the 1994 Reform Act and 1996 Reform Act, on the Company's business and results of operations, (ii) the competitive advantage afforded to IGF by approaches adopted by management in the areas of information, technology, claims handling and underwriting, (iii) the sufficiency of the Company's cash flow to meet the operating expenses, debt service obligations and capital needs of the Company and its subsidiaries, and (iv) the impact of declining MPCI Buy-up Expense Reimbursements on the Company's results of operations, are forward-looking statements within the meanings of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. From time to time the Company may also issue other statements either orally or in writing, which are forward looking within the meaning of these statutory provisions. Forward looking statements are typically identified by the words "believe", "expect", "anticipate", "intend", "estimate", "plan" and similar expressions. These statements involve a number of risks and uncertainties, certain of which are beyond the Company's control. Actual results could differ materially from the forward looking statements in this Form 10-K or from other forward looking statements made by the Company. In addition to the risks and uncertainties of ordinary business operations, some of the facts that could cause actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements are the risks and uncertainties (i) discussed herein, (ii) contained in the Company's other filings with the Securities and Exchange Commission and public statements from time to time, and (iii) set forth below. Uncertain Pricing and Profitability One of the distinguishing features of the property and casualty industry is that its products generally are priced, before its costs are known, because premium rates usually are determined before losses are reported. Premium rate levels are related in part to the availability of insurance coverage, which varies according to the level of surplus in the industry. Increases in surplus have generally been accompanied by increased price competition among property and casualty insurers. The nonstandard automobile insurance business in recent years has experienced very competitive pricing conditions and there can be no assurance as to the Company's ability to achieve adequate pricing. Changes in case law, the passage of new statutes or the adoption of new regulations relating to the interpretation of insurance contracts can retroactively and dramatically affect the liabilities associated with known risks after an insurance contract is in place. New products also present special issues in establishing appropriate premium levels in the absence of a base of experience with such products' performance. The number of competitors and the similarity of products offered, as well as regulatory constraints, limit the ability of property and casualty insurers to increase prices in response to declines in profitability. In states which require prior approval of rates, it may be more difficult for the Company to achieve premium rates which are commensurate with the Company's 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 -36- underwriting results and net income. Nature of Crop Insurance Business The Company's operating results from its crop insurance program can vary substantially from period to period as a result of various factors, including timing and severity of losses from storms, drought, floods, freezes and other natural perils and crop production cycles. Therefore, the results for any quarter or year are not necessarily indicative of results for any future period. The underwriting results of the crop insurance business are recognized throughout the year with a reconciliation for the current crop year in the fourth quarter. The Company expects that for the foreseeable future a majority of its crop insurance will continue to be derived from MPCI business. The MPCI program is federally regulated and supported by the federal government by means of premium subsidies to farmers, expense reimbursement and federal reinsurance pools for private insurers. As such, legislative or other changes affecting the MPCI program could impact the Company's business prospects. The MPCI program has historically been subject to modification at least annually since its establishment in 1980, and some of these modifications have been significant. No assurance can be given that future changes will not significantly affect the MPCI program and the Company's crop insurance business. The 1994 Reform Act also reduced the expense reimbursement rate payable to the Company for its costs of servicing MPCI policies that exceed the basic CAT Coverage level (such policies, "Buy-up Coverage") for the 1997, 1998 and 1999 crop years to 29%, 28% and 27.5%, respectively, of the MPCI Premium serviced, a decrease from the 31% level established for the 1994, 1995 and 1996 crop years. Although the 1994 Reform Act directs the FCIC to alter program procedures and administrative requirements so that the administrative and operating costs of private insurance companies participating in the MPCI program will be reduced in an amount that corresponds to the reduction in the expense reimbursement rate, there can be no assurance that the Company's actual costs will not exceed the expense reimbursement rate. The FCIC has appointed several committees comprised of members of the insurance industry to make recommendations concerning this matter. The 1994 Reform Act also directs the FCIC to establish adequate premiums for all MPCI coverages at such rates as the FCIC determines are actuarially sufficient to attain a targeted loss ratio. Since 1980, the average MPCI loss ratio has exceeded this target ratio. There can be no assurance that the FCIC will not increase rates to farmers in order to achieve the targeted loss ratio in a manner that could adversely affect participation by farmers in the MPCI program above the CAT Coverage level. The 1996 Reform Act, signed into law by President Clinton in April, 1996, provides that, MPCI coverage is not required for federal farm program benefits if producers sign a written waiver that waives eligibility for emergency crop loss assistance. The 1996 Reform Act also provides that, effective for the 1997 crop year, the Secretary of Agriculture may continue to offer CAT Coverage through USDA offices if the Secretary of Agriculture determines that the number of approved insurance providers operating in a state is insufficient to adequately provide catastrophic risk protection coverage to producers. There can be no assurance as to the ultimate effect which the 1996 Reform Act may have on the business or operations of the Company. Total MPCI Premium for each farmer depends upon the kinds of crops grown, acreage planted and other factors determined by the FCIC. Each year, the FCIC sets, by crop, the maximum per unit commodity price ("Price Election") to be used in computing MPCI Premiums. Any reduction of the Price Election by the FCIC will reduce the MPCI Premium charged per policy, and accordingly will adversely impact MPCI Premium volume. The Company's crop insurance business is also affected by market conditions in the agricultural industry which vary depending on such factors as federal legislation and administration policies, foreign country policies relating to agricultural products and producers, demand for agricultural products, weather, natural disasters, technologic advances in agricultural practices, international agricultural markets and general economic conditions both in the United States and abroad. For example, the number of MPCI Buy-up Coverage policies written has historically tended to increase after a year in which a major natural disaster adversely affecting crops occurs, and to decrease following a year in which favorable weather conditions prevail. -37- Highly Competitive Businesses Both the nonstandard automobile insurance and crop insurance businesses are highly competitive. Many of the Company's competitors in both the nonstandard automobile insurance and crop insurance business segments have substantially greater financial and other resources than the Company, and there can be no assurance that the Company will be able to compete effectively against such competitors in the future. In its nonstandard automobile business, the Company competes with both large national writers and smaller regional companies. The Company's competitors include other companies which, like the Company, serve the independent agency market, as well as companies which sell insurance directly to customers. Direct writers may have certain competitive advantages over agency writers, including increased name recognition, loyalty of the customer base to the insurer rather than an independent agency and, potentially, reduced acquisition costs. In addition, certain competitors of the Company have from time to time decreased their prices in an apparent attempt to gain market share. Also, in certain states, state assigned risk plans may provide nonstandard automobile insurance products at a lower price than private insurers. In the crop insurance business, the Company competes against other crop insurance companies and, with respect to CAT Coverage, USDA field service offices in certain areas. In addition the crop insurance industry has become increasingly consolidated. From the 1985 crop year to the 1996 crop year, the number of insurance companies that have entered into agreements with the FCIC to sell and service MPCI policies has declined from 50 to 16. The Company believes that to compete successfully in the crop insurance business it will have to market and service a volume of premiums sufficiently large to enable the Company to continue to realize operating efficiencies in conducting its business. No assurance can be given that the Company will be able to compete successfully if this market consolidates further. Importance of Ratings A.M. Best has currently assigned Superior a B+ (Very Good) rating and Pafco a B- (Adequate) rating. Subsequent to the Acquisition, the rating of Superior was reduced from A- to B+ as a result of the leverage of GGS Holdings resulting from indebtedness in connection with the Acquisition. A "B+" and a "B-" rating are A.M. Best's sixth and eighth highest rating classifications, respectively, out of 15 ratings. A "B+" rating is awarded to insurers which, in A.M. Best's opinion, "have demonstrated very good overall performance when compared to the standards established by the A.M. Best Company" and "have a good ability to meet their obligations to policyholders over long period of time". A "B-" rating is awarded to insurers which, in A.M. Best's opinion, "have demonstrated adequate overall performance when compared to the standards established by the A.M. Best Company" and "generally have an adequate ability to meet their obligations to policyholders, but their financial strength is vulnerable to unfavorable changes in underwriting or economic conditions." IGF recently received an "NA-2" rating (a "rating not assigned" category for companies that do not meet A.M. Best's minimum size requirement) from A.M. Best. IGF intends to seek a revised rating in 1998, 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. -38- 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. Uncertainty Associated with Estimating Reserves for Unpaid Losses and LAE The reserves for unpaid losses and LAE established by the Company are estimates of amounts needed to pay reported and unreported claims and related LAE based on facts and circumstances then known. These reserves are based on estimates of trends in claims severity, judicial theories of liability and other factors. Although the nature of the Company's insurance business is primarily short-tail, the establishment of adequate reserves is an inherently uncertain process, and there can be no assurance that the ultimate liability will not materially exceed the Company's reserves for losses and LAE and have a material adverse effect on the Company's results of operations and financial condition. Due to the inherent uncertainty of estimating these amounts, it has been necessary, and may over time continue to be necessary, to revise estimates of the Company's reserves for losses and LAE. The historic development of reserves for losses and LAE may not necessarily reflect future trends in the development of these amounts. Accordingly, it may not be appropriate to extrapolate redundancies or deficiencies based on historical information. 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 -39- 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 ome lines, regulation of the right to withdraw from markets or agencies, requirements to participate in residual markets, licensing of insurers and agents, deposits of securities for the benefit of policyholders, reporting with respect to financial condition, and other matters. In addition, state insurance department examiners perform periodic financial and market conduct examinations of insurance companies. Such regulation is generally intended for the protection of policyholders rather than security holders. No assurance can be given that future legislative or regulatory changes will not adversely affect the Company. Holding Company Structure; Dividend And Other Restrictions; Management Fees Holding Company Structure. The Company is a holding company whose principal asset is the capital stock of the subsidiaries. The Company relies primarily on dividends and other payments from its subsidiaries, including 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. The Company's reinsurance subsidiary, Granite Re is also limited in its ability to make payments to the Company as a result of restrictions imposed by the regulatory bodies that govern the companies the ceded business to it. Dividend and Other Restrictions. Indiana law defines as "extraordinary" any dividend or distribution which, together with all other dividends and distributions to shareholders within the preceding twelve months, exceeds the greater of: (i) 10% of statutory surplus as regards policyholders as of the end of the preceding year, or (ii) the prior year's net income. Dividends which are not "extraordinary" may be paid ten days after the Indiana Department of Insurance ("Indiana Department") receives notice of their declaration. "Extraordinary" dividends and distributions may not be paid without the prior approval of the Indiana Commissioner of Insurance (the "Indiana Commissioner") or until the Indiana Commissioner has been given thirty days' prior notice and has not disapproved within that period. The Indiana Department must receive notice of all dividends, whether "extraordinary" or not, within five business days after they are declared. Notwithstanding the foregoing limit, a domestic insurer may not declare or pay a dividend from any source of funds other than "Earned Surplus" without the prior approval of the Indiana Department. "Earned Surplus" is defined as the amount of unassigned funds set forth in the insurer's most recent annual statement, less surplus attributable to unrealized capital gain or re-evaluation of assets. Further, no Indiana domiciled insurer may make payments in the form of dividends or otherwise to its shareholders unless it possesses assets in the amount of such payments in excess of the sum of its liabilities and the aggregate amount of the par value of all shares of capital stock; provided, that in no instance shall such dividend reduce the total of (I) gross paid-in and contributed surplus, plus (ii) special surplus funds, plus (iii) unassigned funds, minus (iv) treasury stock at cost, below an amount equal to 50% of the aggregate amount of the par value of all shares of the insurer's capital stock. Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its stockholders except out of that part of its available and accumulated surplus funds which is derived from realized net operating profits on its business and net realized capital gains. A Florida domestic insurer may make dividend payments or distributions to stockholders without prior approval of the Florida Department of Insurance ("Florida Department") if the dividend or distribution does not exceed the larger of: (i) the lesser of (a) 10% of surplus or (b) net investment income, not including realized capital gains, plus a 2-year carryforward, (ii) 10% of surplus with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains, or (iii) the lesser of (a) 10% of surplus -40- or (b) net investment income plus a 3-year carryforward with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains. Alternatively, a Florida domestic insurer may pay a dividend or distribution without the prior written approval of the Florida Department if (1) the dividend is equal to or less than the greater of (i) 10% of the insurer's surplus as regards policyholders derived from net operating profits on its business and net realized capital gains, or (ii) the insurer's entire net operating profits (including unrealized gains or losses) and realized net capital gains derived during the immediately preceding calendar year; (2) the insurer will have policyholder surplus equal to or exceeding 115% of the minimum required statutory surplus after the dividend or distribution; (3) the insurer files a notice of the dividend or distribution with the Florida Department at least ten business days prior to the dividend payment or distribution; and (4) the notice includes a certification by an officer of the insurer attesting that, after the payment of the dividend or distribution, the insurer will have at least 115% of required statutory surplus as to policyholders. Except as provided above, a Florida domiciled insurer may only pay a dividend or make a distribution (i) subject to prior approval by the Florida Department, or (ii) thirty days after the Florida Department has received notice of such dividend or distribution and has not disapproved it within such time. In the consent order approving the Acquisition (the "Consent Order"), the Florida Department has prohibited Superior from paying any dividends (whether extraordinary or not) for four years from date of acquisition 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. The maximum dividends permitted by state law are not necessarily indicative of an insurer's actual ability to pay dividends or other distributions to a parent company, which also may be constrained by business and regulatory considerations, such as the impact of dividends on surplus, which could affect an insurer's competitive position, the amount of premiums that can be written and the ability to pay future dividends. Further, state insurance laws and regulations require that the statutory surplus of an insurance company following any dividend or distribution by such company be reasonable in relation to its outstanding liabilities and adequate for its financial needs. Management Fees. The management agreement originally entered into between SIG and Pafco was assigned as of April 30, 1996 by SIG 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 SIG relating to the nonstandard automobile insurance business and all Superior employees became employees of GGS Management effective April 30, 1996. In the Consent Order approving the Acquisition, the Florida Department has reserved, for a period of three years, the right to re-evaluate the reasonableness of fees provided for in the Superior management agreement at the end of each calendar year and to require Superior to make adjustments in the management fees based on the Florida Department's consideration of the performance and operating percentages of Superior and other pertinent data. There can be no assurance that either the Indiana Department or the Florida Department will not in the future require a reduction in these management fees. 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 2003, 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 -41- subleases an additional 3,303 square feet to third-party tenants. Superior also has an office located at 3030 W. Rocky Pointe Drive, Suite 770, Tampa, Florida consisting of 18,477 square feet of space leased for a term extending through February, 2000. In addition, Superior occupies an office at 1745 West Orangewood, Orange, California consisting of 3,264 square feet under a lease extending through June 2000. 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 bought an office building in Des Moines, Iowa, as its crop insurance division home office. The purchase price was $2.6 million. The sale of the old building is expected to close on April 1, 1998 for $1.35 million. 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 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 certain expenses. IGF alleges the FCIC wrongfully sought to hold IGF responsible for those expenses. The FCIC counterclaimed for approximately $1.2 Million in claims payments for which the FCIC contends IGF is responsible for as successor to the run-off book of business. On October 27, 1997, IGF reached an agreement with the FCIC to settle the case, with both parties dismissing all claims against one another which were subject to the litigation. The FCIC has agreed to pay IGF a lump sum payment of $60,000. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during 1997 to a vote of security holders of the Registrant, through the solicitation of proxies or otherwise. -42- 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 39 Vice President, General Counsel and Secretary of the Company Gary P. Hutchcraft 36 Vice President, Chief Financial Officer and Treasurer of the Company Mr. Bates, J.D., C.P.A., has served as Vice President, General Counsel and Secretary of 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, 1997 and 1996 with respect to the Common Shares and the approximate number of holders of Common Shares as of December 31, 1997 the Common Shares and other matters is included under the caption Market Information on Page 35 of the 1997 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 Preferred Securities limit distributions to shareholders. ITEM 6 - SELECTED FINANCIAL DATA Selected Financial Data of the Company follows: -43- GORAN CAPITAL INC. Selected Financial Data As of the Year Ended December 31, (In Thousands of U.S. Dollars)
1993 1994 1995 1996 1997 Gross Premium Revenue $114,135 $126,978 $146,603 $299,376 $448,982 Reported Net Earnings-Continuing Operations 1,397 3,940 7,171 14,127 15,983 Reported Net Earnings 1,397 3,940 7,171 31,296 12,438 U.S./Canada GAAP Differences: Discounting on Outstanding Claims 49 88 (161) 62 (504) Deferred Income Taxes 562 1,180 (344) (64) 177 Minority Interest --- --- --- (177) 107 Revised Net Earnings-Continuing Operations 2,008 5,208 6,666 14,125 15,763 Revised Net Earnings 2,008 5,208 6,666 31,117 12,218 Basic Earnings Per Share-Continuing Operations $0.38 $0.96 $1.33 $2.67 $2.82 Basic Earnings Per Share $0.38 $0.96 $1.33 $5.87 $2.19 EPS Continuing Operations-Fully Diluted $0.38 $0.96 $1.20 $2.47 $2.68 EPS-Fully Diluted $0.38 $0.96 $1.20 $5.44 $2.08 Dividends Per Share $0.00 $0.00 $0.00 $0.00 $0.00 Reported Total Assets 128,690 115,240 160,816 381,342 560,848 U.S./Canada GAAP Differences: Loans to Purchase Shares (741) (593) (563) (595) (346) Deferred Income Taxes 548 1,742 1,466 1,798 1,975 Outstanding Claims Ceded --- --- --- --- --- Unearned Premiums Ceded --- --- --- --- --- Unrealized Gain (Loss) on Investments --- (1,383) (221) 820 1,336 Revised Total Assets 128,497 115,006 161,498 383,365 563,813 Long Term Bonds and Debentures 12,936 10,787 9,237 --- --- Reported Shareholders' Equity 1,088 5,067 12,622 47,258 60,332 U.S./Canada GAAP Differences: Deferred Income Taxes 548 1,742 1,466 1,798 1,975 Discounting on Claims (1,292) (1,134) (1,327) (1,260) (1,765) Unrealized Gain (Loss) on Investments --- (1,383) (221) 820 1,336 Minority Interest Portion --- --- --- (177) (70) Loans to Purchase Shares (741) (593) (563) (595) (346) Revised Shareholders' Equity (397) 3,699 11,977 47,843 61,462 Shares Outstanding-Fully Diluted 5,242,101 5,399,463 5,567,644 5,724,476 5,886,211
-44- 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 1997 Annual Report on pages 5 through 14 included as Exhibit 13 is incorporated herein by reference. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements included in the 1997 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 1997 annual meeting of common stockholders filed with the Commission pursuant to Regulation 14A (the "1997 Proxy Statement"). ITEM 11 - EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to the Company's 1997 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 1997 Proxy Statement. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to the Company's 1997 Proxy Statement. -45- 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 1997 Annual Report indicated below are incorporated into Item 8 of this Report by reference. Description of Financial Statement Item Page Report of Independent Auditors.........................................34-35 Consolidated Balance Sheets, December 31, 1997 and 1996...................15 Consolidated Statements of Earnings, Years Ended December 31, 1997, 1996 and 1995..............................16 Consolidated Statements of Changes in Shareholders' Equity, Years Ended December 31, 1997, 1996 and 1995..............................17 Consolidated Statements of Changes in Cash Resources, Years Ended December 31, 1997, 1996 and 1995..............................18 Notes to Consolidated Financial Statements, Years Ended December 31, 1997, 1996 and 1995...........................19-23 2. Financial Statement Schedules. The following financial statement schedules are included herein. Description of Financial Statement Item Page Report of Independent Accountant On Differences Between Canadian and United States Generally Accepted Accounting Principles and Supplementary Schedules................................................... Exhibit 2 - Amounts Due From Insurance Companies In Excess of 10% of Shareholders' Equity..................................48 Description of Financial Statement Item Page Schedule II - Condensed Financial Information Of Registrant............49-52 Schedule IV - Reinsurance.................................................52 Schedule V - Valuation And Qualifyi53 Accounts............................53 Schedule VI - Supplemental Information Concerning Property-Casualty Insurance Operations....................................54 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. -46- 3. Exhibits. The Exhibits set forth on the Index to Exhibits are incorporated herein by reference. 4. Reports on Form 8-K. None -47- Exhibit 2 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 Vesta Fire Insurance Company $12,939
Notes: Accounts listed above are amounts greater than $6,146 (U.S.) which is approximately 10% of Shareholders' Equity at December 31, 1997. 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. -48- GORAN CAPITAL INC. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) BALANCE SHEET As At December 31, (In Thousands U.S. Dollars)
(Unaudited) 1996 1997 Assets Cash $319 $1,166 Accounts Receivable 420 334 Capital and Other Assets 543 597 Investment in Subsidiaries 10,772 10,321 ------ ------ Total Assets $12,054 $12,418 ====== ====== Liabilities and Shareholders' Equity Accounts Payable 9,758 9,324 Other Payables 973 540 Subordinated Debenture --- --- ------ ------- Total Liabilities 10,731 9,864 ------ ------- Shareholders' Equity Common Shares 18,473 19,067 Deficit (17,150) (16,513) ------ ------ Total Shareholders' Equity 1,323 2,554 ------ ------ Total Liabilities and Shareholders' Equity $12,054 $12,418 ====== ======
-49- GORAN CAPITAL INC. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF EARNINGS (LOSS) For The Years Ended December 31, (In Thousands of U.S. Dollars) (Unaudited)
1995 1996 1997 Revenues Management Fees $796 $352 $336 Royalty Income --- --- --- Dividend Income --- 3,500 --- Other Income --- --- 52 Net Investment Income 448 264 15 ----- ----- --- Total Revenues 1,244 4,116 403 ----- ----- --- Expenses Debenture Interest Expense 998 868 --- Amortization 114 199 --- General, Administrative and Acquisition Expenses 1,338 1,879 (234) ----- ----- --- Total Expenses 2,450 2,946 (234) ----- ----- --- Net Income (Loss) (1,206) 1,170 637 Deficit, Beginning of Year (17,114) (18,320) (17,150) ------ ------ ------ Deficit, End of Year $(18,320) $(17,150) $(16,513) ====== ====== ======
-50- GORAN CAPITAL INC. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF CHANGES IN CASH RESOURCES For The Years Ended December 31, (In Thousands of U.S. Dollars) (Unaudited)
1995 1996 1997 Cash Flows from Operations Net Income (Loss) $(1,206) $1,170 $637 Items Not Involving Cash: Amortization and Depreciation 114 199 --- Gain on Sale of Capital Assets (7) (4) --- Decrease (Increase) in Accounts Receivable 1,822 (40) 86 Decrease (Increase) in Other Assets (29) (3) (54) Increase (Decrease) in Accounts Payable 1,227 8,749 (434) Increase (Decrease) in Other Payables (141) --- (433) ----- ------ ----- Net Cash Provided (Used) by Operations 1,780 10,071 (198) ----- ------ ----- Cash Flows From Financing Activities: Redemption of Share Capital by Subsidiary --- --- --- Proceeds on Sale of Capital Assets 11 14 --- Issue of Common Shares 305 599 594 ----- ----- ----- Net Cash Provided by Financing Activities 316 613 594 ----- ----- ----- Cash Flows From Investing Activities: Purchase of Fixed Assets (3) --- --- Other, net 3 (93) 451 Reduction of Debentures (1,454) (11,084) --- ----- ------ ----- Net Cash Used by Investing Activities (1,454) (11,177) 451 ----- ------ ----- Net Increase (Decrease) in Cash 642 (493) 847 Cash at Beginning of Year 170 812 319 ----- ----- ----- Cash at End of Year $812 $319 $1,166 ===== ===== ===== Cash Resources are Comprised of: Cash 109 187 78 Short-Term Investments 703 132 1,088 ----- ----- ----- $812 $319 $1,166 ===== ===== =====
-51- GORAN CAPITAL INC. - CONSOLIDATED SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT For The Years Ended December 31, 1997, 1996 and 1995 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)
Premiums Written (1) 1995 1996 1997 Direct Amount $116,202 $290,355 $420,443 Assumed from Other Companies $30,401 $9,021 $28,539 Ceded to Other Companies $(64,781) $(85,598) $(167,086) Net Amount $81,822 $213,778 $281,896 Percentage of Amount Assumed to Net 37.2% 4.2% 10.1%
(1) Excludes premiums written with respect to discontinued operations. -52- GORAN CAPITAL INC. - CONSOLIDATED SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS For The Years Ended December 31, (In Thousands of U.S. Dollars)
1995 1996 1997 Allowance for Allowance for Allowance for Doubtful Doubtful Doubtful Accounts Accounts Accounts Additions: Balance at Beginning of Period $1,209 $927 $1,480 Reserves Acquired in the Superior Acquisition --- 500 --- Charged to Costs and Expenses (1) 2,523 5,034 9,519 Charged to Other Accounts --- --- --- Deductions from Reserves (2,805) (2) (4,981) (2) (9,006) ----- ----- ----- Balance at End of Period $927 $1,480 $1,993 === ===== =====
(1) In 1993, the Company began to direct bill policyholders rather than agents for premiums. During late 1994 and into 1995, the Company experienced an increase in premiums written. During 1995, the Company experienced an increase in premiums written and further evaluated the collectibility of this business and incurred a bad debt expense of approximately $2.5 million. The Company continually monitors the adequacy of its allowance for doubtful accounts and believes the balance of such allowance at December 31, 1997, 1996 and 1995 was adequate. (2) Uncollectible accounts written off, net of recoveries. -53- 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)
1995 1996 1997 Deferred Policy Acquisition Costs $7,641 $13,860 $11,849 Reserves for Losses and Loss Adjustment Expenses 87,655 127,045 152,871 Unearned Premiums 33,159 91,207 118,616 Earned Premiums 72,530 208,883 276,540 Net Investment Income 3,868 7,745 12,777 Losses and Loss Adjustment Expenses Incurred Related to: Current Years 50,666 146,844 201,118 Prior Years 787 (570) 9,516 Paid Losses and Loss Adjustment Expenses 44,749 139,441 203,012 Amortization of Deferred Policy Acquisition Costs 7,150 27,657 19,356 Premiums Written 146,603 299,376 448,982
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. The amounts in the above table exclude amounts with respect to discontinued operations. -54- 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 23, 1998 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 23, 1998, 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 -55- 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. is incorporated by reference in the Registrant's 1996 Form 10-K. 2.1 The Strategic Alliance Agreement by and between Continental Casualty Company and IGF Insurance Company, IGF Holdings, Inc. and Symons International Group, Inc. dated February 28, 1998. 2.2 The MPCI Quota Share Reinsurance Contract by and between Continental Casualty Company and IGF Insurance Company, IGF Holdings, Inc. and Symons International Group, Inc. dated February 28, 1998. 2.3 The MPCI Quota Share Reinsurance Agreement by and between Continental Casualty Company and IGF Insurance Company, IGF Holdings, Inc. and Symons International Group, Inc. dated February 28, 1998. 2.4 The Crop Hail Insurance Quota Share Contract by and between Continental Casualty Company and IGF Insurance Company, IGF Holdings, Inc. and Symons International Group, Inc. dated February 28, 1998. 2.5 The Crop Hail Insurance Quota Share Agreement by and between Continental Casualty Company and IGF Insurance Company, IGF Holdings, Inc. and Symons International Group, Inc. dated February 28, 1998. 2.6 The Crop Hail Insurance Service and Indemnity Agreement by and between Continental Casualty Company and IGF Insurance Company, IGF Holdings, Inc. and Symons International Group, Inc. dated February 28, 1998. 2.7 The Multiple Peril Crop Insurance Service and Indemnity Agreement by and between Continental Casualty Company and IGF Insurance Company, IGF Holdings, Inc. and Symons International Group, Inc. dated February 28, 1998. 2.8 The Stock Purchase Agreement between Symons International Group, Inc. and GS Capital Partners II, L.P. dated July 23, 1998. 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 is incorporated by reference in the Registrant's 1996 Form 10-K. 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. 4.2(1) The Senior Subordinated Indenture between Symons International Group, Inc. as issuer and Wilmington Trust Company as trustee for SIG Capital Trust I dated August 12, 1997 is incorporated by reference in the Registrant's Registration Statement on Form S-4, Reg. No. 33-35713. -56- 4.2(2) First Supplemental Senior Subordinated Indenture between Symons International Group, Inc. and Wilmington Trust Company Related to SIG Capital Trust I dated January 15, 1998. 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 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. 10.3 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. 10.4 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. 10.5 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. 10.6 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. 10.7(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. 10.7(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. 10.8(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. 10.8(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. 10.9 The Employment Agreement between Superior Insurance Company and Roger C. Sullivan, Jr. effective April 23, 1997. 10.10 The Employment Agreement between Registrant and Gary P. Hutchcraft effective May 1, 1997. -57- 10.11 The Employment Agreement between Registrant and David L. Bates effective April 1, 1997. 10.12 The Goran Capital Inc. Stock Option Plan is incorporated by reference to Exhibit 10.20 of Symons International Group, Inc.'s Registration Statement of Form S-1, Reg. No. 333-9129. 10.13 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. 10.14 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. 10.15 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. 10.16 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. 10.17(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. 10.17(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. 10.17(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. 10.17(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. 10.17(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. 10.18 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. 10.19 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. -58- 10.20 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. 10.21 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. 10.22(1) The SIG Capital Trust I 91/2% Trust Preferred Securities Purchase Agreement dated August 7, 1997 is incorporated by reference in the Registrant's Registration Statement on Form S-4, Reg. No. 333-35713. 10.19(2) The Registration Rights Agreement among Symons International Group, Inc., SIG Capital Trust I and Donaldson, Lufkin & Jenrette Securities Corporation, Goldman, Sachs & Co., CIBC Wood Gundy Securities Corp. and Mesirow Financial, Inc. dated August 12, 1997 is incorporated by reference in the Registrant's Registration Statement on Form S-4, Reg. No. 333-35713. 10.19(3) The Declaration of Trust of SIG Capital Trust 1 dated August 4, 1997 is incorporated by reference in the Registrant's Registration Statement on Form S-4, Reg. No. 333-35713. 10.19(4) The Amended and Restated Declaration of Trust of SIG Capital Trust I dated August 12, 1997 is incorporated by reference in the Registrant's Registration Statement on Form S-4, Reg. No. 333-35713. 11 Statement re Computation of Per Share Earnings 13 Annual Report to Security Holders, 1997, 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 1998 Annual Meeting of Shareholders of Registrant. -59- EX-2 2 STRATEGIC ALLIANCE AGREEMENT Exhibit 2.1 STRATEGIC ALLIANCE AGREEMENT By And Between CONTINENTAL CASUALTY COMPANY And IGF INSURANCE COMPANY IGF HOLDINGS, INC. SYMONS INTERNATIONAL GROUP, INC. February 28, 1998 TABLE OF CONTENTS ARTICLE 1 DEFINITIONS..........................................................1 ARTICLE 2 CLOSING.............................................................15 2.1 Time of Closing...............................................15 2.2 Transfer of Employees and Assets..............................16 2.3 Transition Teams..............................................16 2.4 Acts of Closing...............................................16 2.5 Break-Up Fee..................................................16 ARTICLE 3 TRANSFER OF MANAGEMENT RESPONSIBILITY; MPCI AND CROP HAIL BUSINESS.........................................16 3.1 Assumption of Management......................................16 3.2 Transfer of Supporting Policies, Data, and Assets.............17 3.3 Employment of Personnel.......................................17 3.4 Execution of Ancillary Agreements.............................17 3.5 No Assumption of Liabilities..................................17 3.6 Maintenance of SRAs...........................................18 3.7 Underwriting Committee........................................18 3.8 Special Sale and Purchase Rights..............................18 A. In General................................................18 B. CNA's Put Mechanisms......................................19 C. IGF Call Mechanisms.......................................20 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF CNA...............................21 4.1 Existence and Good Standing...................................21 4.2 Due Authorization.............................................21 4.3 No Liens......................................................22 4.4 No Violation..................................................22 4.5 Foreign Status................................................22 4.6 No Broker Transactions........................................22 4.7 Litigation, Actions and Proceedings...........................22 4.8 Good Title....................................................23 4.9 Approvals.....................................................23 4.10 Software......................................................23 4.11 Licenses......................................................23 4.12 Leased Premises...............................................23 4.13 Environmental Matters.........................................23 i 4.14 MPCI Premium Volume...........................................24 4.15 Crop Hail Premium Volume......................................24 4.16 Agency Contracts..............................................24 4.17 Production Costs..............................................24 4.18 Standard Reinsurance Agreements...............................24 4.19 Federal Crop Insurance Corporation............................24 4.20 Governmental Authority........................................24 4.21 Compliance with Laws..........................................25 4.22 Insurance Contracts...........................................25 4.23 Regulatory Filings............................................25 4.24 Reinsurance...................................................26 4.25 Conduct of Business...........................................26 4.26 Other Sale Arrangements.......................................26 4.27 Contracts.....................................................26 ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF IGFH..............................26 5.1 Existence and Good Standing...................................26 5.2 Due Authorization.............................................26 5.3 No Violation..................................................27 5.4 No Broker Transactions........................................27 5.5 Litigation, Actions and Proceedings...........................27 5.6 Approvals.....................................................27 5.7 Reinsurance Agreements........................................27 5.8 Compliance With Laws..........................................28 5.9 Permits, Licenses and Franchises..............................28 ARTICLE 6 COVENANTS...........................................................28 6.1 Execution of Agreements.......................................28 6.2 Conduct of Business...........................................28 6.3 Certain Transactions..........................................29 6.4 Due Diligence.................................................29 6.5 Post-Closing Access...........................................30 6.6 Consents and Reasonable Efforts...............................30 6.7 Representation and Warranties.................................31 6.8 Further Assurances............................................31 6.9 Expenses......................................................31 6.10 Code Section 338(h)(10) Election..............................31 6.11 Exclusivity...................................................31 6.12 NACU..........................................................31 6.13 Non-Competition...............................................31 6.14 Replacement Ancillary Agreements..............................32 ii 6.15 Confidentiality...............................................32 6.16 Intellectual Property and Trade Secrets.......................32 6.17 IGFH Employees................................................32 6.18 ERISA and Employment-Related Matters..........................32 6.19 Licenses......................................................32 6.20 Fronting......................................................32 6.21 Reinsurance Agreements........................................33 6.22 Leased Premises...............................................33 6.23 NACU..........................................................33 ARTICLE 7 CLOSING CONDITIONS..................................................33 7.1 Conditions to Obligations of the Parties......................33 A. Bring Down of Representations and Warranties...........33 B. Performance and Compliance.............................33 C. Opinion of Counsel.....................................33 D. Regulatory Approval....................................33 E. Required Consents......................................33 F. Litigation.............................................33 G. No Material Adverse Effect.............................34 H. Incumbency Certificate.................................34 I. Certificates of Existence and Licensure................34 J. Certified Copies of Resolutions........................34 K. Catastrophic Events....................................34 M. Ancillary Agreements...................................35 ARTICLE 8 EMPLOYEES AND EMPLOYMENT MATTERS....................................35 8.1 Employment Transfer...........................................35 8.2 No Liability for Prior Service................................35 8.3 Hold Harmless.................................................35 ARTICLE 9 TERM AND TERMINATION................................................35 9.1 Duration......................................................35 9.2 Termination Prior to Closing..................................35 9.3 Survival......................................................35 9.4 Put/Call Termination..........................................36 ARTICLE 10 INDEMNIFICATION.....................................................36 10.1 Indemnification by IGFH.......................................36 10.2 Indemnification by CNA........................................36 iii 10.3 Indemnification by CNA for Employment Related Matters.........37 10.4 Indemnification Procedures....................................37 10.5 Stamford Financial............................................38 ARTICLE 11 MISCELLANEOUS.......................................................38 11.1 Further Actions...............................................38 11.2 Costs.........................................................38 11.3 Public Announcements..........................................38 11.4 Survival......................................................38 11.5 Amendment and Modification....................................38 11.6 Waiver........................................................39 11.7 Governing Law; Venue..........................................39 11.8 Notice........................................................39 11.9 Severability..................................................40 11.10 Successors and Assigns........................................40 11.11 Captions......................................................40 11.12 Gender and Tense..............................................41 11.13 Entire Agreement..............................................41 11.14 Negative Inference............................................41 11.15 Counterparts; Facsimile Signatures............................41 11.17 Recitals......................................................41 11.18 Future Cooperation............................................41 iv EXHIBITS....................................................................E-1 Exhibit A MPCI Quota Share Reinsurance Contract.................................E-2 Exhibit B MPCI Quota Share Reinsurance Agreement................................E-3 Exhibit C Crop Hail Insurance Quota Share Contract..............................E-4 Exhibit D Crop Hail Insurance Quota Share Agreement.............................E-5 Exhibit E Crop Hail Insurances Services and Indemnity Agreement.................E-6 Exhibit F Multiple Peril Crop Insurance Services and Indemnity Agreement........E-7 Exhibit G Letter of Intent and Term Sheet Dated February 2, 1998................E-8 Exhibit H LLC Operating Agreement...............................................E-9 Exhibit I General Conveyance, Assignment and Bill of Sale......................E-10 Exhibit J REAP Software License Agreement......................................E-11 Exhibit K Assignment and Assumption Agreement..................................E-12 Exhibit 2.3 Transition Plan Master Schedule......................................E-13 Exhibit 7.1A Form of Bring-Down Certificate.......................................E-14 Exhibit 7.1C Opinion of Counsel...................................................E-15 Exhibit 7.1H Form of Incumbency Certificate.......................................E-16 v SCHEDULES..................................................................E-17 Schedule 2.2 CNA Employees........................................................E-18 Schedule 3.2 CNA's Assets.........................................................E-19 Schedule 4.7 Outstanding Litigation, Actions and Proceedings Relative to CNA MPCI Crop................................E-20 Schedule 4.10 CNA's Computer Software Programs and Intellectual Property Re: Crop - Other than REAP.....................E-21 Schedule 4.11 CNA Licenses.........................................................E-22 Schedule 4.12 Schedule of Leases...................................................E-23 Schedule 4.14 CNA's MPCI Gross and Net Written Premiums for 1995, 1996 and 1997.....................................E-24 Schedule 4.15 CNA's Crop Hail Gross and Net Premiums Written for 1995, 1996 and 1997......................................E-25 Schedule 4.21 Schedule of Agency Contracts.........................................E-26 Schedule 4.22 Line Item Production Costs of CNA for MPCI and Crop Hail Business for 1995, 1996 and 1997.......................E-27 Schedule 4.27 Forms of Insurance Contracts Available for Issuance..................E-28 Schedule 4.32 Other Contracts......................................................E-29 Schedule 5.9 Licenses.............................................................E-30 Schedule 7.1E Schedule of Required Consents........................................E-31 Schedule 10.3 Schedule of Former Employee Litigation Relative to CNA Crop......................................E-32 vi STRATEGIC ALLIANCE AGREEMENT This Strategic Alliance Agreement ("Agreement") is entered into this 28th day of February, 1998 by and between Continental Casualty Company, an Illinois insurance corporation, (including its Affiliates, "CNA") and IGF Holdings, Inc., an Indiana corporation, IGF Insurance Company, an Indiana insurance corporation and Symons International Group, Inc., an Indiana corporation. WITNESSETH: WHEREAS, CNA and IGFH, through their respective Insurance Subsidiaries provide crop insurance coverage to the agricultural community; and WHEREAS, CNA and IGFH desire that IGFH manage the MPCI and Crop Hail business of CNA and both parties have agreed to mechanisms for the buy-out of such Business by IGFH; and WHEREAS, both CNA and IGFH, either directly or through Insurance Subsidiaries, have executed Standard Reinsurance Agreements with the Federal Crop Insurance Corporation for Crop Years 1998 and before; and WHEREAS, CNA and IGFH mutually desire to work together in the development and marketing of new crop insurance coverages and risk management products; and WHEREAS, the parties hereto seek to maximize the management and operational efficiencies of their respective crop insurance operations; and WHEREAS, the parties hereto each recognize and acknowledge that the other possesses unique strengths and resources necessary to the efficient operational management of crop insurance operations. NOW, THEREFORE, for and in consideration of the mutual representations, warranties, covenants and agreements contained herein, and intending to be legally bound hereby, and further in consideration of the execution of the Closing Agreements by the parties hereto, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS Unless otherwise defined herein, for purposes of this Agreement, all defined terms used herein shall have the meaning assigned to them in this Article 1 and, where appropriate, include the plural as well as the singular, and the words "herein", "hereof", and "hereunder" and other words of similar report refer to this Agreement as a whole and not to any particular Article, Section or other Subsection. 1 "90-Day T-Bill Rate" means the 90 Day Treasury Bill Interest Rate as published in the Midwest Edition of "The Wall Street Journal". "A & O Subsidy" means the subsidy for the administrative and operating expenses authorized by the Act and paid by FCIC on behalf of a producer or insured to a reinsured company holding an SRA with FCIC. "Actual Production History" or "APH" means a plan of MPCI which provides the yield component and yield forecast of an insured by utilizing the insured's historic yield record. CRC plans use the policy terms and conditions of the APH as its basic provisions of coverage. "Act" means the Federal Crop Insurance Act, as amended (7 U.S.C. 1501 et seq). "Additional Coverage" means a Multiple-Peril Crop Insurance Policy, including revenue-based products, providing coverage in excess of that provided by CAT Coverage or companion covers. "Affiliate" of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person; provided, however, the Company shall not be deemed to include the Trust. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "A.M. Best" means the A.M. Best Company, Inc., a rating agency and publisher for the insurance industry. "Ancillary Agreements" means the MPCI ISA, the Crop Hail ISA, the MPCI Reinsurance Agreement, the MPCI Contract, the Crop Hail Agreement, the Crop Hail Contract, the LLC Operating Agreement, the REAP Agreement, the Supplemental Intellectual Property Transfer Agreement and the Assignment and Assumption Agreement. "Annual Settlement" means the settlement of accounts between an insurer holding an FCIC SRA and the FCIC for the Reinsurance Year, beginning with the February monthly transaction cut-off date following the Reinsurance Year and continuing thereafter as necessary. "Assignment and Assumption Agreement" means Exhibit K hereto. "Assumed Obligations" means those obligations of CNA assumed by IGF pursuant to the Ancillary Agreements. 2 "Average Pre-Tax Income" for 1998 and future years means: Crop Year Computation of Average Pre-Tax Income 1998: The Change of Control Average Pre-Tax Income. 1999: The Change of Control Average Pre-Tax Income. 2000: The Change of Control Average Pre-Tax Income. 2001: The four (4) year Olympic Average of the 1997 through 2000 Pre-Tax Incomes. 2002 and beyond: The five-year Olympic Average of Pre-Tax Incomes of the five (5) years preceding the year in which the computation is being made. "Board of Directors" or "Board" means with respect to CNA, the Company or a Subsidiary, or New Field, as the case may be, the board of directors of such company (or other body performing functions similar to any of those performed by a board of directors). "Break-Up Fee" shall have the meaning ascribed in Section 2.6 hereof. "Business" shall have the meaning ascribed in Section 3.1 hereof and shall refer to the Business to be transferred to IGFH pursuant to this Agreement and the Ancillary Agreements. "Business Day" means any day other than (i) a Saturday or Sunday, or (ii) a day on which banking institutions in the City of New York are authorized or required by law or executive order to remain closed. "Buy-up Coverage" means Multiple-Peril Crop Insurance replaced by an Additional Coverage policy providing coverage in excess of that provided by CAT Coverage. Buy-up Coverage is offered only through private insurers. "Call Right" or "Call Mechanism" means the right of IGFH to terminate, pursuant to a Change of Control or otherwise, the MPCI Reinsurance Agreement and the Crop Hail Agreement pursuant to the provisions of Article 3 as of the end of the most recently completed Crop Year. "Call Note" means the note payable through which SIG or IGFH may pay CNA if SIG or IGFH exercises its rights under the Call Mechanism or the Change of Control Call Mechanism. "Canadian Hail" means Palliser Insurance Company, Saskatoon, Saskatchewan. "Capital Stock" of any Person means any and all shares, interests, rights to purchase, warrants, options, participation or other equivalents of or interests in (however designed) equity of such Person, including any Preferred Stock, but excluding any debt securities convertible into such equity. "Casualty Insurance" means insurance which is primarily concerned with the losses caused by injuries to third persons (i.e., not the policyholder) and the legal liability imposed on the insured resulting therefrom. It includes, but is not limited to, employers' liability, workers' compensation, 3 public liability, automobile liability, personal liability and aviation liability insurance. It excludes certain types of loss that by law or custom are considered as being exclusively within the scope of other types of insurance, such as fire or marine. "Catastrophic Coverage" or "CAT Coverage" or "CAT" means the minimum available level of Multiple-Peril Crop Insurance, providing coverage for fifty percent (50%) of a farmer's historical yield for eligible crops at sixty percent (60%) of the price per commodity unit for such crop set by the FCIC. CAT Coverage currently is offered through private insurers and, in certain states prior to Crop Year 1998, was offered by USDA field offices. "CAT Administrative Fee" means the processing fee the policyholder must pay for CAT Coverage in accordance with the Act and 7 C.F.R. Chapter IV. The CAT Administrative Fee is the only payment an insured makes for such coverage; there is no premium billing. "CAT LAE Reimbursement Payment"means an LAE Reimbursement Payment made by the FCIC to an insurer holding an SRA with the FCIC equal to four and seven-tenths percent (4.7%) of the total net book premium for eligible CAT crop insurance contracts computed at sixty-five percent (65%) of the recorded or appraised average yield indemnified at one hundred percent (100%) of the projected market price, or equivalent coverage or such other amount as may be contained in the SRA governing the Crop Year. "Cede" means (i) the method (or agreement) by which an insurance company reinsures its risk with another insurance company, it "Cedes" business and is referred to as the "Ceding Company" or (ii) to pass on to another insurer (the reinsurer) all or part of the insurance written by an insurer (the Ceding Company) with the object of reducing the possible liability of the latter. "Ceding Company" means an insurance company that Cedes business to another company or reinsurer. "Change of Control" means any transaction or series of transactions in which any Person or group (within the meaning of Rule 13d-5 under the Exchange Act and Section 13(d) and 14(d) of the Exchange Act) other than G. Gordon Symons, Alan G. Symons, Douglas H. Symons and members of the Symons family or entities directly or indirectly controlled by them acquires all or substantially all of the assets of the Company, IGFH or IGF, or becomes the direct or indirect "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), by way of merger, consolidation, other business combination or otherwise, of greater than fifty percent (50%) of the total voting power (on a fully diluted basis as if all convertible securities had been converted and all options and warrants had been exercised) entitled to vote in the election of Directors of the Company, IGFH, IGF or the Surviving Person (if other than the Company, IGFH or IGF). "Change of Control Average Pre-Tax Income" for 1998 and future years means the Weighted Average of the Pre-Tax Incomes for 1997, 1998, and 1999 if the Change of Control Put or Call Mechanisms are triggered before January 1, 2000 and the Weighted Average of the Pre-Tax Incomes 4 for 1997, 1998, 1999 and 2000 if those same Mechanisms are triggered after January 1, 2000 but prior to June 30, 2000. "Change of Control Call Mechanism" means a Call Mechanism triggered by a Change of Control. "Change of Control Put Mechanism" means a Put Mechanism triggered by a Change of Control. "Change of Control Triggering Event" means a Change of Control. "Closing" means the date and event(s) at which this Agreement, if not already executed, and all of the Ancillary Agreements are executed and the applicable requirements outlined in Articles 2 and 7 are fulfilled. "Closing Agreements" means this Agreement, the Reinsurance Agreements, the LLC Operating Agreement, the REAP Agreement, the MPCI ISA, the Crop Hail ISA, the Supplemental Intellectual Property Transfer Agreement, the General Conveyance Assignment and Bill of Sale and Transfer of Assets, and the Assignment and Assumption Agreement. "Closing Date" shall have the meaning ascribed in Section 2.1 hereof. "CNA" means Continental Casualty Company, an Illinois insurance corporation, including but not limited to its Affiliates. "CNA AgTech" means CNA Agriculture Technology and Services, Inc., an Illinois corporation. "CNA's Assets" means those Assets detailed on Schedule 3.2 hereto. "CNA Crop Hail Gross Book Premium" means the gross premiums for Crop Hail policies and related endorsements written (less any return premiums) on paper excluding business fronted for IGF of CNA Affiliates for the 1998 Crop Year, plus or minus the amount of premiums on such business Ceded to CNA by Producers Lloyds and Canadian Hail Entity. For 1999 and future years, this term shall mean the CNA Crop Hail Gross Book Premium as computed for the 1998 Crop Year multiplied by one (1) plus the percentage change from 1998 to the future year in Total Industry Crop Hail Writings as determined and reported by NCIS. Note that the percentage change can be either positive or negative and thus a future year CNA Crop Hail Gross book Premium may be more or less than the 1998 amount. This definition may change if the reinsurance arrangement with Producers Lloyds changes as outlined in that section. "CNA Crop Hail Policies" means primary coverage Crop Hail insurance policies or other Crop Hail risk management products written or sold by CNA or its Affiliates. "CNA Crop Hail Proportion" for a given year means the ratio of the CNA Crop Hail Gross Book Premium for that year to Combined CNA/IGF Crop Hail Gross Book Premium for that year. 5 "CNA Employee" means those Persons listed on Schedule 2.2. "CNA Field Offices" means the current office locations of CNA Agriculture which offices are located in Spokane, Washington, Cary, North Carolina, Amarillo, Texas, Springfield, Illinois and Overland Park, Kansas. "CNA MPCI Net Book Premium" means for the 1998 Crop Year the MPCI Net Book Premium written by CNA under its 1998 SRA as reported in the Operations Report plus the MPCI Net Book Premium written by Producers Lloyds under its 1998 FCIC SRA that is Ceded to CNA. For 1999 and future Crop Years, this term shall mean the CNA MPCI Net Book Premium as computed for the 1998 Crop Year multiplied by one (1) plus the percentage change from 1998 to the future year in Total Industry MPCI Writings as determined and reported in the Summary of Business Reports. The percentage change can be either positive or negative and thus a future year CNA MPCI Net Book Premium may be more or less than the 1998 amount. "CNA MPCI Policies" means all primary coverage insurance policies or other risk management products written or sold by CNA or its Affiliates that are written, designed, reinsured, and/or subsidized under the authority of the Act through an SRA or other agreement with FCIC. "CNA MPCI Proportion" for a particular Crop Year means the ratio of CNA MPCI Net Book Premium for such year to Combined CNA/IGF MPCI Net Book Premium for that year. "CNA Policies" means CNA MPCI Policies and CNA Crop Hail Policies. "CNA Producers Lloyds Reinsurance Agreement" means that certain MPCI Reinsurance Agreement by and between CNA and Producers Lloyds dated August 29, 1997 (#0929-00-0017) and any successor thereto. "Code" means the Internal Revenue Code of 1986, as amended, and effective as of the date hereof. "Combined CNA/IGF MPCI Net Book Premium" means the sum of MPCI Net Book Premium from the SRA(s) held by each of IGF and CNA in the Crop Year in which a computation is made. "Combined CNA/IGF Crop Hail Gross Book Premium" means the sum of Crop Hail Gross Book Premiums written by each of IGF and CNA in the Crop Year in which a computation is made. "Combined Net Underwriting Gain (Loss)" means the sum of (i) the underwriting gain (loss) on the IGF FCIC SRA and CNA FCIC SRA, if any, as reported on the Operations Report, and (ii) that amount of underwriting gain (loss) on the Producers Lloyds FCIC SRA, if any, reported on the Operations Report that is Ceded to CNA. This Combined Net Underwriting Gain (Loss) shall be reduced (increased) by any gain (loss) shared under any third-party profit sharing agreements such as with NACU but excluding the costs of third party reinsurance agreements. 6 "Company" or "SIG" means Symons International Group, Inc. and its Subsidiaries, unless the context indicates otherwise. "Confidential Information" shall have the meaning as is ascribed to such term in Section 6.15 hereof. "Crop Hail" means a policy of insurance indemnifying a crop producer for crop damage caused by the perils of hail and fire, including perils recognized and approved as Crop Hail by NCIS, all policy endorsements involving such perils, HAILPLUS(TM) marketed by IGF, any and all non-NCIS approved basic policies written by CNA covering the perils of hail and fire marketed as a substitute policy for the NCIS approved basic policies, and nonstandard endorsements such as IGF's Production Guarantee endorsement marketed by IGF or CNA as substitutes for NCIS approved basic endorsements. Excluded from this definition is named peril hail insurance or hail insurance written as a component of MPCI. "Crop Hail Agreement" means the Crop Hail Insurance Quota Share Agreement, attached hereto as Exhibit D. "Crop Hail Contract" means the Crop Hail Insurance Quota Share Contract attached hereto as Exhibit C. "Crop Hail Crop Year" means the calendar year. "Crop Hail Gross Book Premium" means the total of amount of Crop Hail and related endorsement premiums written in a given year by an insurer that is reported to NCIS for statistical purposes. "Crop Hail ISA" or "Crop Hail Fronting Agreement" means that Crop Hail Insurance Services and Indemnity Agreement attached hereto as Exhibit E. "Crop Insurance Business" means MPCI and Crop Hail, but shall specifically exclude named peril and speciality risks insured by IGF. "Crop Revenue Coverage" or "CRC" means the revenue-based insurance policy by this name approved by FCIC for reinsurance and subsidy and reinsured under the SRA which provides an insured with a guaranteed revenue stream by combining both yield and price variability protection. "Crop Year" means, with respect MPCI, the MPCI Crop Year, and with respect to Crop Hail, the Crop Hail Crop Year. "Due Diligence Period" means that period which ends fifteen (15) business days from February 3, 1998 or such other time as may be mutually agreed by the parties. "Effective Time" means 12:01 A.M. on March 17, 1998, or such other time as may be mutually agreed to by the parties hereto. 7 "Employment-Related Liability" means any and all loss, cost, damages, liability, claim, obligation, judgment, payment, set-off, set-aside, remedial action, defense cost (including, but not limited to, attorneys' fees), accommodation, arrangement, accrual, annuity, or burden (financial or otherwise), resulting or arising from or related to (i) any benefit, pension, vacation, welfare, retirement, cafeteria, supplemental, compensation (including, but not limited to, deferred compensation), savings, stock, option (including traditional stock options and derivative-type plans such as stock appreciation rights and phantom stock), investment or any other plan (whether qualified or non-qualified, written or not), (ii) any written or oral contract of employment, or (iii) any right, at law or equity as (i), (ii) or (iii) above pertains to any CNA Employee. "Environmental Laws" means any and all foreign, Federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any Governmental Authority or other Requirements of Law (including common law), regulating, relating to or imposing liability or standards of conduct concerning protection of human health or the environment, as now or may at any time hereafter be in effect. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Federal Crop Insurance Corporation" or "FCIC" means the wholly-owned government corporation within the USDA created by Section 503 of the Act (7 U.S.C. 1503) and authorized to carry out all actions and programs authorized by the Act. "Front" means a contractual arrangement whereby one licensed insurer issues a policy on a risk for and at the request of one or more other insurers with the intent of passing all or virtually all of risk by way of reinsurance to the other insurer(s). The licensed insurer is considered the organization in front of the insurance transaction. "Fronting Company" means a licensed insurer that enters into an agreement with an insurer to issue policies in a state on behalf of another insurer. "Governmental Authority" means any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government (including, without limitation, the NAIC). "Gross Premiums Written" means direct premiums written (less cancellations and returns) plus premiums collected in respect of policies assumed, in whole or in part. "IGF" means IGF Insurance Company, an Indiana insurance corporation, and an indirect, wholly-owned Subsidiary of the Company. 8 "IGFH" or "IGF Holdings" means IGF Holdings, Inc., an Indiana corporation, and a wholly-owned Subsidiary of the Company. "IGF MPCI Policies" means all insurance policies or other risk management products written, sold, or reinsured by IGF or its Affiliates that are written, designed, reinsured and/or subsidized under the authority of the Act through an SRA or other agreement with FCIC. "Industry MPCI Gross Written Premium" means the total MPCI Premium reported by FCIC on its Summary of Business Reports written by reinsured companies holding SRAs with FCIC. This amount includes premiums from Additional Coverage plus CAT Coverage and all premiums from revenue-based products, pilot projects, and other products covered by the SRA or amendments thereto. "Insurance Subsidiary" means any regulated insurance company which is a wholly-owned Subsidiary of either CNA or IGF. "Letter of Intent" means that Letter of Intent and Term Sheet dated February 2, 1998 and attached hereto as Exhibit G. "LLC Operating Agreement" means the Limited Liability Company Agreement of [New Field] LLC attached hereto as Exhibit H. "Loss Adjustment Expenses" or "LAE" means external expenses incurred in the settlement of claims, including outside adjustment expenses, (including, but not limited to, part-time adjusters), legal fees and other costs associated with the claims adjustment process, but not including general overhead expenses. "Loss and LAE Reserves" means liabilities established by insurers to reflect the ultimate estimated cost of claim payments as of a given date. "Losses Paid and/or Reserved" means the sum total of claims payments made to insureds plus those amounts reserved, according to standard underwriting procedures and regulations, for the payment of pending or expected claims. "Material Adverse Effect" means a material adverse effect on (i) the business, assets, property, condition (financial or otherwise) or prospects of either of the parties hereto (including, without limitation, their Affiliates and Subsidiaries) taken as a whole, or (ii) the validity or enforceability of this Agreement or any of the rights or remedies of the parties hereto arising from this Agreement. "Materials of Environmental Concern" means any gasoline or petroleum (including crude oil or any fraction thereof) or petroleum products or any hazardous or toxic substances, materials or wastes, defined or regulated as such in or under any Environmental Law, including, without limitation, asbestos, polychlorinated biphenyls and urea-formaldehyde insulation. 