UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
( X ) Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the year ended December 31, 2001.
( ) 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 of Incorporation IRS Employer Identification No.
2 EVA ROAD, SUITE 200, ETOBICOKE, ONTARIO CANADA M9C 2A8
Address of Principal Executive Offices Zip Code
Registrant's telephone number, including area code: (416) 622-0660 Canada
(317) 259-6300 - USA
Securities registered pursuant to Section 12(b) of the Act: Common Stock
Securities registered pursuant to Section 12(g) of the Act: None Title of Class
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes(X) No( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes(X) No( )
The aggregate market value of the 2,333,854 shares of the Registrant's common
stock held by non-affiliates, as of March 27, 2002 was $1,003,557.
The number of shares of common stock of the Registrant, without par value,
outstanding as of March 27, 2002 was 5,393,698.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year ended
December 31, 2001 are incorporated by reference in Parts II and IV hereof.
Portions of the Registrant's Proxy Statement for the 2002 Annual Meeting of
Shareholders are incorporated by reference in Part III hereof.
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 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,
2001 2000 1999 1998 1997
----- ----- ----- ----- -----
Average. . .6461 .6733 .6724 .6745 .7222
Period End .6287 .6672 .6929 .6532 .6995
High . . . .6714 .6965 .6929 .7061 .7351
Low. . . . .6227 .6416 .6625 .6376 .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.
Table of Contents
ITEM . . . . . . . . . PAGE
PART I
Item 1.. . . . . . . . Business 4
Item 2.. . . . . . . . Properties 20
Item 3.. . . . . . . . Legal Proceedings 21
Item 4.. . . . . . . . Submission of Matters to a Vote of Security Holders 25
PART II
Item 5.. . . . . . . . Market for Registrant's Common Equity and Related Shareholder Matters 26
Item 6.. . . . . . . . Selected Consolidated Financial Data 26
Item 7.. . . . . . . . Management's Discussion and Analysis of Financial Condition and Results
of Operations. . . . 26
Item 7A. . . . . . . . Quantitative and Qualitative Disclosures About Market Risk 26
Item 8.. . . . . . . . Financial Statements and Supplementary Data 26
Item 9.. . . . . . . . Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 26
PART III
Item 10. . . . . . . . Directors and Executive Officers of the Registrant 27
Item 11. . . . . . . . Executive Compensation 27
Item 12. . . . . . . . Security Ownership of Certain Beneficial Owners and Management 27
Item 13. . . . . . . . Certain Relationships and Related Transactions 27
PART IV
Item 14. . . . . . . . Exhibits, Financial Statement Schedules, and Reports on Form 8-K 28
Item 15. . . . . . . . Signatures 36
PART I
ITEM 1 - BUSINESS
FORWARD-LOOKING STATEMENT
All statements, trend analyses, and other information herein contained relative
to markets for the Company's products and/or trends in the Company's operations
or financial results, as well as other statements including words such as
"anticipate," "could," "feel(s)," "believes," "plan," "estimate," "expect,"
"should," "intend," "will," and other similar expressions, constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to known and unknown risks;
uncertainties and other factors which may cause actual results to be materially
different from those contemplated by the forward-looking statements. Such
factors include, among other things: (i) general economic conditions, including
prevailing interest rate levels and stock market performance; (ii) factors
affecting the Company's nonstandard automobile operations such as rate increase
approval, policy renewals, new business written, and premium volume; and (iii)
the factors described in this section and elsewhere in this report.
OVERVIEW OF BUSINESS
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") and Superior Insurance Company ("Superior"), which
maintain their headquarters in Indianapolis, Indiana. Goran owns approximately
73.1% of a U.S. holding company, Symons International Group, Inc. ("SIG"). SIG
owns IGF Holdings, Inc. ("IGFH") and Superior Insurance Group, Inc. ("Superior
Group") which are the holding companies for the insurance subsidiaries. SIG
owns Superior Insurance Group Management, Inc. ("Superior Group Management")
which is the management company for the insurance subsidiaries. The operations
of SIG accounts for 94% of Goran's consolidated revenues. Goran's other
subsidiaries include Granite Reinsurance Company Ltd. ("Granite Re"), Granite
Insurance Company ("Granite"), and Symons International Group (Florida) Inc.
("SIGF").
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, a Canadian federally licensed insurance company, sold its book of
business in January 1990 to an affiliate which subsequently sold to third
parties in June 1990. Granite currently has seven outstanding claims and
maintains an investment portfolio sufficient to support those claim liabilities.
Goran anticipates that the outstanding claims will be settled by the end of
2002.
As previously announced, IGF Insurance Company ("IGF") sold its crop insurance
operations to Acceptance Insurance Companies Inc. ("Acceptance") on June 6,
2001and is now in runoff. Accordingly, the financial statements included in
this report reflect the results of the crop insurance segment as "discontinued
operations."
NONSTANDARD AUTOMOBILE INSURANCE
Overview
Pafco, Superior and Superior's subsidiaries, Superior Guaranty Insurance Company
("Superior Guaranty") and Superior American Insurance Company ("Superior
American") are engaged in the writing of insurance coverage for automobile
physical damage and liability policies. Nonstandard insureds are those
individuals who are unable to obtain insurance coverage through standard market
carriers due to factors such as poor premium payment history, driving experience
or violations, particular occupation or type of vehicle. The Company offers
several different policies, which are directed toward different classes of risk
within the nonstandard market. Premium rates for nonstandard risks are higher
than for standard risks. Since it can be viewed as a residual market, the size
of the nonstandard private passenger automobile insurance market changes with
the insurance environment and grows when standard coverage becomes more
restrictive. Nonstandard policies have relatively short policy periods and low
limits of liability. 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. Also, since the
nonstandard automobile insurance business typically experiences a lower rate of
retention than standard automobile insurance, the number of new policyholders
underwritten by nonstandard automobile insurance carriers each year is
substantially greater than the number of new policyholders underwritten by
standard carriers.
Products
The Company offers both liability and physical damage coverage in the
nonstandard automobile insurance marketplace, with policies having terms from
three to twelve months. Most nonstandard automobile insurance policyholders
choose the basic limits of liability coverage which, though varying from state
to state, generally is $25,000 per person and $50,000 per accident for bodily
injury to others and in the range of $10,000 to $20,000 for damage to cars or
other property.
Primarily, the Company offers two policies, each directed toward different
classes of risk within the nonstandard market. The Superior Choice policy
offers insureds a lower cost alternative in exchange for restricted coverage
terms. The Superior Standard policy is intended for risks who desire more
traditional auto coverage.
Where permitted, Superior offers a five-tier product covering the full spectrum
of automobile insurance customers from nonstandard to ultra-preferred. The
focus of the Company's marketing, however, is the nonstandard auto insurance
market.
Underwriting
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, credit, age, sex and
marital status of the insured. The rate approval process varies from state to
state. Some states allow filing and immediate use of rates, while others require
approval by the state's insurance department prior to the use of the rates.
Underwriting results of insurance companies are frequently measured by their
combined ratios. However, investment income, federal income taxes and other
non-underwriting income or expense are not reflected in the combined ratio. The
profitability of property and casualty insurance companies depends on income
from underwriting, investment and service operations. Underwriting results are
generally considered profitable when the combined ratio is under 100% and
unprofitable when the combined ratio is over 100%. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for a further
discussion on the combined ratio.
In an effort to maintain and improve underwriting profits, the territory
managers monitor loss ratios of the agencies in their regions and meet
periodically with the agencies in order to address any adverse trends in loss
ratios or other profitability indicators.
Marketing
The Company's nonstandard automobile insurance business is concentrated in the
states of Florida, California, Virginia, Colorado, and Georgia. The Company
also writes nonstandard automobile insurance in fifteen additional states.
Although the Company wrote $9.7 million of business in Pennsylvania in 2001, it
is prohibited from writing other than renewal business after July 30, 2001,
based on an agreement with the Indiana Department Of Insurance (refer to
Regulatory Developments in Management Discussion and Analysis of Financial
Condition and Results of Operations). The Company selects states for expansion
or withdrawal based on a number of criteria, including the size of the
nonstandard automobile insurance market, state-wide loss results, competition,
capitalization of its companies and the regulatory climate.
The following table sets forth the geographic distribution of gross premiums
written by the Company for the periods indicated sorted in descending order of
2001 volume.
Goran Capital Inc.
Year Ended December 31, (in thousands)
State . . . . . . . . . 2001 2000 1999
- ----------------------- -------- -------- --------
Florida . . . . . . . . $ 49,162 $ 44,070 $ 67,459
California. . . . . . . 34,287 32,480 29,993
Virginia. . . . . . . . 21,054 20,089 15,470
Georgia . . . . . . . . 15,481 13,670 22,945
Colorado. . . . . . . . 10,112 6,938 8,238
Pennsylvania (1) . . . 9,683 - -
Indiana . . . . . . . . 6,275 12,804 23,599
Kentucky. . . . . . . . 3,135 5,034 5,768
Nevada. . . . . . . . . 1,980 3,707 6,954
Tennessee . . . . . . . 1,696 9,794 6,840
Texas . . . . . . . . . 1,267 5,918 2,641
Arizona . . . . . . . . 1,111 4,484 10,912
Iowa. . . . . . . . . . 1,066 2,023 4,028
Oregon. . . . . . . . . 1,008 4,236 12,394
Missouri. . . . . . . . 839 1,929 4,555
Oklahoma. . . . . . . . 635 1,090 1,921
Other states. . . . . . 697 5,156 12,056
-------- -------- --------
Total nonstandard auto. 159,488 173,422 235,773
Other property. . . . . 1,604 1,039 628
Reinsurance . . . . . . 32,094 7,638 --
-------- -------- --------
Total . . . . . . . . . $193,186 $182,099 $236,401
======== ======== ========
(1) All premiums written in Pennsylvania are on the books of IGF, which was
precluded from writing other than renewal premium after July 30, 2001
The Company markets its nonstandard products exclusively through independent
agencies. The Company has several territory managers, each of whom resides in a
specific marketing region and has access to the technology and software
necessary to provide marketing, rating and administrative support to the
agencies in his or her region.
The Company attempts to foster strong service relationships with its agencies
and customers. The Company has automated certain marketing, underwriting and
administrative functions and has allowed on-line communication with its agency
force. In addition to delivering prompt service while ensuring consistent
underwriting, the Company offers rating software to its agents which permits
them to rate risks in their offices. Over 90% of new business applications are
electronically uploaded directly from the agents office to the company through
this software. An in-house developed point of sale product allows agents to
order motor vehicle, credit and other reports on line at the time of sale in a
number of states and will be offered in all states by the end of 2002.
Most of the Company's agents have limited authority to sell and bind insurance
coverages in accordance with procedures established by the Company, which is a
common practice in the nonstandard automobile insurance business. The Company
reviews all coverages bound by the agents promptly and generally accepts
coverages that 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. The
Company compensates its agents by paying a commission based on a percentage of
premiums produced.
The Company believes having four individual companies licensed in various states
allows it the flexibility to engage in multi-tiered marketing efforts in which
specialized automobile insurance products are directed toward specific segments
of the market. Since certain state insurance laws prohibit a single insurer
from offering similar products with different commission structures or, in some
cases premium rates, it is necessary to have multiple licenses in certain states
in order to obtain the benefits of market segmentation.
Claims
The Company's nonstandard automobile claims department handles claims on a
regional and local basis from claim offices in Indianapolis, Indiana; Atlanta,
Georgia; Tampa, West Palm Beach and Jacksonville, Florida; Orange and Glendale,
California; Alexandria, Virginia; and Lakewood, Colorado. In 2002, the Company
also has established a new claim center in Virginia Beach, Virginia. The
Company uses a combination of its own adjusters and independent appraisers and
adjusters for estimating physical damage claims and limited elements of
investigation.
Claims settlement authority levels are established for each adjuster or manager
based on the employee's ability and 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 outstanding
claims and controlling claims adjustment expenses.
Reinsurance
The Company follows the customary industry practice of reinsuring a portion of
its risks. Insurance is ceded principally to reduce the Company's exposure on
large individual risks and to provide protection against large losses, including
catastrophic losses. Although reinsurance does not legally discharge the ceding
insurer from its primary obligation to pay the full amount of losses incurred
under policies reinsured, it does render the reinsurer liable to the insurer to
the extent provided by the terms of the reinsurance treaty. As part of its
internal procedures, the Company evaluates the financial condition of each
prospective reinsurer before it cedes business to that carrier. Based on the
Company's review of its reinsurers' financial health and reputation in the
insurance marketplace, the Company believes its reinsurers are financially sound
and that they can meet their obligations to the Company under the terms of the
respective reinsurance treaties.
In 2001, Pafco and Superior maintained casualty excess of loss reinsurance on
their nonstandard automobile insurance business covering 62.5% of $750,000 of
losses on an individual occurrence basis in excess of $250,000 up to a maximum
of $3 million.
As of December 31, 2001, amounts recoverable from reinsurers relating to
nonstandard automobile operations follows (in thousands):
Reinsurance
Recoverables as of
Reinsurer A.M. Best Rating December 31, 2001(1)
- ---------------------------------------------- ------------------ ---------------------
National Union Fire Ins Comp of Pittsburgh, PA A++ $ 66,077
Gerling Global Reins Corp of America . . . . . A 384
Lloyds of London . . . . . . . . . . . . . . . Not Rated 1,102
(1) Only recoverables greater than $200,000 are shown. Total nonstandard
automobile reinsurance recoverables as of December 31, 2000 were approximately
$69,856,000.
(2) An A.M. Best Rating of "A++" is the highest of 15 ratings. An A.M. Best
Rating "A" is the third highest of 15 ratings.
Effective January 1, 2000, Pafco and Superior entered into an automobile quota
share agreement with National Union Fire Insurance Company of Pittsburgh (A.M.
Best rated A++). The amount of cession for Pafco is variable up to a maximum of
90% or $30 million and for Superior is variable up to a maximum of 75% or $70
million for all new and renewal business. In 2001, Pafco and Superior ceded 54%
of their nonstandard automobile gross written premiums on new and renewal
business under this treaty. In addition, SIG ceded a portion of its unearned
premium reserve bringing the total cession to 79% in 2001.
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. This agreement was in
effect during 2001.
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 serve the agency market, as well as companies which sell
insurance directly to consumers. Direct writers may have certain competitive
advantages over agency writers, including increased name recognition, increased
loyalty of their customer base and, potentially, reduced acquisition costs. The
Company's primary competitors are Progressive Casualty Insurance Company and
specialty subsidiaries of a number of insurance groups, including AIG, Allstate,
American Financial Group and GMAC. Generally, these competitors are larger and
have greater financial resources than the Company.
The nonstandard automobile insurance business is price sensitive and rates were
decreasing the past several years as competitors moved to protect or increase
their market share. During 2001, however, competitors aggressively raised rates
in an effort to improve underwriting results.
Recent Developments
In January 2000, SIG engaged Gene Yerant as the President of its nonstandard
automobile operations and raised rates an aggregate of 12%, redesigned the auto
insurance product, reduced staff and closed the Tampa processing center. During
2001, rates were raised an additional 24%, financial reporting was automated and
a new in-house processing system was developed. SIG is in the process of
converting its business to this system.
Beginning in the fourth quarter of 2001 and continuing in January and February
2002, SIG sustained adverse loss experience on a substantial portion of its new
business written in certain markets. In late February and early March 2002, SIG
commenced further analysis of loss ratios by individual agency and a review of
claim settlement procedures. Based on this and other analysis, SIG has as of the
filing of this document, or plans to before the end of the second quarter, taken
the following actions to improve its financial position and operating results:
- - Eliminated reinstatements in all markets, i.e., upon policy cancellation, the
insured must obtain a new policy at prevailing rates and underwriting
guidelines;
- - Terminated or placed on new business moratorium several hundred agents
whose loss ratios were abnormally high when compared to the average for the
remaining agents (these agents accounted for approximately 16% of the total
gross written premium in 2001);
- - Increased underwriting requirements in certain markets including: higher down
payments, new policy fees, and shorter policy terms;
- - Hired a consultant with significant auto claims experience to review processes
and suggest modifications to the claims function.
SIG expects the above actions to result in a decline of approximately 10 to 15%
in gross written premiums from 2001 levels with a corresponding decrease in
management fees payable to Superior Group, offset by reductions in operating
expenses due to process changes and efficiencies.
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Loss reserves are estimates, established at a given point in time based on facts
then known and assumptions believed to be reasonable, of what an insurer
predicts its exposure to be in connection with incurred losses. Loss adjustment
expense 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 loss adjustment expense 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 loss
adjustment expenses 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 loss
adjustment expense for similar claims.
Loss and loss adjustment expense 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 recorded loss reserves of SIG and Granite Re at December 31, 2001 are
certified by the Company's Vice President and Chief Actuary. The recorded loss
reserves of Granite at December 31, 2001 are certified by an independent
actuary.
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 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 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 adjustment 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 facts become known and events occur which affect unsettled claims.
Goran Capital Inc.
Nonstandard Automobile Insurance Only
For The Years Ended December 31, (in thousands)
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
-------- -------- -------- -------- --------- --------- --------- --------- -------- ------- ------
Gross
reserves for
unpaid losses.
and LAE. . . . $27,403 $25,248 $71,748 $79,551 $101,185 $121,661 $141,260 $103,441 $79,047
-------- -------- -------- -------- --------- --------- --------- ---------
Deduct
Reinsurance
Recoverable. . 12,581 10,927 9,921 8,124 16,378 6,515 3,167 18,709 28,511
-------- -------- -------- -------- --------- --------- --------- --------- --------
Reserve for
unpaid losses
and LAE, net
of
reinsurance . . $15,682 $17,055 14,822 14,321 61,827 71,427 84,807 114,829 138,093 84,732 50,536
-------- -------- -------- -------- --------- --------- --------- --------- -------- ------- ------
Paid
Cumulative
as
of:
One Year
Later. . . . . 7,519 10,868 8,875 7,455 42,183 59,410 62,962 85,389 81,444 57,696
-------- -------- -------- -------- --------- --------- --------- --------- -------- -------
Two Years
Later. . . . . 12,358 15,121 11,114 10,375 53,350 79,319 89,285 111,042 107,534 --
-------- -------- -------- -------- --------- --------- --------- --------- -------- -------
Three Years
Later. . . . . 13,937 16,855 13,024 12,040 58,993 86,298 98,469 121,907 -- --
-------- -------- -------- -------- --------- --------- --------- --------- -------- -------
Four Years
Later. . . . . 14,572 17,744 13,886 12,822 61,650 89,166 102,854 -- -- --
-------- -------- -------- -------- --------- --------- --------- --------- -------- -------
Five Years
Later. . . . . 14,841 18,195 14,229 13,133 62,621 90,477 -- -- -- --
-------- -------- -------- -------- --------- --------- --------- --------- -------- -------
Six Years
Later. . . . . 14,992 18,408 14,330 13,375 63,031 -- -- -- -- --
-------- -------- -------- -------- --------- --------- --------- --------- -------- -------
Seven Years
Later. . . . . 15,099 18,405 14,426 13,418 -- -- -- -- -- --
-------- -------- -------- -------- --------- --------- --------- --------- -------- -------
Eight Years
Later. . . . . 15,095 18,460 14,386 -- -- -- -- -- -- --
-------- -------- -------- -------- --------- --------- --------- --------- -------- -------
Nine Years
Later. . . . . 15,135 18,411 -- -- -- -- -- -- -- --
-------- -------- -------- -------- --------- --------- --------- --------- -------- -------
Ten Years
Later. . . . . 15,086 -- -- -- -- -- -- -- -- --
-------- -------- -------- -------- --------- --------- --------- --------- -------- -------
Liabilities re
- -estimated as
of:
One Year
Later. . . . . 14,453 17,442 14,788 13,365 59,626 82,011 97,905 131,256 124,012 85,538
-------- -------- -------- -------- --------- --------- --------- --------- -------- -------
Two Years
Later. . . . . 14,949 18,103 13,815 12,696 60,600 91,743 104,821 128,302 121,480 --
-------- -------- -------- -------- --------- --------- --------- --------- -------- -------
Three Years
Later. . . . . 15,139 18,300 14,051 13,080 63,752 91,641 104,551 127,885 -- --
-------- -------- -------- -------- --------- --------- --------- --------- -------- -------
Four Years
Later. . . . . 15,218 18,313 14,290 13,485 63,249 91,003 105,012 -- -- --
-------- -------- -------- -------- --------- --------- --------- --------- -------- -------
Five Years
Later. . . . . 15,198 18,419 14,499 13,441 63,233 91,323 -- -- -- --
-------- -------- -------- -------- --------- --------- --------- --------- -------- -------
Six Years
Later. . . . . 15,114 18,533 14,523 13,592 63,373 -- -- -- -- --
-------- -------- -------- -------- --------- --------- --------- --------- -------- -------
Seven Years
Later. . . . . 15,157 18,484 14,584 13,652 -- -- -- -- -- --
-------- -------- -------- -------- --------- --------- --------- --------- -------- -------
Eight Years
Later. . . . . 15,145 18,508 14,574 -- -- -- -- -- -- --
-------- -------- -------- -------- --------- --------- --------- --------- -------- -------
Nine Years
Later. . . . . 15,165 18,494 -- -- -- -- -- -- -- --
-------- -------- -------- -------- --------- --------- --------- --------- -------- -------
Ten Years
Later. . . . . 15,157 -- -- -- -- -- -- -- -- --
-------- -------- -------- -------- --------- --------- --------- --------- -------- -------
Ne
t cumulative
(deficiency)
or
redundancy . . 525 (1,439) 248 669 (1,546) (19,896) (20,205) (13,056) 16,613 (806)
-------- -------- -------- -------- --------- --------- --------- --------- -------- -------
Expressed as
a percentage
of unpaid
losses and
LAE. . . . . . 3.3% (8.4%) 1.7% 4.7% (2.5%) (27.9%) (23.8%) (11.4%) 12.0% (1.0%)
Revaluation of gross
- ---------------------------------
Losses and LAE as of
- ---------------------------------
Year-end 2001:
- ---------------------------------
Cumulative Gross Paid as
of Year-end 2001 . . . . . . . . 27,072 24,788 73,164 98,585 120,942 125,070 108,213 73,484
------- ------- ------- -------- -------- -------- ------- --------
Gross liabilities re
- -estimated as of year-end 2001 . 27,674 25,461 73,976 99,901 123,570 131,999 123,310 104,850
------- ------- ------- -------- -------- -------- ------- --------
Gross cumulative
(deficiency) or redundancy . . . (271) (213) (2,228) (20,350) (22,385) (10,338) 17,950 (1,409)
- --------------------------------- ------- ------- ------- -------- -------- -------- ------- --------
Activity in the liability for unpaid loss and loss adjustment expenses for
nonstandard automobile insurance is summarized below (in thousands):
2001 2000 1999
-------- --------- --------
Balance at January 1,. . . . . . . . $108,117 $152,455 $134,024
Less Reinsurance Recoverables 23,252 13,527 17,844
-------- --------- --------
Net Balance at January 1, . . 84,865 138,928 116,180
Incurred related to
Current Year. . . . . . . . . 69,667 127,497 214,606
Prior Years . . . . . . . . . 774 (14,118) 16,367
-------- --------- --------
Total Incurred. . . . . . . . 70,441 113,379 230,973
Paid Related to
Current Year. . . . . . . . . 46,973 85,334 122,380
Prior Years . . . . . . . . . 57,791 82,108 85,845
-------- --------- --------
Total Paid. . . . . . . . . . 104,764 167,442 208,225
Net Balance at December 31,. . . . . 50,542 84,865 138,928
Plus Reinsurance Balance . . . . . . 30,600 23,252 13,527
-------- --------- --------
Balance at December 31,. . . . . . . $ 81,142 $108,117 $152,455
======== ========= ========
RATINGS
A.M. Best has currently assigned a "B-" rating to Superior and a "C" rating to
Pafco. A.M. Best's ratings are based upon a comprehensive review of a company's
financial performance, which is supplemented by certain data, including
responses to A.M. Best's questionnaires, 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 "C"
ratings are A.M. Best's eighth and eleventh highest rating classifications,
respectively, out of fifteen ratings. A "B-" rating is awarded to insurers
which, in A.M. Best's opinion, "have, on balance, fair financial strength,
operating performance and market profile when compared to the standards
established by the A.M. Best Company" and "have an ability to meet their current
obligations to policyholders, but their financial strength is vulnerable to
adverse changes in underwriting and economic conditions". A "C" rating is
awarded to insurers which, in A. M. Best's opinion, "have, on balance, weak
financial strength, operating performance and market profile when compared to
the standards established by the A.M. Best Company" and "have an ability to meet
their current obligations to policyholders, but their financial strength is very
vulnerable to adverse changes in underwriting and economic conditions".
A.M. Best has currently assigned an "E" rating (Under Regulatory Supervision) to
IGF reflecting the significant regulatory constraint resulting from the Consent
Order entered into between IGF and the Indiana Department Of Insurance (see
"Recent Regulatory Developments", below).
REGULATION
General
The Company's U.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 an insurance company is domiciled in the state
and whether it is an admitted or non-admitted insurer, such authority may extend
to such things as (i) periodic reporting of the insurer's financial condition;
(ii) periodic financial examination; (iii) approval of rates and policy forms;
(iv) loss reserve adequacy; (v) insurer solvency; (vi) the licensing of insurers
and their agents; (vii) restrictions on the payment of dividends and other
distributions; (viii) approval of changes in control; and (ix) the type and
amount of permitted investments.
The losses, adverse trends and uncertainties discussed in this report have been
and continue to be matters of concern to the domiciliary and other insurance
regulators of the Company's U.S. insurance subsidiaries (see "Recent Regulatory
Developments" and "Risk-Based Capital Requirements" and "RISK FACTORS" below).
Recent Regulatory Developments
Pafco has been subject to an agreed to order of the Indiana Department of
Insurance ("IDOI") since February 17, 2000, which requires Pafco, among other
matters, to:
- - Refrain from doing any of the following without the IDOI's prior written
consent: selling assets or business in force or transferring property, except in
the ordinary course of business; disbursing funds, other than for specified
purposes or for normal operating expenses and in the ordinary course of business
(which does not include payments to affiliates, other than under written
contracts previously approved by the IDOI, and does not include payments in
excess of $10,000); lending funds; making investments, except in specified types
of investments; incurring debt, except in the ordinary course of business and to
unaffiliated parties; merging or consolidating with another company, or entering
into new, or modifying existing, reinsurance contracts.
- - Reduce its monthly auto premium writings, or obtain additional statutory
capital or surplus, such that the ratio of gross written premium to surplus and
net written premium to surplus does not exceed 4.0 and 2.4, respectively; and
provide the IDOI with regular reports demonstrating compliance with these
monthly writings limitations. Restrictions on premium writings would result in
lower premium volume and management fees payable to Superior Group are based on
gross written premium; therefore, lower premium volume results in reduced
management fees paid by Pafco.
- - Continue to comply with prior IDOI agreements and orders to correct
business practices, under which (as previously disclosed) Pafco must provide
monthly financial statements to the IDOI, obtain prior IDOI approval of
reinsurance arrangements and of affiliated party transactions, submit business
plans to the IDOI that address levels of surplus and net premiums written, and
consult with the IDOI on a monthly basis.
Pafco is in compliance with the order. Pafco's inability or failure to comply
with any of the above could result in the IDOI requiring further reductions in
Pafco's permitted premium writings or in the IDOI instituting future proceedings
against Pafco.
Pafco has agreed with the Iowa Department of Insurance ("IADOI") that it will
not write any new nonstandard business until such time as Pafco has reduced its
overall nonstandard automobile policy counts in the state or has:
- - Increased surplus, or
- - Has a net written premium to surplus ratio of less than three to one, or
- - Has a surplus reasonable to its risk.
Pafco has continued to service existing policyholders and renew policies in Iowa
and provide policy count information on a monthly basis in conformance with
IADOI requirements.
The Florida Department of Insurance ("FDOI") concluded its financial review of
Superior for the year ended December 31, 1999, and issued its final report
during the fourth quarter of 2001. The FDOI's final report recommended
additional examination of compliance issues and financial records accuracy for
years subsequent to 1999. Superior is required to submit monthly financial
information to the FDOI, including a demonstration that it has not exceeded a
ratio of net written premiums to surplus of four to one.
On July 7, 2000, the FDOI issued a notice of its intent to issue an order (the
"Notice"), which principally addressed certain policy and finance fee payments
by Superior to Superior Group. A formal administrative hearing to review the
Notice and a determination that the order contemplated by the Notice not be
issued was held in February 2001. The administrative law judge entered a
recommended order on June 1, 2001 that was acceptable to SIG. On August 30,
2001, the FDOI rejected the recommended order and issued its final order which
SIG believes improperly characterized policy fees paid by Superior to Superior
Group and which seeks repayment of approximately $15 million by Superior Group
to Superior. On September 28, 2001, Superior filed an appeal of the final order
to First District Court of Appeal of the State of Florida. On March 4, 2002,
the FDOI filed a petition in the Circuit Court of Leon County, Florida which
seeks enforcement of the FDOI's final order. Superior filed a motion with the
FDOI for stay of the FDOI's final order. Superior also filed a motion with the
District Court of Appeals, which was denied pending a ruling from the FDOI on
Superior's motion for stay.
In 1999, Superior ceased writing business in Illinois and agreed to obtain the
approval of the Illinois Department of Insurance prior to writing any new
business in Illinois. In July 2001, Superior agreed with the Department of
Insurance in Texas to obtain its prior approval before writing any new business
in that state. On October 9, 2001, the State Corporation Commission of Virginia
issued an order to take notice regarding an order suspending Superior's license
to write business in that state, which Superior believes is unwarranted. An
administrative hearing for a determination that the suspension order not be
issued was held March 5, 2002. The non-standard automobile insurance policies
written in Virginia by Superior accounted for approximately 13.1% of SIG's total
gross written premiums in 2001. A decision has not yet been rendered, and
although Superior does not expect an adverse decision, Superior would appeal any
decision that prohibits it from writing business in Virginia.
On June 6, 2001 IGF sold substantially all of its crop insurance assets to
Acceptance. On June 29, 2001, following the sale of IGF's crop insurance assets
and as a result of losses experienced by IGF in its crop insurance operations,
the IDOI and IGF entered into a Consent Order (the "Consent Order") relating to
IGF. IGF has discontinued writing new business and its operations are presently
in run off.
The IDOI has continued to monitor the status of IGF. The Consent Order
prohibits IGF from taking any of the following actions without prior written
consent of the IDOI:
- - Sell or encumber any of its assets, property, or business in force,
- - Disburse funds, except to pay direct unaffiliated policyholder claims and
normal operating expenses in the ordinary course of business (which does not
include payment to affiliates except for the reimbursement of costs for running
IGF by SIG, and does not include payments in excess of $10,000),
- - Lend its funds or make investments, except in specified types of
investments,
- - Incur debts or obligations, except in the ordinary course of business to
unaffiliated parties,
- - Merge or consolidate with another company;
- - Enter into new, or amend existing, reinsurance agreements,
- - Complete, enter into or amend any transaction or arrangement with an
affiliate, or
- - Disburse funds or assets to any affiliate.
The Consent Order requires IGF to provide the IDOI with monthly written updates
and immediate notices of any material change regarding the status of litigation
with Mutual Service Casualty Insurance Company and with Continental Casualty
Company, statutory reserves, number of non-standard automobile insurance
policies in-force by state, and reports of all non-claims related disbursements.
IGF's failure to comply with the Consent Order could cause the IDOI to begin
proceedings to have a rehabilitator or liquidator appointed for IGF to extend
the provisions of the Consent Order.
While IGF is prohibited from writing any new business pursuant to the Consent
Order, the departments of insurance of Florida, Illinois, Minnesota, Missouri,
Nebraska, Virginia and South Carolina have required IGF to cease writing
business in those states. IGF has also agreed with the departments of insurance
of Texas and Washington to not write business in those states, and IGF presently
intends to surrender its certificates of authority in most states in which it
operated prior to the sale to Acceptance.
As a result of the Consent Order, IGF was prohibited from writing new
non-standard automobile insurance in Pennsylvania after July 31, 2001. Prior to
July 31, 2001, the non-standard automobile insurance policies written in
Pennsylvania by IGF accounted for approximately 10% of the total gross written
premiums of SIG. During the third quarter of 2001, the Pennsylvania Department
of Insurance determined that it would not permit new business to be written in
that state by Superior or SIG's other insurance company subsidiaries.
Therefore, total written premiums for 2001 were less than anticipated. For the
year ended December 31, 2001, Pennsylvania premiums were 6.0% of SIG's total
written premiums.
Insurance Holding Company Regulation
SIG also is subject to laws governing insurance holding companies in Florida and
Indiana, where its insurance company subsidiaries are domiciled. These laws,
among other things, (i) require SIG 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 SIG and its affiliates, including the amount of
dividends and other distributions and the terms of surplus notes; and (iii)
restrict the ability of any one person to acquire certain levels of SIG's voting
securities without prior regulatory approval.
Any purchaser of 10% or more of the outstanding shares of common stock of SIG
would be presumed to have acquired control of Pafco and IGF unless the Indiana
Commissioner of Insurance ("Indiana Commissioner") upon application, has
determined otherwise. In addition, any purchaser of 5% or more of the
outstanding shares of common stock of SIG would be presumed to have acquired
control of Superior unless the Florida Commissioner of Insurance ("Florida
Commissioner"), upon application, has determined otherwise.
Dividend payments by SIG's insurance subsidiaries are subject to restrictions
and limitations under applicable laws under which an insurance subsidiary may
not pay dividends to SIG without prior notice to, or approval by, the
subsidiary's domiciliary insurance regulator. The 1996 FDOI consent order
approving SIG's acquisition of Superior, prohibited Superior from paying any
dividends for four years from the date of acquisition without prior approval.
This restriction expired in April 2000. As a result of regulatory actions taken
by the IDOI with respect to Pafco and IGF, those subsidiaries may not pay
dividends to SIG without prior approval by the IDOI (see "Recent Regulatory
Developments" above). Further, payment of dividends may be constrained by
business and regulatory considerations, and state insurance laws and regulations
require that the statutory surplus of an insurance company following any
dividend or distribution by such company be reasonable in relation to its
outstanding liabilities and adequate for its financial needs. Accordingly,
there can be no assurance that the IDOI or the FDOI would permit any of SIG's
insurance subsidiaries to pay dividends at this time or in the future (see "RISK
FACTORS").
While SIG's non-insurance company subsidiaries are not subject directly to the
dividend and other distribution limitations, insurance holding company
regulations govern the amount which a subsidiary within the holding company
system may charge any of the insurers for services (e.g., management fees and
commissions). These regulations may affect the amount of management fees which
may be paid by Pafco and Superior to Superior Group. The management agreement
between Pafco and Superior Group provides for an annual management fee equal to
15% of gross premiums. The management agreement between Superior and Superior
Group provides for an annual management fee of 17% of gross premiums. There can
be no assurance that either the IDOI or the FDOI will not in the future require
a reduction in these management fees.
In addition, neither Pafco nor IGF may engage in any transaction with an
affiliate, without the prior approval of the IDOI (see "Recent Regulatory
Developments" above).
Underwriting and Marketing Restrictions
During the past several years, various regulatory and legislative bodies have
adopted or proposed new laws or regulations to deal with the cyclical nature of
the insurance industry, catastrophic events and insurance capacity and pricing.
These regulations include (i) the creation of "market assistance plans" under
which insurers are induced to provide certain coverages; (ii) restrictions on
the ability of insurers to rescind or otherwise cancel certain policies in
mid-term; (iii) advance notice requirements or limitations imposed for certain
policy non-renewals; and (iv) limitations upon or decreases in rates permitted
to be charged.
Insurance Regulatory Information System
The NAIC Insurance Regulatory Information System ("IRIS") was developed
primarily to assist state insurance departments in executing their statutory
mandate to oversee the financial condition of insurance companies. IRIS ratios
consist of twelve ratios with defined acceptable ranges. They are used as an
initial screening process for identifying companies that may be in need of
special attention. Companies that have several ratios that fall outside of the
acceptable range are selected for closer review by the NAIC. If the NAIC
determines that more attention may be warranted, one of five priority
designations is assigned and the insurance department of the state of domicile
is then responsible for follow-up action.
During 2001, Pafco had values outside of the acceptable ranges for five IRIS
tests. These included the change in net writings ratio, the surplus aid to
surplus ratio, the two-year overall operating ratio, the investment yield ratio,
and the change in surplus ratio.
During 2001, Superior had values outside of the acceptable ranges for four IRIS
tests. These included the change in net writings ratio, the surplus aid to
surplus ratio, the two-year overall operating ratio, and the change in surplus
ratio.
During 2001, IGF had values outside of the acceptable ranges for eight IRIS
tests. These included the gross premiums to surplus ratio, the net premium to
surplus ratio, the change in net writings ratio, the two-year overall operating
ratio, the investment yield ratio, the change in surplus ratio, the liabilities
to liquid assets ratio, and the agents' balances to surplus ratio.
Risk-Based Capital Requirements
In order to enhance the regulation of insurer solvency, the NAIC has adopted a
formula and model law to implement risk-based capital ("RBC") requirements for
property and casualty insurance companies designed to assess minimum capital
requirements and to raise the level of protection that statutory surplus
provides for policyholder obligations. Indiana and Florida have substantially
adopted the NAIC model law and Indiana 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 requires
an insurer to submit a plan containing corrective actions and requires the
relevant insurance commissioner to perform an examination or other analysis and
issue a corrective order if surplus falls below 150% of the RBC amount. The
Authorized Control Level gives the relevant insurance commissioner the option
either to take the aforementioned actions or to rehabilitate or liquidate the
insurer if surplus falls below 100% of the RBC amount. The fourth action level
is the Mandatory Control Level that requires the relevant insurance commissioner
to rehabilitate or liquidate the insurer if surplus falls below 70% of the RBC
amount. Based on the foregoing formula, as of December 31, 2001, the RBC
calculations for Superior and Pafco were in excess of 200% and the calculation
for IGF was in excess of 100%, or above authorized Control Level.
Guaranty Funds; Residual Markets
The Company's insurance subsidiaries also may be required under the solvency or
guaranty laws of most states in which they do business to pay assessments (up to
certain prescribed limits) to fund policyholder losses or liabilities of
insolvent or rehabilitated insurance companies. These assessments may be
deferred or forgiven under most guaranty laws if they would threaten an
insurer's financial strength and, in certain instances, may be offset against
future premium taxes. Some state laws and regulations further require
participation by the insurance company subsidiaries in pools or funds to provide
some types of insurance coverage that they would not ordinarily accept. The
Company's affiliates recognize their obligations for guaranty fund assessments
when they receive notice that an amount is payable to a fund. The ultimate
amount of these assessments may differ from that which has already been
assessed.
It is not possible to predict the future impact of changing state and federal
regulation on the Company's operations and there can be no assurance that laws
and regulations enacted in the future will not be more restrictive than existing
laws.
Employees
At March 1, 2002 the Company and its subsidiaries employed approximately 347
full and part-time employees. None of the Company's employees, or its
subsidiaries' employees, is represented either unions or collective bargaining
agreements. The Company believes that relations with these employees are
excellent.
RISK FACTORS
The following factors, in addition to the other information contained in this
report should be considered in evaluating the Company and its prospects.
Significant Losses Have Been Reported and May Continue
Losses from continuing operations were $(31,937,000), $(63,224,000) and
$(47,000,000) for 2001, 2000, and 1999, respectively. Losses from continuing
operations before the effects of income tax, minority interest and amortization
expense were $(20,188,000), $(18,387,000) and $(49,839,000) for 2001, 2000 and
1999, respectively. Losses from continuing operations decreased from 2000
largely due to lower volume and actions taken to reduce operating expenses.
Although the Company has taken a number of actions to address factors
contributing to these past losses, there can be no assurance that operating
losses will not continue.
Recent and Further Regulatory Actions May Affect the Company's Future Operations
The Company's U.S. insurance company subsidiaries, their business operations,
and their transactions with affiliates, including the Company, are subject to
extensive regulation and oversight by the IDOI, the FDOI and the insurance
regulators of other jurisdictions in which the insurance company subsidiaries
write business. Moreover, the U.S. insurance company subsidiaries' losses,
adverse trends and uncertainties discussed in this report have been and continue
to be matters of concern to the domiciliary and other insurance regulators of
the Company's U.S. insurance company subsidiaries and have resulted in enhanced
scrutiny and regulatory action by several regulators (see "Recent Regulatory
Developments" and "Risk-Based Capital Requirements"). The primary purpose of
insurance regulation is the protection of policyholders rather than
shareholders. Failure to resolve issues with the IDOI and the FDOI, and with
other regulators, in a manner satisfactory to the Company could impair its
ability to execute its business strategy or result in future regulatory actions
or proceedings that could otherwise materially and adversely affect its
operations.
The Company is Subject to a Number of Pending Legal Proceedings
As discussed elsewhere in this report, the Company and certain of its
subsidiaries are involved in a number of pending legal proceedings (see Part I
- - Item 3, "Legal Proceedings"). Although the Company believes that many of the
allegations of wrongdoing are without merit and intends to vigorously defend the
claims brought against it, there can be no assurance that such proceedings will
not have a material adverse effect on the Company's financial position or
results of operations. Furthermore, the existence of these lawsuits diverts the
attention of management and they are costly to defend.
The Terms of the Trust Preferred Securities May Restrict The Company's Ability
to Act
SIG has issued through a wholly owned trust subsidiary $135 million aggregate
principal amount in trust originated preferred securities ("Preferred
Securities"). The Preferred Securities have a term of 30 years with annual
interest at 9.5% paid semi-annually. The obligations of the Preferred Securities
are funded from SIG's nonstandard automobile insurance management company. SIG
elected to defer the semi-annual interest payments due in February and August
2000 and 2001 and may continue to defer such payments for up to an aggregate of
five years as permitted by the indenture for the Preferred Securities. All of
the deferred interest (if all payments due in 2002, 2003 and 2004 are deferred)
approximating $84 million will become due and payable in February 2005.
Although there is no present default under the indenture that would accelerate
the payment of the Preferred Securities, the indenture contains a number of
covenants that may restrict SIG's ability to act in the future. These covenants
include restrictions on SIG's ability to incur or guarantee debt, make payment
to affiliates, repurchase its common stock, pay dividends on common stock or
increase its level of certain investments other than investment grade fixed
income securities. There can be no assurance that compliance with these
restrictions and other provisions of the indenture for the Preferred Securities
will not adversely affect the cash flow of SIG.
Uncertain Pricing and Profitability
One of the distinguishing features of the property and casualty industry is that
its products are priced before losses are reported and final costs are known.
Premium rate levels are related in part to the availability of insurance
coverage, which varies according to the level of surplus in the industry.
Increases in surplus have generally been accompanied by increased price
competition among property and casualty insurers. The nonstandard automobile
insurance business, in recent years, has experienced very competitive pricing
conditions and there can be no assurance as to the Company's ability to achieve
adequate pricing. Changes in case law, the passage of new statutes or the
adoption of new regulations relating to the interpretation of insurance
contracts can retroactively and dramatically affect the liabilities associated
with known risks after an insurance contract is in place. New products also
present special issues in establishing appropriate premium levels in the absence
of experience with such products' performance. The level of claims cannot be
accurately determined for periods after the sale of policies, therefore reserves
are estimated and these estimates are used to set price. If they are low, then
resulting rates could be inadequate.
The number of competitors and the similarity of products offered, as well as
regulatory constraints, limit the ability of property and casualty insurers to
increase prices in response to declines in profitability. In states that
require prior approval of rates, it may be more difficult for SIG to achieve
premium rates that are commensurate with its underwriting experience with
respect to risks located in those states. Accordingly, there can be no assurance
that these rates will be sufficient to produce an underwriting profit.
The reported profits and losses of a property and casualty insurance company are
also determined, in part, by the establishment of, and adjustments to, reserves
reflecting estimates 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.
Uncertainty Associated with Estimating Reserves for Unpaid losses and LAE
The reserves for unpaid losses and LAE established by the Company's applicable
subsidiaries represent 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 that
provides no assurance that the ultimate liability will not materially exceed
reserves for losses and LAE and have a material adverse effect on the 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 reserves for losses and LAE. The
historical development of reserves for losses and LAE may not necessarily
reflect future trends in the development of these amounts. Accordingly, it may
not be appropriate to extrapolate redundancies or deficiencies based on
historical information.
Nature of Nonstandard Automobile Insurance Business
The nonstandard automobile insurance business is affected by many factors that
can cause fluctuation in the results of operations of this business. Many of
these factors are not subject to the control of the Company or its subsidiaries.
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 SIG writes business could result in fewer new car sales and less demand
for automobile insurance. These factors, together with competitive pricing and
other considerations, could result in fluctuations in SIG's underwriting
results.
Highly Competitive Business
Nonstandard automobile insurance is a highly competitive business. Many of the
Company's competitors have substantially greater financial resources than the
Company and there can be no assurance that the Company will be able to compete
effectively against such competitors in the future.
The Company competes with both large national writers and smaller regional
companies. The Company's competitors include other companies that serve the
independent agency market, as well as companies that sell insurance directly to
consumers. Direct writers may have certain competitive advantages over agency
writers, including increased name recognition, loyalty of the customer base to
the insurer, and potentially reduced acquisition costs. In addition, certain
competitors have from time to time decreased their prices in an apparent attempt
to gain market share. Also, in certain states, assigned risk plans may provide
nonstandard automobile insurance products at a lower price than private
insurers. In addition, because the Company's nonstandard auto insurance
products are marketed through independent insurance agencies, which represent
more than one insurance company, the Company faces competition within each
agency.
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. Consequently, the Company is
subject to credit risk with respect to the risks ceded to reinsurers. Although
the Company places its reinsurance with reinsurers that it generally believes to
be financially stable, a significant reinsurer's insolvency or inability to make
payments under the terms of a reinsurance treaty could have a material adverse
effect on the Company's financial condition or results of operations.
The amount and cost of reinsurance available to companies specializing in
property and casualty insurance is subject, in large part, to prevailing market
conditions beyond the control of such companies. SIG'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 SIG's ability to maintain its current reinsurance
facilities, which generally are subject to annual renewal. If SIG is unable to
renew such facilities upon their expiration and is unwilling to bear the
associated increase in net exposures, it may need to reduce the level of its
underwriting commitments.
ITEM 2 - PROPERTIES
The headquarters for the Company is located at 2 Eva Road, Suite 200, Etobicoke,
Ontario, Canada in leased space.
The Company's U.S. offices, SIG's headquarters and Pafco are located at 4720
Kingsway Drive, Indianapolis, Indiana in a building that is owned 100% by Pafco
with no encumbrances. The building is an 80,000 square foot multilevel
structure, approximately 50% of which is utilized by the Company, SIG and Pafco.
The remaining space is leased to third parties at a price of approximately $10
per square foot. All corporate administration, accounting and management
functions are located at this property.
Superior's operations are conducted at leased facilities in Atlanta, Georgia;
Orange, California; Glendale, California; Alexandria, Virginia; Bala Cynwyd,
Pennsylvania; Tampa, Jacksonville and Palm Beach Gardens, Florida; and Lakewood,
Colorado. Under a lease term that extends through February 2003, Superior leases
an office at 280 Interstate North Circle, N.W., Suite 500, Atlanta, Georgia.
Under a lease term that extends through August 2003, Superior occupies a leased
office located at 1400 South Marietta Parkway; Suite 105, Marietta, Georgia.
Under a lease term that extends through December 2007, Superior leases an office
located at 5483 West Waters Avenue, Suite 1200, Tampa, Florida. Under a lease
term that extends through June 2002, Superior occupies a leased office located
at 1745 West Orangewood, Orange, California. Under a lease term that extends
through November 2005, Superior leases an office located at 700 North Central
Avenue, Glendale, California. Under a lease term that extends through October
2003, Superior occupies a leased office located at 6303 Little River Turnpike,
Suite 220, Alexandria, Virginia. Under a lease term that extends through April
2003, Superior leases an office located at 150 Monument Road, Bala Cynwyd,
Pennsylvania. Under a lease term that extends through September 2002, Superior
occupies a leased office at 4500 PGA Blvd., Suite 304A, Palm Beach Gardens,
Florida. Under a lease term that extends through March 2005, Superior leases an
office located at 141 Union Blvd., Suite 130, Lakewood, Colorado.