9 "MPCI Contract" means the Multiple Peril Crop Insurance Quota Share Contract attached hereto as Exhibit A. "MPCI Crop Year" means the twelve (12) month period commencing on July 1 and ending on June 30 of the following year. This definition is synonymous with the Reinsurance Year established by FCIC in its SRA and any change in the FCIC SRA definition of Reinsurance Year will control the definition of Crop Year herein. For avoidance of doubt, the "2000 MPCI Crop Year" is the Crop Year that begins July 1, 1999 and ends June 30, 2000. "MPCI Excess Loss Adjustment Expense" or "XLAE" means an excess LAE payment made by FCIC to an insurer holding an SRA with FCIC as reimbursement for LAE in excess of normal LAE expenses that are otherwise covered in the Federal crop insurance program by the A & O Subsidy and the CAT LAE provisions of the SRA. This XLAE has historically been paid as a percent of premiums written on a per state, per reinsurance fund basis to the extent loss ratios on a per state, per reinsurance fund basis exceed specified levels. The 1998 FCIC SRA includes XLAE provisions for both additional coverage and CAT Coverage. The 1999 FCIC SRA includes provisions providing only for XLAE on CAT Coverage. Future SRAs may include both or neither. "MPCI Imputed Premium" means, for purposes of the profit/loss sharing formulas, LAE and XLAE Reimbursement and other provisions in the FCIC SRA, that amount of premium actuarially determined by FCIC to be appropriate for CAT Coverage although no premium is charged to the insured. It is the amount of premium a farmer would pay for the coverage if they were so charged. "MPCI ISA" or "MPCI Fronting Agreement" means the Multiple Peril Crop Insurance Services and Indemnity Agreement attached hereto as Exhibit F. "MPCI Net Book Premium" means the total premium calculated for all eligible crop insurance contracts, less A & O Subsidy, cancellations and adjustments that are written under a FCIC SRA. This premium includes the Risk Premium Subsidy, premiums paid by insureds, MPCI Imputed Premium, and insured-paid premiums and Risk Premium Subsidy from all revenue-based or other nonstandard MPCI contracts included within the SRA for reinsurance and subsidy. "MPCI Policies" means, collectively, all IGF MPCI Policies, CNA MPCI Policies, Producers Lloyds MPCI Policies, and any other MPCI Policies the risk on which is assumed by IGF or CNA. "MPCI Premium" means, for purposes of the profit/loss sharing arrangement with the federal government, the amount of premiums for all Buy-up Coverage sold, consisting of amounts paid by farmers plus the amount of any related federal premium subsidies. "MPCI Reinsurance Agreement" means the Multiple Peril Crop Insurance Quota Share Agreement attached hereto as Exhibit B. 10 "MPCI Retention" means the MPCI Net Book Premium reduced by premiums Ceded in respect of liability reinsured by FCIC under the SRA. This is the MPCI Premium on which the insurer bears, before third party reinsurance, one hundred percent (100%) of the risk of loss. "MPCI Underwriting Gain (Loss)" means (i) the CNA MPCI Proportion multiplied by (ii) the Combined CNA/IGF Net Underwriting Gain (Loss). "Multiple-Peril Crop Insurance" or "MPCI" means a federally-regulated, subsidized and reinsured crop insurance program that provides producers of crops with varying levels of insurance protection against substantially all natural perils to growing crops. "NAIC" means the National Association of Insurance Commissioners. "NACU" means the North American Crop Underwriters, Inc. "NCIS" means the National Crop Insurance Services, Inc., the actuarial data facility for the commercial crop insurance industry. "Net Premiums Earned" means Net Premiums Written less unearned premium. "Net Premiums Written" means the total premiums for insurance written (less any return premiums) during a given period, reduced by premiums Ceded in respect of liability reinsured by other insurers or the FCIC. "Net Retained Premiums" means the MPCI Net Book Premium reduced by premiums Ceded in respect of liability reinsured by FCIC under the SRA. These are the MPCI Premiums on which the insurer bears, before third party reinsurance, one hundred percent (100%) if the risk of loss. "New Field" means the joint venture project, to be organized as a limited liability company ("LLC") between CNA and IGF. "Olympic Average" means the average determined for a particular set of numbers which is calculated after excluding the single highest number within the set and the single lowest number within the set prior to ascertaining the average (i.e., a five- year Olympic Average would be the average of three (3) years of numbers after the high and low years' numbers were excluded). "Operations Report" means the official monthly accounting report and reconciliation furnished to an SRA holder by FCIC. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency, instrumentality or political subdivision thereof, or any other entity. 11 "Plan of Operation" means that document and supporting documents submitted to FCIC as described in and required by the SRA and Appendix 2 thereto. "Policies-In-Force" means policies written and recorded on the books of an insurer which are unexpired as of a given date. "Pre-Tax Income" for each Crop Year, with the exception of 1997, means the sum of the payments, on a pre-tax basis, received by CNA through the MPCI Reinsurance Agreement and Crop Hail Agreement in such year, including recoveries (net of costs) under any third party reinsurance agreement to which CNA is a party and inures to the benefit of CNA and IGF. For 1997, Pre-Tax Income means $5.4 million. "Price Election" means the maximum per unit commodity price by crop to be used in computing MPCI Premiums, determined annually by the FCIC. "Producers Lloyds" means Producers Lloyds Insurance Company headquartered in Amarillo, Texas which writes both MPCI and Crop Hail and, as of 1998, holds an SRA with FCIC and a private reinsurance agreement with CNA. "Producers Lloyds MPCI Policies" means all insurance policies or other risk management products written, sold or reinsured by Producers Lloyds or its Affiliates that are written, designed, reinsured and/or subsidized under the authority of the Act through an SRA or other agreement with FCIC. "Pure CNA Crop Hail Gross Book Premium" means the total amount of Crop Hail and related endorsement premiums written in a given year on the paper of CNA (excluding business fronted for IGF) which is reported to NCIS for statistical purposes; it does not include any premiums assumed under any Reinsurance Agreements nor does it include, beyond 1998, any premiums written on CNA paper through the Insurance Services Agreement on behalf of IGF. "Put Note" means the note payable through which SIG, IGFH or IGF may pay CNA if CNA exercises its rights under the Put Mechanism or the Change of Control Put Mechanism. The terms of the note for each such Mechanism are outlined in subsections 3.8.B.i and 3.8.B.ii, respectively. "Put Right" or "Put Mechanism" means the right of CNA to terminate, due to a Change of Control or otherwise, the MPCI Reinsurance Agreement and Crop Hail Agreement pursuant to the provisions of Article 3 as of the end of the most recently completed Crop Year. "Quota Share Reinsurance" means a form of reinsurance in which the reinsurer shares a proportional part of both the original premiums and the losses of the reinsured. "REAP" means the software program developed by CNA or at its expense through which its agents can electronically transmit MPCI, Crop Hail and other insurance policy data to CNA. 12 "REAP Agreement" means the Software License Agreement attached hereto as Exhibit J. "Reinsurance" means the practice whereby a company called the "reinsurer" assumes, for a share of the premium, all or part of a risk originally undertaken by a Ceding Company. "Reinsurance Account" means an account maintained by FCIC in which a portion of the underwriting gains earned under the terms of the FCIC SRA are deposited and held, in the insurer's name, for future distribution under the terms of the SRA. "Reinsurance Agreements" means the MPCI Reinsurance Agreement, the MPCI Contract, the Crop Hail Agreement and the Crop Hail Contract and any successor agreements thereto entered into pursuant to this Agreement. Reinsurance Agreement does not include any third party reinsurance agreements, including but not limited to, the CNA agreements with Producers Lloyds and Canadian Hail, the Multi-year Stop Loss MPCI and Crop Hail Agreements held by IGF, and any Named Peril Quota Share or Stop Loss Agreement(s) held by IGF at the time of Closing. "Reinsurance Year" means the period so stated in the appropriate Reinsurance Agreement. "Related Business" means the business of providing property and casualty insurance to individuals or farms and any business related, ancillary or complementary to such business. "Reporting Organization" means the term utilized by the FCIC to refer to those entities that have entered into an SRA with the FCIC and, therefore, report premiums and losses on MPCI to the FCIC. "Requirements of Law" means, as to any Person, the certificate of incorporation and bylaws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Retention" means the amount of liability, premiums or losses which an insurance company retains for its own account after reinsurance. "Risk Premium Subsidy" means the amount of subsidy paid by the FCIC, pursuant to the Act, on the eligible insured's behalf to help make MPCI and other authorized products more affordable. This subsidy is comprised and computed based solely on premiums associated with the risk of loss as distinguished from premiums that may be associated with any program administrative or operating (A&O) costs. FCIC does provide an A&O Subsidy in addition to the Risk Premium Subsidy. "Service Agreements" means the MPCI ISA and the Crop Hail ISA and any other agreements entered into pursuant to this Agreement that involve the service and management of policies written hereunder or written by CNA in previous years. 13 "SIG" or "Company" means Symons International Group, Inc., an Indiana corporation and its Subsidiaries, unless the context indicates otherwise. "Standard Reinsurance Agreement", "SRA" or "FCIC SRA" means the agreement that establishes the terms and conditions under which the FCIC will provide subsidy and reinsurance on eligible crop insurance contracts written pursuant to plans of insurance authorized by the Act and regulations promulgated thereunder and sold or reinsured by private insurance companies. The term includes any mandatory or optional amendments to the SRA. "Statutory Accounting Practices" or "SAP" means the accounting practices which consist of recording transactions and preparing financial statements in accordance with the accounting rules and procedures prescribed or permitted by state regulatory authorities. "Subsidiary" means any corporation, association, partnership or other business entity of which more than fifty percent (50%) of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by a corporation or by one or more its subsidiaries, or by a corporation and one or more of its subsidiaries. "Summary of Business Reports" means the weekly updated reports published by FCIC indicating, among other things, MPCI Additional Coverage and CAT Premiums Written along with associated liability levels, Risk Premium Subsidies, indemnities paid, loss ratio, and acreage insured. "Supplemental Intellectual Property Transfer Agreement" means that document to be entered into to transfer the intellectual property (other than REAP) of the CNA Assets. "Surviving Person" means, with respect to any Person involved in any merger, consolidation or other business combination or the sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of such Person's assets, the Person formed by or surviving such transaction or the Person to which such disposition is made. "Term" means the term of this Agreement, as more fully set forth in Article 11. "Territory(ies)" means all states of the United States and all provinces and territories of the Dominion of Canada. "Total Industry Crop Hail Writings" means the gross premiums on Crop Hail policies and related endorsements written by all licensed insurers on crops grown in the United States as reported to and published by NCIS on an annual basis. 14 "Total Industry MPCI Writings" means the gross premiums on MPCI policies and related endorsements written by all licensed insurers on crops grown in the United States as reported to and published by NCIS on an annual basis. "Trade Secrets" shall the meaning ascribed in Section 6.16 hereof. "Transition Plan" means that document jointly developed by IGF and CNA which is attached as Exhibit 2.3 hereto. "Trust" means SIG Capital Trust I. "Underwriting" means the insurer's or reinsurer's process of reviewing applications submitted for insurance coverage, accepting or denying all or part of the coverage requested and determining the applicable premiums. "Underwriting Committee" means the group of not less than four (4) people, including one CNA representative, to be formed pursuant to Article 3 of this Agreement that will have the responsibility of establishing underwriting guidelines for the MPCI and Crop Hail written pursuant to this Agreement. "USDA" means the United States Department of Agriculture. "Voting Stock" of a Person means all classes of Capital Stock or other interests (including partnership interests) of such Person then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof. "Weighted Average" means the average of a set of numbers arrived at by multiplying the highest and lowest numbers in the set by fifty percent (50%) and adding those products with the other numbers in the set and then dividing the entire sum by a number equal to the total number of numbers in the set less one. For avoidance of doubt, the weighted average of the following set of numbers would be as illustrated: Set: 10, 15, 8, 20; Formula: (20*.5) + (8*.5) + 10 + 15 = 39 all divided by 3 with the result being 13. "Wholly-Owned Subsidiary" means a Subsidiary all the Capital Stock (other than director's qualifying shares and shares held by other Persons, to the extent such shares are required by applicable law to be held by a Person other than the Company or a Subsidiary) of which is owned by the Company or by one or more Wholly-Owned Subsidiaries. ARTICLE 2 CLOSING 2.1 Time of Closing. Unless otherwise agreed by the parties hereto, the Closing of the transactions contemplated by this Agreement will occur at the Effective Time ("Closing Date"). If, 15 however, at the Effective Time the parties hereto are working in good faith towards finalizing all Ancillary Agreements and are preparing for Closing and the parties hereto agree that it appears reasonably likely that the finalization of such Ancillary Agreements will take place within thirty (30) days of the Effective Time, the period for closing this transaction shall be extended to a time mutually agreed by the parties. 2.2 Transfer of Employees and Assets. At the Effective Time the CNA Employees will become employees of IGFH. Possession and right of use of CNA's Assets will be transferred to IGFH at the Effective Time. 2.3 Transition Teams. As of the date hereof, the transition teams outlined in the Transition Plan Master Schedule, Exhibit 2.3 hereto, will immediately begin work in good faith to accomplish the objectives as are set forth in Exhibit 2.3. IGF shall have access from the date hereof until the Effective Time to CNA Employees and the physical facilities used by CNA to manage the Business. 2.4 Acts of Closing. At the Closing, the parties hereto shall execute and deliver the Closing Agreements and all other instruments required or contemplated by this Agreement or shall be reasonably necessary to carry out the purposes of this Agreement to be so executed and not theretofore executed and delivered. All actions taken at Closing shall be deemed to have occurred simultaneously. 2.5 Break-Up Fee. If at the conclusion of the Due Diligence Period this Agreement is unexecuted and the parties hereto nonetheless mutually agree to go forward with the transactions contemplated hereby, and thereafter this Agreement is not executed within thirty (30) days of the conclusion of the Due Diligence Period (or such other time as the parties hereto may mutually agree) through no fault of CNA, then IGFH shall pay CNA the sum of five hundred thousand dollars ($500,000) ("Break-Up Fee") as full and complete compensation for IGFH's failure to execute this Agreement. Notwithstanding the foregoing sentence, IGFH shall not be responsible to pay the Break-Up Fee to CNA if this Agreement is not executed due to strikes, acts of God, governmental restrictions, enemy action, civil commotion, fire, unavoidable casualty or other similar causes beyond the control of IGFH and its Affiliates. ARTICLE 3 TRANSFER OF MANAGEMENT RESPONSIBILITY; MPCI AND CROP HAIL BUSINESS 3.1 Assumption of Management. At the Effective Time, CNA shall transfer to IGF and IGF shall assume the management responsibilities of the entire MPCI and Crop Hail books of business of CNA (the "Business"). Management responsibilities shall include, but are not limited to, sales, underwriting, loss adjustment, claims processing, agent (representative) relations and contracting, policy generation, policy, form and rate development and filing and all other activities incidental to and necessary for the management of the Business as is contemplated hereby. Subject 16 to the Service Agreements, at the Effective Time CNA shall cease management responsibility and control of management decisions relating to the Business. 3.2 Transfer of Supporting Policies, Data, and Assets. At the Effective Time, CNA shall transfer to IGF and IGF shall receive from CNA all policy forms, insurance data and supporting capital assets used by CNA in the Business. The supporting capital assets include, but are not limited to those outlined in Schedule 3.2 ("CNA's Assets"). It is expressly understood that IGF shall receive from CNA, among other things, licenses (at no cost to IGF) to use all software and hardware currently used by CNA in the Business, including the REAP system. It is expressly agreed and understood that the REAP system may be used by IGF at no cost to IGF, only to process CNA Policies until June 30, 1999. All other software transferred to IGF as part of CNA's Assets may be utilized by IGF, at no cost, until June 30, 199 9. 3.3 Employment of Personnel. Unless otherwise agreed by the parties, the CNA Employees will become employees of IGFH at the Effective Time, and shall have available all employee benefits available to all current IGFH employees. No third party beneficiary rights are hereby created in any CNA Employee. 3.4 Execution of Ancillary Agreements. CNA and IGFH will execute the Ancillary Agreements. 3.5 No Assumption of Liabilities. Except for the Assumed Obligations IGF does not and shall not assume, nor does or shall it take subject to or become or be liable, obligated or responsible for, any debts, liabilities or obligations of CNA of any kind or nature whatsoever, known or unknown, whether by the execution, delivery or the performance of this Agreement, by the receipt of CNA's Assets, by employment of the CNA Employees, by the exercise of any rights or possession with respect to CNA's Assets or otherwise, and whether now or hereafter arising or whether contingent or liquidated in amount, and whether relating to or arising out of the ownership or operation by CNA of the Business or CNA's Assets, including, without limitation, any debts, liabilities or obligations of CNA for wages, salaries, commissions, Employment-Related Liabilities, unemployment compensation or other compensation or benefits of any kind, or any debts, liabilities or obligations arising out of any accounts payable, tax liabilities, product liabilities, errors and omissions liabilities, contracts, agreements, liabilities of CNA arising under any reinsurance agreements with third parties (including the FCIC), any policies of insurance issued by CNA, any products written under the Excess Lines, any pending or future investigations by the Compliance Division of Risk Management Agency or its successor, the USDA, the U.S. Department of Justice, or any Governmental Authority related to the Business or the Ancillary Agreements for Crop Years prior to 1998 and for business written in Crop Year 1998 prior to the date of Closing where the liability is unrelated to any action taken by IGFH with respect to such Business after the date of Closing, any Service or Managing General Agency Agreement related to any Business. 17 3.6 Maintenance of SRAs. A. CNA will use its commercially reasonable best efforts to remain an SRA holder and will cooperate to such extent requested by IGF and will amend its 1998 Plan of Operations with FCIC as shall be necessary to fulfill the terms of this Agreement and the Ancillary Agreements and to satisfy the FCIC with the objective that CNA remains an SRA holder for the entire 1998 Reinsurance Year. B. CNA will consult with IGF and will cooperate in the administration of the CNA SRA in accordance with the Reinsurance Agreements and the Service Agreements. C. In the event the FCIC will permit CNA to retain its SRA beyond the 1998 Crop Year, CNA may do so only upon the express written consent of IGF. D. Unless the option to maintain two SRAs is available and exercised by IGF, then for 1999 and future Reinsurance Years, IGF shall hold the SRA through which all of the Business is written with the exception of the portion of the Business Ceded to CNA written under the Producers Lloyds SRA. E. In the event that Producers Lloyds decides not to maintain its SRA CNA will use its commercially reasonable best efforts to assist IGF in persuading Producers Lloyds to accept IGF as its insurance carrier thereby maintaining the Producers Lloyds MPCI Premium within the Combined CNA/IGF MPCI Net Book Premium. 3.7 Underwriting Committee. IGF shall form the Underwriting Committee of four (4) individuals which shall establish underwriting guidelines for the Business. CNA shall have the right to select one (1) member of the Underwriting Committee. IGF shall have the exclusive right to approve, disapprove, or modify the guidelines established by the Underwriting Committee. 3.8 Special Sale and Purchase Rights. A. In General. The following provisions shall apply to all Put and Call Mechanisms and Change of Control Put and Change of Control Call Mechanisms described in this Article: i. Termination of Certain Ancillary Agreements. The exercise of a Put or Call Mechanism or Change of Control Put or Change of Control Call Mechanism (collectively "Mechanisms") authorized under this Section shall terminate the MPCI Reinsurance Agreement and Crop Hail Agreement as of the end of the most recently completed Crop Year. For purposes of this Agreement, the last Crop Year included for purposes of calculating Average Pre-Tax Income in the case of a Put or Call Mechanism other than a Change of Control Put or Call Mechanism shall be the Crop Year ending immediately prior to the date of exercise of such Put or Call Right. This 18 termination shall not terminate any obligations that may survive the termination of this Agreement and the Ancillary Agreements. ii. Effective Period. a. Any Put or Call Mechanism shall only be effective for the 2001 Crop Year and subsequent Crop Years. b. Any Change of Control Put or Change of Control Call Mechanism shall only be effective if exercised prior to the 2001 Crop Year. iii. Estimate of Amounts Due; Notice. In computing any of the amounts due and any of the figures (i.e., Pre-Tax Income and Average Pre-Tax Income) necessary to compute such amounts under any of the Mechanisms outlined in this Article, the parties may, upon mutual agreement, estimate any and all necessary amounts subject to adjustment as the parties may mutually agree. IGF shall receive written notice from CNA forty-five days (45) days in advance of any exercise of a Put Right. iv. Non-competition Period. The payment of funds pursuant to the Mechanisms outlined in this Section by any party shall give rise to and begin to toll the periods of non-competition outlined in Article 6 of this Agreement, which shall survive such termination. B. CNA's Put Mechanisms. i. Put Mechanism. From the 2001 Crop Year and forward, CNA will have the ability to terminate the MPCI Reinsurance Agreement and the Crop Hail Agreement and receive from IGF the compensation provided for in subsection 3.8.B.i.a. a. Sales Price. In the event CNA shall exercise the Put Mechanism, IGFH shall be obligated to pay CNA an amount equal to 5.85 times the Average Pre-Tax Income as computed pursuant to this Section. b. Sales Terms. Within thirty (30) days notice of exercise of the Put Mechanism by CNA, IGF will execute a promissory note payable to CNA in the principal amount equal to the amount owed to CNA as specified in this subsection, which shall be dated as of the date exercise of the Put Mechanism. The principal and accrued interest under the note, if any, thereon shall be due and payable if not sooner paid, on the date which is six (6) months from the date of the note. The note shall not bear interest for the first ninety (90) days thereof. Thereafter the note shall bear simple interest 19 at the rate which is equal to the 90 Day T-Bill rate in effect on the date which is ninety-one (91) days subsequent to the date of the note. ii. Change of Control Put Mechanism. Upon the occurrence of a Change of Control prior to the 2001 MPCI Crop Year, CNA will have the ability to terminate the MPCI Reinsurance Agreement and the Crop Hail Agreement and receive from IGF compensation as provided for in this Article. a. Sales Price. In the event CNA shall exercise a Change of Control Put Mechanism, IGF shall be obligated to pay CNA an amount equal to 5.85 times the Average Pre-Tax Income as computed pursuant to this Section. b. Sales Terms. Upon the exercise of a Change of Control Put Mechanism by CNA, IGF will execute a promissory note payable to CNA in the principal amount equal to the amount owed to CNA as specified in this subsection, which shall be dated as of the date of exercise of the Change of Control Put Mechanism. The principal shall be due and payable if not sooner paid, on the date which is six (6) months from the date of the note. The note shall not bear any interest for the full term thereof. C. IGF Call Mechanisms. i. Call Mechanism. From the 2001 Crop Year and forward, IGF will have the ability to terminate the MPCI Reinsurance Agreement and the Crop Hail Agreement and shall pay CNA compensation as is provided for in subsection 3.8.C.i.a. a. Sales Price. In the event SIG or IGF shall exercise the Call Mechanism, SIG or IGF shall pay CNA an amount equal to 6.70 times the Average Pre-Tax Income as computed pursuant to this Section. b. Sales Terms. Upon the exercise of the Call Mechanism by SIG or IGF, SIG or IGF will execute a promissory note payable to CNA in the principal amount equal to the amount owed to CNA as specified in this subsection, which shall be dated as of the date of the exercise of the Call Mechanism. The principal shall be due and payable if not sooner paid, on the date which is thirty (30) days from the date of the note. The note shall not bear any interest for the full term thereof. ii. Change of Control Call Mechanism. Upon the occurrence of a Change of Control prior to the 2001 MPCI Crop Year, IGF shall have the ability to 20 terminate the MPCI Reinsurance Agreement and the Crop Hail Agreement and shall pay to CNA the compensation as is provided for in subsection 3.8.C.ii.a. a. Sales Price. In the event SIG or IGF shall exercise a Change of Control Call Mechanism, SIG or IGF shall be obligated to pay CNA an amount equal to 6.70 times the Average Pre-Tax Income as computed pursuant to this Section; provided, however, that if SIG or IGFH exercises its the Call Mechanism in Crop Years 1998, 1999 or 2000, the amount paid to CNA shall not be less than fifteen million dollars ($15,000,000). b. Sales Terms. Upon the exercise of a Change of Control Call Mechanism by SIG or IGF, SIG or IGF may either pay the amount owed to CNA as specified in this subsection with the proceeds from the Change of Control event (to the extent relevant) or SIG or IGF may execute a promissory note payable to CNA in the principal amount equal to the amount owed to CNA as specified in this subsection, which shall be dated as of the date of the exercise of the Change of Control Call Mechanism. The principal and any accrued interest, thereon shall be due and payable if not sooner paid, on the date which is six (6) months from the date of the note. The note shall not bear interest for the first ninety (90) days thereof. Thereafter the note shall bear interest at the rate which is equal to the 90 Day T-Bill rate in effect on the date which is ninety-one (91) days subsequent to the date of the note. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF CNA CNA and its Affiliates, jointly and severally, represent and warrant to IGFH as follows: 4.1 Existence and Good Standing. CNA is duly organized, validly existing and in good standing under the laws of their respective states of incorporation and CNA has all requisite power and authority to carry on its operations as they are now being conducted, except where the failure to have such authority would not, individually, or in the aggregate, have a Material Adverse Effect on the business to be transferred pursuant to this Agreement. CNA is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where such qualification is necessary, except for those jurisdictions where the failure to be so qualified would not, individually, or in the aggregate, have a Material Adverse Effect on the business to be transferred pursuant to this Agreement. 4.2 Due Authorization. CNA has the requisite corporate power and authority to execute and deliver this Agreement and the Ancillary Agreements to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the Ancillary Agreements the performance by CNA of its obligations under this Agreement and the Ancillary Agreements have been duly and validly authorized by all necessary corporate action on the part of CNA. No other 21 corporate or shareholder approval on the part of CNA is necessary for CNA to enter into this Agreement and the Ancillary Agreements or to consummate the transactions contemplated hereby. This Agreement (and when executed, the Ancillary Agreements) has been duly and validly executed and delivered by CNA and constitutes its valid and binding obligations, enforceable against them in accordance with its terms, subject to the affect of any applicable bankruptcy, reorganization, insolvency, moratorium, or similar law affecting creditors' rights generally and subject to the affect of general principles of equity. 4.3 No Liens. Except as may be set forth in the Reinsurance Agreements the rights transferred by CNA to IGFH pursuant to this Agreement shall be free and clear of all liens, claims, demands and encumbrances whatsoever. 4.4 No Violation. The execution and delivery of this Agreement or the Ancillary Agreements by CNA will not, and the consummation of the transactions contemplated by this Agreement or the Ancillary Agreements and the compliance with the terms, conditions and provisions of this Agreement or the Ancillary Agreements by CNA and its Affiliates will not: A. violate or conflict with any provision of the articles of incorporation, bylaws, articles of organization or other organizing documents of CNA; or B. conflict with or result in the breach or termination of, or otherwise give any contracting party the right to change the terms of or to terminate or accelerate the maturity of, or constitute a default under the terms of any indenture, mortgage, loan or credit agreement or any other material agreement or instrument to which CNA is a party or by which it or any of its assets may be bound or affected, except to the extent that any of the foregoing would not have a Material Adverse Effect on CNA or its ability to perform its obligations hereunder. 4.5 Foreign Status. CNA is not a "foreign person" within the meaning of Section 1445 of the Code. 4.6 No Broker Transactions. CNA has not made any agreement or taken any action which might cause any person or entity to become entitled to a broker's fee or commission as a result of the transactions contemplated by this Agreement. 4.7 Litigation, Actions and Proceedings. Except as disclosed on Schedule 4.7 hereto, there are no outstanding orders, decrees or judgments by or with any court or Governmental Authority before which CNA was a party that, individually and or in the aggregate, have a Material Adverse Effect on the Business. Except as disclosed on Schedule 4.7 hereto, there are no actions, suits, arbitrations or legal, administrative or other proceedings pending or, to the knowledge of CNA, threatened against CNA, at law or in equity, or before any Governmental Authority which, if adversely determined, would individually or in the aggregate, have a Material Adverse Effect on the Business. 22 4.8 Good Title. With the exception of those applicable provisions of the Reinsurance Agreements and those provisions contained in Article 3 pertaining to the Put Mechanism and Call Mechanism, CNA will deliver good and clear title to CNA's Assets and the Business including, but not limited to, policyholder lists, extant leases, miscellaneous fixed assets and any and all other assets and/or business contemplated hereby, all free and clear of all claims, liens, demands and encumbrances whatsoever. 4.9 Approvals. The transfer by CNA of the Business and CNA's Assets pursuant to this Agreement does not require any consent, approval or authorization of any Governmental Authority. 4.10 Software. CNA has set forth on Schedule 4.10 hereto a true and complete listing, to the best knowledge of CNA, of all computer software programs used principally in the conduct of the Business. Schedule 4.10 hereto also sets forth whether each such computer software program is owned by CNA or licensed by CNA from a third party. CNA has either ownership of or the right to use all software listed on Schedule 4.10, free and clear of any royalty or other similar payment or obligations, claims of infringement or alleged infringement or other lien, charge, claim or other encumbrance of any kind (other than applicable license agreements). CNA is not in conflict with or in violation or infringement of, nor, to the knowledge of CNA, has CNA received any notice of any such conflict with or violation or infringement of, any asserted rights of any other Person with respect to the software and other intellectual property listed on Schedule 4.10. 4.11 Licenses. CNA has the requisite licenses and other necessary approvals of Governmental Authority to engage in the Business in the jurisdictions as set forth on Schedule 4.11 to this Agreement. CNA has been duly authorized by the relevant Governmental Authority in each jurisdiction listed on Schedule 4.11 to issue the contracts of insurance that it is currently writing and which are the subject of the Business, and CNA was duly authorized to issue such contracts in the respective jurisdictions in which it conducts the Business. Except as set forth on Schedule 4.11, CNA has all other permits and approvals from relevant Governmental Authority to conduct the Business in the manner and in the areas in which the Business is presently being conducted and all such permits and authorizations are valid and in full force and effect. 4.12 Leased Premises. CNA has the right pursuant to each and every lease for the office location set forth on Schedule 4.12 to assign the benefits and burdens (excluding overhead) of such lease to IGFH and pursuant to such assignment, IGFH shall be entitled to take possession of such premises at a rental rate which is not in excess of that paid by CNA. 4.13 Environmental Matters. CNA has not in the course of its occupancy of the CNA Field Offices committed any act that would give rise to liability under any Environmental Law and CNA has no knowledge of any act of any Person concerning the CNA Field Offices that could give rise to liability under any Environmental Law. No judicial proceeding or governmental or administrative action is pending, or, to the best of CNA's knowledge, threatened, under any Environmental Law to which CNA is or will be named as a party with respect to the CNA Field Offices, nor are there any consent decrees or other decrees, consent orders, administrative orders or 23 other orders or other administrative or judicial requirements outstanding under any Environmental Law with respect to any CNA Field Office that affect CNA's occupancy thereof. CNA's obligation to indemnify IGF with respect to the foregoing representation under Article 10 of this Agreement shall be limited to claims arising (i) from acts or omissions of CNA that occurred during CNA's occupancy of the premises, and (ii) claims arising from acts or omissions of third persons, liability for which is attributed under applicable law to IGF or IGFH as tenant of the premises and which are asserted against IGF or IGFH or discovered by IGF or IGFH within the initial ninety (90) day period of IGF's or IGFH's occupancy of the premises. 4.14 MPCI Premium Volume. CNA's MPCI Gross Premiums Written and CNA's MPCI Net Premiums Written for Crop Years 1995, 1996 and 1997 are as listed on Schedule 4.14. 4.15 Crop Hail Premium Volume. CNA's Crop Hail Gross Premiums Written and CNA's Crop Hail Net Premiums Written for Crop Years 1995, 1996 and 1997 are as listed on Schedule 4.15. 4.16 Agency Contracts. Schedule 4.16 contains an accurate and complete listing of all agreements (including the party and date of such agreement) that CNA has with agents, managing general agents or others who produce business for CNA (including, but not limited to, Producers Lloyds, NACU and Canadian Hail) that is the subject of this Agreement. CNA will use its commercially reasonably best efforts to cause such agreements to be assigned to IGFH. 4.17 Production Costs. Schedule 4.17 accurately and completely sets forth all costs, by line item (in accordance with CNA's management reporting procedures) incurred by CNA in producing and servicing its Crop Hail and MPCI business for Crop Years 1996 and 1997. 4.18 Standard Reinsurance Agreements. CNA's MPCI Standard Reinsurance Agreement is in full force and effect with the FCIC for Crop Year 1998 and CNA is unaware of any issue, notice or other event or matter that would limit, prohibit or otherwise frustrate the transactions contemplated herein as respects and as is effected by CNA's 1998 Standard Reinsurance Agreement. CNA also has no notice, knowledge, information or other data (other than the normal application and approval process) to indicate that its Standard Reinsurance Agreement for the 1999 Crop Year will not be approved. 4.19 Federal Crop Insurance Corporation. The FCIC is not conducting, nor has during the last five (5) years conducted, any investigation, inquiry, audit or proceeding concerning CNA's compliance with the rules and regulations of the FCIC which would, in the aggregate constitute a Material Adverse Effect. 4.20 Governmental Authority. There is no investigation, audit, inquiry or demand for information of CNA by any Governmental Authority (including, but not limited to, the United States Department of Justice) of CNA during the last five (5) years which has, or CNA believes will have, in the aggregate, a Material Adverse Effect. 24 4.21 Compliance with Laws. Except with respect to those violations, if any, which would not, individually or in the aggregate, have a Material Adverse Effect on the Business, (i) CNA is not in violation of any Federal, state, local or foreign law, ordinance or regulation or any other requirement of Governmental Authority, court or arbitrator applicable to the Business, nor to the knowledge of CNA, has CNA received any written notice that such violation is being alleged, and (ii) without limiting the generality of the foregoing, in connection with CNA's most recently completed or any on-going examination or audit of any Governmental Authority, CNA has not, to its best knowledge, received any notice nor is CNA aware of the intention of any Governmental Authority to send any notice alleging any violation of any such law, ordinance or regulation or directing CNA to take any remedial action with respect to any such law, ordinance or regulation as such may pertain to the Business. 4.22 Insurance Contracts. The forms of insurance contracts available for issuance which relate to the Business, and the states in which such forms are authorized for issuance on the date hereof are listed on Schedule 4.22. All such insurance contract forms have been approved by all applicable Governmental Authority and such forms comply in all material respects with the insurance statutes, regulations and rules applicable thereto. To the knowledge of CNA, at any time wherein CNA paid commissions to any broker or agent within the past thirty-six (36) months in connection with the sale of any insurance contract which is the subject of the Business, each such broker or agent was duly licensed as an insurance broker or agent in the particular jurisdiction in which such broker or agent sold such business for CNA and was licensed or otherwise authorized to sell, on behalf of CNA, the type of insurance contract which is the subject of the Business. Further, no such broker or agent violated (or with or without notice or lapse of time or both would have violated) any federal, state, local or foreign law, ordinance or regulation or other requirement of any Governmental Authority, court or arbitrator applicable to the Business, except where such failure would not, individually or in the aggregate, have a Material Adverse Effect on the Business. Neither the manner in which CNA compensates any Person involved in the sale or servicing of such insurance contracts that is not registered as a broker-dealer or insurance agent, as applicable, nor, to the knowledge of CNA, the conduct of any such Person, renders such Person a broker-dealer or insurance agent under any applicable Federal or state law, and the manner in which CNA compensates each Person involved in the sale or servicing of such insurance contracts is in compliance with all applicable Federal or state laws except where such manner of compensation or conduct having such effect or the failure to be so in compliance would not, individually or in the aggregate, have a Material Adverse Effect on the Business. 4.23 Regulatory Filings. CNA has filed all reports, statements, documents, registrations, filings or submissions (including, without limitation, any sales material) required to be filed by CNA with any Governmental Authority to the extent they relate to the Business, except where the failure to make such filings would not, individually or in the aggregate, have a Material Adverse Effect on the Business. All such registrations, filings and submissions were in compliance in all material respects with applicable law when filed or as amended or supplemented, and CNA knows of no material deficiencies have been asserted by any Governmental Authority with respect to such registrations, filings or submissions that have not been satisfied. 25 4.24 Reinsurance. To the best knowledge of CNA, there are no agreements, written or oral, pursuant to which CNA Cedes or retro-Cedes risks assumed under any insurance contracts which are the subject of the Business. 4.25 Conduct of Business. Since December 31, 1997, CNA has generally conducted the Business only in the ordinary course consistent with past practices, and there has not been any material change in the underwriting, pricing, actuarial, reserving, investment, sales, marketing or agency practices or policies of the Business. 4.26 Other Sale Arrangements. CNA is not obligated or liable, contingently or otherwise, for or with respect to negotiations, letters of intent or commitments for the sale or transfer of all or any part of the Business, whether directly or indirectly. 4.27 Contracts. Schedule 4.27 lists and briefly describes, each and every written contract, agreement, lease, license, commitment or arrangements, including the parties to and the date and subject matter of, and each and every oral contract, agreement, commitment or arrangement to which CNA is a party or which is binding upon CNA that is material to the Business excluding those agreements and documents which are disclosed in other Schedules to this Agreement. Each of the contracts listed on Schedule 4.27 is in full force and effect, and constitutes a legal, valid and binding obligation of CNA, as the case may be, of each other Person that is a party thereto. Except as is set forth on Schedule 4.27, CNA, to its best knowledge, nor any other party to such contract, is in violation, breach or default of any such contract or, with or without notice or lapse of time or both, would be in violation, breach or default of any such contract, except for such violations, breaches or defaults that would not, individually or in the aggregate, have a Material Adverse Effect on the Business. Except as set forth on Schedule 4.27, to the best knowledge of CNA, no such contract contains any provision providing that any party thereto, other than CNA, may terminate such contract by reason of the execution of this Agreement or the Ancillary Agreements or the transactions contemplated thereby. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF IGFH IGF and its Affiliates, jointly and severally, represent and warrant to CNA as follows: 5.1 Existence and Good Standing. IGFH is a corporation duly organized and validly existing under the laws of the State of Indiana and has all requisite power and authority to own, lease and operate its assets, properties and business and to carry on the operations of its business as they are now being conducted, except where such authority is not material to such operations. 5.2 Due Authorization. IGFH has the requisite corporate power and authority to execute and deliver this Agreement (and, when executed, the Ancillary Agreements) and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the Ancillary Agreements and the performance by IGFH of its obligations under this Agreement and the Ancillary 26 Agreements, has been duly and validly authorized by all necessary corporate action on the part of IGFH. No other corporate or shareholder approval on the part of IGFH is necessary for IGFH to enter into this Agreement or to consummate the transactions contemplated thereby. This Agreement (and, when executed, the Ancillary Agreements) has been duly and validly executed and delivered by IGFH and constitutes its valid and binding obligations, enforceable against them in accordance with its terms, subject to the affect of any applicable bankruptcy, reorganization, insolvency, moratorium, or similar law affecting creditors' rights generally and subject to the affect of general principles of equity. 5.3 No Violation. The execution and delivery of this Agreement or the Ancillary Agreements by IGFH will not, and the consummation of the transactions contemplated by this Agreement or the Ancillary Agreements and the compliance with the terms, conditions and provisions of this Agreement or the Ancillary Agreements by IGFH and its Affiliates will not: A. violate or conflict with any provision of the articles of incorporation, bylaws, articles of organization or other organizing documents of IGFH; or B. conflict with or result in the breach or termination of, or otherwise give any contracting party the right to change the terms of or to terminate or accelerate the maturity of, or constitute a default under the terms of any indenture, mortgage, loan or credit agreement or any other material agreement or instrument to which IGFH is a party or by which it or any of its assets may be bound or affected, except to the extent that any of the foregoing would not have a Material Adverse Effect on IGFH or its ability to perform its obligations hereunder. 5.4 No Broker Transactions. Other than with Donaldson, Lufkin & Jenrette for which IGFH is responsible, IGFH has not made any agreement or taken any action which might cause any person or entity to become entitled to a broker's fee or commission as a result of the transactions contemplated by this Agreement. 5.5 Litigation, Actions and Proceedings. There are no outstanding orders, decrees or judgments by or with any court, Governmental Authority or arbitration tribunal before which IGFH was a party that, individually or in the aggregate, have a Material Adverse Effect on the operations of IGFH. There are no actions, suits, arbitrations or legal, administrative or other proceedings pending or, to the best knowledge of IGFH, threatened against IGFH at law or in equity or before any Governmental Authority or before any arbitrator of any kind which, if adversely determined, would individually or in the aggregate, have a Material Adverse Effect on the operations of IGFH. 5.6 Approvals. The execution of this Agreement by IGFH does not require any consent, approval or authorization of any Governmental Authority. 5.7 Reinsurance Agreements. IGF will execute the Reinsurance Agreements. 27 5.8 Compliance With Laws. Except with respect to those violations, if any, that will be cured by IGFH prior to, or by the act of, the Closing of this transaction or which individually or in the aggregate would not have a Material Adverse Effect on the operation of IGFH, IGFH is not in violation of any Federal, state, local or foreign law, ordinance or regulation or any other requirement of any Governmental Authority, court or arbitrator and IGFH has not received any written notice that any such violation is being alleged. 5.9 Permits, Licenses and Franchises. IGFH has been duly authorized by the relevant state Governmental Authority to transact each of the lines of insurance business in each of the jurisdictions as set forth on Schedule 5.9 hereto. Except as listed on Schedule 5.9 hereto, IGFH has all permits and licenses necessary to conduct its business in the manner and in the areas in which such business is presently being conducted, and all such permits and licenses are valid and in full force and effect, except where the failure to have such a permit or license would not, individually or in the aggregate, have a Material Adverse Effect on the operations of IGFH. Except as listed on Schedule 5.9 hereto, IGFH has not engaged in any activity which would cause revocation or suspension of any such permit or license and no action or proceeding looking to or contemplating the revocation or suspension of any such permit or license is pending or threatened. 5.10 Additional License and Permits. In those states or jurisdictions in which IGFH is not licensed as an insurance company, IGFH will comply with all relevant Governmental Authority with respect to its status as a third party administrator or claims adjuster or other licensing laws in connection with the administration of the Business pursuant to this Agreement. ARTICLE 6 COVENANTS 6.1 Execution of Agreements. The parties hereto will execute the Ancillary Agreements (including, but not limited to, the Reinsurance Agreements). 6.2 Conduct of Business. Prior to the Closing, CNA shall in all material respects operate the Business as presently operated and only in the ordinary course and consistent with past practice (including, but not limited to, past underwriting standards), and CNA further covenants to use commercially reasonable best efforts to preserve the value of the Business (including, but not limited to, its relationships with and the good will of CNA's agents, brokers, customers, suppliers, CNA Employees and other Persons having business dealings with CNA in connection with the Business). Without limiting the generality of the foregoing and except as otherwise expressly provided in this Agreement, CNA will not, without the prior written consent of IGFH: A. enter into any contract or other agreement other than in the ordinary course of business (which is consistent with past practice of CNA) with respect to the Business; 28 B. acquire or dispose of CNA's Assets that would otherwise be transferred to IGFH in the transactions contemplated hereby (excepting those acquisitions or dispositions of CNA's Assets which are in the ordinary course of the Business); C. enter into, adopt or terminate any plan, arrangement or contract affecting CNA Employees which could give rise to an Employment-Related Liability (except to the extent that IGFH is fully and completely indemnified by CNA therefore); D. pay, discharge or satisfy any material claims, liabilities or obligations associated with the Business (absolute, asserted or unasserted, contingent or otherwise) other than the payment, discharge or satisfaction in the ordinary course of business which is consistent with CNA's past practice; and E. enter into any contract of reinsurance for the Business. 6.3 Certain Transactions. From the date of this Agreement through Closing, neither CNA, nor any of its officers, Employees, representatives or agents will, directly or indirectly, solicit, encourage or initiate any negotiations or discussions with, or provide any information to or otherwise cooperate in any other manner with, any Person concerning any direct or indirect sale or other disposition of the Business (whether by stock or asset transfer or otherwise). 6.4 Due Diligence. Prior to the execution of this Agreement, IGFH shall have been entitled, through its employees and representatives, to make such investigations of the Business and operation of the Business, as IGFH may reasonably request. CNA and its Employees and representatives (including, without limitation, its counsel, investment bankers and independent public accountants) shall have cooperated with such reasonable requests of IGFH in connection with such review and examination. CNA shall have provided IGFH with full and complete access to every aspect of the Business, subject only to any applicable legal limitations. Without limiting the generality of the foregoing, CNA shall have provided IGFH A. with access to individuals reasonably specified by IGFH to plan the transition of the Business; B. the names of certain individuals (subject to IGFH's reasonable approval) to serve as members of transition teams and cause such individuals to devote reasonable time to transition matters; C. reasonable resources to transition matters (such resources to include, without limitation, office accommodations and related facilities for substantial and continuing presence of IGFH's transition team members on CNA's premises); 29 D. cooperation in connection with IGFH's filing of policy and contract forms to enable IGFH to issue policies and contracts substantially similar to those included in the Business; and E. full cooperation in carrying out of the Transition Plan. In conjunction with the foregoing, CNA hereby acknowledges that the Transition Plan is critical to the success of the transactions contemplated by this Agreement and the Ancillary Agreements. 6.5 Post-Closing Access. Following the Closing, CNA shall allow IGFH, upon reasonable prior notice and during regular business hours, to examine and make copies of any books and records retained by CNA to the extent that such relate to the Business, for any reasonable business purpose, including, without limitation, the preparation or examination of IGFH's tax returns, regulatory filings and financial statements and the conduct of any litigation or regulatory dispute resolution, whether pending or threatened, concerning the conduct of the Business prior to the Closing Date. CNA will further maintain such books and records for IGFH's examination and copying. Access to such books and records shall be at IGFH's expense and may not unreasonably interfere with CNA's business operations. Following the Closing, IGFH shall allow CNA, upon reasonable and prior notice and during regular business hours, the right, at CNA's expense, to examine and make copies of any books and records transferred to IGFH after Closing, for any reasonable business purpose, including, without limitation, the preparation or examination of tax returns, regulatory filings and financial statements and the conduct of any litigation or the conduct of any regulatory, contract holder, participant or other dispute resolution whether pending or threatened, and IGFH will maintain such books and records for CNA's examination and copying. Access to such books and records shall be at CNA's expense and may not unreasonably interfere with IGFH's business operations. 6.6 Consents and Reasonable Efforts. CNA and IGFH shall cooperate fully with one another and use commercially reasonable best efforts to obtain all necessary consents, approvals and agreements of, and to give and make all notices and filings with, any applicable Governmental Authority which may be necessary to authorize, approve or permit the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements (including, but not limited to, any such consents, approvals and agreements which may be necessary from Governmental Authority at the exercise of either the Put or Call Right provided for herein). CNA shall use commercially reasonable best efforts to obtain, and IGFH will cooperate with CNA in obtaining, all other approvals and consents to the transactions contemplated by this Agreement and the Ancillary Agreements respecting the consents, approvals and transfers necessary from third parties under contracts to be assigned. In the event third party consents under contracts to be assigned cannot be obtained, CNA agrees to use commercially reasonable best efforts, in cooperating with IGFH, to obtain comparable benefits for IGFH for the period of this Agreement. 30 6.7 Representation and Warranties. From the date hereof through the Closing Date, CNA and IGFH will use commercially reasonable best efforts to conduct their affairs in such a manner so that, except as otherwise contemplated or permitted by this Agreement or the Ancillary Agreements, the representations and warranties of the respective parties contained herein shall continue to be true, complete and correct in all material respects on and as of the Closing Date as if made on and of the Closing Date. Further, CNA and IGF shall promptly notify the other of any event, condition or circumstance known to them occurring from the date hereof through the Closing Date that would constitute a violation or breach of this Agreement. Prior to Closing, the parties hereto shall provide the other with updates of the Schedules to this Agreement so that such Schedules shall be complete and accurate, to the best of knowledge of such party, as of the date of Closing. 6.8 Further Assurances. The parties hereto shall use all commercially reasonable best efforts to take, or cause to be taken, all actions or to do, or cause to be done, all things or to execute any documents necessary, proper or advisable under applicable laws and regulations, to consummate and make effective the transactions contemplated by this Agreement and the Ancillary Agreements, irrespective of whether such actions are necessary on or after the Closing Date. 6.9 Expenses. Except as otherwise specifically provided in this Agreement, each party shall bear their own respective expenses incurred in connection with the preparation, execution and performance of this Agreement and the Ancillary Agreements and the transactions contemplated hereby. 6.10 Code Section 338(h)(10) Election. Should IGFH, in its sole and absolute discretion, decide that it is to its benefit to make a Section 338(h)(10) election with respect to the transactions contemplated by this Agreement and the Ancillary Agreements, CNA shall cooperate fully with IGFH in making such election. 6.11 Exclusivity. During the pendency of this Agreement, IGFH will engage in the Crop Insurance Business only through the procedures and mechanisms called for and contemplated in this Agreement and the Ancillary Agreements. Notwithstanding any other provision of this Agreement to the contrary, violation of this covenant by IGFH shall entitle CNA to the right to immediately exercise its Put Right. 6.12 NACU. Until the parties hereto shall mutually agree to the contrary, from and after the Effective Time, CNA shall use its commercially reasonable best efforts to cause (i) all MPCI and Crop Hail business of NACU to be placed with IGF; and (ii) the underwriting of such NACU business to be in accordance with CNA underwriting guidelines. 6.13 Non-Competition. From and after the Effective Time, CNA shall not compete with IGFH in any MPCI or Crop Hail business, or in the Business, or either of them for a period which shall be either (i) twenty-four (24) months from the exercise of the Put Right by CNA; or (ii) thirty-six (36) months from the exercise of the Call Right by IGFH. 31 6.14 Replacement Ancillary Agreements. The parties agree that, as is necessary during the Term of this Agreement to give effect to the provisions contained herein, the parties shall execute any and all agreements as may be necessary to amend or replace (due to changed circumstances, the passage of time or otherwise) Ancillary Agreements. 6.15 Confidentiality. CNA will not disclose or reveal to any individual (other than to officers, directors, and employees of CNA), corporation, partnership, association, entity or business, any proprietary or confidential technology, trade secret, confidential information, data, processes, strategies, techniques, philosophies, software, other proprietary intellectual property or other proprietary or confidential information ("Confidential Information") used by IGFH or IGF in any of its businesses, and CNA hereby agrees that the Confidential Information is the exclusive property of IGFH. 6.16 Intellectual Property and Trade Secrets. CNA will allow IGFH, at no cost to IGFH, to utilize all Trade Secrets, proprietary information, software and other formula, data, processes, strategies, techniques, philosophies, other proprietary intellectual property or other proprietary or confidential information (including, but not limited to, the REAP system) (collectively, "Trade Secrets") utilized by CNA in the management and operation of the Business. Further, IGFH is the only business, corporation, partnership, association, or entity which is or will be allowed to utilize the Trade Secrets. At the Closing, CNA will transfer all such rights it has in and to the computer software and intellectual property listed on Schedule 4.10 to IGFH. 6.17 IGFH Employees. CNA has not, and for a period of two (2) years from the date hereof, will not directly (for themselves or others) employ, offer employment to, or solicit the service of any current or future employee of IGFH. 6.18 ERISA and Employment-Related Matters. CNA shall remain solely responsible, on a first-dollar basis and in accordance with Article 10 (Indemnification) hereof, for Employment-Related Liabilities whereby any CNA Employee, has or claims any right to current or future payments by virtue of their status as an employee (including that of a former employee) of CNA. 6.19 Licenses. CNA will, at no charge or cost to IGFH, allow IGFH to utilize the licenses of CNA in the jurisdictions set forth on Schedule 4.11 so that IGF may continue the Business in the jurisdictions set forth on Schedule 4.11. As a consequence of the transfer of the Business, CNA shall allow IGFH to file rates on its behalf and to otherwise establish the pricing for the products and coverages which are to be written through CNA's licenses. 6.20 Fronting. CNA will front for IGF in all Territories and CNA will further keep in effect during the pendency of this Agreement all necessary licenses so that CNA may act as a fronting company for IGFH in the types of business contemplated by this Agreement. CNA will use its best efforts to keep such licenses in place during the pendency of this Agreement. In the event of the exercise of a Put or Call Right, the Fronting arrangement shall cease as of the last day of the current Crop Year in which the Put or Call Right is exercised. 32 6.21 Reinsurance Agreements. CNA will execute the Reinsurance Agreements. 6.22 Leased Premises. CNA will assign all its right, title and interest to its leaseholds for the office locations currently utilized (excluding Overland Park, Kansas) in the Business and as set forth in Schedule 4.12. 6.23 NACU. CNA will use its commercially reasonable best efforts to cause one or more IGF Executives to be named to the NACU Underwriting Committee at the earliest time (in CNA judgment) which is practicable. ARTICLE 7 CLOSING CONDITIONS 7.1 Conditions to Obligations of the Parties. The obligations of the parties hereto to proceed with Closing pursuant to this Agreement are subject to the fulfillment prior to or at Closing of the following conditions (any one or more of which may be waived in whole or in part by the party benefitting from such Closing condition): A. Bring Down of Representations and Warranties. The representations and warranties of the parties hereto contained in this Agreement shall be true and correct in all material respects on and as of the time of Closing, with the same force and effect as such representations and warranties had been made on, as of and with reference to such time and each party shall have received a certificate to such effect signed by an authorized officer of the other, in form and substance similar to Exhibit 7.1A. B. Performance and Compliance. The parties hereto shall have performed in all material respects all of the covenants and complied with all of the provisions required by this Agreement to be performed or complied with by them on or before Closing and each shall have received a certificate to such effect signed by an authorized officer of the other. C. Opinion of Counsel. Each party hereto shall have received an opinion of counsel from counsel to the other, dated as of the Closing Date, in substantially the form of Exhibit 7.1C hereto. D. Regulatory Approval. All applicable approvals and/or waivers, if any, from all pertinent Governmental Authority for the transactions contemplated by this Agreement shall have been received. E. Required Consents. All consents listed on Schedule 7.1E shall have been obtained. F. Litigation. No order of any court or any Governmental Authority shall be in effect which enjoins or prohibits the transactions contemplated hereby or which would have 33 a Material Adverse Effect, and there shall have not been threatened, nor shall there be pending, any action or proceeding by or before any court or Governmental Authority. i. reasonably likely to enjoin or prohibit any of the transactions contemplated by this Agreement or seeking significant monetary relief by reason of the consummation of such transaction, or ii. which might have a Material Adverse Effect on the future conduct of the business and transactions contemplated herein. G. No Material Adverse Effect. There shall not have occurred any Material Adverse Effect. H. Incumbency Certificate. Each of the parties hereto shall have delivered to the other an incumbency certificate (in form and substance substantially similar to Exhibit 7.1H) dated as of the Closing Date certifying the incumbency of all officers of such party who have executed this Agreement or any of the Ancillary Agreements, documents or other instruments required to be delivered hereunder. These certificates shall contain specimens of the signatures of each of such officers and shall be executed by the Secretary of the party proffering such certificate. I. Certificates of Existence and Licensure. Each party hereto shall have delivered to the other a certificate of the Secretary of State of the state in which each such party is incorporated, dated not more than fifteen (15) days before the Closing Date, stating that such party is a corporation in existence under the laws of such state and has paid all applicable taxes due to such state. In addition, CNA shall have delivered to IGFH a certificate of licensure, dated not more than thirty (30) days before the Closing Date, issued by the insurance regulatory authority in each state in which the business proposed to be transferred pursuant to this Agreement is currently conducted by CNA, with such certificate stating that CNA is authorized to conduct the type of business transferred pursuant to this Agreement in such state. J. Certified Copies of Resolutions. Each party hereto shall have delivered to the other copies, certified by the duly qualified and acting secretary or assistant secretary of such other party, of resolutions adopted by the Board of Directors of such party approving this Agreement and the consummation of the transactions contemplated hereby (including, but not limited to, execution of the Ancillary Agreements). K. Catastrophic Events. There shall not have occurred any outbreak of war or any banking moratorium. L. Transfer of Assets. CNA shall have delivered to IGFH at the Effective Time possession of all of CNA's Assets to be transferred pursuant to this Agreement and the 34 Ancillary Agreements, reflecting a transfer of all of CNA's right, title and interest in and to CNA's Assets as provided in this Agreement and the Ancillary Agreements. M. Ancillary Agreements. The parties hereto shall have executed the Ancillary Agreements. ARTICLE 8 EMPLOYEES AND EMPLOYMENT MATTERS 8.1 Employment Transfer. Unless otherwise agreed by the parties, CNA will cease the employment of all CNA Employees and IGFH shall commence employment of all such individuals on March 17, 1998. Upon employment by IGFH all CNA Employees shall become eligible to receive and participate in all plans, programs and benefits applicable to employees of IGFH. 8.2 No Liability for Prior Service. IGFH shall have no liability or responsibility for any Employment-Related Liability (and CNA shall retain all such liability), which is or may become owing to any CNA Employee which is a result of such person's prior employment or service with CNA. CNA will indemnify IGFH, on a first-dollar basis, for any Employment-Related Liability. 8.3 Hold Harmless. As more fully set forth in Article 10, and not limited by this Section 8.3, CNA will indemnify and hold harmless, on a first-dollar basis, IGFH from and against any and all liability whatsoever (including, but not limited to IGFH's internal cost and its cost of all retained advisors and experts in defending such matter) arising from any Employment-Related Liability, including, but not limited to, any suit, case, claim or administrative proceeding, whether pre-existing or hereafter commenced, which in any way relates to such person's employment with CNA or the terms, conditions or method of such person's termination from CNA and employment by IGFH. ARTICLE 9 TERM AND TERMINATION 9.1 Duration. Unless otherwise terminated as provided for herein, the term of this Agreement shall be perpetual (the "Term'). 9.2 Termination Prior to Closing. Unless the parties shall mutually agree in writing to the contrary, this Agreement shall automatically terminate at such time which is thirty (30) days from the Effective Time; provided, however, that the provisions of this Section 9.2 shall be invalid upon the execution of the Ancillary Agreements. 9.3 Survival. If this Agreement shall be terminated as provided for herein, this Agreement shall become null and void and of no further force and effect except for provisions relating to (i) non-competition, (ii) indemnification, (iii) expenses, (iv) public announcements and the provisions of this Section. 35 9.4 Put/Call Termination. This Agreement shall terminate upon the exercise of any Put Right, Change of Control Put Mechanism or Change of Control Call Mechanism. ARTICLE 10 INDEMNIFICATION 10.1 Indemnification by IGFH. IGFH hereby agrees to indemnify, defend and hold harmless CNA from and against any loss, liability, claim, obligation, damages or deficiency arising out of or resulting from any misrepresentation, breach of warranty or nonfulfillment of any covenant or agreement on the part of IGFH contained in this Agreement. Such indemnification shall include, but not be limited to, judgments, costs and expenses (including reasonable attorneys' fees and all other expenses incurred in investigating, preparing or defending any litigation or proceeding, commenced or threatened) incident to the foregoing sentence, provided, however, that the provisions of this Section shall not apply to any loss, liability, claim, obligation, damage or deficiency or any judgment, costs, and expenses (including reasonable attorneys' fees and all other expenses incurred in investigating, preparing or defending any litigation or proceeding, commenced or threatened) incident thereto that arise from the breach of any misrepresentation, warranty or the nonfulfillment of any covenant or agreement if, at the time of Closing, CNA was aware of the breach or other noncompliance of such representation, warranty, covenant or other agreement and the transactions contemplated hereby closed while CNA was in possession of such knowledge and had waived such compliance. The indemnity granted by this Section hereby does not apply until the aggregate of all loss, liability, claim, obligation, damage or deficiency (including judgments and other costs related thereto) exceeds three hundred thousand dollars ($300,000) and then the said indemnity applies only to indemnified amounts that exceed the aggregate three hundred thousand dollars ($300,000). Further, no action or claim for indemnity pursuant to this Section shall be brought or made after February 15, 2000. 10.2 Indemnification by CNA. CNA hereby agrees to indemnify, defend and hold harmless IGFH from and against any loss, liability, claim, obligation, damages or deficiency arising out of or resulting from any misrepresentation, breach of warranty or nonfulfillment of any covenant or agreement on the part of CNA contained in this Agreement. Such indemnification shall include, but not be limited to, judgments, costs and expenses (including reasonable attorneys' fees and all other expenses incurred in investigating, preparing or defending any litigation or proceeding, commenced or threatened) incident to the foregoing sentence, provided, however, that the provisions of this Section shall not apply to any loss, liability, claim, obligation, damage or deficiency or any judgment, costs, and expenses (including reasonable attorneys' fees and all other expenses incurred in investigating, preparing or defending any litigation or proceeding, commenced or threatened) incident thereto that arise from the breach of any misrepresentation, warranty or the nonfulfillment of any covenant or agreement if, at the time of Closing, IGFH was aware of the breach or other noncompliance of such representation, warranty, covenant or other agreement and the transactions contemplated hereby closed while IGFH was in possession of such knowledge and had waived such compliance. The indemnity granted by this Section does not apply until the aggregate of all loss, liability, claim, obligation, damage or deficiency (including judgments and other costs related 36 thereto) exceeds three hundred thousand dollars ($300,000) and then the said indemnity applies only to indemnified amounts that exceed the aggregate three hundred thousand dollars ($300,000). Further, no action or claim for indemnity pursuant to this Section shall be brought or made after February 15, 2000. 10.3 Indemnification by CNA for Employment Related Matters. Notwithstanding any other provision of this Agreement, CNA agrees to indemnify, defend and hold harmless, on a first-dollar basis, IGFH from and against any and all loss, liability, claims, obligation, damage or deficiency, including any judgments, costs and expenses (including reasonable attorneys' fees and all other expenses incurred in investigating, preparing or defending any litigation or proceeding, commenced or threatened) arising out of or related to any litigation, suit, cause of action or proceeding (whether administrative or judicial) before any court or Governmental Authority brought by any former employee of CNA listed on Schedule 10.3 hereto. Additionally, and not in limitation of any foregoing provision of this Section, CNA hereby agrees to indemnify, defend and hold harmless IGFH from and against any and all loss, liability, claim, obligation, damage or deficiency and any judgments, costs and expenses (including reasonable attorneys' fees and all other expenses incurred in investigating, preparing or defending any litigation or proceeding, commenced or threatened) which arise from or pertain to any alleged benefit, payment, inurement, pension, benefit plan, pension plan, vacation pay plan or any other employee benefit of any type or kind sought by any former employee of CNA listed on Schedule 10.3. 10.4 Indemnification Procedures. In the event that either party hereto wishes to assert a claim for indemnification pursuant to this Article, such party seeking indemnification shall deliver a written notice to the other party no later than ten (10) business days after such claim becomes known to such party seeking indemnification, specifying the facts constituting the basis for, and the amount (if known) of the claim asserted. Failure to deliver such a notice as is provided for in the preceding sentence in a timely manner shall not be deemed a waiver of right to indemnification hereunder in connection with such claim, but the amount of reimbursement to which such party may be entitled shall be reduced by the amount, if any, by which such amount could have been mitigated had such notice been delivered in a timely manner. If a party seeking indemnification pursuant to this Article because of a claim or demand made, or an action, proceeding or investigation instituted by any Person that is not a party to this Agreement, and such claim, demand, action, proceeding or investigation may result in indemnification pursuant to this Article, the party seeking indemnification shall deliver to the other party hereto a notice with respect thereto, with such notice specifying the claimant or other third party, the facts surrounding such potential claim for indemnification and the best estimate (which is non-binding of the party seeking indemnification) of the amount of such potential claim by such third party. Such notice as is provided for in the preceding sentence shall be delivered to the party from whom indemnification is sought within twenty (20) business days of the actual knowledge of such party seeking indemnification of such claim. The party from whom indemnification is sought shall have the right, upon written notice to the other, to investigate, contest, defend or settle any matter to which a notice for indemnification due to a claim by a third party has been made. Notwithstanding the foregoing sentence, the party seeking indemnification may, at its option and at its own expense, participate in the investigation, contesting, defense or 37 settlement of any such claim through representatives and counsel of its own choosing; provided, however, that the party from whom indemnification is sought shall have the sole and exclusive right to investigate, contest, defend or settle any such claim from a third party on terms, and in the manner, it shall, in its sole discretion, determine. Notwithstanding the foregoing, the party seeking indemnification has the unilateral right to investigate, contest, defend or settle any claim by a third party, but if such party seeking indemnification shall exercise the right provided for in this sentence, it expressly shall forfeit any right of indemnification provided for in this Article. 10.5 Stamford Financial. CNA and IGFH hereby agree that if either of them shall have entered into any agreement with Stamford Financial, by virtue of which Stamford Financial claims a fee for the transactions contemplated in this Agreement and the Ancillary Agreements, the party entering into such agreement with Stamford Financial will indemnify, defend and hold harmless the other from and against any and all monetary costs (including, without limitation, legal fees) which may be incurred by the party which did not so enter into such agreement with Stamford Financial. ARTICLE 11 MISCELLANEOUS 11.1 Further Actions. Each of the parties hereto agrees to use all reasonable effort to take, or cause to be taken, all reasonable actions and to do, or cause to be done, all reasonable things necessary, proper or advisable to consummate the transactions contemplated by this Agreement. None of the parties hereto will take or permit to be taken any action that would be in breach of the terms or provisions of this Agreement or that would cause any of the representations contained herein to be or to become untrue. 11.2 Costs. Irrespective of whether Closing occurs, except as otherwise stated or hereinafter agreed, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense. 11.3 Public Announcements. Excepting comments in filings required by the SEC, or Governmental Authority, the content and timing of any press release or other public announcement proposed to be made concerning the transactions contemplated by this Agreement must be consented to in advance by each party prior to the public dissemination of such press release or public announcement, with such consent not being unreasonably withheld or delayed. 11.4 Survival. The representations, warranties, covenants and agreements of the parties hereto contained in this Agreement shall survive the Closing and shall not merge in the performance of any obligation by any party hereto. 11.5 Amendment and Modification. This Agreement may not be amended or modified without the prior written consent of all parties hereto. 38 11.6 Waiver. The failure to insist upon strict compliance with any of the terms and conditions to this Agreement at any one time shall not be deemed a waiver of such term or condition at any other time, nor shall any waiver or relinquishment of any right or power granted herein at any time be deemed a waiver or relinquishment of the same or any other right or power at any other time. 11.7 Governing Law; Venue. This Agreement shall be governed by and construed in accordance with the laws of the State of Indiana without giving effect to the principles of conflicts of laws. Each of the parties hereto irrevocably and unconditionally consent to submit to the exclusive jurisdiction of the courts of the United States of America located in Marion County, Indiana (and if such courts do not have appropriate jurisdiction, the courts of the State of Indiana), for any action, proceeding or investigation in any court or before any Governmental Authority arising out of or relating to this Agreement and the transactions contemplated hereby. The parties further agree that service of any process, summons, notice or document by United States Registered Mail to its respective address as set forth in this Agreement shall be effective service of process for any litigation brought against it in any such court. Each of the parties hereto hereby irrevocably and unconditionally waives any objection to the laying of venue in any matter arising out of this Agreement or the transactions contemplated hereby in the courts of the United States of America located in Marion County, Indiana (and if such courts do not have appropriate jurisdiction, the courts of the State of Indiana), and the parties hereto hereby further irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such litigation brought in any such court has been brought in an inconvenient forum. 11.8 Notice. Any notice or other communication to be given hereunder shall be in writing and shall be deemed sufficient when it is: A. mailed by United States Certified Mail, Return Receipt Requested; B. mailed by overnight express mail or other airborne courier; C. sent by facsimile or telecopy machine, followed by confirmation mailed by First Class mail or overnight express mail or airborne courier; or D. delivered in person, at the address set forth below or such other address as a party hereto may provide to the other in writing. 39 Notices pursuant to this Agreement shall be sent to: If to IGFH: Dennis G. Daggett President and Chief Operating Officer IGF Holdings, Inc. 6000 Grand Avenue Des Moines, Iowa 50312 With a copy to: David L. Bates, Esq. Vice President, General Counsel and Secretary Symons International Group, Inc. 4720 Kingsway Drive Indianapolis, Indiana 46205 If to CNA: Lyle W. Marschand President and Chief Operating Officer CNA Agriculture CNA Plaza, 40 South Chicago, Illinois 60685 With a copy to: Secretary Continental Casualty Company CNA Plaza, 43 South Chicago, Illinois 60685 11.9 Severability. If any provision of this Agreement shall be determined to be invalid or unenforceable, this Agreement shall be deemed to amended to delete such provision and the remainder of this Agreement shall be enforceable by its terms. 11.10 Successors and Assigns. This Agreement shall be binding and inure to the benefit of the parties hereto and their respective permitted successors and assigns. 11.11 Captions. Headings and captions contained in this Agreement are inserted only as a matter of convenience and for reference, and in no way define, limit, extend or prescribe the scope of this Agreement or the intent of any provision. 40 11.12 Gender and Tense. The masculine gender shall include the feminine and neuter genders and the singular shall include the plural. 11.13 Entire Agreement. This Agreement and the Ancillary Agreements, taken as a whole, constitute the entire agreement of the parties with respect to the matters set forth herein and supersedes any and all prior understandings or agreements, oral or written, with respect to such matters. 11.14 Negative Inference. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against any party hereto, whether under any rule of construction or otherwise. No party shall be considered the draftsman of this Agreement. On the contrary, this Agreement has been reviewed, negotiated and accepted by all parties hereto and their respective counsel and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto. 11.15 Counterparts; Facsimile Signatures. This Agreement may be executed in any number of counterparts, each of which shall be an original, and all such counterparts shall constitute one in the same Agreement, binding on all the parties notwithstanding that all the parties are not signatories to the same counterparts. The execution of this Agreement may be accomplished by signature transmitted via facsimile. 11.16 Certain Definitions. Certain defined terms outlined in Article 1 hereof are not used herein but have application to certain Ancillary Agreements. In the event that a conflict exists between any term defined herein and also in any Ancillary Agreement, the definition and meaning contained herein shall be controlling. 11.17 Recitals. The recitals contained hereinabove are incorporated by reference as those repeated verbatim. 11.18 Future Cooperation. The parties agree to work together in good faith from the date hereof through the Closing Date to correct or amend any provisions herein or in the Ancillary Agreements which are inconsistent with the parties intent. 41 Strategic Alliance Agreement Signature Pages IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. SYMONS INTERNATIONAL GROUP, INC. By:___________________________________ Its:___________________________________ 42 Strategic Alliance Agreement Signature Pages [continued] IGF HOLDINGS, INC. By:___________________________________ Its:___________________________________ 43 Strategic Alliance Agreement Signature Pages [continued] IGF INSURANCE COMPANY By:___________________________________ Its:___________________________________ 44 Strategic Alliance Agreement Signature Pages [continued] CONTINENTAL CASUALTY COMPANY By:___________________________________ Its:___________________________________ 45 EX-2 3 MPCI QUOTA SHARE REINSURACE CONTRACT Exhibit 2.2 MULTIPLE PERIL CROP INSURANCE (MPCI) QUOTA SHARE CONTRACT (hereinafter referred to as "Contract") Effective: July 1, 1997 issued to Continental Casualty Company (hereinafter referred to as the "Company") by IGF Insurance Company and its Affiliated Companies (hereinafter collectively referred to as "Reinsurer") ARTICLE 1 - TERM This Contract shall cover losses occurring on crops insured during the MPCI crop year commencing at 12:01 a.m., Central Standard Time, July 1, 1997, including such policies written or renewed for the 1998 crop year as defined in the Standard Reinsurance Agreement (SRA) of the Federal Crop Insurance Corporation (FCIC) and each succeeding crop year beginning at July 1, until terminated. This Contract shall terminate automatically upon the exercise of a Put Right or Call Right (as such term is defined under the Strategic Alliance Agreement, hereinafter "SAA", to which this Contract is attached) with termination becoming effective at the end of the Crop Year in which such Put Right or Call Right is exercised, and no policies written after the effective time of termination shall be covered hereunder. Page 1 of 11 MPCI Quota Share CCC / IGF ARTICLE 2 - BUSINESS COVERED The Company agrees to cede and the Reinsurer agrees to accept a 100% quota share of the Company's liability on the following business covered hereunder (hereinafter referred to as "policies"), subject to this Contract's terms and conditions. The Company's business subject hereto after application of the FCIC SRA, including cessions made to the various risk funds provided thereunder for the 1998 crop year (as defined by the FCIC and covered under the terms and conditions of the FCIC's SRA) and succeeding crop years so long as the Company is a holder of an SRA. The Company's net underwriting gain (loss), for the 1998 crop year and succeeding crop years, assumed by the Company through it's participation in the Producers Lloyds Insurance Company Multiple Peril Crop Insurance (MPCI) Quota Share Reinsurance Contract No. 0929-00-0017, net of any reinsurance brokerage paid by the Company in the assumption of the business, so long as the Company is a participant in said Contract. The Company's liability developed through any and all fronting agreements with IGF Insurance Company and its Affiliated Companies (IGF) subject hereto after application of the FCIC SRA, including cessions made to the various risk funds provided thereunder for the 1999 crop year (as defined by the FCIC and covered under the terms and conditions of the FCIC's SRA) and succeeding crop years so long as the IGF Insurance Company is a holder of an SRA. ARTICLE 3 - TERRITORY This Contract applies to the territory of the Company's business covered hereunder. ARTICLE 4- ORIGINAL CONDITIONS All amounts ceded hereunder shall be subject to the same gross rating and to the same clauses, conditions, exclusions and modifications of the policies reinsured hereunder, subject to the limits, terms and conditions of this Contract. Except as specifically and expressly provided for in the Insolvency Article, the provisions of this Contract are intended solely for the benefit of the parties to and executing this Page 2 of 11 MPCI Quota Share CCC / IGF Contract, and nothing in this Contract shall in any manner create, or be construed to create, any obligations to or establish any rights against any party to this Contract in favor of any third parties or other persons not parties to and executing this Contract. ARTICLE 5 - LOSSES The Company alone and at its full discretion shall adjust, settle or compromise all claims and losses. All such adjustments, settlements and compromises, including ex-gratia payments, shall be binding on the Reinsurer in proportion to its participation. The Company shall likewise at its sole discretion commence, continue, defend, compromise, settle or withdraw from actions, suits or proceedings and generally do all such matters and things relating to any claim or loss as in its judgment may be beneficial or expedient; and all loss payments made shall be shared by the Reinsurer proportionately. Reinsurer shall, on the other hand, benefit proportionately from all reductions of losses by salvage, compromise or otherwise. ARTICLE 6 - EXCESS OF ORIGINAL POLICY LIMITS This Contract shall protect the Company as provided in Article 2 - Business Covered in connection with loss in excess of the limit of the original policy. However, this Article shall not apply where the loss has been incurred due to fraud by a member of the Board of Directors or a corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. For the purpose of this Article, the word "loss" shall mean any amounts for which the Company would have been contractually liable to pay had it not been for the limit of the original policy. ARTICLE 7 - EXTRA CONTRACTUAL OBLIGATIONS This Contract shall protect the Company as provided in Article 2 - Business Covered where the loss includes any extra contractual obligations. The term "Extra Contractual Obligations" is defined as those liabilities not covered under any other provision of this Contract and which arise from the handling of any claim on Page 3 of 11 MPCI Quota Share CCC / IGF business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Company to settle within the policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in preparation of the defense or in trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such action. The date on which any Extra Contractual Obligation loss is incurred by the Company shall be deemed, in all circumstances, to be the date of the original occurrence, or the date the original claim is first made, whichever is applicable. However, this Article shall not apply where the loss has been incurred due to fraud by a member of the Board of Directors or a corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any loss covered hereunder. ARTICLE 8 - CURRENCY Where the word "dollars" and/or the sign "$" appear in this Contract, they shall mean United States dollars. For purposes of this Contract, where the Company receives premiums or pays losses in currencies other than United States currency, such premiums or losses shall be converted in to United States dollars at the actual rates of exchange at which these premiums or losses are entered in the Company's books. ARTICLE 9 - ACCOUNTS, REPORTS AND PAYMENTS As soon as practicable after the end of each month, for each Agreement Year for which coverage applies under this Contract, the Company shall furnish to the Reinsurer the FCIC reinsurance accounting report (RoRecap) which shall include but not be limited to the following: Gross liability, premiums and losses paid, by state, before deducting the amount of reinsurance ceded to the FCIC SRA. Net premiums and losses paid, after recoveries from the FCIC SRA and deduction of the allowable Expense Reimbursement under the FCIC SRA. Page 4 of 11 MPCI Quota Share CCC / IGF Calculation of gain or loss between the Company and the FCIC after recoveries from the SRA and deduction of the allowable Expense Reimbursement under the FCIC SRA. Any balance due one party from the other shall be payable upon receipt of the above report. As soon as practicable after the first February following each Agreement Year, the Company shall furnish to the Reinsurer the FCIC reinsurance accounting report (RoRecap) which shall include but not be limited to the following: Gross liability, premiums and losses paid, by state, before deducting the amount of reinsurance ceded to the FCIC SRA. Net premiums and losses paid, after recoveries from the FCIC SRA and deduction of the allowable Expense Reimbursement under the FCIC SRA. Calculation of gain or loss between the Company and the FCIC after recoveries from the SRA and deduction of the allowable Expense Reimbursement under the FCIC SRA. Any balance due one party from the other shall be payable upon receipt of the above report. However, if at any time during the term of this Contract the Company is required to reimburse the FCIC for a net underwriting loss after recoveries from the SRA for the Agreement Year under consideration, the Reinsurer shall pay its proportional share of the net underwriting loss amount to the Company by the date due to the FCIC. Adjustments shall continue until final settlement is reached with the FCIC on all policies reinsured for each Agreement Year unless such earlier definitive date is agreed to by the parties to this Contract. As soon as possible after the conclusion of each calendar quarter and Agreement Year the Company will provide any other information the Reinsurer may require for its Convention Statement which may be reasonably available to the Company. ARTICLE 10 - DEFINITIONS The term "Standard Reinsurance Agreement (SRA) of the FCIC" as used herein shall mean the Reinsurance Agreement between the Federal Crop Insurance Corporation and the Page 5 of 11 MPCI Quota Share CCC / IGF Company including all amendments applicable to the agreement during the term of this Contract. ARTICLE 11 - OFFSET The Company or the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right at any time whether the balances due are on account of premiums or losses. ARTICLE 12 - WARRANTY For business covered hereunder, it is agreed that all terms and agreements of the FCIC are applied. ARTICLE 13 - ACCESS TO RECORDS Upon reasonable notice, the Reinsurer, or its designated representative, shall have access at any reasonable time to inspect and audit the books and records of the Company which pertain in any way to this reinsurance and it may make copies of any records pertaining thereto. This right of inspection, audit and information shall survive termination of this Contract and shall run to the natural expiry of all liabilities under the policies reinsured. ARTICLE 14 - TAXES In consideration of the terms under which this Contract is issued, the Company undertakes not to claim any deduction of the premium hereon when making tax returns, other than Income or Profits Tax returns, to any state or territory of the United States of America or to the District of Columbia. ARTICLE 15 - ERRORS AND OMISSIONS Any inadvertent error, omission or delay in complying with the terms and conditions of this Contract shall not be held to relieve either party hereto from any liability which would attach Page 6 of 11 MPCI Quota Share CCC / IGF to it hereunder if such error, omission or delay had not been made, provided such error, omission or delay is rectified immediately upon discovery. ARTICLE 16 - AMENDMENTS This Contract may be altered or amended in any of its terms and conditions by mutual consent of the Company and the Reinsurer by an Endorsement hereto. Such Endorsement will then constitute a part of this Contract. ARTICLE 17 - LOSS FUNDING This Article is only applicable to those Reinsurers who cannot qualify for credit by the State, meaning the state, province or Federal authority having jurisdiction over the Company's loss reserves. As regards policies issue by the Company coming within the scope of this Contract, the Company agrees that when it shall file with the insurance department or set up on its books reserves for losses covered hereunder which it shall be required to set up by law it will forward to the Reinsurer a statement showing the proportion of such loss reserves which is applicable to them. The Reinsurer hereby agrees that it will apply for and secure delivery to the Company a clean irrevocable and unconditional Letter of Credit issued by a bank chosen by the Reinsurer and acceptable to the appropriate insurance authorities, in an amount equal to the Reinsurer's proportion of the loss reserves in respect of known outstanding losses that have been reported to the Reinsurer and allocated loss expenses relating thereto as shown in the statement prepared by the Company. Under no circumstances shall any amount relating to reserves in respect of losses or loss expenses Incurred But Not Reported be included in the amount of the Letter of Credit. The Letter of Credit shall be "Evergreen" and shall be issued for a period of not less than one year, and shall be automatically extended for one year from its date of expiration or any future expiration date unless thirty (30) days prior to any expiration date, the bank shall notify the Company by certified or registered mail that it elects not to consider the Letter of Credit extended for any additional period. Page 7 of 11 MPCI Quota Share CCC / IGF The Company, or its successors in interest, undertakes to use and apply any amounts which it may draw upon such Credit pursuant to the terms of the Contract under which the Letter of Credit is held, and for the following purposes only: To pay the Reinsurer's share or to reimburse the Company for the Reinsurer's share of any liability for loss reinsured by this Contract, the payment of which has been agreed by the Reinsurer and which has not otherwise been paid. To make refund of any sum which is in excess of the actual amount required to pay the Reinsurer's share of any liability reinsured by this Contract. In the event of expiration of the Letter of Credit as provided for above, to establish deposit of the Reinsurer's share of known and reported outstanding losses and allocated loss expenses relating thereto under this Contract. Such cash deposit shall be held in an interest bearing account separate from the Company's other assets, and interest thereon shall accrue to the benefit of the Reinsurer. It is understood and agreed that this procedure will be implemented only in exceptional circumstances and that, if it is implemented, the Company will ensure that a rate of interest is obtained for the Reinsurer on such a deposit account that is at least equal to the rate which would have been paid by Citibank N.A. in New York, and further that the Company will account to the Reinsurer on an annual basis for all interest accruing on the cash deposit account for the benefit of the Reinsurer. The bank chosen for the issuance of the Letter of Credit shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Company. At annual intervals, or more frequently as agreed but never more frequently than semiannually, the Company shall prepare a specific statement, for the sole purpose of amending the Letter of Credit, of the Reinsurer's share of known and reported outstanding losses and allocated loss expenses relating thereto. If the statement shows that the Reinsurer's share of such losses and allocated loss expenses exceeds the balance of credit as of the statement date, the Reinsurer shall, within thirty (30) days after receipt of notice of such excess, secure delivery to the Company of an amendment of the Letter of Credit increasing the amount of credit by the amount of such difference. If, however, the statement shows that the Reinsurer's share of known and reported outstanding losses plus allocated loss expenses relating thereto is less than the balance of credit as of the statement date, the Company shall, within thirty (30) days after receipt of written request Page 8 of 11 MPCI Quota Share CCC / IGF from the Reinsurer, release such excess credit by agreeing to secure an amendment to the Letter of Credit reducing the amount of credit available by the amount of such excess credit. ARTICLE 18 - INSOLVENCY This reinsurance shall be payable by the Reinsurer on the basis of the liability of the Company under Policy or Policies reinsured without diminution, because of the insolvency of the Company, to the Company or its liquidator, receiver, or statutory successor. In the event of insolvency of the Company, the liquidator or receiver or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim filed against the Company on the Policy or Policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding. During the pendency of such claim the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to the Company or its liquidator or receiver or statutory successor. The expenses thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the Company as part of the expense of liquidation to the extent of a proportionate share of the benefits which may accrue to the Company solely as a result of the defense so undertaken by the Reinsurer. Should the Company go into liquidation or should a receiver be appointed, the Reinsurer shall be entitled to deduct from any sums which may be or may become due to the Company under this reinsurance Contract, any sums which are due to the Reinsurer by the Company under this Contract and which are payable at a fixed or stated date, as well as any other sums due to the Reinsurer which are permitted to be offset under applicable law. It is further understood and agreed that, in the event of the insolvency of the Company, the reinsurance under this Contract shall be payable directly by the Reinsurer to the Company or to its liquidator, receiver or statutory successor, except a) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the Company and b) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the Company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the Company to such payees. In no event shall anyone other than the parties to this Contract or, in the event of the Company's insolvency, its liquidator, receiver, or statutory successor, have any rights under this Contract. Page 9 of 11 MPCI Quota Share CCC / IGF ARTICLE 19 - ARBITRATION As a condition precedent to any right of action hereunder, any dispute arising out of the interpretation, performance or breach of this Contract, including the formation or validity thereof, shall be submitted for decision to a panel of three arbitrators. Notice requesting arbitration will be in writing and sent certified mail, return receipt requested. One arbitrator shall be chosen by each party and the two arbitrators shall, before instituting the hearing, choose an impartial third arbitrator who shall preside at the hearing. If either party fails to appoint its arbitrator within thirty (30) days after being requested to do so by the other party, the latter, after ten (10) days notice by certified mail of its intention to do so, may appoint the second arbitrator. If the two arbitrators are unable to agree upon the third arbitrator within thirty (30) days of their appointment, each of them shall name two, of whom the other shall decline one and the decision shall be made by drawing lots. All arbitrators shall be disinterested active or retired executive officers of insurance or reinsurance companies, Underwriters at Lloyd's London not under the control of either party to this Contract, or a qualified arbitrator supplied by the AAA.. Within thirty (30) days after notice of appointment of all arbitrators, the panel shall meet and determine timely periods for briefs, discovery procedures and schedules for hearings. The panel shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence. Arbitration shall take place in Chicago, Illinois. Insofar as the arbitration panel looks to substantive law, it shall consider the law of the State of Illinois. The decision of any two arbitrators when rendered in writing shall be final and binding. The panel is empowered to grant interim relief as it may deem appropriate. The panel shall make its decision considering the custom and practice of the applicable insurance and reinsurance business as promptly as possible following the termination of the hearings. Judgment upon the award may be entered in any court having jurisdiction thereof. Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the cost of the third arbitrator. The remaining costs of the arbitration shall be allocated by the panel. The panel may, at its discretion, award such further costs Page 10 of 11 MPCI Quota Share CCC / IGF and expenses as it considers appropriate, including but not limited to attorneys fees, to the extent permitted by law. The panel is prohibited from awarding punitive, exemplary or treble damages, of whatever nature, in connection with any arbitration proceeding concerning this Contract. ARTICLE 20 - CHOICE OF LAW This Contract, including all matters relating to formation, validity and performance thereof, shall be interpreted in accordance with the law of the State of Illinois. ARTICLE 21 - INTER-COMPANY POOLING It is understood and agreed that the Company has entered into the CNA Reinsurance Pooling Agreement whereby it assumes 100% (one hundred percent) of the liability of the other participants in the CNA Reinsurance Pooling Agreement. This present Contract protects such assumed liability and attaches prior to redistribution, if any, within the participating companies. Such redistribution shall be disregarded for all purposes of this present Contract. For all purposes of this present Contract, other member companies of the CNA Reinsurance Pooling Agreement are: National Fire Insurance Company of Hartford, American Casualty Company of Reading Pennsylvania, Transportation Insurance Company, Transcontinental Insurance Company, Valley Forge Insurance Company, CNA Casualty of California, CNA Lloyd's of Texas and Columbia Casualty Company. It is also understood and agreed that the Company shall include the insurance companies of the Continental Corporation which are affiliated with, controlled by or under common management of CNA. ARTICLE 22- ENTIRE CONTRACT This Contract and that certain Strategic Alliance Agreement, the Ancillary Agreements, Crop Hail Insurance Services and Indemnity Agreement, MPCI Insurance Services and Indemnity Agreement, Multiple Peril Crop Insurance Quota Share Agreement - effective July 1, 1997, Crop Hail Quota Share Reinsurance Contract - effective January 1, 1998, and the Crop Hail Quota Share Agreement - effective January 1, 1998, between the parties, represent the entire agreement and understanding among the parties. No other oral or written agreements or contracts relating to the risks reinsured hereunder currently exist and/or are contemplated between the parties. Page 11 of 11 MPCI Quota Share CCC / IGF ARTICLE 23 - SEVERABILITY If any law or regulation of any Federal, State, or Local Government of the United States of America or the provinces of Canada or the ruling officials of any supervision over insurance companies, should render illegal this Contract, or any portion thereof, as to risks or properties located in the jurisdiction of such authority, either the Company or the Reinsurer may upon written notice to the other suspend, abrogate, or amend this Contract insofar as it relates to risks or properties located within such jurisdiction to such extent as may be necessary to comply with such law, regulations or ruling. Such illegality, suspension, abrogation, or amendment of a portion of this Contract shall in no way affect any other portion thereof. Page 12 of 11 MPCI Quota Share CCC / IGF IN WITNESS WHEREOF the parties acknowledge that no intermediary is involved in or brought about this transaction, and the parties hereto, by their authorized representatives, have executed this Contract: on this day of 1998 CONTINENTAL CASUALTY COMPANY By: ________________________________________________ Attested by: _________________________________________ and on this day of 1998 IGF INSURANCE COMPANY and its AFFILIATED COMPANIES By: ________________________________________________ Attested by:__________________________________________ MULTIPLE PERIL CROP INSURANCE (MPCI) QUOTA SHARE CONTRACT (referred to as the "Contract") Effective: July 1, 1997 Page 13 of 11 MPCI Quota Share CCC / IGF issued to Continental Casualty Company (referred to as the "Company") by IGF Insurance Company and its Affiliated Companies (referred to as the "Reinsurer") Page 14 of 11 MPCI Quota Share CCC / IGF EX-2 4 MPCI QUOTA SHARE REINSURANCE AGREEMENT Exhibit 2.3 MULTIPLE PERIL CROP INSURANCE (MPCI) QUOTA SHARE AGREEMENT (hereinafter referred to as "Agreement") Effective: July 1, 1997 issued to IGF Insurance Company and its Affiliated Companies (hereinafter referred to as "IGF") by Continental Casualty Company Chicago, Illinois (hereinafter referred to as "CNA") ARTICLE 1 - TERM This Agreement shall cover losses occurring on crops insured during the MPCI crop year commencing at 12:01 a.m., Central Standard Time, July 1, 1997, including such policies written or renewed for the 1998 crop year as defined in the Standard Reinsurance Agreement (SRA) of the Federal Crop Insurance Corporation (FCIC) and each succeeding crop year beginning at July 1, until terminated as provided below. Termination shall take place immediately and automatically upon the exercise of a Put Right or Call Right as defined under the Strategic Alliance Agreement (hereinafter "SAA") between Continental Casualty Company and IGF Holdings, Inc. and its Affiliated Companies, to which this Agreement is attached and made a part of. Upon termination, a full commutation and release of all CNA liability shall be provided to CNA for the then current Crop Year with no amounts due or owing for such year. IGF shall have the right to 100% of the premiums associated with the liability so released. If any payments have been made by CNA to IGF for its share of loss payments required by FCIC prior to the date of exercise, such payments shall be reimbursed to CNA. As an example, if a Call Right is exercised on March 2, 2002, said termination shall cause no balance to be due hereunder Page 1 of 11 MPCI Quota Share IGF / CCC for the 2002 Crop Year (July 1, 2001 - June 30, 2002) and any share of losses paid to FCIC on 2002 Crop Year Policies by CNA shall be reimbursed to CNA; all balances and adjustments under the 2001 Crop Year shall be due and payable and settled in due course. If a Put Right or Call Right is exercised the result shall be the same. ARTICLE 2 - BUSINESS COVERED The IGF agrees to cede and the CNA agrees to accept by way of reinsurance, for each Agreement Year covered hereunder, as follows: All of CNA's and IGF's MPCI business shall be pooled for 1998 and thereafter, whether written under the CNA's SRA, the IGF's SRA, or Producers Lloyds Insurance Company's ( hereinafter Producers Lloyds) SRA. CNA will then receive as its share (as defined in items 4 through 7 [inclusive]), an annual reinsurance cession equal to 70% of the MPCI Underwriting Gain (Loss) (as defined). The annual reinsurance cession will be payable in perpetuity, unless the Put Right or Call Right is triggered. If Producers Lloyds elects to terminate its relationship with CNA or not to enter into a relationship with IGF or to terminate such relationship after the closing date of the transaction between IGF and CNA, then if such relationship terminates prior to July 1, 2000, all of the Producers Lloyds' business will be removed from reimbursement and profit-sharing formulas in calculating any payments to be made under this Agreement after such termination. If Producers Lloyds elects to terminate its relationship with CNA or IGF, as the case may be, on or after July 1, 2000, then the dollar amount of CNA's line for Producers Lloyds shall be the same in the crop year in which Producers Lloyds terminates its relationship as it was in the immediate crop year prior to the termination and there shall be no adjustment to reimbursement and profit-sharing formulas under this Agreement with respect to any crop years prior to such termination. MPCI Underwriting Gain (Loss) shall be defined as (i) the CNA MPCI Proportion (as defined) multiplied by (ii) the combined net underwriting gain (loss) on the MPCI business of CNA and IGF plus the net gain (loss) from assumed Producers Lloyd MPCI business. This combined net underwriting gain (loss) shall be reduced (increased) by any gain (loss) shared under any third party profit sharing agreements such as with NACU and other producers but excluding third party reinsurance agreements. For 1998, the CNA MPCI Proportion shall be equal to (i) the amount of business written by the CNA SRA and Producers Lloyds' SRA for 1998, divided by (ii) the combined amount of business written by the CNA's, IGF's and Producers Lloyds' SRA for 1998. Page 2 of 11 MPCI Quota Share IGF / CCC For 1999, the CNA MPCI Proportion shall be equal to (i) the amount of business written by the CNA SRA for 1998 multiplied by one plus the percentage growth or reduction in industry MPCI gross premiums from 1998 to 1999 as acknowledged by the FCIC plus (ii) the amount of business assumed under the Producers Lloyds reinsurance agreement for 1999, subject to item 2 above, with the resulting product of (i) and (ii) then divided by (iii) the combined amount of business written by the CNA, assumed from Producer Lloyds and IGF SRA for 1999. For 2000, the CNA MPCI Proportion shall be equal to (i) the amount of business written by the CNA SRA for 1998 multiplied by one plus the percentage growth or reduction in industry MPCI gross premiums from 1998 to 2000 as acknowledged by the FCIC plus (ii) the amount of business assumed under the Producers Lloyds reinsurance agreement for 2000, subject to item 2 above, with the resulting product of(i) and (ii) then divided by (iii) the combined amount of business written by CNA, assumed from Producers Lloyds and IGF SRA for 2000. The CNA MPCI Proportion shall continue to adjust for years 2001 and beyond in a manner consistent with the formula for 1999 and 2000. Any and all funds held and/or carried forward by FCIC/RMA for the 1997 Crop Year and all previous crop years shall be the exclusive property of CNA and will not be considered part of the underwriting gain for purposes of this Agreement. Beginning with the 1998 Crop Year, any payout offset against losses by the FCIC/RMA of previously retained CNA funds shall be wired to CNA within five days of receipt based on its proportional share under this Agreement. MPCI premiums will include premiums from all products falling within the Standard Reinsurance Agreement. Page 3 of 11 MPCI Quota Share IGF / CCC ARTICLE 3 - TERRITORY This Agreement applies to the territory of the business covered hereunder. ARTICLE 4- ORIGINAL CONDITIONS All amounts ceded hereunder shall be subject to the same gross rating and to the same clauses, conditions, exclusions and modifications of the policies reinsured hereunder, subject to the limits, terms and conditions of this Agreement. Except as specifically and expressly provided for in the Insolvency Article, the provisions of this Agreement are intended solely for the benefit of the parties to and executing this Agreement, and nothing in this Agreement shall in any manner create, or be construed to create, any obligations to or establish any rights against any party to this Agreement in favor of any third parties or other persons not parties to and executing this Agreement. ARTICLE 5 - LOSSES The IGF alone and at its full discretion shall adjust, settle or compromise all claims and losses. All such adjustments, settlements and compromises, including ex-gratia payments, shall be binding on the CNA in proportion to its participation. The IGF shall likewise at its sole discretion commence, continue, defend, compromise, settle or withdraw from actions, suits or proceedings and generally do all such matters and things relating to any claim or loss as in its judgment may be beneficial or expedient; and all loss payments made shall be shared by the CNA proportionately. CNA shall, on the other hand, benefit proportionately from all reductions of losses by salvage, compromise or otherwise. ARTICLE 6 - EXCESS OF ORIGINAL POLICY LIMITS This Agreement shall protect the IGF as provided in Article 2 - Business Covered in connection with loss in excess of the limit of the original policy. Page 4 of 11 MPCI Quota Share IGF / CCC However, this Article shall not apply where the loss has been incurred due to fraud by a member of the Board of Directors or a corporate officer of the IGF acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. For the purpose of this Article, the word "loss" shall mean any amounts for which the IGF would have been contractually liable to pay had it not been for the limit of the original policy. ARTICLE 7 - EXTRA CONTRACTUAL OBLIGATIONS This Agreement shall protect the IGF as provided in Article 2 - Business Covered where the loss includes any extra contractual obligations. The term "Extra Contractual Obligations" is defined as those liabilities not covered under any other provision of this Agreement and which arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the IGF to settle within the policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in preparation of the defense or in trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such action. The date on which any Extra Contractual Obligation loss is incurred by the IGF shall be deemed, in all circumstances, to be the date of the original occurrence, or the date the original claim is first made, whichever is applicable. However, this Article shall not apply where the loss has been incurred due to fraud by a member of the Board of Directors or a corporate officer of the IGF acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any loss covered hereunder. ARTICLE 8 - CURRENCY Where the word "dollars" and/or the sign "$" appear in this Agreement, they shall mean United States dollars. For purposes of this Agreement, where the IGF receives premiums or pays losses in currencies other than United States currency, such premiums or losses shall be converted Page 5 of 11 MPCI Quota Share IGF / CCC in to United States dollars at the actual rates of exchange at which these premiums or losses are entered in the IGF's books. ARTICLE 9 - ACCOUNTS, REPORTS AND PAYMENTS As soon as practicable after the end of each month, for each Agreement Year for which coverage applies under this Agreement, the IGF shall furnish to the CNA the FCIC reinsurance accounting report (RoRecap) which shall include but not be limited to the following: Gross liability, premiums and losses paid, by state, before deducting the amount of reinsurance ceded to the FCIC SRA. Net premiums and losses paid, after recoveries from the FCIC SRA. Calculation of gain or loss between the IGF and the FCIC as set out by the FCIC and after recoveries from the SRA As soon as practicable after the first February following each Agreement Year, the IGF shall furnish to the CNA the FCIC reinsurance accounting report (RoRecap) which shall include but not be limited to the following: Gross liability, premiums and losses paid, by state, before deducting the amount of reinsurance ceded to the FCIC SRA. Net premiums and losses paid, after recoveries from the FCIC SRA. Calculation of underwriting gain or loss between the IGF and the FCIC after recoveries from the SRA underwriting gain as stated by the FCIC each year for final accounting of the crop year. Any balance due one party from the other shall be payable upon receipt of the above report. However, if at any time during the term of this Agreement the IGF is required to reimburse the FCIC for a net underwriting loss after recoveries from the SRA for the Agreement Year under consideration, the CNA shall pay its proportional share of the net underwriting loss amount to the IGF by the date due to the FCIC. Adjustments shall continue until final settlement is reached with the FCIC on all policies reinsured for each Agreement Year unless such earlier definitive date is agreed to be the parties to this Agreement. Page 6 of 11 MPCI Quota Share IGF / CCC As soon as possible after the conclusion of each calendar quarter and Agreement Year the IGF will provide any other information the CNA may require for its Convention Statement which may be reasonably available to the IGF. ARTICLE 10 - DEFINITIONS The term "Standard Reinsurance Agreement (SRA) of the FCIC" as used herein shall mean the Reinsurance Agreement between the Federal Crop Insurance Corporation and the entity so named including all amendments applicable to the agreement during the term of this Agreement. ARTICLE 11 - OFFSET The IGF or the CNA shall have the right to offset any balance or amounts due from one party to the other under the terms of this Agreement. The party asserting the right of offset may exercise such right at any time whether the balances due are on account of premiums or losses. ARTICLE 12 - WARRANTY For business covered hereunder it is agreed that all terms and agreements of the FCIC are applied. ARTICLE 13 - ACCESS TO RECORDS Upon reasonable notice, the CNA, or its designated representative, shall have access at any reasonable time to inspect and audit the books and records of the IGF which pertain in any way to this reinsurance and it may make copies of any records pertaining thereto. This right of inspection, audit and information shall survive termination of this Agreement and shall run to the natural expiry of all liabilities under the policies reinsured. Page 7 of 11 MPCI Quota Share IGF / CCC ARTICLE 14 - TAXES In consideration of the terms under which this Agreement is issued, IGF undertakes not to claim any deduction of the premium hereon when making tax returns, other than Income or Profits Tax returns, to any state or territory of the United States of America or to the District of Columbia. ARTICLE 15 - ERRORS AND OMISSIONS Any inadvertent error, omission or delay in complying with the terms and conditions of this Agreement shall not be held to relieve either party hereto from any liability which would attach to it hereunder if such error, omission or delay had not been made, provided such error, omission or delay is rectified immediately upon discovery. ARTICLE 16 - AMENDMENTS This Agreement may be altered or amended in any of its terms and conditions by mutual consent of the IGF and the CNA by an Endorsement hereto. Such Endorsement will then constitute a part of this Agreement. ARTICLE 17 - LOSS FUNDING This Article is only applicable to CNA if it cannot qualify for credit by the State, meaning the state, province or Federal authority having jurisdiction over IGF's loss reserves. As regards policies issued by the IGF coming within the scope of this Agreement, the IGF agrees that when it shall file with the insurance department or set up on its books reserves for losses covered hereunder which it shall be required to set up by law it will forward to the CNA a statement showing the proportion of such loss reserves which is applicable to them. The CNA hereby agrees that it will apply for and secure delivery to the IGF a clean irrevocable and unconditional Letter of Credit issued by a bank chosen by the CNA and acceptable to the appropriate insurance authorities, in an amount equal to the CNA's proportion of the loss reserves in respect of known outstanding losses that have been reported to the CNA and allocated loss expenses relating thereto as shown in the statement prepared by the IGF. Under no circumstances shall any amount relating to reserves in Page 8 of 11 MPCI Quota Share IGF / CCC respect of losses or loss expenses Incurred But Not Reported be included in the amount of the Letter of Credit. The Letter of Credit shall be "Evergreen" and shall be issued for a period of not less than one year, and shall be automatically extended for one year from its date of expiration or any future expiration date unless thirty (30) days prior to any expiration date, the bank shall notify the IGF by certified or registered mail that it elects not to consider the Letter of Credit extended for any additional period. The IGF, or its successors in interest, undertakes to use and apply any amounts which it may draw upon such Credit pursuant to the terms of the Agreement under which the Letter of Credit is held, and for the following purposes only: To pay CNA's share or to reimburse IGF for CNA's share of any liability for loss reinsured by this Agreement, the payment of which has been agreed by CNA and which has not otherwise been paid. To make refund of any sum which is in excess of the actual amount required to pay CNA's share of any liability reinsured by this Agreement. In the event of expiration of the Letter of Credit as provided for above, to establish deposit of CNA's share of known and reported outstanding losses and allocated loss expenses relating thereto under this Agreement. Such cash deposit shall be held in an interest bearing account separate from IGF's other assets, and interest thereon shall accrue to the benefit of CNA. It is understood and agreed that this procedure will be implemented only in exceptional circumstances and that, if it is implemented, IGF will ensure that a rate of interest is obtained for CNA on such a deposit account that is at least equal to the rate which would have been paid by Citibank N.A. in New York, and further that IGF will account to CNA on an annual basis for all interest accruing on the cash deposit account for the benefit of CNA. The bank chosen for the issuance of the Letter of Credit shall have no responsibility whatsoever in connection with the propriety of withdrawals made by IGF or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of IGF. At annual intervals, or more frequently as agreed but never more frequently than semiannually, IGF shall prepare a specific statement, for the sole purpose of amending the Letter of Credit, of CNA's share of known and reported outstanding losses and allocated loss expenses relating thereto. If the statement shows that CNA's share of such losses and allocated loss expenses exceeds the balance of credit as of the statement date, CNA shall, Page 9 of 11 MPCI Quota Share IGF / CCC within thirty (30) days after receipt of notice of such excess, secure delivery to IGF of an amendment of the Letter of Credit increasing the amount of credit by the amount of such difference. If, however, the statement shows that CNA's share of known and reported outstanding losses plus allocated loss expenses relating thereto is less than the balance of credit as of the statement date, IGF shall, within thirty (30) days after receipt of written request from CNA, release such excess credit by agreeing to secure an amendment to the Letter of Credit reducing the amount of credit available by the amount of such excess credit. ARTICLE 18 - INSOLVENCY This reinsurance shall be payable by CNA on the basis of the liability of IGF under Policy or Policies reinsured without diminution, because of the insolvency of IGF, to IGF or its liquidator, receiver, or statutory successor. In the event of insolvency of IGF, the liquidator or receiver or statutory successor of the IGF shall give written notice to CNA of the pendency of a claim filed against IGF on the Policy or Policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding. During the pendency of such claim CNA may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to IGF or its liquidator or receiver or statutory successor. The expenses thus incurred by CNA shall be chargeable, subject to court approval, against IGF as part of the expense of liquidation to the extent of a proportionate share of the benefits which may accrue to IGF solely as a result of the defense so undertaken by CNA. Should IGF go into liquidation or should a receiver be appointed, CNA shall be entitled to deduct from any sums which may be or may become due to IGF under this reinsurance Agreement, any sums which are due to CNA by IGF under this Agreement and which are payable at a fixed or stated date, as well as any other sums due to CNA which are permitted to be offset under applicable law. It is further understood and agreed that, in the event of the insolvency of IGF, the reinsurance under this Agreement shall be payable directly by CNA to IGF or to its liquidator, receiver or statutory successor, except a) where this Agreement specifically provides another payee of such reinsurance in the event of the insolvency of IGF and b) where CNA with the consent of the direct insured or insureds has assumed such policy obligations of IGF as direct obligations of CNA to the payees under such policies and in substitution for the obligations of IGF to such payees. Page 10 of 11 MPCI Quota Share IGF / CCC In no event shall anyone other than the parties to this Agreement or, in the event of IGF's insolvency, its liquidator, receiver, or statutory successor, have any rights under this Agreement. ARTICLE 19 - ARBITRATION As a condition precedent to any right of action hereunder, any dispute arising out of the interpretation, performance or breach of this Agreement, including the formation or validity thereof, shall be submitted for decision to a panel of three arbitrators. Notice requesting arbitration will be in writing and sent certified mail, return receipt requested. One arbitrator shall be chosen by each party and the two arbitrators shall, before instituting the hearing, choose an impartial third arbitrator who shall preside at the hearing. If either party fails to appoint its arbitrator within thirty (30) days after being requested to do so by the other party, the latter, after ten (10) days notice by certified mail of its intention to do so, may appoint the second arbitrator. If the two arbitrators are unable to agree upon the third arbitrator within thirty (30) days of their appointment, each of them shall name two, of whom the other shall decline one and the decision shall be made by drawing lots. All arbitrators shall be disinterested active or retired executive officers of insurance or reinsurance companies s, Underwriters at Lloyd's London not under the control of either party to this Contract, or a qualified arbitrator supplied by the AAA.. Within thirty (30) days after notice of appointment of all arbitrators, the panel shall meet and determine timely periods for briefs, discovery procedures and schedules for hearings. The panel shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence. Arbitration shall take place in Des Moines, Iowa. Insofar as the arbitration panel looks to substantive law, it shall consider the law of the State of Illinois. The decision of any two arbitrators when rendered in writing shall be final and binding. The panel is empowered to grant interim relief as it may deem appropriate. The panel shall make its decision considering the custom and practice of the applicable insurance and reinsurance business as promptly as possible following the termination of the hearings. Judgment upon the award may be entered in any court having jurisdiction thereof. Page 11 of 11 MPCI Quota Share IGF / CCC Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the cost of the third arbitrator. The remaining costs of the arbitration shall be allocated by the panel. The panel may, at its discretion, award such further costs and expenses as it considers appropriate, including but not limited to attorneys fees, to the extent permitted by law. The panel is prohibited from awarding punitive, exemplary or treble damages, of whatever nature, in connection with any arbitration proceeding concerning this Agreement. ARTICLE 20 - CHOICE OF LAW This Agreement, including all matters relating to formation, validity and performance thereof, shall be interpreted in accordance with the law of the State of Illinois. ARTICLE 21 - ENTIRE CONTRACT This Agreement and that certain Strategic Alliance Agreement, the Ancillary Agreements, Crop Hail Insurance Services and Indemnity Agreement, MPCI Insurance Services and Indemnity Agreement, Multiple Peril Crop Insurance Quota Share Contract - effective July 1, 1997, Crop Hail Quota Share Reinsurance Contract - effective January 1, 1998, and the Crop Hail Quota Share Agreement - effective January 1, 1998, between the parties, represent the entire agreement and understanding among the parties. No other oral or written agreements or contracts relating to the risks reinsured hereunder currently exist and/or are contemplated between the parties. ARTICLE 22 - SEVERABILITY If any law or regulation of any Federal, State, or Local Government of the United States of America or the provinces of Canada or the ruling officials of any supervision over insurance companies, should render illegal this Agreement, or any portion thereof, as to risks or properties located in the jurisdiction of such authority, either the IGF or the CNA may upon written notice to the other suspend, abrogate, or amend this Agreement insofar as it relates to risks or properties located within such jurisdiction to such extent as may be necessary to comply with such law, regulations or ruling. Such illegality, suspension, abrogation, or amendment of a portion of this Agreement shall in no way affect any other portion thereof. Page 12 of 11 MPCI Quota Share IGF / CCC ARTICLE 22 - ILLUSTRATION IGF and CNA have agreed to append Schedule 1 as an attachment hereto to illustrate their understanding of the operation of this Agreement. Page 13 of 11 MPCI Quota Share IGF / CCC IN WITNESS WHEREOF the parties acknowledge that no intermediary is involved in or brought about this transaction, and the parties hereto, by their authorized representatives, have executed this Agreement: on this day of 1998 IGF INSURANCE COMPANY and its AFFILIATED COMPANIES By: ________________________________________________ Attested by: _________________________________________ and on this day of 1998 CONTINENTAL CASUALTY COMPANY By: ________________________________________________ Attested by:__________________________________________ MULTIPLE PERIL CROP INSURANCE (MPCI) QUOTA SHARE AGREEMENT (referred to as the "Agreement") Effective: July 1, 1997 issued to IGF Insurance Company and its Affiliated Companies (referred to as "IGF") by Continental Casualty Company (referred to as "CNA") Page 14 of 11 MPCI Quota Share IGF / CCC EX-2 5 CROP HAIL INSURANCE QUOTA SHARE CONTRACT Exhibit 2.4 CROP HAIL INSURANCE QUOTA SHARE CONTRACT (hereinafter referred to as "Contract") Effective: January 1, 1998 issued to Continental Casualty Company (hereinafter referred to as the "Company") by IGF Insurance Company and its Affiliated Companies (hereinafter collectively referred to as "Reinsurer") ARTICLE 1 - TERM This Contract shall apply to losses occurring on and after 12:01 a.m. Central Standard Time, January 1, 1998 as respects new and renewal policies on business covered by this Contract, becoming effective on and after said date and shall continue in full force and effect until terminated as provided below. This Contract shall terminate automatically upon the exercise of a Put Right or Call Right as defined under the Strategic Alliance Agreement (hereinafter "SAA") between Continental Casualty Company and IGF Holdings, Inc. and its Affiliated Companies, to which this Contract is attached, with termination becoming effective at the end of the Crop Year in which such Put Right or Call Right is exercised, and no policies written after the effective time of termination shall be covered hereunder. ARTICLE 2 - BUSINESS COVERED Page 1 of 10 Crop Hail Quota Share CCC / IGF The Company agrees to cede and the Reinsurer agrees to accept a 100% quota share of the liabilities of the Company under all policies of Crop Hail insurance, meaning all policies, binders, certificates, endorsements, contracts, coverage written by Producers Lloyds Insurance Company and Pallisers Insurance Company and reinsured by the Company, or other evidences of liability, written or renewed by or on behalf of the Company during the term of this Contract and classified by the Company as crop hail, including allied coverages as described under the Company's policies (hereinafter "policies" as used in this Contract). ARTICLE 3 - TERRITORY This Contract applies to the territory of the Company's business covered hereunder. ARTICLE 4- ORIGINAL CONDITIONS All amounts ceded hereunder shall be subject to the same gross rating and to the same clauses, conditions, exclusions and modifications of the policies reinsured hereunder, subject to the limits, terms and conditions of this Contract. Except as specifically and expressly provided for in the Insolvency Article, the provisions of this Contract are intended solely for the benefit of the parties to and executing this Contract, and nothing in this Contract shall in any manner create, or be construed to create, any obligations to or establish any rights against any party to this Contract in favor of any third parties or other persons not parties to and executing this Contract. ARTICLE 5 - LOSSES The Company alone and at its full discretion shall adjust, settle or compromise all claims and losses. All such adjustments, settlements and compromises, including ex-gratia payments, and loss expenses shall be binding on the Reinsurer in proportion to its' participation. The Company shall likewise at its sole discretion commence, continue, defend, compromise, settle or withdraw from actions, suits or proceedings and generally do all such matters and things relating to any claim or loss as in its judgment may be beneficial or expedient; and all loss payments made shall be shared by the Reinsurer proportionately. The Reinsurer shall, on the other hand, benefit proportionately from all reductions of losses by salvage, compromise or otherwise. Page 2 of 10 Crop Hail Quota Share CCC / IGF In the event the Company's paid losses and loss expenses exceed the Net Earned Premium Income less ceding commission, the Reinsurer agrees to advance the amount by which the losses exceed the Net Earned Premium Income less ceding commission within 30 days of receipt of a written report substantiating such a request. ARTICLE 6 - EXCESS OF ORIGINAL POLICY LIMITS This Contract shall protect the Company as provided in Article 2 - Business Covered in connection with loss in excess of the limit of the original policy. However, this Article shall not apply where the loss has been incurred due to fraud by a member of the Board of Directors or a corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. For the purpose of this Article, the word "loss" shall mean any amounts for which the Company would have been contractually liable to pay had it not been for the limit of the original policy. ARTICLE 7 - EXTRA CONTRACTUAL OBLIGATIONS This Contract shall protect the Company as provided in Article 2 - Business Covered where the loss includes any extra contractual obligations. The term "Extra Contractual Obligations" is defined as those liabilities not covered under any other provision of this Contract and which arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Company to settle within the policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in preparation of the defense or in trial of any action against its insured, or reinsured as provided for in Article 2, or in the preparation or prosecution of an appeal consequent upon such action. The date on which any Extra Contractual Obligation loss is incurred by the Company shall be deemed, in all circumstances, to be the date of the original occurrence, or the date the original claim is first made, whichever is applicable. However, this Article shall not apply where the loss has been incurred due to fraud by a member of the Board of Directors or a corporate officer of the Company acting individually Page 3 of 10 Crop Hail Quota Share CCC / IGF or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any loss covered hereunder. ARTICLE 8 - CURRENCY Where the word "dollars" and/or the sign "$" appear in this Contract, they shall mean United States dollars. For purposes of this Contract, where the Company receives premiums or pays losses in currencies other than United States currency, such premiums or losses shall be converted in to United States dollars at the actual rates of exchange at which these premiums or losses are entered in the Company's books. ARTICLE 9 - ACCOUNTS, REPORTS AND PAYMENTS As soon as possible after the end of the season, but no later than December 15th of each Agreement Year, with Agreement Year meaning any January 1st through December 31st for which coverage applies under this Contract, the Company shall provide the Reinsurer with a complete account, to include but not be limited to the following: Net Earned Premium income accounted for during the Agreement Year, meaning gross earned premium income on business accounted for during that Agreement Year less any returned premium and earned income paid for reinsurances, recoveries under which inure to the benefit of this Contract; less The ceding commission as provided for in this Contract: less; Losses and loss adjustment expense paid during the Agreement Year, with loss adjustment expense for external adjusters