Underwriting, customer service, and administration activities are located at the
Atlanta property. Claims activities are located in the Atlanta, Tampa, Orange,
Glendale and Alexandria properties. Claims property damage training is
performed at the Marietta property.
SIGF is located at 2300 Glades Road, Suite 135E, Boca Raton, Florida in leased
space.
The Company considers all of its properties suitable and adequate for its
current operations.
ITEM 3 - LEGAL PROCEEDINGS
As previously reported, IGF had been a party to a number of pending legal
proceedings and claims relating to agricultural production interruption
insurance policies (the "AgPI Program") which were sold during 1998. All of the
policies of insurance, which were issued in the AgPI Program, were issued by and
under the name of Mutual Service Casualty Insurance Company ("MSI"), a Minnesota
corporation with its principal place of business located in Arden Hills,
Minnesota. Sales of this product resulted in large underwriting losses by IGF.
Approximately $29,147,278 was paid through December 31, 2001 in settlement of
legal proceedings and claims related to the AgPI Program, with payments totaling
approximately $359,000 during 2001. SIG reduced reserves related to AgPI by
approximately $7 million during 2001. SIG has retained a reserve of
approximately $3 million as a provision for expenses and settlement of ongoing
litigation.
All policyholder claims had been settled during 2000. On January 12, 2001 a case
was filed in the Superior Court of California, County of Fresno, entitled S&W
Seed Company, Dudley Silveira, Ric Blanchard and Darrell Silveira v. Mutual
Service Casualty Insurance Company, IGF Insurance Company, and Dibuduo &
Defendis Insurance Agency, Inc.; Case No. OICE CG 00137. The case was brought
by four AgPI policyholders who had previously settled their AgPI claims pursuant
to binding settlement agreements who now seek additional compensation by
asserting through litigation that IGF and the third party carrier paid less than
the policy limits they were promised when they purchased the policy and that
each settling policyholder was forced to accept the lesser amount due their
economic duress - a legal theory recognized in California if certain elements of
economic duress can be established. Discovery is proceeding. On January 16,
2002, the court entered an order granting IGF's motion for judgment on the
pleadings and required plaintiffs to show an insurable interest. Plaintiffs
amended their complaint attempting to allege an insurable interest and on March
19, 2002, the court granted IGF's demurrer to the amended complaint. In
granting the demurrer the court held that any recovery payable to plaintiffs
would be limited to their actual economic losses regardless of how much
plaintiffs thought they had been promised (i.e. plaintiffs cannot be paid policy
limits without regard to actual losses incurred). The plaintiffs have ten (10)
days in which to again amend their complaint.
IGF remains a defendant/cross-complainant in eight lawsuits pending in Fresno
County, California which relate to the cross-claims between the selling brokers,
MSI and IGF. These lawsuits have been consolidated for all purposes and
discovery is proceeding.
IGF and MSI are engaged in arbitration with respect to responsibility for the
AgPI program settlements. The arbitration commenced in December 2000 and the
parties had their first meeting with the panel on May 22, 2001. At that meeting,
MSI moved for an order requiring IGF to post pre-hearing security through the
issuance of a letter of credit in the amount of $39 million. Over IGF's
objection, in a two to one vote, the panel ordered IGF to post the $39 million
security by June 19, 2001. IGF sought relief from the order in the United
States District Court for the District of New Jersey, but was unsuccessful.
On November 7, 2001, the arbitration panel considered a petition for default
judgment against IGF based on IGF's failure to post the pre-hearing security.
On November 23, 2001, the arbitration panel issued an order denying MSI's motion
for default judgment and requiring IGF to place $600,000 in an escrow account to
cover MSI's prospective legal expenses. The panel also continued its original
order that required IGF to post the $39 million security. IGF has deposited
$600,000 into an escrow account as required by the arbitration panel but has not
posted the $39 million letter of credit and is financially unable to do so.
On June 25, 2001, MSI filed a complaint for preliminary and permanent injunctive
relief and damages (the "MSI Complaint") against the Company, SIG, IGFH, Granite
Re, and certain affiliates of those companies, as well as certain members of the
Symons family, and Acceptance Insurance Companies Inc. ("Acceptance") in the
United States District Court for the Southern District of Indiana, Indianapolis
Division. The MSI Complaint alleges that the June 6, 2001 transfer of IGF's
assets to Acceptance and the payments by Acceptance to the Company, SIG and
Granite Re violated Indiana law and are voidable. In addition, the MSI
Complaint alleges that Acceptance, the Company, SIG, IGFH and the Symons Family
are liable to MSI for the entire $39 million claim which MSI is asserting
against IGF in the arbitration proceeding on theories of successor liability and
"piercing the corporate veil." The MSI Complaint seeks preliminary and
permanent injunctive relief against the defendants, an order voiding the various
transactions between and among the defendants and an order determining that the
defendants are directly responsible to MSI for MSI's $39 million claim against
IGF.
The defendants filed answers to the MSI Complaint denying the material
allegations and asserting affirmative defenses to the MSI Complaint. A hearing
on MSI's Motion for Preliminary Injunctive Relief was held Thursday, August 2,
2001. On August 3, 2001, the court denied MSI preliminary injunctive relief. On
January 7, 2002, MSI filed an amended complaint which added Superior Group
Management, Superior Group, Superior and Pafco as defendants (the "MSI Amended
Complaint"). The MSI Amended Complaint asserts claims substantively identical
to the claims in the MSI Complaint. On February 21, 2002, the defendants filed
answers to the MSI Amended Complaint and denied the material allegations
contained in the MSI Amended Complaint and asserted affirmative defenses.
Should MSI be successful in obtaining permanent injunctive relief against the
Company and its affiliates, any such relief would have an adverse impact upon
the Company and its affiliates and their respective assets and operations.
Further, in the event MSI is successful in voiding the various transactions
between the defendants or the defendants are determined to be responsible to MSI
for MSI's $39 million claim against IGF, those orders and determinations could
have an adverse effect upon the Company and its affiliates and their respective
assets and operations.
SIG, IGFH and IGF are parties to a "Strategic Alliance Agreement" dated February
28, 1998 (the "SAA") with Continental Casualty Company ("CNA"), pursuant to
which IGF acquired certain crop insurance operations of CNA. Through
reinsurance agreements, CNA was to share in IGF's profits or losses on IGF's
total crop insurance business. By letter dated January 3, 2001, CNA gave notice
pursuant to the SAA of its exercise of the "Put Mechanism" under the SAA
effective February 19, 2001. According to the SAA, upon exercise of the Put
Mechanism, IGFH is obligated to pay CNA an amount equal to 5.85 times "Average
Pre-Tax Income", an amount based in part upon payments made to CNA under the
SAA. The SAA further provided that 30 days after exercise of the Put, IGF will
execute a promissory note payable six months after the exercise of the Put in
the principal amount equal to the amount owed, as specified by the SAA. In a
letter dated March 20, 2001, CNA also asserted a claim for amounts allegedly due
under reinsurance agreements for the 2000 crop year.
SIG believes it has claims against CNA and defenses to CNA's claim that may
ultimately offset or reduce amounts owed to CNA. SIG and CNA engaged in
discussions regarding possible alternatives for the resolution of their
respective claims against each other. Those discussions ultimately proved to be
unsuccessful.
Following the failure of settlement discussions, on June 4, 2001, IGF, IGFH and
SIG filed a complaint against CNA (the "IGF Complaint") in the United States
District Court for the Southern District of Indiana, Indianapolis Division. The
IGF Complaint asserts claims against CNA for fraud and constructive fraud in
connection with the SAA and breach of contract and seeks relief against CNA for
compensatory and punitive damages. On June 27, 2001, CNA filed its "Answer,
Separate Defenses and Counterclaim", in which CNA generally denied the material
allegations of the IGF Complaint and asserted various defenses to those claims.
On June 6, 2001, CNA filed a complaint against IGF, IGFH and SIG in the United
States District Court for the Southern District of Indiana, Indianapolis
Division (the "CNA Complaint"), asserting claims based on the SAA and related
agreements for approximately $25 million allegedly owed CNA by virtue of its
exercise of the Put Mechanism, $3 million for amounts allegedly due under
reinsurance agreements for the 2000 crop year, $1 million for certain "fronting
costs," and $1 million pursuant to a note executed by IGFH to CNA's affiliate in
connection with the acquisition by IGFH of North American Crop Underwriters,
Inc. in 1998. CNA also asserted claims to the effect that the June 6, 2001 sale
of IGF assets to Acceptance resulted in payments of funds to Goran, SIG and
Granite Re, which funds allegedly should have been paid to IGF instead. On June
6, 2001, CNA asked the district court to enter a temporary restraining order
preventing IGF, IGFH and SIG from disposing of the proceeds received by them in
connection with the sale of IGF assets to Acceptance. In an emergency hearing,
the court denied CNA the relief it requested, without prejudice to
reconsideration of those issues at a future time. CNA has since amended the CNA
Complaint to add Goran and Granite Re as defendants. CNA's counterclaim in
response to the IGF Complaint asserts essentially the same claims against the
same parties as the amended CNA Complaint.
On September 20, 2001 the court ordered a consolidation of the two cases. On
December 4, 2001, CNA filed an Amended Answer and Counterclaim which added
Pafco, Superior and certain members of the Symons family as counterdefendants.
CNA's Amended Answer and Counterclaim also alleges that IGF, IGFH, SIG, and the
other counterdefendants are alter egos of each other and are directly liable to
CNA for its claims. Discovery in the case is proceeding. Although the Company
and its affiliates continue to believe that they have claims against CNA and
defenses to CNA's claims which may offset or reduce amounts owing by the Company
or its affiliates to CNA, there can be no assurance that the ultimate resolution
of the claims asserted by CNA against the Company and its affiliates will not
have a material adverse effect upon the Company's and its affiliates' financial
condition or results of operations.
The California Department of Insurance ("CDOI") filed a Notice of Noncompliance
against Superior on June 29, 2001, which alleged that broker fees were charged
by independent brokers in violation of California law. SIG and the CDOI agreed
to a resolution of the matters raised in the Notice of Noncompliance by a
Stipulation and Consent Order entered on December 26, 2001 wherein Superior
agreed to pay the CDOI a penalty in the amount of $200,000 in settlement of the
action.
The Company is a defendant in a case filed on February 23, 2000, in the United
States District Court for the Southern District of Indiana entitled Robert Winn,
et al. v. Symons International Group, Inc., et al., Cause No. IP 00-0310-C-B/S.
Other parties named as defendants are SIG, three individuals who were or are
officers or directors of SIG or of Goran, PricewaterhouseCoopers LLP and
Schwartz Levitsky Feldman, LLP. The case purports to be brought on behalf of a
class consisting of purchasers of SIG's stock or Goran's stock during the period
February 27, 1998, through and including November 18, 1999. Plaintiffs allege,
among other things, that defendants misrepresented the reliability of SIG's and
Goran's reported financial statements, data processing and financial reporting
systems, internal controls and loss reserves in violation of Section 10(b) of
the Securities Exchange Act of 1934 ("1934 Act") and SEC Rule 10b-5 promulgated
thereunder. The individual defendants are also alleged to be liable as
"controlling persons" under Sec.20(a) of the 1934 Act. The Company, SIG and the
individual defendants filed a motion to dismiss the amended consolidated
complaint for failure to state a claim and for failure to plead with
particularity as required by Fed. R. Civ. P.9 (b) and the Private Securities
Litigation Reform Act of 1995. The accounting firms also filed motions to
dismiss. On February 19, 2002 the court granted in part and denied in part
defendants' motion to dismiss. On March 15, 2002 the Company, SIG and the
individual defendants filed a motion for reconsideration of the court's ruling
on the motion to dismiss, or alternatively to certify an order for appeal.
Superior is a defendant in a case filed on May 8, 2001 in the United States
District Court for the Southern District of Florida entitled The Chiropractic
Centre, Inc. v. Superior Insurance Company which purports to be brought on
behalf of a class consisting of healthcare providers improperly paid discounted
rates on services to patients based upon a preferred provider contract with a
third party. The plaintiff alleges that Superior breached a third party
beneficiary contract, committed fraud and engaged in racketeering activity in
violation of federal and Florida law by obtaining discounted rates offered by a
third party with whom the plaintiff contracted directly. On September 28, 2001
the case was consolidated with fifteen or more similar actions. On October 29,
2001 Superior filed a motion to dismiss the action for lack of jurisdiction,
which is pending. Superior intends to vigorously defend the claims brought
against it.
IGF is a defendant in a declaratory action entitled Kevin L. Stevens, Bank of
America, Conservator of the Estate of Samuel Jay Ramsey and Gael Ramsey v. IGF
Insurance Company originally filed on February 21, 2001 in the Circuit Court of
Green County, Missouri. The action was subsequently removed to the Federal
District Court for the Western District of Missouri. On October 11, 2001, the
Federal District Court granted declaratory judgment in favor of IGF's insured,
Stevens, and held that IGF was responsible for payment of the premium
attributable to a $15 million appeal bond for Steven's appeal from a judgment
against him in a related personal injury action. IGF believes that the District
Court erred in granting declaratory judgement for Stevens and in holding that
IGF is responsible for payment of the premium on the bond. IGF has appealed to
the United States Court of Appeals for the Eighth Circuit for relief from the
declaratory judgment. In the event IGF is ultimately required to pay the
premium on the appeal bond, it would have a material adverse impact on IGF's
financial position.
Superior is a defendant in a case filed September 15, 2000 in the Circuit Court
for Lee County, Florida entitled Charles L. Fulton, D.C. v. Superior Insurance
Company. The case is purported to be brought on behalf of a class consisting of
healthcare providers that rendered treatment to and obtained a valid assignment
of benefits from persons insured by Superior. The court granted Superior's
motions to dismiss the original and amended complaints but denied Superior's
motion to dismiss the second amended complaint. The court is permitting
plaintiff to go forward with class discovery. The plaintiff alleges that
Superior reduced or denied claims for medical expenses payable to the plaintiff
without first obtaining a written report in violation of Florida law. The
plaintiff also alleges that Superior inappropriately reduced the amount of
benefits payable to the plaintiff in breach of Superior's contractual
obligations to the plaintiff. Superior believes the allegations of wrongdoing
in violation of law are without merit and intends to vigorously defend the
claims brought against it.
Superior is a defendant in a case now entitled Oviedo Family Chiropractic
Center, P.A. v. Superior Insurance Company originally filed February 4, 2000 in
the Circuit Court for Dade County, Florida and entitled Medical Re-Hab Center v.
Superior Insurance Company. The court granted Superior's motions to dismiss the
original and first amended complaints. The plaintiff has filed a motion for
leave to file a second amended complaint which is pending. The case purports to
be brought on behalf of a class consisting of (i) healthcare providers that
rendered treatment to Superior insureds and claimants of Superior insureds and
(ii) such insureds and claimants. The plaintiff alleges that Superior reduced
medical benefits payable and improperly calculated interest in violation of
Florida law. Superior believes the claim is without merit and intends to
vigorously defend the charges brought against it.
Superior Guaranty is a defendant in a case filed on October 8, 1999, in the
Circuit Court for Manatee County, Florida entitled Patricia Simmons v. Superior
Guaranty Insurance Company. The case purports to be brought on behalf of a
class consisting of purchasers of insurance from Superior Guaranty. The
plaintiff alleges that the defendant charged interest in violation of Florida
law. Superior Guaranty believes that the allegations of wrongdoing as alleged
in the complaint are without merit and intends to vigorously defend the claims
brought against it.
Superior Guaranty is a defendant in a case filed on November 26, 1996, in the
Circuit Court for Lee County, Florida entitled Raed Awad v. Superior Guaranty
Insurance Company, et al. The case purports to be brought on behalf of a class
consisting of purchasers of insurance from Superior Guaranty. The plaintiffs
allege that the defendant charged premium finance service charges in violation
of Florida law. Superior Guaranty believes that the allegations of wrongdoing
as alleged in the complaint are without merit and intends to vigorously defend
the claims brought against it.
On July 7, 2000 the FDOI issued a notice of its intent to issue an order (the
"Notice") which principally addressed certain policy and finance fee payments by
Superior to Superior Group. A formal administrative hearing to review the
Notice and a determination that the order contemplated by the Notice not be
issued was held in February 2001. The administrative law judge entered a
recommended order on June 1, 2001 that was acceptable to SIG. On August 30,
2001 the FDOI rejected the recommended order and issued its final order which
SIG believes improperly characterizes billing and policy fees paid by Superior
to Superior Group. Superior filed an appeal of the final order to Florida
District Court. On March 4, 2002, the FDOI filed a petition in the Circuit Court
of the Second Judicial Circuit in and for Leon County, Florida that seeks court
enforcement of the FDOI's final order. Superior filed a motion with the FDOI
for stay of the FDOI's final order. Superior also filed a motion with the
District Court of Appeal, which was denied pending a ruling from the FDOI on
Superior's motion for stay.
See "BUSINESS-REGULATION-Recent Regulatory Developments", in Part I of this
report, for additional legal matters involving insurance regulatory matters.
The Company's insurance subsidiaries are parties to other litigation arising in
the ordinary course of business. The Company believes that the ultimate
resolution of these lawsuits will not have a material adverse effect on its
financial condition or results of operations. The Company, through its claims
reserves, reserves for both the amount of estimated damages attributable to
these lawsuits and the estimate costs of litigation.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Information regarding the trading market for the Company's common stock, the
range of selling prices for each quarterly period since January 1, 2000, and the
approximate number of holders of common stock as of December 31, 2001 and other
matters is included under the caption "Market and Dividend Information" on page
47 of the 2001 Annual Report, included as Exhibit 13, which information is
incorporated herein by reference.
ITEM 6 - SELECTED FINANCIAL DATA
The data included on page 5 of the 2001 Annual Report, included as Exhibit 13,
under "Selected Financial Data" is incorporated herein by reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in the 2001 Annual Report on pages
6 through 16 included as Exhibit 13 is incorporated herein by reference.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The discussion entitled "Quantitative and Qualitative Disclosures About Market
Risk" included in the 2001 Annual Report on pages 14 through 15 included as
Exhibit 13 is incorporated herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements in the 2001 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 2001 annual meeting of common shareholders to be filed with the Commission
pursuant to Regulation 14A (the "Proxy Statement").
EXECUTIVE OFFICERS OF THE REGISTRANT
Presented below is certain information regarding the executive officer of the
Company who is not also a director. His age and positions with the Company are
as follows:
NAME AGE POSITION
John G. Pendl 40 Vice President, Chief Financial Officer and
Treasurer
Mr. Pendl has served as Vice President, Chief Financial Officer and Treasurer
since October 2001. From 1998 to September 2001, Mr. Pendl served as M&A
Analyst and Divisional Controller for Collision Team of America, Inc., a
subsidiary of Ford Motor Company. Mr. Pendl also held various corporate
financial positions between 1991 and 1998, primarily with The Corange Group.
Finally, Mr. Pendl served as a tax consultant with the firm of Price Waterhouse
from 1984 through 1990. Mr. Pendl holds an MBA degree from Indiana University
and is a Certified Public Accountant in the State of Indiana.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
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
Proxy Statement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the
Proxy Statement.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The documents listed below are filed as a part of this Report, except as
otherwise indicated:
1. Financial Statements. The following consolidated financial statements found
on the pages of the 2001 Annual Report are incorporated into Item 8 of this
Report by reference:
Description of Financial Statement Item Location in 2001 Annual Report
- ------------------------------------------- --------------------------------
Reports of Independent Accountants Page 46
Consolidated Balance Sheets, December 31,
2001 and 2000 Page 17
Consolidated Statements of Operations, Years
Ended December 31, 2001, 2000 and 1999 Page 18
Consolidated Statements of Changes In
Stockholders' Equity (Deficit), Years Ended
December 31, 2001, 2000 and 1999 Page 19
Consolidated Statements of Cash Flows,
Years Ended December 31, 2001, 2000 and 1999 Page 20
Notes to Consolidated Financial Statements,
Years Ended December 31, 2001,2000 and 1999 Pages 21 through 44
2. Financial Statement Schedules. The following financial statement schedules
are included beginning on page 27:
Reports of Independent Accountants
Schedule II - Condensed Financial Information of Registrant
Schedule IV - Reinsurance
Schedule V - Valuation and Qualifying Accounts
Schedule VI - Supplemental Information Concerning Property - Casualty Insurance
Operations
3. Exhibits. The Exhibits set forth on the Index to Exhibits are incorporated
herein by reference.
4. Reports on Form 8-K: No reports on Form 8-K were filed during the fourth
quarter of 2001.
Board of Directors and Stockholders of
Goran Capital Inc. and Subsidiaries
The audit referred to in our report dated March 29, 2002, relating to the
consolidated financial statements of Goran Capital, Inc. and subsidiaries, which
is incorporated in Item 8 of this Form 10-K by reference to the annual report to
shareholders for the year ended December 31, 2001 included the audit of the
financial statement schedules listed in the accompanying index. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based upon our audits.
In our opinion, such financial statement schedules present fairly, in all
material respects, the information set forth therein.
/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Grand Rapids, Michigan
March 29, 2002
GORAN CAPITAL INC.- CONSOLIDATED
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES.
The information required by this schedule is included in note 3 of Notes to
Consolidated Financial Statement.
GORAN CAPITAL INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
As Of December 31, 2001 and 2000
(In thousands, except share data)
2001 2000
--------- ---------
Assets:
Cash and Short-term Investments. . . . . . . . . $ 2,618 $ 197
Loans to Related Parties . . . . . . . . . . . . 219 3,698
Capital and Other Assets . . . . . . . . . . . . 531 68
Investment in Subsidiaries, at Cost. . . . . . . 10,639 10,738
--------- ---------
Total Assets . . . . . . . . . . . . . . . . . . 14,007 $ 14,701
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Loans from Related Parties and Other Liabilities $ 10,800 $ 5,705
--------- ---------
Total Liabilities. . . . . . . . . . . . . . . . 10,800 5,705
--------- ---------
Stockholders' Equity:
Common Shares. . . . . . . . . . . . . . . . . . 18,502 18,165
Cumulative Translation Adjustment. . . . . . . . 570 1,509
Deficit. . . . . . . . . . . . . . . . . . . . . (15,865) (10,678)
--------- ---------
Total Stockholders' Equity . . . . . . . . . . . 3,207 8,996
--------- ---------
Total Liabilities and Stockholders' Equity . . . $ 14,007 $ 14,701
========= =========
GORAN CAPITAL INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
STATEMENT OF EARNINGS (LOSS) AND ACCUMULATED DEFICIT
For The Years Ended December 31, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
--------- --------- --------
Revenues
Management Fees . . . . . . . . . . . . . . . . . . . . $ -- $ -- $ 75
Net Investment Income . . . . . . . . . . . . . . . . . 173 5 46
Non-Compete Fee Income. . . . . . . . . . . . . . . . . 875 -- --
--------- --------- --------
Total Revenues. . . . . . . . . . . . . . . . . . . . . 1,048 5 121
--------- --------- --------
Expenses:
General, Administrative, Acquisition Expenses and Taxes 6,235 1,257 1,233
--------- --------- --------
Total Expenses. . . . . . . . . . . . . . . . . . . . . 6,235 1,257 1,233
--------- --------- --------
Net Loss. . . . . . . . . . . . . . . . . . . . . . . . (5,187) (1,252) (1,112)
Deficit, Beginning of Year. . . . . . . . . . . . . . . (10,678) (9,426) (8,314)
--------- --------- --------
Deficit End of Year . . . . . . . . . . . . . . . . . . $(15,865) $(10,678) $(9,426)
========= ========= ========
GORAN CAPITAL INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
For The Years Ended December 31, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
-------- -------- --------
Cash Flows from Operations
Net Loss . . . . . . . . . . . . . . . . . $(5,187) $(1,252) $(1,112)
Adjustments:
Foreign Exchange Losses. . . . . . . . . . (165) -- --
Non-Compete Agreement Receipts . . . . . . 4,622 -- --
Items Not Involving Cash:
Decrease (Increase) in Accounts Receivable 3,987 (975) (2,118)
Decrease (Increase) in Other Assets. (449) (485) (166)
Increase (Decrease) in Accounts Payable. . 1,165 2,970 2,735
Translation Adjustment . . . . . . . . . . (503) (89) (436)
-------- -------- --------
Net Cash Provided (Used) by Operations . . 3,470 169 (1,097)
-------- -------- --------
Cash Flows From Financing Activities:
Purchase of Common Shares. . . . . . . . . (218) (185) --
Purchase of Investments. . . . . . . . . . (831) -- --
-------- --------
Issue of Common. . . . . . . . . . . -- -- 1,077
-------- -------- --------
Net Cash Provided by Financing Activities. (1,049) (185) 1,077
-------- -------- --------
Net Increase (Decrease) in Cash. . . . . . 2,421 (16) (20)
Cash at Beginning of Year. . . . . . . . . 197 213 233
-------- -------- --------
Cash at End of Year. . . . . . . . . . . . 2,618 $ 197 $ 213
======== ======== ========
Cash Resources are Comprised of:
Cash . . . . . . . . . . . . . . . . . . . $ 34 $ 56 $ 73
Short-Term Investments . . . . . . . . . . 2,584 141 140
-------- -------- --------
$ 2,618 $ 197 $ 213
======== ======== ========
GORAN CAPITAL INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
For The Years Ended December 31, 1999, 2000 and 2001
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, 2001, 2000 and 1999
(In Thousands)
Property and Liability Insurance 2001 2000 1999
---------- --------- ---------
Direct Amount . . . . . . . . . . . $ 161,092 $168,626 $227,774
---------- --------- ---------
Assumed From Other Companies. . . . 32,094 13,473 8,627
---------- --------- ---------
Ceded to Other Companies. . . . . . (106,324) (78,637) 7,361
---------- --------- ---------
Net Amounts . . . . . . . . . . . . 86,862 $103,462 $243,762
========== ========= =========
Percentage of Amount Assumed to Net 36.9% 13.0% 3.5%
---------- --------- ---------
GORAN CAPITAL INC.- CONSOLIDATED
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
For The Years Ended December 31, 1999, 2000 and 2001
(In Thousands)
2001 2000 1999
Allowance for Allowance for Allowance for
Doubtful Accounts Doubtful Accounts Doubtful Accounts
------------------ ------------------ ------------------
Additions:
Balance at Beginning of Period . $ 1,940 $ 1,479 $ 4,953
Charged to Costs and Expenses(1) 6,122 9,623 6,134
Charged to Other Accounts. . . . - - -
Deductions from Reserves . . . . 6,536 9,162 9,608
------------------ ------------------ ------------------
Balance at End of Period . . . . $ 1,526 $ 1,940 $ 1,479
============= =============== ==============
(1) The Company continually monitors the adequacy of its allowance for doubtful
accounts and believes the balance of such allowance at December 31, 2001, 2000
and 1999 was adequate.
GORAN CAPITAL INC.- CONSOLIDATED
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY - CASUALTY INSURANCE OPERATIONS
For The Years Ended December 31, 2001, 2000 and 1999
(In Thousands)
Reserves
for
Unpaid Amorti- Paid
Claims zation of Claims
Deferred and Deferred and
Policy Claim Net Claims and Policy Claim
Acquisi- Adjust- Invest- Adjustment Expenses Acqui- Adjust-
tion ment Unearned Earned ment Incurred sition ment Premium
Year Costs Expense Premiums Premiums Income Related to: Costs Expense Written
- ---- ------------- --------- -------- ------------------- ------ ----------- -------- ------- -------
Current Prior
Years Years
------------- ---------
1999 13,908 157,425 80,561 261,800 13,125 217,686 24,722 42,665 227,577 236,401
2000 6,454 113,149 62,386 145,532 12,171 132,781 (19,013) 37,453 174,412 182,099
2001 763 84,876 59,216 108,197 6,998 94,556 660 1,380 132,599 193,186
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.
____________________________
April 8, 2002 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 April 8, 2002, on behalf of
the Registrant in the capacities indicated:
(1) Principal Executive Officer:
____________________
/s/ Alan G. Symons
Chief Executive Officer
(2) Principal Financial Officer:
____________________
/s/ John G. Pendl
Chief Financial Officer,
Principal Accounting Officer
(3) The Board of Directors:
____________________ ____________________ ____________________
/s/ G. Gordon Symons /s/ J. Ross Schofield /s/ John K.McKeating
Chairman of the Board Director Director
____________________ ____________________
/s/ Ron L. Foxcroft /s/ David B. Shapira
Director Director
____________________ __________________
/s/ Douglas H. Symons /s/ Alan G. Symons
Director Director
EXHIBIT INDEX
Reference to
Regulation S-K
Exhibit No. Document
2.1 The Strategic Alliance Agreement by and between Continental
Casualty Company and IGF Insurance Company, IGF Holdings, Inc. and Symons
International Group, Inc. dated February 28, 1998 is incorporated by reference
to Exhibit 2.1 of the Registrant's 1997 Form 10-K.
2.2 The MPCI Quota Share Reinsurance Contract by and between
Continental Casualty Company and IGF Insurance Company, IGF Holdings, Inc. and
Symons International Group, Inc. dated February 28, 1998 is incorporated by
reference to Exhibit 2.2 of the Registrant's 1997 Form 10-K.
2.3 The MPCI Quota Share Reinsurance Agreement by and between
Continental Casualty Company and IGF Insurance Company, IGF Holdings, Inc. and
Symons International Group, Inc. dated February 28, 1998 is incorporated by
reference to Exhibit 2.3 of the Registrant's 1997 Form 10-K.
2.4 The Crop Hail Insurance Quota Share Contract by and between
Continental Casualty Company and IGF Insurance Company, IGF Holdings, Inc. and
Symons International Group, Inc. dated February 28, 1998 is incorporated by
reference to Exhibit 2.4 of the Registrant's 1997 Form 10-K.
2.5 The Crop Hail Insurance Quota Share Agreement by and between
Continental Casualty Company and IGF Insurance Company, IGF Holdings, Inc. and
Symons International Group, Inc. dated February 28, 1998 is incorporated by
reference to Exhibit 2.5 of the Registrant's 1997 Form 10-K.
2.6 The Crop Hail Insurance Services and Indemnity Agreement by and
between Continental Casualty Company and IGF Insurance Company, IGF Holdings,
Inc. and Symons International Group, Inc. dated February 28, 1998 is
incorporated by reference to Exhibit 2.6
of the Registrant's 1997 Form 10-K.
2.7 The Multiple Peril Crop Insurance 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
is incorporated by reference to Exhibit 2.7 of the Registrant's 1997 Form 10-K.
2.8 The Stock Purchase Agreement between IGF Holdings, Inc. and 1911 CORP,
dated July 7, 1998 is incorporated by reference to Exhibit 2.9 of the
Registrant's 1998 Form 10-K.
3.1 The Registrant's Restated Articles of Incorporation are incorporated by
reference to Exhibit 1 of the Registrant's Form 20-F filed October 31, 1994.
3.2 Registrant's Restated Bylaws 1 is incorporated by reference to Exhibit
3.2 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 to Exhibit 4.1 in Symons
International Group, Inc.'s Registration Statement on Form S-4, Reg. No.
333-35713.
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 is incorporated by reference to Exhibit 4.3(2) in
Registrant's 1997 Form 10-K.
10.1 The Management Agreement among Superior Insurance Company, Superior
American Insurance Company, Superior Guaranty Insurance Company and GGS
Management, Inc. dated April 30, 1996 is incorporated by reference to Exhibit
10.5 of Symons International Group, Inc.'s Registration Statement on Form S-1,
Reg. No. 333-9129.
10.2 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.
10.3 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 Symons International Group, Inc.'s Registration
Statement on Form S-1, Reg. No. 333-9129.
10.4 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.
10.5 The Registration Rights Agreement between Goran Capital Inc. 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.
10.6* The Employment Agreement between Goran Capital Inc., Symons
International Group, Inc. and Douglas H. Symons effective March 8, 1999 is
incorporated by reference to Exhibit 10.5 of the Registrant's 2000 Form 10-K.
10.7* The Employment Agreement between Goran Capital Inc., Symons
International Group, Inc. and David N. Hafling dated October 15, 2002.
10.8* The Employment Agreement between Goran Capital Inc., Symons
International Group, Inc. and Gene S. Yerant effective January 10, 2000.
10.9 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.
10.10 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.
10.11 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.
10.12 The Insurance Service Agreement between Mutual Service Casualty
Company and IGF Insurance Company dated May 20, 1996 is incorporated by
reference to Exhibit 10.25 of Symons International Group, Inc.'s Registration
Statement on Form S-1, Reg. No. 333-9129.
10.13(2) The Crop Hail Quota Share Reinsurance Contract and Crop Insurance
Service Agreement between Pafco General Insurance Company and IGF Insurance
Company is incorporated by reference to Exhibit 10.27(2) of Symons International
Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
10.13(3) The Automobile Third Party Liability and Physical Damage Quota
Share Reinsurance Contract between IGF Insurance Company and Pafco General
Insurance Company is incorporated by reference to Exhibit 10.27(3) of Symons
International Group, Inc.'s Registration Statement on Form S-1, Reg. No.
333-9129.
10.13(5) The Standard Reinsurance Agreement between Federal Crop Insurance
Corporation and IGF Insurance Company dated July 1, 1997 is incorporated by
reference to Exhibit 10.13(6) of Registrant's 1999 Form 10-K.
10.13(9) Amendment No. 1 to the 1998 Standard Reinsurance Agreement dated
July 29, 1998 is incorporated by reference to Exhibit 10.13(9) of Registrant's
1999 Form 10-K .
10.13(10) The Aggregate Loss Ratio Reinsurance Agreement between National
Union Fire Insurance Company of Pittsburgh, PA and Granite Reinsurance Company,
Ltd. effective January 1, 2000.
10.13(11) The Quota Share Reinsurance Agreement between Superior Insurance
Company and its Wholly -Owned Insurance Subsidiaries and National Union Fire
Insurance Company of Pittsburgh, PA effective January 1, 2000.
10.13(12) The Quota Share Reinsurance Agreement between Pafco General
Insurance Company and National Union Fire Insurance Company of Pittsburgh, PA
effective January 1, 2000.
10.13(13) Addendum I to Aggregate Loss Ratio Reinsurance Agreement between
National Union Fire Insurance Company of Pittsburgh, PA and Granite Reinsurance
Company, Ltd. dated December 21, 2000.
10.13(14) Addendum No. 2 to Quota Share Reinsurance Agreement effective
January 1, 2000 between Superior Insurance Company and its Wholly-Owned
Insurance Subsidiaries and National Union Fire Insurance Company of Pittsburgh,
PA effective December 30, 2000.
10.13(15) Addendum No. 2 to Quota Share Reinsurance Agreement effective
January 1, 2000 between Pafco General Insurance Company and National Union Fire
Insurance Company of Pittsburgh, PA effective December 30, 2000.
10.14(1) The SIG Capital Trust I 9 % Trust Preferred Securities Purchase
Agreement dated August 7, 1997 is incorporated by reference to Exhibit 10.19(1)
of Symons International Group, Inc.'s December 31, 1997 Form 10-K/A, Reg. No.
000-29042.
10.14(2) The Registration Rights Agreement among Symons International Group,
Inc., SIG Capital Trust I and Donaldson, Lufkin & Jenrette Securities
Corporation, Goldman, Sachs & Co., CIBC Wood Gundy Securities Corp. and Mesirow
Financial, Inc. dated August 12, 1997 is incorporated by reference to Exhibit
4.7 in Symons International Group, Inc.'s Registration Statement on Form
S-4,Reg. No. 333-35713.
10.14(3) The Declaration of Trust of SIG Capital Trust 1 dated August 4,
1997 is incorporated by reference to Exhibit 4.3 in Symons International Group,
Inc.'s Registration Statement on Form S-4, Reg. No. 333-35713.
10.14(4) The Amended and Restated Declaration of Trust of SIG Capital Trust
I dated August 12, 1997 is incorporated by reference to Exhibit 4.4 in Symons
International Group, Inc.'s Registration Statement on Form S-4, Reg. No.
333-35713.
10.15 The Goran Capital Inc. Share Option Plan is incorporated by reference
to Exhibit 10.20 of Symons International Group, Inc.'s Registration Statement on
Form S-1, Reg. No. 333-9129.
10.16* The Employment Agreement between Symons International Group,
Inc., Goran Capital Inc. and Gregg F. Albacete effective January 26, 2000.
10.17 The Asset Purchase Agreement by and among Acceptance Companies
Inc., American Growers Insurance Company, American Agrisurance, Inc., Goran
Capital Inc., Symons International Group, Inc., IGF Holdings, Inc. and IGF
Insurance Company dated May 23, 2001 incorporated by reference to Exhibit 10.9
of the Registrant's June 30, 2001 Form 10-Q/A.
10.18 First Amendment to Asset Purchase Agreement by and among
Acceptance Insurance Companies, Inc., American Growers Insurance Company,
American Agrisurance, Inc., Goran Capital Inc., Symons International Group,
Inc., IGF Holdings, Inc. and IGF Insurance Company dated June 5, 2001
incorporated by reference to Exhibit 10.10 of the Registrant's June 30, 2001
Form 10-Q/A.
10.19 Assignment and Assumption Agreement by IGF Holdings, Inc. and IGF
Insurance Company and Acceptance Insurance Companies Inc. dated May 23, 2001
incorporated by reference to Exhibit 10.11 of the Registrant's June 30, 2001
Form 10-Q/A.
10.20 IGF/Acceptance Retrocession Agreement by and between Acceptance
Insurance Company and IGF Insurance Company dated May 23, 2001 incorporated by
reference to Exhibit 10.13 of the Registrant's June 30, 2001 Form 10-Q/A.
10.21 Consulting and Non-competition Agreement by and between Symons
International Group, Inc. and Acceptance Insurance Companies Inc. dated May 23,
2001 incorporated by reference to Exhibit 10.15 of the Registrant's June 30,
2001 Form 10-Q/A.
10.22* Amendment to Personal Employment Agreement effective January 1, 1996
between Granite Reinsurance Company Ltd. and G. Gordon Symons.
10.23* Addendum to Employment Agreement between Goran Capital Inc., Symons
International Group, Inc. and G. Gordon Symons effective January 1, 1998.
10.24* Consulting Agreement between Granite Reinsurance Company Ltd. and
Goran Management Ltd. effective January 1, 1995.
10.25* Addendum to Consulting Agreement dated January 1, 1998 by and between
Goran Capital Inc., Symons International Group, Inc., Granite Reinsurance
Company Ltd., Goran Management Bermuda Ltd. and G. Gordon Symons.
10.26 Consulting and Non-competition Agreement by and between Goran Capital
Inc. and Acceptance Insurance Companies Inc. dated May 23, 2001.
10.27 Granite Reinsurance Company Ltd./Acceptance Crop Hail Retrocession in
Agreement between Acceptance Insurance Company and Granite Reinsurance Company
Ltd. dated May23, 2001.
10.28 MPCI Stop Loss Reinsurance Contract between Granite Reinsurance
Company, Ltd. and Acceptance Insurance Companies Inc. effective July 1, 2000.
13. The 2001 Annual Report of Goran Capital Inc.
*. Compensation related agreement.
------
QUOTA SHARE REINSURANCE AGREEMENT
---------------------------------
BETWEEN
SUPERIOR INSURANCE COMPANY AND ITS WHOLLY-OWNED INSURANCE SUBSIDIARIES
(HEREINAFTER CALLED THE "COMPANY")
AND
NATIONAL UNION FIRE INSURANCE COMPANY OF
PITTSBURGH, PA.
(HEREAFTER CALLED THE "REINSURER")
INDEX
-----
ARTICLE SUBJECT PAGE
------- ------- ----
I BUSINESS COVERED 1.
II. . TERM AND TERMINATION 1.
III TERRITORY 1.
IV. . QUOTA SHARE PARTICIPATION AND LIMIT 1.
V WARRANTY 2.
VI PREMIUM AND COMMISSION 2.
VII COMMUTATION 2.
VIII. DEFINITIONS 2.
IX REPORTS AND ACCOUNTING 2.
X . . EXCLUSIONS . 3.
XI. . ACCESS TO RECORDS . 4.
XII ARBITRATION 4.
XIII. CONFIDENTIALITY . 5.
XIV ERRORS AND OMISSIONS 5.
XV FEDERAL EXCISE TAX 5.
XVI FOLLOW THE FORTUNES 5.
XVII. GOVERNING LAW 5.
XVIII INSOLVENCY 6.
XIX OFFSET 7.
XX. . SEVERABILITY 7.
XXI SPECIAL TERMINATION OR SETTLEMENT 7.
XXII. CURRENCY REVALUATION . 8.
ATTACHMENTS:
NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE, (BRMA 35A)
------
QUOTA SHARE REINSURANCE AGREEMENT
---------------------------------
BETWEEN
SUPERIOR INSURANCE COMPANY AND ITS WHOLLY-OWNED INSURANCE SUBSIDIARIES
(HEREINAFTER CALLED THE "COMPANY")
AND
NATIONAL UNION FIRE INSURANCE COMPANY OF
PITTSBURGH, PA.
(HEREINAFTER CALLED THE "REINSURER")
************************************************************************
ARITCLE I BUSINESS COVERED
The Reinsurer hereby agrees to reinsure a quota share of policies classified by
the Company as non-standard automobile; both liability and physical damage
(including business assumed that is directly underwritten by the Company)
in-force on January 1, 2000 and effective during the term of this agreement.
ARITCLE II TERM AND TERMINATION
This Agreement commences at 12:01 a.m. Eastern Standard Time, January 1, 2000
and shall remain in force until 11:59 p.m. Eastern Standard Time, December 31,
2000. Either party may terminate effective on the first day of any calendar
quarter with 60 days advance written notice. The Reinsurer shall remain liable
for loss under reinsured policies effective prior to the termination date.
ARITCLE III TERRITORY
This Agreement covers risks located nationwide, as per the Company's original
Policies.
ARTICLE IV QUOTA SHARE PARTICIPATION AND LIMIT
- ----------- ---------------------------------------
The aggregate quota share cession shall be at the option of the Company and
subject to a minimum of 20% and a maximum of 75%. However, the maximum cession
will be limited to $11,000,000 per quarter which shall be in addition to the
cession of the in-force business which shall be at the minimum provisional
percent. The provisional quota share percent shall be 20%. In the event this
produces in excess of $11 million for any one quarter, the dollar amount cession
shall be reduced to $11,000,000 dollars for the Company. The quota share
percent applicable for the Company shall be the ratio of the adjusted dollar
cession to the gross subject written premium for the Company in that quarter.
This quarterly limit can be increased by mutual agreement between the Reinsurer
and the Company. The Company shall notify the Reinsurer prior to the last day
of the calendar quarter of the quota share percent.
The Reinsurer's liability for aggregate losses, including allocated loss
adjustment expenses (and unallocated loss adjustment expenses, where applicable
under REPORTS AND ACCOUNTING), shall be limited to 97% of earned premium ceded
for all business effective in all calendar quarters plus the in-force business.
The calculation shall be from inception to date.
ARTICLE V WARRANTY
- ---------- --------
The Company shall maintain catastrophe and per risk reinsurance limiting the
ceded loss from any one occurrence or for any one risk so as not to exceed
$250,000 or $350,000, respectively, or it shall be so deemed.
ARTICLE VI PREMIUM AND COMMISSION
The Company will pay the Reinsurer a premium equal to the pro rata share of
premium applicable on all policies ceded and the Reinsurer shall allow the
Company a minimum and provisional ceding commission of 18% on such premium. The
ceding commission slides 1 for 1 for each 1.0% decrease in the Loss Ratio below
79% up to a maximum ceding commission of 31% at a 66% loss ratio. This
calculation shall be from inception to date for all business ceded effective in
all calendar quarters plus the in-force business.
ARITCLE VII COMMUTATION
The Company may request and the Reinsurer shall grant a commutation of all
liabilities to be effective at the end of any calendar quarter. The Reinsurer
shall pay the Company the outstanding case reserves plus an amount for incurred
but not reported losses as mutually agreed. In the event mutual agreement
cannot be reached, the Reinsurer may appoint an independent actuary to establish
the incurred but not reported losses. The Company shall notify the Reinsurer of
such request within 60 days of the close of the calendar quarter. In such event
the Company shall pay the positive Funds Withheld Balance to the Reinsurer and
the Company shall release the Reinsurer of any and all liabilities.
ARTICLE VIII DEFINITIONS
- ------------- -----------
Funds Withheld Balance shall mean:
Previous Funds Withheld Balance,
plus 97% of ceded written premium,
minus ceding commission,
minus ceded paid losses (including allocated loss adjustment expenses),
minus ceded paid unallocated loss adjustment expenses, if applicable.
Loss Ratio shall mean losses paid and outstanding, including IBNR and allocated
loss adjustment expenses, divided by earned premium.
Premium shall mean the premium charged the insured, net of returned premium,
however, uncollectable premium shall not be deemed a return premium.
Allocated loss adjustment expenses shall be as defined under statutory
accounting practices.
Unallocated loss adjustment expenses shall be as defined under statutory
accounting practices.
ARTICLE IX REPORTS AND ACCOUNTING
Within 45 days after the end of each calendar quarter, the Company shall furnish
an account statement to the Reinsurer, for their share on the Business Covered
including the following:
1. Written premiums-credit
2. Commission-debit
3. Net losses (including allocated loss adjustment expenses) paid by the
Company - debit
4. Reserve for outstanding losses including incurred but not reported
(including allocated loss adjustment expenses).
5. Unearned Premium.
In the event the loss ratio is in excess of 85%, the Reinsurer shall be liable
for unallocated loss adjustment expenses equal to 1% of earned premium for each
Loss Ratio point in excess of 85%, however, not in excess of 6% of earned
premium. When applicable, the coverage for unallocated loss adjustment expenses
shall be included in the maximum limit of 97% of earned premium ceded referred
to in QUOTA SHARE PARTICIPATION AND LIMIT. The forgoing shall be a combined
account for all business effective in all calendar quarters plus the in-force
business. The Company shall report this information separately for all business
effective in each calendar quarter plus a report for the in-force business.
The Company will pay the Reinsurer 3% of the premium with the balance, if any,
being held in a Funds Withheld Balance for subsequent payment of losses,
commission adjustments and return premiums. Amounts due the Company shall be
withdrawn from the Funds Withheld Balance and if the Funds Withheld Balance is
negative, the Reinsurer shall pay the amount due.
ARTICLE X EXCLUSIONS
- ---------- ----------
This reinsurance does not apply to the following:
a. Any actual or alleged failure, malfunction or inadequacy of:
1) Any of the following, whether belonging to any insured or to others:
a) Computer hardware, including microprocessors;
b) Computer application software;
c) Computer operating systems and related software;
d) Computer networks;
e) Microprocessors (computer chips) not part of any computer system, or
f) Any other computerized or electronic equipment or components; or
2) Any other products, an any services, data or functions that directly or
indirectly use or rely upon, in any manner, any of the terms listed in paragraph
2.a. 1);
due to the inability to correctly recognize, process, distinguish, interpret or
accept the year 2000 and beyond.
b. Any advice, consultation, design, evaluation, inspection, installation,
maintenance, repair, replacement or supervision provided or done by the Company
or for the Company to determine, rectify or test for, any potential or actual
problems described in paragraph 2.a.
c. Any loss or liability accruing to the Company directly or indirectly from
any insurance written by or through any Pool or Association including Pools or
Associations in which membership by the Company is required under any statutes
or regulations(other than assigned risk automobile plans).
d. Business excluded by the attached Nuclear Incident Exclusion Clauses -
Liability - Reinsurance.
e. All liability of the Reassured arising, by contract, operation of law, or
otherwise, from its participation or membership, whether voluntary or
involuntary, in any insolvency fund. "Insolvency fund" includes any guaranty
fund, insolvency fund, plan, pool, association, fund or other arrangement,
howsoever denominated, established or governed, which provides for any
assessment of or payment or assumption by the Reassured of part or all of any
claim, debt, charge, fee or other obligation of an insurer, or its successors or
assigns, which has been declared by any competent authority to be insolvent, or
which is otherwise deemed unable to meet any claim, debt, charge, fee or other
obligation in whole or in part.