including part time loss adjusters capped at 4%, except for the reinsurance agreement with Producers Lloyds Insurance Company wherein the loss adjustment expense shall be capped at 4.5% and as incurred under the reinsurance agreement with Pallisers Insurance Company, of gross written premium accounted for during the Agreement Year; plus Subrogation, salvage, or other recoveries on losses occurring during the term of the Agreement Year being accounted for. Page 4 of 10 Crop Hail Quota Share CCC / IGF Within 15 days of receipt of the Company's report, the Reinsurer shall remit any balance due to the Company as respects such report. As soon as possible after the conclusion of each calendar quarter and Agreement Year the Company will provide any other information the Reinsurer may require for its Convention Statement which may be reasonably available to the Company. ARTICLE 10 - CEDING COMMISSION The Reinsurer will allow the Company a ceding commission under the reinsurance agreement with Producers Lloyds Insurance Company of 27.5% provisional and increasing to 31.5% at a loss ratio of 48%, plus intermediary fees and under the reinsurance agreement with Palliser Insurance Company (of 26% provisional and increasing to 29% at 54% loss ratio, plus intermediary fees. Return commission shall be allowed on return premiums at the same rate. ARTICLE 11 - OFFSET The Company or the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right at any time whether the balances due are on account of premiums or losses. ARTICLE 12 - ACCESS TO RECORDS Upon reasonable notice, the Reinsurer, or its designated representative, shall have access at any reasonable time to inspect and audit the books and records of the Company which pertain in any way to this reinsurance and it may make copies of any records pertaining thereto. This right of inspection, audit and information shall survive termination of this Contract and shall run to the natural expiry of all liabilities under the policies reinsured. ARTICLE 13 - TAXES In consideration of the terms under which this Contract is issued, the Company undertakes not to claim any deduction of the premium hereon when making tax returns, other than Page 5 of 10 Crop Hail Quota Share CCC / IGF Income or Profits Tax returns, to any state or territory of the United States of America or to the District of Columbia. ARTICLE 14 - ERRORS AND OMISSIONS Any inadvertent error, omission or delay in complying with the terms and conditions of this Contract shall not be held to relieve either party hereto from any liability which would attach to it hereunder if such error, omission or delay had not been made, provided such error, omission or delay is rectified immediately upon discovery. ARTICLE 15 - AMENDMENTS This Contract may be altered or amended in any of its terms and conditions by mutual consent of the Company and the Reinsurer by an Endorsement hereto. Such Endorsement will then constitute a part of this Contract. ARTICLE 16 - LOSS FUNDING This Article is only applicable to those Reinsurers who cannot qualify for credit by the State, meaning the state, province or Federal authority having jurisdiction over the Company's loss reserves. As regards policies issue by the Company coming within the scope of this Contract, the Company agrees that when it shall file with the insurance department or set up on its books reserves for losses covered hereunder which it shall be required to set up by law it will forward to the Reinsurer a statement showing the proportion of such loss reserves which is applicable to them. The Reinsurer hereby agrees that it will apply for and secure delivery to the Company a clean irrevocable and unconditional Letter of Credit issued by a bank chosen by the Reinsurer and acceptable to the appropriate insurance authorities, in an amount equal to the Reinsurer's proportion of the loss reserves in respect of known outstanding losses that have been reported to the Reinsurer and allocated loss expenses relating thereto as shown in the statement prepared by the Company. Under no circumstances shall any amount relating to reserves in respect of losses or loss expenses Incurred But Not Reported be included in the amount of the Letter of Credit. Page 6 of 10 Crop Hail Quota Share CCC / IGF The Letter of Credit shall be "Evergreen" and shall be issued for a period of not less than one year, and shall be automatically extended for one year from its date of expiration or any future expiration date unless thirty (30) days prior to any expiration date, the bank shall notify the Company by certified or registered mail that it elects not to consider the Letter of Credit extended for any additional period. The Company, or its successors in interest, undertakes to use and apply any amounts which it may draw upon such Credit pursuant to the terms of the Contract under which the Letter of Credit is held, and for the following purposes only: To pay the Reinsurer's share or to reimburse the Company for the Reinsurer's share of any liability for loss reinsured by this Contract, the payment of which has been agreed by the Reinsurer and which has not otherwise been paid. To make refund of any sum which is in excess of the actual amount required to pay the Reinsurer's share of any liability reinsured by this Contract. In the event of expiration of the Letter of Credit as provided for above, to establish deposit of the Reinsurer's share of known and reported outstanding losses and allocated loss expenses relating thereto under this Contract. Such cash deposit shall be held in an interest bearing account separate from the Company's other assets, and interest thereon shall accrue to the benefit of the Reinsurer. It is understood and agreed that this procedure will be implemented only in exceptional circumstances and that, if it is implemented, the Company will ensure that a rate of interest is obtained for the Reinsurer on such a deposit account that is at least equal to the rate which would have been paid by Citibank N.A. in New York, and further that the Company will account to the Reinsurer on an annual basis for all interest accruing on the cash deposit account for the benefit of the Reinsurer. The bank chosen for the issuance of the Letter of Credit shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Company. At annual intervals, or more frequently as agreed but never more frequently than semiannually, the Company shall prepare a specific statement, for the sole purpose of amending the Letter of Credit, of the Reinsurer's share of known and reported outstanding losses and allocated loss expenses relating thereto. If the statement shows that the Reinsurer's share of such losses and allocated loss expenses exceeds the balance of credit as of the statement date, the Reinsurer shall, within thirty (30) days after receipt of notice Page 7 of 10 Crop Hail Quota Share CCC / IGF of such excess, secure delivery to the Company of an amendment of the Letter of Credit increasing the amount of credit by the amount of such difference. If, however, the statement shows that the Reinsurer's share of known and reported outstanding losses plus allocated loss expenses relating thereto is less than the balance of credit as of the statement date, the Company shall, within thirty (30) days after receipt of written request from the Reinsurer, release such excess credit by agreeing to secure an amendment to the Letter of Credit reducing the amount of credit available by the amount of such excess credit. ARTICLE 17 - INSOLVENCY This reinsurance shall be payable by the Reinsurer on the basis of the liability of the Company under Policy or Policies reinsured without diminution, because of the insolvency of the Company, to the Company or its liquidator, receiver, or statutory successor. In the event of insolvency of the Company, the liquidator or receiver or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim filed against the Company on the Policy or Policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding. During the pendency of such claim the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to the Company or its liquidator or receiver or statutory successor. The expenses thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the Company as part of the expense of liquidation to the extent of a proportionate share of the benefits which may accrue to the Company solely as a result of the defense so undertaken by the Reinsurer. Should the Company go into liquidation or should a receiver be appointed, the Reinsurer shall be entitled to deduct from any sums which may be or may become due to the Company under this reinsurance Contract, any sums which are due to the Reinsurer by the Company under this Contract and which are payable at a fixed or stated date, as well as any other sums due to the Reinsurer which are permitted to be offset under applicable law. It is further understood and agreed that, in the event of the insolvency of the Company, the reinsurance under this Contract shall be payable directly by the Reinsurer to the Company or to its liquidator, receiver or statutory successor, except a) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the Company and b) where the Reinsurer with the consent of the direct insured or insureds has assumed Page 8 of 10 Crop Hail Quota Share CCC / IGF such policy obligations of the Company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the Company to such payees. In no event shall anyone other than the parties to this Contract or, in the event of the Company's insolvency, its liquidator, receiver, or statutory successor, have any rights under this Contract. ARTICLE 18 - ARBITRATION As a condition precedent to any right of action hereunder, any dispute arising out of the interpretation, performance or breach of this Contract, including the formation or validity thereof, shall be submitted for decision to a panel of three arbitrators. Notice requesting arbitration will be in writing and sent certified mail, return receipt requested. One arbitrator shall be chosen by each party and the two arbitrators shall, before instituting the hearing, choose an impartial third arbitrator who shall preside at the hearing. If either party fails to appoint its arbitrator within thirty (30) days after being requested to do so by the other party, the latter, after ten (10) days notice by certified mail of its intention to do so, may appoint the second arbitrator. If the two arbitrators are unable to agree upon the third arbitrator within thirty (30) days of their appointment, each of them shall name two, of whom the other shall decline one and the decision shall be made by drawing lots. All arbitrators shall be disinterested active or retired executive officers of insurance or reinsurance companies, Underwriters at Lloyd's London not under the control of either party to this Contract, or a qualified arbitrator supplied by the AAA. Within thirty (30) days after notice of appointment of all arbitrators, the panel shall meet and determine timely periods for briefs, discovery procedures and schedules for hearings. The panel shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence. Arbitration shall take place in Chicago, Illinois. Insofar as the arbitration panel looks to substantive law, it shall consider the law of the State of Illinois. The decision of any two arbitrators when rendered in writing shall be final and binding. The panel is empowered to grant interim relief as it may deem appropriate. The panel shall make its decision considering the custom and practice of the applicable insurance and reinsurance business as promptly as possible following the termination of the hearings. Judgment upon the award may be entered in any court having jurisdiction thereof. Page 9 of 10 Crop Hail Quota Share CCC / IGF Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the cost of the third arbitrator. The remaining costs of the arbitration shall be allocated by the panel. The panel may, at its discretion, award such further costs and expenses as it considers appropriate, including but not limited to attorneys fees, to the extent permitted by law. The panel is prohibited from awarding punitive, exemplary or treble damages, of whatever nature, in connection with any arbitration proceeding concerning this Contract. ARTICLE 19 - CHOICE OF LAW This Contract, including all matters relating to formation, validity and performance thereof, shall be interpreted in accordance with the law of the State of Illinois. ARTICLE 20 - INTER-COMPANY POOLING It is understood and agreed that the Company has entered into the CNA Reinsurance Pooling Agreement whereby it assumes 100% (one hundred percent) of the liability of the other participants in the CNA Reinsurance Pooling Agreement. This present Contract protects such assumed liability and attaches prior to redistribution, if any, within the participating companies. Such redistribution shall be disregarded for all purposes of this present Contract. For all purposes of this present Contract, other member companies of the CNA Reinsurance Pooling Agreement are: National Fire Insurance Company of Hartford, American Casualty Company of Reading Pennsylvania, Transportation Insurance Company, Transcontinental Insurance Company, Valley Forge Insurance Company, CNA Casualty of California, CNA Lloyd's of Texas and Columbia Casualty Company. It is also understood and agreed that the Company shall include the insurance companies of the Continental Corporation which are affiliated with, controlled by or under common management of CNA. ARTICLE 21 - ENTIRE CONTRACT This Contract and that certain Strategic Alliance Agreement, the Ancillary Agreements, Crop Hail Insurance Services and Indemnity Agreement, MPCI Insurance Page 10 of 10 Crop Hail Quota Share CCC / IGF Services and Indemnity, Multiple Peril Crop Insurance Quota Share Agreement effective July 1, 1997, Multiple Peril Crop Insurance Quota Share Reinsurance Contract effective July 1, 1997, and the Crop Hail Quota Share Agreement - effective January 1, 1998, between the parties, represent the entire agreement and understanding among the parties. No other oral or written agreements or contracts relating to the risks reinsured hereunder currently exist and/or are contemplated between the parties. ARTICLE 22 - SEVERABILITY If any law or regulation of any Federal, State, or Local Government of the United States of America or the provinces of Canada or the ruling officials of any supervision over insurance companies, should render illegal this Contract, or any portion thereof, as to risks or properties located in the jurisdiction of such authority, either the Company or the Reinsurer may upon written notice to the other suspend, abrogate, or amend this Contract insofar as it relates to risks or properties located within such jurisdiction to such extent as may be necessary to comply with such law, regulations or ruling. Such illegality, suspension, abrogation, or amendment of a portion of this Contract shall in no way affect any other portion thereof. Page 11 of 10 Crop Hail Quota Share CCC / IGF IN WITNESS WHEREOF the parties acknowledge that no intermediary is involved in or brought about this transaction, and the parties hereto, by their authorized representatives, have executed this Contract: on this day of 1998 CONTINENTAL CASUALTY COMPANY By: ________________________________________________ Attested by: _________________________________________ and on this day of 1998 IGF INSURANCE COMPANY and its AFFILIATED COMPANIES By: ________________________________________________ Attested by:__________________________________________ CROP HAIL INSURANCE QUOTA SHARE CONTRACT (referred to as the "Contract") Effective: January 1, 1998 issued to Continental Casualty Company (referred to as the "Company") by IGF Insurance Company and its Affiliated Companies (referred to as the "Reinsurer") EX-2 6 CROP HAIL INSURANCE QUOTA SHARE AGREEMENT Exhibit 2.5 CROP HAIL INSURANCE QUOTA SHARE AGREEMENT (hereinafter referred to as "Agreement") Effective: January 1, 1998 issued to IGF Insurance Company and its Affiliated Companies (hereinafter referred to as "IGF") by Continental Casualty Company (hereinafter collectively referred to as "CNA") ARTICLE 1 - TERM This Agreement shall apply to losses occurring on and after 12:01 a.m. Central Standard Time, January 1, 1998 as respects new and renewal policies on business covered by this Agreement, becoming effective on and after said date and shall continue in full force and effect until terminated as provided below. Termination shall take place immediately and automatically upon the exercise of a Put Right or Call Right(as defined under the Strategic Alliance Agreement andhereinafter referred to "SAA") between Continental Casualty Company and IGF Holdings, Inc. and its Affiliated Companies, to which this Agreement is attached and made a part of. Upon termination, a full commutation and release of all CNA liability shall be provided to CNA for the then current Crop Year with no amounts due or owing for such year. IGF shall have the right to 100% of the premiums associated with the liability so released. If any payments have been made by CNA to IGF for its share of loss payments incurred prior to the date of exercise, such payments shall be reimbursed to CNA. As an example, if a Call Right is exercised on June 1, 2002, CNA shall not bear any risk on any of the policies bound to that date for the 2002 Crop Year nor have a right to any premiums collected or due thereon. If a Put Right or Call Right is exercised the result shall be the same. Page 1 of 11 Crop Hail Quota Share IGF / CCC ARTICLE 2 - BUSINESS COVERED IGF agrees to cede and CNA agrees to accept by way of reinsurance, for each Agreement Year covered hereunder, with Agreement Year meaning any January 1st through December 31st, 30% of the CNA Crop Hail Proportion (as defined) as follows. Such annual reinsurance cession shall be made in perpetuity unless the Put Right or Call Right is triggered. The CNA Crop Hail business produced by CNA in 1998 shall include Crop Hail business written on a CNA company's paper and the business assumed by CNA under the Producers Lloyds Insurance Company and Palliser Insurance Company reinsurance agreements. CNA's share of gains (losses) in relation to any third party reinsurance agreements and any co-share or other sharing arrangements shall be as negotiated by mutual agreement of the parties hereto. For 1998, the CNA Crop Hail Proportion shall be equal to (i) the amount of Crop Hail business produced by CNA for 1998 excepting business developed through any and all fronting agreements with IGF divided by (ii) the combined amount of Crop Hail business produced by IGF and CNA for 1998. For 1999, the CNA Crop Hail Proportion shall be equal to (i) the amount of Crop Hail business written on a CNA company paper in 1998 multiplied by one plus the percentage growth in industry Crop Hail gross premium from 1998 to 1999 as acknowledged by the NCIS, plus (ii) the amount of Crop Hail business assumed by CNA under the Producers Lloyds Insurance Company and Palliser Insurance Company reinsurance agreements in 1999, subject to items 7 and 8 below, with the resulting sum then divided by (iii) the sum of (i), (ii) and the amount of Crop Hail business produced by IGF for 1999. For 2000, the CNA Crop Hail Proportion shall be equal to (i) the amount of Crop Hail business written on a CNA company paper in 1998 multiplied by one plus the percentage growth in industry Crop Hail gross premium from 1998 to 2000 as acknowledged by the NCIS, plus (ii) the amount of Crop Hail business assumed by CNA under the Producers Lloyds Insurance Company and Palliser Insurance Company Page 2 of 11 Crop Hail Quota Share IGF / CCC reinsurance agreements in 2000, subject to items 7 and 8 below, with the resulting sum then divided by (iii) the sum of (I), (ii) and the amount of Crop Hail business produced by IGF for 2000. The CNA Crop Hail Proportion shall continue to adjust for years 2001 and beyond in a manner consistent with the formula for 1999 and 2000. If Producers Lloyds Insurance Company elects to terminate its relationship with CNA or not to enter into a relationship with IGF or to terminate such relationship after the closing date of the transaction between IGF and CNA, then if such relationship terminates prior to July 1, 2000, all of the Producers Lloyds Insurance Company's business will be removed from reimbursement and profit-sharing formulas in calculating any payments to be made under this Agreement after such termination. If Producers Lloyds Insurance Company elects to terminate its relationship with CNA or IGF, as the case may be, on or after July 1, 2000, then the dollar amount of CNA's line for Producers Lloyds Insurance Company shall be the same in the crop year in which Producers Lloyds Insurance Company terminates its relationship as it was in the immediate crop year prior to the termination and there shall be no adjustment to reimbursement and profit-sharing formulas under this Agreement with respect to any crop years prior to such termination. If Palliser Insurance Company elects to terminate its relationship with CNA or not to enter into a relationship with IGF or to terminate such relationship after the closing date of the transaction between IGF and CNA, then the dollar amount of CNA's line for Palliser Insurance Company shall be the same in the crop year in which Palliser Insurance Company terminates its relationship as it was in the immediate crop year prior to the termination. Crop Hail Business and Policies as used in this Agreement shall mean all insurances and reinsurances written and assumed and classified as crop hail as defined per the NCIS, including allied coverages. ARTICLE 3 - TERRITORY This Agreement applies to the territory of the business covered hereunder. Page 3 of 11 Crop Hail Quota Share IGF / CCC ARTICLE 4- ORIGINAL CONDITIONS All amounts ceded hereunder shall be subject to the same gross rating and to the same clauses, conditions, exclusions and modifications of the policies reinsured hereunder, subject to the limits, terms and conditions of this Agreement. Except as specifically and expressly provided for in the Insolvency Article, the provisions of this Agreement are intended solely for the benefit of the parties to and executing this Agreement, and nothing in this Agreement shall in any manner create, or be construed to create, any obligations to or establish any rights against any party to this Agreement in favor of any third parties or other persons not parties to and executing this Agreement. ARTICLE 5 - LOSSES The IGF alone and at its full discretion shall adjust, settle or compromise all claims and losses. All such adjustments, settlements and compromises, including ex-gratia payments, and loss expenses shall be binding on the CNA in proportion to its' participation. The IGF shall likewise at its sole discretion commence, continue, defend, compromise, settle or withdraw from actions, suits or proceedings and generally do all such matters and things relating to any claim or loss as in its judgment may be beneficial or expedient; and all loss payments made shall be shared by the CNA proportionately. The CNA shall, on the other hand, benefit proportionately from all reductions of losses by salvage, compromise or otherwise. In the event the IGF's paid losses and loss expenses exceed the Net Earned Premium Income less ceding commission, the CNA agrees to advance the amount by which the losses exceed the Net Earned Premium Income less ceding commission within 30 days of receipt of a written report substantiating such a request. ARTICLE 6 - EXCESS OF ORIGINAL POLICY LIMITS This Agreement shall protect the IGF as provided in Article 2 - Business Covered in connection with loss in excess of the limit of the original policy. However, this Article shall not apply where the loss has been incurred due to fraud by a member of the Board of Directors or a corporate officer of the IGF acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. Page 4 of 11 Crop Hail Quota Share IGF / CCC For the purpose of this Article, the word "loss" shall mean any amounts for which the IGF would have been contractually liable to pay had it not been for the limit of the original policy. ARTICLE 7 - EXTRA CONTRACTUAL OBLIGATIONS This Agreement shall protect the IGF as provided in Article 2 - Business Covered where the loss includes any extra contractual obligations. The term "Extra Contractual Obligations" is defined as those liabilities not covered under any other provision of this Agreement and which arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the IGF to settle within the policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in preparation of the defense or in trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such action. The date on which any Extra Contractual Obligation loss is incurred by the IGF shall be deemed, in all circumstances, to be the date of the original occurrence, or the date the original claim is first made, whichever is applicable. However, this Article shall not apply where the loss has been incurred due to fraud by a member of the Board of Directors or a corporate officer of the IGF acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any loss covered hereunder. ARTICLE 8 - CURRENCY Where the word "dollars" and/or the sign "$" appear in this Agreement, they shall mean United States dollars. For purposes of this Agreement, where the IGF receives premiums or pays losses in currencies other than United States currency, such premiums or losses shall be converted in to United States dollars at the actual rates of exchange at which these premiums or losses are entered in the IGF's books. ARTICLE 9 - ACCOUNTS, REPORTS AND PAYMENTS Page 5 of 11 Crop Hail Quota Share IGF / CCC As soon as possible after the end of the season, but no later than December 15th of each Agreement Year, with Agreement Year meaning any January 1st through December 31st for which coverage applies under this Agreement, the IGF shall provide the CNA with a complete account, to include the following: Net Earned Premium income accounted for during the Agreement Year, meaning gross earned premium income on business accounted for during that Agreement Year less returned premiums and earned income paid for reinsurances, recoveries under which inure to the benefit of this Agreement; less The ceding commission as provided for in this Agreement: less; Losses and loss adjustment expense paid during the Agreement Year, with loss adjustment expense for external adjusters including part time loss adjusters capped at 4%, except for the reinsurance agreement with Producers Lloyds Insurance Company wherein the loss adjustment expense shall be capped at 4.5% and as incurred under the reinsurance agreement with Pallisers Insurance Company, of gross written premium accounted for during the Agreement Year; plus Subrogation, salvage, or other recoveries on losses occurring during the term of the Agreement Year being accounted for. Within 15 days of receipt of IGF's report, CNA shall remit any balance due to IGF as respects such report. As soon as possible after the conclusion of each calendar quarter and Agreement Year the IGF will provide any other information the CNA may require for its Convention Statement which may be reasonably available to the IGF. ARTICLE 10 - COMMISSION CNA will allow IGF a 32.5% ceding commission on the business covered as defined in Article 2 except that under the reinsurance agreement with Producers Lloyds Insurance Company the commission will be 27.5% provisional and increasing to 31.5% at a loss ratio of 48%, plus intermediary fees and under the reinsurance agreement with Palliser Insurance Company the commission will be 26% provisional and increasing to 29% at 54% loss ratio, plus intermediary fees. Return commission shall be allowed on return premiums at the same rate. Page 6 of 11 Crop Hail Quota Share IGF / CCC ARTICLE 11 - OFFSET The IGF or the CNA shall have the right to offset any balance or amounts due from one party to the other under the terms of this Agreement. The party asserting the right of offset may exercise such right at any time whether the balances due are on account of premiums or losses. ARTICLE 12 - ACCESS TO RECORDS Upon reasonable notice, the CNA, or its designated representative, shall have access at any reasonable time to inspect and audit the books and records of the IGF which pertain in any way to this reinsurance and it may make copies of any records pertaining thereto. This right of inspection, audit and information shall survive termination of this Agreement and shall run to the natural expiry of all liabilities under the policies reinsured. ARTICLE 13 - TAXES In consideration of the terms under which this Agreement is issued, IGF undertakes not to claim any deduction of the premium hereon when making tax returns, other than Income or Profits Tax returns, to any state or territory of the United States of America or to the District of Columbia. ARTICLE 14 - ERRORS AND OMISSIONS Any inadvertent error, omission or delay in complying with the terms and conditions of this Agreement shall not be held to relieve either party hereto from any liability which would attach to it hereunder if such error, omission or delay had not been made, provided such error, omission or delay is rectified immediately upon discovery. ARTICLE 15 - AMENDMENTS This Agreement may be altered or amended in any of its terms and conditions by mutual consent of the IGF and the CNA by an Endorsement hereto. Such Endorsement will then constitute a part of this Agreement. Page 7 of 11 Crop Hail Quota Share IGF / CCC ARTICLE 16 - LOSS FUNDING This Article is only applicable to CNA if it cannot qualify for credit by the State, meaning the state, province or Federal authority having jurisdiction over IGF's loss reserves. As regards policies issued by the IGF coming within the scope of this Agreement, the IGF agrees that when it shall file with the insurance department or set up on its books reserves for losses covered hereunder which it shall be required to set up by law it will forward to the CNA a statement showing the proportion of such loss reserves which is applicable to them. The CNA hereby agrees that it will apply for and secure delivery to the IGF a clean irrevocable and unconditional Letter of Credit issued by a bank chosen by the CNA and acceptable to the appropriate insurance authorities, in an amount equal to the CNA's proportion of the loss reserves in respect of known outstanding losses that have been reported to the CNA and allocated loss expenses relating thereto as shown in the statement prepared by the IGF. Under no circumstances shall any amount relating to reserves in respect of losses or loss expenses Incurred But Not Reported be included in the amount of the Letter of Credit. The Letter of Credit shall be "Evergreen" and shall be issued for a period of not less than one year, and shall be automatically extended for one year from its date of expiration or any future expiration date unless thirty (30) days prior to any expiration date, the bank shall notify the IGF by certified or registered mail that it elects not to consider the Letter of Credit extended for any additional period. The IGF, or its successors in interest, undertakes to use and apply any amounts which it may draw upon such Credit pursuant to the terms of the Agreement under which the Letter of Credit is held, and for the following purposes only: To pay CNA's share or to reimburse IGF for CNA's share of any liability for loss reinsured by this Agreement, the payment of which has been agreed by CNA and which has not otherwise been paid. To make refund of any sum which is in excess of the actual amount required to pay CNA's share of any liability reinsured by this Agreement. In the event of expiration of the Letter of Credit as provided for above, to establish deposit of CNA's share of known and reported outstanding losses and allocated loss expenses relating thereto under this Agreement. Such cash deposit shall be held in an interest bearing account separate from IGF's other assets, and interest thereon shall accrue to the benefit of CNA. It is understood and agreed that this procedure will be Page 8 of 11 Crop Hail Quota Share IGF / CCC implemented only in exceptional circumstances and that, if it is implemented, IGF will ensure that a rate of interest is obtained for CNA on such a deposit account that is at least equal to the rate which would have been paid by Citibank N.A. in New York, and further that IGF will account to CNA on an annual basis for all interest accruing on the cash deposit account for the benefit of CNA. The bank chosen for the issuance of the Letter of Credit shall have no responsibility whatsoever in connection with the propriety of withdrawals made by IGF or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of IGF. At annual intervals, or more frequently as agreed but never more frequently than semiannually, IGF shall prepare a specific statement, for the sole purpose of amending the Letter of Credit, of CNA's share of known and reported outstanding losses and allocated loss expenses relating thereto. If the statement shows that CNA's share of such losses and allocated loss expenses exceeds the balance of credit as of the statement date, CNA shall, within thirty (30) days after receipt of notice of such excess, secure delivery to IGF of an amendment of the Letter of Credit increasing the amount of credit by the amount of such difference. If, however, the statement shows that CNA's share of known and reported outstanding losses plus allocated loss expenses relating thereto is less than the balance of credit as of the statement date, IGF shall, within thirty (30) days after receipt of written request from CNA, release such excess credit by agreeing to secure an amendment to the Letter of Credit reducing the amount of credit available by the amount of such excess credit. ARTICLE 17 - INSOLVENCY This reinsurance shall be payable by CNA on the basis of the liability of IGF under Policy or Policies reinsured without diminution, because of the insolvency of IGF, to IGF or its liquidator, receiver, or statutory successor. In the event of insolvency of IGF, the liquidator or receiver or statutory successor of the IGF shall give written notice to CNA of the pendency of a claim filed against IGF on the Policy or Policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding. During the pendency of such claim CNA may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to IGF or its liquidator or receiver or statutory successor. The expenses thus incurred by CNA shall be chargeable, subject to court approval, against IGF as part of the expense of liquidation to the extent of a proportionate share of the benefits which may accrue to IGF solely as a result of the defense so undertaken by CNA. Page 9 of 11 Crop Hail Quota Share IGF / CCC Should IGF go into liquidation or should a receiver be appointed, CNA shall be entitled to deduct from any sums which may be or may become due to IGF under this reinsurance Agreement, any sums which are due to CNA by IGF under this Agreement and which are payable at a fixed or stated date, as well as any other sums due to CNA which are permitted to be offset under applicable law. It is further understood and agreed that, in the event of the insolvency of IGF, the reinsurance under this Agreement shall be payable directly by CNA to IGF or to its liquidator, receiver or statutory successor, except a) where this Agreement specifically provides another payee of such reinsurance in the event of the insolvency of IGF and b) where CNA with the consent of the direct insured or insureds has assumed such policy obligations of IGF as direct obligations of CNA to the payees under such policies and in substitution for the obligations of IGF to such payees. In no event shall anyone other than the parties to this Agreement or, in the event of IGF's insolvency, its liquidator, receiver, or statutory successor, have any rights under this Agreement. ARTICLE 18 - ARBITRATION As a condition precedent to any right of action hereunder, any dispute arising out of the interpretation, performance or breach of this Agreement, including the formation or validity thereof, shall be submitted for decision to a panel of three arbitrators. Notice requesting arbitration will be in writing and sent certified mail, return receipt requested. One arbitrator shall be chosen by each party and the two arbitrators shall, before instituting the hearing, choose an impartial third arbitrator who shall preside at the hearing. If either party fails to appoint its arbitrator within thirty (30) days after being requested to do so by the other party, the latter, after ten (10) days notice by certified mail of its intention to do so, may appoint the second arbitrator. If the two arbitrators are unable to agree upon the third arbitrator within thirty (30) days of their appointment, each of them shall name two, of whom the other shall decline one and the decision shall be made by drawing lots. All arbitrators shall be disinterested active or retired executive officers of insurance or reinsurance companies, Underwriters at Lloyd's London not under the control of either party to this Agreement, or a qualified arbitrator supplied by the AAA. Page 10 of 11 Crop Hail Quota Share IGF / CCC Within thirty (30) days after notice of appointment of all arbitrators, the panel shall meet and determine timely periods for briefs, discovery procedures and schedules for hearings. The panel shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence. Arbitration shall take place in Des Moines, Iowa. Insofar as the arbitration panel looks to substantive law, it shall consider the law of the State of Illinois. The decision of any two arbitrators when rendered in writing shall be final and binding. The panel is empowered to grant interim relief as it may deem appropriate. The panel shall make its decision considering the custom and practice of the applicable insurance and reinsurance business as promptly as possible following the termination of the hearings. Judgment upon the award may be entered in any court having jurisdiction thereof. Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the cost of the third arbitrator. The remaining costs of the arbitration shall be allocated by the panel. The panel may, at its discretion, award such further costs and expenses as it considers appropriate, including but not limited to attorneys fees, to the extent permitted by law. The panel is prohibited from awarding punitive, exemplary or treble damages, of whatever nature, in connection with any arbitration proceeding concerning this Agreement. ARTICLE 19 - CHOICE OF LAW This Agreement, including all matters relating to formation, validity and performance thereof, shall be interpreted in accordance with the law of the State of Illinois. ARTICLE 20 - ENTIRE CONTRACT This Agreement and that certain Strategic Alliance Agreement, Insurance Services Agreement, Multiple Peril Crop Insurance Quota Share Contract - effective July 1, 1997 Multiple Peril Crop Insurance Quota Share Agreement - effective July 1, 1997, and the Crop Hail Quota Share Reinsurance Contract - effective January 1, 1998, between the parties, represent the entire agreement and understanding among the parties. No other oral or Page 11 of 11 Crop Hail Quota Share IGF / CCC written agreements or contracts relating to the risks reinsured hereunder currently exist and/or are contemplated between the parties. ARTICLE 21 - SEVERABILITY If any law or regulation of any Federal, State, or Local Government of the United States of America or the provinces of Canada or the ruling officials of any supervision over insurance companies, should render illegal this Agreement, or any portion thereof, as to risks or properties located in the jurisdiction of such authority, either the IGF or the CNA may upon written notice to the other suspend, abrogate, or amend this Agreement insofar as it relates to risks or properties located within such jurisdiction to such extent as may be necessary to comply with such law, regulations or ruling. Such illegality, suspension, abrogation, or amendment of a portion of this Agreement shall in no way affect any other portion thereof. ARTICLE 22 - ILLUSTRATION IGF and CNA have agreed to append Schedule 1 as an attachment hereto to illustrate their understanding of the operation of this Agreement. Page 12 of 11 Crop Hail Quota Share IGF / CCC IN WITNESS WHEREOF the parties acknowledge that no intermediary is involved in or brought about this transaction, and the parties hereto, by their authorized representatives, have executed this Agreement: on this day of 1998 IGF INSURANCE COMPANY and its AFFILIATED COMPANIES By: ________________________________________________ Attested by: _________________________________________ and on this day of 1998 CONTINENTAL CASUALTY COMPANY By: ________________________________________________ Attested by:__________________________________________ CROP HAIL INSURANCE QUOTA SHARE AGREEMENT (referred to as the "Agreement") Effective: January 1, 1998 issued to IGF Insurance Company and its Affiliated Companies (referred to as "IGF") by Continental Casualty Company (referred to as "CNA") EX-2 7 CROP HAIL INSURANCE SERVICE/INDEMNITY Exhibit 2.6 CROP HAIL INSURANCE SERVICES AND INDEMNITY AGREEMENT This Insurance Services and Indemnity Agreement, (hereinafter referred to as the "Agreement") is made and entered into by and between IGF Insurance Company (hereinafter referred to as "IGF"), an Indiana domiciled property and casualty insurer with principal offices located at 6000 Grand, Des Moines, Iowa 50312 and Continental Casualty Company, (hereinafter referred to as "CCC"), an Illinois domiciled property and casualty insurer with principal offices located at CNA Plaza, Chicago, Illinois, effective January 1, 1998 for the benefit of IGF and CCC. WHEREAS, CCC and IGF, IGF Holdings, Inc. and Symons International Group, Inc. have entered into a Strategic Alliance Agreement (hereinafter referred to as the "SAA"), and pursuant to Article 6 thereof have agreed to execute certain Ancillary Agreements; WHEREAS, among the Ancillary Agreements CCC and IGF have entered into is a Crop Hail Quota Share Contract (hereinafter referred to as the "Reinsurance Contract") effective January 1,1998 for certain policies issued by CCC and reinsured 100% by IGF (as defined in the Reinsurance Contract, and hereinafter referred to as the "Policy (ies) "), pursuant to the terms of such Reinsurance Contract; WHEREAS, in connection therewith CCC and IGF wish to enter into an agreement for the provision of insurance services and indemnity; WHEREAS, IGF possesses the staff and expertise to administer the Policies and agrees to assume certain duties and responsibilities to administer such Policies; and WHEREAS, CCC'S offer to write such business is based on IGF'S acceptance of such duties and responsibilities as described herein; NOW, THEREFORE, the parties, in consideration of the mutual agreements, covenants, and provisions herein contained, agree as follows: I. TERM Crop Hail Insurance Services & Indemnity Agreement Page 1 of 11 This Agreement shall take effect with the Reinsurance Contract and shall have the same term and cancellation provisions in their entirety as provided in the Reinsurance Contract, except as specified in Sections 4.5 and 4.7 of Article IV and Sections 12.1 through 12. 6 of Article XII of this Agreement. If this Agreement is terminated or expires for any reason, the Reinsurance Contract shall simultaneously terminate or expire. II. APPOINTMENTS Section 2.1: IGF shall serve as CCC'S marketing, production, and underwriting agent for the Policies and shall adjust any claims made under the Policies. Section 2.2: IGF warrants that it has and shall maintain throughout the term of this Agreement any and all licenses required to perform and provide the services specified in this Agreement in CCC's state of domicile and in all other states or provinces in which IGF is performing services on behalf of CCC. IGF also warrants that it shall abide by all rules and regulations as required by insurance department, bureau of insurance, or other appropriate regulatory agency of the states or provinces in which Policies are written, including any rate, form, or other filings as required by each state insurance department, bureau of insurance, or other appropriate regulatory agency. Section 2.3: Payment of all commissions due on Policies produced by producers shall be made directly by IGF to the producers. Section 2.4: In consideration for these appointments, IGF and CCC agree to exercise all authority and perform all duties required by this Agreement. III. UNDERWRITING AUTHORITY AND RELATED DUTIES Section 3.1: IGF is authorized, and agrees on behalf of CCC, to accept and decline insurance risks, underwrite, price, bind, issue, and cancel or nonrenew the Policies, make customary endorsements, changes, assignments, transfers and modifications of existing Policies, subject to limitations provided herein. IGF warrants that it shall accept and decline insurance risks, underwrite, price, issue, and cancel or nonrenew the Policies, make customary endorsements, changes, assignments, transfers and modifications of existing Policies in a timely and professional manner through qualified persons, fully familiar with generally accepted standards in the United States and Canada, as appropriate, and for the 1998 Crop Year according to CCC's formal written guidelines as may be provided from time to time to IGF, and for the 1999 Crop Year and subsequent Crop Years according to formal written guidelines of the Underwriting Committee (as defined in the SAA) as may be provided from time to time to IGF. Crop Hail Insurance Services & Indemnity Agreement Page 2 of 11 Section 3.2: Nothing stated anywhere in this Agreement shall impair IGF'S right to cancel or nonrenew any Policy, providing such action is in full compliance with applicable law and CCC receives advance notice of IGF'S intent. CCC has the right to cancel or nonrenew any Policy upon the prior approval of IGF unless this Agreement expires or is terminated, whereupon CCC may do so without prior approval but shall provide ten (10) days prior written notice to IGF. Section 3.3: CCC agrees that it shall, upon written request from IGF, promptly appoint such persons as agents of CCC or grant such persons a power of attorney as requested by IGF. CCC also agrees that it shall, upon written request from IGF promptly file with appropriate regulatory authorities such forms and rates as requested by IGF. IGF's staff shall perform the administrative functions necessary for CCC to make such appointment and grant such powers. IV. CLAIMS AUTHORITY AND RELATED DUTIES Section 4.1: IGF is authorized and agrees on behalf of CCC to adjust, compromise, process and pay all claims arising under the Policies issued under this Agreement, including the right to litigate claims in CCC's name, except as provided in Section 4.5 of Article IV herein. IGF warrants that any claims arising under the Policies will be handled in a timely and professional manner by qualified persons, fully familiar with generally accepted claims handling standards in the United States and Canada, as appropriate, and for the 1998 Crop Year according to CCC's formal written guidelines as may be provided from time to time to IGF. IGF is authorized and agrees to investigate, monitor, and handle any claims under any of the Policies issued under this Agreement and reinsured pursuant to the Reinsurance Contract on CCC'S behalf or retain any independent claims consultant or adjuster as may be required. Section 4.2: CCC and IGF shall provide the other with prompt notification of any losses or claims, or any information that makes a loss or claim reasonably likely under the Policies and as provided elsewhere in this Agreement. Section 4.3: In recognition of statutory, regulatory and legal duties to handle claims in a prompt and fair manner, CCC and IGF agree to exercise their commercially reasonable best efforts and cooperate fully with the other to handle claims in said manner and in full compliance with all such requirements. Section 4.4: Within 15 days after the end of each calendar month while this Agreement is in effect, IGF shall promptly report to CCC on all open and closed claims handled by it during such month in the reporting format as mutually agreed to between CCC and IGF. Crop Hail Insurance Services & Indemnity Agreement Page 3 of 11 Such reports shall include information on all claims and allocated claims expenses reserved, paid and outstanding. IGF shall report within thirty (30) days of any such developments, significant developments on claims, including but not limited to, major reserve increases or decreases, settlements, or new information changing the liability assessment or valuation previously reported to CCC by IGF. IGF shall send CCC a copy of any claim file upon request by CCC. All claim files will be the joint property of CCC and IGF during the period this Agreement is in effect. Section 4.5: Upon termination of this Agreement, or in the event of an order of liquidation of CCC during the period this Agreement is in effect, such files shall become the sole property of CCC or its estate. IGF shall have reasonable access to, and the right to copy, any such claim files in CCC'S possession on a timely basis, if requested. Section 4.6: IGF shall pursue salvage or subrogation on behalf of CCC in all appropriate cases, on any claims arising under the Policies. Section 4.7: In the event this Agreement is terminated and unless otherwise mutually agreed to between CCC and IGF, IGF shall have the right and duty to settle and handle all subsequent claims and losses until such time as all Policies issued, underwritten or serviced by IGF pursuant to this Agreement have expired and the Reinsurance Contract has expired, and all known claims thereunder have been paid or settled, have runoff or otherwise have been disposed of in the judgment of CCC, and all incurred but not reported loss reserves have been reduced to zero, and any amounts owed to CCC by others or under the Reinsurance Contract in regard to any claims have been collected by CCC. Reinsurance indemnity for any claim or loss discussed herein shall be provided in accordance with the terms and conditions of the Reinsurance Contract. Section 4.8: All claims and/or losses handled by IGF pursuant to Section 4.7 herein shall be reported to CCC by IGF within forty-five (45) days after the end of each calendar quarter in such reporting format as requested by CCC. Section 4.9: IGF agrees to notify CCC immediately upon notice of any allegations of bad faith as respects any Policy covered under the Reinsurance Contract, and, of the receipt of any notice that a lawsuit has been filed against IGF, any of its employees or agents, and/or CCC by an insured on a Policy covered under the Reinsurance Contract. IGF shall furnish CCC, upon CCC's request, with copies of all pleadings and related file material pertaining thereto in a prompt and timely fashion. Crop Hail Insurance Services & Indemnity Agreement Page 4 of 11 V. ACCOUNTING AUTHORITY AND RELATED DUTIES Section 5.1: The parties agree that IGF shall bill its customers directly for the Policies and collect all premiums due and owing for such Policies. IGF shall reimburse CCC for all premium taxes due under such Policies at such times as requested by CCC to fulfill its filing and payment obligations. Section 5.2: Within fifteen (15) days after the end of each month while this Agreement is in effect, IGF shall provide CCC with an accounting report containing the following information (on an Agreement Year [meaning each January 1 - December 31 for which coverage applies under the Reinsurance Contract], to date, on a state by state, basis): 1) limits of liability exposed and number of policies written; 2) gross written premium; 3) paid losses and number of losses paid; 3) reserves for outstanding losses and number of outstanding losses; 4) unearned premium reserve; 5) amount of ceding commission allowed under the Reinsurance Contract; and 6) loss adjustment expenses (collectively, the information contained in 1- 6 is hereinafter referred to as the "accounting information") and any other information mutually agreed to between the parties in writing. Section 5.3: On or before December 15th of each Agreement Year for which coverage applies under the Reinsurance Contract, IGF shall forward to CCC a "provisional final" accounting report of the accounting information for the Agreement Year. If the net premiums due CCC exceeds the ceding commission and losses paid (including loss adjustment expense), IGF shall pay the balance due as soon as possible to CCC, not later than December 31st of each Agreement Year. If the ceding commission and losses paid (including loss adjustment expense) due IGF exceeds the net premiums, CCC shall pay the balance due as soon as possible to IGF, not later than December 31st of each Agreement Year. Thereafter, a final accounting shall be made when all cessions have expired or terminated, all losses have been settled and all liability has been discharged for each Agreement Year to which coverage applies under the Reinsurance Contract. If the parties dispute the amount of premiums owed, IGF shall remit the undisputed portions of the premium owed CCC. Section 5.4: As soon as possible after the conclusion of each calender quarter and Agreement Year the IGF will provide any other information CCC may require for its Convention Statement which may be reasonably available to IGF. It is understood and agreed that IGF and CCC shall each provide to the other any other information mutually agreed to between the parties in writing. Crop Hail Insurance Services & Indemnity Agreement Page 5 of 11 VI. REGULATORY COMPLIANCE AND RELATED DUTIES Section 6.1: CCC and IGF agree to use their commercially reasonable best efforts to achieve full compliance with all applicable statutory, regulatory and legal requirements. Section 6.2: CCC and IGF agree that IGF is authorized to file rules, rates and forms on behalf of CCC within a state or province to include two (2) separate company filings per jurisdiction. IGF will provide CCC with copies of all rule, rate and form filings at least five (5) business days prior to filing. CCC will have the right to approve such filing, but CCC's approval will not be unreasonably withheld. CCC will have the opportunity to review all data relevant to its rule, rate and form filing. Section 6.3: IGF agrees to advise CCC of any complaints and/or inquiries concerning rule, rate or form filings, and to provide CCC with the opportunity to respond to regulators or consumers. CCC and IGF agree to provide the other, promptly upon request, with all information and support required for any regulatory compliance obligation and for any reports, statements or other filings required by regulatory authorities. Section 6.4: IGF agrees to monitor all legal, statutory and regulatory developments affecting the Policies hereunder and promptly report same to CCC. Should any such changes affect the Policies hereunder, the parties agree to ensure full compliance with such changes. IGF agrees to prepare any documentation necessary to assure such compliance. In the event that CCC becomes aware of any such development, it shall report it promptly to IGF. Section 6.5: In the event that any State, by statute, regulation or otherwise, prohibits or restricts IGF'S authority hereunder, the parties agree that IGF's authority to act on behalf of CCC shall be so restricted in that State. VII. COMPENSATION The parties agree that compensation for the performance of the mutual duties specified hereunder shall be as follows: (i) for Agreement Year 1998 CCC shall receive reimbursement, in such amount as the parties agree by April 1, 1998, for its direct overhead expenses/fixed costs of operating and maintaining its crop insurance program, including but not limited to, office rent, staffing, premium processing, accounting and billing, claim handling, commissions, filing of 1998 crop hail forms, rules and rates, development and filing of hail endorsements, marketing, advertising, licensing, and other expenses incurred for business already issued prior to the closing date of the transaction between IGF and CCC, in the manner that the parties agree by April 1, 1998; (ii) and in addition for Agreement Year 1998 and subsequent Agreement Years, IGF agrees to reimburse CCC for all its reasonable fronting costs, including its costs and expenses related to the production of Policies pursuant to this Agreement, related to rule, rate and form filings under this Agreement and related to the performance of its obligations under this Agreement. Crop Hail Insurance Services & Indemnity Agreement Page 6 of 11 VIII. INDEMNIFICATION Section 8.1: In addition to the obligations of IGF pursuant to the terms of the Reinsurance Contract, IGF shall indemnify CCC as follows in Sections 8.2 and 8.3. However, Sections 8.2 and 8.3 shall not apply to any liability, claim, suit, demand, damages (including punitive and exemplary damages), judgment, cost, interest and expense (including but not limited to attorneys' fees and disbursements) or regulatory fines or administrative penalties caused by the action of or the failure to take action by any employee of CCC. Nor shall Sections 8.2 and 8.3 prevent the application of any available reinsurance proceeds. Section 8.2: IGF shall indemnify, defend and hold harmless CCC, its agents, employees, subsidiaries and affiliates from and against all liability, claims, suits, demands, damages (including punitive and exemplary damages), judgments, costs, interest and expense (including but not limited to attorneys' fees and disbursements) arising out of, or in connection with, any Policy issued under this Agreement and reinsured under the Reinsurance Contract, including but not limited to production activities (such as claims made by producers against CCC for commissions allegedly due them on Policies under the Agreement), failure of producers to be properly licenced, producers, underwriting activities, policy issuance, claim handling and the resolution of coverage issues; provided however, that notwithstanding any other provisions of this Agreement, such indemnification of IGF shall not extend to any matter subject to the obligations of CCC or its affiliates under the Reinsurance Contract or the Crop Hail Quota Share Agreement. Section 8.3: IGF agrees to indemnify, defend and hold CCC harmless and make full and prompt reimbursement for any regulatory fines or administrative penalties levied against CCC relating to IGF'S failure to fulfill any policy, rate, claim payment or other filing or obligations required by or to regulatory authorities. CCC shall use its commercially reasonable best efforts to advise IGF as soon as possible of any such fine or penalty, or any information indicating that a fine or penalty may be levied. Section 8.4: Any inadvertent delay, omission or error shall not be held to relieve either party hereto from any liability which would attach to it hereunder if such delay, omission or error had not been made. Crop Hail Insurance Services & Indemnity Agreement Page 7 of 11 Section 8.5: CCC agrees to save, indemnify, and hold IGF harmless against any and all loss, liability or damage resulting from any misrepresentation or breach of warranty by CCC under the terms of this Agreement. Section 8.6: The indemnities provided in Sections 8.1, 8.2, 8.3, and 8.5 herein shall survive any termination of this Agreement. IX. ARBITRATION In the event of an irreconcilable dispute between the parties to this Agreement, such dispute shall be submitted for decision to the process of arbitration in the manner and pursuant to the procedure set forth in the ARBITRATION Article of the Reinsurance Contract. X. MODIFICATION There will be no modification of or change in the terms of this Agreement without the written approval of the parties to this Agreement. XI. BINDING EFFECT OF AGREEMENT This Agreement will be binding upon and inure to the benefit of the parties, their successors and assigns. XII. TERMINATION Section 12.1: This Agreement and IGF'S obligations, except as specified in Article I, Sections 4.5 and 4.7 of Article IV, and Section 8.6 of Article VIII hereunder, shall terminate automatically and without notice upon the occurrence of any one or more of the following events: (a) termination of the Reinsurance Contract; or (b) termination or modification of IGF'S participation in the Reinsurance Contract. Section 12.2: Any termination of this Agreement shall be subject always to IGF'S duty to satisfy, fulfill, fully perform and discharge all of its obligations pursuant to this Agreement. Section 12.3: This Agreement, except as specified in Article I, Sections 4.5 and 4.7 of Article IV, and Section 8.6 of Article VIII, may be terminated at any time by mutual written agreement. Crop Hail Insurance Services & Indemnity Agreement Page 8 of 11 Section 12.4: Notwithstanding anything herein to the contrary, should the Put Right or Call Right be triggered, then IGF must stop using CCC front at the end of the crop year in which the Put or Call right was exercised. Section 12.5: Immediately, following receipt of written notice from CCC, on account of IGF's failure to comply with a condition or provision of this Agreement within thirty (30) days after such failure is brought the IGF's attention in writing this Agreement shall terminate. Section 12.6: Unless otherwise directed by CCC in writing, in the event this Agreement is terminated, IGF shall continue to perform the duties necessary to service all Policies, at its own expense, until all liability underlying the Policies shall have been terminated. Such services shall consist of, but shall not necessarily be limited to, cancellations, return premiums, endorsements, account current reporting and claim settlements. IGF shall also issue, for and on behalf of CCC, an effective notice of non-renewal to all policyholders terminating their coverage upon the expiration of their Policy term next following the termination of this Agreement. Should good cause exist for CCC to assume such duties, IGF shall reimburse CCC for the expenses it shall incur in performing such duties. IGF shall also provide CCC, at IGF's expense, with a copy of all insurance records on unexpired Policies and all insurance claim files. XIII. CONTRIBUTION IGF, upon any payment hereunder, shall fully share in the subrogation, contribution and salvage rights of CCC, as applicable, to the extent of IGF'S payment to CCC. XIV. RESOLUTION OF CONFLICTING TERMS In the event of any conflict or inconsistency between this Agreement and the Reinsurance Contract, this Agreement shall prevail and be controlling. Notwithstanding anything to the contrary contained in Article IX herein, any irreconcilable dispute between the parties to this Agreement shall be resolved by arbitration, in the manner and pursuant to the procedure set forth in the Reinsurance Contract, as more fully set forth in Article IX of this Agreement. XV. SEVERABILITY In the event any provision of this Agreement shall be declared invalid or unenforceable by any regulatory body or court having jurisdiction, such validity or enforceability shall not affect the validity or enforceability of the remaining portions of this Agreement. XVI. ASSIGNMENT IGF and CCC agree that this Agreement is non-assignable, in whole or in part, without the written consent of the other party. XVII. RECORDS Section 17.1: Upon reasonable notice, IGF or its designated representative, or CCC and its designated representative, shall have access at any reasonable time to inspect and audit the books and records which pertain in any way to this Agreement and may make copies of any records pertaining thereto. This right of inspection, audit and information shall survive termination of this Agreement and shall run to the natural expiry of all liabilities under the policies covered under the Reinsurance Contract. Section 17.2: Subject to provisions regarding ownership of policies and claims files, the records for the Policies shall be the property of IGF and be left in IGF's possession, provided IGF has then rendered and continues to render timely accounts and payments of all monies due CCC. Otherwise, the records, and the use and control of expirations, shall be the property of CCC and IGF shall immediately thereafter forward all such records to CCC. XVIII. ENTIRE AGREEMENT This Agreement, the Strategic Alliance Agreement, the MPCI Insurance Services and Indemnity Agreement, the Ancillary Agreements, the Reinsurance Contract, the Crop Hail Quota Share Agreement, the Multiple Peril Crop Insurance Quota Share Contract, and the Multiple Peril Crop Insurance Quota Share Agreement between the parties hereto, represent the entire agreement and understanding among the parties signatory to this Agreement. No other oral or written agreements or contracts relating to the risks reinsured hereunder currently exist and/or are contemplated between the parties. XIX. ADDITIONAL SERVICES Section 19.1: IGF is willing to assist CNA: A. In administering insurance products marketed or developed by CNA outside the agreements listed in Article XVIII; Crop Hail Insurance Services & Indemnity Agreement Page 10 of 11 B. In performing services, including but not limited to regulatory compliance, processing, debt collection, accounting, or other activities related to CNA's Business in years prior to the 1998 Crop Year; C. In performing loss adjustment and claims processing related to any insurance or other products of CNA outside the agreements listed in Article XVIII; and D. Any other services outside the the agreements listed in Article XVIII that utilize the staff and expertise of IGF that it is willing to perform on behalf of CNA. Any services provided under this Section shall be based on terms included in a separate agreement or agreements or an amendment or amendments to this Agreement outlining the terms, conditions, and compensation for the performance of such services. In general, the fees for services performed shall be those outlined in Section 19.2. Section 19.2: Subject to specific provisions to the contrary in any separate agreements or amendments to this Agreement regarding services to be performed by IGF on behalf of CNA under Section 19.1, the following schedule of fees shall apply to all such separate agreements or amendments to this Agreement: ADMINISTRATOR EMPLOYEE PROVIDING SERVICE RATE PER HOUR Executive - President, Executive Vice President $205.00 Internal Legal Staff - Indianapolis and Des Moines $150.00 Corporate Manager - I.e., Accounting, National Claims Mgt. Staff $85.00 Field Manager Rate - Service Office Director, Regional Claims Mgt. $60.00 Field Service Rate - Claims Adjuster $40.00 After April 1, 1999, the rates contained in this fee schedule shall be recalculated annually for a five (5) year period thereafter by multiplying the effective rate for the prior year by a factor of 1.05. IGF shall provide the CNA with a report that provides an accounting of functions performed and expenses incurred and the related fees and costs associated production of Policies pursuant to this Agreement, related to rule, rate and form filings under this Agreement and related to the performance of its obligations under this Agreement. Crop Hail Insurance Services & Indemnity Agreement Page 11 of 11 Section 19.3: Subject to specific provisions to the contrary in any separate agreements or amendments to this Agreement regarding services to be performed by IGF on behalf of CNA under Section 19.1, CNA shall reimburse IGF for all actual transportation, communication, meals, lodging, outside legal, and administrative expenses related to the functions performed on behalf of CNA including actual computer service costs for processing data. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate by their duly authorized representatives. CONTINENTAL CASUALTY COMPANY: By: _______________________________________________________________ Name: _______________________________________________________________ Title: _______________________________________________________________ Date: _______________________________________________________________ Crop Hail Insurance Services & Indemnity Agreement Page 12 of 11 IGF INSURANCE COMPANY and its AFFILIATED COMPANIES By: _______________________________________________________________ Name: _______________________________________________________________ Title: _______________________________________________________________ Date: _______________________________________________________________ EX-2 8 MPCI SERVICE AND INDEMNITY AGREEMENT Exhibit 2.7 MULTIPLE PERIL CROP INSURANCE INSURANCE SERVICES AND INDEMNITY AGREEMENT This Insurance Services and Indemnity Agreement, (hereinafter referred to as the "Agreement") is made and entered into by and between IGF Insurance Company (hereinafter referred to as "IGF"), an Indiana domiciled property and casualty insurer with principal offices located at 6000 Grand, Des Moines, Iowa 50312 and Continental Casualty Company, (hereinafter referred to as "CCC"), an Illinois domiciled property and casualty insurer with principal offices located at CNA Plaza, Chicago, Illinois, effective July 1, 1997 for the benefit of IGF and CCC. WHEREAS, CCC and IGF, IGF Holdings, Inc. and Symons International Group, Inc. have entered into a Strategic Alliance Agreement(hereinafter referred to as the "SAA"), and pursuant to Article 6 thereof have agreed to execute certain Ancillary Agreements; WHEREAS, among the Ancillary Agreements CCC and IGF have entered into is a Multiple Peril Crop Insurance Quota Share Contract (hereinafter referred to as the "Reinsurance Contract") effective July 1,1997 for certain policies issued by CCC and reinsured 100% by IGF (as defined in the Reinsurance Contract, and hereinafter referred to as the "Policy (ies)"), pursuant to the terms of such Reinsurance Contract; WHEREAS, in connection therewith CCC and IGF wish to enter into an agreement for the provision of insurance services and indemnity; WHEREAS, IGF possesses the staff and expertise to administer the Policies and agrees to assume certain duties and responsibilities to administer such Policies; and WHEREAS, CCC'S offer to write such business is based on IGF'S acceptance of such duties and responsibilities as described herein; NOW, THEREFORE, the parties, in consideration of the mutual agreements, covenants, and provisions herein contained, agree as follows: Multiple Peril Crop Insurance Insurance Services & Indemnity Agreement Page 1 of 11 I. TERM This Agreement shall take effect with the Reinsurance Contract and shall have the same term and cancellation provisions in their entirety as provided in the Reinsurance Contract, except as specified in Sections 4.5 and 4.7 of Article IV and Sections 12.1 through 12.6 of Article XII of this Agreement. If this Agreement is terminated or expires for any reason, the Reinsurance Contract shall simultaneously terminate or expire. II. APPOINTMENTS Section 2.1: IGF shall serve as CCC'S marketing, production, and underwriting agent for the Policies and shall adjust any claims made under the Policies. Section 2.2: IGF warrants that it has and shall maintain throughout the term of this Agreement any and all licenses required to perform and provide the services specified in this Agreement in CCC's state of domicile and in all other states in which IGF is performing services on behalf of CCC. IGF also warrants that it shall abide by all rules and regulations as required by insurance department, bureau of insurance, the FCIC/Risk Management Agency (hereinafter referred to as "FCIC") or other appropriate regulatory agency of the states in which Policies are written, including any filings as required by the appropriate regulatory agency. Section 2.3: Payment of all commissions due on Policies produced by producers shall be made directly by IGF to the producers. Section 2.4: In consideration for these appointments, IGF and CCC agree to exercise all authority and perform all duties required by this Agreement. III. UNDERWRITING AUTHORITY AND RELATED DUTIES Section 3.1: IGF is authorized, and agrees on behalf of CCC, to accept and decline insurance risks, underwrite, price, bind, issue, and cancel or nonrenew the Policies, make customary endorsements, changes, assignments, transfers and modifications of existing Policies, subject to limitations provided herein. IGF warrants that it shall accept and decline insurance risks, underwrite, price, issue, and cancel or nonrenew the Policies, make customary endorsements, changes, assignments, transfers and modifications of existing Policies in a timely and professional manner through qualified persons, fully familiar with generally accepted standards in the United States, and for the 1998 Crop Year according to CCC's formal written guidelines as may be provided from time to time to IGF, and for the 1999 Crop Year and subsequent Crop Years according to formal written guidelines of the Underwriting Committee (as defined in the SAA) as may be provided from time to time to IGF. Multiple Peril Crop Insurance Insurance Services & Indemnity Agreement Page 2 of 11 Section 3.2: Nothing stated anywhere in this Agreement shall impair IGF'S right to cancel or nonrenew any Policy, providing such action is in full compliance with applicable law and CCC receives advance notice of IGF'S intent. CCC has the right to cancel or nonrenew any Policy upon the prior approval of IGF unless this Agreement expires or is terminated, whereupon CCC may do so without prior approval but shall provide ten (10) days prior written notice to IGF. Section 3.3: CCC agrees that it shall, upon written request from IGF, promptly appoint such persons as agents of CCC or grant such persons a power of attorney as requested by IGF. CCC also agrees that it shall, upon written request from IGF promptly file with appropriate regulatory authorities such forms and rates as requested by IGF. IGF's staff shall perform the administrative functions necessary for CCC to make such appointment and grant such powers. IV. CLAIMS AUTHORITY AND RELATED DUTIES Section 4.1: IGF is authorized, and agrees on behalf of CCC, to adjust, compromise, process and pay all claims arising under the Policies issued under this Agreement, including the right to litigate claims in CCC's name, except as provided in Section 4.5 of Article IV herein. IGF warrants that any claims arising under the Policies will be handled in a timely and professional manner by qualified persons, fully familiar with generally accepted claims handling standards in the United States, and for the 1998 Crop Year according to CCC's formal written guidelines as may be provided from time to time to IGF. IGF is authorized and agrees to investigate, monitor, and handle any claims under any of the Policies issued under this Agreement and reinsured pursuant to the Reinsurance Contract on CCC'S behalf or retain any independent claims consultant or adjuster as may be required. Section 4.2: CCC and IGF shall provide the other with prompt notification of any losses or claims, or any information that makes a loss or claim reasonably likely under the Policies and as provided elsewhere in this Agreement. Section 4.3: In recognition of statutory, regulatory and legal duties to handle claims in a prompt and fair manner, CCC and IGF agree to exercise their commercially reasonable best efforts and cooperate fully with the other to handle claims in said manner and in full compliance with all such requirements. Section 4.4: Within 15 days after the end of each calendar month while this Agreement is in effect, IGF shall promptly report to CCC on all open and closed claims handled by it during such month in the reporting format as mutually agreed to between CCC and IGF. Such reports shall include information on all claims and allocated claims expenses Multiple Peril Crop Insurance Insurance Services & Indemnity Agreement Page 3 of 11 reserved, paid and outstanding. IGF shall report within thirty (30) days of any such developments, significant developments on claims, including but not limited to, major reserve increases or decreases, settlements, or new information changing the liability assessment or valuation previously reported to CCC by IGF. IGF shall send CCC a copy of any claim file upon request by CCC. All claim files will be the joint property of CCC and IGF during the period this Agreement is in effect. Section 4.5: Upon termination of this Agreement, or in the event of an order of liquidation of CCC during the period this Agreement is in effect, such files shall become the sole property of CCC or its estate. IGF shall have reasonable access to, and the right to copy, any such claim files in CCC'S possession on a timely basis, if requested. Section 4.6: IGF shall pursue salvage or subrogation on behalf of CCC in all appropriate cases, on any claims arising under the Policies. Section 4.7: In the event this Agreement is terminated and unless otherwise mutually agreed to between CCC and IGF, IGF shall have the right and duty to settle and handle all subsequent claims and losses until such time as all Policies issued, underwritten or serviced by IGF pursuant to this Agreement have expired and the Reinsurance Contract has expired, and all known claims thereunder have been paid or settled, have runoff or otherwise have been disposed of in the judgment of CCC, and all incurred but not reported loss reserves have been reduced to zero, and any amounts owed to CCC by others or under the Reinsurance Contract in regard to any claims have been collected by CCC. Reinsurance indemnity for any claim or loss discussed herein shall be provided in accordance with the terms and conditions of the Reinsurance Contract. Section 4.8: All claims and/or losses handled by IGF pursuant to Section 4.7 herein shall be reported to CCC by IGF within forty-five (45) days after the end of each calendar quarter in such reporting format as requested by CCC. Section 4.9: IGF agrees to notify CCC immediately upon notice of any allegations of bad faith as respects any Policy covered under the Reinsurance Contract, and, of the receipt of any notice that a lawsuit has been filed against IGF, any of its employees or agents, and/or CCC by an insured on a Policy covered under the Reinsurance Contract. IGF shall furnish CCC, upon CCC's request, with copies of all pleadings and related file material pertaining thereto in a prompt and timely fashion. V. ACCOUNTING AUTHORITY AND RELATED DUTIES Multiple Peril Crop Insurance Insurance Services & Indemnity Agreement Page 4 of 11 Section 5.1: The parties agree that IGF shall bill its customers directly for the Policies and collect all premiums due and owing for such Policies. IGF shall reimburse CCC for all premium taxes due under such Policies at such times as requested by CCC to fulfill its filing and payment obligations. Section 5.2: Within fifteen (15) days after the end of each month while this Agreement is in effect, IGF shall provide CCC, for each Agreement Year for which coverage applies under the Reinsurance Contract, the following report: Gross liability, premiums and losses paid, by state, before deducting the amount of reinsurance ceded to the FCIC SRA. Net premiums and losses paid, after recoveries from the FCIC SRA and deduction of the allowable Expense Reimbursement under the FCIC SRA. Calculation of gain or loss between the Company and the FCIC after recoveries from the SRA and deduction of the allowable Expense Reimbursement under the FCIC SRA. Any balance due one party from the other shall be payable upon receipt of the above report. Section 5.3: As soon as practicable after the first February following each Agreement Year, the IGF shall furnish to CCC the following report: Gross liability, premiums and losses paid, by state, before deducting the amount of reinsurance ceded to the FCIC SRA. Net premiums and losses paid, after recoveries from the FCIC SRA and deduction of the allowable Expense Reimbursement under the FCIC SRA. Calculation of gain or loss between the Company and the FCIC after recoveries from the SRA and deduction of the allowable Expense Reimbursement under the FCIC SRA. Any balance due one party from the other shall be payable upon receipt of the above report. Section 5.4: As soon as possible after the conclusion of each calender quarter and Agreement Year the IGF will provide any other information CCC may require for its Convention Statement which may be reasonably available to IGF. It is understood and agreed that IGF and CCC shall each provide to the other any other information mutually agreed to between the parties in writing. Multiple Peril Crop Insurance Insurance Services & Indemnity Agreement Page 5 of 11 Section 5.5: The parties agree to apply commercially reasonable best efforts to coordinate the flow of funds among the escrow accounts maintained by each party under their respective FCIC SRAs including the exploration of establishing a new account at a bank of convenience to IGF over which IGF shall have administrative control. Section 5.6: Except for the actions of the FCIC that are of generic and equal application to insurers holding SRAs (i.e., nonpayment or rationed payment of A & O Subsidies due to the lack of appropriated funds) that result in the nonpayment of amounts otherwise due to such insurers, the failure of the FCIC to remit funds to either CCC or IGF under their respective SRAs for any Reinsurance Year due to an offset or an outright refusal to remit such funds whether they be for administrative and operating expenses or underwriting gain or loss (with the exception of Withheld Funds as defined below) shall not excuse either CCC or IGF from making remittances of its obligations under this Agreement and the Multiple Peril Crop Insurance Quota Share Agreement. Furthermore, should FCIC offset funds from a Reinsurance Account of either party for losses in which each party would have a share under the Multiple Peril Crop Insurance Quota Share Agreement, then the party whose Reinsurance Agreement was offset shall be considered to have paid its respective obligation to the extent of the offset. Should such offset be greater than the obligation of the party subject to such offset under the Multiple Peril Crop Insurance Quota Share Agreement, then the other party shall remit such funds or such excess shall be an account payable due from the other party. Section 5.7: For any applicable Reinsurance Year, any gains withheld by FCIC in a Reinsurance Account of IGF or CCC ("Withheld Funds") that would otherwise be due and payable to one or the other parties shall be treated as an account payable to the party to which such funds are owing. Such accounts payable shall be due upon the receipt of such Withheld Funds by the party holding the account payable. VI. REGULATORY COMPLIANCE AND RELATED DUTIES Section 6.1: CCC and IGF agree to use their commercially reasonable best efforts to achieve full compliance with all applicable statutory, regulatory and legal requirements. Section 6.2: CCC and IGF agree that IGF is authorized to make such filings with the FCIC, as are required by applicable law, on CCC's behalf. IGF will provide CCC with copies of all filings at least five (5) business days prior to filing. CCC will have the right to approve such filing, but CCC's approval will not be unreasonably withheld. CCC will have the opportunity to review all data relevant to such filings. Multiple Peril Crop Insurance Insurance Services & Indemnity Agreement Page 6 of 11 Section 6.3: IGF agrees to advise CCC of any complaints and/or inquiries and to provide CCC with the opportunity to respond to regulators or consumers. CCC and IGF agree to provide the other, promptly upon request, with all information and support required for any regulatory compliance obligation and for any reports, statements or other filings required by regulatory authorities. Section 6.4: IGF agrees to monitor all legal, statutory and regulatory developments affecting the Policies hereunder and promptly report same to CCC. Should any such changes affect the Policies hereunder, the parties agree to ensure full compliance with such changes. IGF agrees to prepare any documentation necessary to assure such compliance. In the event that CCC becomes aware of any such development, it shall report it promptly to IGF. Section 6.5: In the event that the FCIC or any State, by statute, regulation or otherwise, prohibits or restricts IGF'S authority hereunder, the parties agree that IGF's authority to act on behalf of CCC pursuant to this Agreement shall be so restricted in that State. VII. COMPENSATION The parties agree that compensation for the performance of the mutual duties specified hereunder shall be as follows: Section 7.1: For the 1998 crop year, CCC shall pay to IGF the entire A & O Subsidies, CAT LAE Reimbursement and XLAE received by CCC through its 1998 FCIC Standard Reinsurance Agreement (hereinafter "SRA") net of the following expenses: (i) reimbursements for any commissions on 1998 MPCI business paid prior to Closing; (ii) a percentage of 1998 premiums written on policies with sales closing dates prior to January 1, 1998 equal to the FCIC SRA A & O Subsidy rate for the products marketed (i.e., twenty-seven percent (27%) for regular MPCI; twenty-three and one-quarter percent (23.25%) for CRC) less the average commission rate paid or due to be paid on such business less XXXX percent (X%) for LAE; (iii) YYY percent (Y%) of premium on 1998 or 1999 premiums written on policies with sales closing dates after January 1, 1998 and before June 30, 1998; and (iv) direct overhead expenses of CCC's participation in the Multiple Peril Crop insurance program, including, but not limited to, office rent, staffing, product development, marketing, advertising, licensing, and all other direct overhead expenses/fixed costs, and with respect to the foregoing in the manner of the payments described in this paragraph and in the amount (which insofar as it is undetermined in this paragraph, then as the parties agree by April 1, 1998) of the payments described in this paragraph. Multiple Peril Crop Insurance Insurance Services & Indemnity Agreement Page 7 of 11 Section 7.2: For any other year beyond the 1998 crop year that CCC has an SRA: (i) CCC shall transmit one hundred percent (100%) of the A & O Subsidies, CAT LAE Reimbursement and XLAE received by CCC under the SRA to IGF immediately upon receipt, or instruct FCIC to transmit them directly to IGF, or authorize the opening of a specific account under IGF's control for the purposes of receiving such funds, or assign such proceeds directly to IGF, or otherwise facilitate the receipt by IGF of such funds; and (ii) IGF agrees to reimburse CCC for all its reasonable fronting costs, including its costs and expenses related to the production of Policies pursuant to this Agreement, related to filings under this Agreement and related to the performance of its obligations under this Agreement. Section 7.3: For any year in which CCC does not have an SRA, IGF agrees to reimburse CCC for all its reasonable fronting costs, including its costs and expenses related to the production of Policies pursuant to this Agreement, related to filings under this Agreement and related to the performance of its obligations under this Agreement. VIII. INDEMNIFICATION Section 8.1: In addition to the obligations of IGF pursuant to the terms of the Reinsurance Contract, IGF shall indemnify CCC as follows in Sections 8.2 and 8.3. However, Sections 8.2 and 8.3 shall not apply to any liability, claim, suit, demand, damages (including punitive and exemplary damages), judgment, cost, interest and expense (including but not limited to attorneys' fees and disbursements) or regulatory fines or administrative penalties caused by the action of or the failure to take action by any employee of CCC. Nor shall Sections 8.2 and 8.3 prevent the application of any available reinsurance proceeds. Section 8.2: IGF shall indemnify, defend and hold harmless CCC, its agents, employees, subsidiaries and affiliates from and against all liability, claims, suits, demands, damages (including punitive and exemplary damages), judgments, costs, interest and expense (including but not limited to attorneys' fees and disbursements) arising out of, or in connection with, any Policy issued under this Agreement and reinsured under the Reinsurance Contract, including but not limited to production activities (such as claims made by producers against CCC for commissions allegedly due them on Policies under the Agreement), failure of producers to be properly licenced, underwriting activities, policy issuance, claim handling and the resolution of coverage issues; provided however, that notwithstanding any other provisions of this Agreement, such indemnification of IGF shall not extend to any matter subject to the obligations of CCC or its affiliates under the Multiple Peril Crop Insurance Quota Share Agreement. Multiple Peril Crop Insurance Insurance Services & Indemnity Agreement Page 8 of 11 Section 8.3: IGF agrees to indemnify, defend and hold CCC harmless and make full and prompt reimbursement for any regulatory fines, administrative penalties, or civil forfeiture levied against CCC by the FCIC/RMA or other department or agency, relating to IGF'S failure to fulfill any of its obligations under this Agreement to administer the 1998 Crop Year MPCI book of business until the expiration of the liabilities associated therewith. CCC shall use its commercially reasonable best efforts to advise IGF as soon as possible of any such fine or penalty, or any information indicating that a fine or penalty may be levied. Section 8.4: Any inadvertent delay, omission or error shall not be held to relieve either party hereto from any liability which would attach to it hereunder if such delay, omission or error had not been made. Section 8.5: CCC agrees to save, indemnify, and hold IGF harmless against any and all loss, liability or damage resulting from any misrepresentation or breach of warranty by CCC under the terms of this Agreement. Section 8.6: The indemnities provided in Sections 8.1, 8.2, 8.3, and 8.5 herein shall survive any termination of this Agreement. IX. ARBITRATION In the event of an irreconcilable dispute between the parties to this Agreement, such dispute shall be submitted for decision to the process of arbitration in the manner and pursuant to the procedure set forth in the ARBITRATION Article of the Reinsurance Contract. X. MODIFICATION There will be no modification of or change in the terms of this Agreement without the written approval of the parties to this Agreement. XI. BINDING EFFECT OF AGREEMENT This Agreement will be binding upon and inure to the benefit of the parties, their successors and assigns. Multiple Peril Crop Insurance Insurance Services & Indemnity Agreement Page 9 of 11 XII. TERMINATION Section 12.1: This Agreement and IGF'S obligations, except as specified in Article I, Sections 4.5 and 4.7 of Article IV, and Section 8.6 of Article VIII hereunder, shall terminate automatically and without notice upon the occurrence of any one or more of the following events: (a) termination of the Reinsurance Contract; or (b) termination or modification of IGF'S participation in the Reinsurance Contract. Section 12.2: Any termination of this Agreement shall be subject always to IGF'S duty to satisfy, fulfill, fully perform and discharge all of its obligations pursuant to this Agreement. Section 12.3: This Agreement, except as specified in Article I, Sections 4.5 and 4.7 of Article IV, and Section 8.6 of Article VIII, may be terminated at any time by mutual written agreement. Section 12.4: Notwithstanding anything herein to the contrary, should the Put Right or Call Right be triggered, then IGF must stop using the CCC front at the end of the current crop year in which the Put or Call right is exercised. Section 12.5: Immediately, following receipt of written notice from CCC, on account of IGF's failure to comply with a condition or provision of this Agreement within thirty (30) days after such failure is brought the IGF's attention in writing, this Agreement shall terminate. Section 12.6: Unless otherwise directed by CCC in writing, in the event this Agreement is terminated, IGF shall continue to perform the duties necessary to service all Policies, at its own expense, until all liability underlying the Policies shall have been terminated. Such services shall consist of, but shall not necessarily be limited to, cancellations, return premiums, endorsements, account current reporting and claim settlements. IGF shall also issue, for and on behalf of CCC, an effective notice of non-renewal to all policyholders terminating their coverage upon the expiration of their Policy term next following the termination of this Agreement. Should good cause exist for CCC to assume such duties, IGF shall reimburse CCC for the expenses it shall incur in performing such duties. IGF shall also provide CCC, at IGF's expense, with a copy of all insurance records on unexpired Policies and all insurance claim files. XIII. CONTRIBUTION IGF, upon any payment hereunder, shall fully share in the subrogation, contribution and salvage rights of CCC, as applicable, to the extent of IGF'S payment to CCC. XIV. RESOLUTION OF CONFLICTING TERMS In the event of any conflict or inconsistency between this Agreement and the Reinsurance Contract, this Agreement shall prevail and be controlling. Notwithstanding anything to the contrary contained in Article IX herein, any irreconcilable dispute between the parties to this Agreement shall be resolved by arbitration, in the manner and pursuant to the procedure set forth in the Reinsurance Contract, as more fully set forth in Article IX of this Agreement. Multiple Peril Crop Insurance Insurance Services & Indemnity Agreement Page 10 of 11 XV. SEVERABILITY In the event any provision of this Agreement shall be declared invalid or unenforceable by any regulatory body or court having jurisdiction, such validity or enforceability shall not affect the validity or enforceability of the remaining portions of this Agreement. XVI. ASSIGNMENT IGF and CCC agree that this Agreement is non-assignable, in whole or in part, without the written consent of the other party. XVII. RECORDS Section 17.1: Upon reasonable notice, IGF or its designated representative, or CCC and its designated representative, shall have access at any reasonable time to inspect and audit the books and records which pertain in any way to this Agreement and may make copies of any records pertaining thereto. This right of inspection, audit and information shall survive termination of this Agreement and shall run to the natural expiry of all liabilities under the policies covered under the Reinsurance Contract. Section 17.2: Subject to provisions regarding ownership of policies and claims files, the records for the Policies shall be the property of IGF and be left in IGF's possession, provided IGF has then rendered and continues to render timely accounts and payments of all monies due CCC. Otherwise, the records, and the use and control of expirations, shall be the property of CCC and IGF shall immediately thereafter forward all such records to CCC. XVIII. ENTIRE AGREEMENT This Agreement, the Strategic Alliance Agreement, the Crop Hail Insurance Services and Indemnity Agreement, the Ancillary Agreements, the Reinsurance Contract, the Multiple Peril Crop Insurance Quota Share Agreement, the Crop Hail Quota Share Contract, and the Crop Hail Quota Share Agreement, between the parties hereto, represent the entire agreement and understanding among the parties signatory to this Agreement. No other oral or written agreements or contracts relating to the risks reinsured hereunder currently exist and/or are contemplated between the parties. Multiple Peril Crop Insurance Insurance Services & Indemnity Agreement Page 11 of 11 XIX. ADDITIONAL SERVICES Section 19.1: IGF is willing to assist CNA: A. In administering insurance products marketed or developed by CNA outside the agreements listed in Article XVIII; B. In performing services, including but not limited to regulatory compliance, processing, debt collection, accounting, or other activities related to CNA's Business in years prior to the 1998 Crop Year; C. In performing loss adjustment and claims processing related to any insurance or other products of CNA outside the agreements listed in Article XVIII; and D. Any other services outside the the agreements listed in Article XVIII that utilize the staff and expertise of IGF that it is willing to perform on behalf of CNA. Any services provided under this Section shall be based on terms included in a separate agreement or agreements or an amendment or amendments to this Agreement outlining the terms, conditions, and compensation for the performance of such services. In general, the fees for services performed shall be those outlined in Section 19.2. Section 19.2: Subject to specific provisions to the contrary in any separate agreements or amendments to this Agreement regarding services to be performed by IGF on behalf of CNA under Section 19.1, the following schedule of fees shall apply to all such separate agreements or amendments to this Agreement: ADMINISTRATOR EMPLOYEE PROVIDING SERVICE RATE PER HOUR Executive - President, Executive Vice President $205.00 Internal Legal Staff - Indianapolis and Des Moines $150.00 Multiple Peril Crop Insurance Insurance Services & Indemnity Agreement Page 12 of 11 Corporate Manager - I.e., Accounting, National Claims Mgt. Staff $85.00 Field Manager Rate - Service Office Director, Regional Claims Mgt. $60.00 Field Service Rate - Claims Adjuster $40.00 After April 1, 1999, the rates contained in this fee schedule shall be recalculated annually for a five (5) year period thereafter by multiplying the effective rate for the prior year by a factor of 1.05. IGF shall provide the CNA with a report that provides an accounting of functions performed and expenses incurred and the related fees and costs associated therewith on a monthly basis. The timing of the payment for such fees and costs shall be according to the terms of the separate agreement or amendment to this Agreement related to the services performed. Section 19.3: Subject to specific provisions to the contrary in any separate agreements or amendments to this Agreement regarding services to be performed by IGF on behalf of CNA under Section 19.1, CNA shall reimburse IGF for all actual transportation, communication, meals, lodging, outside legal, and administrative expenses related to the functions performed on behalf of CNA including actual computer service costs for processing data. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate by their duly authorized representatives. CONTINENTAL CASUALTY COMPANY: By: _______________________________________________________________ Name: _______________________________________________________________ Title: _______________________________________________________________ Date: _______________________________________________________________ IGF INSURANCE COMPANY and its AFFILIATED COMPANIES Multiple Peril Crop Insurance Insurance Services & Indemnity Agreement Page 13 of 11 By: _______________________________________________________________ Name: _______________________________________________________________ Title: _______________________________________________________________ Date: _______________________________________________________________ Multiple Peril Crop Insurance Insurance Services & Indemnity Agreement Page 14 of 11 EX-2 9 STOCK PURCHASE AGREEMENT BETWEEN SYMONS & GS Exhibit 2.8 Execution Copy Original STOCK PURCHASE AGREEMENT This Stock Purchase Agreement ("Agreement") is entered into this _____ day of July, 1997 by and among Symons International Group, Inc., an Indiana corporation ("SIG"), and GS Capital Partners II, L.P., a Delaware limited partnership ("GSCP"), GS Capital Partners Offshore, L.P., a Cayman Island limited partnership ("Offshore"), Goldman, Sachs & Co. VerWaltung GmbH ("VerWaltung"), Stone Street Funds 1996, L.P., a Delaware limited partnership ("Stone Street", and Bridge Street Funds 1996, L.P., a Delaware limited partnership ("Bridge Street") (Offshore, VerWaltung, Stone Street and Bridge Street are collectively referred to as the "Affiliates"). WITNESSETH: There are currently issued and outstanding 1,106,625 common shares ("Shares") of GGS Management Holdings, Inc., a Delaware corporation ("GGSM"); and WHEREAS, SIG owns 575,445 Shares; and WHEREAS, GSCP and the Affiliates own in the aggregate 531,180 Shares, which are owned as follows:
Company Shares GS Capital Partners II, L.P. 333,277.8 GS Capital Partners Offshore, L.P. 132,491.7 Goldman Sachs & Co VerWaltung GmbH 12,292.6 Stone Street Funds 1996, L.P. 31,652.4 Bridge Street Funds 1996, L.P. 21,465.5
and; WHEREAS, SIG desires to purchase, and GSCP and the Affiliates desire to sell, the 531,180 Shares of GGSM currently owned in the aggregate by GSCP and Affiliates; and WHEREAS, the parties hereto have agreed that the aggregate purchase price for such Shares shall be Sixty-One Million Dollars ($61,000,000.00) (the "Purchase Price"); and WHEREAS, GSCP understands and agrees that SIG intends to finance the Purchase Price from the proceeds received by SIG from an issuance of notes (the "Note Financing"); and -1- WHEREAS, the parties hereby agree that upon the completion of the purchase of such Shares, the parties hereto shall relinquish all rights to any and all prior agreements and understandings executed by the parties prior to the date hereof. NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, and subject to the terms and conditions hereof, the parties hereto agree as follows: Section 1 Purchase of Shares 1.1 GSCP and the Affiliates hereby agree to sell, and SIG hereby agrees to purchase, in the aggregate, Five Hundred Thirty-One Thousand, One Hundred Eighty (531,180) Shares of GGSM ("The Stock") for the aggregate purchase price of Sixty-One Million Dollars ($61,000,000.00). 1.2 Subject to Section 6 hereof, the closing of the purchase contemplated herein (the "Closing") shall occur simultaneously with the closing of the Note Financing; provided, however, that, should the Note Financing not occur, SIG may, at its option, schedule the Closing at any time prior to September 30, 1997 upon ten (10) days' advance written notice. Section 2 Closing 2.1 At the Closing, SIG shall pay the Purchase Price to the account or accounts which shall be designated by GSCP at least ten (10) days prior to the Closing. GSCP and the Affiliates shall deliver The Stock at the Closing, duly endorsed by GSCP or an Affiliate, as appropriate, transferring The Stock to SIG, free and clear of all liens, encumbrances, pledges, voting agreements, contractual rights or other claims of any nature whatsoever with respect to The Stock. Section 3 Representations and Warranties of GSCP GSCP and the Affiliates, jointly and severally, represent and warrant to SIG as follows: 3.1 GSCP and the Affiliates are duly organized, validly existing and in good standing under the applicable laws of their jurisdiction of formation. GSCP and the Affiliates have the requisite partnership or corporate power and authority, as appropriate, to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of, and the performance by each of GSCP and the Affiliates of its obligations under this Agreement have been duly and validly authorized by all necessary partnership or corporate action, as appropriate, on the part of each of GSCP and the Affiliates. No other corporate, shareholder or partnership approval on the part of any of GSCP or the Affiliates is necessary for any of GSCP or the Affiliates to enter into this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by each of GSCP and the -2- Affiliates and constitutes its valid and binding obligations, enforceable against them in accordance with its terms, subject to the effect of any applicable bankruptcy, reorganization, insolvency, moratorium or similar law affecting creditors' rights generally and subject to the effect of general principles of equity. 3.2 At the Closing, GSCP and the Affiliates will deliver The Stock free and clear of all liens, claims, demands and encumbrances whatsoever with respect to the stock. 3.3 The execution and delivery of this Agreement by GSCP and the Affiliates will not, and the consummation of the transactions contemplated by this Agreement and the compliance with the terms, conditions and provisions of this Agreement by GSCP and the Affiliates will not, (i) violate or conflict with any provision of the articles of incorporation, bylaws, partnership agreements or other organizing documents of GSCP or the Affiliates; or (ii) conflict with or result in the breach or termination of, or otherwise give any contracting party the right to change the terms of, or to terminate or accelerate the maturity of, or constitute a default under the terms of, any indenture, mortgage, loan or credit agreement or any other material agreement or instrument to which any of GSCP and/or the Affiliates is a party or by which any of them or any of their assets may be bound or affected, except to the extent that any of the foregoing would not materially impact GSCP and its Affiliates' ability to perform their obligations hereunder. Further, GSCP and the Affiliates represent and warrant that the execution and delivery of this Agreement by GSCP and the Affiliates will not result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the Shares or give to others (other than SIG) any interest or rights therein. 3.4 GSCP and the Affiliates have not made any agreement or taken any other action which might cause any person or entity to become entitled to a broker's fee or commission as a result of the transactions contemplated in this Agreement. 3.5 There are no actions, suits, investigations or proceedings of any nature pending or, to the knowledge of GSCP and the Affiliates, threatened, against GSCP or the Affiliates (x) affecting The Stock, or (y) that would be reasonably likely to impair GSCP and the Affiliates' ability to consummate the obligations hereunder, at law or in equity, by or before any court or governmental department, agency or instrumentality. 3.6 GSCP and the Affiliates will deliver to SIG at the Closing good title to The Stock. GSCP and the Affiliates will transfer The Stock to SIG at the Closing free and clear of all claims, liens, demands and encumbrances whatsoever with respect to the Stock. 3.7 GSCP and the Affiliates hereby agree that they will not, disclose or reveal to any individual (other than to officers, directors, and employees of GSCP and its affiliates), corporation, partnership, association, entity or business, any proprietary or confidential technology, trade secret, confidential information, data, processes, strategies, techniques, philosophies or software, other proprietary intellectual property or other proprietary or confidential information (collectively, "Confidential Information") used by SIG in any of its businesses and GSCP and the Affiliates hereby agree that the Confidential Information is the exclusive property of SIG and/or its subsidiaries. -3- 3.8 GSCP and the Affiliates have not, and hereby agree that, for three years from the date hereof, they will not, directly (for themselves or others), employ, offer employment to, or solicit the services of any current or future employee of SIG or any subsidiary of SIG while such individual is in the employ of SIG or any subsidiary of SIG. Section 4 Representations and Warranties of SIG SIG hereby represents and warrants to GSCP and the Affiliates as follows: 4.1 SIG is a corporation duly organized, validly existing and in good standing under the laws of the State of Indiana, and SIG has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of, and the performance by SIG of its obligations under, this Agreement have been duly and validly authorized by all necessary corporate action on the part of SIG. No other corporate or shareholder proceedings on the part of SIG are necessary to approve this Agreement or consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by SIG and constitutes SIG's valid and binding obligation, enforceable against SIG in accordance with its terms, subject to the effect of any applicable bankruptcy, reorganization, insolvency, moratorium or similar law affecting creditors' rights generally and subject to the effect of general principles of equity. 4.2 The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated by this Agreement and the compliance with the terms, conditions and provisions of this Agreement by SIG will not, (i) violate or conflict with any provision of SIG's charter, articles of incorporation, bylaws or other governing documents; or (ii) conflict with or result in a breach or termination of, or otherwise give any contracting party the right to change the terms of, or to terminate or accelerate the maturity of, or constitute a default under the terms of, any indenture, mortgage, loan or credit agreement or any other material agreement or instrument to which SIG or any of its affiliates is a party or by which any of them or their assets are bound, except to the extent that any of the foregoing would not materially impact SIG's ability to perform its obligations hereunder. 4.3 The purchase by SIG of The Stock pursuant to this Agreement does not require any consent, approval or authorization of, any governmental or regulatory authority. 4.4 SIG has not made any agreement or taken any other action which might cause anyone to become entitled to a broker's fee or commission as a result of the transactions contemplated hereby. 4.5 There are no actions, suits, proceedings or investigations of any nature pending, or to the knowledge of SIG, threatened, against SIG or any of its affiliates and no other events have occurred or are reasonably likely to occur, in each case which would be reasonably likely to -4- materially impair SIG's ability to consummate the Note Offering or perform its obligations hereunder. 4.6 Neither SIG, nor any of its affiliates, has attempted to contact, contacted, held discussions with, conducted negotiations with, or entered into any agreement or undertaking (whether oral or written) with, any party concerning the sale, transfer or other disposal, or potential sale, transfer or other disposal, of any of the shares of capital stock (whether by way of merger, consolidation or otherwise) of GGSM, GGS Management, Inc., Superior Insurance Company or Pafco General Insurance Company. Notwithstanding any other provision of this Agreement, SIG shall only be responsible for the accuracy of this representation up through and including the Closing. Section 5 Cancellation of Agreements 5.1 The parties hereto agree that, if the Closing occurs, all Shareholder Agreements (as hereinafter defined) entered into between the parties hereto prior to the date hereof shall become null, void and of no effect as of the date of Closing. Such agreements include, but are not limited to, a Stock Purchase Agreement dated as of January 31, 1996 and the three amendments thereto, the Amended and Restated Stockholder Agreement dated as of November 8, 1996 including any and all amendments thereto, the Registration Rights Agreement dated as of April 30, 1996 and any and all letter agreements between the parties executed prior to the date hereof ("Shareholder Agreements"). Section 6 Conditions To Closing 6.1 The obligations of SIG to proceed with the Closing under this Agreement are subject to the fulfillment prior to or at Closing of the following conditions (any one or more of which may be waived in whole or in part by SIG at SIG's option): a. The representations and warranties of GSCP and the Affiliates contained in this Agreement shall be true and correct in all material respects on and as of the date of Closing with the same force and effect as if those representations and warranties had been made on, or as of, such date and SIG shall have received a certificate to such effect signed by an authorized officer, partner or other authorized signatory of GSCP and the Affiliates. b. GSCP and the Affiliates shall have performed in all material respects all of their covenants and complied with all of the provisions required by this Agreement to be performed or complied with by them on or before the Closing, and SIG shall have received a certificate to such effect signed by an authorized officer, partner or other authorized signatory of GSCP and/or the Affiliates. -5- c. No order of any court or administrative agency shall be in effect with enjoins or prohibits the transactions contemplated hereby. d. GSCP and the Affiliates shall have delivered to SIG copies, certified by the duly qualified and acting Secretary, Assistant Secretary, partner or other authorized signatory of GSCP and/or the Affiliates, of resolutions adopted by the appropriate governing body of GSCP and the Affiliates approving this Agreement and the consummation of the transactions contemplated hereby. e. SIG shall have completed the Note Financing. f. GSCP and the Affiliates shall execute such further instruments of conveyance and transfer as SIG may reasonably request to convey and transfer The Stock to SIG. g. GSCP and the Affiliates shall execute at Closing the mutual general release in the form attached hereto as Exhibit A and made a part hereof by reference. 6.2 The obligations of GSCP and the Affiliates to proceed with the Closing under this Agreement are subject to the fulfillment prior to or at Closing of the following conditions (any one or more of which may be waived in whole or in part by GSCP at its option): a. The representations and warranties of SIG contained in this Agreement shall be true and correct in all material respects (except that the representation contained in Section 4.6 shall be true in all respects) on and as of the date of Closing with the same force and effect as those such representations and warranties had been made on, as of, and with reference to, such date, and GSCP and the Affiliates shall have received a certificate to such effect signed by an authorized officer of SIG. b. SIG shall have performed in all material respects all of the covenants and complied with all of the provisions required by this Agreement to be performed or complied by them on or before the Closing, and GSCP and the Affiliates shall have received a certificate to such effect signed by an authorized officer of SIG. c. SIG shall execute at Closing the mutual general release in the form attached hereto as Exhibit A and made a part hereof by reference (the "Release"). -6- Section 7 Indemnification 7.1 a. The parties hereto hereby each agree to indemnify, defend and hold harmless the other from and against any loss, liability, claim, action, obligation, damage, deficiency, judgment, costs and expenses (including reasonable attorneys' fees and expenses incurred in the investigating, preparing or defending any litigation or proceeding commenced or threatened)("Damage") arising out of or resulting from any misrepresentation, breach of warranty or non-fulfillment of any covenant on the part of such party as shall be contained in this Agreement b. Following the Closing, SIG shall indemnify and hold harmless GSCP and the Affiliates and each of the officers, directors, employees, representatives and agents of GSCP and the Affiliates, including the present directors (each as "Indemnified Director") of GGSM and its subsidiaries designated by GSCP and/or the Affiliates (each of the foregoing, including the Indemnified Directors, an "Indemnified Party"), against all Damages suffered by an Indemnified Party arising out of, relating to, or resulting from, any claim, action, suit, proceeding or investigation arising out of, relating to, or resulting from, the fact that such Indemnified Party or any of its affiliates, or any entity of or for which he or she is a director, officer, employee, representative agent, was a shareholder or director of GGSM and/or any of its subsidiaries. Without limiting SIG's and its subsidiaries' obligations pursuant to the prior sentence, SIG agrees that it will cause GGSM to maintain in effect for a period of three years following the Closing all rights to indemnification and all limitations of liability existing as of the date hereof in favor of the Indemnified Directors in GGSM's and its direct or indirect subsidiaries' Certificates of Incorporation and Bylaws. SIG shall use its best efforts to cause the Indemnified Directors to be covered for a period of three years after the Closing by the directors' and officers' insurance policy currently maintained by GGSM (provided that SIG may permit GGSM to substitute therefor policies of at lease the same coverage and amount containing terms and conditions which are not less advantageous to the Indemnified Directors than the terms and conditions of such existing policy) with respect to acts or omissions which are or were committed by the Indemnified Directors in their capacity as directors of GGSM. 7.2 Notwithstanding anything contained herein, no action or claim for Damage resulting from any breach of the representations and warranties contained herein shall be brought or made after December 31, 1998. 7.3 Any indemnification payment made pursuant to this Agreement shall be increased by any federal, state, local or foreign tax liability actually incurred, or expected with reasonable certainty to be incurred. -7- 7.4 In addition to the rights otherwise granted by this Section 7, GSCP and the Affiliates, on the one hand, and SIG, on the other hand, agree that the Damage caused by the breach by it of any of the provisions hereof will be difficult to determine and monetary damages may not afford the other party a full and adequate remedy for such breach, and therefore, each of the parties agrees that the other party shall be entitled to an immediate injunction and restraining order (without the necessity of a bond) to prevent any breach or any threatened or continued breach by such party without the other party having to prove Damages, in addition to any other remedies to which the other party may be entitled at law or in equity. Section 8 Termination 8.1 This Agreement may be terminated or extended at any time by mutual written consent of the parties hereto prior to September 30, 1997. 8.2 Unless earlier terminated in accordance with Section 8.1, this Agreement will terminate on September 30, 1997 if the Closing has not yet occurred. 8.3 In the event of termination of this Agreement as provided in this Section 8, this Agreement shall forthwith terminate and there shall be no liability on the part of any party or any party's officers or directors, expect for liabilities arising from a breach of this Agreement prior to such termination. Section 9 Post-Closing Price Adjustment 9.1 In the event that, within one (1) year following the Closing, SIG or any of its affiliates shall, in any transaction or series of related transactions, directly or indirectly, sell, transfer or otherwise dispose of (each a "Sale") GGSM, GGS Management, Inc. ("GGS") or Pafco General Insurance Company ("Pafco") and Superior Insurance Company ("Superior"), or shall enter into any agreement for the Sale of GGSM, GGS or Pafco and Superior (whether any such Sale or contemplated Sale is by means of a merger, consolidation, or sale of all or substantially all of the assets or shares of capital stock of GGSM, GGS or Pafco and Superior, or otherwise), that, upon the consummation of any such Sale, SIG shall pay to GSCP an amount of cash equal to (such amount, the "Price Adjustment Amount") (a) 48% of the total value of the highest amount of consideration received or to be received by SIG or any of its affiliates in connection with such Sale, less (b)(i) $61,000,000 plus (ii), if the Note Financing is consummated, the Daily Interest Amount (as defined below) multiplied by the number of days that elapse from the Closing through the date upon which SIG or any of its affiliates enters into any agreement for any Sale subject to this Section 9.1. "Daily Interest Amount" shall equal (x) $61,000,000, multiplied by (y) (a) the annual interest payable by SIG in respect of the notes issued pursuant to the Note Financing (or in respect of any notes issued in exchange for such notes) divided by, (b) 365. 9.2 Notwithstanding the provisions of Section 9.1 hereof, if the Price Adjustment Amount -8- is negative, SIG shall not be required to make any payment to GSCP pursuant to this Section 9. 9.3 Notwithstanding any other provision of this Agreement, in no event shall SIG be required to pay to GSCP pursuant to this Section 9 an amount in excess of $5,000,000. Section 10 Miscellaneous 10.1 Each of the parties hereto agrees to use all commercially reasonable efforts to take, or cause to be taken, all reasonable actions and to do, or cause to be done, all reasonable things necessary, proper or advisable to consummate the transactions contemplated by this Agreement. None of the parties hereto will take or permit to be taken (by any entity that they control) any action that would be in breach of the terms or provisions of this Agreement or that would cause any of the representations contained herein to be or become untrue. In addition, SIG shall use commercially reasonable efforts to cause the Note Financing to be consummated prior to September 30, 1997. 10.2 Whether or not the Closing occurs, subject to Section 7, except as otherwise stated or hereinafter agreed, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense. It is specifically agreed that, subject to Section 7, SIG shall not be responsible for the legal, accounting or other professional fees incurred by GSCP relating to this Agreement, its execution or the Closing. 10.3 At Closing, GSCP will deliver written resignations of Sanjay H. Patel and Michael A. Pruzan (or any designated successor thereto) from the Board of Directors of GGSM, GGS Management, Inc., Superior Insurance Company, Superior American Insurance Company, Superior Guaranty Insurance Company, Standard Plan, Inc. and Pafco General Insurance Company. 10.4 The content and timing of any press release or other public announcement proposed to be made concerning the transactions contemplated by this Agreement must be consented to in advance by each party, which consents shall not be unreasonably withheld or delayed. Except in connection with any press release or other public announcement made pursuant to the prior sentence, SIG shall not, and shall not permit any of its affiliates to, issue any press release or make any other public statement which makes any reference to GSCP, its affiliates, or "Goldman Sachs," without the prior consent of GSCP 10.5 Subject to Section 7.2 hereof, the representations, warranties, covenants and agreements of the purchasers and sellers contained in this Agreement shall survive the Closing and shall not merge in the performance of any obligation by any party hereto. 10.6 This Agreement may not be amended or modified without the prior written consent of all parties. 10.7 Failure to insist upon strict compliance with any of the terms or conditions to this -9- Agreement at any one time shall not be deemed a waiver of such term or condition at any other time, nor shall any waiver or relinquishment of any right or power granted herein at any time be deemed a waiver or relinquishment of the same or any other right or power at any other time. -10- 10.8 This Agreement shall be governed by and construed in accordance with the laws of the State of New York without giving effect to the principles of conflicts of laws. Each of the parties hereto irrevocably and unconditional consents to submit to the exclusive jurisdiction of the courts of the United States of America located in the County of New York (and if such courts do not have appropriate jurisdiction, the court of the State of New York), for any action, proceeding or investigation in any court or before any governmental authority ("Litigation") arising out of or relating to this Agreement or the Release and the transactions contemplated hereby and thereby (and agrees not to commence any Litigation relating thereto except in such courts), and further agrees that service of any process, summons, notice or document by U.S. registered mail to its respective address set forth in this Agreement shall be effective service of process for any Litigation brought against it in any such court. Each of the parties hereto hereby irrevocably and unconditional waives any objection to the laying of venue of any Litigation arising out of this Agreement or the transactions contemplated hereby in the courts of the United States of America located in the County of New York (and if such courts do not have appropriate jurisdiction, the courts of the State of New York), and hereby further irrevocably and unconditional waives and agrees not to plead or claim in any such court that any such Litigation brought in any such court has been brought in an inconvenient forum. 10.9 Any notice or other communication to be given hereunder shall be in writing and shall be deemed sufficient when: a. mailed by United States Certified Mail, Return Receipt Requested; b. mailed by overnight express mail; c. sent by facsimile or telecopy machine, followed by confirmation mailed by First Class Mail or overnight express mail; or d. delivered in person, at the address set forth below, or such other address as a party may provide to the other in accordance with the procedure for notice as set forth in this Section. If to: Symons International Group, Inc.: David L. Bates, Esq. Vice President, General Counsel and Secretary 4720 Kingsway Drive Indianapolis, Indiana 46205 Telephone317 259-6384 Facsimile317 259-6395 -11- If to: GSCP Michael A. Pruzan Goldman Sachs & Co. 85 Broad Street New York, New York 10004 Telephone212 902-9123 Facsimile212 357-0926 Copy to: Gail Weinstein, Esq. Fried, Frank, Harris, Shriver & Jacobson One New York Plaza New York, New York 10004 Telephone212 859-8000 Facsimile212 859-8585 10.10 If any provision of this Agreement shall be determined to be invalid or unenforceable, this Agreement shall be deemed amended to delete such provision and the remainder of this Agreement shall be enforceable by this terms. 10.11 This Agreement may not be assigned or delegated by any party without the prior written consent of all other parties. 10.12 This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assigns. 10.13 Each party agrees to execute and deliver all such documents and agreements and to take all further acts as may be reasonably necessary or appropriate to effectuate this Agreement. 10.14 Headings and captions contained in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit, extend or prescribe the scope of this Agreement or the intent of any provision. 10.15 The masculine gender shall include the feminine and neuter genders and the singular shall include the plural. 10.16 This Agreement constitutes the entire agreement of the parties with respect to the matters set forth herein and supersedes any and all prior understandings or agreements, oral or written, with respect to such matters. -12- 10.17 Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against any party hereto, whether under any rule of construction or otherwise. No party shall be considered the draftsman. On the contrary, this Agreement has been reviewed, negotiated and accepted by all parties and their lawyers and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto. 10.18 This Agreement may be executed in any number of counterparts, each of which shall be an original, and all such counterparts shall constitute one in the same Agreement, binding on all the parties notwithstanding that all the parties are not signatories to the same counterpart. 10.19 This Agreement is for the sole benefit of the parties hereto and shall be construed to grant legal or equitable rights only to the parties hereto. 10.20 The preambles contained herein above are incorporated herein by reference as though repeated verbatim. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. SYMONS INTERNATIONAL GROUP, INC. By:___________________________________ Name: Title: GS CAPITAL PARTNERS II, L.P. By: GS Advisors, L.P. Its general partner By: GS Advisors, Inc. Its general partner By:____________________________________ Name: Title: -13- Stock Purchase Agreement cont. . . . . . GS CAPITAL PARTNERS OFFSHORE, L.P. By: GS Advisors II (Cayman), L.P. Its general partner By: GS Advisors II, Inc. Its general partner By:____________________________________ Name: Title: GOLDMAN SACHS & CO. VerWaltung GmbH By:____________________________________ Name: Title: and By:____________________________________ Name: Title: STONE STREET FUNDS 1996, L.P. By: Stone Street Empire, Corp., Its general partner By:____________________________________ Name: Title: BRIDGE STREET FUNDS 1996, L.P. By: Stone Street Empire, Corp., Its general partner By:____________________________________ Name: Title: -14- Execution Copy Original MUTUAL GENERAL RELEASE For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Goran Capital Inc. and SIG, jointly and severally, on the one hand, and GSCP and the Affiliates, jointly and severally, on the other hand, for themselves and their respective successors and assigns, hereby fully release and discharge each other and all entities and persons related to or affiliated with them, from all liabilities, contingent or otherwise, which Goran Capital Inc., SIG, its direct and indirect subsidiaries, or GSCP and the Affiliates, or any related or affiliated entities, have against the other party with respect to any and all claims, demands, liabilities or costs or other expenses or liabilities incurred pursuant to the Shareholder Agreements, including any and all other expenses or liabilities of a non-recurring nature incurred pursuant to the Shareholder Agreements. None of the terms or provisions of this Mutual General release may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the parties hereto. This Mutual General Release shall be binding upon the undersigned and their respective parties hereto. This Mutual General Release shall be governed by and shall be construed and interpreted in accordance with, the internal laws of the State of New York, without reference to principles of conflict of laws. All defined terms used herein shall have the same meaning as is ascribed in the Stock Purchase Agreement to which this Mutual General Release is an Exhibit. IN WITNESS WHEREOF, the undersigned have executed this Mutual General Release effective this _____ day of _______________, 1997. SYMONS INTERNATIONAL GROUP, INC. By:___________________________________ Name: Title: GORAN CAPITAL INC. By:___________________________________ Name: Title: Mutual General Release cont. . . . . . GS CAPITAL PARTNERS II, L.P. By: GS Advisors, L.P. Its general partner By: GS Advisors, Inc. Its general partner By:____________________________________ Name: Title: GS CAPITAL PARTNERS OFFSHORE, L.P. By: GS Advisors II (Cayman), L.P. Its general partner By: GS Advisors II, Inc. Its general partner By:____________________________________ Name: Title: Mutual General Release cont. . . . . . GOLDMAN SACHS & CO. VerWaltung GmbH By:____________________________________ Name: Title: and By:____________________________________ Name: Title: STONE STREET FUNDS 1996, L.P. By: Stone Street Empire, Corp., Its general partner By:____________________________________ Name: Title: BRIDGE STREET FUNDS 1996, L.P. By: Stone Street Empire, Corp., Its general partner By:____________________________________ Name: Title: EX-4 10 FIRST SEUPPLEMENTAL SENIOR INDENTURE Exhibit 4.2(2) FIRST SUPPLEMENTAL INDENTURE, dated as of January 15, 1998 between SYMONS INTERNATIONAL GROUP, INC., a corporation organized under the laws of the State of Indiana (the "Company"), having its principal office at 4720 Kingsway Drive, Indianapolis, Indiana 46205, and WILMINGTON TRUST COMPANY, a Delaware banking corporation duly organized and existing under the laws of the State of Delaware, as Trustee (hereinafter called the "Trustee"). RECITALS OF THE COMPANY WHEREAS, the Company has heretofore executed and delivered to the Trustee a certain indenture, dated as of August 12, 1997 (the "Indenture"), pursuant to which one series of senior subordinated notes of the Company (the "Securities") were issued. All terms used in this First Supplemental Indenture that are defined in the Indenture shall have the meanings assigned to them in the Indenture; WHEREAS, Section 9.1 of the Indenture provides that without the consent of the Holders of the Securities, the Company, when authorized by a resolution of its Board of Directors, and the Trustee may enter into an indenture supplemental to the Indenture for certain purposes; WHEREAS, the Company pursuant to the foregoing authority, proposes in and by this First Supplemental Indenture to amend the Indenture in certain respects with respect to the Securities of any series created before the date hereof; and WHEREAS, all things necessary to make this First Supplemental Indenture a valid agreement of the Company and the Trustee and a valid amendment of and supplement to the Indenture have been done. NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows: 2 ARTICLE I PROVISIONS OF GENERAL APPLICATION SECTION Definitions (a) The following definitions in Section 1.1 of the Indenture are hereby amended as follows: "Board of Directors" means, with respect to the Company or a Subsidiary, as the case may be, the Board of Directors (or other body performing functions similar to any of those performed by a Board of Directors). "Change of Control" means any transaction or series of transactions in which any Person or group (within the meaning of Rule 13d-5 under the Exchange Act and Section 13(d) and 14(d) of the Exchange Act) other than the Company and its Subsidiaries acquires all or substantially all of the Company's assets or becomes the direct or indirect "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), by way of merger, consolidation, other business combination or otherwise, of greater than 50% of the total voting power (on a fully diluted basis as if all convertible securities had been converted and all options and warrants had been exercised) entitled to vote in the election of directors of the Company or the Surviving Person (if other than the Company). "Marketable Securities" means securities listed on a national securities exchange which have a minimum weekly trading volume of at least 100,000 shares. "Permitted Investment" means an Investment by the Company or any Subsidiary in (i) a Person that will, upon the making of such Investment, be or become a Subsidiary; provided that the primary business of such Subsidiary is a Related Business; (ii) a Person if as a result of such Investment such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all its assets to, the Company or a Subsidiary; provided that such Person's primary business is a Related Business; (iii) Temporary Cash Investments; (iv) any demand deposit account with an Approved Lender; (v) receivables owing to the Company or any Subsidiary if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided that such trade terms may include such concessionary trade terms as the Company or any such Subsidiary deems reasonable under the circumstances; (vi) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business; (vii) loans or advances to employees made in the ordinary course of business consistent with past practices of the Company or such Subsidiary; (viii) stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Company or any Subsidiary or in satisfaction of judgments; (ix) any Person to the extent such Investment represents the non-cash portion of the consideration 3 received for an Asset Disposition as permitted pursuant to Section 10.13; and (x) any Affiliate (the primary business of which is a Related Business) that is not a Subsidiary, provided that the aggregate of all such Investments outstanding at any one time under this clause (x) shall not exceed $1,000,000; (xi) Investments by the Subsidiaries in Investment Grade Securities; and (xii) Investments by the Subsidiaries in Non-Investment Grade Securities; provided that on the date such Investment is made, the fair market value of such Investment when taken with all other such Investments shall not exceed in the aggregate 15% of the total Invested Assets of the Subsidiaries taken as a whole; provided further that such Investment in other Investment-Grade Securities and Non-Investment Grade Securities in any single issuer, together with all other investments in the same issuer, as determined at the date such Investment is made and after giving effect thereto, shall not exceed in the aggregate those percentages of the total Invested Assets of the Subsidiaries permitted by state law or regulations (as they may be amended from time to time) determined as of the end of the preceding calendar quarter; and provided further that this clause (xii) shall not prohibit an Investment that qualifies as a Permitted Investment under clauses (i) or (ii) above. "Related Business" means the business of providing property and casualty insurance to individuals or farms and any business related, ancillary or complementary to such business of the Company. "Temporary Cash Investments" means any of the following: (a) securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof), (b) time deposits and certificates of deposit, eurodollar time deposits and eurodollar certificates of deposit of (i) any lender under the Credit Agreement, or (ii) any United States commercial bank of recognized standing (y) having capital and surplus in excess of $500,000,000 and (z) whose short-term commercial paper rating from S&P is at least A-1 or the equivalent thereof or from Moody's is at least P-1 or the equivalent thereof (any such bank being an "Approved Lender"), in each case with maturities of not more than 270 days from the date of acquisition, (c) commercial paper and variable or fixed rate notes issued by an Approved Lender (or by the parent company thereof) and maturing within six months of the date of acquisition, (d) repurchase agreements entered into by a Person with a bank or trust company (including any of the lenders under the Credit Agreement) or recognized securities dealer having capital and surplus in excess of $500,000,000 for (i) direct obligations issued by or fully guaranteed by the United States of America, (ii) time deposits or certificates of deposit described under subsection (b) above, or (iii) commercial paper or other notes described under subsection (c) above, in which, in each such case, such bank, trust company or dealer shall have a perfected first priority security interest (subject to no other Liens) and having, on the date of purchase thereof, a fair market value of at least 100% of the amount of the repurchase obligations, (e) obligations of any State of the United States or any political subdivision thereof, the interest with respect to which is exempt from federal income taxation under Section 103 of the U.S. Internal Revenue Code, having a long term rating of at least AA- or Aa-3 by S&P or Moody's, respectively, and maturing within three years from the date of acquisition thereof, (f) Investments in municipal auction preferred stock (i) rated AAA (or the equivalent thereof) or better by S&P or Aaa (or the 4 equivalent thereof) or better by Moody's and (ii) with dividends that reset at least once every 365 days and (g) Investments, classified in accordance with GAAP as current assets, in money market investment programs registered under the Investment Company Act of 1940, as amended, which are administered by reputable financial institutions having capital of at least $100,000,000 and the portfolios of which are limited to Investments of the character described in clauses (a), (b), (c), (e) and (f) above. (b) The following definitions are hereby added to Section 1.1 of the Indenture: "Invested Assets" means the amount on a consolidated basis of a Person's Investments as reflected on such Person's most recent quarterly balance sheet prepared in accordance with GAAP. "Investment Grade Securities" means: (i) U.S. Government Obligations; (ii) any certificate of deposit, maturing not more than 270 days after the date of acquisition, issued by, or time deposit of, a commercial banking institution that has combined capital and surplus of not less than $100.0 millon or its equivalent in foreign currency, whose debt is rated at the time as of which any investment therein is made, "A" (or higher) according to S&P or Moody's, or if neither S&P nor Moody's shall then exist or if the debt of such bank has not been rated by S&P or Moody's, the equivalent of such rating by any other internationally recognized securities rating agency; (iii) commercial paper, maturing not more than 270 days after the date of acquisition, issued by a corporation (other than an Affiliate or Subsidiary of the Issuer) with a rating, at the time as of which any investment therein is made, of "A-1" (or higher) according to S&P or "P-1," (or higher) according to Moody's, or if neither S&P nor Moody's shall then exist, the equivalent of such rating by any other internationally recognized securities rating agency; (iv) any banking acceptances, any private loans or any money market deposit accounts, in each case, issued or offered by any commercial bank having capital and surplus in excess of $100.0 million or its equivalent in foreign currency, whose debt or credit paying ability is rated at the time as of which any investment therein is made, "A" (or higher) according to S&P or Moody's, or if neither S&P nor Moody's shall then exist or if the debt or credit paying ability of such bank has not been rated by S&P or Moody's, the equivalent of such rating by any other internationally recognized securities rating agency; (v) any other debt securities or debt instruments with a rating of "BBB-1" or higher by S&P, "Baa-3," or higher by Moody's, Class "2" or higher by the NAIC or the equivalent of such rating by S&P, Moody's or the NAIC, or if none of S&P, Moody's and the NAIC shall then exist or if such security has not been rated by S&P, Moody's or the NAIC, the equivalent of such rating by any other internationally recognized securities rating agency; (vi) any fund investing exclusively in investments of the types described in clauses (i) through (v) above. "NAIC" means the National Association of Insurance Commissioners. "Non-Investment Grade Securities" means any Investment (including, without limitation, debt securities, equity securities, real estate investments and real estate loans) other than Investment Grade Securities. 5 "U.S. Government Obligations" means securities that are (i) direct obligations of the United States of America the timely payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled and supervised by and acting as an agency or instrumentality of the United States of America the timely payment of which is unconditionally guaranteed as a full faith obligation by the United States of America, and shall also include a depositary receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act of 1933, as amended), as custodian with respect to any such U.S. Government Obligation or a specific payment of principal of or interest on any such U.S. Government Obligation held by such custodian for the account of the holder of such depositary receipt; provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depositary receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal of or interest on the U.S. Government Obligation evidenced by such depositary receipt. ARTICLE II MISCELLANEOUS SECTION Incorporation of Indenture. All the provisions of this First Supplemental Indenture shall be deemed to be incorporated in, and made a part of, the Indenture; and the Indenture, as supplemented and amended by this First Supplemental Indenture, shall be read, taken and construed as one and the same instrument. SECTION Application of First Supplemental Indenture. The provisions and benefit of this First Supplemental Indenture shall be effective with respect to Outstanding Securities prior to and after the execution hereof. SECTION Headings. The headings of the Articles and Sections of the First Supplemental Indenture are inserted for convenience of reference and shall not be deemed to be a part thereof. SECTION Counterparts. This First Supplemental Indenture may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. SECTION Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with another provision hereof which is required to be included in this First Supplemental Indenture by any of the provisions of the Trust Indenture Act, such required provision shall control. SECTION Successors and Assigns. All covenants and agreements in this First Supplemental Indenture by the Company shall bind its successors and assigns, whether so expressed or not. 6 SECTION Separability Clause. In case any provision in this First Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. [rest of page intentionally left blank] 7 IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental Indenture to be duly executed, all as of the day and year first above written. SYMONS INTERNATIONAL GROUP, INC., as Issuer By: Name: Alan G. Symons Title: Chief Executive Officer By: Name: Gary P. Hutchcraft Title: Vice President WILMINGTON TRUST COMPANY, as Trustee By: Name: Title: STATE OF ) : ss.: COUNTY OF ) On the day of January __, 1998, before me personally came ______________, to me known, who, being by me duly sworn, did depose and say that he is _______________ of Symons International Group, Inc., one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal is affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. ------------------------- Notary Public [NOTARIAL SEAL] My Commission Expires: STATE OF ) : ss.: COUNTY OF ) On the day of January, 1998, before me personally came , to me known, who, being by me duly sworn, did depose and say that he is of Wilmington Trust Company, one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. ------------------------- Notary Public [NOTARIAL SEAL] My Commission Expires: ----------------------------------------------------------------------- SYMONS INTERNATIONAL GROUP, INC. As Issuer WILMINGTON TRUST COMPANY As Trustee ------------------ FIRST SUPPLEMENTAL SENIOR SUBORDINATED INDENTURE Dated as of January 15, 1998 ----------------------------------------------------------------------- EX-10 11 EMPLOYMENT AGREEMENT OF ROGER SULLIVAN Exhibit 10.9 EMPLOYMENT AGREEMENT WHEREAS, GGS Management, Inc. and its subsidiaries (collectively, the "Company") considers it essential to its best interests and the best interests of its stockholders to foster the continuous employment of its key management personnel and, accordingly, the Company desires to employ Roger C. Sullivan ("You", "Your"or "Executive"), upon the terms and conditions hereinafter set forth; and WHEREAS, the Executive desires to continue to be employed by the Company, upon the terms and conditions contained herein. NOW, THEREFORE, in consideration of the covenants and agreements set forth below, the parties agree as follows: 1. Employment 1.1 Term of Agreement. The Company agrees to employ Executive as Executive Vice President of Superior Insurance Company (including its subsidiaries, "Superior"), effective as of April 23, 1997 and continuing until March 31, 2002 ("Initial Term"), unless such employment is terminated pursuant to Section 3 below; provided, however, that the term of this Agreement shall automatically be extended without further action of either party for additional one (1) year periods thereafter unless, not later than twelve (12) months prior to the end of the then effective term, either the Company or the Executive shall have given written notice that such party does not intend to extend this Agreement. (the Initial Term and any extension thereof, the "Term"). If Company gives Executive such a notice of non-renewal, Executive's employment shall terminate as of the expiration date of this Agreement. It is expressly understood and agreed that a notice of non-renewal issued by the Company shall not extinguish the Executive's non-competition obligations pursuant to Section 4 herein. 1.2 Terms of Employment. During the Term, You agree to be a full-time employee of the Company serving in the position of Executive Vice President of Superior or other positions as the Chief Executive Officer or the Board of Directors so direct and further agree to devote substantially all of Your working time and attention to the business and affairs of Superior and, to the extent necessary to discharge the responsibilities associated with Your position as Executive Vice President of Superior and to use Your best efforts to perform faithfully and efficiently such responsibilities. Executive shall perform such duties and responsibilities as may be determined from time to time by the Chairman and/or Chief Executive Officer of Superior and the Board of Directors of Superior, which duties shall be consistent with the position of Executive Vice President of Superior, which shall grant Executive authority, responsibility, title and standing comparable to that of the executive vice president and of a stock insurance company of similar standing and which will not require Executive to relocate his principal place of residence from the metropolitan Atlanta, Georgia area. Nothing herein shall prohibit You from devoting Your time to civic and community activities or managing personal investments, as long as the foregoing do not interfere with the performance of Your duties hereunder. -1- 1.3 Appointment and Responsibility. The Board of Directors of Superior shall, following the effective date of this Agreement, elect and appoint Executive as Executive Vice President of Superior and Executive shall also be elected to the Board of Directors of Superior. The parties hereby agree that the failure to elect Executive to the Board of Directors of Superior shall, for purposes of this Agreement, be a Termination of Executive without cause. 2. Compensation, Benefits and Prerequisites 2.1 Salary. Company shall pay Executive a salary, in equal bi-weekly installments, equal to an annualized salary rate of $185,000. Executive's salary as payable pursuant to this Agreement may be increased from time to time as mutually agreed upon by Executive and the Company. Notwithstanding any other provision of this Agreement, Executive's salary paid by Company for any year covered by this Agreement shall not be less than such salary paid to Executive for the immediately preceding calendar year. All salary and bonus amounts paid to Executive pursuant to this Agreement shall be in U.S. dollars. 2.2 Bonus. The Company and Executive understand and agree that the Company expects to achieve significant growth during the term of this Agreement and that Executive will make a material contribution to that growth which will require certain personal and familial sacrifices on the part of Executive. Accordingly, it is the desire and intention of the Company to reward Executive for the attainment of that growth through bonus and other means (including, but not limited to, stock options, stock appreciation rights and other forms of incentive compensation). Therefore, the Company will pay Executive a lump-sum bonus (subject to normal withholdings) within thirty (30) business days from receipt by Company of its consolidated, annual audited financial statements in an amount which shall be determined in accordance with the following Bonus Table. All amounts used for calculation purposes in this section shall be based on the audited, consolidated financial statements of Superior (or any successor thereto), with such financial statements having been prepared in accordance with applicable Generally Accepted Accounting Principles, applied on a consistent basis with that of prior years. It is agreed that Executive's minimum bonus for the first year of this Agreement shall not be less than 35% of Executive's salary.