ARTICLE XI ACCESS TO RECORDS
- ----------- -------------------
The Reinsurer, or its duly authorized representative, shall have free access at
all reasonable times during and after the currency of this agreement, to books
and records maintained by any of the division, department and branch offices of
the Company which are involved in the subject matter of this Agreement and which
pertain to the reinsurance provided hereunder and all claims made in connection
therewith. Notwithstanding the provisions of the preceding sentence, if
undisputed balances due from the Reinsurer under this Agreement have not been
paid for the two most recent reported calendar quarters, the Reinsurer shall not
have access to any of the Company's records relating to this Agreement without
the specific consent of the Company.
ARTICLE XII ARBITRATION
- ------------ -----------
A. All disputes or differences arising out of the interpretation of this
Agreement shall be submitted to the decision of two arbitrators, one to be
chosen by each party, and in the event of the arbitrators failing to agree, to
the decision of an umpire to be chosen by the arbitrators. The arbitrators and
umpire shall be disinterested active or retired executive officials of fire or
casualty insurance or reinsurance companies or Underwriters at Lloyd's, London.
If either of the parties fails to appoint an arbitrator within one month after
being required by the other party in writing to do so, or if the arbitrators
fail to appoint an umpire within one month of a request in writing by either of
them to do so, such arbitrator or umpire, as the case may be, shall at the
request of either party be appointed by a Justice of the Supreme Court of the
State of New York.
B. The arbitration proceeding shall take place in New York, New York. The
applicant shall submit its case within one month after the appointment of the
court of arbitration, and the respondent shall submit its reply within one month
after the receipt of the claim. The arbitrators and umpire are relieved from all
judicial formality and may abstain from following the strict rules of law.
Punitive damages shall not be awarded by the panel against either party which
are apart from the punitive damages that may be in dispute. They shall settle
any dispute under the Agreement according to an equitable rather than a strictly
legal interpretation of its terms.
C. Their written decision shall be provided to both parties and shall be final
and not subject to appeal.
D. Each party shall bear the expenses of his arbitrator and shall jointly and
equally share with the other the expenses of the umpire and of the arbitration.
E. This Article shall survive the termination of this Agreement.
ARTICLE XIII CONFIDENTIALITY
- ------------- ---------------
All terms and conditions of this Agreement and any materials provided in the
course of inspection shall be kept confidential by the Reinsurer as against
third parties, unless the disclosure is required pursuant to process of law or
unless the disclosure is to Reinsurer's retrocessionaires, financial auditors or
governing regulatory bodies. Disclosing or using this information for any
purpose beyond the scope of this Agreement, or beyond the exceptions set forth
above, is expressly forbidden without the prior consent of the Company.
ARTICLE XIV ERRORS AND OMISSIONS
- ------------ ----------------------
Any inadvertent delay, omission or error shall not relieve either party hereto
from any liability which would attach to it hereunder if such delay, omission or
error had not been made, provided such delay, omission or error is rectified
immediately upon discovery.
ARTICLE XV FEDERAL EXCISE TAX
- ----------- --------------------
(Federal Excise Tax applies only to those Retrocessionaires, excepting
Underwriters at Lloyd's London and other Retrocessionaires exempt from Federal
Excise Tax, who are domiciled outside the United States of America.)
A. The Retrocessionaires has agreed to allow for the purpose of paying the
Federal Excise Tax 1% of the premium payable hereon to the extent such premium
is subject to Federal Excise Tax.
B. In the event of any return of premium becoming due hereunder the
Retrocessionaires will deduct 1% from the amount of the return and the
Retrocedent or its agent should take steps to recover the Tax from the United
States Government.
ARTICLE XVI FOLLOW THE FORTUNES
- ------------ ---------------------
A. The Reinsurer's liability shall attach simultaneously with that of the
Company and shall be subject in all respects to the same risks, terms,
conditions, interpretations, waivers, and to the same modification, alterations
and cancellations as the respective insurances (or reinsurances) of the Company,
the true intent of this Agreement being that the Reinsurer shall, in every case
to which this Agreement applies, follow the underwriting fortunes of the
Company.
B. Nothing shall in any manner create any obligations or establish any
rights against the Reinsurer in favor of any third parties or any persons not
parties to this Agreement.
ARTICLE XVII GOVERNING LAW
- ------------- --------------
This Agreement shall be governed by and construed in accordance with the laws of
the state of New York.
ARTICLE XVIII INSOLVENCY
- -------------- ----------
A. In the event of insolvency and the appointment of conservator,
liquidator, or statutory successor of the ceding company, the portion of any
risk or obligation assumed by the reinsurer shall be payable to the conservator,
liquidator, or statutory successor of the company having authority to allow such
claims: without diminution because of that insolvency, or because the
conservator, liquidator, or statutory successor has failed to pay all or a
portion of any claims. Payments directly to the ceding insurer or to its
conservator, liquidator, or statutory successor, except where the contract of
insurance or reinsurance specifically provides another payee of such reinsurance
in the event of the insolvency of the ceding insurer. The reinsurance contract
may provide that the conservator, liqudator, or statutory successor of a ceding
insurer shall give written notice of the pendency of a claim against the ceding
insurer indicating the policy or bond reinsured, within a reasonable time after
such claims is filed and the reinsurer may interpose, at its own expense, in the
proceeding where such claims is to be adjusticated, any defense or defenses
which it amy deem available to the ceding insurere or its conservator,
liquidator, or statutory successor. The expense thus incurred by the reinsurer
shall be payable subject to court approval out of the estate of the insolvent
ceding insurer as part of the expense of conservation or liquidation to the
extent of a proportionate share of the benefit which may accrue to the ceding
insurer in conversation or liquidation, solely as result of the defense
undertaken by the reinsurer. It is agreed, however, that the liquidator,
receiver, conservator or statutory successor of the Company shall give written
notice to the Reinsurers of the pendency of a claim against the Company which
would involve a possible liability on the part of the Reinsurers, indicating the
policy or bond reinsured, within a reasonable time after such claim is filed in
the conservation or liquidation proceeding or in the receivership. It is further
agreed that during the pendency of such claim the Reinsurers may investigate
such claim and interpose, at their own expense, in the proceeding where such
claim is to be adjudicated, any defense or defenses that they may deem available
to the Company or its liquidator, receiver, conservator, or statutory successor.
The expense thus incurred by the Reinsurers shall be chargeable, subject to the
approval of the Court, against the Company as part of the expense of
conservation or liquidation to the extent of a pro rata share of the benefit
which may accrue to the Company solely as a result of the defense undertaken by
the Reinsurers.
B. Where two or more Reinsurers are involved in the same claim and a
majority in interest elect to interpose defense to such claim, the expense shall
be apportioned in accordance with the terms of the Agreement as though such
expense had been incurred by the Company.
C. The reinsurance shall be payable by the Reinsurers to the Company or to
its liquidator, receiver, conservator, or statutory successor, except as
provided by Section 4118(a) (1) (A) and 1114 (c) of the New York Insurance Law
or except (a) where the Agreement specifically provides another payee of such
reinsurance in the event of the insolvency of the Company, and (b) where the
Reinsurers with the consent of the direct insured or insureds have voluntarily
assumed such policy obligations of the Company as direct obligations of the
Reinsurers to the payees under such policies and in substitution for the
obligations of the Company to the payees. Then, and in that event only, the
Company, with the prior approval of the certificate of assumption on New York
risks by the Superintendent of Insurance of the State of New York, is entirely
released from its obligation and the Reinsurers pay any loss directly to payees
under such policy.
D. Notwithstanding clauses A, B, and C, where the Company is authorized
under the Insurance Companies Act (Canada) to insure in Canada risks, in the
event of the insolvency of the Company, reinsurance payable in respect of the
insurance business in Canada of the Company shall be payable to the Chief Agent
in Canada of the Company or to the liquidator, receiver, conservator or
statutory successor appointed in Canada in respect of the insurance business in
Canada of the Company without diminution because of the insolvency of the
Company or because the Company or a liquidator, receiver, conservator or
statutory successor of the Company has failed to pay all or any portion of any
claim. All other terms and conditions of clauses A, B, and C remain in effect
and apply to this clause D which shall prevail if there is a conflict or
inconsistency.
ARTICLE XIX OFFSET
- ------------ ------
Each party hereto shall have, and may exercise at any time and from time to
time, the right to offset any undisputed balance or balances, whether on account
of premiums or on account of losses, due from such party to the other (or, if
more than one, any other) party hereto under this Agreement or under any other
reinsurance agreement heretofore or hereafter entered into by and between them,
and may offset the same against any undisputed balance or balances due to the
former from the latter under the same or any other reinsurance agreement between
them, and the party asserting the right of offset shall have and may exercise
such right whether the undisputed balance or balances due to such party from the
other are on account of premiums or on account of losses and regardless of the
capacity, whether as assuming insurer or as ceding insurer, in which each party
acted under the agreement or, if more than one, the different agreements
involved
Where the Company is authorized under the Insurance Companies Act (Canada) to
insure in Canada risks, for the purpose of this Article, the branch of a Company
in Canada shall be considered as a party separate and distinct from the Company
and the right of offset provided for in this Article shall belong to and be
applied against that branch as though it were a separate and distinct party.
ARTICLE XX SEVERABILITY
- ----------- ------------
If any provision of this Agreement shall be rendered illegal or unenforceable by
the laws, regulations or public policy of any state, such provision shall be
considered void in such state, but this shall not affect the validity or
enforceability of any other provision of this Agreement or the enforceability of
such provision in any other jurisdiction.
ARTICLE XXI SPECIAL TERMINATION OR SETTLEMENT
- ------------ ------------------------------------
SECTION I (TERMINATION)
- -------------------------
A. Either party may terminate this Agreement immediately in the event that:
1. The other party should at any time become insolvent, or suffer any
impairment of contributed capital, or file a petition in bankruptcy, or go into
liquidation, rehabilitation, or voluntary supervision, or have a receiver
appointed, or be acquired or controlled by any other insurance company or
organization, or
2. There is a severance of obstruction of free and unfettered communication
and/or normal commercial and/or financial intercourse between the United States
of America and the country in which the Reinsurer is incorporated or has its
principal office as a result of war, currency regulations, or any circumstances
arising out of political, financial or economic emergency.
B. Either party may terminate this Agreement immediately in the event that:
1. Upon application of the NAIC Insurance Regulatory Information System
(IRIS) tests to the Company's quarterly and annual statement (which the Company
hereby agrees to furnish the Reinsurer upon request) it is found that four (4)
or more of the Company's IRIS financial ratio values are outside of the usual
range established in the IRIS system.
2. Upon review of the Insurance Solvency International ISI) Performance
Tests as published with respect to the Company (or upon application of such
Performance Tests to the Company's annual financial statements which the Company
hereby agrees to furnish to the Reinsurer upon request) it is found that four
(4) or more of the Company's ratios are outside of normal range (as defined by
the ISI standard).
Termination under A. or B. shall be automatic. The Reinsurer will specify the
mode of payment, i.e. a run-off basis or a clean-cut basis with portfolio
transfer, if applicable.
SECTION II (SETTLEMENT)
- -------------------------
After termination of this Agreement under this or any article, including the
natural expiry of the Agreement, if the Reinsurer has any residual liability to
the Company, the Company will, at the request of the Reinsurer, furnish to the
Reinsurer statements as specified in Section B1., above, and if four or more
values are outside of the usual range established in the IRIS or ISI system (as
applicable in accordance with Section B1., above) the Reinsurer shall have the
option of an immediate commutation in accordance with the commutation article.
In addition to the payments specified in that article the Reinsurer shall return
the unearned premium and the Company will allow a deduction of commission equal
to the average ceding commission on the ceded premium.
ARTICLE XXII CURRENCY REVALUATION
- ------------- ---------------------
It is agreed that underwriting to contractual and/or understanding limits will
be done in terms of United States (U.S.) dollar equivalent on the basis of
exchange rates in effect at the time of inception of new or renewal business or
at the time an addition to an existing risk takes place. In the event there is a
reduction in parity value of the U.S. dollar from that existing at the time the
risk was written which results in the contractual and/or understanding limits
being exceeded, the Company shall be held covered for such excess until next
renewal of the risk, at which time underwriting will then conform to the
contractual and/or understanding U.S. dollar limits in effect at the time.
IN WITNESS WHEREOF: the parties hereto have caused this Agreement to be
executed by their authorized representative.
In: ___________________ this ___________ day of ______________________ 2000
SUPERIOR INSURANCE COMPANY AND ITS WHOLLY-OWNED
INSURANCE SUBSIDIARIES
By: ___________________________ Title: ______________________________
and in: _______________this ____________ day of ________________________ 2000
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA.
By: __________________________ Title: ________________________________
QUOTA SHARE REINSURANCE AGREEMENT
---------------------------------
BETWEEN
PAFCO GENERAL INSURANCE COMPANY
(HEREINAFTER CALLED THE "COMPANY")
AND
NATIONAL UNION FIRE INSURANCE COMPANY OF
PITTSBURGH, PA.
(HEREINAFTER CALLED THE "REINSURER")
INDEX
-----
ARTICLE SUBJECT PAGE
------- ------- ----
I BUSINESS COVERED 1.
II. . TERM AND TERMINATION 1.
III TERRITORY 1.
IV. . QUOTA SHARE PARTICIPATION AND LIMIT 1.
V WARRANTY 2.
VI PREMIUM AND COMMISSION 2.
VII COMMUTATION 2.
VIII. DEFINITIONS 2.
IX REPORTS AND ACCOUNTING 2.
X . . EXCLUSIONS . 3.
XI. . ACCESS TO RECORDS . 4.
XII ARBITRATION 4.
XIII. CONFIDENTIALITY . 5.
XIV ERRORS AND OMISSIONS 5.
XV FEDERAL EXCISE TAX 5.
XVI FOLLOW THE FORTUNES 5.
XVII. GOVERNING LAW 5.
XVIII INSOLVENCY 6.
XIX OFFSET 7.
XX. . SEVERABILITY 7.
XXI SPECIAL TERMINATION OR SETTLEMENT 7.
XXII. CURRENCY REVALUATION . 8.
--
ATTACHMENTS:
NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE, (BRMA 35A)
QUOTA SHARE REINSURANCE AGREEMENT
---------------------------------
BETWEEN
PAFCO GENERAL INSURANCE COMPANY
(HEREINAFTER CALLED THE "COMPANY")
AND
NATIONAL UNION FIRE INSURANCE COMPANY OF
PITTSBURGH, PA.
(HEREINAFTER CALLED THE "REINSURER")
************************************************************************
ARTICLE I BUSINESS COVERED
The Reinsurer hereby agrees to reinsure a quota share of policies classified by
the Company as non-standard automobile; both liability and physical damage
(including business assumed that is directly underwritten by the Company)
in-force on January 1, 2000 and effective during the term of this agreement.
ARTICLE II TERM AND TERMINATION
This Agreement commences at 12:01 a.m. Eastern Standard Time, January 1, 2000
and shall remain in force until 11:59 p.m. Eastern Standard Time, December 31,
2000. Either party may terminate effective on the first day of any calendar
quarter with 60 days advance written notice. The Reinsurer shall remain liable
for loss under reinsured policies effective prior to the termination date.
ARTICLE III TERRITORY
This Agreement covers risks located nationwide, as per the Company's original
Policies.
ARTICLE IV QUOTA SHARE PARTICIPATION AND LIMIT
- ----------- ---------------------------------------
The aggregate quota share cession shall be at the option of the Company and
subject to a minimum of 40% and a maximum of 75%. However, the maximum cession
will be limited to $5,000,000 per quarter which shall be in addition to the
cession of the in-force business which shall be at the minimum provisional
percent. The provisional quota share percent shall be 40%. In the event this
produces in excess of $5 million for any one quarter, the dollar amount cession
shall be reduced to $5,000,000 dollars for the Company. The quota share percent
applicable for the Company shall be the ratio of the adjusted dollar cession to
the gross subject written premium for the Company in that quarter. This
quarterly limit can be increased by mutual agreement between the Reinsurer and
the Company. The Company shall notify the Reinsurer prior to the last day of
the calendar quarter of the quota share percent.
The Reinsurer's liability for aggregate losses, including allocated loss
adjustment expenses (and unallocated loss adjustment expenses, where applicable
under REPORTS AND ACCOUNTING), shall be limited to 97% of earned premium ceded
for all business effective in all calendar quarters plus the in-force business.
The calculation shall be from inception to date.
ARTICLE V WARRANTY
- ---------- --------
The Company shall maintain catastrophe and per risk reinsurance limiting the
ceded loss from any one occurrence or for any one risk so as not to exceed
$250,000 or $350,000, respectively, or it shall be so deemed.
ARTICLE VI PREMIUM AND COMMISSION
The Company will pay the Reinsurer a premium equal to the pro rata share of
premium applicable on all policies ceded and the Reinsurer shall allow the
Company a minimum and provisional ceding commission of 18% on such premium. The
ceding commission slides 1 for 1 for each 1.0% decrease in the Loss Ratio below
79% up to a maximum ceding commission of 31% at a 66% loss ratio. This
calculation shall be from inception to date for all business ceded effective in
all calendar quarters plus the in-force business.
ARTICLE VII COMMUTATION
The Company may request and the Reinsurer shall grant a commutation of all
liabilities to be effective at the end of any calendar quarter. The Reinsurer
shall pay the Company the outstanding case reserves plus an amount for incurred
but not reported losses as mutually agreed. In the event mutual agreement
cannot be reached, the Reinsurer may appoint an independent actuary to establish
the incurred but not reported losses. The Company shall notify the Reinsurer of
such request within 60 days of the close of the calendar quarter. In such event
the Company shall pay the positive Funds Withheld Balance to the Reinsurer and
the Company shall release the Reinsurer of any and all liabilities.
ARTICLE VIII DEFINITIONS
- ------------- -----------
Funds Withheld Balance shall mean:
Previous Funds Withheld Balance,
plus 97% of ceded written premium,
minus ceding commission,
minus ceded paid losses (including allocated loss adjustment expenses),
minus ceded paid unallocated loss adjustment expenses, if applicable.
Loss Ratio shall mean losses paid and outstanding, including IBNR and allocated
loss adjustment expenses, divided by earned premium.
Premium shall mean the premium charged the insured, net of returned premium,
however, uncollectable premium shall not be deemed a return premium.
Allocated loss adjustment expenses shall be as defined under statutory
accounting practices.
Unallocated loss adjustment expenses shall be as defined under statutory
accounting practices.
ARTICLE IX REPORTS AND ACCOUNTING
Within 45 days after the end of each calendar quarter, the Company shall furnish
an account statement to the Reinsurer, for their share on the Business Covered
including the following:
6. Written premiums-credit
7. Commission-debit
8. Net losses (including allocated loss adjustment expenses) paid by the
Company - debit
9. Reserve for outstanding losses including incurred but not reported
(including allocated loss adjustment expenses).
10. Unearned Premium.
In the event the loss ratio is in excess of 85%, the Reinsurer shall be liable
for unallocated loss adjustment expenses equal to 1% of earned premium for each
Loss Ratio point in excess of 85%, however, not in excess of 6% of earned
premium. When applicable, the coverage for unallocated loss adjustment expenses
shall be included in the maximum limit of 97% of earned premium ceded referred
to in QUOTA SHARE PARTICIPATION AND LIMIT. The forgoing shall be a combined
account for all business effective in all calendar quarters plus the in-force
business. The Company shall report this information separately for all business
effective in each calendar quarter plus a report for the in-force business.
The Company will pay the Reinsurer 3% of the premium with the balance, if any,
being held in a Funds Withheld Balance for subsequent payment of losses,
commission adjustments and return premiums. Amounts due the Company shall be
withdrawn from the Funds Withheld Balance and if the Funds Withheld Balance is
negative, the Reinsurer shall pay the amount due.
ARTICLE X EXCLUSIONS
- ---------- ----------
This reinsurance does not apply to the following:
f. Any actual or alleged failure, malfunction or inadequacy of:
3) Any of the following, whether belonging to any insured or to others:
g) Computer hardware, including microprocessors;
h) Computer application software;
i) Computer operating systems and related software;
j) Computer networks;
k) Microprocessors (computer chips) not part of any computer system, or
l) Any other computerized or electronic equipment or components; or
4) Any other products, an any services, data or functions that directly or
indirectly use or rely upon, in any manner, any of the terms listed in paragraph
2.a. 1);
due to the inability to correctly recognize, process, distinguish, interpret or
accept the year 2000 and beyond.
g. Any advice, consultation, design, evaluation, inspection, installation,
maintenance, repair, replacement or supervision provided or done by the Company
or for the Company to determine, rectify or test for, any potential or actual
problems described in paragraph 2.a.
h. Any loss or liability accruing to the Company directly or indirectly from
any insurance written by or through any Pool or Association including Pools or
Associations in which membership by the Company is required under any statutes
or regulations(other than assigned risk automobile plans).
i. Business excluded by the attached Nuclear Incident Exclusion Clauses -
Liability - Reinsurance.
j. All liability of the Reassured arising, by contract, operation of law, or
otherwise, from its participation or membership, whether voluntary or
involuntary, in any insolvency fund. "Insolvency fund" includes any guaranty
fund, insolvency fund, plan, pool, association, fund or other arrangement,
howsoever denominated, established or governed, which provides for any
assessment of or payment or assumption by the Reassured of part or all of any
claim, debt, charge, fee or other obligation of an insurer, or its successors or
assigns, which has been declared by any competent authority to be insolvent, or
which is otherwise deemed unable to meet any claim, debt, charge, fee or other
obligation in whole or in part.
ARTICLE XI ACCESS TO RECORDS
- ----------- -------------------
The Reinsurer, or its duly authorized representative, shall have free access at
all reasonable times during and after the currency of this agreement, to books
and records maintained by any of the division, department and branch offices of
the Company which are involved in the subject matter of this Agreement and which
pertain to the reinsurance provided hereunder and all claims made in connection
therewith. Notwithstanding the provisions of the preceding sentence, if
undisputed balances due from the Reinsurer under this Agreement have not been
paid for the two most recent reported calendar quarters, the Reinsurer shall not
have access to any of the Company's records relating to this Agreement without
the specific consent of the Company.
ARTICLE XII ARBITRATION
- ------------ -----------
A. All disputes or differences arising out of the interpretation of this
Agreement shall be submitted to the decision of two arbitrators, one to be
chosen by each party, and in the event of the arbitrators failing to agree, to
the decision of an umpire to be chosen by the arbitrators. The arbitrators and
umpire shall be disinterested active or retired executive officials of fire or
casualty insurance or reinsurance companies or Underwriters at Lloyd's, London.
If either of the parties fails to appoint an arbitrator within one month after
being required by the other party in writing to do so, or if the arbitrators
fail to appoint an umpire within one month of a request in writing by either of
them to do so, such arbitrator or umpire, as the case may be, shall at the
request of either party be appointed by a Justice of the Supreme Court of the
State of New York.
B. The arbitration proceeding shall take place in New York, New York. The
applicant shall submit its case within one month after the appointment of the
court of arbitration, and the respondent shall submit its reply within one month
after the receipt of the claim. The arbitrators and umpire are relieved from all
judicial formality and may abstain from following the strict rules of law.
Punitive damages shall not be awarded by the panel against either party which
are apart from the punitive damages that may be in dispute. They shall settle
any dispute under the Agreement according to an equitable rather than a strictly
legal interpretation of its terms.
C. Their written decision shall be provided to both parties and shall be final
and not subject to appeal.
D. Each party shall bear the expenses of his arbitrator and shall jointly and
equally share with the other the expenses of the umpire and of the arbitration.
E. This Article shall survive the termination of this Agreement.
ARTICLE XIII CONFIDENTIALITY
- ------------- ---------------
All terms and conditions of this Agreement and any materials provided in the
course of inspection shall be kept confidential by the Reinsurer as against
third parties, unless the disclosure is required pursuant to process of law or
unless the disclosure is to Reinsurer's retrocessionaires, financial auditors or
governing regulatory bodies. Disclosing or using this information for any
purpose beyond the scope of this Agreement, or beyond the exceptions set forth
above, is expressly forbidden without the prior consent of the Company.
ARTICLE XIV ERRORS AND OMISSIONS
- ------------ ----------------------
Any inadvertent delay, omission or error shall not relieve either party hereto
from any liability which would attach to it hereunder if such delay, omission or
error had not been made, provided such delay, omission or error is rectified
immediately upon discovery.
ARTICLE XV FEDERAL EXCISE TAX
- ----------- --------------------
(Federal Excise Tax applies only to those Retrocessionaires, excepting
Underwriters at Lloyd's London and other Retrocessionaires exempt from Federal
Excise Tax, who are domiciled outside the United States of America.)
A. The Retrocessionaires has agreed to allow for the purpose of paying the
Federal Excise Tax 1% of the premium payable hereon to the extent such premium
is subject to Federal Excise Tax.
B. In the event of any return of premium becoming due hereunder the
Retrocessionaires will deduct 1% from the amount of the return and the
Retrocedent or its agent should take steps to recover the Tax from the United
States Government.
ARTICLE XVI FOLLOW THE FORTUNES
- ------------ ---------------------
C. The Reinsurer's liability shall attach simultaneously with that of the
Company and shall be subject in all respects to the same risks, terms,
conditions, interpretations, waivers, and to the same modification, alterations
and cancellations as the respective insurances (or reinsurances) of the Company,
the true intent of this Agreement being that the Reinsurer shall, in every case
to which this Agreement applies, follow the underwriting fortunes of the
Company.
D. Nothing shall in any manner create any obligations or establish any
rights against the Reinsurer in favor of any third parties or any persons not
parties to this Agreement.
ARTICLE XVII GOVERNING LAW
- ------------- --------------
This Agreement shall be governed by and construed in accordance with the laws of
the state of New York.
ARTICLE XVIII INSOLVENCY
- -------------- ----------
E. In the event of insolvency and the appointment of conservator,
liquidator, or statutory successor of the ceding company, the portion of any
risk or obligation assumed by the reinsurer shall be payable to the conservator,
liquidator, or statutory successor of the company having authority to allow such
claims: without diminution because of that insolvency, or because the
conservator, liquidator, or statutory successor has failed to pay all or a
portion of any claims. Payments directly to the ceding insurer or to its
conservator, liquidator, or statutory successor, except where the contract of
insurance or reinsurance specifically provides another payee of such reinsurance
in the event of the insolvency of the ceding insurer. The reinsurance contract
may provide that the conservator, liqudator, or statutory successor of a ceding
insurer shall give written notice of the pendency of a claim against the ceding
insurer indicating the policy or bond reinsured, within a reasonable time after
such claims is filed and the reinsurer may interpose, at its own expense, in the
proceeding where such claims is to be adjusticated, any defense or defenses
which it amy deem available to the ceding insurere or its conservator,
liquidator, or statutory successor. The expense thus incurred by the reinsurer
shall be payable subject to court approval out of the estate of the insolvent
ceding insurer as part of the expense of conservation or liquidation to the
extent of a proportionate share of the benefit which may accrue to the ceding
insurer in conversation or liquidation, solely as result of the defense
undertaken by the reinsurer. It is agreed, however, that the liquidator,
receiver, conservator or statutory successor of the Company shall give written
notice to the Reinsurers of the pendency of a claim against the Company which
would involve a possible liability on the part of the Reinsurers, indicating the
policy or bond reinsured, within a reasonable time after such claim is filed in
the conservation or liquidation proceeding or in the receivership. It is further
agreed that during the pendency of such claim the Reinsurers may investigate
such claim and interpose, at their own expense, in the proceeding where such
claim is to be adjudicated, any defense or defenses that they may deem available
to the Company or its liquidator, receiver, conservator, or statutory successor.
The expense thus incurred by the Reinsurers shall be chargeable, subject to the
approval of the Court, against the Company as part of the expense of
conservation or liquidation to the extent of a pro rata share of the benefit
which may accrue to the Company solely as a result of the defense undertaken by
the Reinsurers.
F. Where two or more Reinsurers are involved in the same claim and a
majority in interest elect to interpose defense to such claim, the expense shall
be apportioned in accordance with the terms of the Agreement as though such
expense had been incurred by the Company.
G. The reinsurance shall be payable by the Reinsurers to the Company or to
its liquidator, receiver, conservator, or statutory successor, except as
provided by Section 4118(a) (1) (A) and 1114 (c) of the New York Insurance Law
or except (a) where the Agreement specifically provides another payee of such
reinsurance in the event of the insolvency of the Company, and (b) where the
Reinsurers with the consent of the direct insured or insureds have voluntarily
assumed such policy obligations of the Company as direct obligations of the
Reinsurers to the payees under such policies and in substitution for the
obligations of the Company to the payees. Then, and in that event only, the
Company, with the prior approval of the certificate of assumption on New York
risks by the Superintendent of Insurance of the State of New York, is entirely
released from its obligation and the Reinsurers pay any loss directly to payees
under such policy.
H. Notwithstanding clauses A, B, and C, where the Company is authorized
under the Insurance Companies Act (Canada) to insure in Canada risks, in the
event of the insolvency of the Company, reinsurance payable in respect of the
insurance business in Canada of the Company shall be payable to the Chief Agent
in Canada of the Company or to the liquidator, receiver, conservator or
statutory successor appointed in Canada in respect of the insurance business in
Canada of the Company without diminution because of the insolvency of the
Company or because the Company or a liquidator, receiver, conservator or
statutory successor of the Company has failed to pay all or any portion of any
claim. All other terms and conditions of clauses A, B, and C remain in effect
and apply to this clause D which shall prevail if there is a conflict or
inconsistency.
ARTICLE XIX OFFSET
- ------------ ------
Each party hereto shall have, and may exercise at any time and from time to
time, the right to offset any undisputed balance or balances, whether on account
of premiums or on account of losses, due from such party to the other (or, if
more than one, any other) party hereto under this Agreement or under any other
reinsurance agreement heretofore or hereafter entered into by and between them,
and may offset the same against any undisputed balance or balances due to the
former from the latter under the same or any other reinsurance agreement between
them, and the party asserting the right of offset shall have and may exercise
such right whether the undisputed balance or balances due to such party from the
other are on account of premiums or on account of losses and regardless of the
capacity, whether as assuming insurer or as ceding insurer, in which each party
acted under the agreement or, if more than one, the different agreements
involved.
Where the Company is authorized under the Insurance Companies Act (Canada) to
insure in Canada risks, for the purpose of this Article, the branch of a Company
in Canada shall be considered as a party separate and distinct from the Company
and the right of offset provided for in this Article shall belong to and be
applied against that branch as though it were a separate and distinct party.
ARTICLE XX SEVERABILITY
- ----------- ------------
If any provision of this Agreement shall be rendered illegal or unenforceable by
the laws, regulations or public policy of any state, such provision shall be
considered void in such state, but this shall not affect the validity or
enforceability of any other provision of this Agreement or the enforceability of
such provision in any other jurisdiction.
ARTICLE XXI SPECIAL TERMINATION OR SETTLEMENT
- ------------ ------------------------------------
SECTION I (TERMINATION)
- -------------------------
A. Either party may terminate this Agreement immediately in the event that:
3. The other party should at any time become insolvent, or suffer any
impairment of contributed capital, or file a petition in bankruptcy, or go into
liquidation, rehabilitation, or voluntary supervision, or have a receiver
appointed, or be acquired or controlled by any other insurance company or
organization, or
4. There is a severance of obstruction of free and unfettered communication
and/or normal commercial and/or financial intercourse between the United States
of America and the country in which the Reinsurer is incorporated or has its
principal office as a result of war, currency regulations, or any circumstances
arising out of political, financial or economic emergency.
B. Either party may terminate this Agreement immediately in the event that:
3. Upon application of the NAIC Insurance Regulatory Information System
(IRIS) tests to the Company's quarterly and annual statement (which the Company
hereby agrees to furnish the Reinsurer upon request) it is found that four (4)
or more of the Company's IRIS financial ratio values are outside of the usual
range established in the IRIS system.
4. Upon review of the Insurance Solvency International ISI) Performance
Tests as published with respect to the Company (or upon application of such
Performance Tests to the Company's annual financial statements which the Company
hereby agrees to furnish to the Reinsurer upon request) it is found that four
(4) or more of the Company's ratios are outside of normal range (as defined by
the ISI standard).
Termination under A. or B. shall be automatic. The Reinsurer will specify the
mode of payment, i.e. a run-off basis or a clean-cut basis with portfolio
transfer, if applicable.
SECTION II (SETTLEMENT)
- -------------------------
After termination of this Agreement under this or any article, including the
natural expiry of the Agreement, if the Reinsurer has any residual liability to
the Company, the Company will, at the request of the Reinsurer, furnish to the
Reinsurer statements as specified in Section B1., above, and if four or more
values are outside of the usual range established in the IRIS or ISI system (as
applicable in accordance with Section B1., above) the Reinsurer shall have the
option of an immediate commutation in accordance with the commutation article.
In addition to the payments specified in that article the Reinsurer shall return
the unearned premium and the Company will allow a deduction of commission equal
to the average ceding commission on the ceded premium.
ARTICLE XXII CURRENCY REVALUATION
- ------------- ---------------------
It is agreed that underwriting to contractual and/or understanding limits will
be done in terms of United States (U.S.) dollar equivalent on the basis of
exchange rates in effect at the time of inception of new or renewal business or
at the time an addition to an existing risk takes place. In the event there is a
reduction in parity value of the U.S. dollar from that existing at the time the
risk was written which results in the contractual and/or understanding limits
being exceeded, the Company shall be held covered for such excess until next
renewal of the risk, at which time underwriting will then conform to the
contractual and/or understanding U.S. dollar limits in effect at the time.
IN WITNESS WHEREOF: the parties hereto have caused this Agreement to be
executed by their authorized representative.
In: ___________________ this ___________ day of ______________________ 2000
PAFCO GENERAL INSURANCE COMPANY
By: ___________________________ Title: ______________________________
and in: _______________this ____________ day of ________________________ 2000
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA.
By: __________________________ Title: ________________________________
ADDENDUM I
TO
AGGREGATE LOSS RATIO REINSURANCE AGREEMENT
BETWEEN
NATIONAL UNION FIRE INSURANCE COMPANY OF
PITTSBURGH, PA
(HEREINAFTER CALLED THE "REINSURER")
AND
GRANITE REINSURANCE COMPANY, LTD.
(HEREINAFTER CALLED THE "RETROCESSIONAIRE")
It is understood and agreed that addendums number 1 & 2 to the Underlying
Agreements, copies attached hereto, are accepted as part of the Underlying
Agreements.
All other terms and conditions remain unchanged.
IN WITNESS WHEREOF: the parties hereto have caused this Agreement to be
executed by their Authorized representatives.
In:______________________________this_____________day of________________2000
NATIONAL UNION FIRE INSURANCE COMPANY OF
----------------------------------------
PITTSBURGH, PA
By:_______________________________
Title:______________________________
AND IN____________________________THIS_____________DAY OF_________________2000
GRANITE REINSURANCE COMPANY, LTD.
By:________________________________
Title:_______________________________
ADDENDUM NO. 2
TO
QUOTA SHARE REINSURANCE AGREEMENT
EFFECTIVE JANUARY 1ST 2000
BETWEEN
SUPERIOR INSURANCE COMPANY AND ITS WHOLLY-OWNED
INSURANCE SUBSIDIARIES
AND
NATIONAL UNION FIRE INSURANCE COMPANY OF
PITTSBURGH, PA.
(HERAFTER CALLED THE "REINSURER")
It is understood and agreed that effective December 30, 2000 the following
articles are amended to read as follows.
ARTICLE II TERM AND TERMINATION
---------- --------------------
This Agreement commences at 12:01 a.m. Eastern Standard Time, January 1, 2000
and shall remain in force until 11:59 p.m. Eastern Standard Time, December 31,
2001. Either party may terminate effective on the first day of any calendar
quarter with 60 days advance written notice. The Reinsurer shall remain liable
for loss under reinsured policies effective prior to the termination date.
ARTICLE IV QUOTA SHARE PARTICIPATION AND LIMIT
- ----------- ---------------------------------------
The aggregate quota share cession shall be at the option of the Company and
subject to a maximum of 75%. However, the maximum cession will be limited to
$70,000,000 for the calendar year 2001. In the event this produces more than
$70,000,000 for the calendar year, the dollar amount of cessions shall be
reduced to $70,000,000. The quota share percent applicable for the Company
shall be the ratio of the adjusted dollar cession to the gross subject written
premium for the Company for that year. This limit can be increased by mutual
agreement between the Reinsurer and the Company. The Company shall notify the
Reinsurer prior to the last day of the calendar quarter of the quota share
percent for that quarter. It is agreed that the cession for any one quarter
shall not exceed 40% of the total cession for the calendar year. In the event
the declared percent cession for a calendar quarter produces premiums in excess
of 40% of the premium ceded for the calendar year the cession for that quarter
shall be adjusted to the dollar amount that would equal 40% of the premium ceded
for the year.
The Reinsurer's liability for aggregate losses, including allocated loss
adjustment expenses (and unallocated loss adjustment expenses where applicable
under REPORTS AND ACOCUNTING), shall be limited to 97% of earned premium ceded
for all business from the inception date of this agreement and the calculation
shall be from inception to the calculation date.
All other terms and conditions remain unchanged.
IN WITNESS WHEREOF: the parties hereto have caused this Agreement to be
executed by their Authorized representatives.
In:________________________________this_____________day of ________________2000
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA
-------------------------------------------------------
By:___________________________
Title:__________________________
And in______________________________this _____________day of________________2000
SUPERIOR INSURANCE COMPANY
--------------------------
By:____________________________
Title:___________________________
ADDENDUM NO. 2
TO
QUOTA SHARE REINSURANCE AGREEMENT
EFFECTIVE JANUARY 1ST 2000
BETWEEN
PAFCO GENERAL INSURANCE COMPANY
-------------------------------
(HEREINAFTER CALLED THE "COMPANY")
AND
NATIONAL UNION FIRE INSURANCE COMPANY OF
PITTSBURGH, PA.
(HEREINAFTER CALLED THE "REINSURER")
It is understood and agreed that effective December 30, 2000 the following
articles are amended to read as follows.
ARTICLE II TERM AND TERMINATION
- ----------- ----------------------
This Agreement commences at 12:01a.m. Eastern Standard Time, January 1, 2000,
and shall remain in force until 11:59 p.m. Eastern Standard Time, December 31,
2001. Either party may terminate effective on the first day of any calendar
quarter with 60 days advance written notice. The Reinsurer shall remain liable
for loss under reinsured policies effective prior to the termination date.
ARTICLE IV QUOTA SHARE PARTICIPATION AND LIMIT
- ----------- ---------------------------------------
The aggregate quota share cession shall be at the option of the Company and
subject to a maximum of 90%. However, the maximum cession will be limited to
$30,000,000 for the calendar year 2001. In the event this produces more than
$30,000,000 for the calendar year, the dollar amount of cessions shall be
reduced to $30,000,000. The quota share percent applicable for the Company
shall be the ratio of the adjusted dollar cession to the gross subject written
premium for the Company for that year. This limit can be increased by mutual
agreement between the Reinsurer and the Company. The Company shall notify the
Reinsurer prior to the last day of the calendar quarter of the quota share
percent for that quarter. It is agreed that the cession for any one quarter
shall not exceed 40% of the total cession for the calendar year. In the event
the declared percent cession for a calendar quarter produces premiums in excess
of 40% of the premium ceded for the calendar year the cession for that quarter
shall be adjusted to the dollar amount that would equal 40% of the premium ceded
for the year.
The Reinsurer's liability for aggregate losses, including allocated loss
adjustment expenses (and unallocated loss adjustment expenses where applicable
under REPORTS AND ACOCUNTING), shall be limited to 97% of earned premium ceded
for all business from the inception date of this agreement and the calculation
shall be from inception to the calculation date.
All other terms and conditions remain unchanged.
IN WITNESS WHEREOF: the parties hereto have caused this Agreement to be
executed by their Authorized representatives.
In:________________________________this_____________day of ________________2000
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA
By:___________________________
Title:__________________________
And in______________________________this _____________day of________________2000
PAFCO GENERAL INSURANCE COMPANY
By:____________________________
Title:___________________________
EMPLOYMENT AGREEMENT
WHEREAS, Symons International Group, Inc.("SIG") and Goran Capital Inc.
("Goran") (collectively, SIG and Goran are referred to as the "Company")
consider it in SIG's best interests to employ Gregg Albacete ("You", "Your"or
"Executive"), upon the terms and conditions hereinafter set forth; and
WHEREAS, the Executive desires to be employed by SIG, 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. SIG agrees to employ Executive as Vice
-------------------
President and Chief Information Officer effective as of January 26, 2000 and
continuing until January 26, 2003 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 the Company or Executive gives written
notice that it or he does not intend to extend this Agreement (the "Term").
1.2 Terms of Employment. During the Term, You agree to be a full-time
--------------------
employee of SIG serving in the position of Vice President and Chief Information
Officer of SIG and further agree to devote substantially all of Your working
time and attention to the business and affairs of SIG and, to the extent
necessary to discharge the responsibilities associated with Your position as
Vice President and Chief Information Officer of SIG 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 Chief Executive Officer or Executive Vice President of SIG, which duties
shall be consistent with the position of Vice President and Chief Information
Officer of SIG, which shall grant Executive authority, responsibility, title and
standing comparable to that of the vice president and chief information officer
of a stock insurance holding company of similar standing. Your primary place of
work will be at the Company's headquarters in Indianapolis, Indiana, but it is
understood and agreed that your duties may require travel. Nothing herein shall
prohibit You from devoting Your time to civic and community activities or
managing personal investments, as long as the foregoing do not interfere with
the performance of Your duties hereunder.
1.3 Appointment and Responsibility. The Board of Directors of SIG
--------------------------------
shall, following the effective date of this Agreement, elect and appoint
Executive as Vice President and Chief Information Officer. Consistent with
Section 1.2 of this Agreement, Executive shall be primarily responsible for the
information systems 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 One Hundred Seventy Five
Thousand Dollars ($175,000). 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.
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 of up to Seventy-Five Thousand Dollars ($75,000) (subject to normal
withholdings) within sixty (60) business days from receipt by Company of its
consolidated, annual audited financial statements. Executive's bonus for the
year ended December 31, 2000 shall be in an amount not less than Thirty-Seven
Thousand Five Hundred Dollars ($37,500). Additional bonus amounts shall be
subject to the discretion of the Chief Executive Officer and Executive Vice
President of the Company.
2.3 Employee Benefits. During the term of this Agreement, You shall be
-----------------
entitled to participate in all incentive, savings, and retirement plans,
practices, policies, and programs available generally to other employees of the
Company. During the term of this Agreement, You and/or Your family, as the case
may be, shall be eligible for participation in and shall receive all benefits
under welfare benefit plans, practices, policies, and programs available
generally to other employees of the Company.
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) An automobile allowance equal to the value of a Suburban, but in no
event in excess of seven hundred fifty dollars ($750.00) 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 Hiring Bonus. The Company will pay Executive Fifty Thousand
-------------
Dollars ($50,000) upon commencement of employment. Should the Executive's
employment with the Company terminate within the first twelve (12) months of
employment, including termination for cause and excluding other termination by
the Company, the Executive shall immediately reimburse the Company the sum of
Four Thousand One Hundred Sixty-Six Dollars ($4,166) for each remaining month of
the first twelve (12) months of employment.
2.7 Relocation Expense.
-------------------
--
A. Company will cover the direct costs of moving Executive and his
family from Dallas, Texas to Indianapolis, Indiana, including house-hunting
visits to Indianapolis, packing and unpacking of household goods, and insurance.
A. Company will pay realtor fees of up to seven percent (7%) on
the sale of Executive's Dallas, Texas home.
A. Company will pay all closing costs on an Indianapolis home.
A. Company will reimburse Executive for temporary living expenses
in Indianapolis and weekly travel to and from Dallas, Texas until the relocation
is complete.
2.8 Stock Options. Executive shall be eligible to participate in
--------------
the Company's stock option plan and will be granted 10,000 options for shares of
SIG at the market price on the first day of the Term. Executive's stock options
shall be issued pursuant to the Symons International Group, Inc. 1996 Stock
Option Plan and a Stock Option Agreement with respect thereto which shall be
substantially in the form of Exhibit A attached hereto. The options shall vest
and become exercisable by the Executive pro-rata over a three (3) year period
from the date of grant.
3. TERMINATION OF EXECUTIVE'S EMPLOYMENT
3.1 Termination of Employment and Severance Pay. Executive's
------------------------------------------------
employment under this Agreement may be terminated by the Company 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, an amount
equal to his salary for a period of one (1) year from the date of termination of
employment. Further, if Executive shall be terminated without cause, receipt of
severance payments are conditioned upon execution by Executive and the Company
of that mutual Agreement of Release and Waiver attached hereto as Exhibit B.
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;
(e) gross negligence or willful misconduct by the Executive in the
performance of his duties hereunder; or
--
(f) failure of the Executive to follow the written directive of the
Chief Executive Officer of Executive Vice President of the Company such that the
activities of the Executive are detrimental to the business operations.
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, (a) Company (including its successors, if
any) shall require Executive to perform his duties and obligations pursuant to
this Agreement in a location other than the city of employment of Executive at
the time of such Change of Control, or (b) Company (including its successors, if
any) shall materially change the duties, authority or responsibilities of
Executive such that the same are materially inconsistent with the duties,
authority or responsibilities of Executive at the time of such Change of
Control, then Executive's employment under this Agreement shall be deemed to
have terminated for other than cause pursuant to Section 3.1 hereof, and
Executive shall be entitled to receive salary and benefits as provided in such
Section 3.1. In addition, Executive's stock options shall vest immediately and
Executive may exercise such options within four (4) weeks of the date of
termination of employment. In the event Executive shall fail to exercise the
options within four (4) weeks of termination of employment, the options shall
expire.
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. 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 of
this Agreement, then for 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. 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 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:
Chief Executive Officer
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
If to Executive, to:
Gregg Albacete
______________________
______________________
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.
73
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 Mutuality. This Agreement is mutually binding on Goran and SIG.
5.11 Miscellaneous. No provision of this Agreement may be modified,
-------------
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by 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 _____ day of January, 2000.
("COMPANY")
GORAN CAPITAL INC.
By:__________________________________
Title:________________________________
SYMONS INTERNATIONAL GROUP, INC.
By:__________________________________
Title:________________________________
GREGG ALBACETE
("EXECUTIVE")
____________________________
AMENDMENT TO PERSONAL EMPLOYMENT AGREEMENT with an effective date of January 1,
1996.
BETWEEN: GRANITE REINSURANCE COMPANY
LTD.; A BODY POLITIC AND CORPORATE DULY INCORPORATED, HAVING ITS OFFICES AT
- --------------------------------------------------------------------------------
BISHOP'S COURT HILL, ST. MICHAEL,
-------------------------------------
BARBADOS, WEST INDIES;
- ------------------------
(hereinafter referred to as the "Company")
AND G. GORDON SYMONS, EXECUTIVE,
RESIDING AT 3 QUEEN'S COVE, APT. B6,
FAIRYLANDS, PEMBROKE, BERMUDA, HM 05;
(hereinafter referred to as the "Executive")
WHEREAS the parties hereto are presently governed by a Personal Employment
Agreement with an effective date of December 31, 1991, and Amendments to the
Personal Employment Agreement dated October 1, 1992 and January 1, 1995
(collectively referred to as the "Agreements");
AND WHEREAS the parties hereto desire to amend the terms of the Agreement
in accordance with the provisions hereof;
NOW THEREFORE be it agreed as follows:
2. REMUNERATION
------------
The provisions of subparagraph 5.1 of the said Personal Employment
Agreement shall be amended by Increasing the salary from One Hundred
Thousand Dollars ($100,000.00) per annum to One Hundred and Fifty
Thousand Dollars ($150,000.00) per annum payable in equal monthly
installments not in advance.