BONUS TABLE If Audited Net % of Annual Salary Income (as a % of Payable to Executive Budgeted Net Income Is As Bonus Less Than 75% -0- 75% or more, but less than 90% 12.5% 90% or more, but less than 100% 25.0% 100% or more, but less than 115% 37.5% 115% or more 50.0%
-2- 2.3 Employee Benefits. Executive shall be entitled to receive all benefits and prerequisites which are provided to other Executives of Company under the applicable Company plans and policies, and to future benefits and prerequisites made generally available to executive employees of the Company with duties and compensation comparable to that of Executive upon the same terms and conditions as other Company participants in such plans. 2.4 Additional Prerequisites. During the term of this Agreement, Company shall provide Executive with: (a) Not less than four (4) weeks paid vacation during each calendar year. (b) A vehicle commensurate with Executive's position or, at Executive's option, a vehicle allowance of at least $600.00 per month. 2.5 Expenses. During the period of his employment hereunder, Executive shall be entitled to receive reimbursement from the Company (in accordance with the policies and procedures in effect for the Company's employees) for all reasonable travel, entertainment and other business expenses incurred by him in connection with his services hereunder. 2.6 Stock Options. Within sixty (60) days of the execution of this Agreement, Executive will receive options to purchase 5,000 shares of Symons International Group, Inc. which vest in accordance with the Symons International Group 1996 Stock Option Plan and 5,000 shares of GGS Management Holdings, Inc. which vest in accordance with the GGS Management Holdings, Inc. Stock Option Plan. These options shall be in addition to any options granted to the Executive prior to the commencement of this Agreement. Further, Executive shall be eligible to be awarded stock options, in the discretion of the Board of Directors of GGS Management Holdings, Inc. and Symons International Group, Inc. 3. Termination of Executive's Employment 3.1 Change of Control. Notwithstanding any other provisions of this Agreement, if (i) a Change of Control shall occur; and (ii) within six (6) months of any such Change of Control, Executive (a) receives a Notice of Non-Renewal, (b) is terminated for any reason other than for cause, (c) is not employed elsewhere in the Goran Group on terms consistent with this Agreement, or (d) Company (including its successors, if any) is in breach of this Agreement, then Executive shall continue to receive his current salary (in bi-weekly payments) until the earlier to occur of: (a) Executive shall commence employment with a firm or entity other than the Company or any of its Affiliates, such that his base salary is at or greater than existing base salary pursuant to this Agreement; or (b) The expiration of the Term. -3- The receipt by Executive of payment pursuant to this Section 3.1 is specifically conditioned, and no payments pursuant to this Section 3.1 shall be made to Executive if he is, at the time of his Termination, in breach of any provision (specifically including, but not limited to, the provisions of this Agreement pertaining to non-competition and confidentiality) of this Agreement and, further, if such payments have already begun, the continuation of payments to Executive pursuant to this Section 3.1 shall cease at the time Executive shall fail to comply with the non-competition and confidentiality provisions of Article 4 herein. It is expressly understood and agreed that the amount of any payment to Executive required pursuant to this Section 3.1 shall be reduced (but not below zero) by any compensation received by Executive during the period called for in this Section 3.1. A Change of Control shall mean the failure of Symons International Group, Inc. (including any of its Affiliates) to own a majority of the outstanding common stock of either GGS Management Holdings, Inc. or Superior Insurance Company. 3.2 Termination of Employment and Severance Pay. Executive's employment under this Agreement may be terminated by either party at any time for any reason; provided, however, that if Executive's employment is terminated for any reason other than for cause or poor performance, he shall receive, as severance pay salary continuation, at the salary rate in effect at the time of termination, until the end of the Term, (the "Severance Payments"). Further, if Executive shall be terminated without cause, receipt of severance payments described in the preceding sentence are conditioned upon execution by Executive and the Company of that mutual Waiver and Release attached hereto as Exhibit A. Further, Executive shall receive severance pay in accordance with this Section 3.2 if Executive shall terminate this Agreement due to a breach thereof by the Company or if Executive is directed by the Company (including, if applicable, any successor) to engage in any act or action constituting fraud or any unlawful conduct relating to the Company or its business as may be determined by application of applicable law. Should Executive fail to adequately perform his duties as Executive Vice President of Superior, Executive shall receive written notification of such performance issues and shall have ninety (90) days to rectify such problem. Notwithstanding any other provision of this Agreement, if Executive (a) shall be terminated for poor performance (which shall be determined by the Chief Executive Officer of the Company and concurred in by a majority of the Board of Directors of Superior); or (b) provided a Notice of Non-Renewal, then Executive shall receive, as severance pay, salary continuation until the earlier to occur of: (a) one (1) year from the date of Executive's termination, or (b) Executive shall commence employment with a firm or entity other than the Company or its Affiliates such that his base salary is at or greater than the existing base salary pursuant to this Agreement. It is expressly understood and agreed that the amount of any payment to Executive required pursuant to this Section 3.2 shall be reduced (but not below zero) by any compensation received by Executive during the period called for in this Section 3.2. -4- 3.3 Cause. For purposes of this Section 3, "cause" shall mean: (a) the Executive being convicted in the United States of America, any State therein, or the District of Columbia, or in Canada or any Province therein (each, a "Relevant Jurisdiction"), of a crime for which the maximum penalty may include imprisonment for one year or longer (a "felony") or the Executive having entered against him or consenting to any judgment, decree or order (whether criminal or otherwise) based upon fraudulent conduct or violation of securities laws; (b) the Executive's being indicted for, charged with or otherwise the subject of any formal proceeding (criminal or otherwise) in connection with any felony, fraudulent conduct or violation of securities laws, in a case brought by a law enforcement or securities regulatory official, agency or authority in a Relevant Jurisdiction; (c) the Executive engaging in fraud, or engaging in any unlawful conduct relating to the Company or its business, in either case as determined under the laws of any Relevant Jurisdiction; (d) the Executive breaching any provision of this Agreement; or (e) gross negligence or willful misconduct by the Executive in the performance of his duties hereunder. 3.4 Disability. So long as otherwise permitted by law, if Executive has become permanently disabled from performing his duties under this Agreement, the Company's Chairman of the Board, may, in his discretion, determine that Executive will not return to work and terminate his employment as provided below. Upon any such termination for disability, Executive shall be entitled to such disability, medical, life insurance, and other benefits as may be provided generally for disabled employees of Company during the period he remains disabled, as well as a continuation of a portion of Executive's salary ("Supplemental Payments") necessary to make Executive's total remuneration for the period beginning on the date of Executive's disability and ending six (6) months thereafter at least equal to Executive's Base Salary at the time of Your disability. Permanent disability shall be determined pursuant to the terms of Executive's long term disability insurance policy provided by the Company. Should Executive decease during the Term, the Company will continue to pay Executive's salary, in regular bi-weekly payments, for the lesser of (a) six (6) months, or (b) the remaining period of the Term of this Agreement. 3.5 Indemnification. Executive shall be indemnified by Company (and, where applicable, its subsidiaries) to the maximum extent permitted by applicable law for actions undertaken for, or on behalf of, the Company and its subsidiaries. -5- 4. Non-Competition, Confidentiality and Trade Secrets 4.1 Noncompetition. In consideration of the Company's entering into this Agreement and the compensation and benefits to be provided by the Company to You hereunder, and further in consideration of Your exposure to proprietary information of the Company, You agree as follows: (a) Until the date of termination or expiration of this Agreement for any reason (the "Date of Termination") You agree not to enter into competitive endeavors and not to undertake any commercial activity which is contrary to the best interests of the Company or its Affiliates, including, directly or indirectly, becoming an employee, consultant, owner (except for passive investments of not more than one percent (1%) of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a national securities exchange or in an over-the-counter securities market), officer, agent or director of, or otherwise participating in the management, operation, control or profits of (a) any firm or person engaged in the operation of a business engaged in the acquisition of insurance businesses or (b) any firm or person which either directly competes with a line or lines of business of the Company accounting for five percent (5%) or more of the Company's gross sales, revenues or earnings before taxes or derives five percent (5%) or more of such firm's or person's gross sales, revenues or earnings before taxes from a line or lines of business which directly compete with the Company. Notwithstanding any provision of this Agreement to the contrary, You agree that Your breach of the provisions of this Section 4.1(a) shall permit the Company to terminate Your employment for cause. (b) If Your employment is terminated by You, or by reason of Your Disability, by the Company for cause, or pursuant to a notice of non-renewal as outlined in Section 1.1, then, during the period you receive payments pursuant to Article 3 hereof, but in no event for a period of less than one (1) year after the Date of Termination, You agree not to become, directly or indirectly, an employee, consultant, owner (except for passive investments of not more than one percent (1%) of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a national securities exchange or in an over-the-counter securities market), officer, agent or director of, or otherwise to participate in the management, operation, control or profits of, any firm or person which directly competes with a business of the Company which at the Date of Termination produced any class of products or business accounting for five percent (5%) or more of the Company's gross sales, revenues or earnings before taxes at which the Date of Termination derived five percent (5%) or more of such firm's or person's gross sales, revenues or earnings before taxes. -6- (c) You acknowledge and agree that damages for breach of the covenant not to compete in this Section 4.1 will be difficult to determine and will not afford a full and adequate remedy, and therefore agree that the Company shall be entitled to an immediate injunction and restraining order (without the necessity of a bond) to prevent such breach or threatened or continued breach by You and any persons or entities acting for or with You, without having to prove damages, and to all costs and expenses (if a court or arbitrator determines that the Executive has breached the covenant not to compete in this Section 4.1, including reasonable attorneys' fees and costs, in addition to any other remedies to which the Company may be entitled at law or in equity. You and the Company agree that the provisions of this covenant not to compete are reasonable and necessary for the operation of the Company and its subsidiaries. However, should any court or arbitrator determine that any provision of this covenant not to compete is unreasonable, either in period of time, geographical area, or otherwise, the parties agree that this covenant not to compete should be interpreted and enforced to the maximum extent which such court or arbitrator deems reasonable. 4.2 Confidentiality. You shall not knowingly disclose or reveal to any unauthorized person, during or after the Term, any trade secret or other confidential information (as outlined in the Uniform Trade Secrets Act) relating to the Company or any of its Affiliates, or any of their respective businesses or principals, and You confirm that such information is the exclusive property of the Company and its Affiliates. You agree to hold as the Company's property all memoranda, books, papers, letters and other data, and all copies thereof or therefrom, in any way relating to the business of the Company and its Affiliates, whether made by You or otherwise coming into Your possession and, on termination of Your employment, or on demand of the Company at any time, to deliver the same to the Company. Any ideas, processes, characters, productions, schemes, titles, names, formats, policies, adaptations, plots, slogans, catchwords, incidents, treatment, and dialogue which You may conceive, create, organize, prepare or produce during the period of Your employment and which ideas, processes, etc. relate to any of the businesses of the Company, shall be owned by the Company and its Affiliates whether or not You should in fact execute an assignment thereof to the Company, but You agree to execute any assignment thereof or other instrument or document which may be reasonably necessary to protect and secure such rights to the Company. 5. Miscellaneous 5.1 Amendment. This Agreement may be amended only in writing, signed by both parties. 5.2 Entire Agreement. This Agreement contains the entire understanding of the parties with regard to all matters contained herein. There are no other agreements, conditions or representations, oral or written, expressed or implied, with regard to the employment of Executive -7- or the obligations of the Company or the Executive. This Agreement supersedes all prior employment contracts and non-competition agreements between the parties. 5.3 Notices. Any notice required to be given under this Agreement shall be in writing and shall be delivered either in person or by certified or registered mail, return receipt requested. Any notice by mail shall be addressed as follows: If to the Company, to: Superior Insurance Company 4720 Kingsway Drive Indianapolis, Indiana 46205 Attention: President and Chief Executive Officer If to Executive, to: Roger C. Sullivan 280 Interstate Circle North, N.W. Atlanta, Georgia 30339 or to such other addresses as one party may designate in writing to the other party from time to time. 5.4 Waiver of Breach. Any waiver by either party of compliance with any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement. 5.5 Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 5.6 Governing Law. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Indiana, without giving effect to conflict of law principles. 5.7 Headings. The headings of articles and sections herein are included solely for convenience and reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 5.8 Counterparts. This Agreement may be executed by either of the parties in counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute a single instrument. 5.9 Survival. Company's obligations under Section 3.1 and Executive's obligations under Section 4 shall survive the termination and expiration of this Agreement in accordance with the specific provisions of those Paragraphs and Sections and this Agreement in its entirety shall be binding upon, and inure to the benefit of, the successors and assigns of the parties hereto. -8- 5.10 Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by You and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior subsequent time. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date set forth above. GGS MANAGEMENT, INC. ("Company") By:__________________________________ Title:________________________________ State of Indiana ) ) SS: County of __________) Before me the undersigned, a Notary Public for _______________ County, State of Indiana, personally appeared __________________________, and acknowledged the execution of this instrument this _______ day of ___________________, 1997. ------------------------------ , Notary Public State of Indiana My Commission Expires:________________ -9- ROGER C. SULLIVAN ("Executive") ------------------------------ State of Indiana ) ) SS: County of __________) Before me the undersigned, a Notary Public for _______________ County, State of Indiana, personally appeared Roger C. Sullivan, and acknowledged the execution of this instrument this _______ day of ___________________, 1997. ------------------------------- , Notary Public State of Indiana My Commission Expires:_________________ -10- EX-10 12 EMPLOYMENT AGREEMENT OF GARY HUTCHCRAFT Exhibit 10.10 EMPLOYMENT AGREEMENT WHEREAS, Goran Capital Inc., and its subsidiaries (collectively, the "Company") considers it essential to its best interests and the best interests of its stockholders to foster the continuous employment of its key management personnel and, accordingly, the Company desires to employ Gary P. Hutchcraft ("You", "Your"or "Executive"), upon the terms and conditions hereinafter set forth; and WHEREAS, the Executive desires to continue to be employed by the Company, upon the terms and conditions contained herein. NOW, THEREFORE, in consideration of the covenants and agreements set forth below, the parties agree as follows: 1. Employment 1.1 Term of Agreement. The Company agrees to employ Executive as Vice President and Chief Financial Officer, effective as of May 1, 1997 and continuing until April 30, 1998, unless such employment is terminated pursuant to Section 3 below; provided, however, that the term of this Agreement shall automatically be extended without further action of either party for additional one (1) year periods thereafter unless, not later than six (6) months prior to the end of the then effective term, either the Company or the Executive shall have given written notice that such party does not intend to extend this Agreement. If Company gives Executive such a notice of non-renewal, Executive's employment shall terminate as of the expiration date of this Agreement. It is expressly understood and agreed that a notice of non-renewal issued by the Company shall not extinguish the Executive's non-competition obligations pursuant to Section 4 herein. 1.2 Terms of Employment. During the Term, You agree to be a full-time employee of the Company serving in the position of Vice President and Chief Financial Officer of the Company and further agree to devote substantially all of Your working time and attention to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities associated with Your position as Vice President and Chief Financial Officer of the Company and to use Your best efforts to perform faithfully and efficiently such responsibilities. Executive shall perform such duties and responsibilities as may be determined from time to time by the Chairman and/or Chief Executive Officer of the Company and the Board of Directors of the Company, which duties shall be consistent with the position of Vice President and Chief Financial Officer of the Company, which shall grant Executive authority, responsibility, title and standing comparable to that of the vice president and chief financial officer of a stock insurance holding company of similar standing and which will not require Executive to relocate his principal place of residence from the metropolitan Indianapolis, Indiana area. Nothing herein shall prohibit You from devoting Your time to civic and community activities or managing personal investments, as long as the foregoing do not interfere with the performance of Your duties hereunder. -1- 1.3 Appointment and Responsibility. The Boards of Directors of the Company shall, following the effective date of this Agreement, elect and appoint Executive as Vice President and Chief Financial Officer. Consistent with Section 1.2 of this Agreement, Executive shall be primarily responsible for the financial affairs of the Company. 2. Compensation, Benefits and Prerequisites 2.1 Salary. Company shall pay Executive a salary, in equal bi-weekly installments, equal to an annualized salary rate of $132,000. Executive's salary as payable pursuant to this Agreement may be increased from time to time as mutually agreed upon by Executive and the Company. Notwithstanding any other provision herein, the catch-up payment shall be paid to Executive by April 1 of each year of this Agreement. For the calendar year beginning January 1, 1997 and for each succeeding calendar year thereafter, Company shall pay Executive the salary applicable to that calendar year in twenty-six (26) bi-weekly installments. Notwithstanding any other provision of this Agreement, Executive's salary paid by Company for any year covered by this Agreement shall not be less than such salary paid to Executive for the immediately preceding calendar year. All salary and bonus amounts paid to Executive pursuant to this Agreement shall be in U.S. dollars. 2.2 Bonus. The Company and Executive understand and agree that the Company expects to achieve significant growth during the term of this Agreement and that Executive will make a material contribution to that growth which will require certain personal and familial sacrifices on the part of Executive. Accordingly, it is the desire and intention of the Company to reward Executive for the attainment of that growth through bonus and other means (including, but not limited to, stock options, stock appreciation rights and other forms of incentive compensation). Therefore, the Company will pay Executive a lump-sum bonus (subject to normal withholdings) within thirty (30) business days from receipt by Company of its consolidated, annual audited financial statements in an amount which shall be determined in accordance with the following Bonus Table. All amounts used for calculation purposes in this section shall be based on the audited, consolidated financial statements of Goran Capital Inc. (or any successor thereto), with such financial statements having been prepared in accordance with applicable Generally Accepted Accounting Principles, applied on a consistent basis with that of prior years. BONUS TABLE
If Audited Net % of Annual Salary Income (as a % of Payable to Executive Budgeted Net Income Is As Bonus Less Than 75% -0- 75% or more, but less than 100% 10% 100% or more, but less than 125% 20% 125% or more 30%
-2- It is understood and agreed that Goran Capital Inc.'s budgeted net income for the year ending December 31, 1997 is $16,267,000 and that budgeted net income for future years shall be set forth in Annual Addendums to this Agreement. 2.3 Employee Benefits. Executive shall be entitled to receive all benefits and prerequisites which are provided to other Executives of Company under the applicable Company plans and policies, and to future benefits and prerequisites made generally available to executive employees of the Company with duties and compensation comparable to that of Executive upon the same terms and conditions as other Company participants in such plans. 2.4 Additional Prerequisites. During the term of this Agreement, Company shall provide Executive with: (a) Not less than three (3) weeks paid vacation during each calendar year. (b) A vehicle commensurate with Executive's position. 2.7 Expenses. During the period of his employment hereunder, Executive shall be entitled to receive reimbursement from the Company (in accordance with the policies and procedures in effect for the Company's employees) for all reasonable travel, entertainment and other business expenses incurred by him in connection with his services hereunder. 3. Termination of Executive's Employment 3.1 Termination of Employment and Severance Pay. Executive's employment under this Agreement may be terminated by either party at any time for any reason; provided, however, that if Executive's employment is terminated for any reason other than for cause, he shall receive, as severance pay, one (1) month's current salary for each full and partial year of service. Further, if Executive shall be terminated without cause, receipt of severance payments described in the preceding sentence are conditioned upon execution by Executive and the Company of that mutual Waiver and Release attached hereto as Exhibit A. Further, Executive shall receive severance pay in accordance with this Section 3.1 if Executive shall terminate this Agreement due to a breach thereof by the Company or if Executive is directed by the Company (including, if applicable, any successor) to engage in any act or action constituting fraud or any unlawful conduct relating to the Company or its business as may be determined by application of applicable law. -3- 3.2 Cause. For purposes of this Section 3, "cause" shall mean: (a) the Executive being convicted in the United States of America, any State therein, or the District of Columbia, or in Canada or any Province therein (each, a "Relevant Jurisdiction"), of a crime for which the maximum penalty may include imprisonment for one year or longer (a "felony") or the Executive having entered against him or consenting to any judgment, decree or order (whether criminal or otherwise) based upon fraudulent conduct or violation of securities laws; (b) the Executive's being indicted for, charged with or otherwise the subject of any formal proceeding (criminal or otherwise) in connection with any felony, fraudulent conduct or violation of securities laws, in a case brought by a law enforcement or securities regulatory official, agency or authority in a Relevant Jurisdiction; (c) the Executive engaging in fraud, or engaging in any unlawful conduct relating to the Company or its business, in either case as determined under the laws of any Relevant Jurisdiction; (d) the Executive breaching any provision of this Agreement; or (e) gross negligence or willful misconduct by the Executive in the performance of his duties hereunder. 3.3 Change of Control. Notwithstanding any other provisions of this Agreement, if (i) a Change of Control shall occur; and (ii) within twelve (12) months of any such Change of Control, Executive (a) receives a Notice of Non-Renewal, (b) is terminated for any reason other than for cause, or (c) Company (including its successors, if any) is in breach of this Agreement, then Executive shall continue to receive his current salary (in bi-weekly payments) until the earlier to occur of: (a) Executive shall commence employment with a firm or entity other than the Company such that his base salary is at or greater than existing base salary pursuant to this Agreement; or (b) The expiration of seventy-eight (78) weeks from Executive's Date of Termination. The receipt by Executive of payment pursuant to this Section 3.3 is specifically conditioned, and no payments pursuant to this Section 3.3 shall be made to Executive if he is, at the time of his Termination, in breach of any provision (specifically including, but not limited to, the provisions of this Agreement pertaining to non-competition and confidentiality) of this Agreement and, further, if such payments have already begun, the continuation of payments to Executive pursuant to this Section 3.3 shall cease at the time Executive shall fail to comply with the non-competition and confidentiality provisions of Article 4 herein. It is expressly understood and agreed that the amount -4- of any payment to Executive required pursuant to this Section 3.3 shall be reduced (but not below zero) by any compensation received by Executive during the period called for in this Section 3.3. A Change of Control shall mean the inability of the Symons family to cause the election of a majority of the members of the Board of Directors of Goran Capital Inc., Symons International Group, Inc. or their respective successors. 3.4 Disability. So long as otherwise permitted by law, if Executive has become permanently disabled from performing his duties under this Agreement, the Company's Chairman of the Board, may, in his discretion, determine that Executive will not return to work and terminate his employment as provided below. Upon any such termination for disability, Executive shall be entitled to such disability, medical, life insurance, and other benefits as may be provided generally for disabled employees of Company during the period he remains disabled. Permanent disability shall be determined pursuant to the terms of Executive's long term disability insurance policy provided by the Company. If Company elects to terminate this Agreement based on such permanent disability, such termination shall be for cause. 3.5 Indemnification. Executive shall be indemnified by Company (and, where applicable, its subsidiaries) to the maximum extent permitted by applicable law for actions undertaken for, or on behalf of, the Company and its subsidiaries. 4. Non-Competition, Confidentiality and Trade Secrets 4.1 Noncompetition. In consideration of the Company's entering into this Agreement and the compensation and benefits to be provided by the Company to You hereunder, and further in consideration of Your exposure to proprietary information of the Company, You agree as follows: (a) Until the date of termination or expiration of this Agreement for any reason (the "Date of Termination") You agree not to enter into competitive endeavors and not to undertake any commercial activity which is contrary to the best interests of the Company or its affiliates, including, directly or indirectly, becoming an employee, consultant, owner (except for passive investments of not more than one percent (1%) of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a national securities exchange or in an over-the-counter securities market), officer, agent or director of, or otherwise participating in the management, operation, control or profits of (a) any firm or person engaged in the operation of a business engaged in the acquisition of insurance businesses or (b) any firm or person which either directly competes with a line or lines of business of the Company accounting for five percent (5%) or more of the Company's gross sales, revenues or earnings before taxes or derives five percent (5%) or more of such firm's or person's gross sales, revenues or earnings before taxes from a line or lines of business which directly compete with the Company. -5- Notwithstanding any provision of this Agreement to the contrary, You agree that Your breach of the provisions of this Section 4.1(a) shall permit the Company to terminate Your employment for cause. (b) If Your employment is terminated by You, or by reason of Your Disability, by the Company for cause, or pursuant to a notice of non-renewal as outlined in Section 1.1, then for two (2) years after the Date of Termination, You agree not to become, directly or indirectly, an employee, consultant, owner (except for passive investments of not more than one percent (1%) of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a national securities exchange or in an over-the-counter securities market), officer, agent or director of, or otherwise to participate in the management, operation, control or profits of, any firm or person which directly competes with a business of the Company which at the Date of Termination produced any class of products or business accounting for five percent (5%) or more of the Company's gross sales, revenues or earnings before taxes at which the Date of Termination derived five percent (5%) or more of such firm's or person's gross sales, revenues or earnings before taxes. It is expressly agreed and understood that this Section 4.1(b) shall not apply to a public accounting or consulting firm. (c) You acknowledge and agree that damages for breach of the covenant not to compete in this Section 4.1 will be difficult to determine and will not afford a full and adequate remedy, and therefore agree that the Company shall be entitled to an immediate injunction and restraining order (without the necessity of a bond) to prevent such breach or threatened or continued breach by You and any persons or entities acting for or with You, without having to prove damages, and to all costs and expenses (if a court or arbitrator determines that the Executive has breached the covenant not to compete in this Section 4.1, including reasonable attorneys' fees and costs, in addition to any other remedies to which the Company may be entitled at law or in equity. You and the Company agree that the provisions of this covenant not to compete are reasonable and necessary for the operation of the Company and its subsidiaries. However, should any court or arbitrator determine that any provision of this covenant not to compete is unreasonable, either in period of time, geographical area, or otherwise, the parties agree that this covenant not to compete should be interpreted and enforced to the maximum extent which such court or arbitrator deems reasonable. 4.2 Confidentiality. You shall not knowingly disclose or reveal to any unauthorized person, during or after the Term, any trade secret or other confidential information (as outlined in the Indiana Uniform Trade Secrets Act) relating to the Company or any of its affiliates, or any of their respective businesses or principals, and You confirm that such information is the exclusive property of the Company and its affiliates. You agree to hold as the Company's property all memoranda, books, papers, letters and other data, and all copies thereof or therefrom, in any way -6- relating to the business of the Company and its affiliates, whether made by You or otherwise coming into Your possession and, on termination of Your employment, or on demand of the Company at any time, to deliver the same to the Company. Any ideas, processes, characters, productions, schemes, titles, names, formats, policies, adaptations, plots, slogans, catchwords, incidents, treatment, and dialogue which You may conceive, create, organize, prepare or produce during the period of Your employment and which ideas, processes, etc. relate to any of the businesses of the Company, shall be owned by the Company and its affiliates whether or not You should in fact execute an assignment thereof to the Company, but You agree to execute any assignment thereof or other instrument or document which may be reasonably necessary to protect and secure such rights to the Company. 5. Miscellaneous 5.1 Amendment. This Agreement may be amended only in writing, signed by both parties. 5.2 Entire Agreement. This Agreement contains the entire understanding of the parties with regard to all matters contained herein. There are no other agreements, conditions or representations, oral or written, expressed or implied, with regard to the employment of Executive or the obligations of the Company or the Executive. This Agreement supersedes all prior employment contracts and non-competition agreements between the parties. 5.3 Notices. Any notice required to be given under this Agreement shall be in writing and shall be delivered either in person or by certified or registered mail, return receipt requested. Any notice by mail shall be addressed as follows: If to the Company, to: Goran Capital, Inc. 4720 Kingsway Drive Indianapolis, Indiana 46205 Attention: President and Chief Executive Officer If to Executive, to: Gary P. Hutchcraft 4720 Kingsway Drive Indianapolis, Indiana 46205 or to such other addresses as one party may designate in writing to the other party from time to time. -7- 5.4 Waiver of Breach. Any waiver by either party of compliance with any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement. 5.5 Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 5.6 Governing Law. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Indiana, without giving effect to conflict of law principles. 5.7 Headings. The headings of articles and sections herein are included solely for convenience and reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 5.8 Counterparts. This Agreement may be executed by either of the parties in counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute a single instrument. 5.9 Survival. Company's obligations under Section 3.1 and Executive's obligations under Section 4 shall survive the termination and expiration of this Agreement in accordance with the specific provisions of those Paragraphs and Sections and this Agreement in its entirety shall be binding upon, and inure to the benefit of, the successors and assigns of the parties hereto. 5.10 Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by You and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior subsequent time. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date set forth above. GORAN CAPITAL INC. AND SUBSIDIARIES ("Company") By:_______________________________________ Title:______________________________________ -8- State of Indiana ) ) SS: County of __________) Before me the undersigned, a Notary Public for _______________ County, State of Indiana, personally appeared ___________________________________, and acknowledged the execution of this instrument this _______ day of ___________________, 1997. ------------------------------ , Notary Public State of Indiana My Commission Expires:_________________ GARY P. HUTCHCRAFT ("Executive") ----------------------------------- State of Indiana ) ) SS: County of __________) Before me the undersigned, a Notary Public for _______________ County, State of Indiana, personally appeared Gary P. Hutchcraft, and acknowledged the execution of this instrument this _______ day of ___________________, 1996. ------------------------------- , Notary Public State of Indiana, County of _______________ My Commission Expires:_________________ -9- EX-10 13 EMPLOYMENT AGREEMENT OF DAVID BATES Exhibit 10.11 EMPLOYMENT AGREEMENT WHEREAS, Goran Capital Inc., and its subsidiaries (collectively, the "Company") considers it essential to its best interests and the best interests of its stockholders to foster the continuous employment of its key management personnel and, accordingly, the Company desires to employ David L. Bates ("You", "Your"or "Executive"), upon the terms and conditions hereinafter set forth; and WHEREAS, the Executive desires to continue to be employed by the Company, upon the terms and conditions contained herein. NOW, THEREFORE, in consideration of the covenants and agreements set forth below, the parties agree as follows: 1. Employment 1.1 Term of Agreement. The Company agrees to employ Executive as Vice President and General Counsel, effective as of April 1, 1997 and continuing until March 31, 1998, unless such employment is terminated pursuant to Section 3 below; provided, however, that the term of this Agreement shall automatically be extended without further action of either party for additional one (1) year periods thereafter unless, not later than six (6) months prior to the end of the then effective term, either the Company or the Executive shall have given written notice that such party does not intend to extend this Agreement. If Company gives Executive such a notice of non-renewal, Executive's employment shall terminate as of the expiration date of this Agreement. It is expressly understood and agreed that a notice of non-renewal issued by the Company shall not extinguish the Executive's non-competition obligations pursuant to Section 4 herein. 1.2 Terms of Employment. During the Term, You agree to be a full-time employee of the Company serving in the position of Vice President and General Counsel of the Company and further agree to devote substantially all of Your working time and attention to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities associated with Your position as Vice President and General Counsel of the Company and to use Your best efforts to perform faithfully and efficiently such responsibilities. Executive shall perform such duties and responsibilities as may be determined from time to time by the Chairman and/or Chief Executive Officer of the Company and the Board of Directors of the Company, which duties shall be consistent with the position of Vice President and General Counsel of the Company, which shall grant Executive authority, responsibility, title and standing comparable to that of the vice president and general counsel of a stock insurance holding company of similar standing. Your primary place of work will be at the company's U.S. headquarters in Indianapolis, Indiana, but it is understood and agreed that your duties may require travel. In the event you are relocated to another Company location, the Company agrees to pay for the cost of your move (including temporary lodging expenses) and to facilitate the sale of your Indianapolis home so that you will be enabled to purchase a new home in your new location that is comparable in price to your existing home and have your family join you at such new location within two (2) months of your transfer or such other period as is reasonable considering market and location. Nothing herein shall prohibit You from devoting Your time to civic and community activities or managing personal investments, as long as the foregoing do not interfere with the performance of Your duties hereunder. 1.3 Appointment and Responsibility. The Boards of Directors of the Company shall, following the effective date of this Agreement, elect and appoint Executive as Vice President and General Counsel. Consistent with Section 1.2 of this Agreement, Executive shall be primarily responsible for the legal affairs of the Company. 2. Compensation, Benefits and Prerequisites 2.1 Salary. Company shall pay Executive a salary, in equal bi-weekly installments, equal to an annualized salary rate of $110,000. Executive's salary as payable pursuant to this Agreement may be increased from time to time as mutually agreed upon by Executive and the Company. Notwithstanding any other provision of this Agreement, Executive's salary paid by Company for any year covered by this Agreement shall not be less than such salary paid to Executive for the immediately preceding calendar year. All salary and bonus amounts paid to Executive pursuant to this Agreement shall be in U.S. dollars. 2.2 Bonus. The Company and Executive understand and agree that the Company expects to achieve significant growth during the term of this Agreement and that Executive will make a material contribution to that growth which will require certain personal and familial sacrifices on the part of Executive. Accordingly, it is the desire and intention of the Company to reward Executive for the attainment of that growth through bonus and other means (including, but not limited to, stock options, stock appreciation rights and other forms of incentive compensation). Therefore, the Company will pay Executive a lump-sum bonus (subject to normal withholdings) within thirty (30) business days from receipt by Company of its consolidated, annual audited financial statements in an amount which shall be determined in accordance with the following Bonus Table. All amounts used for calculation purposes in this section shall be based on the audited, consolidated financial statements of Goran Capital Inc. (or any successor thereto), with such financial statements having been prepared in accordance with applicable Generally Accepted Accounting Principles, applied on a consistent basis with that of prior years. -2- BONUS TABLE
If Audited Net % of Annual Salary Income (as a % of Payable to Executive Budgeted Net Income) Is As Bonus Less Than 75% -0- 75% or more, but less than 100% 10% 100% or more, but less than 125% 20% 125% or more 30%
2.3 Employee Benefits. Executive shall be entitled to receive all benefits and prerequisites which are provided to other Executives of Company under the applicable Company plans and policies, and to future benefits and prerequisites made generally available to executive employees of the Company with duties and compensation comparable to that of Executive upon the same terms and conditions as other Company participants in such plans. 2.4 Additional Prerequisites. During the term of this Agreement, Company shall provide Executive with: (a) Not less than three (3) weeks paid vacation during each calendar year. (b) A vehicle commensurate with Executive's position. (c) A golfing membership at Hillcrest Country Club or other comparable country club. 2.7 Expenses. During the period of his employment hereunder, Executive shall be entitled to receive reimbursement from the Company (in accordance with the policies and procedures in effect for the Company's employees) for all reasonable travel, entertainment and other business expenses incurred by him in connection with his services hereunder. 3. Termination of Executive's Employment 3.1 Termination of Employment and Severance Pay. Executive's employment under this Agreement may be terminated by either party at any time for any reason; provided, however, that if Executive's employment is terminated for any reason other than for cause, he shall receive, as severance pay, one (1) month's current salary for each full and partial year of service. Further, if Executive shall be terminated without cause, receipt of severance payments described in the preceding sentence are conditioned upon execution by Executive and the Company of that mutual Waiver and Release attached hereto as Exhibit A. Further, Executive shall receive severance pay -3- in accordance with this Section 3.1 if Executive shall terminate this Agreement due to a breach thereof by the Company or if Executive is directed by the Company (including, if applicable, any successor) to engage in any act or action constituting fraud or any unlawful conduct relating to the Company or its business as may be determined by application of applicable law. 3.2 Cause. For purposes of this Section 3, "cause" shall mean: (a) the Executive being convicted in the United States of America, any State therein, or the District of Columbia, or in Canada or any Province therein (each, a "Relevant Jurisdiction"), of a crime for which the maximum penalty may include imprisonment for one year or longer (a "felony") or the Executive having entered against him or consenting to any judgment, decree or order (whether criminal or otherwise) based upon fraudulent conduct or violation of securities laws; (b) the Executive's being indicted for, charged with or otherwise the subject of any formal proceeding (criminal or otherwise) in connection with any felony, fraudulent conduct or violation of securities laws, in a case brought by a law enforcement or securities regulatory official, agency or authority in a Relevant Jurisdiction; (c) the Executive engaging in fraud, or engaging in any unlawful conduct relating to the Company or its business, in either case as determined under the laws of any Relevant Jurisdiction; (d) the Executive breaching any provision of this Agreement; or (e) gross negligence or willful misconduct by the Executive in the performance of his duties hereunder. 3.3 Change of Control. Notwithstanding any other provisions of this Agreement, if (i) a Change of Control shall occur; and (ii) within twelve (12) months of any such Change of Control, Executive (a) receives a Notice of Non-Renewal, (b) is terminated for any reason other than for cause, or (c) Company (including its successors, if any) is in breach of this Agreement, then Executive shall continue to receive his current salary (in bi-weekly payments) until the earlier to occur of: (a) Executive shall commence employment with a firm or entity other than the Company such that his base salary is at or greater than existing base salary pursuant to this Agreement; or (b) The expiration of seventy-eight (78) weeks from Executive's Date of Termination. -4- The receipt by Executive of payment pursuant to this Section 3.3 is specifically conditioned, and no payments pursuant to this Section 3.3 shall be made to Executive if he is, at the time of his Termination, in breach of any provision (specifically including, but not limited to, the provisions of this Agreement pertaining to non-competition and confidentiality) of this Agreement and, further, if such payments have already begun, the continuation of payments to Executive pursuant to this Section 3.3 shall cease at the time Executive shall fail to comply with the non-competition and confidentiality provisions of Article 4 herein. It is expressly understood and agreed that the amount of any payment to Executive required pursuant to this Section 3.3 shall be reduced (but not below zero) by any compensation received by Executive during the period called for in this Section 3.3. A Change of Control shall mean the inability of the Symons family to cause the election of a majority of the members of the Board of Directors of Goran Capital Inc., Symons International Group, Inc. or their respective successors. 3.4 Disability. So long as otherwise permitted by law, if Executive has become permanently disabled from performing his duties under this Agreement, the Company's Chairman of the Board, may, in his discretion, determine that Executive will not return to work and terminate his employment as provided below. Upon any such termination for disability, Executive shall be entitled to such disability, medical, life insurance, and other benefits as may be provided generally for disabled employees of Company during the period he remains disabled. Permanent disability shall be determined pursuant to the terms of Executive's long term disability insurance policy provided by the Company. If Company elects to terminate this Agreement based on such permanent disability, such termination shall be for cause. 3.5 Indemnification. Executive shall be indemnified by Company (and, where applicable, its subsidiaries) to the maximum extent permitted by applicable law for actions undertaken for, or on behalf of, the Company and its subsidiaries. 4. Non-Competition, Confidentiality and Trade Secrets 4.1 Noncompetition. In consideration of the Company's entering into this Agreement and the compensation and benefits to be provided by the Company to You hereunder, and further in consideration of Your exposure to proprietary information of the Company, You agree as follows: (a) Until the date of termination or expiration of this Agreement for any reason (the "Date of Termination") You agree not to enter into competitive endeavors and not to undertake any commercial activity which is contrary to the best interests of the Company or its affiliates, including, directly or indirectly, becoming an employee, consultant, owner (except for passive investments of not more than one percent (1%) of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a -5- national securities exchange or in an over-the-counter securities market), officer, agent or director of, or otherwise participating in the management, operation, control or profits of (a) any firm or person engaged in the operation of a business engaged in the acquisition of insurance businesses or (b) any firm or person which either directly competes with a line or lines of business of the Company accounting for five percent (5%) or more of the Company's gross sales, revenues or earnings before taxes or derives five percent (5%) or more of such firm's or person's gross sales, revenues or earnings before taxes from a line or lines of business which directly compete with the Company. Notwithstanding any provision of this Agreement to the contrary, You agree that Your breach of the provisions of this Section 4.1(a) shall permit the Company to terminate Your employment for cause. (b) If Your employment is terminated by You, or by reason of Your Disability, by the Company for cause, or pursuant to a notice of non-renewal as outlined in Section 1.1, then for two (2) years after the Date of Termination, You agree not to become, directly or indirectly, an employee, consultant, owner (except for passive investments of not more than one percent (1%) of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a national securities exchange or in an over-the-counter securities market), officer, agent or director of, or otherwise to participate in the management, operation, control or profits of, any firm or person which directly competes with a business of the Company which at the Date of Termination produced any class of products or business accounting for five percent (5%) or more of the Company's gross sales, revenues or earnings before taxes at which the Date of Termination derived five percent (5%) or more of such firm's or person's gross sales, revenues or earnings before taxes. It is expressly agreed and understood that this Section 4.1(b) shall not apply to a public accounting or consulting firm. (c) You acknowledge and agree that damages for breach of the covenant not to compete in this Section 4.1 will be difficult to determine and will not afford a full and adequate remedy, and therefore agree that the Company shall be entitled to an immediate injunction and restraining order (without the necessity of a bond) to prevent such breach or threatened or continued breach by You and any persons or entities acting for or with You, without having to prove damages, and to all costs and expenses (if a court or arbitrator determines that the Executive has breached the covenant not to compete in this Section 4.1, including reasonable attorneys' fees and costs, in addition to any other remedies to which the Company may be entitled at law or in equity. You and the Company agree that the provisions of this covenant not to compete are reasonable and necessary for the operation of the Company and its -6- subsidiaries. However, should any court or arbitrator determine that any provision of this covenant not to compete is unreasonable, either in period of time, geographical area, or otherwise, the parties agree that this covenant not to compete should be interpreted and enforced to the maximum extent which such court or arbitrator deems reasonable. 4.2 Confidentiality. You shall not knowingly disclose or reveal to any unauthorized person, during or after the Term, any trade secret or other confidential information (as outlined in the Indiana Uniform Trade Secrets Act) relating to the Company or any of its affiliates, or any of their respective businesses or principals, and You confirm that such information is the exclusive property of the Company and its affiliates. You agree to hold as the Company's property all memoranda, books, papers, letters and other data, and all copies thereof or therefrom, in any way relating to the business of the Company and its affiliates, whether made by You or otherwise coming into Your possession and, on termination of Your employment, or on demand of the Company at any time, to deliver the same to the Company. Any ideas, processes, characters, productions, schemes, titles, names, formats, policies, adaptations, plots, slogans, catchwords, incidents, treatment, and dialogue which You may conceive, create, organize, prepare or produce during the period of Your employment and which ideas, processes, etc. relate to any of the businesses of the Company, shall be owned by the Company and its affiliates whether or not You should in fact execute an assignment thereof to the Company, but You agree to execute any assignment thereof or other instrument or document which may be reasonably necessary to protect and secure such rights to the Company. 5. Miscellaneous 5.1 Amendment. This Agreement may be amended only in writing, signed by both parties. 5.2 Entire Agreement. This Agreement contains the entire understanding of the parties with regard to all matters contained herein. There are no other agreements, conditions or representations, oral or written, expressed or implied, with regard to the employment of Executive or the obligations of the Company or the Executive. This Agreement supersedes all prior employment contracts and non-competition agreements between the parties. 5.3 Notices. Any notice required to be given under this Agreement shall be in writing and shall be delivered either in person or by certified or registered mail, return receipt requested. Any notice by mail shall be addressed as follows: -7- If to the Company, to: Chief Executive Officer Goran Capital Inc. 4720 Kingsway Drive Indianapolis, Indiana 46205 Attention: President and Chief Executive Officer If to Executive, to: David L. Bates 9932 Springstone Road McCordsville, Indiana 46055 or to such other addresses as one party may designate in writing to the other party from time to time. 5.4 Waiver of Breach. Any waiver by either party of compliance with any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement. 5.5 Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 5.6 Governing Law. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Indiana, without giving effect to conflict of law principles. 5.7 Headings. The headings of articles and sections herein are included solely for convenience and reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 5.8 Counterparts. This Agreement may be executed by either of the parties in counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute a single instrument. 5.9 Survival. Company's obligations under Section 3.1 and Executive's obligations under Section 4 shall survive the termination and expiration of this Agreement in accordance with the specific provisions of those Paragraphs and Sections and this Agreement in its entirety shall be binding upon, and inure to the benefit of, the successors and assigns of the parties hereto. -8- 5.10 Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by You and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior subsequent time. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date set forth above. GORAN CAPITAL INC. AND SUBSIDIARIES ("Company") By:__________________________________ Title:_______________________________ State of Indiana ) ) SS: County of __________) Before me the undersigned, a Notary Public for _______________ County, State of Indiana, personally appeared ______________________________, and acknowledged the execution of this instrument this _______ day of ___________________, 1997. ------------------------------- ,Notary Public State of Indiana My Commission Expires:______________ -9- DAVID L. BATES ("Executive") --------------------------------------- State of Indiana ) ) SS: County of __________) Before me the undersigned, a Notary Public for _______________ County, State of Indiana, personally appeared ______________________________, and acknowledged the execution of this instrument this _______ day of ___________________, 1997. ------------------------------- , Notary Public State of Indiana My Commission Expires:_________________ -10- EX-11 14 COMPUTATION OF PER SHARE EARNINGS Exhibit 11 GORAN CAPITAL INC. - Consolidated Analysis of Earnings Per Share As At December 31, (In Thousands U.S. Dollars)
1995 1996 1997 NASDAQ Trading Activity Average Price $6.20 $13.98 $24.08 Proceeds from Exercise of Warrants and Options (US$) $1,353,460 $3,789,130 $9,753,456 Shares Repurchased - Treasury Method 218,396 270,943 347,841 Shares Outstanding - Weighted Average Basic 5,012,005 5,286,270 5,590,576 Add Options and Warrants Outstanding 774,035 709,149 546,856 Less Treasury Method - Shares Repurchased (218,396) (207,943) (347,841) Shares Outstanding - Fully Diluted 5,567,644 5,724,476 5,789,592 Net Earnings in Accordance with U.S. GAAP $6,665,935 $31,294,636 $12,111,000 Earnings Per Share - GAAP $1.33 $5.92 $2.17 Basic - Fully Diluted $1.20 $5.47 $2.09
EX-13 15 1997 ANNUAL REPORT OF GORAN Exhibit 13 1997 Goran Capital, Inc. Annual Report GORAN LOGO 1997 Annual Report [Large Goran logo with three photos] [small Goran logo] 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 38 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. ("SIG") which began trading on the NASDAQ on November 5, 1996 under the symbol SIGC. SIG owns IGF Insurance Company of Des Moines, Iowa which is the fourth largest crop insurer in the United States. SIG also owns Superior Insurance Company of Tampa, Florida and Pafco General Insurance Company of Indianapolis, Indiana. These insurers provide nonstandard automobile insurance and combined are the tenth largest writers of such insurance in the United States. The other subsidiaries, Granite Reinsurance Company Ltd. and Symons International Group, Inc. - Florida underwrite finite (limited risk) reinsurance in Bermuda, the United States and Canada and offer commercial insurance coverage, respectively. The operations of Symons International Group, Inc. Florida were discontinued in 1997 with a sale of this operation expected in early 1998. The investment portfolios of the insurance subsidiaries include primarily debt and government instruments. The majority of holdings of the portfolios are publicly traded and most of the holdings of the debt portfolio have investment grade ratings. Goran is a public company listed on The Toronto Stock Exchange under the symbol GNC and NASDAQ under the symbol GNCNF. All dollar amounts shown in this report are in U.S. currency unless otherwise indicated. The conversion rates for 1997 and as of December 31, 1997 were $1.3846 and $1.4295, respectively. Table of Contents Financial Highlights 1 Chairman's Report 2 Management's Discussion and Analysis 5 Consolidated Financial Statements 15 Notes to Consolidated Financial Statements 19 Auditors' Report 34 Corporate Directory 36 Subsidiaries and Branch Offices IBC Shareholder Information IBC GRAPH 1993 1994 1995 1996 1997 $88,936 $103,134 $124,634 $305,499 $460,600 Gross Premiums Written By Year [small Goran logo] Financial Highlights (dollars in thousands, except per share amounts) For The Years Ended December 31,
1997 1996 1995 1994 1993 Gross premium revenue $448,982 $299,376 $146,303 $126,978 $114,135 Earnings from continuing operations $15,983 $14,127 $7,157 $3,940 $1,397 Earnings per share from continuing operations $2.86 $2.67 $1.43 $0.81 $0.29 Shareholders' Equity $60,332 $47,258 $12,622 $5,067 $1,088 Book Value per share $10.53 $8.74 $2.49 $1.03 $0.22 Market Value per share $29.41 $20.08 $8.57 $5.20 $3.55
CORPORATE STRUCTURE Goran Capital, Inc. Toronto, Ontario ("Goran" or the "Company") | - ---------------------------------------------------------------------- | | | | 67% Owned 100% Owned 100% Owned 100% Owned Symons International Granite Reinsurance Granite Symons Group, Inc., Company, Ltd. Insurance International Indianapolis, Indiana Barbados Company Group, Inc. ("SIG") ("Granite Re") ("Granite") Florida |------------------------------------------| IGF Holdings, Inc. GGS Management, Inc. ("IGFH") ("GGS Management") | | IGF Insurance Company ("IGF") ----------------------------------- | | Pafco General Superior Insurance Insurance Company Company ("Pafco") ("Superior") | ------------------------- | | Superior Guaranty Superior American Insurance Company Insurance Company -1- [small Goran logo] Chairman's Report to Shareholders: GORAN MILESTONES Greetings: As has been my practice in the past, I have used "milestones" to provide a comparison of our development. I have taken a broader approach this year and carried the results into an appraisal of our efforts as I see it. I am much encouraged with the future and I feel certain you will be too when you digest the information assembled below.
YEAR: No. of Employees Gross Revenue Pre-Tax Earnings Net Earnings 1994 253 $133,596 $4,614 $3,941 1995 325 $152,443 $9,654 $7,157 1996 672 $317,770 $24,984 $14,127 1997 786 $491,461 $37,904 $15,983 (1) 1998 800 $730,000 N/A N/A
(1) 1998 information is an estimate based on stated corporate goals. Amounts are for continuing operations. Revenue is gross premiums, interest and fee income. All dollar amounts are in thousands of U.S. dollars. While I don't always agree with analysts, generally they do a good job. But as a person who has been in the business of insurance for more than fifty years, I have an advantage in assessing the true value of an insurance enterprise over those that do not have my experience. I have a better tuned antenna and feel many analysts miss some important aspects of the true worth of an insurance company. Over the years I have been the instigator and closer in the sale and purchase of many insurance entities. The true value of those businesses was somewhat more than a mere multiplication of the Earnings Per Share, (EPS). We believe that our companies are grossly undervalued in the market place in that it does not appreciate the cost and value added for growth in gross revenue. To help you understand what I mean, let's look at values paid by knowing buyers for recent acquisitions in fields of insurance similar to our companies. Note that the price paid for these entities doesn't follow a straight multiplication of EPS, in fact the most constant number that parallels the price is the Gross Written Premium. -2- [small Goran logo] Chairman's Report
Premium Mean Purchase Trailing to Purchase Premiums Price EPS Multiple Price Ratio Omni Insurance $140M $185M 30 132% (sold to Hartford) 10/16/97 Guaranty National $510M $469M 16 91% (sold to Orion Capital) 9/18/97 Titan $172M $240M 17 140% (sold to U.S.F.&G.) 8/8/97 Integon $783M $519M N/A 62% (sold to G.M.A.C.) ----- ----- --- --- 6/3/97 Average 21 88% == ===
In today's world, the value of an insurer is more closely linked to its gross written premiums. Depending on the class of business, this value multiple should be between 75% and 100% of the insurers premium volume. We have outperformed all the above companies in every worthwhile category. Yet, I ponder why no value has been attributed to our $150M of premium growth in 1997. In the past several years we have acquired businesses in the industry sectors that we felt had the most potential for growth: Crop insurance (the fastest growing segment of the Commercial insurance industry) and Non-Standard automobile insurance (the growth leader in the Personal line component). You will note that our growth parallels this pattern and that we have consistently demonstrated our ability to grow faster than our industry peer group. Let me recall for you our two most recent acquisitions, Superior Insurance Group, and CNA Crop Book. When we bought Superior Insurance Group on May 1, 1996, it was coming off a year in which it had produced $95M of Gross Written Premiums and earned about $5M of pre-tax income. For 1997, Superior wrote $250M of premiums and earned a pre-tax profit of $20M. This growth came through the repositioning of Superior in its markets and changing the way it did business. This rate of growth is continuing in 1998. On March 2, 1998 we took over CNA's book of MPCI and Crop Hail insurance. In return, CNA gets a share of our crop reinsurance business that would otherwise be placed with other reinsurers. We feel we can use our marketing expertise and varied products to grow this approximately $110M of business in the same way we have grown our previous acquisitions in the past, outpacing other crop insurers in the process. Over the last 5 years, we have seen our performance as follows: annual gross revenue average compound growth: 45% annual net income average compound growth: 92% annual ROE average compound growth: 64% This growth and performance is the result of attracting a competent work force, excelling in niche markets and making acquisitions that others look at and say are insightful purchases (oddly, only after we have turned these acquisitions into great producers). We are continuing to look at growth and acquisitions with enthusiasm. -3- [small Goran logo] Chairman's Report During the second half of 1997, we retained Donaldson, Lufkin & Jenrette ("DLJ") to lead a $135M, thirty-year issue of Trust Preferred Securities. As part of this successful issue, we did a road show to tell the story of our company. DLJ prepared the presentations for that road show and commented, among other positive statements, that we have "a proven management team." This team has the ability, experience and the tools to continue our growth and performance into the future. The commendations on the quality of our personnel by the firm of Donaldson, Lufkin & Jenrette is self evident and anything I might add on the professional standing of our managers and employees would be redundant. I would be remiss however if I didn't thank them all for their efforts and professional interest in the company's welfare and success. It has been said that a business is, at its inception, "Desperate," then "Honest" and finally "Respectable." We have worked hard to reach "respectability" and it is this that motivates us. We have made profits for our shareholders and have greatly enhanced the company's corporate governance function. Our growth in the business of insurance, measured by premium income, profits and professionalism has been outstanding. This has come about primarily through the efforts and dedication of our personnel and I extend to all of them the thanks of the Board of Directors. We have two public companies, Goran Capital Inc. and Symons International Group Inc., and as a public organization we must maintain larger and more diverse Boards. As Chairman, I rely on these gentlemen for their help and advice. Our meetings are often lengthy and diverse and we wrestle with many additional factors because the company is growth oriented. I wish to thank each of these gentlemen for their contribution over the past year and assure them that their efforts are greatly appreciated. Thanks Board, thanks employees. [large Goran logo] -4- [small Goran logo] MANAGEMENT'S DISCUSSION AND ANALYSIS [photographs of wheat down left margin] FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Goran Capital Inc. (the "Company" or "Goran") underwrites and markets nonstandard private passenger automobile insurance and crop insurance. The Company also writes third party property and casualty coverage and also provides finite risk, stop loss and quota share reinsurance. Acquisitions and Public Offerings On April 30 ,1996 the Company purchased the operations of Superior Insurance Company for $66.6 million in cash (the "Acquisition"). Funds for the Acquisition were provided from funds affiliated with Goldman Sachs and a bank term loan of $48 million. Both Goldman Sachs and the bank term loan were taken out in November 1997. On November 5, 1996, SIG issued 3,450,000 shares in an initial public offering of 33% of its stock at $12.50 per share. On November 12, 1997, SIG issued $135 million of Trust Preferred Securities at 9.50%. The proceeds of this offering were used to buyout Goldman Sachs' minority interest share of the nonstandard automobile operations, repay the term loan used to acquire Superior and provide capital to the nonstandard automobile division for future growth. The Preferred Securities carry a 30 year term with a noncallable period of 10 years. Distributions are payable semi-annually at a rate of 9.5% per annum with all principal paid at maturity. SIG also has the ability to forego distributions for periods of up to five years, although it has no intention to do so, and the Preferred Securities have limited covenants. SIG believed the time was proper to obtain the benefit of 100% of the nonstandard automobile operations, provide longer term financing at favorable terms and provide additional capital for future growth. Nonstandard Automobile Insurance Operations The Company, through Pafco and Superior, is engaged in the writing of automobile insurance for "nonstandard risks". Nonstandard insureds are those individuals who are unable to obtain insurance through standard market carriers due to factors such as poor premium payment history, driving experience, record of prior accidents or driving violations, particular occupation or type of vehicle. Premium rates for nonstandard risks are higher than for standard risks. Nonstandard policies have relatively short policy periods and low limits of liability. Due to the low limits of coverage, the period of time that elapses between the occurrence and settlement of losses under nonstandard policies is shorter than many other types of insurance. The nonstandard automobile market is the fastest growing sector of the personal lines market. Crop Insurance Operations General Crop insurance consists of three main products. Hail insurance, which is controlled by the private insurance industry, receives no subsidy from the government. Multi-Peril Crop Insurance ("MPCI"), is a government sponsored product, administered through the Federal Crop Insurance Corporation ("FCIC"). Named perils insurance covers farmers for risks specific to specific crops. Farmers who purchase insurance receive subsidies to reduce their cost and provide protection for major catastrophic loss. When a farmer wants to borrow -5- [small Goran logo] MANAGEMENT'S DISCUSSION AND ANALYSIS money to buy his seed, the bank wants insurance on the harvest so the bank knows the loan can be repaid either through normal harvest or through an insurance policy covering the yield on the crop. There are many types of coverages and percentages that farmers can purchase. The Company works with independent agents to meet the insurable needs of the farmer which includes the best coverage and premium for the farm. The government supports this effort through commissions it pays the Company to do this work and through premium subsidy for the farmer's insurance costs. The government also provides back-up risk protection to the 18 or so crop insurance providers in the event of major loss. Based on the results for any given year, the Company and the government share in the results of profit and loss. In order to protect IGF from the loss part of this equation, IGF buys third party reinsurance to reduce the downside from a loss year which includes participation by Granite Re. Certain Accounting Policies for Crop Insurance Operations The majority of the Company's crop insurance business consists of MPCI. MPCI is a government-sponsored program with accounting treatment which differs in certain respects from more traditional property and casualty insurance lines. Farmers may purchase "CAT Coverage" (the minimum available level of MPCI coverage) upon payment of a fixed administrative fee of $50 per policy (the "CAT Coverage Fee") instead of a premium. This fee is included in other income. Commissions paid to agents to write CAT policies are partially offset by the CAT Coverage Fee. For purposes of the profit-sharing formula under the MPCI program referred to below, the Company is credited with an imputed premium (its "MPCI Imputed Premium") for all CAT Coverage policies it sells, determined in accordance with the profit-sharing formula established by the FCIC. For income statement purposes under GAAP, Gross Premiums Written consist of the aggregate amount of premiums paid by farmers for "Buy-up Coverage" (MPCI coverage in excess of CAT Coverage), and any related federal premium subsidies, but do not include any MPCI Imputed Premium credited on CAT Coverage. By contrast, Net Premiums Written and Net Premiums Earned do not include any MPCI Premiums or premium subsidies, all of which are deemed to be ceded to the United States Government as reinsurer. The Company's profit or loss from its MPCI business is determined after the crop season ends on the basis of a profit-sharing formula established by federal regulation and the FCIC. For GAAP income statement purposes, any such profit or loss sharing earned or payable by the Company is treated as an adjustment to commission expense and is included in policy acquisition and general and administrative expenses. Amounts receivable from the FCIC are reflected on the Company's consolidated balance sheet as reinsurance recoverables. The Company also receives from the FCIC (i) an expense reimbursement payment equal to a percentage of Gross Premiums Written for each Buy-up Coverage policy it writes (the "Buy-up Expense Reimbursement Payment"), (ii) an LAE reimbursement payment equal to 13.0% of MPCI Imputed Premiums for each CAT Coverage policy it writes (the "CAT LAE Reimbursement Payment") and (iii) a small excess LAE Reimbursement Payment of two hundredths of one percent (0.02%) of MPCI Retention to the extent the Company's MPCI Loss Ratios on a per state basis exceed certain levels (the "MPCI Excess LAE Reimbursement Payment"). For GAAP income statement purposes, the Buy-up Expense Reimbursement Payment is treated as a contribution to income and reflected as an offset against policy acquisition and general and administrative expenses. The CAT LAE Reimbursement Payment and the MPCI Excess LAE Reimbursement Payment are, for income statement purposes, recorded as an offset against LAE, up to the actual amount of LAE incurred by the Company in respect of such policies, and the remainder of the payment, if any, is recorded as other income. In 1996, the Company instituted a policy of recognizing (i) 35% of its estimated MPCI Gross Premiums Written for each of the first and second quarters, (ii) commission expense on MPCI Gross Premiums Written at contractual rates and (iii) Buy-up Expense Reimbursement at the contractual rate of MPCI Gross Premiums Written along with normal operating expenses incurred in connection with premium writings. In the third quarter, if a sufficient volume of policyholder acreage reports have been received and processed by the Company, the Company's policy is to recognize MPCI Gross Premiums Written for the first nine months based on a re-estimate. If an insufficient volume of policies have been processed, the Company's policy is to recognize 20% of its full year estimate of MPCI Gross Premiums Written in the third quarter. The remaining amount of MPCI Gross Premiums Written is recognized in the fourth quarter, when all amounts are reconciled. In prior years, recognition of MPCI Gross Premiums Written was 30%, 30%, 30% and 10%, for the first, second, third and fourth quarters, respectively. Commencing with its June 30, 1995 financial statements, the Company also began recognizing MPCI underwriting gain or loss during the first, second and third quarters, reflecting the Company's best estimate of the amount of such gain or loss to be recognized for the full year, based on, among other things, historical results, plus a provision for adverse developments. In the fourth quarter, a reconciliation amount is recognized for the underwriting gain or loss based on final premium and loss information. -6- [small Goran logo] Selected Segment Data of the Company The following table presents historical segment data for the Company's nonstandard automobile and crop insurance operations. This data does not reflect results of operations attributable to corporate overhead, interest costs and amortization of intangibles or commercial or reinsurance insurance operations, nor does it include the results of operations of Superior prior to May 1, 1996.
Year Ended December 31, Nonstandard - Automobile Insurance Operations 1997 1996 1995 Gross premiums written $323,915 $187,176 $49,005 ======= ======= ====== Net premiums written $256,745 $186,579 $37,302 ======= ======= ====== Net premiums earned $251,020 $168,746 $34,460 Fee income 15,515 7,578 1,787 Net investment income 10,969 6,489 624 Net realized capital gain (loss) 9,462 (1,014) (508) ------- ------ ------ Total Revenues 286,966 181,799 36,363 ------- ------- ------ Losses and loss adjustment expenses 195,900 124,385 25,423 Policy acquisition and general and administrative expenses 72,463 46,796 12,929 ------- ------ ------ Total Expenses 268,363 171,181 38,352 ------- ------- ------ Earnings (loss) before income taxes $18,603 $10,618 $(1,989) ======= ====== ====== GAAP RATIOS (Nonstandard Automobile Only) Loss ratio 70.2% 65.1% 65.8% LAE ratio 7.8% 8.6% 8.0% Expense ratio, net of billing fees 22.7% 23.2% 32.3% ---- ---- ---- Combined ratio 100.7% 96.9% 106.1% ===== ==== ===== Crop Insurance Operations: Gross premiums written $126,401 $110,059 $70,374 ======= ======= ====== Net premiums written $20,796 $23,013 $11,608 ====== ====== ====== Net premiums earned $20,794 $23,013 $11,608 Fee income 4,764 1,672 384 Net investment income 191 181 674 Net realized capital gain (loss) (18) (1) 164 ----- -- --- Total Revenues 25,731 24,865 12,830 ------ ------ ------ Losses and loss adjustment expenses 16,185 12,724 8,629 Policy acquisition and general and administrative expenses(1) (11,551) (6,095) (7,466) Interest and amortization of intangibles 235 551 627 ----- ----- ----- Total Expenses 4,869 7,180 1,790 ----- ----- ------ Earnings before income taxes $20,862 $17,685 $11,040 ====== ====== ====== Statutory Capital and Surplus: Pafco $19,924 $18,112 $11,875 IGF 42,809 29,412 9,219 Superior 65,146 57,121 49,277
(1) Negative crop expenses are caused by inclusion of MPCI expense reimbursements and underwriting gain. -7- [small Goran logo] MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS Overview 1997 Compared To 1996 The Company recorded earnings from continuing operations of $15,983,000 or $2.86 per share, respectively in 1997. This is approximately a 13.1% and 7.1% increase from 1996 comparable amounts of $14,127,000 or $2.67 per share. In the fourth quarter of 1997, the Company discontinued the operations of SIGFL and expects to sell these operations in 1998. The intended sale results from the Company's decision to focus on nonstandard automobile, crop and reinsurance operations. The Company recorded a loss from discontinued operations of $3,545,000 in 1997 compared to a loss of $1,000,000 in 1996. Such increase was due to a deterioration in the loss ratio. The Company also recorded a gain of $18,169,000 in 1996 from the sale of SIG stock in its IPO. That gain is not included as part of earnings from continuing operations. The nonstandard automobile insurance segment demonstrated improved earnings due to continued premium growth, improved expense ratios and higher realized gains from investment sales. Premium growth in nonstandard automobile was generated from increased pressure on uninsured motorists to obtain insurance, expansion into new states and increased market share penetration. During 1997, the Company increased reserves at Pafco for both prior and current accident years. The total increase for prior accident years at Pafco was approximately $7.5 million. The improvement in crop insurance earnings relates to growth in market share and favorable underwriting results. Growth in market share occurred in all product lines for crop and is the result of improved marketing and agent service efforts. Record underwriting results are due to favorable crop conditions and continued improvement in risk selection. 1996 Compared To 1995 Earnings and earnings per share from continuing operations increased 97.4% to $14,127,000 and 86.7% to $2.67 in 1996 from $7,157,000 and $1.43 in 1995. Improved earnings in 1996 were attributable to both the nonstandard automobile and crop segments. The nonstandard automobile segment benefitted from significant premium growth from the acquisition of Superior, elimination of quota share reinsurance and internal growth. The nonstandard automobile segment also benefitted from lower loss and expense ratios due to improved claims management, introduction of multi-tiered products and operating efficiencies through reengineering, management changes and gains from technological advancements. The crop insurance segment also benefitted from significant premium growth in both crop hail and MPCI premiums. The crop insurance segment's profitability was enhanced by a lower crop hail loss ratio and improved MPCI underwriting gains. Years Ended December 31, 1997 and 1996 Gross Premiums Written Consolidated Gross Premiums Written increased 50.0% in 1997 due to growth in both the nonstandard automobile and crop segments. Gross Premiums Written for the nonstandard automobile segment increased 73.1% in 1997. While a portion of this increase relates to four additional months of premium in 1997 of Superior, additional premium growth relates to internal growth due to improved service, certain product improvements, tougher uninsured motorist laws in states such as California and Florida and entrance into new states such as Nevada and Oregon. Such increase was primarily due to volume rather than rate increases, although the Company adjusts rates on an ongoing basis. Gross Premiums Written for the crop segment increased 14.5% in 1997. Such increase was due to continued industry privatization and aggressive marketing efforts, resulting in continued increase in market share. Remaining gross written premiums represent reinsurance business. Net Premiums Written Net Premiums Written increased in 1997 as compared to 1996 due to the growth in Gross Premiums Written offset by quota share reinsurance. In 1997, the Company ceded $62,412,000 of nonstandard automobile premiums as part of a quota share treaty instituted January 1, 1997. For the first three quarters of 1997 the Company ceded 20% of nonstandard automobile premiums and ceded 25% of such premiums in the fourth quarter. In 1998 the Company plans to cede 10% of nonstandard automobile premiums with adjustments as needed for surplus leverage. No such treaty was in effect during 1996. In 1997, the Company ceded $15,640,000 of crop hail premiums as part of a 40% quota share treaty instituted January 1, 1997. In 1996, crop hail premiums were ceded at a rate of 10%. Granite Re participated in 10% of the nonstandard automobile quota share treaties but did not participate in the crop hail quota share treaties. Net Premiums Earned Net Premiums Earned increased in 1997 as compared to the prior year, reflecting the strong growth in Gross Written Premiums offset by the effects of the nonstandard automobile and crop hail quota share treaties. Net premiums earned to net premiums written for the nonstandard automobile segment was 97.8% in 1997 as compared to 90.4% in 1996. The increase in the earned ratio is due to higher premium growth earlier in 1997. -8- [small Goran logo] Fee Income Fee income increased $11,023,000 in 1997 compared to 1996. Such increase was due to billing fee income on nonstandard automobile business from an increase in in-force policy count. There was also an increase in the receipt of CAT Coverage Fees and CAT LAE Reimbursement Payments due to higher premium volume. Net Investment Income Net investment income increased $5,032,000 in 1997 compared to 1996. Such increase was due primarily from additional months of investment income from Superior but also due to greater invested assets resulting from premium growth and higher profitability. Net Realized Capital Gains (Loss) Realized gains of $9,393,000 in 1997 were due to the significant strength of the equity markets in 1997 and the Company's position to realize gains as securities had reached targeted pricing levels. Losses and LAE The Loss and LAE Ratio for the nonstandard automobile segment was 78.0% for 1997 as compared to 73.7% for 1996. The Crop Hail Loss Ratio in 1997 was 77.8% compared to 55.3% in 1996. The increase in the Loss and LAE Ratio for the nonstandard automobile segment reflects the recent growth in premium volume in an effort to increase market share and improve economies of scale, increased physical damage severity costs and certain pending rate increases. The Company increased 1996 and prior nonstandard automobile reserves at Pafco by $6.0 million in the first two quarters and $1.5 million in the fourth quarter which increased the Loss and LAE Ratio by 3.0% in 1997. Deficient reserve development at superior was approximately $2.5 million in 1997. The increase in the crop hail loss ratio is the result of storm damage in the third quarter in certain eastern states on new business obtained in 1997. The Company continues to aggressively address ways to decrease the nonstandard automobile loss ratios including elimination of unprofitable agents, rate increases and improved claims management and closure rates. The Company is also reviewing the pricing of the crop hail business to improve future loss experience. Policy Acquisition and General and Administrative Expenses Policy acquisition and general and administrative expenses have increased as a result of the increased volume of business produced by the Company. Policy acquisition and general and administrative expenses rose to $66,197,000 or 23.9% of Net Premiums Earned for 1997 compared to $48,647,000 or 23.3% of Net Premiums Earned in 1996. The Expense Ratio, net of billing fees, for the nonstandard automobile segment improved to 22.7% for 1997 as compared to 23.2% for 1996. Due to the accounting for the crop insurance segment, operating expenses for 1997 includes a contribution to earnings of $11,551,000 as compared to $6,095,000 for 1996. Such increase was due to greater Buy-up Expense Reimbursement Payments and MPCI underwriting gain due to increased premium volumes and more favorable underwriting results. Amortization of intangibles includes goodwill from the acquisition of Superior, additional goodwill from the acquisition of the minority interest position in GGSH, debt or preferred security issuance costs and organizational costs. The increase in 1997 reflects the effects of the Preferred Securities Offering. Interest Expense Interest expense primarily represents interest incurred since April 30, 1996 on the GGS Senior Credit Facility. The GGS Senior Credit Facility was repaid with the proceeds from the Preferred Securities Offering. Income Tax Expense Income tax expense was 30.6% of pre-tax income from continuing operations for 1997 as compared to 32.2% in 1996. Distributions on Preferred Securities Distributions on Preferred Securities are calculated at a rate of 9.5% net of federal income taxes from the offering date of August 12, 1997. Years Ended December 31, 1996 and 1995 Gross Premiums Written Gross Premiums Written in 1996 increased to $299,376,000 from $146,603,000 in 1995 reflecting a 282% increase in nonstandard automobile insurance and an increase of 56.4% in crop insurance. Other Gross Premiums Written consist of finite reinsurance premiums. The increase in nonstandard automobile Gross Premiums Written was due to the Acquisition, which generated Gross Premiums Written of $118,661,000 subsequent to the Acquisition, as well as a 21% increase in policies in-force issued by Pafco. The increase in Pafco policies in-force primarily resulted from improved service and product improvements. The increase in crop insurance Gross Premiums Written was primarily due to (i) farmers electing higher percentage of crop price levels to be insured under MPCI Buy-up Coverages, (ii) an increase in MPCI policies in-force, and (iii) increase in the number of acres insured, together with an increase of $10,990,000, or 64.8%, in crop hail premiums in 1996 compared to 1995. Net Premiums Written The Company's Net Premiums Written in 1996 increased 161.3% to $213,778,000 from $81,822,000 in 1995 due to the Acquisition, which generated -9- [small Goran logo] MANAGEMENT'S DISCSUSSION AND ANALYSIS Net Premiums Written for Superior of $118,298,000 subsequent to the Acquisition, and the increase in Gross Premiums Written in Pafco's nonstandard automobile insurance business. In addition, the increase in Net Premiums Written resulted from the Company's election not to renew, as of January 1, 1996, its 25% quota share reinsurance on its nonstandard automobile business. As a result of increases over time in its statutory capital, the Company determined that it no longer required the additional capacity provided by this coverage in order to maintain acceptable premium to surplus ratios. Since all MPCI premiums are reported as 100% ceded, MPCI Gross Premiums Written have no effect on Net Premiums Written. Net Premiums Earned The Company's Net Premiums Earned in 1996 increased 188.1% reflecting the increase in Net Premiums Written. The ratio of Net Premiums Earned to Net Premiums Written in 1996 increased to 97.7% from 88.7% in 1995 due to growth in Net Premiums Written in 1996 exceeding growth in Net Premiums Written in 1995. Fee Income The Company's fee income in 1996 increased 327.9% due principally to (i) billing fee revenue of $4,655,000 at Superior subsequent to the Acquisition, (ii) increased billing fee revenue at Pafco of $998,000 from nonstandard automobile insurance policies, resulting from the increase in the in-force policy count described above, and an increase in fees charged per installment in late 1995, and (iii) increased CAT Coverage Fees and CAT LAE Reimbursement Payments resulting from the introduction of CAT Coverages in the Federal Crop Insurance Reform Act of 1994 (the "1994 Reform Act"). Net Investment Income The Company's net investment income in 1996 increased 100.2%. This increase was due primarily to the investment earnings of $4,996,000 at Superior subsequent to the Acquisition. Also contributing to the increase in net investment income is an increase in average invested assets in the nonstandard automobile division (not including Superior) to $30,911,000 in 1996 from $22,653,000 in 1995. Net Realized Capital Gain (Loss) The Company recorded a net realized capital loss from the sale of investments of $637,000 in 1996 compared to a net realized capital loss from the sale of investments of $198,000 in 1995. The net realized capital loss in 1996 was the result of sales of securities to shorten the portfolio's overall maturity to provide a better duration match with claims payments. Losses and LAE The Loss and LAE Ratio for the nonstandard automobile segment in 1996 was 73.7% as compared to 73.8% in 1995. The reduction in the Loss and LAE Ratio for 1996 was a function of rate increases and improved claim closure ratios. Crop hail loss ratios decreased in 1996 to 55.3% from 74.3% in 1995 due to more favorable weather conditions and a broader geographic expansion of premiums which serves to reduce exposure. Policy Acquisition and General and Administrative Expenses The Expense Ratio for the nonstandard automobile segment, net of billing fees decreased to 23.2% in 1996 from 32.3% in 1995. This decrease was due to several factors including: (i) lower commission expense at Superior through utilization of multi-tier products, (ii) lower staff expenses as a result of higher utilization and work flow re-engineering, and (iii) technological advancements in the underwriting, premium processing and claims areas. As a result of the accounting for the crop insurance segment, such segment experienced a contribution to income reflected in the policy acquisition and general and administrative expense line item of $6,095,000 in 1996 compared to a contribution to income of $7,466,000 in 1995. This decrease in contribution resulted from a combination of several factors. The primary difference is the decrease in ceding commission income of $2,036,000 which is due to only a 10% quota share agreement for crop hail in 1996 versus a 25% quota share in 1995. Other items include a commission expense increase of $6,217,000 due to higher premium writings and an increase in other operating expenses of $4,153,000. This net increase in expense of $10,370,000 was reduced by an increase of $8,490,000 in Buy-up Expense Reimbursement and an increase in the MPCI underwriting gain of $2,624,000. Interest Expense The Company's interest expense in 1996 increased to $4,961,000 from $1,761,000 in 1995 due primarily to interest of $2,774,000 on the $48 million indebtedness incurred by a subsidiary of GGSH to partially fund the Acquisition (the "GGS Senior Credit Facility"). Income Tax Expense The effective tax rate in 1996 reflects a 32.2% provision compared to a 25.8% provision in 1995. The increase in the effective tax rate is due to lower tax-exempt interest income. -10- [small Goran logo] Symons International Group, Inc. - Florida ("SIGF") Goran's wholly-owned subsidiary, Symons International Group, Inc. - Florida is a specialized surplus lines underwriting unit. The Company decided to discontinue the operations of this unit in 1997 and expects a sale of this operation to occur in 1998. Such operations no longer fit the Company's strategic operating plan of concentrating on the business segments of nonstandard automobile, crop and reinsurance. Goran wrote third party property and casualty coverage using Pafco, IGF and other insurance companies under contract with SIGF. The volume of business grew by 15.7% to $9,560,000 in 1997 compared to $8,258,000 in 1996 and $5,414,000 in 1995, however, the underwriting profits continued to deteriorate in 1997. SIGF produced an overall loss to the Company of $3,545,000 in 1997 compared to $1,000,000 in 1996 and compared to a profit of $14,000 for 1995. Non-U.S. Operations Granite Insurance Company ("Granite") 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 deficiencies showing in the most recent year. Granite's invested assets reduced to $3.4 million from $4.5 million in 1996. This is the result of the administration and settlement of claims. Total outstanding claims decreased to $1.3 million in 1997 from $1.9 million in 1996. It is expected that the run-off of outstanding claims will continue at least until 1998. Granite recorded a net loss of $261,000 in 1997, compared to $50,000 earnings in 1996 and $200,000 earnings in 1995. This is reflective of the reduction in investment income. Granite Reinsurance Company Limited ("Granite Re") Granite Re is managed by Atlantic Security Ltd. 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. Granite Re participates in various programs in Bermuda, the 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 implemented on June 30, 1990, is now winding down in accordance with management's forecast and is producing profits as anticipated. During 1997, 1996 and 1995, Granite Re participated in certain stop loss programs for Goran's crop insurance 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. In 1997, Granite Re participated in Goran's nonstandard automobile subsidiaries quota share treaty. 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, which is expected to be sold in 1998. Gross premiums written during the 12 months ended November 30, 1997 (Granite Re has a year-end different from Goran) were $10.5 million compared to $12.3 million for the corresponding period in 1996 and $34.8 million in 1995. Earnings were $2.3 million, $2.6 million and $4.0 million in 1997, 1996 and 1995, respectively. Total capital and surplus of Granite Re increased to $18.0 million in 1997 from $15.8 million in 1996. Granite Re 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 and investments. Such portfolios take about eight to nine years to run-off, thus generating investment returns and underwriting gains and losses during the life of the run-off. New business underwritten 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. Liquidity and Capital Resources The primary sources of funds available to Goran are from the management fee arrangements with Granite. At this time SIG pays no dividends to Goran or any of its shareholders. The primary source of funds available to SIG as a holding company are dividends from its primary subsidiaries, IGF, IGF Holdings and GGS Management. SIG also receives $150,000 quarterly pursuant to an administration agreement with IGF to cover the costs of executive management, accounting, investing, marketing, data processing and reinsurance. GGS Management collects billing fees charged to policyholders of Pafco and Superior who elect to make their premium payments in installments. GGS Management also receives management fees under its management agreement with Pafco and Superior. When the Florida Department of Insurance ("Florida -11- [small Goran logo] MANAGEMENT'S DISCUSSION AND ANALYSIS Department") approved the acquisition of Superior by GGS Holdings, it prohibited Superior from paying any dividends (whether extraordinary or not) for four years from the date of Acquisition without the prior written approval of the Florida Department. Extraordinary dividends, within the meaning of the Indiana Insurance Code, cannot be paid by Pafco without the prior approval of the Indiana Insurance Commissioner. The management fees charged to Pafco and Superior by GGS Management are subject to review by the Indiana and Florida Departments of Insurance. The nonstandard automobile insurance subsidiaries' primary sources of funds are premiums, investment income and proceeds from the maturity or sale of invested assets. Such funds are used principally for the payment of claims, operating expenses (primarily management fees), commissions, dividends and the purchase of investments. There is variability to cash outflows because of uncertainties regarding settlement dates for liabilities for unpaid losses. Accordingly, the Company maintains investment programs intended to provide adequate funds to pay claims without forced sales of investments. As claim payments tend to lag premium receipts and due to the growth in premium volume the Company has experienced an increase in its investment portfolio and has not experienced any problems with meeting its obligations for claims payments or management fees. As of December 31, 1997, IGF has the ability to pay $13,404,000 in dividends without prior regulatory approval. Cash flows in the Company's MPCI business differ from cash flows from certain more traditional lines. The Company pays insured losses to farmers as they are incurred during the growing season, with the full amount of such payments being reimbursed to the Company by the federal government within three business days. MPCI premiums are not received from farmers until covered crops are harvested. Such premiums are required to be paid in full to the FCIC by the Company, with interest, if not paid by a specified date in each crop year. During 1997, IGF continued the practice of borrowing funds under a revolving line of credit to finance premiums payable to the FCIC on amounts not yet received from farmers (the "IGF Revolver"). The maximum borrowing amount under the IGF Revolver was $6,000,000 until July 1, 1996, at which time the maximum borrowing amount increased to $7,000,000. The IGF Revolver carried a weighted average interest rate of 9.7%, 8.6%, and 8.75% in 1995, 1996 and 1997, respectively. These payables to the FCIC accrue interest at a rate of 15%, as do the receivables from farmers. By utilizing the IGF Revolver, which bears interest at a floating rate equal to the prime rate plus .25%, IGF avoids incurring interest expense at the rate of 15% on interest payable to the FCIC while continuing to earn 15% interest on the receivables due from the farmer. Subsequent to December 31, 1997, IGF had reduced its contractual borrowing rate to prime minus .75%. The IGF Revolver contains certain covenants which restrict IGF's ability to (i) incur indebtedness and (ii) make loans to others, including affiliates. The IGF Revolver also contains other customary covenants which, among other things, restricts IGF's ability to participate in mergers, acquire another enterprise or participate in the organization or creation of any other business entity. At December 31, 1997, $2,918,000 remains available under the IGF Revolver. On August 12, 1997, SIG issued $135 million in Trust Originated Preferred Securities (the "Preferred Securities Offering"). These Preferred Securities were offered through a wholly-owned trust subsidiary of SIG and are backed by Senior Subordinated Notes to the Trust from SIG. These Preferred Securities were offered under Rule 144A of the SEC and, pursuant to the Registration Rights Agreement executed at closing, SIG filed a Form S- 4 Registration Statement with the SEC on September 16, 1997 to effect the Exchange Offer. The S-4 Registration Statement was declared effective on September 30, 1997 and the Exchange Offer successfully closed on October 31, 1997. The proceeds of the Preferred Securities Offering were used to repurchase the remaining minority interest in GGSH for $61 million, repay the balance of the GGS Senior Credit Facility of $44.9 million and SIG expects to contribute the balance, after expenses, of approximately $24 million to the nonstandard automobile insurers of which $10.5 million was contributed in 1997. Expenses of the issue aggregated $5.1 million and will be amortized over the term of the Preferred Securities (30 years). In the third quarter SIG wrote off the remaining unamortized costs of the GGS Senior Credit Facility of approximately $1.1 million pre-tax or approximately $0.09 per share after income taxes and minority interest. The Preferred Securities have a term of 30 years with semi-annual distribution payments at 9.5% per annum commencing February 15, 1998. The Preferred Securities may be redeemed in whole or in part after 10 years. SIG shall not, and shall not permit any subsidiary, to incur directly or indirectly, any indebtedness unless, on the date of such incurrence ( and after giving effect thereto), the consolidated coverage ratio exceeds 2.5 to 1. The coverage ratio is the aggregate of net earnings, plus interest expense, income taxes, depreciation and amortization divided by interest expense for the same period. The Company plans to fund the distributions on the Preferred Securities from the excess management and billing fees which are paid by the nonstandard automobile insurers to their management company. The Company believes such funds are adequate to pay the distributions on the Preferred Securities for the forseeable future. Additionally, the Company has available dividend capacity from IGF to also meet this funding. -12- [small Goran logo] [photograph of cars on freeway down right margin] Net cash provided by operating activities in 1997 aggregated $14,027,000 compared to $12,728,000 in 1996, excluding the sale of subsidiary stock in 1996 of $18,169,000. This increase in funds provided was caused by additional cash of $15,508,000 from net earnings adjusted for non-cash expenses and realized gains or losses and continued premium growth which results in increased cash flows as loss payments lag receipt of premiums. Net cash used in investing activities increased from $80,482,000 in 1996 to $100,208,000 in 1997 reflecting investment of remaining proceeds from the Preferred Securities Offering and cash flow from operations. In 1997, financing activities provided cash of $89,007,000 compared to cash provided of $72,703,000 in 1996, with funds in 1997 primarily from the Preferred Securities Offering while funds provided in 1996 were primarily from the financing of the acquisition of Superior. Net cash provided by operating activities in 1996 was $30,897,000 compared to $9,637,000 in 1995 for an increase of $21,260,000. This increase was due to the $18,169,000 gain from the SIG IPO as well as improved profitability and growth in written premiums. Loss payments in the nonstandard automobile insurance business tend to lag behind receipt of premiums thus providing cash for operations. Net cash used in investing activities increased from $5,673,000 in 1995 to $80,482,000 in 1996. Included in 1996 was a $66,590,000 use of cash for the Acquisition. The remaining increase in cash used in investing activities in 1996 related to the growth in investments due to increased cash provided by operating activities. The primary items comprising the $72,703,000 of cash provided by financing activities in 1996 were the $48,000,000 of proceeds from the GGS Senior Credit Facility, $21,200,000 minority interest investment received as part of the formation of GGS Holdings and the funding of the Acquisition and $37,969,000 of proceeds from the Initial Public Offering. The Company believes cash flows in the nonstandard automobile segment from premiums, investment income and billing fees are sufficient to meet that segment's obligations to policyholders, operating expenses and debt service for the foreseeable future. This is due primarily to the lag time between receipt of premiums and claims payments. Therefore, the Company does not anticipate additional borrowings for this segment other than in the event of an acquisition. The Company also believes cash flows in the crop segment from premiums and expense reimbursements are sufficient to meet the segment's obligations for the foreseeable future. Due to the more seasonal nature of the crop segment's operations, it may be necessary to obtain short term funding at times during a calendar year by drawing on an existing line of credit. Except for this short term funding and normal increases therein resulting from an increase in the business in force, the Company does not anticipate any significant short or long term additional borrowing needs for this segment. Accordingly, while there can be no assurance as to the sufficiency of the Company's cash flow in future periods, the Company believes that its cash flow will be sufficient to meet all of the Company's operating expenses and debt service for the foreseeable future and, therefore, does not anticipate additional borrowings except as may be necessary to finance acquisitions. While GAAP shareholders' equity was $60,332,000 at December 31, 1997, it does not reflect the statutory equity upon which the Company conducts its various insurance operations. Pafco, Superior and IGF individually had statutory surplus at December 31, 1997 of $19,924,000, $65,146,000 and $42,809,000, respectively. -13- [small Goran logo] MANAGEMENT'S DISCUSSION AND ANALYSIS Effects of Inflation Due to the short term that claims are outstanding in the two product lines the Company underwrites, inflation does not pose a significant risk to the Company. Primary Differences Between GAAP and SAP The financial statements contained herein have been prepared in conformity with Generally Accepted Accounting Principles ("GAAP") which differ from statutory accounting practices ("SAP") prescribed or permitted for insurance companies by regulatory authorities in the following respects: (i) certain assets are excluded as "Nonadmitted Assets" under statutory accounting; (ii) costs incurred by the Company relating to the acquisition of new business are expensed for statutory purposes, (iii) the investment in wholly owned subsidiaries is consolidated for GAAP rather than valued on the statutory equity method. The net income or loss and changes in unassigned surplus of the subsidiaries is reflected in net income for the period rather than recorded directly to unassigned surplus, (iv) fixed maturity investments are reported at amortized cost or market value based on their National Association of Insurance Commissioners ("NAIC") rating; (v) the liability for losses and loss adjustment expenses and unearned premium reserves are recorded net of their reinsured amounts for statutory accounting purposes, (vi) deferred income taxes are not recognized on a statutory basis and (vii) credits for reinsurance are recorded only to the extent considered realizable. New Accounting Standards The NAIC is considering the adoption of a recommended statutory accounting standard for crop insurers, the impact of which is uncertain since several methodologies are currently being examined. Although the Indiana Department has permitted the Company to continue, for its statutory financial statements through March 31, 1998, its practice of recording its MPCI business as 100% ceded to the FCIC with net underwriting results recognized in ceding commissions, the Indiana Department has indicated that in the future it will require the Company to adopt the MPCI accounting practices recommended by the NAIC or any similar practice adopted by the Indiana Department. Since such a standard would be adopted industry wide for crop insurers, the Company would also be required to conform its future GAAP financial statements to reflect the new MPCI statutory accounting methodology and to restate all historical GAAP financial statements consistent with this methodology for comparability. The Company cannot predict what accounting methodology will eventually be implemented or when the Company will be required to adopt such methodology. The Company anticipates that any such new crop accounting methodology will not affect GAAP net earnings. The NAIC currently has a project under way to codify SAP, as existing SAP does not address all accounting issues and may differ from state to state. Upon completion, the codification is expected to replace prescribed or permitted SAP in each state as the new comprehensive statutory basis of accounting for insurance companies. The final format of the codification is uncertain at this time, yet implementation could be required as early as January 1, 1999. Due to the project's uncertainty, the Company has not yet quantified the impact any such changes would have on the statutory capital and surplus or results of operations of the Company's insurance subsidiaries. The impact of adopting this new comprehensive statutory basis of accounting may, however, materially impact statutory capital and surplus. Impact of the Year 2000 Issue The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. This could result in recognizing data using "00" as 1900 rather than 2000 which could result in system failures or miscalculations. This could create a disruption in business activities. The Company's nonstandard automobile operations have been in the process of developing a completely new array of information technology services. During 1998 the Company will be testing and implementing these new systems and expects to be fully operational with these new systems in 1998. The new systems will be completely Year 2000 compliant. However, the intention of the new systems was to improve transaction processing and the Company's expense ratio rather than any Year 2000 issue. The Company has expended most of the funds necessary for implementation of these new systems prior to January 1, 1998 and does not expect expenditures in 1998 to be material. The Company's crop operations have been implementing changes to incorporate Year 2000 concerns for the past two years and expect completion of such efforts in 1998. Expenditures for these changes have not been material and are not expected to be material in the future. While implementation of these new systems or changes to existing systems carries risks that modifications will need to be made in order for them to be completely effective, the Company believes at this time that such modifications will not require material funds and will not be extensive subsequent to December 31, 1998. There is no assurance that such systems will be implemented without a disruption to the Company's operations. -14- [small Goran logo] CONSOLIDATED FINANCIAL STATEMENTS As at December 31 (in thousands of U.S. dollars, except per share data) CONSOLIDATED BALANCE SHEETS
ASSETS 1997 1996 Cash and investments (note 5) $247,124 $202,666 ------- ------- Accounts Receivable Premiums receivable 89,762 63,874 Due from insurance companies 13,782 33,905 Due from associated companies 1,442 140 Accrued and other receivables 2,658 3,330 ------- ------- 107,644 101,249 Reinsurance recoverable on outstanding claims 94,424 33,113 Prepaid reinsurance premiums 36,607 14,983 Capital assets (note 6) 12,230 8,181 Deferred policy acquisition costs 11,849 13,860 Deferred income taxes 2,098 974 Intangibles (note 7) 42,562 4,089 Other assets 6,310 2,227 ------- ------- $560,848 $381,342 ======= ======= LIABILITIES Accounts Payable Due to insurance companies $37,350 $5,755 Accrued and other payables 27,266 21,051 ------- ------- 64,616 26,806 Outstanding claims (notes 2(e) and 4) 152,871 127,045 Unearned premiums (note 4) 118,616 91,207 Bank loans (note 8) 4,182 48,000 ------- ------- 340,285 293,058 ------- ------- Minority interest: Equity in net assets of subsidiaries 25,231 41,026 Preferred Securities (note 3) 135,000 --- ------- ------- 160,231 41,026 ------- ------- Contingent liabilities and commitments (note 12) SHAREHOLDERS EQUITY 60,332 47,258 ------- ------- $560,848 $381,342 ======= =======
See accompanying notes to Consolidated Financial Statements Approved on behalf of the board /s/ /s/ Director Director -15- [small Goran logo] CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 (in thousands of U.S. Dollars, except per share data) CONSOLIDATED STATEMENTS OF EARNINGS
REVENUE 1997 1996 1995 Gross premiums written $448,982 $299,376 $146,603 ======= ======= ======= Net premiums written $281,896 $213,778 $81,822 ======= ======= ====== Net premiums earned $276,540 $208,883 $72,530 Fee income 20,309 9,286 2,170 Net investment income 12,777 7,745 3,868 Net realized capital gains (losses) 9,393 (637) (198) ------- ------- ------ Total Revenue 319,019 225,277 78,370 ------- ------- ------ EXPENSES Net claims incurred 210,634 146,274 51,453 Commissions and operating expenses (note 14) 66,197 48,647 15,502 Amortization of intangibles 1,197 411 --- Interest expense 3,087 4,961 1,761 ------- ------- ------ Total Expenses 281,115 200,293 68,716 ------- ------- ------ Earnings before undernoted items 37,904 24,984 9,654 Provision for income taxes (note 10) 11,596 8,056 2,497 Preferred security distributions, net of tax 3,120 --- --- Minority interest 7,205 2,801 --- ------ ------ ----- Earnings from continuing operations 15,983 14,127 7,157 Net earnings (loss) from discontinued operations (note 3) (3,545) (1,000) 14 Gain on sale of subsidiary stock (note 3) --- 18,169 --- ------- ------ ----- Net earnings $12,438 $31,296 $7,171 ====== ====== ===== Earnings per share from continuing operations $2.86 $2.67 $1.43 Earnings per share from continuing operations - fully diluted $2.70 $2.48 $1.24 Net earnings per share $2.22 $5.92 $1.43 Net earnings per share - fully diluted $2.12 $5.28 $1.24 ==== ==== ====
See accompanying Notes to Consolidated Financial Statements -16- [small Goran logo] CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 (in thousands of U.S. Dollars, except per share data) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Capital Cumulative Retained Total Stock Contributed Translation Earnings Shareholders' (Note 9) Surplus Adjustment (Deficit) Equity Balance at December 31, 1995 $16,817,000 $ --- $(300,000) $(3,895,000) $12,622,000 Issuance of common shares 599,000 --- --- --- 599,000 Increase in contributed surplus --- 2,775,000 --- --- 2,775,000 Change in cumulative translation adjustment --- --- (34,000) --- (34,000) Net earnings --- --- --- 31,296,000 31,296,000 ---------- --------- ------- ---------- ---------- Balance at December 31, 1996 17,416,000 2,775,000 (334,000) 27,401,000 47,258,000 Issuance of common shares 594,000 --- --- --- 594,000 Change in cumulative translation adjustment --- --- 42,000 --- 42,000 Net earnings --- --- --- 12,438,000 12,438,000 ----------- --------- ------- ---------- ---------- Balance at December 31, 1997 $18,010,000 $2,775,000 $(292,000) $39,839,000 $60,332,000 ========== ========= ======= ========== ==========
See accompanying Notes to Consolidated Financial Statements -17- [small Goran logo] CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 (in thousands of U.S. Dollars, except per share data) CONSOLIDATED STATEMENTS OF CHANGES IN CASH RESOURCES
1997 1996 1995 Cash provided by (used in): Operating activities Net earnings $12,438 $31,296 $ 7,171 Items not involving cash: Amortization 5,258 2,438 693 Minority interest share in net earnings 7,205 2,801 (16) Loss (gain) on sale of investments (9,393) 637 198 Gain on sale of capital assets --- (4) (7) ------- ------ ------ Working capital provided by operating activities 15,508 37,168 8,039 Changes in working capital relating to operations (note 15) (1,481) (6,271) 1,598 ------- ------ ------ 14,027 30,897 9,637 ------- ------ ------ Financing activities Proceeds from issuance of preferred securities 129,877 --- --- Repayment of debentures --- (11,085) (1,462) Proceeds from (repayment of) bank loans (43,818) 42,189 220 Proceeds from consolidated subsidiary minority interest owners 2,354 41,000 --- Issue of share capital 594 599 303 ------- ------ ------ 89,007 72,703 (939) ------- ------ ------ Investing activities Purchase of minority interest (61,000) --- --- Acquisition of Superior --- (66,590) --- Net purchase of marketable securities (34,535) (11,996) (4,147) Net purchase of capital assets (5,803) (2,459) (1,681) Other, net 1,130 563 155 ------- ------ ------ (100,208) (80,482) (5,673) ------- ------ ------ Increase in cash resources during the year 2,826 23,118 3,025 Cash resources, beginning of year 33,731 10,613 7,588 ------- ------ ------ Cash resources, end of year $36,557 $33,731 $10,613 ======= ====== ====== Cash resources are comprised of: Cash $13,324 $ 4,679 $ 4,171 Short-term investments $23,233 29,052 6,442 ------- ------ ------ $36,557 $33,731 $10,613 ======= ====== ======