WHEREOF, THE PARTIES HAVE SIGNED HEREIN BELOW
GRANITE REINSURANCE COMPANY LTD. EXECUTIVE
Per: ____________________________________ Per: ____________________
ADDENDUM TO EMPLOYMENT AGREEMENT
This Addendum is entered into as of the 1st day of January, 1998 by and
between Goran Capital, Inc. ("Goran"), Symons International Group, Inc. ("SIG"),
Granite Reinsurance Company Ltd. ("Granite Re") and G. Gordon Symons (the
"Chairman") with respect to the following:
A. The Chairman is the Chairman of the Board of Directors of Goran and
SIG and the Chairman of the Board and President of Granite Re;
B. Granite Re and the Chairman have heretofore entered into that
certain
Personal Employment Agreement dated December 31, 1991 (as amended
from time to time, the "Employment Agreement") pursuant to which an
annual sum of One Hundred Fifty Thousand Dollars ($150,000) is paid by
Granite Re to the Chairman (the "Annual Sum");
C. Granite Re desires to ensure that it continues to receive the benefits
enuring to it pursuant to the terms of the Employment Agreement;
D. Goran desires to ensure that its wholly owned subsidiary,
Granite Re,
continues to receive the benefits enuring to it pursuant to the
terms of the
Employment Agreement; and
E. The parties to the Employment Agreement desire to amend such
Employment Agreement consistent with the terms contained herein
(including, but not limited to, the provisions of this amendment
dealing
with non-competition) and otherwise ratify and affirm the Employment
Agreement.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Goran, SIG, Granite Re and the
Chairman agree as follows:
1. Ratification and Amendment. The parties to the Employment Agreement
----------------------------
hereby reaffirm and modify the Employment Agreement and hereby ratify all
existing terms of the Employment Agreement and also amend the provisions of the
Employment Agreement to provide that upon the occurrence of a Triggering Event
(as defined herein), the sum of One Million One Hundred Twenty-Five Thousand
Dollars ($1,125,000) (the "Contract Payment") shall be paid to the Chairman.
2. Triggering Event. A Triggering Event shall occur upon the happening of
-----------------
any of the following events:
a. Granite Re shall fail to pay the Granite Re Obligation; or
b. There shall occur a "Change of Control" with respect to Goran or SIG.
For purposes of this Addendum, a "Change of Control" shall mean the inability of
the Symons family to cause the election of a majority of the Board of Directors
of Goran or SIG or their respective successors. In the event of a Change of
Control, Goran shall comply with the provisions of Sections 1 and 8 hereof.
3. Payments to Surviving Spouse. In the event of the death of the Chairman
----------------------------
prior to the satisfaction by Granite Re of the Contract Payment, the Annual Sum
payments and the Contract Payment shall be made to the Chairman's spouse if she
is then surviving, in accordance with the terms of this Addendum.
4. Noncompetition Agreement. As partial consideration of Granite Re
-------------------------
entering into this Addendum, the Chairman agrees as follows:
a. The Chairman, from and after the date of this Addendum, shall not
compete, in any manner, with Goran or SIG (including the Affiliates of Goran or
SIG, as such term "Affiliates" is defined for purposes of the Securities laws of
the United States.)
5. Monthly Installments. The Annual Sum shall be paid in equal monthly
---------------------
installments.
6. U.S. Dollars. The payment of all amounts hereunder shall be made in
-------------
United State dollars.
7. Liability. If a Triggering Event shall occur, Goran and SIG shall
---------
become jointly and severally liable with Granite Re for all obligations of
Granite Re pursuant to the Employment Agreement or this Addendum. Neither the
Employment Agreement nor this Addendum may be amended, canceled, terminated or
otherwise revised unless same shall be in writing signed by the parties to the
Employment Agreement.
8. Counterparts. This Addendum may be executed in any number of
------------
counterparts, each of which shall be an original; but such counterparts shall
---
together constitute but one and the same instrument.
9. Full Force and Effect. Except as otherwise provided herein, the
------------------------
Employment Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Addendum as of the day and
year first set forth above.
"Chairman"
________________________________________
G. Gordon Symons
"Granite Re"
Granite Reinsurance Company Ltd.
By: ________________________________
Colin James
"Goran"
Goran Capital Inc.
By: _________________________________
Alan G. Symons, President and Chief
Executive Officer
"SIG"
Symons International Group, Inc.
By: __________________________________
Alan G. Symons, Chief Executive Officer
CONSULTING AGREEMENT with an effective date of January 1, 1995
BETWEEN: GRANITE REINSURANCE COMPANY LTD., a body politic and
corporate duly incorporated, having its office at Bishop's Court Hill, P.O. Box
111, St. Michael, Barbados, West Indies.
(hereinafter referred to as the "Company")
AND: GORAN MANAGEMENT LTD., a body politic and corporate duly
incorporated, with offices at Jardine House, 33-35 Reid Street, P.O. Box HM
1752, in the City of Hamilton, Bermuda, HM GX;
(hereinafter referred to as the "Consultant")
WHEREAS the Company is actively engaged internationally in the business of
reinsurance and anticipates its premium volume of business for 1995 to be
Fifteen Million Untied States Dollars ($15,000,000) U.S.);
WHEREAS the Consultant has expertise in the field of reinsurance and is
desirous of entering into this Agreement with respect to providing international
consulting services on demand to the Company to the extent and as requested by
the Company;
WHEREAS the company wishes to engage the services offered by the Consultant
and the Consultant is willing to enter into an agreement to provide services on
the terms and conditions described herein:
NOW, THEREFORE, BE IT AGREED AS FOLLOWS:
MEMORANDUM TO AMEND/REPLACE THE FOLLOWING AGREEMENT:
BETWEEN: GRANITE REINSURANCE COMPANY LTD.,
(Granite Re) a body politic and corporate duly incorporated, having its offices
at Bishop's Court Hill, St. Michael, Barbados, West Indies;
AND GORAN MANAGEMENT LTD., (Goran) a body politic and corporate duly
incorporated, with offices at Milner House, 18 Parliament Street in the City of
Hamilton, Bermuda, HM 12;
AND
BETWEEN SMART CONSULTANTS, INC., (Smart) a body politic and corporate duly
incorporated according to the laws of the State of Nevada, having its registered
office at First Interstate Tower, 3800 Howard Hughes Parkway, Suite 1550, in the
City of Las Vegas, Nevada, U.S.A. 89109;
AND GRANITE REINSURANCE COMPANY LTD.,
(Granite Re) a body politic and corporate duly incorporated, having its
offices at Bishop's Court Hill, St. Michael, Barbados, West Indies;
AND
BETWEEN SMART CONSULTANTS, INC., (Smart) a body politic and corporate duly
incorporated according to the laws of the State of Nevada, having its registered
office at First Interstate Tower, 3800 Howard Hughes Parkway, Suite 1550, in the
City of Las Vegas, Nevada, U.S.A. 89109;
AND SYMONS INTERNATIONAL GROUP, INC., (SIG) a body politic and corporate
duly incorporated according to law having its registered offices at 4720
Kingsway Drive in the City of Indianapolis, State of Indiana, U.S.A., 46205;
WHEREAS the parties to these Agreements are desirous of affective certain
changes to these Agreements all to take effect as of January 1, 1998, these
amendments have been agreed between the parties.
Granite Re/Goran - the provisions of subparagraph 5 of the above Consulting
Agreement to be amended to Two Hundred and Fifty Thousand dollars ($250,000) per
annum payable in equal monthly installments, effective from January 1, 1998.
Smart/Granite Re Agreement is cancelled effective December 31, 1997.
Smart/SIG, Inc. Agreement is cancelled effective December 31, 1997.
Nothing contained herein has any affect on that Employment Agreement between G.
Gordon Symons and Granite Reinsurance Company Ltd.
WHEREOF THE PARTIES HAVE HERETO SIGNED
GRANITE REINSURANCE COMPANY LTD. GORAN MANAGEMENT LTD.
______________________________________ ______________________________
SMART CONSULTANTS, INC. SYMONS INTERNATIONAL GROUP, INC.
______________________________________ _____________________________
G. GORDON SYMONS
______________________________________
ADDENDUM TO CONSULTING AGREEMENT
This Addendum is entered into as of the 1st day of January, 1998 by and
between Goran Capital, Inc. ("Goran"), Symons International Group, Inc. ("SIG"),
Granite Reinsurance Company Ltd. ("Granite Re"), Goran Management Bermuda Ltd.
("Goran Bermuda") and G. Gordon Symons (the "Chairman") with respect to the
following:
A. The Chairman is the Chairman of the Board of Directors of Goran and SIG
and the Chairman of the Board and President of Granite Re;
B. Granite Re and Goran Bermuda have heretofore entered into that certain
Consulting Agreement dated January 1, 1995 (as amended from time to time, the
"Consulting Agreement") whereby an annual sum of Two Hundred Fifty Thousand
Dollars ($250,000) (the "Annual Sum") is paid by Granite Re to Goran Bermuda;
C. Granite Re desires to ensure that it continues to receive the benefit it
currently derives from the Consulting Agreement;
D. Goran desires to ensure that its wholly owned subsidiary, Granite Re,
continues to receive the benefit it currently derives from the Consulting
Agreement; and
E. The parties to the Consulting Agreement desire to amend such Consulting
Agreement consistent with the terms contained herein (including, but not limited
to, the provisions of this Addendum dealing with non-competition) and otherwise
ratify and affirm the Consulting Agreement.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Goran, Granite Re, Goran Bermuda
and the Chairman agree as follows:
1. Ratification and Amendment. Granite Re and Goran Bermuda hereby
----------------------------
reaffirm and modify the Consulting Agreement, and hereby ratify all existing
terms of the Consulting Agreement and also amend the provisions of the
Consulting Agreement to provide that, upon the occurrence of a Triggering Event
(as defined herein), the sum of One Million Eight Hundred Seventy-Five Thousand
Dollars ($1,875,000) (the "Contract Payment") shall be paid to Goran Bermuda.
2. Triggering Event. A Triggering Event shall occur upon the happening of
-----------------
any of the following events:
a. Granite Re shall fail to pay the Annual Sum; or
b. There shall occur a "Change of Control" with respect to Goran or SIG.
For purposes of this Addendum, a "Change of Control" shall mean the inability of
the Symons family to cause the election of a majority of the Board of Directors
of Goran or SIG or their respective successors. In the event of a Change of
Control, Goran shall comply with the provisions of Sections 1 and 8 hereof.
3. Payments to Surviving Spouse. In the event of the death of the Chairman
-----------------------------
prior to the satisfaction by Granite Re of the Contract Payment, the Annual Sum
payments and the Contract Payment shall be made to the Chairman's spouse if she
is then surviving, in accordance with the terms of this Addendum.
4. Noncompetition Agreement. As consideration of Granite Re entering into
-------------------------
this Addendum, Goran Bermuda agrees as follows:
a. Goran Bermuda, from and after the date of this Addendum, shall not
compete, in any manner, with Goran or SIG (including the Affiliates of Goran or
SIG, as such term "Affiliates" is defined for purposes of the Securities Laws of
the United States.)
5. Monthly Installments. The Annual Sum shall be paid in equal monthly
---------------------
installments.
6. Counterparts. This Addendum may be executed in any number of
------------
counterparts, each of which shall be an original; but such counterparts shall
----
together constitute but one and the same instrument.
7. U.S. Dollars. The payment of all amounts hereunder shall be made in
-------------
United States dollars.
8. Liability. If a Triggering Event shall occur, Goran and SIG shall become
---------
jointly and severally liable with Granite Re for all obligations pursuant to the
Consulting Agreement or this Addendum. Neither the Consulting Agreement nor
this Addendum may be amended, canceled, terminated or otherwise revised unless
same shall be in writing signed by the parties to the Consulting Agreement.
9. Full Force and Effect. Except as otherwise provided herein, the
------------------------
Consulting Agreement shall remain in full force and effect.
-
IN WITNESS WHEREOF, the parties have executed this Addendum as of the day
and year first set forth above.
"Chairman"
________________________________________
G. Gordon Symons
----------------
"Granite Re"
Granite Reinsurance Company Ltd.
By: ___________________________________
Colin James
"Goran Bermuda"
Goran Management Bermuda Ltd.
By: ___________________________________
G. Gordon Symons
"Goran"
Goran Capital Inc.
By: ___________________________________
Alan G. Symons, President and Chief
Executive Officer
"SIG"
Symons International Group, Inc.
By: ___________________________________
Alan G. Symons, Chief Executive Officer
EXECUTION COPY
EXECUTION COPY
CONSULTING AND NONCOMPETITION AGREEMENT
This Consulting and Noncompetition Agreement ("Agreement") is made as of May 23,
2001 by and between Goran Capital Inc., a Canadian corporation, for itself and
on behalf of all of its affiliates except Symons International Group, Inc., an
Indiana corporation ("SIG") (collectively, "Goran") and Acceptance Insurance
Companies Inc., a Delaware corporation, for itself and on behalf of all of its
affiliates and assignees (collectively, "Purchaser"). Capitalized terms used in
this Agreement and not otherwise defined herein shall have the meanings ascribed
to them in the Asset Purchase Agreement (the "Asset Purchase Agreement") dated
as of May 23, 2001 by and among Goran, SIG, IGF Holdings, Inc., an Indiana
corporation ("IGFH"), IGF Insurance Company, an Indiana insurance corporation
("IGF"), Acceptance and others.
WHEREAS, pursuant to the Asset Purchase Agreement the Sellers sold and Purchaser
purchased certain assets associated with the Business;
WHEREAS, Goran is highly knowledgeable regarding the Business, has been involved
in the direction and conduct of the Business for more than five years and is
also highly knowledgeable regarding the Business of Sellers as generally
conducted by them throughout the 2001 MPCI Crop Year and the 2001 Crop Hail Year
(the "Sellers Business");
WHEREAS, Purchaser desires to induce Goran to provide Purchaser certain
consulting services between the Closing and the third anniversary date of the
Closing;
WHEREAS, Purchaser desires to induce Goran not to engage in the Business in any
form prior to the third anniversary date of the Closing; and
WHEREAS, Goran and Purchaser jointly desire that Goran receive reasonable
compensation (i) for its provision of consulting services to Purchaser and (ii)
for agreeing not to engage in the Business in any form prior to the third
anniversary date of the Closing.
NOW, THEREFORE, Goran and Purchaser hereby agree as follows:
1. Confidential Information.
(a) Goran acknowledges that:
(i) The Business is a specialized form of insurance in a national market not
capable of geographic description or limitation; and
(ii) Because of the nature of Goran's knowledge, experience and
relationships with respect to the Business, Goran has and will continue to
receive, conceive, originate, discover or develop, information and data not
generally known in the insurance industry and not freely available to persons
who are not providing services to Sellers, regarding Sellers' agents,
reinsurers, underwriting practices and experience, business operations, legal
and regulatory affairs, business opportunities, procedures, policies, products,
services, customer lists, financial data, pricing, trade secrets, management,
market research and forecasts, product development, marketing strategy and
activities and other operations, plans and perspectives of Sellers
(collectively, "Confidential Information"). All such Confidential Information
pertaining to the Business which is received, conceived, originated, discovered
or developed at and before Closing shall be deemed "Proprietary Confidential
Information" for purposes of this Agreement. All such Confidential Information
other than Proprietary Confidential Information regardless of when received,
conceived, originated, discovered or developed shall be deemed "Nonproprietary
Confidential Information" for purposes of this Agreement.
(b) Goran agrees that it will not use or disclose Proprietary Confidential
Information at any time during or after termination of this Agreement and
that it shall not use or disclose Nonproprietary Confidential Information at any
time during the term of this Agreement.
2. Noncompetition.
(a) From the Closing until the third anniversary date of the Closing, Goran
will not directly or indirectly:
(i) solicit, divert or interfere with any business, financial, insurance or
other relationships which Sellers had, with respect to the Business, prior to
Closing with any customer, agent, employee, vendor or reinsurer of Sellers prior
to Closing, and which relationship Purchaser has not terminated; or
(ii) induce or attempt to induce any customer, agent, employee, vendor or
reinsurer of Sellers, with respect to the Business immediately prior to Closing,
to terminate, reduce or alter their relationship with Purchaser in any way
detrimental to Purchaser; or
(iii) compete with Purchaser as an employer, agent, owner, resource,
consultant or advisor to any entity providing products, services or advice
directly related to any agricultural production risk or otherwise conducting
Business.
(b) Notwithstanding any other provision of this Agreement or any other
contract, agreement or understanding of any kind whatsoever, Goran shall
automatically and immediately forfeit all consideration paid or to be paid to it
by Purchaser under this Agreement if it enters into any business, employment or
other arrangement or activity that is detrimentally competitive the Business
purchased by Purchaser pursuant to the Asset Purchase Agreement, or injurious to
the financial interests of the Business purchased by Purchaser pursuant to the
Asset Purchase Agreement, at any time prior to the third anniversary date of the
Closing.
3. Consulting Services. Goran hereby agrees to be available to
--------------------
Purchaser as reasonably requested by Purchaser, but in no event for more than 20
hours in any given calendar month, for the provision of consulting services
related to the operation of the Business commencing on the date of the Closing
and continuing until the third anniversary date of the Closing (the "Consulting
Term").
4. Additional Payment. For and in consideration of Goran's execution,
-------------------
delivery and performance of this Agreement and subject to Paragraph 2 of this
Agreement, Purchaser will pay Goran Four Million Five Hundred Thousand Dollars
($4,500,000) at Closing.
5. Assignment and Binding Effect. Goran may not transfer in any manner any
------------------------------
right to receive any portion of the consideration stated in Paragraph 4 of this
Agreement ("Consideration"). Goran hereby consents to Purchaser's assignment of
all of Purchaser's rights and obligations under this Agreement to any of
Purchaser's affiliates or successors. This Agreement shall be and remain
binding upon Goran and shall inure to the benefit of any successors in interest
and assigns of Purchaser.
6. Remedies. Goran and Purchaser agree the restrictions contained in
--------
paragraphs 1 and 2 under this Agreement are necessary for the protection of the
legitimate business interests and goodwill of the Business purchased by
Purchaser pursuant to the Asset Purchase Agreement, and Goran considers such
restrictions to be reasonable for such purposes. Goran agrees that any breach
of paragraph 1 or 2 will cause Purchaser substantial and irrevocable damage.
In the event of any such breach, in addition to such other remedies as may be
available, including the recovery of damages, Purchaser shall have the right to
injunctive relief to restrain or enjoin any actual or threatened breach of the
provisions of paragraphs 1 and 2. If Purchaser shall prevail in a legal
proceeding to remedy a breach or threatened breach of this Agreement, Purchaser
shall be entitled to recover reasonable attorneys' fees and costs incurred in
connection with such proceeding, in addition to any other relief it may be
granted. No remedy conferred upon any party by this Agreement is intended to be
exclusive of any other remedy, and each and every such remedy shall be
cumulative and in addition to any other remedy given hereunder. The failure to
enforce any of the provisions of this Agreement shall not be construed as a
waiver of such provisions. A waiver or failure to enforce by Purchaser on any
one occasion is effective only in that instance, and will not be construed as a
bar to, or waiver of, any right on any other occasion.
7. Applicable Law. This Agreement, or any portion thereof, shall be
---------------
interpreted in accordance with the laws of the State of Iowa, irrespective of
the fact that Goran now is or may become organized in a different state or
country.
8. Severability. If any provision(s) of this Agreement shall be held
------------
invalid or unenforceable, the validity and enforceability of all other
provisions of this Agreement shall not be affected thereby.
9. Entire Agreement. This Agreement supersedes all prior agreements and
-----------------
understandings between Goran and Purchaser concerning the subject matter hereof.
When this Agreement becomes effective it shall contain the entire agreement of
Purchaser and Goran relating to the subject matter hereof, and Purchaser and
Goran will have made no agreements, representations or warranties relating to
the subject matter of this Agreement that are not set forth herein.
10. Effectiveness and Termination. This Agreement is conditioned upon and
-------------------------------
effective at Closing. If the Asset Purchase Agreement is terminated pursuant to
its terms and conditions, this Agreement shall terminate concurrently with the
Asset Purchase Agreement.
Dated this 23rd day of May, 2001.
GORAN CAPITAL INC.
By:
Name:
Title:
ACCEPTANCE INSURANCE COMPANIES INC.
By:
Name: John E. Martin
------------------
Title: President and Chief Executive Officer
-------------------------------------------
GRANITE REINSURANCE COMPANY LIMITED
/ACCEPTANCE CROP HAIL RETROCESSION AGREEMENT
THIS RETROCESSION AGREEMENT ("Crop Hail Agreement") is made and entered into as
of May 23, 2001 by and between Acceptance Insurance Company, a Nebraska domestic
insurance company ("Acceptance") and Granite Reinsurance Company Limited, a
Barbados insurance company ("Granite").
W I T N E S S E T H :
WHEREAS, affiliates of Acceptance and others have entered into a certain Asset
Purchase Agreement (the "Asset Purchase Agreement") dated as of May 23, 2001;
and
WHEREAS, in conjunction with the Asset Purchase Agreement, Acceptance and others
entered into a certain IGF/Acceptance Retrocession Agreement and an
IGF/Acceptance Quota Share Reinsurance Agreement, both dated as of May 23, 2001
and attached hereto ("Acceptance's Assumption Agreements"); and
WHEREAS, subject to the terms and conditions set forth in this Crop Hail
Agreement, Acceptance desires to cede to Granite and desires to accept from
Acceptance and to reinsure 100% of all risks reinsured by Acceptance under
Acceptance's Assumption Agreements except MPCI risks reinsured by the Federal
Crop Insurance Corporation and located within the United States ("Reinsured
Contracts").
NOW, THEREFORE, in consideration of the premises and the mutual promises of the
parties hereto, they hereby covenant and agree as follows:
ARTICLE I
EFFECTIVE TIME
This Crop Hail Agreement shall be effective as of 12:01 a.m. Eastern Standard
Time ("Effective Time") on the date of the Closing as defined in the Asset
Purchase Agreement. If the Asset Purchase Agreement is terminated pursuant to
its terms and conditions, this Retrocession Agreement shall terminate
concurrently with the Asset Purchase Agreement and never shall be effective.
ARTICLE II
REINSURED OBLIGATIONS; REPRESENTATIONS OF PARTIES
SECTION 2.01. DESCRIPTION OF REINSURED OBLIGATIONS. Subject to the provisions
of this Crop Hail Agreement, Acceptance hereby assigns, transfers, sets over,
cedes and reinsures to Granite, and Granite hereby reinsures on a 100% quota
share basis from Acceptance, all liabilities and obligations for losses
associated with the Reinsured Obligations.
SECTION 2.02. REPRESENTATIONS. Granite represents, to the best of its
knowledge and belief, that as of the Effective Time:
(a) Granite is a corporation duly organized and validly existing in good
standing under the laws of Barbados. Granite has the corporate power and
authority to carry on their business substantially as it is now being conducted.
(b) Granite has the requisite corporate power and authority to take,
and has taken, all corporate action necessary to execute and deliver this Crop
Hail Agreement, and to consummate the transactions contemplated hereby. This
Crop Hail Agreement has been validly executed and delivered by Granite, and is a
valid and binding agreement, enforceable against Granite in accordance with its
terms.
SECTION 2.03. REPRESENTATIONS. Acceptance represents, to the best of its
knowledge and belief, that as of the Effective Time:
(a) Acceptance is a corporation duly organized and validly existing in good
standing under the laws of the State of Nebraska and is an authorized insurer in
Nebraska and has the corporate power and authority to carry on its business
substantially as it is now being conducted.
(b) Acceptance has the requisite corporate power and authority and has taken
all corporate action necessary to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. This Agreement has been
validly executed and delivered and is a valid and binding agreement of
Acceptance, enforceable against Acceptance in accordance with its terms.
SECTION 2.04. QUOTA SHARE BASIS. The parties acknowledge and agree that the
reinsurance provided herein is on a 100% quota share basis. Granite agrees to
assume all obligations and liabilities of Acceptance under the Reinsured
Contracts, subject, however, to the same rights, offsets, counterclaims,
cross-actions and defenses that are or may be possessed by the parties. It is
expressly understood that no such offsets, counterclaims, cross-actions or
defenses are or shall be waived, but that the same are expressly preserved and
that the parties shall be duly subrogated thereto, whether the same be known to
exist or are hereafter discovered.
ARTICLE III
INSOLVENCY
SECTION 3.01. INSOLVENCY.
(a) In the event of the insolvency of Acceptance, it is agreed that the
liquidator, receiver, conservator or statutory successor of Acceptance shall
give written notice to Granite of the pendency of a claim against Acceptance
indicating the policy reinsured which claim would involve a possible liability
on the part of Granite within a reasonable time after such claim is filed in the
conservation or liquidation proceeding or in the receivership, and that during
the pendency of such claim, Granite may investigate such claim and interpose, at
its own expense, in the proceeding where such claim is to be adjudicated, any
defense or defenses that it may deem available to Acceptance or its liquidator,
receiver, conservator or statutory successor. The expense thus incurred by
Granite shall be chargeable, subject to the approval of the Court, against
Acceptance as part of the expense of conservation or liquidation to the extent
of a pro rata share of the benefit which may accrue to Acceptance solely as a
result of the defense undertaken by Granite.
(b) It is further understood and agreed that, in the event of the insolvency
of Acceptance, the reinsurance under this Agreement shall be payable directly by
Granite to Acceptance or to its liquidator, receiver or statutory successor,
except (1) where this Agreement specifically provides another payee of such
reinsurance in the event of the insolvency of Acceptance or (2) where Granite
with the consent of the direct insured or insureds has assumed such policy
obligations of Acceptance as direct obligations of Granite to the payees under
such policies and in substitution for the obligations of Acceptance to such
payees.
ARTICLE IV
CONSIDERATION FOR RETROCESSION CONTRACTS
SECTION 4.01. CONSIDERATION. For and in consideration for this Retrocession
Agreement Acceptance will remit to Granite all gross written premium with
respect to the Reinsured Contracts, and Acceptance shall be deemed to have a
fiduciary responsibility to Granite with respect to all such premium. Written
premium with respect to the Reinsured Contracts paid to Acceptance before the
Effective Time will be remitted to Granite on the date of the Closing. All
gross written premiums with respect to the Reinsured Contracts paid to
Acceptance after Closing will be remitted to Granite not less often than once
each month.
SECTION 4.02. COMMISSION AND TAXES. Acceptance's Assumption Agreements contain
clauses that recover for companies ceding to Acceptance under such agreements
all commissions due independent agents, premium tax paid or due and payable and
all amounts due for bureau, boards and fees to associations. To the same extent
that these amounts are deducted or paid then the net premium payable under this
Crop Hail Agreement will be reduced accordingly.
SECTION 4.03. LOSS ADJUSTMENT AND CLAIMS SETTLEMENT COSTS. Acceptance will
manage and administrate the claims handling on behalf of companies ceding to
Acceptance under Acceptance's Assumption Agreements. The cost associated
thereto as per the Management and Service Agreement entered into as of May 23,
2001 by and between Acceptance and IGF Insurance Company.
ARTICLE V
LIABILITY
SECTION 5.01. PAYMENT OF CLAIMS AND BENEFITS. From and after the Effective
Time, Granite shall be responsible for (a) paying all losses due under the
Reinsured Contracts in accordance with the terms of thereof; (b) paying all
premium refunds with respect to premiums received under the Reinsured Contracts;
and (c) paying all expenses in connection with the investigations, adjustment,
appraisal or settlement of all claims under the Reinsured Contracts on or after
the Effective Time.
SECTION 5.02. ACTIONS ON OR AFTER EFFECTIVE TIME. If any legal or regulatory
actions are threatened or filed in connection with any of the Reinsured
Contracts on or after the Effective Time, the parties agree to provide each
other with prompt notice thereof, within such time period as would allow the
appropriate party the opportunity to answer, appear or to take any action
necessary or to avoid a default judgment. The parties agree to cooperate with
each other with respect to any such legal or regulatory actions, whether
threatened or actual.
SECTION 5.03. TAXES. Acceptance shall retain full responsibility for any tax
liability relating to the Reinsured Contracts for all taxable periods or
portions thereof.
ARTICLE VI
ERRORS AND OVERSIGHTS
Each party to this Retrocession Agreement will act reasonably to comply
with its terms. Clerical errors and oversights occasioned in good faith in
carrying out this Retrocession Agreement will not prejudice either party and
will be rectified promptly on an equitable basis.
ARTICLE VII
ARBITRATION
SECTION 7.1 COMPULSORY ARBITRATION.
(a) The parties intend this article to be enforceable in accordance with the
Federal Arbitration Act (9 U.S.C. Section 1, et seq.), including any amendments
to that Act which are subsequently adopted, notwithstanding any other choice of
law provision set forth in this Agreement. In the event that either party
refuses to submit to arbitration as required herein, the other party may request
a United States Federal District Court to compel arbitration in accordance with
the Federal Arbitration Act. Both parties consent to the jurisdiction of such
court to enforce this article and to confirm and enforce the performance of any
award of the arbitrators.
(b) Any dispute or other matter in question between Granite and Acceptance
arising out of or relating to the formation, interpretation, performance, or
breach of this Agreement, whether such dispute arises before or after
termination of this Agreement, shall be resolved by arbitration if the parties
are unable to resolve the dispute through negotiation. Arbitration shall be
initiated by the delivery of a written demand for arbitration by one party to
the other.
SECTION 7.2. PROCEDURE.
(a) Each party shall appoint an individual as arbitrator and the two so
appointed shall then appoint an umpire. If either party refuses or neglects to
appoint an arbitrator within forty-five (45) days after the initial delivery of
the demand for arbitration, the other party may appoint the second arbitrator.
If the two arbitrators do not agree on an umpire within forty-five (45) days of
their appointment, the parties shall petition the American Arbitration
Association to appoint an umpire with the qualifications set forth below. The
arbitrators shall be active or retired officers of insurance or reinsurance
companies or Lloyd's of London Underwriters or reinsurance brokers; the
arbitrators shall not have a personal or financial interest in the result of the
arbitration.
(b) The arbitration hearing shall be held in Omaha, Nebraska or such other
place as may be mutually agreed. Each party shall submit its case to the
arbitrators within forty-five (45) days of the selection of the umpire or within
such longer period as may be agreed by the arbitrators. The arbitrators shall
not be obliged to follow judicial formalities or the rules of evidence except to
the extent required by law of the state of New York; they shall make their
decisions according to the practice of the reinsurance business. The decision
rendered by a majority of the arbitrators shall be final and binding on both
parties. Such decision shall be a condition precedent to any right of legal
action arising out of the arbitrated dispute which either party may have against
the other. Judgment upon the award rendered may be entered in any court having
jurisdiction thereof. Both parties shall abide by the final decision of such
Court or of any appellate court in the event of an appeal.
(c) Except as provided above, arbitration shall be based, insofar as
applicable, upon the Commercial Arbitration Rules of the American Arbitration
Association.
SECTION 7.3. COSTS. Each party shall bear its own costs in connection with
any such arbitration including, without limitation, all legal, accounting, and
any other professional fees and expenses, the fees and expenses of its own
arbitrator, and all other costs and expenses each party incurs to prepare for
such arbitration. Other than set forth above, each side shall pay one-half of
the fee and expenses of the umpire, and one-half of the other expenses that the
parties jointly incur directly related to the arbitration proceeding.
ARTICLE VIII
TERMINATION
SECTION 8.01. TERMINATION DATE. This Agreement can only be terminated by
mutual consent.
SECTION 8.02. APPROVALS. If the approval of any state insurance department is
necessary for the effectiveness of this Retrocession Agreement, the parties will
cooperate and use their best efforts to obtain such approvals.
SECTION 8.03. COSTS OF TERMINATION. If this Retrocession Agreement is
terminated pursuant to Section 8.01, neither party shall be liable to the other
for any costs, expenses, causes of actions, fees or claims of any type due with
respect to such termination.
ARTICLE IX
REGULATORY COMPLIANCE AND APPROVALS
SECTION 9.01. COMPLIANCE. The parties agree to comply with all laws,
regulations or directions of appropriate state insurance departments with regard
to (a) any notification to policyholders under the Reinsured Contracts
(including without limitation all content, description, timing or other
requirements), (b) this Retrocession Agreement and (c) all service requirements
to policyholders under the Reinsured Contracts.
SECTION 9.02. REGULATORY APPROVALS. The parties agree that where formal
approval is required by any state insurance regulatory agency, this Retrocession
Agreement shall not be effective as to any and all Reinsured Contracts in effect
in such state until such approval is obtained.
ARTICLE X
CONFIDENTIALITY
SECTION 10.01. CONFIDENTIAL INFORMATION. During the course of performance
under this Retrocession Agreement, the parties and their respective agents,
employees and representatives will obtain or have access to certain proprietary
or confidential information. The parties undertake and covenant, one to the
other, that they will, and they will cause their respective agents, employees
and representatives to, maintain the confidential information in a confidential
manner in accordance with applicable local, state or federal laws, and in
accordance with this Retrocession Agreement.
ARTICLE XI
RELATIONSHIP OF PARTIES
SECTION 11.01. NO EMPLOYMENT RELATIONSHIP. The relationships between the
parties hereto shall be that of independent contractors. Nothing herein shall
be construed to create the relationship of employer and employee between the
parties or any of their respective agents or employees.
ARTICLE XII
OTHER PROVISIONS
SECTION 12.01. PARAGRAPH HEADINGS. The headings of the provisions of this
Retrocession Agreement are for reference purposes and have no legal force or
effect.
SECTION 12.02. GOVERNING LAW. This Retrocession Agreement shall be construed
and interpreted according to the laws of the State of Iowa.
SECTION 12.03. OTHER ACTIONS. The parties will use their best efforts to cause
the reinsurance contemplated under this Retrocession Agreement to be consummated
and approved by all necessary regulatory bodies and to do such further acts,
matters and deeds, and execute any and all additional instruments and
agreements, that may be mutually agreed as necessary or reasonably required in
order to carry this Retrocession Agreement into full effect.
SECTION 12.04. COUNTERPARTS; FACSIMILE SIGNATURES. This Agreement may be
executed in one or more counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same instrument. For
purposes of this Agreement, facsimile signatures shall be deemed originals, and
the parties agree to exchange original signatures as promptly as possible.
SECTION 12.05. SET OFF. Granite and Acceptance 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 any
time whether the balances due are on account of premiums or losses or otherwise.
SECTION 12.06. NOTICES. Until otherwise notified, all formal notices,
requests, demands and other communications between the parties shall be directed
to the parties at their respective addresses as follows:
If to Reinsurer:
Acceptance Insurance Company
535 West Broadway
Council Bluffs, Iowa 51503
Attn: President
If to Ceding Companies:
IGF Insurance Company
4720 Kingsway Drive
Indianapolis, Indiana 46205
Attn: President
SECTION 12.07. ASSIGNMENT. This Retrocession Agreement is not assignable by
either party without prior written consent of the other party and, where
required, the prior approval of any appropriate state insurance department.
Neither party's consent under this Section shall be unreasonably withheld.
SECTION 12.08. WAIVER. Failure of Reinsurer or Ceding Companies to enforce any
of its rights or remedies under this Retrocession Agreement shall not constitute
a waiver of such rights or remedies exercisable hereunder.
SECTION 12.09. SEVERABILITY. If any provision of this Retrocession Agreement
should be determined to be invalid or otherwise unenforceable under law, the
remainder of this Retrocession Agreement shall not be affected thereby.
SECTION 12.10. AGREEMENT BINDING. This Retrocession Agreement is binding upon
the parties hereto, their respective representatives, successors and assigns.
SECTION 12.11. MULTIPLE COPIES. This Retrocession Agreement may be executed in
multiple copies, and each shall have the same force and effect of the original.
SECTION 12.11 JOINT AND SEVERAL LIABILITY. All rights and obligations of
the Ceding Companies created under the terms of this Retrocession Agreement
shall be joint and several.
SECTION 12.12. INTEREST. Interest on the balance due and payable that is not
paid when due, shall, in addition to the amount due, incur and pay interest on
the amount due at 1 % per month on part thereof.
IN WITNESS WHEREOF, this Retrocession Agreement has been duly executed.
CEDING COMPANIES:
IGF INSURANCE COMPANY, for itself and for CONTINENTAL CASUALTY INSURANCE COMPANY
By
Name
Title
REINSURER:
ACCEPTANCE INSURANCE COMPANY
By
Name
Title __________________________________
MPCI STOP LOSS REINSURANCE CONTRACT
TABLE OF CONTENTS
ARTICLE
- -----------------------------------
Preamble
1 . . . . . . . . . . . . . . . . . Term
2 . . . . . . . . . . . . . . . . . Season
3 . . . . . . . . . . . . . . . . . Business Covered
4 . . . . . . . . . . . . . . . . . Territory
5 . . . . . . . . . . . . . . . . . Exclusions
6 . . . . . . . . . . . . . . . . . Reinsuring
7 . . . . . . . . . . . . . . . . . Extra Contractual Obligations
8 . . . . . . . . . . . . . . . . . Excess of Original Policy Limits
9 . . . . . . . . . . . . . . . . . Definitions
10. . . . . . . . . . . . . . . . . Notice of Loss and Loss Settlements
11. . . . . . . . . . . . . . . . . Premium
12. . . . . . . . . . . . . . . . . Net Retained Lines
13. . . . . . . . . . . . . . . . . Offset
14. . . . . . . . . . . . . . . . . Access to Records
15. . . . . . . . . . . . . . . . . Errors and Omissions
16. . . . . . . . . . . . . . . . . Currency
17. . . . . . . . . . . . . . . . . Arbitration
18. . . . . . . . . . . . . . . . . Service of Suit
19. . . . . . . . . . . . . . . . . Insolvency
ATTACHMENTS
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Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance - U.S.A.
Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance - Canada
16
MPCI STOP LOSS REINSURANCE CONTRACT
(hereinafter referred to as the "Contract")
In consideration of the mutual covenants hereinafter contained and subject to
all the terms and conditions hereinafter set forth
GRANITE REINSURANCE COMPANY, LTD.
(hereinafter referred to as "Reinsurer ")
do hereby indemnify, as herein provided,
ACCEPTANCE INSURANCE COMPANIES INC.
(hereinafter referred to as the "Company" )
Wherever the word "Company" is used in this Contract, such term shall be held to
include any and/or all of the subsidiary companies which are or may hereafter
come under the management of the Company, provided that notice be given to the
Reinsurer of any such subsidiary companies which may hereafter come under the
management of the Company as soon as practicable, with full particulars as to
how such acquisition is likely to affect this Contract.
ARTICLE 1
TERM
This Contract shall become effective as of July 1, 2000 and shall remain in full
force and effect with respect to all Covered Business risks in force or
attaching from that date through June 30, 2005.
The Reinsurer shall be responsible for all losses in progress at June 30, 2005
in the same manner and to the same extent it would have been responsible had the
Contract expired or terminated the day following the conclusion of the loss in
progress.
ARTICLE 2
SEASON
The Season commences on July 1 of each year and continues through June 30 of the
following year.
ARTICLE 3
BUSINESS COVERED
This Contract shall indemnify the Company, as set forth in the Reinsuring
Article, in respect of the liability which may accrue to the Company under all
policies, bonds, binders, certificates, contracts of insurance or reinsurance,
co-insurance or co-indemnity, or other evidences of liability (hereinafter
referred to as "policy(ies)" and/or "bond(s)", oral or written, issued or
renewed before or after the effective time and date hereof, issued by or
contracted for by the Company in respect of all business classified by the
Company as Multi-Peril Crop Insurance (MPCI) business, as defined and reinsured
by the FCIC and issued by the Company, IGF Insurance Company or Continental
Casualty Company. This Contract shall also indemnify the Company, as set forth
in Part II of Article 6, in respect of the indemnification obligations to the
Company of IGF Insurance Company and IGF Holdings, Inc. under Article IX of that
certain Asset Purchase Agreement dated as of May 23, 2001 ("APA"), but the
Reinsurer shall not be liable for more than $36,400,000 minus the aggregate
amounts paid to the Company pursuant to Article IX of the APA by IGF Insurance
Company or IGF Holdings, Inc. in the aggregate under this sentence and such Part
II; provided, however, that such aggregate dollar limitation on such liabilities
shall not apply with respect to an indemnification obligation arising from or
related to actual fraud committed by IGF Insurance Company, IGF Holdings, Inc.
or the Reinsurer.
ARTICLE 4
TERRITORY
This Contract shall apply only to risks located in the United States of America.
ARTICLE 5
EXCLUSIONS
This Contract shall not apply to and specifically excludes:
1. Any loss or damage which is occasioned by war, invasion, hostilities,
acts of foreign enemies, civil war, rebellion, insurrection, military or usurped
power, or martial law or confiscation by order of any government or public
authority, but not excluding loss or damage which would be covered under a
standard policy form containing a standard war exclusion clause.
2. All liability of the Company excluded by the following clauses attached
hereto:
(a) Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance -
U.S.A.
(b) Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance -
Canada.
3. Risks not reinsured by FCIC.
4. This Contract excludes all liability of the Company arising by contract,
operation of law, or otherwise, from its participation or membership, whether
voluntary or involuntary, in any insolvency fund. "Insolvency fund" includes any
guaranty fund, insolvency fund, plan, pool, association, fund or other
arrangement, howsoever denominated, established or governed, which provides for
any assessment of or payment or assumption by the Company of part or all of any
claim, debt, charge, fee, or other obligation of an insurer, or its successors
or assigns, which has been declared by any competent authority to be insolvent,
or which is otherwise deemed unable to meet any claim, debt, charge, fee or
other obligation in whole or in part.
5. Loss adjustment expense. For the purposes of this Contract, the term
"loss adjustment expense" shall mean all loss adjustment expenses incurred by
the Company, as defined by the FCIC.
ARTICLE 6
REINSURING
Part I: The Reinsurer shall be liable for 100% of the subject ultimate
- -------
net loss in excess of:
1. 140%, but not greater than 150%, of the Company's subject net retained
premium income for each crop year.
2. The liability of the Reinsurer for the term of the treaty shall not
exceed $40,000,000 in all without the payment of additional premium equal to a
rate of 5% of subject net retained premium income for each year unearned.
Part II: In addition, the Reinsurer shall be jointly and severally
- --------
liable to the Company, to the same extent and on the same terms and conditions
- ----
that IGF Insurance Company and IGF Holdings, Inc. shall be liable to the
Company, against all damages, losses, liabilities, costs and expenses of every
kind whatsoever incurred or suffered by the Company that result from, relate to
or arise out of those matters specified by Article IX of the APA.
Notwithstanding any other provision of this Contract, however, the Reinsurer
shall not be liable to the Company under this Part II in excess of an aggregate
of $36,400,000 minus the aggregate amounts paid to the Company pursuant to
Article IX of the APA by IGF Insurance Company or IGF Holdings, Inc. in the
aggregate under Article 3 and this Part II; provided, however, that such
aggregate dollar limitation on such liabilities shall not apply with respect to
an indemnification obligation arising from or related to actual fraud committed
by IGF Insurance Company, IGF Holdings, Inc. or the Reinsurer.
ARTICLE 7
---------
EXTRA CONTRACTUAL OBLIGATIONS
This Contract shall not protect the Company within the limits hereof, where the
ultimate net 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 the preparation of the defense or in the
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 is incurred by the Company
shall be deemed, in all circumstances, to be the date of the original disaster
and/or casualty.
ARTICLE 8
---------
EXCESS OF ORIGINAL POLICY LIMITS
This Contract shall not protect the Company, within the limits hereof, in
connection with ultimate net loss in excess of the limit of its original policy,
such loss in excess of the limit having been incurred because of failure by it
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 the preparation of
the defense or in the trial of any action against its insured or reinsured or in
the preparation or prosecution of an appeal consequent upon such action.
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 9
---------
DEFINITIONS
A. The term "ultimate net loss" as used in this Contract shall mean the
ratio of the net retained premium income into the net retained loss. An example
of the calculation is as follows: net retained premium income equals $100 and
the net retained loss equals $150 resulting in the calculation of $150 divided
by $100 which equals 150%.
B. The term "subject ultimate net loss" as used in this Contract shall mean
the subject net retained premium on business the subject of this Contract,
classified by the Company as MPCI.
C. The term "net retained premium income" as used in this Contract shall
mean gross premium income on Covered Business, less cessions to the FCIC's
Assigned Risk, Developmental and Commercial Funds.
D. The term "subject net retained premium income" as used in this Contract
shall mean the net retained premium on Covered Business the subject of this
Contract, classified by the Company as MPCI.
E. The term "net retained loss" as used in this Contract shall mean the
gross losses less all cessions to the FCIC's Assigned Risk and Developmental and
Commercial Funds.
ARTICLE 10
----------
NOTICE OF LOSS AND SETTLEMENTS
The Company shall give notice to the Reinsurer, as soon as reasonably
practicable in the event ultimate net losses are likely to result in a claim
being made upon the Reinsurer, based upon a reasonable estimate of the Company's
subject net retained premium income, and the Company shall keep the Reinsurer
advised of all subsequent developments.
The Reinsurer agrees to abide by the loss settlements of the Company, such
settlements to be construed as satisfactory proof of loss. Amounts falling to
the share of the Reinsurer shall be immediately payable to the Company by the
Reinsurer upon reasonable evidence of the amount paid or to be paid by the
Company being presented to the Reinsurer.
Should the ultimate net loss of the Company exceed the Company's estimated
retention prior to the time that the subject net retained premium income of the
Company is known, the Reinsurer shall make provisional settlement based on a
reasonable estimate of the subject net retained premium income. Any provisional
settlement shall be adjusted when the Company 's actual subject net retained
premium income is known.
In addition, the Company shall provide information regarding potential loss
developments on July 15, August 30 and October 15 of each year, or as soon as
information is available.
INTEREST EXPENSE
From the date following 10 days after demand by the Company for payments due
under this clause, the amount outstanding shall bear interest at the rate of 1
% per month or part thereof until paid.
Should Company withhold money due Reinsurer that is in excess of an actual paid
loss, or should the Reinsurer pay to the Company any amount greater than the
actual paid loss, or should Company withhold any amount pursuant to Part II of
Article 6, the amount in excess of such actual paid losses, or in excess of sums
properly due under Part II of Article 6, shall be repaid or paid to Reinsurer
including interest thereon at the rate of 1 % per month or part thereof from the
date such excess amount was paid or withheld until full payment hereunder
including interest.
ARTICLE 11
----------
PREMIUM
A. The Company will pay the Reinsurer a minimum and deposit premium of
$6,000,000 at the signing of this treaty for the crop year 2001 and 2002 and
shall pay a minimum deposit premium of $3,000,000 on January 1, 2003, a minimum
deposit of $3,000,000 on January 1, 2004 and a minimum deposit of $3,000,000 on
January 1, 2005.
B. Within 30 days following the end of the calendar year the Company shall
provide any other information which the Reinsurer may require to prepare their
Annual Statement which is reasonably available to the Company.
ARTICLE 12
----------
NET RETAINED LINES
This Contract applies only to that portion of any policy which the Company
retains net for its own account (prior to deduction of any underlying
reinsurance specifically permitted in this Contract), and in calculating the
amount of any loss hereunder and also in computing the amount or amounts in
excess of which this Contract attaches, only loss or losses in respect of that
portion of any policy which the Company retains net for its own account shall be
included.
The amount of the Reinsurer' liability hereunder in respect of any loss or
losses shall not be increased by reason of the inability of the Company to
collect from any other reinsurer(s), whether specific or general, any amounts
which may have become due from such reinsurer(s), whether such inability arises
from the insolvency of such other reinsurer(s) or otherwise.
ARTICLE 13
----------
OFFSET
The Company and the Reinsurer shall have the right to offset any balance or
amounts due from one party to the other. The party asserting the right of
offset may exercise such right any time whether the balances due are on account
of premiums or losses or otherwise.
ARTICLE 14
----------
ACCESS TO RECORDS
The Reinsurer or its designated representatives shall have access at any
reasonable time to all records of the Company which pertain in any way to this
reinsurance.
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 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
----------
CURRENCY
Whenever the word "Dollars" or the "$" sign appears in this Contract, they shall
be construed to mean United States Dollars and all transactions under this
Contract shall be in United States Dollars.
Amounts paid or received by the Company in any other currency shall be converted
to United States Dollars at the rate of exchange at the date such transaction is
entered on the books of the Company.
[RESERVED]
ARTICLE 17
----------
SERVICE OF SUIT
It is agreed that in the event of the failure of the Reinsurer to pay any amount
claimed to be due under this Contract, the Reinsurer, at the request of the
Company, shall submit to the jurisdiction of any court of the State of Iowa
which shall be the exclusive forum for any proceeding arising under this
Reinsurance Contract, including, but not limited to, its negotiation, execution
or performance, and all matters arising hereunder shall be determined in
accordance with the law and practice of such court.
Service of process upon Granite Reinsurance Company Limited in such suit may be
made at any office of Symons International Group, Inc. or any of its affiliates,
or upon any officer or director of Granite Reinsurance Company wherever found
(hereinafter "agent for service of process"), and in any suit instituted against
any Reinsurer(s) upon this Contract, the Reinsurer(s) shall abide by the final
decision of such court or of any appellate court in the event of an appeal.
The above named are authorized and directed to accept service of process on
behalf of the Reinsurer(s) in any such suit and/or upon the request of the
Company to give a written undertaking to the Company that the agent for service
of process shall enter a general appearance on behalf of the Reinsurer(s) in the
event such a suit shall be instituted.
Further, pursuant to any statute of any state, territory or district of the
United States of America which makes provision therefor, the Reinsurer(s) hereby
designate the Superintendent, Commissioner or Director of Insurance or other
officer specified for that purpose in the statute, or his successor or
successors in office, as their true and lawful attorney upon whom may be served
any lawful process in any action, suit or proceeding instituted by or on behalf
of the Company or any beneficiary hereunder arising out of this Contract and
hereby designate the agent for service of process as the firm to whom the said
officer is authorized to mail such process or a true copy thereof.
The provisions of this Article shall survive any termination of this Agreement.
ARTICLE 18
----------
INSOLVENCY
(All references to the insolvency of the Company herein are also applicable to
the insolvency of each and every insurance carrier collectively referred to as
the "Company.")
In the event of the insolvency of the Company, this reinsurance shall be payable
directly to the Company, or to its liquidator, receiver, conservator or
statutory successor on the basis of the liability of the Company without
diminution because of the insolvency of the Company or because the liquidator,
receiver, conservator or statutory successor of the Company has failed to pay
all or a portion of any claim. It is agreed, however, that the liquidator,
receiver, conservator or statutory successor of the Company shall give written
notice to the Reinsurer of the pendency of a claim against the Company
indicating the policy or bond reinsured, which claim would involve a possible
liability on the part of the Reinsurer within a reasonable time after such claim
is filed in the conservation or liquidation proceeding or in the receivership,
and that during the pendency of such claim, the Reinsurer may investigate such
claim and interpose, at their own expense, in the proceeding where such claim is
to be adjudicated any defense or defenses that they may deem available to the
Company or its liquidator, receiver, conservator or statutory successor. The
expense thus incurred by the Reinsurer shall be chargeable, subject to the
approval of the court, against the Company as part of the expense of
conservation or liquidation to the extent of a pro rata share of the benefit
which may accrue to the Company solely as a result of the defense undertaken by
the Reinsurer.
Where two or more reinsurers are involved in the same claim and a majority in
interest elect to interpose defense to such claim, the expense shall be
apportioned in accordance with the terms of the reinsurance Contract as though
such expense had been incurred by the Company.
As to all reinsurance made, ceded, renewed or otherwise becoming effective under
this Contract, the reinsurance shall be payable as set forth above by the
Reinsurer to the Company or to its liquidator, receiver, conservator or
statutory successor, (except as provided by Sections 4118(a)(1)(A) and 1114(c)
of the New York Insurance Law) or except (1) where the Contract specifically
provides another payee in the event of the insolvency of the Company, or (2)
where the Reinsurer, with the consent of the direct insured or insureds, have
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. Then, and in that event only, the
Company, with the prior approval of the certificate of assumption on New York
risks by the Superintendent of Insurance of the State of New York, is entirely
released from its obligation and the Reinsurer pay any loss directly to payees
under such policy.
ARTICLE 19
REGULATORY COMPLIANCE AND APPROVALS
The parties agree to comply with all laws, regulations or directions of
appropriate state insurance departments with regard to (a) any notification to
policyholders under the Reinsured Contracts (including without limitation all
content, description, timing or other requirements), (b) this Reinsurance
Contract Agreement and (c) all service requirements to policyholders under the
Reinsured Contracts.
The parties agree that where formal approval is required by any state insurance
regulatory agency, this Reinsurance Contract shall not be effective as to any
and all Reinsured Contracts in effect in such state until such approval is
obtained.
The Reinsurer has provided its Statutory Financial Statements and actuarial
opinion for the year ended December 31, 2000 to the Company and the Reinsurer
will provide the Company with copies of its Statutory Financial Statements and
actuarial opinion for each subsequent calendar year by April 30 of the following
year.
SIGNATURES ON THE FOLLOWING PAGE
--------------------------------
GRANITE REINSURANCE COMPANY
By:_______________________________________
Its:_______________________________________
ACCEPTANCE INSURANCE COMPANIES INC.
By:_______________________________________
Its:_______________________________________
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is entered into by and between
Goran Capital Inc. ("Goran") and Symons International Group, Inc. (together with
its subsidiaries, "SIG") and David N. Hafling ("You", "Your" or "Executive") as
of October 15, 2001 with reference to the following:
WHEREAS, Goran and SIG consider it essential in their respective best
interests and the best interests of their respective stockholders for SIG to
retain the employment of David N. Hafling, upon the terms and conditions
hereinafter set forth; and
WHEREAS, the Executive desires to continue employment by SIG 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. SIG agrees to continue the employment of
-------------------
Executive as Vice President, Chief Actuary of SIG, until December 31, 2004 or
until such employment is terminated pursuant to Section 3 below; provided,
--------
however, that the term of this Agreement shall automatically be extended without
--
further action of either party for additional one (1) year periods thereafter
unless, not later than sixty (60) days prior to the end of the then effective
term, either SIG or the Executive shall have given written notice that such
party does not intend to extend this Agreement.
1.2 Terms of Employment. During the term of this Agreement, You agree
--------------------
to be a full-time employee of SIG serving in the position of Vice President,
Chief Actuary of SIG and further agree to devote substantially all of Your
working time and attention to the business and affairs of SIG and, to the extent
necessary to discharge the responsibilities associated with Your position as
Vice President, Chief Actuary of SIG, to use Your best efforts to perform
faithfully and efficiently such responsibilities. Executive shall perform such
duties and responsibilities as may be determined from time to time by the Vice
Chairman, Chief Executive Officer or Executive Vice President of SIG and the
Board of Directors of SIG, which duties shall be consistent with the position of
Vice President, Chief Actuary of SIG which shall grant Executive authority,
responsibility, title and standing comparable to that of the Vice President,
Chief Actuary of a stock insurance holding company of similar standing. Nothing
herein shall prohibit You from devoting Your time to civic and community
activities or managing personal investments, as long as the foregoing do not
interfere with the performance of Your duties hereunder.
2. COMPENSATION, BENEFITS AND PERQUISITES
2.1 Salary. SIG shall pay Executive a salary, in equal bi-weekly
------
installments, equal to an annualized salary rate of One Hundred Fifty Thousand
Dollars ($150,000). Executive's salary payable pursuant to this Agreement may
be increased from time to time as mutually agreed upon by Executive and SIG.
SIG shall pay Executive the salary applicable in twenty-six (26) bi-weekly
installments. Notwithstanding any other provision of this Agreement,
Executive's salary paid by SIG 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. SIG and Executive understand and agree that SIG desires 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 SIG to reward Executive for the attainment of that
growth through bonus and other discretionary means (such as stock options, and
stock appreciation rights). Executive may earn an annual bonus of up to $30,000
dependent upon certain financial criteria as set forth in Exhibit 2.2 hereof.
2.3 Employee Benefits. Executive shall be entitled to receive health
------------------
plan benefits which are provided to other executive employees of SIG under the
applicable company plans and policies, and to future benefits and health plan
benefits made generally available to executive employees of SIG with duties and
compensation comparable to that of Executive upon the same terms and conditions
as other company participants in such plans.
2.4 Additional Perquisites. During the term of this Agreement, SIG
-----------------------
shall provide Executive with not less than four (4) weeks paid vacation during
each calendar year.
2.5 Expenses. During the period of his employment with SIG, Executive
--------
shall be entitled to receive reimbursement from SIG (in accordance with the
policies and procedures in effect for the company employees) for all reasonable
travel, entertainment and other business expenses incurred by him in connection
with his services hereunder.
3. TERMINATION OF EXECUTIVE'S EMPLOYMENT
3.1.1 Termination of Employment and Severance Pay. Executive's
------------------------------------------------
employment under this Agreement may be terminated by either party at any time
for any reason; provided, however, that if Executive's employment is terminated
-------- -------
by SIG for any reason other than for cause, SIG and Goran, jointly and
severally, agree to pay severance to Executive of up to six (6) month's then
current salary in regular bi-weekly payments (the "Salary Continuation"),
subject to reduction as provided in Section 3.1.2. Further, if Executive shall
be terminated without cause, severance payments described in the preceding
sentence are conditioned upon execution by Executive and SIG of a waiver and
release agreement substantially in the form of Exhibit A attached hereto.
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 SIG
or if Executive is directed by SIG to engage in any act or action constituting
fraud or any unlawful conduct relating to SIG or its business as may be
determined by application of applicable law. For purposes of this Section 3.1,
termination of employment shall include a change of employment such that
Executive shall no longer be employed by SIG as a Vice President or as its
senior executive responsible for the actuarial function of SIG or at a salary
less than Executive's current salary.
3.1.2 Reduction of Salary Continuation. It is expressly understood and
--------------------------------
agreed that the amount of any payment to Executive required pursuant to Section
3.1.1 shall be reduced (but not below zero) by the amount of any compensation
received by Executive or attributable to services performed by Executive during
the Salary Continuation period. During the Salary Continuation, Executive shall
provide SIG with a bi-weekly report which shall specify all services performed
by Executive for third parties, the identity of the person or entity for which
services were performed and any compensation paid or expected to be paid to or
for the benefit of Executive. Executive shall use his reasonable best efforts
during the Salary Continuation period to obtain employment comparable to that
with SIG.
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 SIG or its business, in either case as determined under the laws of
any Relevant Jurisdiction;
(d) the Executive breaching any provision of this Agreement; or
(e) the Executive "Grossly Neglects" his duty to SIG. For purposes of this
Agreement, "Gross Neglect" means the failure to perform the functions of the
Executive's job or the failure by Executive to carry out reasonable directions
with respect to material duties after the Executive has been notified in writing
that the Executive is failing to perform these functions or failing to carry out
reasonable directions. Such notice shall specify the functions or directions
that the Executive is failing to perform and what steps need to be taken to cure
and shall set forth the reasonable time frame, which shall be at a minimum
forty-five (45) days, within which to cure. If Executive fails to cure within
the time frame, SIG may terminate Executive's employment for cause by giving him
thirty (30) days notice or pay in lieu thereof.
3.3 Disability. So long as otherwise permitted by law, if Executive
----------
has become permanently disabled from performing his duties under this Agreement,
SIG'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 SIG 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 SIG. If SIG elects to
terminate this Agreement based on such permanent disability, such termination
shall be for cause.
3.4 Indemnification. Executive shall be indemnified by SIG to the
---------------
maximum extent permitted by applicable law for actions undertaken for, or on
behalf of SIG.
4. NON-COMPETITION, NON-SOLICITATION, CONFIDENTIALITY AND TRADE SECRETS
4.1 Noncompetition. In consideration of SIG's entering into this
--------------
Agreement and the compensation and benefits to be provided by SIG to You
hereunder, and further in consideration of Your exposure to proprietary
information of SIG, You agree that until the date of termination or expiration
of this Agreement for any reason (the "Date of Termination") not to enter into
competitive endeavors and not to undertake any commercial activity which is
contrary to the best interests of SIG 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 SIG
accounting for five percent (5%) or more of SIG'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 SIG.
Notwithstanding any provision of this Agreement to the contrary, You agree
that Your breach of the provisions of this Section 4.1 shall permit SIG to
terminate Your employment for cause.
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 SIG or any of its affiliates, or any of their respective businesses
or principals, and You confirm that such information is the exclusive property
of SIG and its affiliates. You agree to hold as SIG's property all memoranda,
books, papers, letters and other data, and all copies thereof or therefrom, in
any way relating to the business of SIG and its affiliates, whether made by You
or otherwise coming into Your possession and, on termination of Your employment,
or on demand of SIG at any time, to deliver the same to SIG.
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 SIG, shall be owned by SIG and its affiliates
whether or not You should in fact execute an assignment thereof to SIG, 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 SIG.
4.3 Nonsolicitation. During Executive's employment with SIG and for
---------------
one (1) year following termination of Executive's employment, Executive will not
directly or indirectly solicit, divert or interfere with the relationship
between SIG or its affiliates and any employee of SIG or its affiliates.
5. MISCELLANEOUS
5.1 Amendment. This Agreement may be amended only in writing, signed
---------
by both parties.
5.2 Entire Agreement. This Agreement contains the entire understanding
----------------
of the parties with regard to all matters contained herein. There are no other
agreements, conditions or representations, oral or written, expressed or
implied, with regard to the employment of Executive or the obligations of SIG 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 SIG, to:
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Attention: Chief Executive Officer
If to Executive, to:
David N. Hafling
8650 Winding Ridge Road
Indianapolis, Indiana 46217
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. SIG'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.
By:__________________________________
Alan G. Symons, Chief Executive Officer
SYMONS INTERNATIONAL GROUP, INC.
By:__________________________________
Douglas H. Symons, Chief Executive Officer
_____________________________________
David N. Hafling
EMPLOYMENT AGREEMENT
WHEREAS, Symons International Group, Inc. ("SIG") and Goran Capital Inc.
("GORAN") (collectively, SIG and Goran are referred to as the "Company")
consider it in their best interests to employ Gene S. Yerant ("you" or the
"Executive") upon the terms and conditions hereinafter set forth; and
WHEREAS, the Executive is an individual with substantial experience in the
business of nonstandard automobile insurance;
WHEREAS, the Company desires to employ an executive who will make a
significant contribution to effect profitability in its nonstandard automobile
insurance business; and
WHEREAS, the Executive desires to be employed by the Company upon the terms
and conditions contained herein.
NOW, THEREFORE, in consideration of the covenants and agreements set forth
below, the parties agree as follow:
1. Employment
1.1 Term of Agreement. The Company agrees to employ the Executive as
-------------------
Executive Vice President of Goran, Executive Vice President of SIG, and
President of Superior Insurance Group, Inc. ("Superior") effective as of January
10, 2000 and continuing for a period of sixty (60) months through January 10,
2005 unless such employment is terminated pursuant to Section 3 below; provided,
however, that the term of the Agreement shall automatically be extended without
further action of either party for additional one-year periods thereafter
unless, not later than six months prior to the end of the effective term, either
the Company or the Executive shall have given written notice that such party
does not intend to extend this Agreement (the "Term").
1.2 Terms of Employment. During the Term, you agree to be a full-time
--------------------
employee of SIG and Goran serving in the positions of Executive Vice President
of SIG and Goran and President of Superior 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 Executive Vice President of SIG and Goran and
President of Superior, 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 Board of
Directors of the Company, which duties shall be consistent with the position of
Executive Vice President of SIG and Goran, which shall grant Executive
authority, responsibility, title and standing comparable to that of an executive
vice president of a publicly held insurance company. 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 Director. The Company will appoint the Executive as a member of
--------
the Board of Directors of SIG and Superior at their first meeting(s) following
the effective date of this Agreement. The Companies will provide Officers and
Directors Liability insurance in an amount equal to $10 million. The Executive
agrees to resign as a director of SIG and Superior and other affiliates of the
Company upon the termination or expiration of this Agreement.
2. Compensation, Benefits and Prerequisites
2.1 Salary: During the term of this Agreement, the Company shall pay
------
Executive a salary at the minimum annual rate of Five Hundred Thousand Dollars
($500,000). The salary shall be payable in bi-weekly equal installments.
2.2 Bonus Plan:
-----------
Bonus A. Based on Superior?s GAAP combined ratios, including billing fees
--------
being below 100% and gross written premium for 2000 being greater than
$250,000,000. A bonus of $25,000 per .25% improvement in combined ratio (as an
example at 98% combined ratio the bonus would equal $200,000). For the year
2001 the gross written premium must exceed $300,000,000 and grow thereafter at
15% per annum. A guaranteed minimum bonus of $125,000 is payable should the
combined ratio be 101.5% or better for the year 2000. The minimum is increased
to $166,000 at combined ratio of 100% for the year 2000. The minimum is
increased to $250,000 should the combined ratio be better than 99% for the year
2000. All of the above adjusted to eliminate prior years'development. Payment
of the bonus is based on audit and actuary report of combined ratio with deficit
or credit of reserves for year 2000 forward adjusting the bonus paid.
Bonus A is payable by April 15 of the year following the year on which
the bonus is based. The year 2000 bonus is payable by April 15, 2001. The year
2001 bonus is payable by April 15, 2002 and so on and so forth.
B. Bonus B. In addition to the foregoing, should Superior equal or exceed
-------
the pre-tax profit as shown below in the year shown below a lump sum bonus as
shown will be payable.
Year Ended
December 31, PRE-TAX PROFIT AT SUPERIOR BONUS PAYABLE
- ------------ --------------------------- --------------
2000 . . . . $ 25,893,000 $ 500,000
2001 . . . . $ 29,777,000 $ 500,000
2002 . . . . $ 34,243,000 $ 500,000
2003 . . . . $ 39,380,000 $ 500,000
2004 . . . . $ 45,287,000 $ 500,000
18
Bonus B is payable by April 15 of the year following the year on which the
bonus is based. The year 2000 bonus is payable by April 15, 2001. The year 2001
bonus is payable by April 15, 2002 and so on and so forth.
2.3 Stock Options. Executive shall be eligible to participate in the
--------------
Company's stock option plan and will be granted 100,000 options for shares of
Goran at the market price on the first day of the Term. Executive's stock
options shall be issued pursuant to the Goran Capital Inc. Share Option Plan and
a Stock Option Agreement with respect thereto which shall be substantially in
the Form of Exhibit A attached hereto. These options shall vest and become
exercisable by the Executive pro-rata over a five (5) year period from the date
of grant. However, should the Executive be terminated for other than material
cause, the options shall vest immediately and Executive may exercise such
options within four (4) weeks of the date of termination of employment. In the
event Executive shall fail to exercise the options within four (4) weeks of
termination of employment, the options shall expire.
2.4 Privatization: Should the majority stockholders of Goran complete
--------------
a privatization of SIG and Goran, the Executive will be entitled to an ownership
interest in the new entity. The Executive's ownership interest shall be in the
form of stock options in the parent holding company of Superior (the "New
Entity"). Executive will be entitled to options which equal 2.5% of the
ownership interests of the New Entity. The exercise price of the options in the
New Entity shall be based upon the value of the Company at the time of the
privatization. As a condition of the grant of such replacement options, the
options referred to in paragraph 2.3 shall be canceled and any shares of stock
of Goran which have theretofore been issued upon the exercise of the options
referred to in paragraph 2.3 shall be exchanged for the replacement options all
as more fully set forth in the Stock Option Agreement. The vesting period of
such replacement options will be over the remaining initial term of this
Agreement. The amount of the exercise price of such replacement options shall
be based upon a formula which shall be the same formula utilized for valuing the
options of other executives of the Company in comparable positions, including
the president and chief operating officer of the Company.
Should the Company authorize and/or issue additional stock the
Executive will be issued additional stock sufficient to maintain a 2.5% interest
in the Company. There shall be no dissolution of interest without the
Executive's express written consent.
In the event Executive elects or is required to sell his vested
options or shares to the Company or New Entity, the price for each option or
share shall be as determined by the Company pursuant to the Company's plan for
its Executives as determined by the Board of Directors and which shall be
comparable to those of similar entities. Notwithstanding the foregoing, the
value of such options or shares shall be determined in accordance with the same
formula or price utilized for valuing the options or shares of other executives
of the Company in comparable positions, including the president and chief
executive officer of the Company.
2.5 Employee Benefits: The Executive shall be entitled to receive
-----------------
all benefits and prerequisites which are comparable to those provided to other
Executives of the Company and in accordance with the policies of the Company.
2.6 Additional Perquisites: During the term of this Agreement,
-----------------------
the Company shall provide the Executive with:
Draft Dated 11/5/99
1
A. A minimum of six (6) weeks paid vacation during each
calendar year.
Draft Dated 11/5/99
5
21
B. A monthly motor vehicle allowance equal to the value of a
luxury car or the Company will provide the Executive with a luxury car (Defined
as a BMW 740iL or its equivalent.) and will reimburse for all operational
expenses. Executive will be entitled to trade the car in at the time the car
has in excess of 75,000 miles or four (4) years, whichever first occurs.
C. Monthly dues incurred by Executive at the country club and
city club of his choice located within reasonable geographic limits of the
corporate offices of the Company, including the entrance fees to become a member
of the country club and city club.
2.7 Expenses: During the period of the Executive's employment
--------
hereunder, the Executive shall be entitled to receive reimbursement from the
Company (in accordance with the policies and procedures in effect for the
Company's Executive employees) for all reasonable travel, entertainment and
other business expenses incurred by him in connection with his services
hereunder.
2.8 Insurance: The Company will allow the Executive to include in
---------
his expense account the cost of personal insurance for up to two (2) private
cars, homeowner's insurance on his principal residence in the city of employment
of the Executive, including $2 million umbrella liability.
2.9 401(k): Executive will be eligible for the SIG 401(k)
------
plan in accordance with the policies of the Company.
2.10 Hiring Bonus: The Company will pay Executive Two Hundred
---- -------------
Fifty Thousand Dollars ($250,000) upon commencement of employment. Should the
Executive leave the Company within the first twelve (12) months of employment,
including termination for material cause, and excluding termination by the
Company, the Executive shall immediately reimburse the Company the sum of Twenty
Thousand Eight Hundred Dollars ($20,800) for each remaining month of the first
twelve (12) months of employment
2.11 Relocation Expense
A Company will cover the direct costs of moving the Executive
and his family from Dallas, Texas to Indianapolis, Indiana, including visits to
Indianapolis, packing, moving costs, insurance and unpacking.
B. Company will pay realtor fees up to 7% on the sale of the
Dallas home.
C. Company will pay all closing costs on an Indianapolis home
and buy down the mortgage to 6.75% for a mortgage loan of up to $300,000.
D. Company will hire a relocation firm or give you a minimum
price on your home based on fair market value. If your Dallas home does not sell
within 120 days of the agreed move date, the Company will purchase the home at
the agreed fair market value or the relocation firm will take it over. The
Company will help with any bridging loans required.
E. Company will reimburse the Executive for weekly travel to
and from Dallas until the relocation is complete.
3. Termination of Executive's Employment
3.1 Termination of Employment and Severance Pay. The Executive's
------------------------------------------------
employment under this Agreement may be terminated by either party at any time
for any reason.
In the event Executive is terminated for any reason other than for
material cause, the Executive shall be entitled to receive a continuation of
his salary and benefits in effect under this Agreement on the date of his
employment termination for a period of two (2) years provided that the Executive
has not breached the terms of this Agreement. Should the Executive be
terminated by the Company for other than material cause, all of Executive's
stock options shall immediately vest and Executive shall be entitled to exercise
the options within four (4) weeks of termination. If Executive shall fail to
exercise the options within four (4) weeks of termination of employment, the
options shall expire. All bonuses that shall have become earned as of the most
recently preceding year end shall be due and payable in accordance with the
bonus payment dates as set forth in Section 2.2 hereof. Bonuses, which would
have been earned for the year in which the Executive is terminated, shall be
paid pro rata to the date of termination. Termination shall be effective as of
the date specified by the party initiating the termination in a written notice
delivered to the other party.
In the event this Agreement is not renewed by Company, Employee shall
be entitled to receive a continuation of his salary and benefits in effect under
this Agreement on the date of non-renewal for a period of one (1) year from the
date of such non-renewal provided that the Executive has not breached the terms
of this Agreement.
Upon termination of employment by the Executive, for whatever reason,
the Executive will not be entitled to receive any further salary, benefits or
bonuses and all stock options which have not then vested shall expire.
3.2 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, (a) Company (including its successors, if
any) shall require Executive to perform his duties and obligations pursuant to
this Agreement in a location other than the city of employment of Executive at
the time of such Change of Control, or (b) Company (including its successors, if
any) shall materially change the duties, authority or responsibilities of
Executive such that the same are materially inconsistent with the duties,
authority or responsibilities of Executive at the time of such Change of
Control, then Executive?s employment under this Agreement shall be deemed to
have terminated for other than material cause pursuant to Section 3.1 hereof,
and Executive shall be entitled to receive salary, benefits and rights with
respect to stock options as provided in such Section 3.1.
"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 or
their respective successors.
3.3 Transition of Duties. Should the Executive terminate his
----------------------
employment with the Company, the Executive will make himself readily available
to the Company for a reasonable period of time, at the Company's discretion, to
facilitate the transition of information and knowledge to a new executive. At
the discretion of the Company, this period shall be a maximum of six (6) weeks
following notice of termination.
3.4 Material Cause: For purposes of this Agreement, "material cause"
---------------
shall mean only the following: (i) the committing of any act by Executive which
would be considered a criminal offense (other than minor traffic violations or
conviction of or admission to conversion of Company assets in an amount greater
than Five Thousand Dollars ($5,000)) under the laws of either Indiana or the
United States of America; (ii) the failure by Executive to perform his material
duties under this Agreement (excluding nonperformance resulting from Executive's
disability) or disobedience to lawful directives from those persons or bodies
outlined in Section 1.2 which have the authority to determine and direct
Executive's work and activities where such failure is not cured by Executive
within fifteen (15) days of his receipt of written notification from Company
specifying Executive's failure or breach and the steps the Executive must take
to cure that failure or breach; however, during the fifteen (15) days the
Company has the option to put the Executive on leave of absence with pay; or
(iii) disability as provided in Section 3.5.
3.5 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 herein. Upon
any such termination for disability, Executive shall be entitled to such
disability, medical, life insurance, and other benefits as may be generally
provided 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 deemed to be for material cause.
Non-Competition, Confidentiality and Trade Secrets
4.1 Agreement Not To Compete: Until the expiration of the term of this
-------------------------
Agreement or for a period of two (2) years after the date that the Executive's
employment with the Company terminates, whichever period is the later, the
Executive will not, unless he receives prior written approval of the Board of
Directors of the Company, directly or indirectly engage in any of the following
actions:
Draft Dated 11/19/99
1
A. Directly or indirectly, attempt to move or transfer business
greater than 5% of the aggregate amount of gross sales, revenues or earnings
before taxes of the Company; or
Draft Dated 11/5/99
1
B. Directly or indirectly hire, solicit for hire or engage in an
activity that would entice employees of the Company to move to a competitor or
to a company or business where the Executive has become employed; or
Draft Dated 11/5/99
1
C. Intentionally cause material damage to the Company.
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 relating to the Company or any of its affiliates, which
you acquired during your term of employment, 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. Material knowledge and information you bring to the
Company are specifically excluded from this Agreement
5. Miscellaneous
5.1 Mutuality. This Agreement is mutually binding on Goran and SIG.
---------
5.2 Binding Effect. This Agreement is binding on all assignees and/or
---------------
successors of the Company.
5.3 Amendment. This Agreement may be amended only in writing, signed
----------
by both parties.
5.4 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.
5.5 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 or to such other address as shall be specified in writing:
If to the Company, to:
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Attention: Chief Executive Officer
If to Executive, to:
Mr. Gene S. Yerant
6515 Waggoner Drive
Dallas, TX 75230
5.6 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.
5.7 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.
5.8 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.
5.9 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.
5.10 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.
5.11 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 Sections.
5.12 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 10th day of December, 1999.
GORAN CAPITAL INC.
By: _____________________________
Title: _____________________________
SYMONS INTERNATIONAL GROUP, INC.
By:__________________________________
Title:________________________________
GENE S. YERANT
("Executive")
__________________________
------
AGGREGATE LOSS RATIO REINSURANCE AGREEMENT
BETWEEN
NATIONAL UNION FIRE INSURANCE COMPANY OF
PITTSBURGH, PA.
(HEREAFTER CALLED THE "RETROCEDENT")
AND
GRANITE REINSURANCE COMPANY, LTD.
(HEREINAFTER CALLED THE "RETROCESSIONAIRE")
INDEX
-----
ARTICLE SUBJECT PAGE
------- ------- ----
I BUSINESS COVERED 1.
II. . TERM AND TERMINATION 1.
III TERRITORY 1.
IV. . COVERAGE 1.
V LIMIT OF LIABILITY 1.
VI PREMIUM 2.
VII DEFINITIONS 2.
VIII REPORTS AND ACCOUNTING 2.
IX TRUST FUND 2.
X . . COVENANTS 2.
XI SERVICE OF SUIT 3.
XII ACCESS TO RECORDS 3.
XIII ARBITRATION 3.
XIV CONFIDENTIALITY 4.
XV ERRORS AND OMISSIONS 4.
XVI FEDERAL EXCISE TAX 4.
XVII. FOLLOW THE FORTUNES . 4.
XVIII GOVERNING LAW 5.
XIX INSOLVENCY 5.
XX OFFSET 5.
XXI . SEVERABILITY 6.
XXII SPECIAL TERMINATION OR SETTLEMENT 6.
XXIII CURRENCY REVALUATION . 7.
01-335447.06 15
01-335447.06
AGGREGATE LOSS RATIO REINSURANCE AGREEMENT
BETWEEN
NATIONAL UNION FIRE INSURANCE COMPANY OF
PITTSBURGH, PA.
(HEREINAFTER CALLED THE "RETROCEDENT")
AND
GRANITE REINSURANCE COMPANY, LTD.
(HEREINAFTER CALLED THE "RETROCESSIONAIRE")
************************************************************************
ARTICLE I BUSINESS COVERED
---------
All liability assumed under Quota Share Reinsurance Agreements from Superior
Insurance Company and its wholly-owned insurance subsidiaries and Pafco General
Insurance Company effective January 1, 2000.
ARTICLE II TERM AND TERMINATION
----------
Effective from 12:01 a.m. Eastern Standard Time January 1, 2000 until all
liabilities are finalized.
ARTICLE III TERRITORY
-----------
As per the Underlying Agreements.
ARTICLE IV COVERAGE
----------
The Retrocessionaire shall be liable separately for each Reinsurance Agreement,
for losses incurred (including all Loss Adjustment Expenses) in excess of a loss
ratio of 79%. All terms & conditions of the Underlying Agreements, copies
attached hereto, shall apply.
ARTICLE V LIMIT OF LIABILITY
---------
The Retrocessionaire shall be liable separately for each Reinsurance Agreement,
for 18% of earned premium on each Underlying Agreement, however, not in excess
of 6% of the combined earned premium on the Underlying Agreements.
ARTICLE VI PREMIUM
- ----------- -------
The Retrocedent shall pay an initial deposit premium of $10,000 within 15 days
of receipt of the first cash premium payment received on any of the Underlying
Agreements. The final premium shall be 12.5% of the premium cash payments
received and the difference between that premium and the deposit premium shall
be paid upon the finalization of all liabilities in accordance with the
Underlying Agreements. In addition the Retrocedent shall pay 100% of the
payment received upon the finalization of the liabilities in accordance with the
Underlying Agreements. Such payment shall be made within 30 days of receipt of
the payment on the Underlying Agreements. However, no payment shall be made
after the deposit premium unless all conditions of this agreement have been
complied with.
ARTICLE VII DEFINITIONS
-----------
Loss Ratio, shall be in accordance with the Underlying Agreements.
ARTICLE VIII REPORTS AND ACCOUNTING
------------
The Retrocedent shall forward to the Retrocessionaire a copy of all reports
received in accordance with the Underlying Agreements within 10 days of their
receipt. In the event the paid loss (including all loss adjustment expenses)
are in excess of 79% of the earned premium on any individual agreement, the
Retrocessionaire shall pay such excess within 5 days of receipt of the accounts
statement, however, not in excess of the limit of liability.
ARTICLE IX TRUST FUND
----------
The Retrocessionaire shall establish a Trust Account acceptable to regulatory
authorities of the Retrocedent. The deposit shall be $1 million and shall be
made upon the execution of this agreement. In the event the Loss Ratio on any
of the Underlying Agreements is in excess of 79%, the Retrocessionaire shall
deposit additional securities to increase the Trust Account, if necessary, to
the amount calculated as follows: the combined results, calculated separately
for each agreement, of the difference between the Loss Ratio and 79%; plus, the
ratio of unallocated loss adjustment expenses times the earned premium on the
Underlying Agreements, however, not in excess of the limit of liability. Such
deposit shall be made within 10 days of request by the Retrocedent. All
deposits shall be released upon the finalization of all liabilities.
A letter of credit acceptable to regulatory authorities may be utilized in place
of a Trust Account. In the event the Retrocessionaire or the bank issuing the
letter of credit gives notice of their intent not to extend the Letter of Credit
at any anniversary date, without the approval of the Retrocedent, the full
amount of the Letter of Credit shall be considered due and payable immediately.
ARTICLE X COVENANTS
---------
It is understood and agreed that the Retrocessionaire will not enter any new
reinsurance agreements
without approval of Retrocedent.
ARTICLE XI SERVICE OF SUIT
- ----------- -----------------
A. It is agreed that in the event of the failure of the Retrocessionaire hereon
to pay any amount claimed to be due hereunder, the Retrocessionaire hereon, at
the request of the Retrocedent, will submit to the jurisdiction of a court of
competent jurisdiction within the United States. Nothing in this clause
constitutes or should be understood to constitute a waiver of Retrocessionaire's
rights to commence an action in any court of competent jurisdiction in the
United States, to remove an action to a United States District Court, or to seek
a transfer of a case to another court as permitted by the laws of the United
States or of any state in the United States. It is further agreed that service
of process in such suit may be made upon Mendes & Mount, 750 Seventh Avenue, New
York, New York 10019-6829, and that in any suit instituted against any one of
them upon this Agreement, Retrocessionaire will abide by the final decision of
such court or of any Appellate Court in the event of an appeal.
B. The above-named are authorized and directed to accept service of process on
behalf of Retrocessionaire in any such suit and/or upon the request of the
Retrocedent to give a written undertaking to the Retrocedent that they will
enter a general appearance upon Retrocessionaire's behalf in the event such a
suit shall be instituted.
C. Further, pursuant to any statute of any state, territory or district of the
United States which makes provision therefore, Retrocessionaire hereon hereby
designate the Superintendent, Commissioner or Director of Insurance or other
officer specified for that purpose in the statute, or his successor or
successors in office, as their true and lawful attorney upon whom may be served
any lawful process in any action, suit or proceeding instituted by or on behalf
of the Retrocedent or any beneficiary hereunder arising out of this contract of
reinsurance, and hereby designate the above-named Mendes & Mount as the person
to whom the said officer is authorized to mail such process or a true copy
thereof.
ARTICLE XII ACCESS TO RECORDS
- ------------ -------------------
The Retrocessionaire, or its duly authorized representative, shall have free
access at all reasonable times during and after the currency of this agreement,
to books and records maintained by any of the division, department and branch
offices of the Retrocedent which are involved in the subject matter of this
Agreement and which pertain to the reinsurance provided hereunder and all claims
made in connection therewith. Notwithstanding the provisions of the preceding
sentence, if undisputed balances due from the Retrocessionaire under this
Agreement have not been paid for the two most recent reported calendar quarters,
the Retrocessionaire shall not have access to any of the Retrocedent's records
relating to this Agreement without the specific consent of the Retrocedent.
ARTICLE XIII ARBITRATION
- ------------- -----------
A. All disputes or differences arising out of the interpretation of this
Agreement shall be submitted to the decision of two arbitrators, one to be
chosen by each party, and in the event of the arbitrators failing to agree, to
the decision of an umpire to be chosen by the arbitrators. The arbitrators and
umpire shall be disinterested active or retired executive officials of fire or
casualty insurance or reinsurance companies or Underwriters at Lloyd's, London.
If either of the parties fails to appoint an arbitrator within one month after
being required by the other party in writing to do so, or if the arbitrators
fail to appoint an umpire within one month of a request in writing by either of
them to do so, such arbitrator or umpire, as the case may be, shall at the
request of either party be appointed by a Justice of the Supreme Court of the
State of New York.
B. The arbitration proceeding shall take place in New York, New
York. The applicant shall submit its case within one month after the appointment
of the court of arbitration, and the respondent shall submit its reply within
one month after the receipt of the claim. The arbitrators and umpire are
relieved from all judicial formality and may abstain from following the strict
rules of law. Punitive damages shall not be awarded by the panel against either
party which are apart from the punitive damages that may be in dispute. They
shall settle any dispute under the Agreement according to an equitable rather
than a strictly legal interpretation of its terms.
C. Their written decision shall be provided to both parties and shall
be final and not subject to appeal.
D. Each party shall bear the expenses of his arbitrator and shall
jointly and equally share with the other the expenses of the umpire and of
the arbitration.
E. This Article shall survive the termination of this Agreement.
ARTICLE XIV CONFIDENTIALITY
- ------------ ---------------
All terms and conditions of this Agreement and any materials provided in the
course of inspection shall be kept confidential by the Retrocessionaire as
against third parties, unless the disclosure is required pursuant to process of
law or unless the disclosure is to retrocessionaire's, financial auditors or
governing regulatory bodies. Disclosing or using this information for any
purpose beyond the scope of this Agreement, or beyond the exceptions set forth
above, is expressly forbidden without the prior consent of the Retrocedent.
ARTICLE XV ERRORS AND OMISSIONS
- ----------- ----------------------
Any inadvertent delay, omission or error shall not relieve either party hereto
from any liability which would attach to it hereunder if such delay, omission or
error had not been made, provided such delay, omission or error is rectified
immediately upon discovery.
ARTICLE XVI FEDERAL EXCISE TAX
- ------------ --------------------
A. The Retrocessionaire has agreed to allow for the purpose of paying the
Federal Excise Tax 1% of the premium payable hereon to the extent such premium
is subject to Federal Excise Tax.
B. In the event of any return of premium becoming due hereunder the
Retrocessionaire will deduct 1% from the amount of the return and the
Retrocedent or its agent should take steps to recover the Tax from the United
States Government.
ARTICLE XVII FOLLOW THE FORTUNES
- ------------- ---------------------
E. The Retrocessionaire's liability shall attach simultaneously with that of
the Retrocedent and shall be subject in all respects to the same risks, terms,
conditions, interpretations, waivers, and to the same modification, alterations
and cancellations as the respective insurances (or reinsurances) of the
Retrocedent, the true intent of this Agreement being that the Retrocessionaire
shall, in every case to which this Agreement applies, follow the underwriting
fortunes of the Retrocedent.
F. Nothing shall in any manner create any obligations or establish any
rights against the Retrocessionaire in favor of any third parties or any persons
not parties to this Agreement.
ARTICLE XVIII GOVERNING LAW
- -------------- --------------
This Agreement shall be governed by and construed in accordance with the laws of
the state of New York.
ARTICLE XIX INSOLVENCY
- ------------ ----------
I. In the event of the insolvency of the Retrocedent, this reinsurance shall
be payable directly to the Retrocedent, or to its liquidator, receiver,
conservator or statutory successor immediately upon demand on the basis of the
liability of the Retrocedent without diminution because of the insolvency of the
Retrocedent or because the liquidator, receiver, conservator or statutory
successor of the Retrocedent has failed to pay all or a portion of any claim. It
is agreed, however, that the liquidator, receiver, conservator or statutory
successor of the Retrocedent shall give written notice to the Retrocessionaire
of the pendency of a claim against the Retrocedent which would involve a
possible liability on the part of the Retrocessionaires, indicating the policy
or bond reinsured, within a reasonable time after such claim is filed in the
conservation or liquidation proceeding or in the receivership. It is further
agreed that during the pendency of such claim the Retrocessionaire may
investigate such claim and interpose, at their own expense, in the proceeding
where such claim is to be adjudicated, any defense or defenses that they may
deem available to the Retrocedent or its liquidator, receiver, conservator, or
statutory successor. The expense thus incurred by the Retrocessionaire shall be
chargeable, subject to the approval of the Court, against the Retrocedent as
part of the expense of conservation or liquidation to the extent of a pro rata
share of the benefit which may accrue to the Retrocedent solely as a result of
the defense undertaken by the Retrocessionaire.
Retrocedent
ARTICLE XX OFFSET
- ----------- ------
Each party hereto shall have, and may exercise at any time and from time to
time, the right to offset any undisputed balance or balances, whether on account
of premiums or on account of losses or otherwise, due from such party to the
other (or, if more than one, any other) party hereto under this Agreement or
under any other reinsurance agreement heretofore or hereafter entered into by
and between them, and may offset the same against any undisputed balance or
balances due to the former from the latter under the same or any other
reinsurance agreement between them, and the party asserting the right of offset
shall have and may exercise such right whether the undisputed balance or
balances due to such party from the other are on account of premiums or on
account of losses or otherwise and regardless of the capacity, whether as
assuming insurer or as ceding insurer, in which each party acted under the
agreement or, if more than one, the different agreements involved, provided,
however, that, in the event of the insolvency of a party hereto, offsets shall
only be allowed in accordance with the provisions of Section 7427 of the
Insurance Law of the State of New York.
Where the Retrocedent is authorized under the Insurance Companies Act (Canada)
to insure in Canada risks, for the purpose of this Article, the branch of a
Retrocedent in Canada shall be considered as a party separate and distinct from
the Retrocedent and the right of offset provided for in this Article shall
belong to and be applied against that branch as though it were a separate and
distinct party.
ARTICLE XXI SEVERABILITY
- ------------ ------------
If any provision of this Agreement shall be rendered illegal or unenforceable by
the laws, regulations or public policy of any state, such provision shall be
considered void in such state, but this shall not affect the validity or
enforceability of any other provision of this Agreement or the enforceability of
such provision in any other jurisdiction.
ARTICLE XXII SPECIAL TERMINATION OR SETTLEMENT
- ------------- ------------------------------------
SECTION I (TERMINATION)
- -------------------------
A. Either party may terminate this Agreement upon 45 days notice in the event
that:
5. The other party should at any time become insolvent, or suffer any
impairment of capital, or file a petition in bankruptcy, or go into liquidation,
rehabilitation, or voluntary supervision, or have a receiver appointed, or be
acquired or controlled by any other insurance Retrocedent or organization, or
6. There is a severance or obstruction of free and unfettered communication
and/or normal commercial and/or financial intercourse between the United States
of America and the country in which the Retrocessionaire is incorporated or has
its principal office as a result of war, currency regulations, or any
circumstances arising out of political, financial or economic emergency.
J. The Retrocedent may terminate this Agreement forthwith in the event that:
5. The Retrocessionaire ceases writing reinsurance and elects to run-off its
existing business.
6. As respects domestic Retrocessionaires:
Upon application of the NAIC Insurance Regulatory Information System (IRIS)
tests to the Retrocessionaire's quarterly and annual statements (which the
Retrocessionaire hereby agrees to furnish to the Retrocedent upon request) it is
found that four (4) or more of the Retrocessionaire's IRIS financial ratio
values are outside of the usual range established in the IRIS system.
7. As respects alien Retrocessionaires:
Upon review of the Insurance Solvency International (ISI) Performance Tests as
published with respect to the Retrocessionaire (or upon application of such
Performance Tests to the Retrocessionaire's annual financial statements which
the Retrocessionaire hereby agrees to furnish to the Retrocedent upon request)
it is found that four (4) or more of the Retrocessionaire's ratios are outside
of the normal range (as defined by the ISI standard).
Termination under A. or B. shall be effected by written notice of cancellation.
The Retrocedent will specify the mode of payment, i.e., a run-off basis or a
clean-cut basis with portfolio transfer, if applicable. In the event the
Retrocedent elects a run-off basis, the Retrocessionaire will fund all of the
outstanding ceded liabilities through a Trust Account or by providing a Letter
of Credit that meets the requirements of the New York State Insurance
Department.
SECTION II (SETTLEMENT)
- -------------------------
After termination of this Agreement under this or any article, including the
natural expiry of the Agreement, if the Retrocessionaire has any residual
liability to the Retrocedent, the Retrocessionaire will, at the request of the
Retrocedent, furnish to the Retrocedent statements as specified in Section IB.,
above, and if four or more values are outside of the usual range established in
the IRIS or ISI system (as applicable in accordance with Section IB., above) the
Retrocedent shall have the option of an immediate settlement of all present and
future obligations under this Agreement-.in accordance with Section III, below,
or requiring the Retrocessionaire to fund all of the outstanding ceded
liabilities through a Trust Account or by providing a Letter of Credit that
meets the requirements of the New York State Insurance Department. In the event
the Retrocedent elects the funding option, it shall the notify the
Retrocessionaire in writing and the Retrocessionaire shall provide such funding
within 15 days of such notification; however, it is agreed that the Retrocedent
retains the right to require settlement in accordance with Section III at any
subsequent date.
SECTION III (PAYMENT)
- -----------------------
A. Amounts due the Retrocedent or the Retrocessionaire under this Article shall
include all present and future obligations and shall include unearned premiums,
outstanding losses (including IBNR), and all other balances.
B. In the event of a clean-cut termination with portfolio transfer or an
immediate settlement of all present and future obligations the Retrocedent will,
upon receipt of payment, provide to the Retrocessionaires a full and final
release of Retrocessionaire's liability under the Agreement.
C. When requested by either party an appraisal of outstanding losses and IBNR
shall be made by an disinterested actuary.
D. Settlement shall take into account adjustment for net present value.
This Article shall survive the termination of this Agreement
ARTICLE XXIII CURRENCY REVALUATION
- -------------- ---------------------
It is agreed that underwriting to contractual and/or understanding limits will
be done in terms of United States (U.S.) dollar equivalent on the basis of
exchange rates in effect at the time of inception of new or renewal business or
at the time an addition to an existing risk takes place. In the event there is a
reduction in parity value of the U.S. dollar from that existing at the time the
risk was written which results in the contractual and/or understanding limits
being exceeded, the RetrocedentRetrocedent shall be held covered for such excess
until next renewal of the risk, at which time underwriting will then conform to
the contractual and/or understanding U.S. dollar limits in effect at the time.
IN WITNESS WHEREOF: the parties hereto have caused this Agreement to be executed
by their authorized representatives.
IN: _____________________________ THIS _____________DAY OF _____________ 2000
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA
BY: ___________________________
Title: _________________________
And in: this _____________day of _____________ 2000
GRANITE REINSURANCE COMPANY, LTD.
BY: _________________________
Title:_______________________
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - U.S.A.
1. This Reinsurance does not cover any loss or liability accruing to the
Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any
Pool of Insurers or Reinsurer formed for the purpose of covering Atomic or
Nuclear Energy risks.
2. Without in any way restricting the operation of paragraph (1) of this
clause, this Reinsurance does not cover any loss or liability accruing to the
Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any
insurance against Physical Damage (including business interruption or
consequential loss arising out of such Physical Damage) to:
I. Nuclear reactor power plants including all auxiliary property on the
site, or
II. Any other nuclear reactor installation, including laboratories handling
radioactive materials in connection with reactor installations, and "critical
facilities" as such, or
III. Installations for fabricating complete fuel elements or for processing
substantial quantities of "special nuclear material", and for reprocessing,
salvaging, chemically separating, storing or disposing of "spent" nuclear fuel
or waste materials, or
IV. Installations other than those listed in paragraph (2) III above using
substantial quantities of radioactive isotopes or other products of nuclear
fission.
3. Without in any way restricting the operations of paragraphs (1) and (2)
hereof, this Reinsurance does not cover any loss or liability by radioactive
contamination accruing to the Reassured, directly or indirectly, and whether as
Insurer or Reinsurer, from any insurance on property which is on the same site
as a nuclear reactor power plant or other nuclear installation and which
normally would be insured therewith except that this paragraph (3) shall not
operate
(a) where Reassured does not have knowledge of such nuclear reactor power
plant or nuclear installation, or
(b) where said insurance contains a provision excluding coverage for damage
to property caused by or resulting from radioactive contamination, however
caused. However on and after 1st January 1960 this sub-paragraph (b) shall only
apply provided the said radioactive contamination exclusion provision has been
approved by the Governmental Authority having jurisdiction thereof.