See accompanying Notes to Consolidated Financial Statements -18- [small Goran logo] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 (in thousands of U.S. dollars, except share and per share data) 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, in 38 states, primarily in the Midwest and Southern United States. SIG's wholly-owned 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; GGS Management, Inc. ("GGS") - a management company for the nonstandard automobile operations domiciled in Delaware; Superior Insurance Company ("Superior") - an insurance company domiciled in Florida; Superior American Insurance Company ("Superior American") - an insurance company domiciled in Florida; Superior Guaranty Insurance Company ("Superior Guaranty") - an insurance company domiciled in Florida; Pafco General Insurance Company ("Pafco") - an insurance company domiciled in Indiana; and IGF Holdings, Inc. ("IGFH") - a holding company for the crop operations which includes IGF Insurance Company ("IGF") - an insurance company domiciled in Indiana. 2. Granite Reinsurance Company Ltd. ("Granite Re") - a finite risk reinsurance company based in Barbados. 3. Granite Insurance Company ("Granite") - a Canadian federally licensed insurance company which ceased writing new insurance policies on January 1, 1990. 4. Symons International Group, Inc. of Ft. Lauderdale, Florida ("SIGF") - a Florida based surplus lines insurance agency. (See Note 3.) 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. (See Note 3.) 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. (See Note 3.) On August 12, 1997, SIG acquired the 48% minority interest in GGSH from Goldman Funds through a purchase business combination. (See Note 3.) -19- [small Goran logo] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 (in thousands of U.S. dollars, except share and per share data) 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: (i) DIRECT CLAIMS The reserve includes the recognition of the time value of money on direct claims liabilities. Using an interest rate of 6.0% (1996 - 7.5%) net claims incurred have been reduced by $504 (1996 increased by $66) and outstanding claims at December 31, 1997 reduced by $1,765 (1996 - $1,261). (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 6.0% (1996 - 7.5%) net claims incurred would have been increased by $64 (1996 - increased by $730 ) and outstanding claims at December 31, 1997 would have been reduced by $1,554 (1996 - $1,618). -20- [small Goran logo] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 (in thousands of U.S. dollars, except share and per share data) (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 1997. (k) Preferred Securities Preferred securities represent SIG-obligated mandatorily redeemable securities of subsidiary holding solely parent debentures and are reported at their liquidation value under minority interest. Distributions on these securities are charged against consolidated earnings. 3. CORPORATE REORGANIZATION, ACQUISITIONS AND PUBLIC OFFERINGS 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. Immediately 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. -21- [small Goran logo] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 (in thousands of U.S. dollars, except share and per share data) On January 31, 1996, the Company and SIG entered into an agreement ("Agreement") with GS Capital Partners II, L.P. (the "Goldman Funds") to create GGSH, to be owned 52% by the Company and 48% by the Goldman Funds. In accordance with the Agreement, on April 30, 1996, the Company contributed certain fixed assets and Pafco with a combined book value, determined in accordance with generally accepted accounting principles, of $17,186, to GGSH. Goldman Funds contributed $21,200 to GGSH, in accordance with the Agreement. In return for the cash contribution of $21,200, Goldman Funds received a minority interest share in GGSH at the date of contribution of $18,425, resulting in a $2,775 increase to additional paid-in capital. At December 31, 1996, Goldman Funds' minority interest share consisted of the following: Contribution April 30, 1996 $18,425 GGSH earnings 2,801 ------ $21,226 ====== 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 $66,590. In conjunction with the Acquisition, the Company's funding was through a senior bank facility of $48,000 and a cash contribution from Goldman Funds of $21,200. The acquisition of Superior was accounted for as a purchase and recorded as follows: Assets acquired $165,826 Liabilities assume 100,566 Net assets acquire 65,260 Purchase price 66,590 ------ Goodwill $1,330 ====== The Company's results from operations for the year ended December 31, 1996 include the results of Superior subsequent to April 30, 1996. On August 12, 1997, the Company purchased the remaining minority interest in GGSH for $61 million in cash. The excess of the acquisition price over the minority interest liability of $25,355 aggregated approximately $35,645 and was assigned to goodwill as the fair market value of acquired assets approximated their carrying value. Goodwill is amortized over a 25-year period on a straight-line basis based upon management's estimate of the expected benefit period. 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 balance of its debentures. 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 earnings as follows: 1996 1995 (unaudited) Revenues $269,362 $185,629 Earnings from continuing operations $16,318 $9,421 Earnings per share from continuing operations $3.08 $1.88 -22- [small Goran logo] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 (in thousands of U.S. dollars, except share and per share data) 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 in 1996. On August 12, 1997, SIG issued $135 million in Trust Originated Preferred Securities ("Preferred Securities"). These Preferred Securities were offered through a wholly-owned trust subsidiary of SIG and are backed by Senior Subordinated Notes to the Trust from SIG. These Preferred Securities were offered under Rule 144A of the SEC ("Preferred Securities Offering") and, pursuant to the Registration Rights Agreement executed at closing, SIG filed a Form S-4 Registration Statement with the SEC on September 16, 1997 to effect the Exchange Offer. The S-4 Registration Statement was declared effective on September 30, 1997 and the Exchange Offer successfully closed on October 31, 1997. The proceeds of the Preferred Securities Offering were used to repurchase the remaining minority interest in GGSH for $61 million, repay the balance of the term debt of $44.9 million and SIG expects to contribute the balance, after expenses, of approximately $24 million to the nonstandard automobile insurers of which $10.5 million was contributed in 1997. Expenses of the issue aggregated $5.1 million and will be amortized over the term of the Preferred Securities (30 years). In the third quarter the Company wrote off the remaining unamortized costs of the term debt of approximately $1.1 million pre-tax or approximately $0.09 per share after income taxes and minority interest. The Preferred Securities have a term of 30 years with semi-annual distribution payments at 9.5% per annum commencing February 15, 1998. The Preferred Securities may be redeemed in whole or in part after 10 years. SIG shall not, and shall not permit any subsidiary, to incur directly or indirectly, any indebtedness unless, on the date of such incurrence (and after giving effect thereto), the Consolidated Coverage Ratio exceeds 2.5 to 1. The Coverage Ratio is the aggregate of net earnings, plus interest expense, income taxes, depreciation, and amortization divided by interest expense for the same period. Assuming the Preferred Securities Offering took place at January 1, 1997, the proforma effect of this offering on the Company's consolidated statement of earnings for the year ended December 31, 1997 is as follows: Unaudited (In thousands) Revenues $319,019 Net earnings $11,163 Net earnings per common share $1.99 Proforma results for the Preferred Securities Offerings for 1996 and 1995 would not be meaningful due to the Acquisition and IPO in 1996. 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. In December 1997, the Company discontinued the operations of SIGF. Accordingly, the results of these operations have been accounted for separately from the results of ongoing operations. The net loss from discontinued operations was $3,545 and $1,000 and net earnings of $14 for the years ended December 31, 1997, 1996 and 1995, respectively. -23- [small Goran logo] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 (in thousands of U.S. dollars, except share and per share data) 4. REINSURANCE 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 $250 (1996 - $250) with the result that claims incurred 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. The effect of reinsurance on the activities of the Group can be summarized as follows:
1997 Gross Ceded Net Premiums written $448,982 $(167,086) $281,896 Premiums earned 422,200 (145,660) 276,540 Incurred losses and loss adjustment expenses 312,079 (101,445) 210,634 Commission expense (note 14) 65,529 (74,426) 8,898 Outstanding claims 152,871 (94,424) 58,447 Unearned premiums 118,616 (36,607) 82,009 1996 Gross Ceded Net Premiums written $299,376 $(85,598) $213,778 Premiums earned 303,187 (94,304) 208,883 Incurred losses and loss adjustment expenses 237,882 (91,608) 146,274 Commission expense (note 14) 48,601 (44,096) 4,505 Outstanding claims 127,045 (33,113) 93,932 Unearned premiums 91,207 (14,983) 76,224 1995 Gross Ceded Net Premiums written $146,603 $(64,781) $ 81,822 Premiums earned 141,824 (69,294) 72,530 Incurred losses and loss adjustment expenses 145,261 (93,808) 51,453 Commission expense (note 14) 25,069 (25,950) (881) Outstanding claims 87,655 (41,667) 45,988 Unearned premiums 33,159 (6,263) 26,896
5. CASH AND INVESTMENTS 1997 1996
Book Market Book Market Value Value Value Value Cash $13,324 $13,324 $4,679 $4,679 Short-term investments 23,233 23,233 29,052 29,052 Equities 35,446 36,631 28,443 29,431 Bonds and debentures 172,401 174,215 137,521 138,383 Mortgages 2,220 2,220 2,430 2,430 Real Estate 450 450 466 466 Other loan receivable 50 50 75 75 ------- ------- ------- ------- Total Cash & Investments $247,124 $250,123 $202,666 $204,516 ======= ======= ======= =======
-24- [small Goran logo] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 (in thousands of U.S. dollars, except share and per share data) At December 31, 1997, cash and investments of approximately $42,367 (1996 - $41,659) 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. 6. CAPITAL ASSETS
1997 Accumulated 1996 Cost Depreciation Net Net Land $226 $--- $226 $226 Buildings 5,421 1,323 4,098 3,154 Furniture, fixture and equipment 12,119 4,242 7,877 4,788 Automobiles 46 17 29 13 ------ ----- ----- ----- Total $17,812 $5,582 $12,230 $8,181 ====== ===== ====== =====
Depreciation expense related to capital assets for the years ended December 31, 1997, 1996 and 1995, was $1,754, $1,811 and $483, respectively. 7. INTANGIBLES Intangible assets at December 31 are as follows:
1997 Accumulated 1996 Cost Depreciation Net Net Goodwill $36,975 $654 $36,321 $1,330 Deferred preferred security debt costs 5,123 70 5,053 --- Deferred debt costs --- --- --- 1,232 Organization costs 1,527 339 1,188 1,527 ------ ----- ------ ----- Total $43,625 $1,063 $42,562 $4,089 ====== ===== ====== =====
Amortization expense related to intangible assets for the years ended December 31, 1997, 1996, and 1995 was $1,197, $411 and $0, respectively. 8. BANK LOANS IGF maintained a secured revolving line of credit, bearing interest at prime plus 25 basis points, in the amount of $7,000,000 at December 31, 1997. Interest on this line of credit was at the New York prime rate (8.50% at December 31, 1997) plus 0.25% adjusted daily. Subsequent to December 31, 1997 this rate was adjusted to prime minus .75%. 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 capital purchases and requires the maintenance of certain financial ratios. At December 31, 1997, IGF was in compliance with all covenants associated with the line or had received proper waivers. The weighted average interest rate on the line of credit was 8.75%, 8.6% and 9.7% during 1997, 1996 and 1995, respectively. At December 31, 1997, IGF had outstanding borrowings in the amount of $4,182 (1996 - $NIL). -25- [small Goran logo] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 (in thousands of U.S. dollars, except share and per share data) The term debt at GGS, was repaid in full on August 12, 1997. Interest on the term debt was 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 repayment. 9. CAPITAL STOCK The Company's authorized share capital consists of: (a) First Preferred Shares An unlimited number of first preferred shares of which none are outstanding at December 31, 1997 (1996 NIL). (b) Common Shares An unlimited number of common shares of which 5,730,276 are outstanding as at December 31, 1997 (1996 - 5,405,820). During the year, pursuant to the exercise of warrants and options, the Company issued 324,456 (1996 - 341,591) common shares for aggregate consideration in the amount of $594 (1996 - $599). The Company has reserved for issue 546,856 (1996 - 709,149) common shares consisting of: i) 0 (1996 - 182,250) shares issuable on the exercise of warrants for the purchase of common shares at $2.19 per share, issued to former debenture holders; and ii) 546,856 (1996 - 526,899) shares pursuant to the employee incentive share option plan as follows: Number of Shares Exercise Price ($ Cdn) Expiry Date ---------------- ---------------------- ------------ 2,000 7.25 April 25, 2000 8,000 11.00 December 7, 2000 47,049 2.48 March 8, 2001 45,000 5.25 July 14, 2002 47,364 7.25 April 25, 2003 1,000 5.25 July 14, 2004 1,000 7.25 April 25, 2005 7,861 39.00 August 11, 2005 207,088 16.50 May 13, 2006 180,494 29.00 January 29, 2007 ------- 546,856 ======= The warrants expired on December 31, 1997, leaving 24,625 warrants unexercised. iii) 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. The options granted to the Company's Chairman (436,567 shares) -26- [small Goran logo] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 (in thousands of U.S. dollars, except share and per share data) vest and become exercisable in full on the first anniversary of the grant date. All of the remaining outstanding stock options vest and become exercisable in three equal installments on the first, second and third anniversaries of the date of grant. All options were granted at an exercise price equal to the fair market value of the Company's common stock at time of grant. Information regarding the SIG Stock Option Plan is summarized below:
1997 1996 Weighted Weighted average average exercise exercise Shares price Shares price - ------------------------------------------------------------------------------------------------------ Outstanding at the beginning of the year 830,000 $12.50 --- $ --- - ------------------------------------------------------------------------------------------------------ Granted 185,267 15.35 830,000 12.50 - ------------------------------------------------------------------------------------------------------ Exercised (1,667) 12.50 --- --- - ------------------------------------------------------------------------------------------------------ Forfeited (13,600) 12.50 --- --- ------- --- - ------------------------------------------------------------------------------------------------------ Outstanding at the end of the year 1,000,000 $13.03 830,000 $12.50 ========= ======= - ------------------------------------------------------------------------------------------------------ Options exercisable at year end 521,578 --- - ------------------------------------------------------------------------------------------------------ Available for future grant --- 170,000 - ------------------------------------------------------------------------------------------------------
Options Options Weighted outstanding exercisable average weighted weighted remaining average average Number life (in exercise Number exercise Range of exercise prices outstanding years) price exercisable price - ------------------------------------------------------------------------------------------------------ $12.50-$13.75 933,733 8.9 $12.66 521,578 $12.50 - ------------------------------------------------------------------------------------------------------ $17.75-$19.25 66,267 9.7 18.23 --- --- ------ --- - ------------------------------------------------------------------------------------------------------ 1,000,000 521,578 ========= ======= - ------------------------------------------------------------------------------------------------------
The Board of Directors of GGSH adopted the GGS Management Holdings, Inc. Stock Option Plan (the "GGS Stock Option Plan"), effective April 30, 1996. The GGS Stock Option Plan authorizes the granting of nonqualified and incentive stock options to such officers and other key employees as may be designated by the Board of Directors of GGSH. Options granted under the GGS Stock Option Plan have a term of ten years and vest at a rate of 20% per year for the five years after the date of the grant. The exercise price of any options granted under the GGS Stock Option Plan shall be subject to the following formula: 50% of each grant of options having an exercise price determined by the Board of Directors of GGSH at its discretion, with the remaining 50% of each grant of options subject to a compound annual increase in the exercise price of 10%, with a limitation on the exercise price escalation as such options vest. -27- [small Goran logo] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 (in thousands of U.S. dollars, except share and per share data) Information regarding the GGS Stock Option Plan is summarized below:
1997 1996 Weighted Weighted average average exercise exercise Shares price Shares price - --------------------------------------------------------------------------------------------------------------- Outstanding at the beginning of the year 55,972 $51.75 --- $ --- - --------------------------------------------------------------------------------------------------------------- Granted --- --- 55,972 51.75 - --------------------------------------------------------------------------------------------------------------- Forfeited (1,950) 51.75 --- --- ------ --- - --------------------------------------------------------------------------------------------------------------- Outstanding at the end of the year 54,022 $51.75 55,972 $51.75 ====== ====== - --------------------------------------------------------------------------------------------------------------- Options exercisable at year end 10,804 --- - --------------------------------------------------------------------------------------------------------------- Available for future grant 57,089 55,139 - ---------------------------------------------------------------------------------------------------------------
Options Options Weighted outstanding exercisable average weighted weighted remaining average average Number life (in exercise Number exercise Range of exercise prices outstanding years) price exercisable price - ----------------------------------------------------------------------------------------------------------------- $44.17-$53.45 37,815 8.3 $46.13 10,804 $46.38 - ----------------------------------------------------------------------------------------------------------------- $58.79-$71.14 16,207 8.3 64.87 --- --- ------ --- - ----------------------------------------------------------------------------------------------------------------- 54,022 10,804 ====== ====== - -----------------------------------------------------------------------------------------------------------------
10. INCOME TAXES The provision for (recovery of) income taxes is analyzed as follows:
1997 1996 1995 ---- ----- ---- Consolidated net earnings before income taxes and discontinued operations $37,904 $43,153 $9,654 ====== ====== ===== Incomes taxes at Canadian statutory rates $16,867 $19,203 $4,287 Effect on taxes resulting from: Tax exempt income (1,714) (1,495) (1,571) U.S. statutory rate differential (3,262) (2,566) (750) Application of losses carried forward and reserves (292) --- (399) Nontaxable gain on IPO --- (8,085) --- Operating loss for which no current income tax benefit is recognized 116 1,027 785 Timing differences 1,124 (73) (145) Other, net (119) (28) 145 ------- ------- ------ Current tax provision 12,720 7,983 2,352 Deferred tax provision (recovery) (1,124) 73 145 ------- ------- ------ $11,596 $ 8,056 $2,497 ====== ======= ======
At December 31, 1997, the Company's Canadian subsidiary had reserves, unclaimed for income tax purposes, of $677 (1996 - $1,027). In addition, the Company and its consolidated subsidiaries have operating loss carry forwards of approximately $8,444 (1996 - $12,591) for tax purposes which expire primarily after 1997. The Company also has net capital losses carried forward of approximately $7,875 (1996 - $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 not been recorded in these financial statements. -28- [small Goran logo] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 (in thousands of U.S. dollars, except share and per share data) 11. RELATED PARTY TRANSACTIONS 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. During 1997, SIGL entered into an agreement with Goran whereby as consideration for release of 333,400 of the escrowed shares, SIGL repaid $1,444 of the loan. The balance due to Goran of $2,226 continues to be guaranteed by SIGL and is secured by the 100,000 remaining escrowed shares. Included in other receivables are $346 (1996 - $595) 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. 12. CONTINGENT LIABILITIES AND COMMITMENTS 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. On October 27, 1997, IGF reached an agreement with the FCIC to settle a lawsuit started March 23, 1995, with both parties dismissing all claims against one another which were subject to the litigation. The FCIC has agreed to pay IGF a lump sum payment of $60,000. The Company bought an office building in Des Moines, Iowa, as its crop insurance division home office. The purchase price was $2.6 million. The sale of the old building is expected to close on April 1, 1998 for $1,350,000. 13. SEGMENTED INFORMATION
United States United States Nonstandard 1997 Crop Auto Other Consolidated Gross premiums written $126,401 $323,915 $(1,334) $448,982 ======= ======= ===== ======= Net premiums written $20,796 $256,745 $4,355 $281,896 ====== ======= ===== ======= Net premiums earned $20,794 $251,020 $4,726 $276,540 Fee income 4,764 15,515 30 20,309 Net investment income 191 10,969 1,617 12,777 Net realized capital gains (losses) (18) 9,462 (51) 9,393 --- ----- ------ --------- Total revenue 25,731 286,966 6,322 319,019 ------ ------- ----- ------- Net claims incurred 16,185 195,900 (1,451) 210,634 Commission and operating expenses (11,551) 72,463 5,285 66,197 Interest and amortization of intangibles 235 --- 4,049 4,284 --- --- ----- ----- Total expenses 4,869 268,363 7,883 281,115 ----- ------- ----- ------- Earnings (loss) before income taxes, minority interest and discontinued operations $20,862 $18,603 $(1,561) $37,904 ====== ====== ===== ====== Identifiable assets $108,650 $302,795 $149,403 $560,848 ======= ======= ======= =======
-29- [small Goran logo] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 (in thousands of U.S. dollars, except share and per share data)
United States United States Nonstandard 1996 Crop Auto Other Consolidated Gross premiums written $110,059 $187,176 $2,141 $299,376 ======= ======= ===== ======= Net premiums written $23,013 $186,569 $4,196 $213,778 ====== ======= ===== ======= Net premiums earned $23,013 $168,746 $17,124 $208,883 Fee income 1,672 7,578 36 9,286 Net investment income 181 6,489 1,075 7,745 Net realized capital gains (losses) (1) (1,014) 378 (637) -- ----- --- ---- Total revenue 24,865 181,799 18,613 225,277 ------ ------- ------ ------- Net claims incurred 12,724 124,385 9,165 146,274 Commission and operating expenses (6,095) 46,796 7,946 48,647 Interest and amortization of intangibles 551 --- 4,821 5,372 --- --- ----- ----- Total expenses 7,180 171,181 21,932 200,293 ----- ------- ------ ------- Earnings (loss) before income taxes, minority interest and discontinued operations $17,685 $10,618 $(3,319) $24,984 ====== ====== ===== ====== Identifiable assets $72,916 $260,332 $48,094 $381,342 ====== ======= ====== =======
United States United States Nonstandard 1995 Crop Auto Other Consolidated Gross premiums written $70,374 $49,005 $27,224 $146,603 ====== ====== ====== ======= Net premiums written $11,608 $37,302 $32,912 $81,822 ====== ====== ====== ====== Net premiums earned $11,608 $34,460 $26,462 $72,530 Fee income 384 1,787 (1) 2,170 Net investment income 674 624 2,570 3,868 Net realized capital gains (losses) 164 (508) 146 (198) --- --- --- --- Total revenue 12,830 36,363 29,177 78,370 ------ ------ ------ ------ Net claims incurred 8,629 25,423 17,401 51,453 Commission and operating expenses (7,466) 12,929 10,039 15,502 Interest and amortization of intangibles 627 --- 1,134 1,761 --- --- ----- ----- Total expenses 1,790 38,352 28,574 68,716 ----- ------ ------ ------ Earnings (loss) before income taxes, minority interest and discontinued operations $11,040 $(1,989) $603 $9,654 ====== ====== === ===== Identifiable assets $59,733 $47,372 $53,711 $160,816 ====== ====== ====== ======
Other results are comprised of the operations of Granite, Granite Re and corporate operations of Goran and SIG. The negative premiums for other in 1997 result from return premiums on prior periods for reinsurance transactions which has no significant impact on net earnings. See also Note 1. -30- [small Goran logo] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 (in thousands of U.S. dollars, except share and per share data) 14. REGULATORY MATTERS 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, 1997 amounted to $145,859 (1996 - $120,229). 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 Commissioner ("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, 1997, 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, 1997, 1996 and 1995 were gains of $26,589, $12,277 and $9,653, respectively. 15. CHANGES IN WORKING CAPITAL RELATING TO OPERATIONS
1997 1996 1995 Increase in accounts receivable $(6,395) $(19,448) $(5,252) Decrease (increase) in reinsurance recoverable on outstanding claims (61,311) 8,464 (25,930) Decrease (increase) in prepaid reinsurance premiums (21,624) (8,785) 916 Decrease (increase) in deferred policy acquisition costs 2,011 1,649 (3,058) Decrease (increase) in deferred income taxes (1,124) 73 147 Increase in other assets (4,083) (2,433) (470) Increase (decrease) in accounts payable 37,810 5,576 (2,291) Increase (decrease) in outstanding claims 25,826 (4,545) 28,289 Increase in unearned premiums 27,409 13,178 9,247 ------ ------ ------ $(1,481) $(6,271) $1,598 ====== ======= ======
16. 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: -31- [small Goran logo] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 (in thousands of U.S. dollars, except share and per share data) (a) Earnings and retained earnings
1997 1996 1995 Net earnings in accordance with Canadian GAAP $12,438 $31,296 $7,171 Add effect of difference in accounting for: Deferred income taxes (see note (d)) 177 (64) (344) Minority interest 107 (177) --- Outstanding claims (see note (e)) (504) 62 (161) ------ ------- ----- Net earnings in accordance with U.S. GAAP $12,218 $31,117 $6,666 ====== ====== ======
Applying U.S. GAAP, deferred income tax assets would be increased by $1,975 and $1,798, outstanding claims would be increased by $1,765 and $1,261, and cumulative translation adjustment would be increased by $0 and $41 as at December 31, 1997 and 1996, respectively. As a result of these adjustments, retained earnings would be increased by $140 and increased by $360, which is net of related minority interest of $70 and $177, as at December 31, 1997 and 1996, 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. Basic earnings per share are computed based on the weighted average number of common shares outstanding during the year. 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 basic and fully diluted earnings per share:
1997 1996 1995 Basic 5,590,576 5,286,270 5,012,005 Fully Diluted 5,886,211 5,724,476 5,567,644
Earnings per share, as determined in accordance with U.S. GAAP, are as follows:
1997 1996 1995 Basic earnings per share from continuing operations $2.82 $2.67 $1.33 Fully diluted earnings per share from continuing operations $2.68 $2.47 $1.20 Basic earnings per share $2.19 $5.89 $1.33 Fully diluted earnings per share $2.08 $5.44 $1.20
(c) Supplemental cash flow information Cash paid for interest and income taxes is summarized as follows:
1997 1996 1995 Cash paid for interest $ 3,467 $4,005 $1,548 Cash paid for income taxes, net of refunds $10,979 $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. (See note (a)) -32- [small Goran logo] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 (in thousands of U.S. dollars, except share and per share data) (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 $346 and $595 as at December 31, 1997 and 1996, respectively, to reflect the loans due from certain shareholders which relate to the purchase of common shares of the Company. (g) Unrealized gain (loss) on investments U.S. GAAP require that unrealized gains and 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 $1,336 and by $820, which is net of deferred tax of $1,005 and $625 and related minority interest of $658 and $405, as at December 31, 1997 and 1996, respectively, before consideration for deferred taxes. 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:
1997 1996 Shareholders' equity in accordance with Canadian GAAP $60,332 $47,258 Add (deduct) effect of difference in accounting for: Deferred income taxes (see note (a)) 1,975 1,798 Outstanding claims (see note (a)) (1,765) (1,261) Minority interest portion (70) (177) Receivables from sale of capital stock (see note (f)) (346) (595) Unrealized gain on investments (see note (g)) 1,336 820 ------ ------ Shareholders' equity in accordance with U.S. GAAP $61,462 $47,843 ====== ======
17. SUBSEQUENT EVENT On March 2, 1998, the Company announced that its subsidiary, IGF, signed a definitive agreement with CNA to purchase its multi-peril and crop hail operations. IGF will reinsure back to CNA a small portion of the Company's total crop book of business. CNA wrote approximately $110 million of multi-peril and crop hail insurance business in 1997. Starting in the year 2000, assuming no event of change of control as defined in the agreement, IGF can purchase the insurance premiums reinsured to CNA through a call provision or CNA can require IGF to buy the insurance premiums reinsured to CNA. Regardless of the method of takeout of CNA, CNA must not compete in MPCI or crop hail for a period of time after the buyout. The formula for the buyout is based on a multiple of average pre-tax earnings that CNA receives from reinsuring IGF's book of business. -33- 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 are 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, 1997. 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 Company's assets. The independent accounting firm of Schwartz Levitsky Feldman, Chartered Accountants has audited and reported on the Company's financial statements. Their opinion is based upon audits conducted by them in accordance with generally accepted auditing standards to obtain reasonable assurance 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 representatives to review the internal accounting controls, the consolidated financial statements and other financial reporting matters. In addition to having unrestricted access to the books and records of the Company, the independent external auditors also have unrestricted access to the Audit Committee. The Audit Committee reports its findings and makes recommendations to the Board of Directors. /s/ Alan G. Symons Alan G. Symons Chief Executive Officer /s/ Gary P. Hutchcraft Gary P. Hutchcraft Vice President and Chief Financial Officer February 27, 1998 AUDITORS' REPORT To the Shareholders of Goran Capital Inc. We have audited the consolidated balance sheets of Goran Capital Inc. as at December 31, 1997 and 1996 and the consolidated statements of earnings, shareholders' equity and changes in cash resources for each of the three years in the period ended December 31, 1997. 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 -34- [small Goran logo] MARKET INFORMATION 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, 1997 and 1996 and the results of its operations and the changes in its cash resources for each of the three years in the period ended December 31, 1997 in accordance with generally accepted accounting principles. Chartered Accountants Toronto, Ontario February 27, 1998 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, 1997 there were approximately 100 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 1,000. The number of common shares outstanding on December 31, 1997 totaled 5,730,276. 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 1997, 1996 and 1995. TORONTO STOCK EXCHANGE
1997 1996 1995 Quarter Ended High Low High Low High Low March 31 29.15 18.98 14.02 8.76 6.19 4.92 June 30 26.05 19.31 14.05 10.59 6.10 5.37 September 30 39.35 24.27 19.35 11.32 7.10 6.10 December 31 39.32 27.75 20.26 16.79 8.74 7.47
NASDAQ
1997 1996 1995 Quarter Ended High Low High Low High Low March 31 29.25 18.75 13.125 8.625 6.25 3.80 June 30 26.25 19.75 13.125 10.75 6.125 5.125 September 30 40.00 24.50 19.375 11.125 7.125 5.25 December 31 39.50 27.75 22.00 17.00 8.75 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. -35- [small Goran logo] CORPORATE DIRECTORY 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 Montreal, Quebec Partner Vision 2120, Inc. *Alan G. Symons Indianapolis, Indiana 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, General Counsel and Secretary 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 -36- [small Goran logo] 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 19, 1998 at 10:00 a.m. 181 University Avenue, Suite 1101, Toronto, Ontario Canada 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 30339 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 Corporate Office 6000 Grand Avenue Des Moines, Iowa 50312 Tel: 515-633-1000 Fax: 515-633-1010 IGF Mid West 6000 Grand Avenue Des Moines, Iowa 50312 Tel: 515-633-1000 Fax: 515-633-1012 IGF Mid East 3900 Wood Duck Drive, Suite B Springfield, Illinois 62707 Tel: 217-726-2450 Fax: 217-726-2451 IGF Southwest 7914 Abbeville Avenue Lubbock, Texas 79424 Tel: 806-783-3010 Fax: 806-783-3017 IGF South 101 Business Park Drive, Suite C Jackson, Mississippi 39213 Tel: 601-957-9780 Fax: 601-957-9793 IGF East 8000 Regency Park, Suite 280 Cary, North Carolina 27511 Tel: 919-462-7850 Fax: 919-462-7863 IGF West 1750 Bullard Avenue, Suite 106 Fresno, California 93710 Tel: 209-432-0196 Fax: 209-432-0294 IGF North 116 South Main, Box 1090 Stanley, North Dakota 58784 Tel: 701-628-3536 Fax: 701-628-3537 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 BACK PAGE [Goran logo] GORAN CAPITAL INC. 181 University Avenue 4720 Kingsway Drive Box 11, Suite 1101 Indianapolis, Indiana Toronto, Ontario 46205 Canada M5H 3M7 Tel: 416-594-1155 Tel: 317-259-6400 Fax: 416-594-0711 Fax: 317-259-6395 EX-99 16 MANAGEMENT PROXY CIRCULAR Exhbit 99 GORAN CAPITAL INC. NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS NOTICE IS HEREBY GIVEN that the Annual and a Special Meeting (the "Meeting") of the Shareholders of Goran Capital Inc. (the "Corporation") will be held at 181 University Avenue, Suite 1101, Toronto, Ontario, on Tuesday, May 19, 1998, at 10:00 a.m., Toronto time, for the following purposes: 1. To receive the annual report and financial statements of the Corporation for the year ended December 31, 1997, 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 thought fit, approve certain amendments to the Corporation's Share Option Plan. 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, 1998. BY ORDER OF THE BOARD ALAN G. SYMONS CEO and President March 27, 1998 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 our transfer agent, Montreal Trust Company, 151 Front Street West, 8th Floor, Toronto, Ontario M5J 2N1. 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 Tuesday, May 19, 1998, at 10:00 a.m., or at any and all adjournments thereof, for the purposes set forth in the accompanying Notice of 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 specified in the enclosed form of proxy are directors and officers of the Corporation and will represent management at the Meeting. Each shareholder of the Corporation has the right to appoint a person (who need not be a shareholder), other than the persons specified in the enclosed form of proxy, to attend for him and on his behalf at the Meeting or any adjournment thereof. Such right may be exercised by striking out the names of the specified persons and inserting the name of the shareholder's nominee in the space provided or by completing another appropriate form of proxy and, in either case, signing, dating and delivering the form of proxy to the Corporation prior to the holding of the Meeting. 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. As of the date of this Circular, management of the Corporation knows of no such amendments, variations or other matters to come before the Meeting other than the matter referred to in the Notice of Meeting and routine matters incidental to the conduct of 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 5,806,466 common shares, each of which carries one vote. The Corporation has fixed March 20, 1998 as the Record Date for the Meeting. The Corporation will prepare a list of the holders of common shares at the close of business on that day. Each person named in such list is entitled to be present and 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 ten 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 Percentage of Outstanding Name Beneficially Owned, Common Shares Controlled or Directed1 - ---------------------------------------------------------------------------------------------------- Symons International Group 1,646,413 28.4% Ltd.2 - ---------------------------------------------------------------------------------------------------- G. Gordon Symons 544,511 9.4% - ---------------------------------------------------------------------------------------------------- Alan G. Symons 506,366 8.7% - ---------------------------------------------------------------------------------------------------- Douglas H. Symons 195,722 3.4% - ----------------------------------------------------------------------------------------------------
1 The information as to beneficial ownership of shares not being within the knowledge of the Corporation, has been furnished by the persons and companies listed above. Information presented is as of March 18, 1988. 2 Mr. G. Gordon Symons is the controlling shareholder of Symons International Group Ltd., a private company. 2 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 consider and, if thought fit, approve certain proposed changes to the Corporation's Share Option Plan 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. - -----------------------------------------------------------------------------------------------------------------------
Year First Number of Commons Name and Principal Position in the Became Shares of the Corporation Occupation Corporation Director Beneficially Owned1 - ----------------------------------------------------------------------------------------------------------------------- G. Gordon Symons Chairman of the 1986 2,190,9244 Chairman of the Board Board Goran Capital Inc. - ----------------------------------------------------------------------------------------------------------------------- Alan G. Symons2 CEO and President 1986 506,366 CEO and President Goran Capital Inc. - ----------------------------------------------------------------------------------------------------------------------- Douglas H. Symons3 COO and Vice 1989 195,722 President, Symons International President Group, Inc., Chief Operating Officer, Goran Capital Inc. - ----------------------------------------------------------------------------------------------------------------------- J. Ross Schofield,3 President Director 1992 3,800 Schofield Insurance Brokers - ----------------------------------------------------------------------------------------------------------------------- David B. Shapira,3 Director Director 1989 100,000 Enershare Technology Corporation - ----------------------------------------------------------------------------------------------------------------------- James G. Torrance, Q.C.2 Director 1995 2,000 Partner Emeritus Smith Lyons, Barristers & Solicitors - ----------------------------------------------------------------------------------------------------------------------- John K. McKeating2 Director 1995 -0- Partner Vision 2120, Inc. - -----------------------------------------------------------------------------------------------------------------------
1 Information as to the shareholdings of each nominee has been provided by the nominee. 2 Member of the Audit Committee. 3 Member of the Compensation Committee 4 Includes 1,646,413 shares owned by Symons International Group Ltd., a private company of which Mr. G. Gordon Symons is the controlling shareholder. 3 Each of the foregoing nominees has held the principal occupation indicated above during the past five years except: (i) David B. Shapira who prior to 1995 was the President of Morse Jewelers Inc. Proposed Amendments to the Share Option Plan The Corporation has a share option plan (the "Option Plan"). Under the Option Plan, options to acquire shares in the Corporation may be granted to employees (including directors if they are full-time employees) of the Corporation, its subsidiaries and affiliates and certain other service providers. In the opinion of the board of directors and management of the Corporation, the strength and motivation of the Corporation and its related entities is and will continue to be of significant importance to the continued success of the Corporation and the enhancement of shareholder value, and these assets are promoted and supported by the Option Plan. The Option Plan presently provides that the aggregate number of shares issuable thereunder cannot exceed 10% of the number of outstanding shares and that the exercise price of any option granted thereunder may not be less than the Fair Market Value (as defined in the Option Plan) of the shares at the time of the grant. Certain of the rules of the Toronto Stock Exchange (the "TSE") necessitate certain changes to the Option Plan. These changes will: (i) fix the maximum number of shares issuable thereunder at 871,000 (representing approximately 15% of the outstanding issue); (ii) provide that the exercise price of any option granted thereunder shall be not less than the Fair Market Value of the shares, on the date of the grant; (iii) limit the number of shares issuable to any one person thereunder to 5% of the number of shares outstanding, and (iv) increasing the period in which the option may be exercised to ten (10) years, and certain other related and non-substantive amendments as may be required by regulators with jurisdiction in the matter (collectively, the "Plan Amendments"). The approval of the Plan Amendments at the Meeting by a majority of disinterested shareholders is a requirement of the TSE. The form of resolution to be considered at the Meeting concerning the Plan Amendments is set forth as Appendix I to this management information circular. The need for disinterested shareholder approval arises because the Plan Amendments do not include certain limitations on option grants described below which would limit the flexibility of the Corporation's board of directors in administering the Option Plan. If (and only if) the Plan Amendments do not receive the requisite level of shareholder approval, the shareholders will be asked to consider the following amendments to the Option Plan (collectively, the "Additional Amendments"): (i) limiting the number of shares reserved for issuance under the Option Plan to insiders, and the number of shares issued under the Option Plan to insiders within any one-year period, to 10% of outstanding issue; (ii) limiting the number of shares issued under the Option Plan within any one-year period to 5% of outstanding issue; and (iii) the Plan Amendments, and certain other related and non-substantive amendments as may be required by regulators with jurisdiction in the matter. 4 The approval of the Additional Amendments at the Meeting by a majority of all shareholders is a requirement of the TSE. The form of resolution to be considered at the Meeting concerning the Additional Amendments is set forth as Appendix II to this management proxy circular. Management recommends approval of Proposal 3 on the form of proxy and approval by the shareholders of the Shareholder's Resolution attached as Appendix I hereto. 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, 1997 was $1,860,413 all in the form of salary, bonus and consulting fees. In 1997, 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 quarterly board or committee meeting attended. Interest of Insiders in Material Transactions Reference is made to the 1997 Annual Report, sent to each shareholder with this management proxy circular, and to Note 14, Related Party Transactions, to the Corporation's financial statements as at and for the year ended December 31, 1997. 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, 1997, on account of loans to purchase common shares of the Corporation and its affiliates: - -------------------------------------------------------------------------------------------------------
Name and Municipality of Largest Balance Residence Date of Loan During 1997 Present Balance - ------------------------------------------------------------------------------------------------------- G. Gordon Symons June 27, 1986 $148,000 $148,000 Bermuda June 30, 1986 $200,000 $200,000 May 31, 1988 (US) $51,729 - 0 - - ------------------------------------------------------------------------------------------------------- Alan G. Symons June 30, 1986 $29,722 $19,772 Indianapolis, Indiana February 25, 1988 (US) $27,309 $27,309 - ------------------------------------------------------------------------------------------------------- Douglas H. Symons June 30, 1986 $15,000 $15,000 Indianapolis, Indiana February 25, 1988 (US) $2,219 (US) $2,219 - -------------------------------------------------------------------------------------------------------
The foregoing loans dated June 27, 1986 and June 30, 1986 were made for the purchase of common shares of the Corporation require that the shares acquired be pledged for the benefit of the 5 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. During 1997 Mr. G. Gordon Symons had an outstanding unsecured loan in the amount of $70,000 not relating to the purchase of common shares of the Corporation. This loan was repaid March 26, 1998. 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 $24,577. 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. During 1997, the Company loaned an aggregate of $515,000 to Alan G. Symons. This sum, plus applicable interest, was repaid to the Company prior to December 31, 1997. Also during 1997, the Company advanced to Symons International Group, Ltd. sums representing unearned management fees. At December 31, 1997, such over-advance aggregated $295,091. Mr. G. Gordon Symons is the Controlling Shareholder of Symons International Group, Ltd. Executive Compensation The Corporation had five executive officers during 1997. The aggregate cash compensation paid by the Corporation and its subsidiaries to the Corporation's executive officers including salaries, fees, commissions and bonuses, during 1997 was $1,860,413. The aggregate value of compensation, other than that referred to above, paid to executive officers during 1997 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. 6 TABLE 1: SUMMARY COMPENSATION TABLE - -----------------------------------------------------------------------------------------------------------------------
Long- Annual Term Compensation Awards - ----------------------------------------------------------------------------------------------------------------------- Securities Other Under Salary Bonus Annual Options All Other Name and US $ US $ Compensation Granted Compensation Principal Position Year Note A Note A US$ Note B (#) Note C US $ - ----------------------------------------------------------------------------------------------------------------------- G. Gordon 1997 -0- -0- Nil 166,651 $440,000H Symons, Chairman 1996 $171,000 $393,945 Nil 51,524 $170,799E 1995 $175,000 $70,0000 Nil 18,946 $25,272D - ----------------------------------------------------------------------------------------------------------------------- Alan G. Symons 1997 $378,230F $300,000G Nil 9,650 Note B CEO, President 1996 $242,786 $143,333 Nil 51,399 Note B and Secretary 1995 $148,077 $42,893 Nil 18,945 Note B - ----------------------------------------------------------------------------------------------------------------------- Douglas H. Symons 1997 $200,000I $200,000I Nil 9,650 Note B Vice President and 1996 $195,973 $50,000 Nil 54,333 Note B COO 1995 $149,982 $100,000 Nil 9,473 Note B - ----------------------------------------------------------------------------------------------------------------------- Gary P. Hutchcraft 1997 $127,846I $65,564 Nil 1,000 Note B Vice President and 1996 $55,418 $28,000 Nil -0- N/R Treasurer 1995 N/R N/R Nil N/R N/R - ----------------------------------------------------------------------------------------------------------------------- David L. Bates 1997 $107,307I $41,461I Nil 3,704 Note B Vice President and 1996 $95,162 $97,076 Nil -0- Note B General Counsel 1995 $63,237 -0- Nil N/R N/R - -----------------------------------------------------------------------------------------------------------------------
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. Amounts reflect stock options granted during 1997. 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 $278,230 paid by Symons International Group, Inc. Note G Includes $200,000 paid by Symons International Group, Inc. Note H Amount paid by a subsidiary of the Company, Granite Re, a Barbados company to companies owned by Mr. G. Gordon Symons. Note I Amount paid by Symons International Group, Inc. 7 Employee Share Option Plan The Corporation has a Share Option Plan (as defined above, the "Option Plan"). Certain terms of the Plan are described above under "Proposed Amendments to the Share Option Plan." The terms, conditions and limitations of options granted under the Option Plan are determined by the board of directors of the Corporation with respect to each option, within certain limitations. The exercise price per share is payable in full on the date of exercise. Options granted under the Option Plan are not assignable. During 1997, options to purchase a total of 188,355 common shares were granted to executive officers pursuant to the Option Plan. Including the options referred to above, there were outstanding options to purchase a total of 550,690 common shares as of December 31, 1997, at an average exercise price of $17.46. TABLE 2: OPTION GRANTS DURING 1997 - --------------------------------------------------------------------------------------------------------------------------
Market Value % Of Total Of Securities Securities Options Underlying Under Granted To Exercise Or Options On The Options Employees Base Price Date Of Grant Expiration Name Granted (#) 1997 ($/Security) ($/Security) Date - -------------------------------------------------------------------------------------------------------------------------- G. Gordon 164,030 87.1% $29.00 $29.00 Jan 29, 2007 Symons 2,621 1.4% $39.00 $39.00 Aug 13, 2007 - -------------------------------------------------------------------------------------------------------------------------- Alan G. 7,030 3.7% $29.00 $29.00 Jan 29, 2007 Symons 2,620 1.4% $39.00 $39.00 Aug 13, 2007 - -------------------------------------------------------------------------------------------------------------------------- Douglas H. 7,030 3.7% $29.00 $29.00 Jan 29, 2007 Symons 2,620 1.4% $39.00 $39.00 Aug 13, 2007 - -------------------------------------------------------------------------------------------------------------------------- David L. 704 .4% $29.00 $29.00 Jan 29, 2007 Bates - -------------------------------------------------------------------------------------------------------------------------- Gary P. 1,000 .5% $29.00 29.00 Jan 29, 2007 Hutchcraft - --------------------------------------------------------------------------------------------------------------------------
8 TABLE 3: AGGREGATED OPTION EXERCISES DURING 1997 AND FINANCIAL YEAR-END OPTION VALUES - ------------------------------------------------------------------------------------------------------------------------
Value Of Unexercised Unexercised In- Securities Options The-Money Acquired Aggregate at FY-End (#) Options ($) On Value Exercisable/ Exercisable/ Name Exercise Realized Unexercisable Unexercisable - ----------------------------------------------------------------------------------------------------------------------- G. Gordon Symons 157,000 $4,304,940 283,121/0 $11,324,840/0 - ----------------------------------------------------------------------------------------------------------------------- Alan G. Symons - 0 - - 0 - 94,994/0 $3,794,760/0 - ----------------------------------------------------------------------------------------------------------------------- Douglas H. Symons - 0 - - 0 - 104,505/0 $4,180,200/0 - -----------------------------------------------------------------------------------------------------------------------
Composition of the Compensation Committee At its meeting on March 19, 1997, the Board reconfigured the Compensation Committee to consist of Messrs. J. Ross Schofield, David B. Shapira and Douglas H. Symons. Mr. Douglas H. Symons was Chief Operating Officer and Vice President of the Corporation throughout 1997. 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 Corporation's total compensation program for officers includes base salaries, bonuses and the grant of stock options pursuant to the Option Plan. The Corporation'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 Corporation believes that this program also motivates the Corporation'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 Corporation's officers during 1997 achieves these objectives and is fair and reasonable. 9 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 of 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. 10 COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN OF GORAN CAPITAL INC. WITH TSE 300 [GRAPHIC OMITTED]
1992 1993 1994 1995 1996 1997 GNC $100 $177 $275 $448 $1,038 $1,589 TSE300 $100 $129 $126 $141 $177 $200
Performance Graph The graph shown above compares the total cumulative shareholder return for $100 invested in common shares of GNC on December 31, 1992, with the cumulative total return of the TSE 300 Stock Index for the five 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. 11 Statement of Corporate Governance Practices 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 approximately 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. 12 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 seven (7) times during 1997 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 the early part of 1997, 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 the early part of 1997, 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. 13 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. 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 Alan G. Symons President and CEO 14 APPENDIX I RESOLVED THAT: 1. The Corporation's share option plan (the "Option Plan") be amended, subject to receipt of all requisite regulatory approvals, as follows: (i) by deleting the first sentence of Section 3 of the Option Plan and replacing with the following; "The aggregate number of Shares that may be issued pursuant to the exercise of Options shall not exceed 871,000, subject to adjustment in accordance with Section 12 hereof, which Shares shall be made available from the authorized but unissued Shares and which have been reserved for issuance upon the exercise of Options granted under the Plan."; (ii) by adding the following sentence to the end of Section 3 of the Option Plan: "Options shall not be granted hereunder which could result in the issuance to any Participant, pursuant to the Plan and any other share compensation arrangement established by the Corporation, of a number of shares exceeding 5% of the number of Shares then outstanding, on a non-diluted basis."; (iii) by deleting the words "90% of the" from subsection 6(a) of the Option Plan, such that the exercise price of any Option granted thereunder may not be less than the Fair Market Value (as defined in the Option Plan); and (iv) by adding a new sentence at the end of Section 12 of the Option Plan as follows: "Upon the occurrence of the events described in subsections (a), (b) and/or (c) of this Section 12, the number of Shares reserved for issuance under this Plan pursuant to Section 3 shall be correspondingly adjusted." (v) by deleting the word "eight" and replacing it with the word "ten" in Section 6(b)(ii), referring to the years in which an optionee has to exercise an option. 2. The Corporation's board of directors is authorized to take all such actions including, without limitation, making further consequential or related amendments to the Option Plan, as the board of directors deems necessary or appropriate in order to give full effect to the meaning and intent of the above resolutions. APPENDIX II RESOLVED THAT: 1. The Corporation's share option plan (the "Option Plan") be amended, subject to receipt of all requisite regulatory approvals, as follows: (i) by deleting the first sentence of Section 3 of the Option Plan and replacing with the following: "The aggregate number of Shares that may be issued pursuant to the exercise of Options shall not exceed 1,015,000, subject to adjustment in accordance with Section 12 hereof, which Shares shall be made available from the authorized but unissued Shares and which have been reserved for issuance upon the exercise of Options granted under the Plan."; (ii) by adding the following text at the end of Section 3 of the Option Plan: "Options shall not be granted hereunder which could result in the issuance to any Participant, pursuant to the Plan and any other share compensation arrangement established by the Corporation, of a number of Shares exceeding 5% of the number of Shares then outstanding, on a non-diluted basis. In addition, Options shall not be granted hereunder which could result in the issuance, within any one-year period, pursuant to the Plan or any other share compensation arrangement established by the Corporation, of a number of Shares exceeding: (a) 10% of the number of Shares then outstanding, on a non-diluted basis; or (b) 5% of the number of shares then outstanding, on a non-diluted basis, to an insider and his or her affiliates. For the purposes of this section, "insider", "associate" and "affiliate" shall have the meanings ascribed thereto in the Ontario Securities Act."; (iii) by deleting the words "90% of the" from subsection 6(a) of the Option Plan, such that the exercise price of any Option granted thereunder may not be less than the Fair Market Value (as defined in the Option Plan); and (iv) by adding a new sentence at the end of Section 12 of the Option Plan as follows: "Upon the occurrence of the events described in subsections (a), (b) and/or (c) of this Section 12, the number of shares reserved for issuance under this Plan pursuant to Section 3 shall be correspondingly adjusted." (v) by deleting the word "eight" and replacing it with the word "ten" in Section 6(b)(ii), referring to the years in which an optionee has to exercise an option. 2. The Corporation's board of directors is authorized to take all such actions including, without limitation, making further consequential or related amendments to the Option Plan, as the board of directors deems necessary or appropriate in order to give full effect to the meaning and intent of the above resolutions. -----END PRIVACY-ENHANCED MESSAGE-----