4. Without in any way restricting the operations of paragraphs (1), (2) and
(3) hereof, this Reinsurance does not cover any loss or liability by radioactive
contamination accruing to the Reassured, directly or indirectly, and whether as
Insurer or Reinsurer, when such radioactive contamination is a named hazard
specifically insured against.
5. It is understood and agreed that this clause shall not extend to risks
using radioactive isotopes in any form where the nuclear exposure is not
considered by the Reassured to be the primary hazard.
6. The term "special nuclear material" shall have the meaning given it in
the Atomic Energy Act of 1954 or by any law amendatory thereof.
7. Reassured to be sole judge of what constitutes:
(a) substantial quantities, and
(b) the extent of installation, plant or site.
Note: Without in any way restricting the operation of paragraph (1) hereof, it
is understood and agreed that
(a) all policies issued by the Reassured on or before 31st December 1957
shall be free from the application of the other provisions of this Clause until
expiry date or 31st December 1960 whichever first occurs whereupon all the
provisions of this Clause shall apply.
(b) with respect to any risk located in Canada policies issued by the
Reassured on or before 31st December 1958 shall be free from the application of
the other provisions of this Clause until expiry date or 31st December 1960
whichever first occurs whereupon all the provisions of this Clause shall apply.
12/12/57
NMA 1119
NOTES: Wherever used herein the terms:
"Reassured" shall be understood to mean "Company", "Reinsured ", "Reassured"
or whatever other term is used in the attached reinsurance document to designate
the reinsured company or companies.
"Agreement" shall be understood to mean "Agreement", "Contract", "Policy" or
whatever other term is used to designate the attached reinsurance document.
"Reinsurer" shall be understood to mean "Reinsurer", "Underwriters" or whatever
other term is used in the attached reinsurance document to designate the
reinsurer or reinsurers.
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - CANADA
1. This Agreement does not cover any loss or liability accruing to the
Reinsured directly or indirectly, and whether as Insurer or Reinsurer, from any
Pool of Insurers or Reinsurer formed for the purpose of covering Atomic or
Nuclear Energy risks.
2. Without in any way restricting the operation of paragraph 1 of this
clause, this Agreement does not cover any loss or liability accruing to the
Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any
insurance against Physical Damage (including business interruption or
consequential loss arising out of such Physical Damage) to:
(1) Nuclear reactor power plants including all auxiliary property on the
site, or
(2) Any other nuclear reactor installation, including laboratories handling
radioactive materials in connection with reactor installations, and critical
facilities as such, or
(3) Installations for fabricating complete fuel elements or for processing
substantial quantities of radioactive materials, and for reprocessing,
salvaging, chemically separating, storing or disposing of spent nuclear fuel or
waste materials, or
(4) Installations other than those listed in (3) above using substantial
quantities of radioactive isotopes or other products of nuclear fission.
3. Without in any way restricting the operation of paragraphs 1 and 2 of
this clause, this Agreement does not cover any loss or liability by radioactive
contamination accruing to the Reinsured, directly or indirectly, and whether as
Insurer or Reinsurer, from any insurance on property which is on the same site
as a nuclear reactor power plant or other nuclear installation and which
normally would be insured therewith, except that this paragraph 3 shall not
operate:
(a) where the Reinsured does not have knowledge of such nuclear reactor
power plant or nuclear installation, or
(b) where the said insurance contains a provision excluding coverage for
damage to property caused by or resulting from radioactive contamination,
however caused.
4. Without in any way restricting the operation of paragraphs 1, 2 and 3 of
this clause, this Agreement does not cover any loss or liability by radioactive
contamination accruing to the Reinsured, directly or indirectly, and whether as
Insurer or Reinsurer, when such radioactive contamination is a named hazard
specifically insured against.
5. This clause shall not extend to risks using radioactive isotopes in any
form where the nuclear exposure is not considered by the Reinsured to be the
primary hazard.
6. The term "radioactive material" means uranium, thorium, plutonium,
neptunium, their respective derivatives and compounds, radioactive isotopes of
other elements and any other substances which may be designated by or pursuant
to any law, act or statute, or law amendatory thereof as being prescribed
substances capable of releasing atomic energy, or as being requisite for the
production, use or application of atomic energy.
7. Reinsured to be sole judge of what constitutes:
(a) substantial quantities, and
(b) the extent of installation, plant or site.
8. Without in any way restricting the operation of paragraphs 1, 2, 3 and 4
of this clause, this Agreement does not cover any loss or liability accruing to
the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer
caused:
(a) by any nuclear incident as defined in or pursuant to the Nuclear
Liability Act or any other nuclear liability act, law or statute, or any law
amendatory thereof or nuclear explosion, except for ensuing loss or damage which
results directly from fire, lightning or explosion of natural, coal or
manufactured gas;
by contamination by radioactive material.
NOTE: Without in any way restricting the operation of paragraphs 1, 2, 3 and 4
of this clause, paragraph 8 of this clause shall only apply to all original
contracts of the Reinsured whether new, renewal or replacement which become
effective on or after December 31, 1992.
NMA 1980a (01.04.96)
Form approved by Lloyd's Underwriters' Non-Marine Association Limited.
NOTES: Wherever used herein the terms:
"Reassured" shall be understood to mean "Company", "Reinsured ", "Reassured"
or whatever other term is used in the attached reinsurance document to designate
the reinsured company or companies.
"Contract" shall be understood to mean "Agreement", "Contract", "Policy" or
whatever other term is used to designate the attached reinsurance document.
"Reinsurer" shall be understood to mean "Reinsurer", "Underwriters" or whatever
other term is used in the attached reinsurance document to designate the
reinsurer or reinsurers.
GORAN CAPITAL INC.
ANNUAL REPORT TO SHAREHOLDERS
DECEMBER 31, 2001
CORPORATE PROFILE
Goran Capital Inc. ("Goran") owns subsidiaries engaged in a number of business
activities. The most extensive of these is the property and casualty insurance
business conducted in the United States, Canada and Barbados, on both a direct
and reinsurance basis through a number of subsidiaries collectively referred to
in this report as Goran. The common stock of Goran trades on The Toronto Stock
Exchange under the symbol "GNC" and the OTC Bulletin Board under the symbol
"GNCNF.OB".
Goran owns 73.1% of Symons International Group, Inc. ("SIG") which trades on the
OTC Bulletin Board under the symbol "SIGC.OB". SIG owns insurance companies
principally engaged in the nonstandard automobile insurance market.
Superior Insurance Company and Pafco General Insurance Company underwrite
nonstandard automobile insurance in the United States. Nonstandard automobile
insurance is marketed and sold through independent agents to drivers who are
unable to obtain coverage from insurers at standard or preferred rates.
Prior to 2001, the Company was also engaged in the crop insurance business. On
June 6, 2001, the Company exited the crop insurance business when it sold the
crop insurance operations of IGF Insurance Company to a third party.
Accordingly, the financial statements included in this report reflect the
results of the crop insurance segment as "discontinued operations."
Granite Reinsurance Company Ltd. underwrites finite (limited risk) reinsurance
in Bermuda, the United States and Canada.
All dollar amounts shown in this report are in U.S. currency unless otherwise
indicated. The conversion rates between U.S. and Canadian dollars for
transactions occurring during the year 2001 was 1.5490 and for balances as of
December 31, 2001 the rate is 1.5911.
TABLE OF CONTENTS Page
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
President's Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . 6
Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 21
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Stockholder Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Board of Directors and Executive Officers. . . . . . . . . . . . . . . . . . . . . . . . . . 48
Subsidiaries and Branch Offices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
FINANCIAL HIGHLIGHTS (1)
(In thousands, except per share data)
For the years ended December 31,
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . $193,186 $182,099 $236,401 $303,745 $322,581
Net operating earnings (loss) from continuing operations (2) . . . . . . $(20,761) $(12,417) $(49,883) $ 471 $ 11,680
Net earnings (loss) from discontinued operations . . . . . . . . . . . . $ (2,156) $(17,041) $(15,373) $ (9,421) $ 10,015
Net earnings (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . $(34,093) $(80,265) $(62,373) $(11,936) $ 12,438
Basic operating earnings (loss) per share from continuing operations (2) $ (3.64) $ (2.13) $ (8.49) $ 0.08 $ 2.09
Basic earnings (loss) per share from discontinued operations . . . . . . $ (0.38) $ (2.93) $ (2.61) $ (1.61) $ 1.79
Basic earnings (loss) per share. . . . . . . . . . . . . . . . . . . . . $ (5.99) $ (13.79) $ (10.61) $ (2.04) $ 2.22
Stockholders' equity (deficit) . . . . . . . . . . . . . . . . . . . . . $(89,146) $(72,668) $(12,887) $ 49,725 $ 60,332
Return on average equity (3) . . . . . . . . . . . . . . . . . . . . . . N/A N/A N/A (21.7%) 23.1%
Book value (deficit) per share . . . . . . . . . . . . . . . . . . . . . $ (15.65) $ (12.48) $ (2.19) $ 8.51 $ 10.79
Market Value per share . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.61 $ 0.34 $ 2.00 $ 10.38 $ 29.41
1) The financial statements of the Company have been prepared in accordance with Canadian GAAP presented in U.S. dollars.
2) Operating earnings and per share amounts exclude amortization, interest, taxes, deferred income, realized capital gains
and losses, minority interest, and any extraordinary items.
3) Return on average equity cannot be calculated due to the accumulated deficit in stockholders' equity in 2001 and 2000.
CORPORATE STRUCTURE
GRANITE REINSURANCE SYMONS INT'L GRANITE INSURANCE SYMONS INT'L
COMPANY LTD GROUP, INC COMPANY GROUP (FLORIDA) INC
BARBADOS INDIANA CANADA FLORIDA
100% OWNED 73.1 % OWNED 100% OWNED 100% OWNED
SUPERIOR INSURANCE IGF HOLDING, INC
GROUP MANAGEMENT INC
SUPERIOR INSURANCE IGF INSURANCE COMPANY
GROUP, INC.
PAFCO GENERAL SUPERIOR INSURANCE
INSURANCE COMPANY COMPANY
SUPERIOR AMERICAN SUPERIOR GUARANTY
INSURANCE COMPANY INSURANCE COMPANY
President's Report to Shareholders
- -------------------------------------
Dear Fellow Shareholder:
Our company is principally engaged in the insurance business through its
investments in various companies located in the United States, Canada, and
Barbados. The results of our operations have, in general, been very
disappointing, principally due to poor industry conditions. However, one of our
investments has continued to do well.
Granite Reinsurance Company Ltd. (Granite Re) started in 1990 and has been an
exceptional success, making a profit in almost every year since its inception.
Total earnings since inception are approximately $24.2 million. Recently, we
filed to have Granite Re rated by A.M. Best and expect to promote the company to
a broader geographic area during a hardening market.
Granite Insurance Company (Granite) is a Canadian-licensed insurance company.
We sold all of its business in 1990 in order to focus on our US investments.
Nonetheless, Granite has been profitable in most of the years since it ceased
writing business in 1990. Recently, the Canadian property/casualty market has
experienced more attractive pricing and we see numerous opportunities for
writing profitable business. We are presently working with the government of
Canada to reactivate Granite as an operating property/casualty company.
The Company's investment in the US operations started off exceptionally well,
but over the last four years has done very poorly. The non-standard automobile
insurance industry started to deteriorate in 1998, seeing combined ratios
exceeding 110% by 2000. Being a highly-leveraged non-standard auto insurance
writer, losses were much greater than most of our competitors. When business is
good, it is very good and when it is bad, it is very bad.
We replaced all of senior management and most of middle management of the
non-standard operations during 2000 and early 2001 Under new management's
guidance, we've taken the following steps:
- - reduced premium volume to write in more profitable areas
- - raised premium rates (by almost 30% since the beginning of 2000)
- - opened regional offices to improve service and enhance claims settlements
- - designed and implemented a new operating system
- - improved staff and financial management
- - improved claims management
We've done everything that common sense tells us to do. Unfortunately, the
turnaround has not been as quick as we expected. We are hopeful that results
will prove positive in 2002.
IGF Insurance Company (IGF) was the fourth largest crop insurance company until
certain brokers in California and a third-party insurance company caused the
crop operation to lose substantial amounts of money under a product called AgPi.
While we have lawsuits pending against the brokers and the third-party insurance
company, the devastation to IGF's surplus put it in a position where we had to
dispose of the operations. Specifically, IGF sold its book of business,
operating systems, and furniture and fixtures to Acceptance on June 6, 2001 in
exchange for approximately $21 million.
As part of the Acceptance transaction, Symons International Group, Inc. (SIG)
and a number of its employees entered into stringent non-competition agreements
which essentially bar the parties from re-entering the crop insurance business.
Also as part of the Acceptance transaction, Goran Capital Inc. (Goran) and three
of its key principals entered into equally stringent non-competition agreements.
In return, Goran received $4.5 million in non-compete compensation.
Also as part of the Acceptance transaction, Granite Re took on reinsurance
obligations of the crop insurance program of Acceptance, including the IGF
former book, for the next five years. In order to increase the cash paid to IGF
at closing, Granite Re undertook a $9 million guarantee for the full five years.
In return, Granite Re will receive $3 million a year.
Overall, the sale of the crop insurance activities was a sad day as we enjoyed
the business. However, it has allowed us to run off the crop insurance company
while continuing our efforts to recover monies, through the legal process, in
compensation for the damages caused by certain of the aforementioned parties. I
remain hopeful that right will overcome wrong and that we will receive
substantial damage awards as a result of our lawsuits.
Granite is involved in an action against Toronto Dominion Bank for recovery of
monies improperly taken from Granite in 1989. We expect a favorable resolution
of this lawsuit within the next couple of years which would result in a
substantial increase in the shareholder value of Goran.
The Company's non-standard auto operations, now concentrated in the key states
of California, Florida, Virginia, Colorado, and Georgia, are migrating to a new,
internally-built operating system that will reduce overhead costs and bad debt
expenses and improve our loss ratios. We expect to finally see a return to
profitable operating results from our non-standard auto segment.
Goran invested $150,000 in December, 2001 to acquire the assets of a managing
general agency in Boca Raton, Florida. The agency, now doing business as Symons
International Group (Florida), Inc. (SIGF) has 6 staff and for 2001 brokered
over $9 million in gross written premiums. SIGF handles the needs of insurance
agents who require insurance coverage that is unique or for which the agent
lacks capacity. Goran is continuing to seek out new opportunities to invest in
or expand its non-standard reinsurance and MGA business.
As a final note, I wish to thank all the employees of Goran and its
subsidiaries, which now number 338, and the Goran and SIG Boards of Directors
for working so diligently over the last four years in our efforts to improve
results.
Yours truly,
Alan G. Symons
President and Chief Executive Officer
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
OF GORAN CAPITAL INC.
The selected consolidated financial data presented below is derived from the
consolidated financial statements of the Company and its Subsidiaries for the
year ended December 31. This information should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto, included
elsewhere in this Report. All information is in thousands, except share, per
share, and ratio data.
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
(4)
Gross Premiums Written. . . . . . . . . . . $193,186 $182,099 $236,401 $303,745 $322,581
Net Premiums Earned . . . . . . . . . . . . 108,197 145,532 261,800 281,276 255,746
Fee Income. . . . . . . . . . . . . . . . . 12,425 14,239 15,335 16,431 15,545
Net Investment Income . . . . . . . . . . . 6,998 12,171 13,125 13,126 12,586
Income (loss) from Continuing Operations. . $(31,937) $(63,224) $(47,000) $ (2,515) $ 2,423
Income (loss) from Discontinued Operations. $ (2,156) $(17,041) $(15,373) $ (9,421) $ 10,015
--------- --------- --------- --------- ---------
Net Income (Loss) . . . . . . . . . . . . . $(34,093) $(80,265) $(62,373) $(11,936) $ 12,438
========= ========= ========= ========= =========
PER COMMON SHARE DATA:
Basic Income (Loss) from Continuing
Operations. . . . . . . . . . . . . . . . $ (5.61) $ (10.86) $ (8.00) $ (0.43) $ 0.43
Basic Income (loss) from Discontinued
Operations. . . . . . . . . . . . . . . . $ (0.38) $ (2.93) $ (2.61) $ (1.61) $ 1.79
Basic Net Income (Loss). . . . . . . . . . $ (5.99) $ (13.79) $ (10.61) $ (2.04) $ 2.22
Basic Weighted Average Shares Outstanding . 5,696 5,822 5,876 5,841 5,591
GAAP RATIOS:
Loss and LAE Ratio (1). . . . . . . . . . . 88.0% 78.2% 92.6% 81.2% 76.0%
Expense Ratio (2) . . . . . . . . . . . . . 37.7% 38.7% 31.5% 23.3% 24.3%
Combined Ratios (3) . . . . . . . . . . . . 125.7% 116.9% 124.1% 104.5% 100.3%
CONSOLIDATED BALANCE SHEET DATA:
Investments . . . . . . . . . . . . . . . . $113,795 $148,890 $225,168 $236,144 $231,130
Total Assets. . . . . . . . . . . . . . . . 503,955 440,032 519,922 570,989 560,848
Losses and LAE. . . . . . . . . . . . . . . 84,876 113,149 157,425 140,484 135,087
Trust Preferred Securities. . . . . . . . . 94,540 112,000 135,000 135,000 135,000
Total Shareholders' Equity (Deficit). . . . (89,146) (72,668) (12,887) 49,725 60,332
Book Value (Deficit) Per Share. . . . . . . $ (15.65) $ (12.48) $ (2.19) $ 8.51 $ 10.79
(1) Loss and LAE ratio: The ratio of loss and loss adjustment expenses incurred during the
period, as a percentage of premiums earned.
(2) Expense ratio: The ratio of policy acquisition, general and administrative expenses less
billing fees, as a percentage of premiums earned.
(3) Combined ratio: The sum of the loss and LAE ratio plus the expense ratio as a percentage
of premiums earned.
(4) Loss from continuing operations for the year 2000 includes a write-down of $33.5 million
for goodwill. See Note 6 to the consolidated financial statements for additional information.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
All statements, trend analyses, and other information herein contained relative
to markets for the Company's products and/or trends in the Company's operations
or financial results, as well as other statements including words such as
"anticipate," "could," "feel(s)," "believes," "plan," "estimate," "expect,"
"should," "intend," "will," and other similar expressions, constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to known and unknown risks,
uncertainties and other factors which may cause actual results to be materially
different from those contemplated by the forward-looking statements. Such
factors include, among other things: (i) general economic conditions, including
prevailing interest rate levels and stock market performance; (ii) factors
affecting the Company's nonstandard automobile operations such as rate increase
approval, policy renewals, new business written, and premium volume; and (iii)
the factors described in this section and elsewhere in this report.
OVERVIEW
Goran Capital, Inc. (the "Company" or "Goran") owns insurance companies that
underwrite and market nonstandard private passenger automobile insurance. The
Company's principal insurance company subsidiaries are Pafco General Insurance
Company ("Pafco"), Superior Insurance Company ("Superior") and IGF Insurance
Company ("IGF").
STRATEGIC ALIGNMENT
As previously announced, in the fourth quarter of 2000, management initiated a
strategic review of the Company's U.S. operations. This review resulted in a
plan to divest of the Company's crop insurance segment, allowing management to
focus on nonstandard automobile insurance. In June 2001, the Company sold its
crop insurance segment and adopted a plan to wind-down the remaining crop
insurance segment obligations.
Accordingly, financial results of the crop insurance segment are presented as
discontinued operations in the Company's financial statements. Continuing
operations of the Company consist primarily of the nonstandard automobile
insurance segment.
NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS
Pafco, Superior, Superior Guaranty Insurance Company ("Superior Guaranty"),
Superior American Insurance Company ("Superior American") and IGF, are engaged
in the writing of insurance coverage for automobile physical damage and
liability policies for nonstandard risks. Nonstandard risk insureds are those
individuals who are unable to obtain insurance coverage through standard market
carriers due to factors such as poor premium payment history, driving experience
or violations, particular occupation or type of vehicle. The Company offers
several different policies that are directed towards different classes of risk
within the nonstandard market. Premium rates for nonstandard risks are higher
than for standard risks. Since it can be viewed as a residual market, the size
of the nonstandard private passenger automobile insurance market changes with
the insurance environment, for example, expanding when the standard coverage
becomes more restrictive. 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. Also,
since the nonstandard automobile insurance business typically experiences lower
rates of retention than standard automobile insurance, the number of new
policyholders underwritten by nonstandard automobile insurance carriers each
year is substantially greater than the number of new policyholders underwritten
by standard carriers.
RESULTS OF OPERATIONS
CONSOLIDATED OVERVIEW
Years Ended December 31, 2001 and 2000
For the year 2001, the Company reported a loss on continuing operations of
$(31,937,000) or $(5.61) per share (basic and diluted). Loss on continuing
operations for the year 2000 was $(63,224,000) or $(10.86) per share (basic and
diluted), which includes a one-time write down of goodwill in the amount of
$33,464,000. Loss before income taxes and distributions on minority interest was
$(21,568,000) and $(53,347,000) for 2001 and 2000, respectively. Operating
earnings (loss) from continuing operations, measured as income (loss) before
amortization, interest, taxes, realized capital gains and losses and minority
interest was $(20,761,000) or $(3.64) per share (basic and diluted) in 2001 and
$(12,417,000) or $(2.13) per share in 2000 (basic and diluted). Premium rate
increases, reductions in the expense ratio, and the decrease in gross written
premiums are the primary factors contributing to the reduction in losses for
2001.
The loss from discontinued operations was $(2,156,000) and $(17,041,000) for
2001 and 2000, respectively. Underwriting losses and operating costs in excess
of original estimates contributed to the losses in 2001.
The Company is continuing to seek and implement rate increases and other
underwriting actions to achieve profitability. A number of systems have been
automated and service problems have been eliminated or significantly reduced.
Although the Company has taken a number of actions to address factors
contributing to these past losses, there can be no assurance that operating
losses will not continue. See "Liquidity and Capital Resources" for further
discussion of recent trends and uncertainties that are reasonably likely to have
a material effect on the Company's financial condition and results of
operations.
Years Ended December 31, 2000 and 1999
For the year 2000, the Company reported a loss on continuing operations of
$(63,224,000) or $(10.86) per share (basic and diluted) which includes a
one-time write down of goodwill in the amount of $33,464,000. Loss on
continuing operations for the year 1999 was $(47,000,000) or $(8.00) per share.
Loss before income taxes and distribution on minority interest was $(53,347,000)
and $(52,033,000) for 2000 and 1999, respectively. Operating earnings (loss)
from continuing operations, measured as income/(loss) before amortization,
interest, taxes, realized capital gains and losses, minority interest, and any
extraordinary items, was $(12,417,000) or $(2.13) per share (basic and diluted)
in 2000 and $(49,883,000) or $(8.49) per share in 1999 (basic and diluted).
Premium rate increases and reductions in loss ratios are the primary factors
contributing to the reduction in losses of 2000.
Discontinued operations reported losses of $(17,041,000) and $(15,373,000) for
2000 and 1999, respectively. Underwriting losses and operation costs in excess
of administrative expense reimbursements contributed to the losses.
GORAN CAPITAL INC.
Goran Capital Inc. is an investment holding company that holds subsidiary
investments and engages in the identification and evaluation of potential
investment opportunities. The net loss for 2001 and 2000 was $5,187,000 and
$1,252,000, respectively. The increased loss is attributable mainly to legal
costs and an increase in reserves for uncollectibility of certain loans. Net
cash flow for 2001 and 2000 was $2,421,000 and $(16,000), respectively.
SYMONS INTERNATIONAL GROUP, INC.
Years Ended December 31, 2001 and 2000
Gross Premiums Written
Gross premiums written have decreased 7.7% or $13,369,000 in 2001 from 2000
levels. Premium rate increases of approximately 24.8% were implemented
throughout 2001 that were offset by a reduction in policies in force of 23.3%.
In addition, the decline in gross premiums resulted from SIG exiting certain
highly competitive markets and instituting other underwriting initiatives
intended to increase profitability, which had the effect of reducing premium.
Regulatory action in certain states also limited premium written.
Net Premiums Written
Net premiums written represent the portion of premiums retained by SIG after
consideration for risk sharing through reinsurance contracts. As a result of
losses in SIG's insurance subsidiaries and to manage overall risk retention, SIG
entered into a reinsurance agreement to cede a portion of its gross written
premiums to a third party. During 2001, SIG ceded approximately 54% of its gross
written premiums on new and renewal business, under a quota share reinsurance
contract that was effective January 1, 2000, to the reinsurers. In addition, SIG
ceded a portion of its unearned premium reserve bringing the total cession to
79% in 2001.
Net Premiums Earned
Net premiums earned decreased 44.1% or $60,759,000 for the year ended December
31, 2001 as compared to the same period in 2000. Premiums are earned ratably
over the term of the underlying insurance contracts. The reduction in net
premiums earned reflects the overall reduction in gross premiums written and the
increase in ceded premiums.
Fee Income
Fee income is derived from installment billings and other services provided to
policyholders. For the year ended December 31, 2001, fee income decreased 13.0%
or $1,845,000. The reduction in fee income is attributed to the reduction of
insurance policies in force of 23.3% and the overall decline in written premium.
Net Investment Income
Net investment income decreased 37.6% or $3,788,000 in 2001 as compared to 2000.
This decrease is reflective of the decline in invested assets during a period of
declining premiums and the liquidation of investments to pay prior year losses
settled in 2001. Furthermore, return on investments deteriorated due to a highly
volatile market dominated by unfavorable economic conditions due to the
worldwide recession and fallout from the September 2001 terrorist attacks.
Net Realized Capital Losses
Net realized capital losses were $(1,185,000) in 2001 as compared to net
realized capital losses of $(5,972,000) in 2000. Capital losses resulted from
the liquidation of longer duration fixed income securities in 2001 in order to
rebalance the investment activities in the portfolio. These transactions
resulted in higher cash proceeds that were reinvested in shorter duration
investment instruments. Capital losses were also realized due to the continued
liquidation of investments to fund operations and claim payments under
unfavorable market conditions.
Losses and LAE
The loss and LAE ratio for SIG for the year ended December 31, 2001, was 91.5%
of net premiums earned as compared to 82.3% of net premiums earned for 2000. A
portion of LAE, unallocated loss adjustment expense ("ULAE") is not ceded as
part of the quota share reinsurance contract mentioned above and accounts for
approximately four percentage points of the increased loss ratio in 2001 with
the remainder of the increase due to adverse current loss expense.
Policy Acquisition and General and Administrative Expense
SIG reduced policy acquisition and general and administrative expenses for the
year 2001 to $40,535,000 from the 2000 level of $67,538,000, a reduction of
approximately 40%. This reduction reflects the decline in gross written
premiums, an increase in ceding commissions associated with the quota share
reinsurance contract and overall operating expense reduction initiatives. As a
percentage of gross premiums earned, the Company experienced a decrease in its
operating expense ratio, net of fee income, from 38.8% in 2000 to 36.7% in 2001.
This decrease in the expense ratio is the result of reduced operating expense
initiatives and an increase in ceding commissions earned under the quota share
reinsurance contract.
Amortization of Intangibles
Amortization expense decreased by $34,806,000 in 2001, as compared to 2000.
This reflects the write down of goodwill to zero at December 31, 2000.
Income Taxes
At December 31, 2001 SIG's net deferred tax assets are fully offset by a 100%
valuation allowance that resulted in no tax benefit in 2001.
Years Ended December 31, 2000 and 1999
Gross Premiums Written
Gross premiums written decreased 26.2% or $61,940,000 in 2000 from 1999 levels.
Premium rate increases of approximately 14% were implemented throughout 2000
that were offset by a 29% reduction in policies in force. The reduction in
written premiums was further affected by a shift during the second quarter of
2000 to writing a higher mix of six-month policies while management evaluated
rate adequacy.
Net Premiums Written
Net premiums written represent the portion of premiums retained by SIG after
consideration for risk sharing through reinsurance contracts. As a result of
losses in SIG's insurance subsidiaries and to manage overall risk retention, a
reinsurance agreement was negotiated to cede a portion of the gross written
premiums to a third party. SIG ceded approximately 45% of its gross written
premiums in 2000 under a quota share reinsurance contract that was effective
January 1, 2000.
Net Premiums Earned
Premiums are earned ratably over the term of the underlying insurance contracts.
The reduction in net premiums earned is reflective of the overall reduction in
gross premiums written and the increase in ceded premiums.
Fee Income
Fee income is derived from installment billings and other services provided to
policyholders. The reduction in fee income of 6.9% in the year 2000 is
attributed to the 29% reduction of insurance policies in force, offset by earned
fee rate increases from 1999.
Net Investment Income
Net investment income decreased 17.7% in 2000 as compared to 1999. This reflects
the decline in invested assets during a period of declining premiums and the
payout of prior year losses when settled in 2000.
Net Realized Capital Losses
Net realized capital losses were $5,972,000 in 2000 as compared to $324,000 in
1999. Capital losses were realized in 2000 due to the liquidation and
reinvestment of a portion of the equity portfolio during the year as well as
continued liquidation of investments to fund operations during a period of
declining premiums.
Losses and LAE
The loss and LAE ratio was 82.3% for 2000 as compared to 92.7% for 1999. SIG
estimates the accident year 2000 gross loss and LAE ratio to be 85.6% as
compared to its current estimate of 84.8% for accident year 1999. Accident year
1999 reserves developed favorably during 2000. As a result, the current
estimate for accident year 1999 is 4.5 percentage points lower than projected as
of year-end 1999. SIG also experienced favorable development on accident years
1998 and prior.
Policy Acquisition and General and Administrative Expense
SIG reduced policy acquisition and general and administrative expenses 28.1%
during 2000 to $67,538,000 from $93,922,000 in 1999. This reduction reflects a
26.2% decline in gross written premiums, an increase in ceding commissions
associated with the quota share reinsurance contract, and overall operating
expense reductions. As a percentage of net premiums earned, SIG experienced an
increase in its operating expense ratio net of billing fees from 31.6% to 38.8%.
This increase was the result of SIG ceding 45% of its gross written premium
under a quota share reinsurance contract and the 44.8% decline in earned
premiums.
Amortization of Intangibles
Amortization expense increased in 2000 due to an impairment charge on the
carrying value of goodwill resulting from the Superior Insurance Group
Management, Inc. ("Superior Group Management") acquisition in 1997. The
impairment charge and amortization expense recognized in 2000 was $34,806,000.
Amortization of debt acquisition costs of $171,000 comprises the balance of the
year 2000 expense.
Income Taxes
The variance in the rate from the federal statutory rate of 35%, before the
effect of a valuation allowance on deferred tax assets, is primarily due to
nondeductible goodwill amortization and alternative minimum taxes.
At December 31, 2000 SIG's net deferred tax assets were fully offset by a
valuation allowance. Therefore, the Company has not recognized the benefit of
tax losses carried forward. Earnings in future periods will result in no income
tax expense until the current operating loss carryforwards are utilized.
SYMONS INTERNATIONAL GROUP (FLORIDA) INC.
Goran's wholly-owned subsidiary, Symons International Group (Florida) Inc.
("SIGF") is engaged in several lines of business, including a property/casualty
insurance brokerage and a flood insurance brokerage. The property
casualty/insurance brokerage operations were acquired effective on November 1,
2001 via an asset purchase transaction.
Historically, SIGF was a specialized surplus lines underwriting unit. By late
1998, SIGF's operations no longer fit the Company's strategic operating plan of
concentrating on the business segments of nonstandard automobile and
reinsurance. Accordingly, the majority of the book of business was sold
effective January 1, 1999. A small amount of premium remained after the sale.
The premium volume from this operation was $1,218,000, $1,619,000 and $6,427,000
as of December 31, 2000, 1999 and 1998, respectively. The net loss was $48,000,
$861,000 and $2,937,000 as of December 31, 2000, 1999 and 1998, respectively.
GRANITE INSURANCE COMPANY
Granite Insurance Company ("Granite") is a Canadian federally licensed insurance
company which is presently servicing its investment portfolio and seven
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. Granite's
invested assets decreased to $2.5 million from $2.8 million in 2000. This was
the result of claims paid for the year. Total net outstanding claims decreased
to $88,000 in 2001 from $243,000 in 2000. It is expected that the run-off of
outstanding claims will be completed in 2002. Granite recorded a net gain of
$827,000 in 2001, a net loss of $117,000 in 2000, and a net gain of $179,000 in
1999.
GRANITE REINSURANCE COMPANY LTD.
Granite Reinsurance Company Ltd. ("Granite Re") is managed by Atlantic Security
Ltd. of Bermuda and a corporate services management company in Barbados.
Granite Re underwrites finite risk, stop loss and quota share reinsurance,
through various programs in Bermuda, the United States and Canada. During 2001,
2000 and 1999, Granite Re participated in certain quota share and stop loss
programs for the now discontinued crop operations. These programs were in
accordance with third party placements.
Net premiums earned were $31.5 million in 2001, $7.8 million in 2000, and $12.7
million in 1999. Net earnings (loss) were $0.5 million in 2001, $7.5 million in
2000, and $(0.2) million in 1999. The net earnings for 2000 were primarily
related to favorable development in the losses incurred on its quota share
reinsurance, which is assumed from a related insurer and interest income on a
book of business assumed from a nonaffiliate.
In 1998, Granite Re participated in Goran's nonstandard automobile insurance
through a quota share treaty. On January 1, 1999, the nonstandard automobile
treaty was commuted resulting in a return premium of $11.2 million. There was
no other assumed automobile reinsurance in 1999.
Granite Re's capital and surplus was $14.8 million and $14.3 million as of
December 31, 2001 and 2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of funds for Goran is through dividend and other funding
from Granite Re, its Barbados based subsidiary.
The primary source of funds available to SIG are fees from policyholders and
management fees and dividends from its subsidiaries.
Superior Insurance Group, Inc. ("Superior Group") collects billing fees charged
to policyholders who elect to make their premium payments in installments.
Superior Group also receives management fees under its management agreement with
its insurance subsidiaries. When the Florida Department of Insurance ("FDOI")
approved the acquisition of Superior by Superior Group Management, it prohibited
Superior from paying any dividends (whether extraordinary or not) for four years
from the date of acquisition (May 1, 1996) without the prior written approval of
the FDOI, which restriction expired in April 2000. As a result of regulatory
actions taken by the Indiana Department of Insurance ("IDOI") with respect to
Pafco and IGF, those subsidiaries may not pay dividends without prior approval
by the IDOI. Pafco cannot pay extraordinary dividends, within the meaning of
the Indiana Insurance Code, without the prior approval of the Indiana Insurance
Commissioner. The management fees charged to Pafco, IGF and Superior are
subject to review by the IDOI and FDOI.
The nonstandard automobile insurance subsidiaries' primary source of funds
is premiums, investment income and proceeds from the maturity or sale of
invested assets. Such funds are used principally for the payment of claims,
payment of claims settlement costs, operating expenses (primarily management
fees), commissions to independent agents, premium taxes, dividends and the
purchase of investments. There is variability in cash outflows because of
uncertainties regarding settlement dates for liabilities for unpaid losses.
Accordingly, SIG maintains investment programs intended to provide adequate
funds to pay claims. During 2001 and 2000, due to reduced premium volume, SIG
has liquidated investments to pay claims. SIG historically has tried to
maintain duration averages of 3.5 years. However, the reduction in new funds
due to lower premium volume has and will continue to cause SIG to shorten the
duration of its investments. SIG may incur additional costs in selling longer
bonds to pay claims as claim payments tend to lag premium receipts. Due to the
decline in premium volume, SIG has experienced a reduction in its investment
portfolio, but to date has not experienced any problems meeting its obligations
for claims payments.
On August 12, 1997, SIG issued through a wholly owned trust subsidiary
$135 million aggregate principal amount in trust originated preferred securities
("Preferred Securities"). The Preferred Securities have a term of 30 years with
semi-annual interest payments of $6.4 million that commenced February 15, 1998.
SIG may redeem the Preferred Securities in whole or in part after 10 years.
SIG elected to defer the semi-annual interest payments due in February and
August 2000. SIG may continue to defer interest payments in accordance with the
terms of the trust indenture for a period of up to five years. The unpaid
interest installment amounts accrue interest at 9.5%. SIG continued the same
deferral practice for the February and August payments due in 2001 and may
continue this deferral practice for all payments due in 2002, 2003, and 2004.
The payment due in February 2002 has been deferred.
The following table sets forth SIG's minimum required obligations under the
Preferred Securities for interest and principal payments for each of the next
four years and thereafter assuming all semi-annual interest payments due in
2002, 2003, and 2004 are deferred (in thousands):
2002 2003 2004 2005 Thereafter Total
----- ----- ----- ------- ----------- --------
Interest payments. $ - $ - $ - $96,779 $ 282,150 $378,929
Principal payments - - - - 135,000 135,000
----- ----- ----- ------- ----------- --------
Total due. . . . . $ - $ - $ - $96,779 $ 417,150 $513,929
===== ===== ===== ======= =========== ========
The trust indenture contains certain restrictive covenants based upon SIG's
consolidated coverage ratio of earnings before interest, taxes, depreciation and
amortization (EBITDA). If SIG's EBITDA falls below 2.5 times consolidated
interest expense (including Preferred Security distributions) for the most
recent four quarters, the following restrictions become effective:
- - SIG may not incur additional indebtedness or guarantee additional
indebtedness.
- - SIG may not make certain restricted payments, including loans or advances
to affiliates, common stock repurchases or dividends in excess of a stated
limitation.
- - SIG may not increase its level of non-investment grade securities defined
as equities, mortgage loans, real estate, real estate loans and non-investment
grade fixed income securities.
These restrictions currently apply as SIG's consolidated coverage ratio was
(.90) in 2001, and will continue to apply until SIG's consolidated coverage
ratio complies with the terms of the trust indenture. SIG complied with these
additional restrictions as of December 31, 2001 and is in compliance as of March
29, 2002. SIG discovered it was not in compliance with the covenant dealing with
the percentage of investment in other than "Permitted Investments" as defined by
the indenture. The indenture allows for no more than 15% of total invested
assets to be in non-investment grade securities as defined above. At December
31, 2001, approximately 21% of SIG's investment portfolio was invested in equity
securities and non-investment grade bonds. SIG cured the covenant violation as
of March 29, 2002 via the sale of approximately $8 million of non-investment
grade securities and the reinvestment of the proceeds in Permitted Investments.
During 2001, Granite Re purchased Preferred Securities bearing a principal
amount of $17,460,000. During 2000, Granite Re and Granite purchased Preferred
Securities bearing principal amounts of $18,000,000 and $5,000,000,
respectively. As a result, the Company's balance sheet as of December 31, 2001
presents a net Preferred Securities balance of $94,540,000. The Company's total
purchases of Preferred Securities resulted in a $39,690,000 increase to the
Company's consolidated stockholders' equity as of December 31, 2001.
Net cash used by operating activities in 2001 aggregated $23,490,000
compared to $49,412,000 in 2000.
The Company believes cash flows in the nonstandard automobile operations
from premiums, investment income and billing fees are sufficient to meet
obligations to policyholders and operating expenses for the foreseeable future.
This is due primarily to the lag time between receipt of premiums and the
payment of claims. Accordingly, while there can be no assurance as to the
sufficiency of the Company's cash flow in future periods, the Company believes
that its cash flow will be sufficient to meet all of the Company's operating
expenses and operating debt service (not including the Preferred Securities) for
the foreseeable future.
The preceding paragraph notwithstanding, SIG has experienced, beginning in the
fourth quarter of 2001 and continuing in January and February 2002, sustained
adverse loss experience on a substantial portion of its new business written in
certain markets. In late February and early March 2002, SIG commenced further
analysis of loss ratios by individual agency and a review of claim settlement
procedures. Based on this and other analysis, SIG has, as of the filing of this
document, taken the following actions to improve the financial position and
operating results of the Company:
- - Eliminated reinstatements in all markets (i.e., upon policy cancellation,
the insured must obtain a new policy at prevailing rates and underwriting
guidelines),
- - Terminated or placed on new business moratorium several hundred agents
whose loss ratios were abnormally high when compared to the average for the
remaining agents (these agents accounted for approximately 16% of the total
gross written premium in 2001),
- - Increased underwriting requirements in certain markets including: higher
down payments, new policy fees, and shorter policy terms, and
- - Hired a consultant with significant auto claims experience to review
processes and suggest modifications to the claims function.
SIG expects the above actions to result in a decline of approximately 10 to 15%
in gross written premiums from 2001 levels with a corresponding decrease in
management fees payable to Superior Group, offset by reductions in operating
expenses due to process changes and efficiencies.
Shareholders' equity reflected a deficit of $89.1 million at December 31, 2001,
which does not reflect the statutory surplus upon which the Company conducts its
various insurance operations. The Company's U.S. insurance subsidiaries, not
including IGF, after the effects of codification (See Note 13), had statutory
surplus of approximately $21.9 million at December 31, 2001. (See Note 13 for
discussion regarding the effects of codification on statutory surplus.)
EFFECTS OF INFLATION
Due to the short term that claims are outstanding in the majority of the
product lines the Company underwrites, inflation does not pose a significant
risk to the Company.
SIGNIFICANT ACCOUNTING POLICIES
The financial statements contained herein reflect the selection and application
of accounting policies that require management to make significant estimates and
assumptions. Management believes that the following is the more critical
judgment area in the application of our accounting policies that currently
affect our financial condition and results of operations. The reserve for losses
and LAE includes estimates for reported unpaid losses and LAE, including a
portion attributable to losses incurred but not reported. These reserves are not
discounted. Reserves are established using individual case-basis evaluations
and statistical analysis as claims are reported. Those estimates are subject to
the effects of trends in loss severity and frequency. While management believes
the reserves make reasonable provisions for unpaid loss and LAE obligations,
those provisions are necessarily based on estimates and are subject to
variability. Changes in the estimated reserves are charged or credited to
operations, as additional information on the estimated amount of a claim becomes
known during the course of its settlement. The gross reserve for losses and LAE
is reported net of anticipated receipts for salvage and subrogation. See Note 7
to the Consolidated Financial Statements for additional disclosure regarding the
reserve for losses and loss adjustment expenses. The variation between the
estimated loss and LAE and actual experience can be material.
PRIMARY DIFFERENCES BETWEEN GAAP AND SAP
The financial statements contained herein have been prepared in conformity
with Generally Accepted Accounting Principles ("GAAP") which differ from
Statutory Accounting Practices ("SAP") prescribed or permitted for insurance
companies by regulatory authorities in the following respects: (i) certain
assets are excluded as "Nonadmitted Assets" under statutory accounting; (ii)
costs incurred by the Company relating to the acquisition of new business are
expensed for statutory purposes; (iii) the investment in wholly-owned
subsidiaries is consolidated for GAAP rather than valued on the statutory equity
method in which the net income or loss and changes in unassigned surplus of the
subsidiaries is reflected in net income for the period rather than recorded
directly to unassigned surplus; (iv) fixed maturity investments are reported at
amortized cost or market value based on their National Association of Insurance
Commissioners ("NAIC") rating; (v) the liability for losses and LAE and unearned
premium reserves are recorded net of their reinsured amounts for statutory
accounting purposes; (vi) deferred income taxes are recognized as specified by
statutory guidance and (vii) credits for reinsurance are recorded only to the
extent considered realizable.
NEW ACCOUNTING STANDARDS
The NAIC adopted the Codification of Statutory Accounting Principles guidance
("Codification"), which replaces the Accounting Practices and Procedures manual,
as the NAIC's primary guidance on statutory accounting effective January 1,
2001. The IDOI and the FDOI have adopted Codification.
The changes in statutory accounting principles resulting from codification that
affect SIG's insurance subsidiaries will, among other things, limit the
statutory carrying value of electronic data processing equipment and deferred
tax assets in determining statutory surplus. The consolidated statutory surplus
of SIG's insurance subsidiaries as of December 31, 2001 is $21.9 million,
exclusive of IGF.
In June 2001, the Financial Accounting Standards Board (the "Board") finalized
FASB Statements No. 141, Business Combinations, No. 142, Goodwill and Other
Intangible Assets, and No. 143, Accounting for Asset Retirement Obligations. In
August 2001, the Board issued FASB Statement No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets. These new standards are effective
in 2002 and are not expected to have a material impact on the Company's
financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Insurance company investments must comply with applicable laws and regulations
that prescribe the kind, quality and concentration of investments. In general,
these laws and regulations permit investments, within specified limits and
subject to certain qualifications, in federal, state and municipal obligations,
corporate bonds, preferred and common securities, real estate mortgages and real
estate.
The investment portfolios of the Company at December 31, 2001, consisted of the
following (in thousands):
Cost or
Type of Investment Amortized Cost Market Value
- ------------------------------------------------------------------ -------------- ------------
Fixed maturities:
United States Treasury securities and obligations of United States
government corporation and agencies. . . . . . . . . . . . . . . . 29,982 30,210
Obligations of states and political subdivisions . . . . . . . . . 17,536 19,438
Corporate securities . . . . . . . . . . . . . . . . . . . . . . . 29,807 28,718
-------------- ------------
Total Fixed Maturities . . . . . . . . . . . . . . . . . . . . . . 77,325 78,366
Equity Securities:
Common Stocks. . . . . . . . . . . . . . . . . . . . . . . . . . . 21,610 18,323
Short-Term investments . . . . . . . . . . . . . . . . . . . . . . 13,266 13,266
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Other invested assets. . . . . . . . . . . . . . . . . . . . . . . 1,594 1,594
-------------- ------------
113,795 111,549
============== ============
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):
2001 2000
---- ----
Percent Total Percent Total
------------- -------------
Time to Maturity Market Value Market Value Market Value Market Value
- ---------------------------------- ------------- -------------- ------------- -------------
1 year or less . . . . . . . . . . 7,998 10.2 $ 11,792 11.1%
More than 1 year through 5 years . 26,343 33.6 42,966 40.6
More than 5 years through 10 years 20,554 26.2 14,825 14.0
More than 10 years . . . . . . . . 4,091 5.2 22,724 21.5
------------- -------------- ------------- -------------
58,986 75.2 92,307 87.2
Mortgage-backed securities . . . . 19,380 24.8 13,610 12.8
------------- -------------- ------------- -------------
Total. . . . . . . . . . . . . . . 78,366 100.0% $ 105,917 100.0%
============= ============== ============= =============
The following table sets forth the ratings assigned to the fixed maturity
securities of the Company as of December 31 (in thousands):
2001 2000
---- ----
Percent Total Percent Total
------------- -------------
Rating(1) Market Value Market Value Market Value Market Value
- ----------------------------- ------------- -------------- ------------- -------------
Aaa or AAA. . . . . . . . . . 51,754 66.1 $ 68,717 64.9%
Aa or AA. . . . . . . . . . . 3,357 4.3 3,861 3.6
A . . . . . . . . . . . . . . 9,655 12.3 12,515 11.8
Baa or BBB. . . . . . . . . . 7,617 9.7 14,861 14.0
Ba or BB. . . . . . . . . . . 4,883 6.2 5,148 4.9
Other below investment grade. 1,100 1.4 815 .8
------------- -------------- ------------- -------------
Total . . . . . . . . . . . . 78,366 100% $ 105,917 100.0%
============= ============== ============= =============
(1) Ratings are assigned by Standard & Poor's Corporation, and when not available, are
based on ratings assigned by Moody's Investors Service, Inc
The investment results of the Company for the periods indicated are set forth
below (in thousands):
Years Ended December 31
2001 2000 1999
--------- --------- ---------
Net investment income (1) . . . . . . . . . . . $ 6,998 $ 12,171 $ 13,125
Average investment portfolio (2). . . . . . . . 131,343 $187,243 $232,947
Pre-tax return on average investment portfolio. 5.3% 6.5% 5.6%
Net realized gains (losses) . . . . . . . . . . $ (1,177) $ (5,970) $ 44
(1) Includes dividend income received in respect of holdings of common
stock.
(2) Average investment portfolio represents the average (based on amortized
cost) of the beginning and ending investment portfolio.
If interest rates were to increase 10% from the December 31, 2001 levels, the
decline in fair value of the fixed maturity securities would not significantly
affect the Company's ability to meet its obligations to policyholders and
debtors.
MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
The Company's investment strategy is to invest available funds in a manner that
will maximize the after-tax yield of the portfolio while emphasizing the
stability and preservation of the capital base. The Company seeks to maximize
the total return on investment through active investment management utilizing
third-party professional administrators, in accordance with pre-established
investment policy guidelines established and reviewed regularly by the Board of
Directors of the Company. Accordingly, the entire portfolio of fixed maturity
securities is available to be sold in response to changes in market interest
rate; changes in relative values of individual securities and asset sectors;
changes in prepayment risks; changes in credit quality; and liquidity needs, as
well as other factors.
The portfolio is invested in types of securities and in an aggregate duration,
which reflect the nature of the Company's liabilities and expected liquidity
needs diversified among industries, issuers and geographic locations. The
Company's fixed maturity and common equity investments are substantially in
public companies.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For investment
securities and debt obligations, the table presents principal cash flows and
related weighted-average interest rates by expected maturity date.
Additionally, the Company has assumed its available for sale securities are
similar enough to aggregate those securities for presentation purposes.
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate
(U.S. dollars in thousands)
2002 2003 2004 2005 2006 Thereafter Total 12/31/01
------- ------- ------- ------- -------
ASSETS
Available for sale. . $7,586 $7,766 $7,499 $8,440 $6,901 $ 39,216 $ 77,408 $ 78,366
Average interest rate 7.3% 5.6% 6.6% 4.3% 6.3% 6.5% 6.1% 6.1%
LIABILITIES
Preferred securities. -- -- -- -- -- 135,000 135,000 9,000
Average interest rate -- -- -- -- -- 9.5% 9.5% 9.5%
CONSOLIDATED BALANCE SHEETS
As of December 31, 2001 and 2000
(U.S. dollars in thousands, except share data)
2001 2000
---------- ----------
ASSETS:
Investments:
Fixed maturities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 77,325 $ 107,827
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,610 20,268
Short-term investments, at amortized cost, which approximates market. . . 13,266 17,594
Mortgage loans, at cost . . . . . . . . . . . . . . . . . . . . . . . . . - 1,870
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . 1,594 1,331
---------- ----------
Total Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113,795 148,890
Investments in and advances to related parties. . . . . . . . . . . . . . . . 1,130 4,254
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . 11,263 3,230
Receivables, net of allowances of $1,526 and $1,940 . . . . . . . . . . . . . 47,441 54,370
Reinsurance recoverable on paid and unpaid losses, net. . . . . . . . . . . . 29,284 44,843
Prepaid reinsurance premiums. . . . . . . . . . . . . . . . . . . . . . . . . 40,039 24,774
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . 763 6,454
Property and equipment, net of accumulated depreciation . . . . . . . . . . . 9,907 12,400
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,376 4,983
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,421 3,784
Assets of discontinued operations . . . . . . . . . . . . . . . . . . . . . . 115,900 132,050
---------- ----------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 376,319 $ 440,032
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT:
LIABILITIES:
Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . $ 84,876 $ 113,149
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,216 62,386
Reinsurance payables. . . . . . . . . . . . . . . . . . . . . . . . . . . 58,868 63,632
Distributions payable on preferred securities . . . . . . . . . . . . . . 23,252 15,263
Deferred Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,250 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,563 14,904
Liabilities of discontinued operations. . . . . . . . . . . . . . . . . . 115,900 131,366
---------- ----------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 370,925 400,700
---------- ----------
MINORITY INTEREST:
Company-obligated mandatorily redeemable preferred stock of trust subsidiary
holding solely parent debentures . . . . . . . . . . . . . . . . . . . . . . 94,540 112,000
---------- ----------
STOCKHOLDERS' DEFICIT:
Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,502 19,132
Contributed surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,465 23,748
Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . (763) (291)
Retained (deficit). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (149,350) (115,257)
---------- ----------
TOTAL STOCKHOLDERS' (DEFICIT) . . . . . . . . . . . . . . . . . . . . . . . . (89,146) (72,668)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) . . . . . . . . . . . . . . . . $ 376,319 $ 440,032
========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2001, 2000, and 1999
(U.S. dollars in thousands, except per share data)
2001 2000 1999
---------- --------- ---------
Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 193,186 $182,099 $236,401
Less ceded premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (106,324) (78,637) 7,361
---------- --------- ---------
NET PREMIUMS WRITTEN . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 86,862 $103,462 $243,762
========== ========= =========
NET PREMIUMS EARNED. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 108,197 $145,532 $261,800
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,425 14,239 15,335
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,998 12,171 13,125
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,750 - -
Net realized capital gain (loss) . . . . . . . . . . . . . . . . . . . . . . (1,177) (5,970) 44
---------- --------- ---------
TOTAL REVENUE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128,193 165,972 290,304
---------- --------- ---------
Expenses:
Losses and loss adjustment expenses. . . . . . . . . . . . . . . . . . . . . 95,216 113,768 242,408
Policy acquisition and general and administrative expenses . . . . . . . . . 53,165 70,591 97,735
Amortization of intangibles. . . . . . . . . . . . . . . . . . . . . . . . . 1,380 34,960 2,194
---------- --------- ---------
TOTAL EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149,761 219,319 342,337
---------- --------- ---------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTEREST . . . . . . . . . . . . . . . . . . . . . (21,568) (53,347) (52,033)
---------- --------- ---------
Income taxes:
Current income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . - 487 (765)
Deferred income tax expense (benefit). . . . . . . . . . . . . . . . . . . . - (2,636) 7,183
---------- --------- ---------
TOTAL INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (2,149) 6,418
---------- --------- ---------
LOSS FROM CONTINUING OPERATIONS BEFORE
MINORITY INTEREST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21,568) (51,198) (58,451)
Minority Interest:
Earnings in consolidated subsidiary. . . . . . . . . . . . . . . . . . . . . - -- 19,787
Distributions on preferred securities, net of tax of nil in 2001 and 2000,
4,489 in 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,369) (12,026) (8,336)
---------- --------- ---------
LOSS FROM CONTINUING OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . (31,937) (63,224) (47,000)
Discontinued Operations:
Loss on disposal of discontinued segment less applicable taxes of nil. . . . - (900) -
Loss from operations of discontinued segment, less applicable income
taxes of nil in 2001, 2000 and 1999. . . . . . . . . . . . . . . . . . . . . (2,156) (16,141) (15,373)
---------- --------- ---------
LOSS FROM DISCONTINUED OPERATIONS. . . . . . . . . . . . . . . . . . . . . . (2,156) (17,041) (15,373
---------- --------- ---------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (34,093) $(80,265) $(62,373)
========== ========= =========
Weighted average shares outstanding - basic and fully diluted. . . . . . . . 5,696 5,822 5,876
========== ========= =========
Net loss from continuing operations per share - basic and fully diluted. . . $ (5.61) $ (10.86) $ (8.00)
========== ========= =========
Net loss of discontinued operations per share - basic and fully diluted. . . $ (0.38) $ (2.93) $ (2.61)
========== ========= =========
Net loss per share - basic and fully diluted . . . . . . . . . . . . . . . . $ (5.99) $ (13.79) $ (10.61)
========== ========= =========
The accompanying notes are an integral part of the consolidated financial statements
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended December 31, 2001, 2000 and 1999
(U.S. dollars in thousands, except number of shares)
Common Stock
Retained Cumulative Total
Contributed Earnings Translation Stockholders
Shares Amount Surplus (Deficit) Adjustment Equity
------------- ------------ ------------- --------------- ------------ ---------
Balance at January 1, 1999 . . . 5,876,398 $ 19,317 $ 2,775 $ 27,381 $ 252 $ 49,725
============= ============ ============= =============== ============ =========
Comprehensive Income:
Net Loss . . . . . . . . . . . . -- -- -- (62,373) -- (62,373)
Change in cumulative translation
adjustment . . . . . . . . . . . -- -- -- -- (239) (239)
Balance at December 31,1999. . . 5,876,398 $ 19,317 $ 2,775 $ (34,992) $ 13 $(12,887)
============= ============ ============= =============== ============ =========
Comprehensive Income:
Net Loss . . . . . . . . . . . . -- -- -- (80,265) -- (80,265)
Change in cumulative translation
Adjustment . . . . . . . . . . . -- -- -- -- (304) (304)
Preferred Securities purchase. . -- -- 20,973 -- -- 20,973
Purchase of common shares. . . . (100,000) (185) -- -- -- (185)
Balance at December 31, 2000 . . 5,776,398 $ 19,132 $ 23,748 $ (115,257) $ (291) $(72,668)
============= ============ ============= =============== ============ =========
Comprehensive Income:
Net Loss . . . . . . . . . . . . -- -- -- (34,093) -- (34,093)
Change in cumulative translation
Adjustment . . . . . . . . . . . -- -- (472) (472)
Preferred Securities purchase. . -- -- 18,717 18,717
Purchase of common shares. . . . (382,700) (218) (218)
Reclassification of Organization
Expense. . . . . . . . . . . . . (412) (412)
Balance at December 31, 2001 . . 5,393,698 $ 18,502 $ 42,465 $ (149,350) $ (763) $(89,146)
============= ============ ============= =============== ============ =========
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2001, 2000 and 1999
(U.S. dollars in thousands)
2001 2000 1999
--------- --------- ----------
Cash flows from operating activities
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(34,093) $(80,265) $ (62,373)
Adjustments to reconcile net loss to net cash provided by (used in)
operations:
Minority interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- (19,787)
Depreciation, amortization, impairment and other . . . . . . . . . . . . . 3,892 38,983 5,858
Deferred income tax expense. . . . . . . . . . . . . . . . . . . . . . . . -- (2,635) 4,177
Net realized capital (gain) loss . . . . . . . . . . . . . . . . . . . . . 1,177 5,970 (22)
Gain on sale of capital assets . . . . . . . . . . . . . . . . . . . . . . -- -- --
Net changes in operating assets and liabilities (net of assets acquired):
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,929 14,153 (6,114)
Reinsurance recoverable on losses, net . . . . . . . . . . . . . . . . . . 15,559 (40,053) 20,922
Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . (15,265) (23,896) 5,443
Federal income taxes recoverable (payable) . . . . . . . . . . . . . . . . -- -- 11,379
Deferred policy acquisition costs. . . . . . . . . . . . . . . . . . . . . 5,691 7,454 2,424
Other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . 7,509 (9,816) 7,256
Losses and loss adjustment expenses. . . . . . . . . . . . . . . . . . . . (28,273) (44,276) 16,941
Unearned premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,170) (18,175) (17,368)
Reinsurance payables . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,764) 58,142 15,329
Distribution payable on preferred securities . . . . . . . . . . . . . . . 7,989 10,454 --
Deferred Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,250 -- --
Net assets from discontinued operations. . . . . . . . . . . . . . . . . . 6,079 34,548 (33)
--------- --------- ----------
Net cash provided by / (used in ) operations:. . . . . . . . . . . . . . . (23,490) (49,412) (15,968)
--------- --------- ----------
Cash flow from investing activities net of assets acquired:
Net sales (purchases) of short-term investments. . . . . . . . . . . . . . 4,328 15,040 (13,211)
Proceeds from sales, calls and maturities of fixed maturities. . . . . . . 67,105 77,641 206,742
Purchases of fixed maturities. . . . . . . . . . . . . . . . . . . . . . . (35,105) (10,181) (182,453)
Proceeds from sales of equity securities . . . . . . . . . . . . . . . . . 12,707 16,736 11,215
Purchase of equity securities. . . . . . . . . . . . . . . . . . . . . . . (12,494) (25,408) (9,850)
Proceeds from repayment of mortgage loans. . . . . . . . . . . . . . . . . 1,870 120 75
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . (1,314) (1,663) (6,414)
Net investing activities from discontinued operations. . . . . . . . . . . (5,306) (150) (1,385)
Net proceeds from sales (purchases) of other investments . . . . . . . . . (217) (415) (2,161)
--------- --------- ----------
Net cash provided by / (used in) investing activities: . . . . . . . . . . 31,574 71,720 2,558
--------- --------- ----------
Cash flow from financing activities net of assets acquired:
Purchase of affiliate preferred securities . . . . . . . . . . . . . . . . (2,497) (2,027) --
Other financing activities . . . . . . . . . . . . . . . . . . . . . . . . (630) -- --
Redemption of share capital. . . . . . . . . . . . . . . . . . . . . . . . -- (185) --
Net financing activities from discontinued operations. . . . . . . . . . . (48) (16,473) 4,954
Loans from and (repayments to) related parties . . . . . . . . . . . . . . 3,124 (2,608) 80
--------- --------- ----------
Net cash provided by / (used in ) financing activities:. . . . . . . . . . (51) (21,293) 5,034
--------- --------- ----------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . 8,033 1,015 (8,376)
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . 3,230 2,215 10,591
--------- --------- ----------
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . 11,263 $ 3,230 $ 2,215
========= ========= ==========
The accompanying notes are an integral part of the consolidated financial statements.
GORAN CAPITAL INC AND SUBSIDIARIES
_________________________________________________________________________
- ---
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
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 described in "BASIS OF PRESENTATION"
below.
The following is a description of the significant accounting policies and
practices employed:
A. BASIS OF PRESENTATION: The consolidated financial statements are
prepared in accordance with Canadian Generally Accepted Accounting
Principles. In addition, the consolidated financial statements are also
used to satisfy the Company's financial filing requirements in the U.S.
Consequently, the consolidated financial statements include disclosures
that are not necessarily required under Canadian GAAP and contain
references to U.S. GAAP accounting pronouncements. Note 20, presents a
reconciliation of Canadian and U.S. GAAP.
The consolidated financial statements include the accounts, after
intercompany eliminations, of the Company and its wholly-owned subsidiaries
as follows:
Symons International Group, Inc. ("SIG") is a 73.1% owned subsidiary of Goran.
SIG's subsidiaries are as follows:
Superior Insurance Group Management, Inc ("Superior Group Management")
a holding company for the nonstandard automobile operations which includes:
Superior Insurance Group, Inc. ("Superior Group") a management company
for the nonstandard automobile operations;
Superior Insurance Company ("Superior") an insurance company domiciled
in Florida;
Superior American Insurance Company ("Superior American") an insurance
company domiciled in Florida;
Superior Guaranty Insurance Company ("Superior Guaranty") an insurance
company domiciled in Florida;
Pafco General Insurance Company ("Pafco") an insurance company
domiciled in Indiana;
IGF Holdings, Inc. ("IGFH") a holding company
IGF Insurance Company ("IGF") an insurance company domiciled in
Indiana (See Note 23);
Granite Reinsurance Company Ltd. ("Granite Re") a finite risk reinsurance
company domiciled in Barbados.
Granite Insurance Company ("Granite") a Canadian federally licensed insurance
company.
Symons International Group (Florida) Inc. ("SIGF") a Florida domestic
corporation.
B. USE OF ESTIMATES: The preparation of financial statements requires
management to make estimates and assumptions that affect amounts reported
in the financial statements and accompanying notes. Actual results could
differ from those estimates.
C. SIGNIFICANT ESTIMATES: The most significant estimates in the Company's
balance sheet are the determination of prepaid policy acquisition costs and
the reserve for insurance losses and loss adjustment expenses ("LAE").
Management's estimate of prepaid policy acquisition costs is based on
historical studies and assumptions made regarding costs incurred.
Management's estimate of insurance losses and LAE is based on past loss
experience and consideration of current claim trends as well as prevailing
social, economic and legal conditions. Actual results could differ from
those estimates.
D. PREMIUMS: Premiums are recognized as income ratably over the life of
the policies and are stated net of ceded premiums. Unearned premiums are
computed on the daily pro rata basis.
E. INVESTMENTS: Investments are presented on the following basis:
Fixed maturities and equity securities are carried at amortized cost
for fixed maturities and cost for equity securities.
Real estate is carried at cost, less an allowance for depreciation.
Mortgage loans are carried at outstanding principal balance.
Realized gains and losses on sales of investments are recorded on the
trade date and are recognized in net income on the specific identification
basis. Interest and dividend income are recognized as earned.
F. CASH AND CASH EQUIVALENTS: For presentation in the statement of cash
flows, the Company includes in cash and cash equivalents all cash on hand
and demand deposits with original maturities of three months or less.
G. DEFERRED POLICY ACQUISITION COSTS: Deferred policy acquisition costs
are comprised of agents' commissions, premium taxes, certain other costs
and investment income which are related directly to the acquisition of new
and renewal business, net of expense allowances received in connection with
reinsurance ceded, which have been accounted for as a reduction of the
related policy acquisition costs. These costs are deferred and amortized
over the terms of the policies to which they relate. Acquisition costs that
exceed estimated losses and loss adjustment expenses and maintenance costs
are charged to expense in the period in which those excess costs are
determined.
H. PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost.
Depreciation for buildings is based on the straight-line method over 31.5
years and the straight-line method for other property and equipment over
their estimated useful lives ranging from five to seven years. Asset and
accumulated depreciation accounts are relieved for dispositions, with
resulting gains or losses reflected in net income.
I. INTANGIBLE ASSETS: Intangible assets consist primarily of debt
acquisition costs and goodwill, in years 2000 and prior. Deferred debt
acquisition costs are amortized over the term of the debt. Prior to 2000,
goodwill was amortized over a 25-year period on a straight-line basis based
upon management's estimate of the expected benefit period. See Note 5
regarding the goodwill impairment charge recorded in 2000.
J. ASSET IMPAIRMENT POLICY: The Company reviews the carrying values of
its long-lived and identifiable intangible assets for possible impairment
whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable. See Note 6 regarding the
goodwill impairment charge recorded in 2000. Any long-lived assets held for
disposal are reported at the lower of carrying amounts or fair value, less
expected costs to sell.
K. LOSSES AND LOSS ADJUSTMENT EXPENSES: Reserves for losses and LAE
include estimates for reported unpaid losses and LAE, including a portion
attributable to losses incurred but not reported. These reserves have not
been discounted. Reserves are established using individual case-basis
evaluations and statistical analysis as claims are reported. Those
estimates are subject to the effects of trends in loss severity and
frequency. While management believes the reserves make reasonable
provisions for unpaid loss and LAE obligations, those provisions are
necessarily based on estimates and are subject to variability. Changes in
the estimated reserves are charged or credited to operations as additional
information on the estimated amount of a claim becomes known during the
course of its settlement. The gross reserve for losses and LAE is reported
net of anticipated receipts for salvage and subrogation of approximately
$5,822,000 and $6,983,000 at December 31, 2001 and 2000, respectively.
L. PREFERRED SECURITIES: Preferred Securities represent company-obligated
mandatorily redeemable securities of SIG's trust subsidiary holding solely
parent debentures and are reported at their liquidation value under
minority interest. Distributions on these securities are charged against
consolidated earnings.
M. INCOME TAXES: The Company utilizes the liability method of accounting
for deferred income taxes. Under the liability method, companies will
establish a deferred tax liability or asset for the future tax effects of
temporary differences between book and taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities.
N. REINSURANCE: Reinsurance premiums, commissions, and reserves related
to reinsured business are accounted for on a basis consistent with those
used in accounting for the original policies and the terms of the
reinsurance contracts. Premiums ceded to other companies have been reported
as a reduction of premium income.
O. EARNINGS PER SHARE: The Company's basic earnings per share
calculations are based upon the weighted average number of shares of common
stock outstanding during each period. As the Company has reported losses in
2001, 2000, and 1999, common stock equivalents are anti-dilutive.
Therefore, fully diluted earnings per share is the same as basic earnings
per share.
P. RECLASSIFICATIONS: Certain amounts from prior periods have been
reclassified to allow for comparability to the 2001 presentation.
2. CORPORATE REORGANIZATION AND ACQUISITIONS:
On August 12, 1997, the Company purchased the remaining minority interest in
Superior Group Management for $61 million in cash. The excess of the
acquisition price over the minority interest liability was assigned to goodwill
as the fair market value of assets and liabilities approximated their carrying
value. See Note 6 regarding the goodwill impairment charge recorded in 2000.
Effective on November 1, 2001, SIGF acquired the assets of a property casualty
insurance brokerage located in Boca Raton, Florida. The purchase price of the
asset purchase was $150,000.
3. INVESTMENTS:
Investments are summarized as follows (in thousands):
Cost or Estimated
Amortized Unrealized Market
December 31, 2001 (in thousands) Cost Gain Loss Value
------ ------ ----- -----
Fixed Maturities:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies . . . . . . $ 29,982 $ 609 $ (381) $ 30,210
Obligations of states and political subdivisions. 17,536 1,949 (47) 19,438
Corporate securities. . . . . . . . . . . . . . . 29,807 501 (1,590) 28,718
---------- ----------- -------- --------
Total fixed maturities. . . . . . . . . . . . . . 77,325 3,059 (2,018) 78,366
Equity securities . . . . . . . . . . . . . . . . 21,610 377 (3,664) 18,323
Short-term investments. . . . . . . . . . . . . . 13,266 -- -- 13,266
Other invested assets ( including real estate). . 1,594 -- -- 1,594
---------- ----------- -------- --------
Total Investments . . . . . . . . . . . . . . . . $ 113,795 $ 3,436 $(5,682) $111,549
========== =========== ======== ========
Cost or Estimated
Amortized Unrealized Market
December 31, 2000 (in thousands) Cost Gain Loss Value
---------- ----- ------ --------
Fixed Maturities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies . . . . . . $ 59,389 $ 541 $ (188) $ 59,742
Obligations of states and political subdivisions. 241 1 -- 242
Corporate securities. . . . . . . . . . . . . . . 48,197 177 (2,441) 45,933
---------- ----------- -------- --------
Total fixed maturities. . . . . . . . . . . . . . 107,827 719 (2,629) 105,917
Equity securities . . . . . . . . . . . . . . . . 20,268 1,754 (3,332) 18,690
Short-term investments. . . . . . . . . . . . . . 17,594 -- (114) 17,480
Mortgage loans. . . . . . . . . . . . . . . . . . 1,870 -- -- 1,870
Other invested assets . . . . . . . . . . . . . . 1,331 -- -- 1,331
---------- ----------- -------- --------
Total Investments . . . . . . . . . . . . . . . . $ 148,890 $ 2,473 $(6,075) $145,288
========== =========== ======== ========
At December 31, 2001, The Standard & Poor's Corporation or Moody's Investor
Services, Inc considered approximately 92% of the Company's fixed maturities
investment grade. Securities with quality ratings, Baa and above are considered
investment grade securities. In addition, the Company's investments in fixed
maturities did not contain any significant geographic or industry concentration
of credit risk.
The amortized cost and estimated market value of fixed maturities at December
31, 2001, by contractual maturity, are shown in the table that follows. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without penalty (in thousands):
Estimated
Amortized Cost Market Value
-------------- ------------
Maturity:
Due in one year or less. . . . . . . . 7,894 7,998
Due after one year through five years. 26,401 26,343
Due after five years through ten years 20,754 20,554
Due after ten years. . . . . . . . . . 4,776 4,091
Mortgage-backed securities . . . . . . 17,500 19,380
-------------- ------------
TOTAL. . . . . . . . . . . . . . . . . 77,325 78,366
============== ============
Gains and losses realized on sales of investments are as follows (in thousands):
2001 2000 1999
-------- -------- ---------
Proceeds from sales . $81,682 $94,497 $218,032
Gross gains realized. $ 547 $ 1,361 $ 3,351
Gross losses realized $(1,724) $(7,331) $ (3,307)
Net investment income for the years ended December 31 are as follows (in
thousands):
2001 2000 1999
------- -------- --------
Fixed maturities. . . . . . . . $6,202 $ 9,342 $12,150
Equity securities . . . . . . . 174 344 401
Cash and short-term investments 697 1,269 1,232
Mortgage loans. . . . . . . . . 65 -- 152
Other . . . . . . . . . . . . . 769 1,318 (173)
------- --------
Total investment income . . . . 7,907 12,273 13,762
Investment expenses . . . . . . (909) (102) (637)
------- --------
Net investment income . . . . . $6,998 $12,171 $13,125
======= ======== ========
Investments with a market value of approximately $17,115,000 and $16,042,000
(amortized cost of approximately $16,799,000 and $15,993,000) as of December 31,
2001 and 2000, respectively, were on deposit in the United States and Canada.
The deposits are required by various insurance departments and others to support
licensing requirements and certain reinsurance contracts, respectively.
4. DEFERRED POLICY ACQUISITION COSTS:
Policy acquisition costs are capitalized and amortized over the life of the
policies. Policy acquisition costs are those costs directly related to the
issuance of insurance policies including commissions, premium taxes, and
underwriting expenses net of reinsurance commission income on such policies.
Policy acquisition costs both acquired and deferred, and the related
amortization charged to income were as follows (in thousands):
2001 2000 1999
--------- --------- ---------
Balance, beginning of year $ 6,454 $ 13,908 $ 16,332
Costs deferred during year 28,056 29,999 40,241
Amortization during year . (33,747) (37,453) (42,665)
--------- --------- ---------
Balance, end of year . . . $ 763 $ 6,454 $ 13,908
========= ========= =========
5. PROPERTY AND EQUIPMENT:
Property and equipment at December 31 are summarized as follows (in thousands):
Accumulated
2001 Cost Depreciation 2001 Net 2000 Net
--------- ----------- --------- ---------
Land . . . . . . . . . . . . . $ 100 $ - $ 100 $ 100
Buildings. . . . . . . . . . . 4,273 1,618 2,655 2,964
Office furniture and equipment 2,387 1,572 815 939
Automobiles. . . . . . . . . . 102 55 47 64
Computer equipment . . . . . . 14,171 7,881 6,290 8,333
------------- --------- --------- -------
Total. . . . . . . . . . . . . $ 21,033 $ 11,126 $ 9,907 $12,400
============= ========= ========= =======
Accumulated depreciation at December 31, 2000 was $10,182,000. Depreciation
expense related to property and equipment for the years ended December 31, 2001,
2000 and 1999 were $3,741,000, $3,507,000 and $3,414,000, respectively.
6. INTANGIBLE ASSETS:
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-lived
Assets", SIG determined in 2000 that the carrying value of goodwill that
resulted from the acquisition of Superior Group Management exceeded its fair
value. This determination was made after considering the series of continued
losses which the company had experienced, the reduction in the volume of
premiums written and an evaluation of future cash flows. Based upon this
assessment, a charge of $33,464,000 was recorded in the fourth quarter of 2000
to write-off the remaining carrying value of the goodwill. This charge is
included as amortization expense in the accompanying financial statements for
2000.
Intangible assets at December 31 are as follows (in thousands):
Accumulated
2001 Cost Amortization 2001 Net 2000 Net
--------- ---------- -------- --------
Goodwill. . . . . . $ 39,471 $ 39,471 $ - $1,209
Deferred debt costs 5,132 756 4,376 3,774
------------- --------- --------- ------
$ 44,603 $ 40,227 $ 4,376 $4,983
============= ========= ========= ======
Accumulated amortization with impairment at December 31, 2000 was $40,123,000.
Amortization expense related to intangible assets for the years ended December
31, 2001, 2000 and 1999 was $1,380,000, $34,960,000, and $2,194,000
respectively.
7. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (IN THOUSANDS):
Activity in the liability for unpaid losses and LAE is summarized as follows (in
thousands):
2001 2000 1999
-------- --------- --------
Balance at January 1. . . . . $113,149 $157,425 $140,484
Less reinsurance recoverables 19,979 3,411 1,301
-------- --------- --------
Net balance at January 1. . . 93,370 154,014 139,183
-------- --------- --------
Incurred related to:
Current year. . . . . . . . . 94,556 132,781 217,686
Prior years . . . . . . . . . 660 (19,013) 24,722
-------- --------- --------
Total Incurred. . . . . . . . 95,216 113,768 242,408
-------- --------- --------
Paid related to:
Current year. . . . . . . . . 69,917 89,612 126,526
Prior years . . . . . . . . . 62,682 84,800 101,051
-------- --------- --------
Total paid. . . . . . . . . . 132,599 174,412 227,577
-------- --------- --------
Net balance at December 31. . 55,987 93,370 154,014
Plus reinsurance recoverables 28,889 19,779 3,411
-------- --------- --------
Balance at December 31. . . . $ 84,876 $113,149 $157,425
======== ========= ========
Reserve estimates are regularly adjusted in subsequent reporting periods as new
facts and circumstances emerge to indicate that a modification of the prior
estimate is necessary. The adjustment, referred to as "Reserve development," is
inevitable given the complexities of the reserving process and is recorded in
the statements of operations in the period when the need for the adjustment
becomes apparent. The foregoing reconciliation indicates unfavorable development
of $660,000 on the December 31, 2000 reserves. The 2000 deficient reserve
development resulted primarily from a higher than expected frequency and
severity on nonstandard automobile claims. The favorable reserve development of
$19,013,000 during 2000 resulted from a major restructuring and strengthening of
the nonstandard automobile claims function effective at the beginning of 2000.
At that time SIG replaced its existing claims management team with new claims
management that improved performance of the claims staff.
The anticipated effect of inflation is implicitly considered when estimating
losses and LAE liabilities. While anticipated price increases due to inflation
are considered in estimating the ultimate claims costs, increases in average
claim severities is caused by a number of factors. Future severities are
projected based on historical trends adjusted for implemented changes in
underwriting standards, policy provisions, claims management practices and
procedures, and general economic trends. Anticipated severity trends are
monitored relative to actual development and are modified if necessary.
Liabilities for loss and LAE have been established when sufficient information
has been developed to indicated the involvement of a specific insurance policy.
In addition, reserves have been established to cover additional exposure on both
known and unasserted claims.
8. PREFERRED SECURITIES:
On August 12, 1997, SIG's trust subsidiary issued $135 million in preferred
securities ("Preferred Securities") bearing interest at an annual rate of 9.5%.
The principal assets of the trust subsidiary are senior subordinated notes of
SIG in the principal amount of $135 million with an interest rate and maturity
date substantially identical to those of the Preferred Securities. Expenses of
the issue aggregated $5.1 million and are amortized over the term of the
Preferred Securities.
The Preferred Securities represent SIG-obligated mandatorily redeemable
securities of SIG's trust subsidiary holding solely parent debentures and have a
term of 30 years with semi-annual interest payments commencing February 15,
1998. SIG may redeem the Preferred Securities in whole or in part after 10
years. The annual Preferred Security obligations of approximately $13 million
per year are funded from SIG's nonstandard automobile management company. The
nonstandard auto funds are the result of management and billing fees in excess
of operating costs. Under the terms of the indenture, SIG is permitted to defer
semi-annual interest payments for up to five years. SIG elected to defer the
interest payments due in February and August 2000 and 2001 and may continue this
practice through 2004 (the payment due in February 2002 was deferred). Given
SIG's election to defer past interest payments and option to continue this
practice through 2004, the Company has reflected the preferred securities as
equity securities instead of debt. As such, gains on the redemption of the
preferred securities are reflected as increases to contributed surplus.
The trust indenture for the Preferred Securities contains certain restrictive
covenants. These covenants are based upon SIG's consolidated coverage ratio of
earnings before interest, taxes, depreciation and amortization ("EBITDA"). If
SIG's EBITDA falls below 2.5 times consolidated interest expense (including
Preferred Security distributions) for the most recent four quarters the
following restrictions become effective:
- - SIG may not incur additional indebtedness or guarantee additional
indebtedness.
- - SIG may not make certain restricted payments including loans or
advances to affiliates, common stock repurchases and dividends in excess of
a stated limitation.
- - SIG may not increase its level of non-investment grade securities
defined as equities, mortgage loans, real estate, real estate loans and
non-investment grade fixed income securities.
These restrictions currently apply, as SIG's consolidated coverage ratio was
(.90) in 2001 and will continue to apply until SIG's consolidated coverage ratio
is in compliance with the terms of the trust indenture. SIG complied with these
additional restrictions as of December 31, 2001 and is in compliance as of March
29, 2002. SIG discovered it did not comply with the covenant dealing with the
percentage of investment in other than "Permitted Investments" as defined by the
indenture. The indenture allows for no more than 15% of total invested assets to
be in non-investment grade securities as defined above. At December 31, 2001,
approximately 21% of SIG's investment portfolio was invested in equity
securities and non-investment grade bonds. The Company cured this covenant
violation as of March 29, 2002 via the sale of approximately $8 million of the
non-investment grade securities and the reinvestment of the proceeds in
Permitted Investments.
During 2001, Granite Re purchased Preferred Securities bearing a principal
amount of $17,460,000. During 2000, Granite Re and Granite purchased Preferred
Securities bearing principal amounts of $18,000,000 and $5,000,000,
respectively. As a result, the Company's balance sheet as of December 31, 2001
presents a net Preferred Securities balance of $94,540,000. The Company's total
purchases of Preferred Securities resulted in an increase of $39,690,000 to the
Company's consolidated stockholders' equity as of December 31, 2001.
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, 2001 and 2000.
(b) Common Shares
An unlimited number of common shares of which 5,393,698 and 5,776,398 were
outstanding as of December 31, 2001 and 2000, respectively. The Company did not
issue any common shares during either 2001 or 2000. The Company purchased
382,700 of its common shares for an aggregate consideration of $218,000 during
2001. The Company purchased 100,000 of its common shares for an aggregate
consideration of $185,000 during 2000.
10. INCOME TAXES:
Goran and Granite file separate Canadian income tax returns.
SIGF files a separate U.S. federal income tax return.
SIG files a consolidated U.S. federal income tax return with its wholly-owned
subsidiaries. Intercompany tax sharing agreements between SIG and its
wholly-owned subsidiaries provide that income taxes will be allocated based upon
separate return calculations in accordance with the Internal Revenue Code of
1986, as amended.
A reconciliation of the differences between federal tax computed by applying the
U.S. federal statutory rate of 35% to income before income taxes and the income
tax provision is as follows (in thousands):
2001 2000 1999
-------- --------- ---------
Computed income taxes (benefit) at statutory rate $(7,975) $(17,981) $(15,682)
Goodwill. . . . . . . . . . . . . . . . . . . . . -- 12,176 779
Other . . . . . . . . . . . . . . . . . . . . . . 3,377 (4,154) (619)
Tax Exempt (Income) Loss. . . . . . . . . . . . . (223) (3,443) 88
-------- --------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . $(4,821) $(13,402) $(15,434)
---------
Valuation allowance . . . . . . . . . . . . . . . 4,821 11,253 21,852
-------- --------- ---------
Income tax expense. . . . . . . . . . . . . . . . $ -- $ (2,149) $ 6,418
======== ========= =========
The net deferred tax asset at December 31, 2001 and 2000 is comprised of the
following (in thousands):
2001 2000
-------- --------
Deferred tax assets:
Unpaid losses and loss adjustment expenses $ 1,358 $ 2,899
Unearned premiums. . . . . . . . . . . . . 1,159 2,633
Allowance for doubtful accounts. . . . . . 2,582 1,302
Unrealized losses on investments . . . . . 926 1,378
Net operating loss carryforwards . . . . . 26,705 25,764
Other. . . . . . . . . . . . . . . . . . . 15,732 8,758
-------- --------
Deferred tax assets . . . $48,462 $42,734
-------- --------
Deferred tax liabilities:
Deferred policy acquisition costs. . . . . $ (168) $(2,259)
Other. . . . . . . . . . . . . . . . . . . (1,157) (892)
-------- --------
Deferred Tax Liabilities . . . . . . . . . $(1,325) $(3,151)
-------- --------
$47,137 $39,583
Valuation allowance . . . 47,137 39,583
-------- --------
Net deferred tax assets . $ -- $ --
======== ========
At December 31, 2001 the Company's net deferred tax assets are fully offset by a
valuation allowance. The company will continue to assess the valuation
allowance and to the extent it is determined that such allowance is no longer
required, the tax benefit of the corresponding portion of remaining net deferred
tax assets will be then be recognized.
As of December 31, 2001, the Company has unused net operating loss carryovers
available as follows (in thousands):
Goran &
Year expiring SIG Granite SIGF Total
-------- -------- ------ -------
2002 . . . . . $ 126 649 775
2003 . . . . . 1,016 1,016
2004 . . . . . 467 467
2005 . . . . . 1,659 1,659
2006 . . . . . 1,113 1,113
2007 . . . . . 423 423
2017 . . . . . $ 4,368 4,368
2018 . . . . . 1,295 1,295
2019 . . . . . 35,005 -- 861 35,866
2020 . . . . . 17,096 -- 47 17,143
2021 . . . . . 311 311
Capital Losses -- 7,472 -- 7,472
-------- -------- ------ -------
TOTAL. . . . . $ 52,227 $ 12,799 $6,882 $71,908
======== ======== ====== =======
Approximately $12 million of SIG's total unused net operating loss carryover was
generated by the discontinued operations. The loss generated by the discontinued
operations is available for use by SIG's continuing operations. SIG's U.S.
Federal income tax filings for years prior to 2000 have been examined by the
U.S. Internal Revenue Service.
11. LEASES:
The Company leases buildings, furniture, cars and equipment under operating
leases. Operating leases generally include renewal options for periods ranging
from two to seven years and require the Company to pay utilities, taxes,
insurance and maintenance expenses.
The following is a schedule of future minimum lease payments under cancelable
and non-cancelable operating leases for each of the five years succeeding
December 31, 2000 and thereafter, excluding renewal options (in thousands):
Year Ending December 31:
2002 . . . . . . . . . . $1,449
2003 . . . . . . . . . . 499
2004 . . . . . . . . . . 202
2005 . . . . . . . . . . 131
2006 and Thereafter. . . 166
Rental expense charged to operations in 2001, 2000 and 1999 amounted to
$1,749,000, $1,848,000, and $2,370,000, respectively, including amounts paid
under short-term cancelable leases.
12. REINSURANCE:
The Company limits the maximum net loss that can arise from a large risk, or
risks in concentrated areas of exposure, by reinsuring (ceding) certain levels
of risks with other insurers or reinsurers, either on an automatic basis under
general reinsurance contracts known as "treaties" or by negotiation on
substantial individual risks. Such reinsurance includes quota share, excess of
loss, stop-loss and other forms of reinsurance on essentially all property and
casualty lines of insurance. The Company remains contingently liable with
respect to reinsurance ceded, which would become an ultimate liability of the
Company in the event that such reinsuring companies might be unable, at some
later date, to meet their obligations under the reinsurance agreements. In
addition, the Company assumes reinsurance on certain risk.
The Company commuted the accident year 2000 portion of the reinsurance treaty
with National Union Fire Insurance Company. The Company recognized the amounts
received from National as a reduction of losses and LAE paid (thereby increasing
losses and LAE incurred) to recognize the effect of releasing National from its
obligations under the treaty. There was no effect on premiums earned, losses
incurred, LAE incurred or commission in the 2001 income statement due to this
commutation.
The Company sold 100% of its 2001 crop year business to Acceptance Insurance
Companies, Inc. ("Acceptance") effective June 6, 2001. The agreements are
without recourse as they relate to the net profit or loss on the 2001 crop year
book of business. The sale was approved by the Indiana Department of Insurance.
Reinsurance activity for 2001, 2000 and 1999, which includes reinsurance with
related parties, is summarized as follows (in thousands):
2001 Gross Ceded Net
---- ------- ----- ------
Premiums written $193,186 $(106,324) $ 86,862
Premiums earned 166,312 (58,115) 108,197
Incurred losses and loss adjustment expenses 135,148 (39,932) 95,216
Commission expenses (income) 19,130 (25,716) (6,586)
2000 Gross . . . Ceded Net
---- ------- ----- ------
Premiums written $182,099 $ (78,637) $103,462
Premiums earned 200,278 (54,746) 145,532
Incurred losses and loss adjustment expenses 154,929 (41,161) 113,768
Commission expenses (income) 22,275 (14,043) 8,232
1999 Gross . . . . Ceded Net
---- ------- ----- ------
Premiums written 236,401 7,361 243,762
Premiums earned 254,445 7,355 261,800
Incurred losses and loss adjustment expenses 239,035 3,373 242,408
Commission expenses (income) 27,985 435 28,420
Amounts recoverable from reinsurers relating to unpaid losses and loss
adjustment expenses were $30,181,000 and $23,252,000 as of December 31, 2001 and
2000, respectively. These amounts are reported as assets and are not netted
against the liability for loss and LAE in the accompanying Consolidated Balance
Sheets.
13. RELATED PARTY TRANSACTIONS:
The Company and its subsidiaries have entered into transactions with various
related parties including transactions with Symons International Group Ltd.
("SIGL"), the Company's majority shareholder.
The following balances were outstanding at December 31 (in thousands):
2001 2000
--------- --------
Gross amounts due from (to) directors and officers. $ 3,772 $ 2,054
Other gross amounts due from (to) related parties . 8,844 9,087
--------- --------
Gross receivables (payables). . . . . . . . . . . . $ 12,616 $11,141
Reserve for uncollectibility. . . . . . . . . . . . (11,486) (6,887)
========= ========
Net receivables (payables). . . . . . . . . . . . . $ 1,130 $ 4,254
========= ========
The following transactions occurred with related parties in the years ended
December 31 (in thousands):
2001 2000 1999
------ ------ ------
Consulting fees charged by various related parties $ 800 $1,895 $3,652
Management fees charged by SIGL. . . . . . . . . . $(100) $ 900 $ 201
Approximately 23% and 50% of the amounts due from officers and directors were
non-interest-bearing on December 31, 2001 and 2000, respectively.
SIG paid $-0-, $1,846,000 and $3,112,000 in 2001, 2000 and 1999, respectively,
for consulting and other services to a vendor owned in part by a relative of
certain directors of the Company. The consulting and other services were for the
conversion of SIG's nonstandard automobile operating system. SIG capitalized
these costs as part of its nonstandard automobile operating system.
Approximately 90% of these payments are for services provided by consultants and
vendors unrelated to the Company.
In 1989, the Company fully reserved a loan owed by a subsidiary of SIGL. SIGL
guaranteed the loan and pledged shares of Goran ("escrowed shares") as security
for the loan. The outstanding loan balance was $3,340,000 (Canadian dollars) for
the periods ending December 31, 2001 and 2000. This loan balance continues to be
guaranteed by SIGL and is secured with 100,000 shares of Goran owned by SIGL.
The Company leases office space in Canada from a relative of certain directors
of The Company. The rent paid was $35,000, $40,000 and $10,000 as of December
31, 2001, 2000 and 1999, respectively.
In 1999, Granite Re issued a performance bond in favor of Tritech Financial
Systems Inc. ("Tritech") in the amount of $328,000. In August 2000 the creditor
called the bond. Tritech is owned by a relative of certain directors of the
Company. The bond is secured by a guarantee from Tritech, a personal guarantee
from its president and 50,000 shares of Goran's common stock. Tritech is paying
interest on the outstanding balance at a rate of 7.5%. Interest received during
the years ended December 31, 2001 and 2000 was $24,600 and $6,150, respectively.
In December 2001, Superior Insurance Group obtained a line of credit from
Granite Re in the total amount of $2.5 million. At December 31, 2001, $1.3
million was outstanding under the line. This note bears interest at the rate of
prime plus 5.25% for a total of 10.0% at December 31, 2001. Interest is payable
monthly until the principal becomes due on December 20, 2004.
14. REGULATORY MATTERS:
Pafco and IGF are domiciled in Indiana and prepare their statutory financial
statements in accordance with accounting practices prescribed or permitted by
the Indiana Department of Insurance ("IDOI"). While neither Pafco nor IGF has
surplus from which to pay dividends, statutory requirements place limitations on
the amount of funds that can be remitted to SIG from Pafco and IGF. The Indiana
statute allows 10% of surplus in regard to policyholders or 100% of net income,
whichever is greater, to be paid as dividends only from earned surplus; however,
the Consent Orders with the IDOI, described below, prohibit the payment of any
dividends by Pafco and IGF. Superior, Superior American and Superior Guaranty,
are domiciled in Florida and prepare their statutory financial statements in
accordance with accounting practices prescribed or permitted by the Florida
Department of Insurance ("FDOI"). The Florida statute also contains limitations
with regard to the payment of dividends. Superior may pay dividends of up to 10%
of surplus or 100% of net income, whichever is greater, from earned surplus.
Prescribed statutory accounting practices include a variety of publications of
the National Association of Insurance Commissioners ("NAIC"), as well as state
laws, regulations, and general administrative rules. Permitted statutory
accounting practices encompass all accounting practices not so prescribed.
On June 6, 2001 IGF sold substantially all of its crop insurance assets to
Acceptance. On June 24, 2001, following the sale of IGF's crop insurance assets
and as a result of losses experienced by IGF in its crop insurance operations,
the IDOI and IGF entered into a Consent Order (the "Consent Order") relating to
IGF. IGF has discontinued writing new business and its operations are presently
in run off.
The IDOI has continued to monitor the status of IGF. The Consent Order prohibits
IGF from taking any of the following actions without prior written consent of
the IDOI:
- - Sell or encumber any of its assets, property, or business in force,
- - Disburse funds, except to pay direct unaffiliated policyholder
claims and normal operating expenses in the ordinary course of
business (which does not include payment to affiliates except for the
reimbursement of costs for running IGF by SIG, and does not include
payments in excess of $10,000),
- - Lend its funds or make investments, except in specified types of
investments,
- - Incur debts or obligations, except in the ordinary course of
business to unaffiliated parties,
- - Merge or consolidate with another company,
- - Enter into new, or amend existing, reinsurance agreements,
- - Complete, enter into or amend any transaction or arrangement with
an affiliate, or
- - Disburse funds or assets to any affiliate.
The Consent Order requires IGF to provide the IDOI with monthly written updates
and immediate notices of any material change regarding the status of litigation
with Mutual Service Casualty Insurance Company and with Continental Casualty
Company, statutory reserves, number of non-standard automobile insurance
policies in-force by state, and reports of all non-claims related disbursements.
IGF's failure to comply with the Consent Order could cause the IDOI to begin
proceedings to have a rehabilitator or liquidator appointed for IGF to extend
the provisions of the Consent Order.
While IGF is prohibited from writing any new business pursuant to the Consent
Order, the departments of insurance of Florida, Illinois, Minnesota, Missouri,
Nebraska, Virginia and South Carolina have required IGF to cease writing
business in those states. IGF has also agreed with the departments of insurance
of Texas and Washington to note write business in those states, and IGF
presently intends to surrender its certificates of authority in most states in
which it operated prior to the sale to Acceptance.
As a result of the Consent Order, IGF was prohibited from writing new
non-standard automobile insurance in Pennsylvania after July 31, 2001. Prior to
July 31, 2001, the non-standard automobile insurance policies written in
Pennsylvania by IGF accounted for approximately 10% of the total gross written
premiums of SIG. During the third quarter of 2001, the Pennsylvania Department
of Insurance determined that it would not permit new business to be written in
that state by Superior or the Company's other insurance company subsidiaries.
Consequently, total written premiums for 2001 were less than anticipated.
Pafco has been subject to an agreed to order the IDOI since February 17, 2000
which requires Pafco, among other matters, to:
- - Refrain from doing any of the following without the IDOI's prior
written consent: (i) selling assets or business in force or
transferring property, except in the ordinary course of business; (ii)
disbursing funds, other than for specified purposes or for normal
operating expenses and in the ordinary course of business (which does
not include payments to affiliates, other than under written contracts
previously approved by the IDOI, and does not include payments in
excess of $10,000); (iii) lending funds; (iv) making investments,
except in specified types of investments; (v) incurring debt, except
in the ordinary course of business and to unaffiliated parties; (vi)
merging or consolidating with another company; or (vii) entering into
new, or modifying existing, reinsurance contracts.
- - Reduce its monthly auto premium writings, or obtain additional
statutory capital or surplus, such that the ratio of gross written
premium to surplus and net written premium to surplus does not exceed
4.0 and 2.4, respectively; and provide the IDOI with regular reports
demonstrating compliance with these monthly writings limitations.
- - Continue to comply with prior IDOI agreements and orders to
correct business practices under which Pafco must provide monthly
financial statements to the IDOI, obtain prior IDOI approval of
reinsurance arrangements and affiliated party transactions, submit
business plans to the IDOI that address levels of surplus and net
premiums written, and consult with the IDOI on a monthly basis.
Pafco's inability or failure to comply with any of the above could result in the
IDOI requiring further reductions in Pafco's permitted premium writings or in
the IDOI instituting future proceedings against Pafco. Restrictions on premium
writings result in lower premium volume. Management fees payable to Superior
Group are based on gross written premium; therefore lower premium volume results
in reduced management fees paid by Pafco.
Pafco has agreed with the Iowa Department of Insurance ("IADOI") that it will
not write any new non-standard business in Iowa, until such time as Pafco has
reduced its overall non-standard automobile policy counts in the state or has:
- - Increased surplus, or
- - Has achieved a net written premium to surplus ratio of less than
three to one, or
- - Has surplus reasonable to its risk.
Pafco has continued to service existing policyholders and renew policies in Iowa
and provide policy count information on a monthly basis in conformance with
IADOI requirements.
Superior and Pafco also provide monthly financial information to the departments
of insurance in certain states in which they write business, and Pafco has
agreed to obtain IDOI prior approval of any new affiliated party transactions.
The financial review of Superior for the year ended December 31, 1999 by the
FDOI has been completed and the FDOI issued its final report during the fourth
quarter of 2001. The FDOI's final report recommended additional examination of
compliance issues and financial records accuracy for years subsequent to 1999.
The FDOI took no further action.
On July 7, 2000, the FDOI issued a notice of its intent to issue an order (the
"Notice") which principally addressed certain policy and finance fee payments by
Superior to Superior Group. A formal administrative hearing to review the Notice
and a determination that the order contemplated by the Notice not be issued was
held in February 2001. The administrative law judge entered a recommended order
on June 1, 2001 that was acceptable to SIG. On August 30, 2001, the FDOI
rejected the recommended order and issued its final order which SIG believes
improperly characterized billing and policy fees paid by Superior to Superior
Group. Superior filed an appeal of the final order to Florida District Court. On
March 4, 2002, the FDOI filed a petition in the Circuit Court of the Second
Judicial Circuit in and for Leon County, Florida which seeks court enforcement
of the FDOI's final order. Superior filed a motion with the FDOI for a stay of
the FDOI's final order. Superior also filed a motion with the District Court of
Appeals that was denied pending a ruling from the FDOI on Superior's motion for
stay.
In 1999, Superior ceased writing business in Illinois and agreed to obtain the
approval of the Illinois Department of Insurance prior to writing any new
business in Illinois. In July 2001, Superior agreed with the Department of
Insurance in Texas to obtain its prior approval before writing any new business
in that state. On October 9, 2001, the State Corporation Commission of Virginia
issued an order to take notice regarding an order suspending Superior's license
to write business in that state, which Superior believes is unwarranted. An
administrative hearing for a determination that the suspension order not be
issued was held March 5, 2002. The nonstandard automobile insurance policies
written in Virginia by Superior accounted for approximately 13.1% of SIG's total
gross written premiums in 2001. A decision has not yet been rendered, and
although Superior does not expect an adverse decision, Superior would appeal any
decision that prohibits it from writing business in Virginia.
SIG's operating subsidiaries, their business operations, and their transactions
with affiliates, including SIG, are subject to regulation and oversight by the
IDOI, the FDOI, and the insurance regulators of other states in which the
subsidiaries write business. SIG is a holding company and all of its operations
are conducted by its subsidiaries. Regulation and oversight of insurance
companies and their transactions with affiliates is conducted by state insurance
regulators primarily for the protection of policyholders and not for the
protection of other creditors or of shareholders. Failure to resolve issues with
the IDOI and the FDOI or other state insurance regulators in a mutually
satisfactory manner could result in future regulatory actions or proceedings
that materially and adversely affect the Company.
The NAIC adopted the Codification of Statutory Accounting Principles guidance
("Codification"), which replaces the Accounting Practices and Procedures manual,
as the NAIC's primary guidance on statutory accounting effective January 1,
2001. The IDOI and FDOI have adopted Codification.
The changes in statutory accounting principles resulting from Codification which
impact the Company's U.S. insurance subsidiaries, among other things, limit the
statutory carrying value of electronic data processing equipment and deferred
tax assets in determining statutory surplus. The consolidated statutory surplus
of the Company's U.S. insurance subsidiaries as of December 31, 2001 was $21.9
million.
15. COMMITMENTS AND CONTINGENCIES:
As previously reported, IGF had been a party to a number of pending legal
proceedings and claims relating to agricultural production interruption
insurance policies (the "AgPI Program") which were sold during 1998. All of the
policies of insurance, which were issued in the AgPI Program, were issued by and
under the name of Mutual Service Casualty Insurance Company ("MSI"), a Minnesota
corporation with its principal place of business located in Arden Hills,
Minnesota. Sales of this product resulted in large underwriting losses by IGF.
Approximately $29 million was paid through December 31, 2001 in settlement of
legal proceedings and claims related to the AgPI Program, with payments totaling
approximately $359,000 during 2001. SIG reduced reserves related to AgPI by
approximately $7 million during 2001. SIG has retained a reserve of
approximately $3 million as a provision for expenses and settlement of ongoing
litigation.
All policyholder claims had been settled during 2000. On January 12, 2001 a case
was filed in the Superior Court of California, County of Fresno, entitled S&W
Seed Company, Dudley Silveira, Ric Blanchard and Darrell Silveira v. Mutual
Service Casualty Insurance Company, IGF Insurance Company, and Dibuduo &
Defendis Insurance Agency, Inc.; Case No. OICE CG 00137. The case was brought by
four AgPI policyholders who had previously settled their AgPI claims pursuant to
binding settlement agreements who now seek additional compensation by asserting
through litigation that IGF and the third party carrier paid less than the
policy limits they were promised when they purchased the policy and that each
settling policyholder was forced to accept the lesser amount due their economic
duress - a legal theory recognized in California if certain elements of economic
duress can be established. Discovery is proceeding. On January 16, 2002, the
court entered an order granting IGF's motion for judgment on the pleadings and
required plaintiffs to show an insurable interest. Plaintiffs amended their
complaint attempting to allege an insurable interest and on March 19, 2002, the
court granted IGF's demurrer to the amended complaint. In granting the demurrer
the court held that any recovery payable to plaintiffs would be limited to their
actual economic losses regardless of how much plaintiffs thought they had been
promised (i.e. plaintiffs cannot be paid policy limits without regard to actual
losses incurred). The plaintiffs have ten (10) days in which to again amend
their complaint.
IGF remains a defendant/cross-complainant in eight lawsuits pending in Fresno
County, California, which relate to the cross-claims between the selling
brokers, MSI and IGF. These lawsuits have been consolidated for all purposes and
discovery is proceeding.
IGF and MSI are engaged in arbitration with respect to responsibility for the
AgPI program settlements. The arbitration commenced in December 2000 and the
parties had their first meeting with the panel on Mary 22, 2001. At that
meeting, MSI moved for an order requiring IGF to post pre-hearing security
through the issuance of a letter of credit in the amount of $39 million. Over
IGF's objection, in a two to one vote, the panel ordered IGF to post the $39
million security by June19, 2001. IGF sought relief from the order in the United
States District Court for the District of New Jersey but was unsuccessful.
On November 7, 2001, the arbitration panel considered a petition for default
judgment against IGF based on IGF's failure to post the pre-hearing security. On
November 23, 2001, the arbitration panel issued an order denying MSI's motion
for default judgment and requiring IGF to place $600,000 in an escrow account to
cover MSI's prospective legal expenses. The panel also continued its original
order that required IGF to post the $39 million security. IGF has deposited
$600,000 into an escrow account as required by the arbitration panel but has not
posted the $39 million letter of credit and is financially unable to do so.
On June 25, 2001, MSI filed a complaint for preliminary and permanent injunctive
relief and damages (the "MSI Complaint") against SIG, IGF, IGFH, Granite Re,
Goran and certain affiliates of those companies, as well as certain members of
the Symons family, and Acceptance in the United States District Court for the
Southern District of Indiana, Indianapolis Division. The MSI Complaint alleges
that the June 6, 2001 transfer of IGF's assets to Acceptance and the payments by
Acceptance to SIG, Goran and Granite Re violated Indiana law and are voidable.
In addition, the MSI Complaint alleges that Acceptance, SIG, Goran, IGFH and the
Symons Family are liable to MSI for the entire $39 million claim which MSI is
asserting against IGF in the arbitration proceeding on theories of successor
liability and "piercing the corporate veil." The MSI Complaint seeks preliminary
and permanent injunctive relief against the defendants, an order voiding the
various transactions between and among the defendants and an order determining
that the defendants are directly responsible to MSI for MSI's $39 million claim
against IGF.
The defendants filed answers to the MSI Complaint denying the material
allegations and asserting affirmative defenses to the MSI Complaint. A hearing
on MSI's Motion for Preliminary Injunctive Relief was held Thursday, August 2,
2001. On August 3, 2001, the court denied MSI preliminary injunctive relief. On
January 7, 2002, MSI filed an amended complaint which added Superior Group
Management, Superior Group, Superior and Pafco as defendants (the "MSI Amended
Complaint"). The MSI Amended Complaint asserts claims substantively identical to
the claims in the MSI Complaint. On February 21, 2002, the defendants filed
answers to the MSI Amended Complaint and denied the material allegations
contained in the MSI Amended Complaint and asserted affirmative defenses.
Should MSI be successful in obtaining permanent injunctive relief against the
Company and/or its affiliates, any such relief would have an adverse impact upon
the Company and its affiliates and their respective assets and operations.
Further, in the event MSI is successful in voiding the various transactions
between the defendants or the defendants are determined to be responsible to MSI
for MSI's $39 million claim against IGF, those orders and determinations also
could have an adverse effect upon the Company and its affiliates and their
respective assets and operations.
As previously reported in Goran's Form 8-K filed on August 2, 2001, SIG, IGFH
and IGF, are parties to a "Strategic Alliance Agreement" dated February 28, 1998
(the "SAA") with Continental Casualty Company ("CNA"), pursuant to which IGF
acquired certain crop insurance operations of CNA. Through reinsurance
agreements, CNA was to share in IGF's profits or losses on IGF's total crop
insurance business. By letter dated January 3, 2001, CNA gave notice pursuant to
the SAA of its exercise of the "Put Mechanism" under the SAA effective February
19, 2001. According to the SAA, upon exercise of the Put Mechanism, IGFH is
obligated to pay CNA an amount equal to 5.85 times "Average Pre-Tax Income", an
amount based in part upon payments made to CNA under the SAA. The SAA further
provided that 30 days after exercise of the Put, IGF will execute a promissory
note payable six months after the exercise of the Put in the principal amount
equal to the amount owed, as specified by the SAA. In a letter dated March 20,
2001, CNA also asserted a claim for amounts allegedly due under reinsurance
agreements for the 2000 crop year.
Also, as previously reported in Goran's Form 8-K filed on August 2, 2001, SIG
believes it has claims against CNA and defenses to CNA's claim that may
ultimately offset or reduce amounts owed to CNA. SIG and CNA engaged in
discussions regarding possible alternatives for the resolution of their
respective claims against each other. Those discussions ultimately proved to be
unsuccessful.
Following the failure of settlement discussions, on June 4, 2001, IGF, IGFH and
SIG filed a complaint against CNA (the "IGF Complaint") in the United States
District Court for the Southern District of Indiana, Indianapolis Division. The
IGF Complaint asserts claims against CNA for fraud and constructive fraud in
connection with the SAA and breach of contract and seeks relief against CNA for
compensatory and punitive damages. On June 27, 2001, CNA filed its "Answer,
Separate Defenses and Counterclaim", in which CNA generally denied the material
allegations of the IGF Complaint and asserted various defenses to those claims.
On June 6, 2001, CNA filed a complaint against IGF, IGFH and SIG in the United
States District Court for the Southern District of Indiana, Indianapolis
Division (the "CNA Complaint"), asserting claims based on the SAA and related
agreements for approximately $25 million allegedly owed CNA by virtue of its
exercise of the Put Mechanism, $3 million for amounts allegedly due under
reinsurance agreements for the 2000 crop year, $1 million for certain "fronting
costs," and $1 million pursuant to a note executed by IGFH to CNA's affiliate in
connection with the acquisition by IGFH of North American Crop Underwriters,
Inc. in 1998. CNA also asserted claims to the effect that the June 6, 2001 sale
of IGF assets to Acceptance resulted in payments of funds to Goran, SIG and
Granite Re, which funds allegedly should have been paid to IGF instead. On June
6, 2001, CNA asked the district court to enter a temporary restraining order
preventing IGF, IGFH and SIG from disposing of the proceeds received by them in
connection with the sale of IGF assets to Acceptance. In an emergency hearing,
the court denied CNA the relief it requested, without prejudice to
reconsideration of those issues at a future time. CNA has since amended the CNA
Complaint to add Goran and Granite Re as defendants. CNA's counterclaim in
response to the IGF Complaint asserts essentially the same claims against the
same parties as the amended CNA Complaint.
On September 20, 2001 the court ordered a consolidation of the two cases. On
December 4, 2001, CNA filed an Amended Answer and Counterclaim that added Pafco,
Superior and certain members of the Symons family as counterdefendants. CNA's
Amended Answer and Counterclaim also alleges that IGF, IGFH, SIG, and the other
counterdefendants are alter egos of each other and are directly liable to CNA
for its claims. Discovery in the case is proceeding. Although SIG continues to
believe that it has claims against CNA and defenses to CNA's claims which may
offset or reduce amounts owing by SIG or its affiliates to CNA, there can be no
assurance that the ultimate resolution of the claims asserted by CNA against SIG
and its affiliates will not have a material adverse effect upon the Company's
and its affiliates' financial condition or results of operations.
The California Department of Insurance ("CDOI") filed a Notice of Noncompliance
against Superior on June 29, 2001, which alleged that broker fees were charged
by independent brokers in violation of California law. SIG and the CDOI agreed
to a resolution of the matters raised in the Notice of Noncompliance by a
Stipulation and Consent Order entered on December 26, 2001 wherein Superior
agreed to pay the CDOI a penalty in the amount of $200,000 in settlement of the
action.
The Company is a defendant in a case filed on February 23, 2000, in the United
States District Court for the Southern District of Indiana entitled Robert Winn,
et al. v. Symons International Group, Inc., et al., Cause No. IP 00-0310-C-B/S.
Other parties named as defendants are SIG, three individuals who were or are
officers or directors of SIG or of Goran, PricewaterhouseCoopers LLP and
Schwartz Levitsky Feldman, LLP. The case purports to be brought on behalf of a
class consisting of purchasers of SIG's stock or Goran's stock during the period
February 27, 1998, through and including November 18, 1999. Plaintiffs allege,
among other things, that defendants misrepresented the reliability of SIG's
reported financial statements, data processing and financial reporting systems,
internal controls and loss reserves in violation of Section 10(b) of the
Securities Exchange Act of 1934 ("1934 Act") and SEC Rule 10b-5 promulgated
thereunder. The individual defendants are also alleged to be liable as
"controlling persons" under Sec.20(a) of the 1934 Act. The Company, SIG and the
individual defendants filed a motion to dismiss the amended consolidated
complaint for failure to state a claim and for failure to plead with
particularity as required by Fed. R. Civ. P.9 (b) and the Private Securities
Litigation Reform Act of 1995. The accounting firms also filed motions to
dismiss. On February 19, 2002 the court granted in part and denied in part
defendants' motion to dismiss. On March 15, 2002 the Company, SIG and the
individual defendants filed a motion for reconsideration of the court's ruling
on the motion to dismiss, or alternatively to certify an order for appeal.
Superior is a defendant in a case filed on May 8, 2001 in the United States
District Court for the Southern District of Florida entitled The Chiropractic
Centre, Inc. v. Superior Insurance Company which purports to be brought on
behalf of a class consisting of healthcare providers improperly paid discounted
rates on services to patients based upon a preferred provider contract with a
third party. The plaintiff alleges that Superior breached a third party
beneficiary contract, committed fraud and engaged in racketeering activity in
violation of federal and Florida law by obtaining discounted rates offered by a
third party with whom the plaintiff contracted directly. On September 28, 2001
the case was consolidated with fifteen or more similar actions. On October 29,
2001 Superior filed a motion to dismiss the action for lack of jurisdiction,
which is pending. Superior intends to vigorously defend the claims brought
against it.
IGF is a defendant in a declaratory action entitled Kevin L. Stevens, Bank of
America, Conservator of the Estate of Samuel Jay Ramsey and Gael Ramsey v. IGF
Insurance Company originally filed on February 21, 2001 in the Circuit Court of
Green County, Missouri. The action was subsequently removed to the Federal
District Court for the Western District of Missouri. On October 11, 2001, the
Federal District Court granted declaratory judgment in favor of the Company's
insured, Stevens, and held that IGF was responsible for payment of the premium
attributable to a $15,000,000 appeal bond for Stevens' appeal from a judgment
against him in a related personal injury action. IGF believes that the District
Court erred in granting declaratory judgement for Stevens and in holding that
IGF is responsible for payment of the premium on the bond. IGF has appealed to
the United States Court of Appeals for the Eighth Circuit for relief from the
declaratory judgment. In the event IGF is ultimately required to pay the premium
on the appeal bond, it would have a material adverse impact on IGF's financial
position.
Superior is a defendant in a case filed September 15, 2000 in the Circuit Court
for Lee County, Florida entitled Charles L. Fulton, D.C. v. Superior Insurance
Company. The case is purported to be brought on behalf of a class consisting of
healthcare providers that rendered treatment to and obtained a valid assignment
of benefits from persons insured by Superior. The court granted Superior's
motions to dismiss the original and amended complaints but denied Superior's
motion to dismiss the second amended complaint. The court is permitting
plaintiff to go forward with class discovery. The plaintiff alleges that
Superior reduced or denied claims for medical expenses payable to the plaintiff
without first obtaining a written report in violation of Florida law. The
plaintiff also alleges that Superior inappropriately reduced the amount of
benefits payable to the plaintiff in breach of Superior's contractual
obligations to the plaintiff. Superior believes the allegations of wrongdoing in
violation of law are without merit and intends to vigorously defend the claims
brought against it.
Superior is a defendant in a case now entitled Oviedo Family Chiropractic
Center, P.A. v. Superior Insurance Company originally filed February 4, 2000 in
the Circuit Court for Dade County, Florida and entitled Medical Re-Hab Center v.
Superior Insurance Company. The court granted Superior's motions to dismiss the
original and first amended complaints. The plaintiff has filed a motion for
leave to file a second amended complaint which is pending. The case purports to
be brought on behalf of a class consisting of (i) healthcare providers that
rendered treatment to Superior insureds and claimants of Superior insureds and
(ii) such insureds and claimants. The plaintiff alleges that Superior reduced
medical benefits payable and improperly calculated interest in violation of
Florida law. Superior believes the claim is without merit and intends to
vigorously defend the charges brought against it.
Superior Guaranty is a defendant in a case filed on October 8, 1999, in the
Circuit Court for Manatee County, Florida entitled Patricia Simmons v. Superior
Guaranty Insurance Company. The case purports to be brought on behalf of a class
consisting of purchasers of insurance from Superior Guaranty. The plaintiff
alleges that the defendant charged interest in violation of Florida law.
Superior Guaranty believes that the allegations of wrongdoing as alleged in the
complaint are without merit and intends to vigorously defend the claims brought
against it.
Superior Guaranty is a defendant in a case filed on November 26, 1996, in the
Circuit Court for Lee County, Florida entitled Raed Awad v. Superior Guaranty
Insurance Company, et al. The case purports to be brought on behalf of a class
consisting of purchasers of insurance from Superior Guaranty. The plaintiffs
allege that the defendant charged premium finance service charges in violation
of Florida law. Superior Guaranty believes that the allegations of wrongdoing as
alleged in the complaint are without merit and intends to vigorously defend the
claims brought against it.
On July 7, 2000 the FDOI issued a notice of its intent to issue an order (the
"Notice") which principally addressed certain policy and finance fee payments by
Superior to Superior Group. A formal administrative hearing to review the Notice
and a determination that the order contemplated by the Notice not be issued was
held in February 2001. The administrative law judge entered a recommended order
on June 1, 2001 that was acceptable to SIG. On August 30, 2001 the FDOI rejected
the recommended order and issued its final order which SIG believes improperly
characterizes billing and policy fees paid by Superior to Superior Group.
Superior filed an appeal of the final order to the Florida District Court. On
March 4, 2002, the FDOI filed a petition in the Circuit Court of the Second
Judicial Circuit in and for Leon County, Florida which seeks enforcement of the
FDOI's final order. Superior filed a motion with the FDOI for stay of the FDOI's
final order. Superior also filed a motion with the District Court of Appeals
that was denied pending a ruling from FDOI on Superior's motion for stay.
See note 14, "REGULATORY MATTERS", for additional legal matters involving
insurance regulatory matters.
The Company's insurance subsidiaries are parties to other litigation arising in
the ordinary course of business. The Company believes that the ultimate
resolution of these lawsuits will not have a material adverse effect on its
financial condition or results of operations. The Company, through its claims
reserves, reserves for both the amount of estimated damages attributable to
these lawsuits and the estimate costs of litigation.
The Company and its subsidiaries are named as defendants in various other
lawsuits relating to their business. Legal actions arise from claims made under
insurance policies issued by the Company's subsidiaries. The Company in
establishing its loss reserves has considered these actions. The Company
believes that the ultimate disposition of these lawsuits will not materially
affect the Company's operations or financial position.
SIG is a 50% owner in a limited liability corporation ("LLC") established to
provide business services to the Company and an unrelated third party. The fair
market value of the LLC's operating assets approximated its outstanding debt at
December 31, 2001.
16. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid/(received) for income taxes and interest are summarized as follows (in
thousands):
2001 2000 1999
----- -------- ---------
Cash paid/(received) for federal income taxes, net of refunds $ -- $(6,134) $(17,952)
Cash paid for interest on trust preferred . . . . . . . . . . $ -- $ -- $ 12,825
17. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS:
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair value of the Company's financial instruments.
Considerable judgment is required to develop these fair values and, accordingly,
the estimates shown are not necessarily indicative of the amounts that would be
realized in a one-time, current market exchange of all of the Company's
financial instruments.
a) FIXED MATURITY, EQUITY SECURITIES, AND OTHER INVESTMENTS: Fair
values for fixed maturity and equity securities are based on quoted
market prices.
b) SHORT-TERM INVESTMENTS, AND CASH AND CASH EQUIVALENTS: The
carrying value for assets classified as short-term investments, and
cash and cash equivalents in the accompanying Consolidated Balance
Sheets approximates their fair value.
c) SHORT-TERM DEBT: The carrying value for short-term debt
approximates fair value.
d) PREFERRED SECURITIES: There is not an active market for the
Preferred Securities; however, the estimated market value of the
entire issue as of December 31, 2001 was $9,000,000.
18. STOCK OPTION PLANS:
In June 1986, Goran adopted the Goran Capital Inc. 1986 Stock Option Plan (the
"Goran Stock Option Plan"). The Goran Stock Option Plan provides Goran the
authority to grant nonqualified stock options and incentive stock options to
officers and key employees of Goran and its subsidiaries and nonqualified stock
options to non-employee directors of Goran. Options have been granted at an
exercise price equal to the fair market value of the Goran stock at date of
grant. The outstanding stock options vest and become exercisable at varying
terms ranging from immediate vesting to equal installments over terms up to 5
years. On June 15, 1999, all Goran options granted at an exercise price in
excess of CDN$14.70, were repriced to CDN$14.70 per share. In 2000, certain
officers and non-employee directors of Goran surrendered a total of 515,771
stock options.
Information regarding the Goran Stock Option Plan is summarized below (in
Canadian dollars):
2001 2000 1999
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- ------ --------- ------ -------- ------
Outstanding at the beginning
of the year. . . . . . . . . 195,937 $ 8.36 660,708 $14.17 695,572 $29.92
Granted . . . . . . . . . . . 633,750 $ 0.90 100,000 $ 2.35 -- --
Exercised . . . . . . . . . . -- -- -- -- -- --
Forfeited/Surrendered . . . . 38,500 $14.16 (564,771) $14.15 (34,864) $14.69
------- --------- --------
Outstanding at the end of the
Year . . . . . . . . . . . . 791,187 $ 2.09 195,937 $ 8.36 660,708 $14.17
======= ========= ========
Options exercisable at year
End. . . . . . . . . . . . . 682,520 $ 2.29 88,605 $14.62 619,035 $14.18
Available for future grant. . 79,813 -- 675,063 -- 210,292 --
On November 1, 1996, SIG adopted the Symons International Group, Inc. 1996 Stock
Option Plan (the "SIG Stock Option Plan"). The SIG Stock Option Plan provides
SIG the 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. Options
have been granted at an exercise price equal to the fair market value of the
SIG's stock at date of grant. All of the outstanding stock options vest and
become exercisable in three equal installments on the first, second and third
anniversaries of the date of grant. On October 14, 1998, all SIG options were
repriced to $6.3125 per share. In November 1999, certain officers and
non-employee directors of SIG surrendered a total of 1,153,600 stock options.
Information regarding the SIG Stock Option Plan is summarized below:
2001 2000 1999
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ------- ---------- ------- ----------- -------
Outstanding at the
Beginning of the year . . . 1,344,833 $0.9400 213,033 $6.3125 1,457,833 $6.3125
Granted . . . . . . . . . . -- -- 1,287,000 $0.5436 -- $6.3125
Exercised . . . . . . . . . -- -- -- -- (1,667) $6.3125
Forfeited/Surrendered . . . (73,500) $2.8474 (155,200) $5.0391 (1,243,133) $6.3125
---------- ---------- -----------
Outstanding at the end of
the year . . . . . . . . . 1,271,333 $0.8283 1,344,833 $0.9400 213,033 $6.3125
========== ========== ===========
Options exercisable at year
End. . . . . . . . . . . . 465,333 $1.3180 73,500 $6.3125 120,366 $6.3125
Available for future grant. 228,667 -- 155,167 -- 1,286,967 --
Options Options
Outstanding Exercisable
Weighted weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Life (in years) Price Exercisable Price
- ------------------------- ----------- --------------- ------ ----------- ------
0.50 - $0.8750 1,209,000 8.2 $0.5448 403,000 $0.5455
6.3125 62,333 5.5 $6.3125 62,333 $6.3125
----------- -----------
1,271,333 8.0 465,333
============= ===============
The Board of Directors of Superior Group Management adopted the GGS Management
Holdings, Inc. Stock Option Plan (the "Superior Group Management Stock Option
Plan"), effective April 30, 1996. The Superior Group Management Stock Option
Plan authorizes the granting of nonqualified and incentive stock options to such
officers and other key employees as may be designated by the Board of Directors
of Superior Group Management. Options granted under the Superior Group
Management Stock Option Plan have a term of ten years and vest at a rate of 20%
per year for the five years after the date of the grant. The exercise price of
any options granted under the Superior Group Management Stock Option Plan is
subject to the following formula: 50% of each grant of options having an
exercise price determined by the Board of Directors of Superior Group Management
at its discretion, with the remaining 50% of each grant of options subject to a
compound annual increase in the exercise price of 10%, with a limitation on the
exercise price escalation as such options vest.
Information regarding the Superior Group Management Stock Option Plan is
summarized below:
2001 2000 1999
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- ------ ------- ------ ------- ------
Outstanding at the beginning
of the year. . . . . . . . . 83,432 $54.42 92,232 $51.75 94,732 $51.75
Granted . . . . . . . . . . . -- -- -- -- -- --
Forfeited . . . . . . . . . . (100) $57.65 (8,800) $51.48 (2,500) $51.75
------- ------- -------
Outstanding at the end of the
year . . . . . . . . . . . . 83,332 $57.65 83,432 $54.42 92,232 $51.75
======= ======= =======
Options exercisable at year
end. . . . . . . . . . . . . 83,332 -- 66,726 -- 42,448 --
Available for future grant. . 27,779 -- 27,679 -- 18,879 --
Options Options
Outstanding Exercisable
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Life (in years) Price Exercisable Price
- ------------------------- ----------- --------------- ----- ----------- -----
44.17. . . . . . . . . . 41,667 4.1 $ 44.17 41,667 $ 44.17
71.14. . . . . . . . . . 41,665 4.1 $ 71.14 41,665 $ 71.14
The Company applies U.S. Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretation in accounting for its
stock option plans. Accordingly, no compensation cost has been recognized for
such plans. Had compensation cost been determined, based on fair value at the
grant dates for options granted under the Company stock option plan as well
under both the SIG Stock Option Plan and the GGS Stock Option Plan during 2001,
2000 and 1999 consistent with the method of U.S. SFAS No. 123, "Accounting for
Stock-Based Compensation", the Company's pro-forma net earnings and pro-forma
earnings per share for the years ended December 31, 2001, 2000 and 1999 would
have been as follows:
2001 2001 2000 2000 1999 1999
As Pro- As Pro- As Pro-
Reported Forma Reported Forma Reported Forma
---------- --------- ---------- --------- ---------- ---------
Earnings (loss) from
continuing operations. . . . $ (31,937) $(32,643) $ (63,224) $(63,676) $ (47,000) $(50,596)
Basic and fully diluted EPS
from continuing operations . $ (5.61) $ (5.73) $ (10.86) $ (10.94) $ (8.00) $ (8.61)
Net earnings (loss). . . . . $ (34,093) $(34,799) $ (80,265) $(80,717) $ (62,373) $(65,969)
Basic and fully diluted EPS. $ (5.99) $ (6.11) $ (13.79) $ (13.86) $ (10.61) $ (11.23)
The fair value of each option grant used for purposes of estimating the
pro-forma amounts summarized above is estimated on the grant date using the
Black-Scholes option-pricing model with the weighted average assumptions for
2001 and 2000 shown on the following table:
SIG Goran SIG Goran
2001 2001 2000 2000
Grants Grants Grants Grants
------ ----------- ----------- -----------
Risk-free interest rates --- 2.34% 5.00% 5.00%
Dividend yields --- --- --- ---
Volatility factors --- 156% 106% 106%
Weighted average expected life --- 2.6 years 4.0 years 5.0 years
Weighted average fair value per share --- $ 0.68 $ 0.40 $ 1.31
The Goran stock options are granted and denominated in Canadian dollars. The
pro-forma stock based compensation for these options are translated at the
average rate for the year. The weighted average fair value per share is
translated at the year end rate.
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Quarterly financial information is as follows (in thousands):
First Second Third Fourth Total
-------- -------- --------- --------- ---------
2001
Gross written premiums. . . . . . . . . . . . . $48,338 $49,950 $ 27,348 $ 67,550 $193,186
Net premiums written. . . . . . . . . . . . . . 16,945 27,702 14,684 27,531 86,862
Net premiums earned . . . . . . . . . . . . . . 18,844 26,411 22,943 39,999 108,197
Total revenues. . . . . . . . . . . . . . . . . 22,912 31,444 29,671 44,166 128,193
Net operating earnings (loss) from continuing
operations (1) . . . . . . . . . . . . . . . . (5,803) (1,338) (6,677) (5,943) (20,761)
Net loss from continuing operations . . . . . . (9,547) (3,940) (9,041) (9,409) (31,937)
Basic operating earnings (loss) per share from
continuing operations (1). . . . . . . . . . . (1.00) (.28) (1.29) (1.08) (3.65)
Net loss from continuing operations per share
- basic and diluted. . . . . . . . . . . . . . (1.65) (.68) (1.57) (1.71) (5.61)
2000
Gross written premiums. . . . . . . . . . . . . $59,859 $30,032 $ 45,852 $ 46,356 $182,099
Net premiums written. . . . . . . . . . . . . . 31,859 20,163 32,180 19,260 103,462
Net premiums earned . . . . . . . . . . . . . . 44,467 38,483 34,176 28,406 145,532
Total revenues. . . . . . . . . . . . . . . . . 51,903 43,153 37,524 33,392 165,972
Net operating earnings (loss) from continuing
operations (1) . . . . . . . . . . . . . . . . (3,544) (3,320) (7,573) 2,020 (12,417)
Net loss from continuing operations . . . . . . (7,422) (8,473) (13,523) (33,806) (63,224)
Basic operating earnings (loss) per share from
continuing operations (1). . . . . . . . . . . (0.60) (0.56) (1.31) 0.34 (2.13)
Net loss from continuing operations per share
- basic and diluted. . . . . . . . . . . . . . (1.26) (1.45) (2.35) (5.80) (10.86)
(1) Operating earnings (loss) and per share amounts exclude amortization, interest,
taxes, deferred income, realized capital gains and losses, minority interest and
any extraordinary items.
(2) In the fourth quarter of 2000, the Company recorded an impairment charge related
to goodwill of $33.5 million.
20. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES ("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.
There were no material difference in net earnings or earnings per share in 2001,
2000 and 1999.
(a) Receivables from sale of capital stock
The SEC Staff Accounting Bulletins require that accounts or notes
receivable arising from transactions involving capital stock be
presented as deductions from stockholders' equity and not as assets.
Accordingly, in order to comply with U.S. GAAP stockholders' equity
would be reduced by $1,258,000 at December 31, 2001 and 2000, to
reflect the loans due from certain stockholders which relate to the
purchase of common shares of the Company.
(b) Unrealized gain (loss) on investments
U.S. GAAP requires that unrealized gains and losses on investment
portfolios be included as a component in determining stockholders'
equity. In addition, SFAS No. 115 permits prospective recognition of
unrealized gains (losses) on investment portfolio for year-ends
commencing after December 15, 1993. As a result, stockholders' equity
would be decreased by $2,246,000 and $3,602,000 for the years ended
December 31, 2001 and 2000, respectively.
(c) Discontinued operations
U.S. GAAP requires the netting of all assets and liabilities of
discontinued operations and the presentation of those net assets as a
single line item in the consolidated balance sheets for all periods
presented. There is no impact on stockholders' equity.
(d) Changes in stockholder's equity
A reconciliation of stockholders' equity (deficit) from Canadian
GAAP to U.S. GAAP is as follows (in thousands):
2001 2000
--------- ---------
Stockholders' equity in accordance with Canadian GAAP . $(89,146) $(72,668)
Add (deduct) effect of difference in account for:
Receivables from sale of capital stock (see note a) (1,258) (1,258)
Unrealized gain (loss) on investments (see note b). (2,246) (3,602)
--------- ---------
Stockholders' equity in accordance with U.S. GAAP . . . $(92,650) $(77,528)
========= =========
(e) Comprehensive Income
U.S. GAAP requires the presentation of a statement of
comprehensive income. Canadian GAAP does not require a similar
disclosure. The Company's comprehensive income is as follows (in
thousands):
2001 2000
--------- ---------
Net Income (Loss) per Statement of Operations. $(34,093) $(80,265)
Purchase of Preferred Securities . . . . . . . 20,973 18,717
Change in cumulative translation adjustment. . (472) (304)
Unrealized gain (loss) on investments. . . . . (2,246) (3,602)
--------- ---------
Comprehensive Income (Loss). . . . . . . . . . $(15,838) $(65,454)
========= ---------
21. SUBSEQUENT EVENTS
In March 2002, Granite Re purchased Preferred Securities bearing a principal
amount of $26.5 million at a cost of $2.39 million. After the March 2002
purchases, the Company holds Preferred Securities bearing a total principal
amount of $66.96 million.
22. MANAGEMENT'S PLANS
The financial statements have been prepared on a going concern basis which
assumes the realization of assets and settlement of liabilities in the normal
course of operations. The Company's subsidiary, SIG, which accounts for the
majority of the assets, liabilities and results of operations of the
consolidated entity has experienced significant losses from operations and net
capital deficiency which raise substantial doubt as to SIG's ability to continue
as a going concern. The financial statements do not give effect to adjustments,
if any, that would be necessary should SIG be unable to continue as a going
concern and be required to realize its assets and liquidate its liabilities
other than in the normal course of operations.
The Company reported net losses of $34.1 million and $80.3 million for the years
2001 and 2000, respectively and is a party to a number of legal proceedings and
claims. While the stockholders' equity at December 31, 2001 is a deficit of
approximately $89.1 million, SIG has offsetting thirty-year mandatorily
redeemable trust preferred stock outstanding of $135 million that are not due
for redemption until 2027. SIG's insurance subsidiaries, excluding IGF, have
statutory surplus of approximately $21.9 million. Management has initiated
substantial changes in operational procedures in an effort to return SIG to
profitable levels and to improve its financial condition. SIG has and is
continuing to raise its rates in a market environment where increasing rates and
withdrawal from the market by other companies show positive trends for improving
profitability of nonstandard automobile insurance underwriters.
Beginning in the fourth quarter of 2001 and continuing in January and February
2002, SIG sustained adverse loss experience on a substantial portion of its new
business written in certain markets. In late February and early March 2002, SIG
commenced further analysis of loss ratios by individual agency and a review of
claim settlement procedures. Based on this and other analysis, SIG has, as of
the filing of this document, taken the following actions to improve the
financial position and operating results of SIG:
- - Eliminated reinstatements in all markets (i.e., upon policy
cancellation, the insured must obtain a new policy at prevailing rates
and underwriting guidelines),
- - Terminated or placed on new business moratorium several hundred
agents whose loss ratios were abnormally high when compared to the
average for the remaining agents (these agents accounted for
approximately 16% of SIG's total gross written premium in 2001),
- - Increased underwriting requirements in certain markets including:
higher down payments, new policy fees, and shorter policy terms, and
- - Hired a consultant with significant auto claims experience to
review processes and suggest modifications to the claims function.
The Company expects the above actions to result in a decline of approximately 10
to 15% in SIG's gross written premiums from 2001 levels with a corresponding
decrease in management fees payable to Superior Group, offset by reductions in
operating expenses due to process changes and efficiencies.
Management believes that despite the recent losses and the deterioration in
shareholders equity and statutory surplus, it has developed a business plan
that, if successfully implemented, can improve SIG's operating results and
financial condition in 2002.
23. DISCONTINUED OPERATIONS
As previously announced, IGF sold its crop insurance operations to Acceptance on
June 6, 2001. This business was predominantly written through IGF. The
divestiture of the crop insurance segment transferred ownership of certain crop
insurance accounts, effective with the 2001 crop cycle.
Management does not expect any remaining crop business to be material to the
consolidated financial statements and accordingly has discontinued reporting
crop insurance as a business segment. The results of the crop insurance segment
have been reflected as "Discontinued Operations" in the accompanying
consolidated financial statements.
Summarized results of operations and financial position for discontinued
operations were as follows:
STATEMENTS OF OPERATIONS
(in thousands)
Year Ended December 31,
2001 2000 1999
------------------------- --------- ---------
Gross premiums written. . . . . . . . . . . . . . . . . . $ 256,722 $241,748 $237,286
========================= ========= =========
Net premiums written. . . . . . . . . . . . . . . . . . . $ (308) $ 26,466 $ 12,737
========================= ========= =========
Net premiums earned. . . . . . . . . . . . . . . . $ (308) $ 26,531 $ 14,240
Net investment and fee income. . . . . . . . . . . 1,657 1,229 749
Net realized capital gain. . . . . . . . . . . . . 799 10 21
------------------------- --------- ---------
Total revenues. . . . . . . . . . . . . . . . . . . . . . 2,148 27,770 15,010
------------------------- --------- ---------
Loss and loss adjustment expenses. . . . . . . . . 3,559 40,690 34,225
Policy acquisition and general and administrative
expenses . . . . . . . . . . . . . . . . . . . . . . 654 2,059 215
Interest and amortization expense. . . . . . . . . 91 1,162 1,113
------------------------- --------- ---------
Total expenses. . . . . . . . . . . . . . . . . . . . . . 4,304 43,911 35,553
------------------------- --------- ---------
Loss before income taxes. . . . . . . . . . . . . . . . . (2,156) (16,141) (20,543)
Income taxes:
Current income tax (benefit). . . . . . . . . . . - - (5,852)
Deferred income tax expense . . . . . . . . . . . - - 682
------------------------- --------- ---------
Total income tax expense (benefit). . . . . . . . . . . . - - (5,170)
------------------------- --------- ---------
Loss from operations of discontinued segment. . . . . . . - (16,141) (15,373)
Loss on disposal of discontinued segment. . . . . . . . . (2,156) (900) -
------------------------- --------- ---------
Net loss from discontinued operations . . . . . . . . . . $ (2,156) $(17,041) $(15,373)
========================= ========= =========
- -------------------------------------------------------------------------------
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 a system of internal controls, which is designed to
provide reasonable assurance that accounting records are reliable and to
safeguard the Company's assets. The independent accounting firm of BDO Seidman,
LLP has audited and reported on the Company's consolidated financial statements
for 2001 and 2000. Their opinion is based upon audits conducted by them in
accordance with generally accepted auditing standards to obtain assurance that
the consolidated financial statements are free of material misstatements.
The 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
Chief Executive Officer
March 29, 2002
BOARD OF DIRECTORS AND STOCKHOLDERS OF GORAN CAPITAL INC.
Goran Capital inc.
Toronto, Canada
We have audited the accompanying consolidated balance sheets of Goran Capital
Inc. and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the
related consolidated statements of earnings (loss), changes in shareholders'
equity (deficit) and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America and Canada. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Goran
Capital Inc. and subsidiaries at December 31, 2001 and 2000, and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in Canada.
The consolidated financial statements as at December 31, 1999 and for the year
then ended, prior to the reclassifications made to reflect the Company's crop
insurance segment as discontinued operations, were audited by other auditors who
expressed an opinion without reservation on those statements in their report
dated March 14, 2000, except for Note 23, which is as of March 23, 2000. We have
audited the reclassifications to the 1999 consolidated financial statements and,
in our opinion, such reclassifications, in all material respects, are
appropriate and have been properly applied.
/s/ BDO SEIDMAN, LLP
Grand Rapids, Michigan
March 29, 2002
COMMENTS BY AUDITOR FOR U.S. READERS ON CANADA - U.S. REPORTING DIFFERENCES
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the company's ability to continue as a going concern, such as those described in
Note 22 to the financial statements. Our report to the shareholders dated
March 29, 2002 is expressed in accordance with Canadian reporting standards
which do not permit a reference to such events and conditions in the auditors'
report when these are adequately disclosed in the financial statements.
/s/ BDO SEIDMAN, LLP
Grand Rapids, Michigan
March 29, 2002
STOCKHOLDER INFORMATION
Registrar and Transfer Agent IndependentPublic Accountants
CIBC Mellon Trust Company BDO Seidman LLP
Toronto, Ontario Grand Rapids, Michigan
Annual Meeting of Stockholders
2 Eva Road, Suite 200
Toronto, Ontario Canada M9C 2A8
May 31, 2002
10:00 A.M.
ANNUAL REPORT ON FORM 10-K
A copy of the Annual Report on Form 10-K for Goran Capital Inc. for the year
ended December 31, 2001, filed with the Securities and Exchange Commission, may
be obtained, without charge, upon request to the individual and address noted
under Shareholder Inquiries.
MARKET AND DIVIDEND INFORMATION
As of July 1, 2000 Goran Capital Inc.'s common stock began trading on the OTC
Bulletin Board under the symbol GNCNF.OB. Prior to this date Goran Capital
Inc.'s stock was traded on the NASDAQ Stock Market's National Market. The
shares also trade on the Toronto Stock Exchange.
As of December 31, 2001 there were approximately 100 common stockholders of
record, including many brokers holding shares for the individual clients. The
number of individual stockholders on the same date is estimated at 1000.
The number of commons shares outstanding on December 31, 2001 totaled 5,393,698.
Information relating to the common shares is available through the Toronto Stock
Exchange and the U.S. OTC Bulletin Board. The following table sets forth the
high and low closing sale prices for the common shares for each quarter of 2001,
2000 and 1999.
TORONTO STOCK EXCHANGE
2001 2000 1999
Quarter Ended High Low High Low High Low
- ------------- ---- --- ---- --- ---- -----
March 31 $2.70 $0.90 $4.15 $1.50 $12.37 $7.73
June 30 $1.75 $0.80 $3.50 $1.75 $ 9.75 $7.06
September 30 $1.15 $0.53 $2.84 $1.95 $12.78 $7.40
December 31 $1.25 $0.60 $2.25 $ .50 $ 8.74 $1.95
U.S. OTC BULLETIN BOARD TRADING PRICES
2001 2000 1999
Quarter Ended High Low High Low High Low
- ------------- ---- --- ---- --- ---- -----
March 31 $1.88 $0.75 $2.88 $1.05 $10.73 $8.38
June 30 $1.14 $0.58 $2.44 $1.16 $10.19 $7.31
September 30 $0.80 $0.35 $1.95 $1.25 $13.25 $7.75
December 31 $0.81 $0.41 $1.38 $0.34 $ 8.38 $2.00
52
U.S. OTC Bulletin Board quotations reflect inter-dealer prices without retail
markdown or commission and may not represent actual transactions. Goran Capital
Inc. did not declare or pay cash dividends on its common stock during the years
ended December 31, 2001, 2000 and 1999. Goran Capital Inc. does not plan to pay
cash dividends on its common stock in the foreseeable future.
SHAREHOLDER INQUIRIES
Inquiries should be directed to:
ALAN G. SYMONS
Chief Executive Officer
Goran Capital Inc.
Tel: (317) 259-6302
E-mail: [email protected]
BOARD OF DIRECTORS
G. GORDON SYMONS
Chairman of the Board
Goran Capital Inc.
Symons International Group, Inc.
ALAN G. SYMONS
President, Chief Executive Officer
Goran Capital Inc.
DOUGLAS H. SYMONS
Vice President, Chief Operating Officer
Goran Capital Inc.
President, Chief Executive Officer and Secretary
Symons International Group, Inc.
J. ROSS SCHOFIELD
President, Schofield Insurance Brokers
DAVID B. SHAPIRA
President, Medbers Limited
JOHN K. MCKEATING
Former Partner, Vision 2120, Inc.
RON FOXCROFT
President, Fluke Transportation Group
EXECUTIVE OFFICERS
ALAN G. SYMONS
President, Chief Executive Officer
Goran Capital Inc.
DOUGLAS H. SYMONS
Vice President, Chief Operating Officer and Secretary
Goran Capital Inc.
President, Chief Executive Officer and Secretary
Symons International Group, Inc.
JOHN G. PENDL
Vice President, Chief Financial Officer and Treasurer
Goran Capital Inc.
COMPANY, SIG AND SUBSIDIARY OFFICES
HEAD OFFICE - CANADA
GORAN CAPITAL INC.
2 Eva Road, Suite 200
Toronto, Ontario Canada M9C 2A8
Tel: 416-622-0660
Fax: 416-622-8809
US OFFICE
GORAN CAPITAL INC.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6400
Fax: 317-259-6395
Website: www.gorancapital.com
--------------------
SIG CORPORATE OFFICE
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6300
Fax: 317-259-6395
Website: www.sigins.com
--------------
OTHER SUBSIDIARY OFFICES
Superior Insurance Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6300
Fax: 317-259-6395
Website: www.sigauto.com
---------------
Pafco General Insurance Company
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6300
Fax: 317-259-6395
Superior Insurance Company
280 Interstate North Circle, N.W., Suite 500
Atlanta, Georgia 30339
Tel: 770-952-4885
Fax: 770-988-8583
IGF Insurance Company
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6300
Fax: 317-259-6395
Superior Insurance Company - Claims Office
1745 West Orangewood Road, Suite 210
Orange, California 92826
Tel: 714-978-6811
Fax: 714-978-0353
Superior Insurance Company - Claims Office
6303 Little River Turnpike, Suite 220
Alexandria, Virginia 22312
Tel: 703-916-8001
Fax: 703-916-1783
Superior Insurance Company - Claims Office
700N Central Avenue, Suite 570
Glendale, California 91203
Tel: 818-956-3077
Fax: 818-956-3069
Superior Insurance Company - Claims Office
5503 W Waters Avenue, Suite 500
Tampa, Florida 33634
Tel: 813-887-4878
Fax: 813-243-0268
Superior Insurance Company - Claims Office
141 Union Boulevard, Suite 130
Lakewood, Colorado 80228
Tel: 303-984-7000
Fax: 303-985-1253
Superior Insurance Company- Claims Office
4500 PGA Boulevard, Suite 304A
Palm Beach Gardens, Florida 33418
Tel: 561-622-7831
Fax: 561-622-9741
Superior Insurance Company- Claims Office
7775 Baymeadows Way, Suite 107
Jacksonville, Florida 32256
Tel: Pending
Fax: Pending
Superior Insurance Company- Claims Office
5700 Cleveland Street, Suite 336
Virginia Beach, Virginia 23462
Tel: 757-499-0500
Fax: 757-499-0560