-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TbR9sewKMNkm3MLVBOQInK3UNoTkZXz8PsIUabcuIRmEIhjvvs8GjCb2pgoGC630 HQ2bNd1HkvgsbqF4upPkSA== 0000950130-97-000300.txt : 19970129 0000950130-97-000300.hdr.sgml : 19970129 ACCESSION NUMBER: 0000950130-97-000300 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970128 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTEGON CORP /DE/ CENTRAL INDEX KEY: 0000878660 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 133559471 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-10997 FILM NUMBER: 97512111 BUSINESS ADDRESS: STREET 1: 500 W FIFTH ST CITY: WINSTON SALEM STATE: NC ZIP: 27152 BUSINESS PHONE: 9107702000 MAIL ADDRESS: STREET 1: 500 W FIFTH STREET STREET 2: 500 W FIFTH STREET CITY: WINSTON SALEM STATE: NC ZIP: 27152 10-K405 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 Fiscal Year Ended December 31, 1996 OR [_] 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 001-10997 ---------------- INTEGON CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 13-3559471 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 500 WEST FIFTH STREET 27152 WINSTON-SALEM, NORTH CAROLINA (Zip Code) (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, (910) 770-2000 INCLUDING AREA CODE: SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ------------------------ Common Stock, par value $.01 per share New York Stock Exchange $3.875 Convertible Preferred Stock, New York Stock Exchange par value $.01 per share
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None 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 ((S)229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value based on published prices as of January 24, 1997 of Integon Corporation's voting common stock held by non-affiliates was approximately $185.1 million. As of January 24, 1997, there were 15,736,121 shares outstanding of Integon Corporation's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Selected portions of Integon Corporation's definitive proxy statement for its 1997 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS OVERVIEW Integon Corporation (together with its subsidiaries unless the context otherwise requires, the "Company"), through its wholly owned property and casualty insurance subsidiaries, specializes in the marketing and underwriting of nonstandard automobile insurance to individuals. To a lesser extent, the Company also writes specialty automobile insurance and, in North Carolina, preferred risk automobile insurance. The Company has been writing insurance for more than 25 years and currently markets its products in 29 states through approximately 13,000 independent agencies located principally in the eastern United States. The Company's nonstandard automobile insurance products are designed for drivers who are unable to obtain coverage from standard market carriers due to prior driving records, other underwriting criteria or market conditions. These drivers are normally charged higher premium rates than the rates charged for preferred or standard risk drivers and generally obtain lower liability limits than preferred or standard risk policyholders. The Company's specialty automobile insurance products include business vehicle insurance designed primarily for tradespeople and artisans who have small fleets or lightweight single vehicles, as well as motorcycle insurance. RECENT HISTORY; STRATEGY In October 1994, the Company acquired Bankers and Shippers Insurance Company (which changed its name to Integon National Insurance Company in 1996) ("Bankers and Shippers"), for a purchase price of $153.2 million. The acquisition of Bankers and Shippers, which was also engaged in the nonstandard automobile insurance business, increased to 19 the number of states in which the Company then marketed its products and provided significant geographic diversity. Since the acquisition, the Company has continued to expand into additional states in its effort to become a national provider of nonstandard automobile insurance. Currently, the Company is writing business in 29 states. For the year ended 1995, the Company reported net income of $34.0 million and net income available to common stockholders of $28.4 million. Net premiums written grew 70.7% over 1994 to $620.4 million as a result of the Bankers and Shippers acquisition and increased market penetration in most of the Company's existing states, as well as in new markets. The GAAP combined ratio for 1995 was 95.0%. For the year ended 1996, the Company reported net income of $170,000 and a loss to common stockholders of $5.4 million. While net premiums written increased 28.6% to $798.0 million in 1996 over 1995, the Company's GAAP combined ratio increased to 102.4% from 95.0% in 1995, attributable primarily to a significant increase in the loss ratio from 73.4% to 80.0%. The Company's results for the fourth quarter of 1996 were significantly below those for the 1996 third quarter and those for the fourth quarter of 1995. The Company recorded a net loss of $16.4 million and net loss to common stockholders of $17.8 million for the three months ended December 31, 1996, compared to net income of $10.5 million and net income available to common stockholders of $9.2 million for the comparable 1995 period, and net income of $4.9 million and net income available to common stockholders of $3.5 million for the three months ended September 30, 1996. The Company's loss, expense and combined ratios were 89.1%, 25.6% and 114.7% for the fourth quarter of 1996, compared to 76.8%, 21.9% and 98.7% for the third quarter of 1996 and 74.2%, 20.5% and 94.7% for the fourth quarter of 1995. At December 31, 1996 the Company's statutory premium to surplus ratio increased to 3.248x, compared to 3.03x at September 30, 1996 and 2.74x at December 31, 1995. The deterioration in fourth quarter results was due to a number of factors, including increased frequency, an increase in the Company's expense ratio, deferred acquisition cost writeoffs, an increase in bad debt reserves, a $2.0 million write-down of bonds in its investment portfolio and an increase in the Company's loss and loss 2 adjustment expense ("LAE") reserves of $12.5 million. Increased fourth quarter frequency trends were experienced by the Company in most states, including several of its larger core markets. The loss reserve increase related primarily to less than adequate reserves being set in earlier periods in the 1996 accident year, as the Company was writing business at prices that were inadequate and that attracted segments of business with higher loss frequencies. In addition, the need for increased use of outside adjusters following Hurricane Fran in September 1996 adversely affected the Company's loss and LAE experience in October and November. The Company's expense ratio was adversely impacted in the fourth quarter by increased expenses for beginning the modifications necessary to accommodate the Year 2000. For a discussion of other factors affecting the fourth quarter and year ended December 31, 1996, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." In November 1996, John C Head III, Chairman of the Board, was appointed Chief Executive Officer of the Company, and will continue to serve as such until the Company appoints a replacement pursuant to an on-going executive search. The Company has announced that its focus in 1997 will be on restoring underwriting profits. Growth in net premiums written has slowed, and will continue to be slowed, as the Company seeks to achieve an acceptable combined ratio. During the period of October 1996 through March 1997, the Company has increased or is planning to increase rates in states representing approximately 95% of 1996 net premiums written. These increases vary by state and are expected to range from 3% to 20%. Where rates could not be increased within 30 days because of regulatory constraints, underwriting restrictions were put into place. These restrictions include requiring higher down payments, reducing the number of payments permitted, restricting reinstatement provisions and requiring shorter term policies. Such pricing and underwriting actions may impact the Company's competitive position, insofar as its competitors may be able to offer more attractive policy rates and terms. Management is also continuing to pursue its strategy of the Company being a low-cost provider of nonstandard automobile insurance while maintaining a commitment to provide excellent service to both agents and insureds. The Company is continuing to invest in technology and information systems personnel, which will enhance its current ability to automate certain marketing, underwriting, claims and administrative functions to ensure that the Company will be able to continue to provide excellent service to its agents and insureds. This new automated technology will reduce the manual effort of agents to initiate new business, process payments and endorsements, and communicate with the Company. While such increased investment in technology has resulted, and may in the future result, in an increase in the Company's expense ratio, management believes that such continuing investment is essential for the Company to maintain a competitive position in the industry. On January 28, 1997, the Company announced that Integon Capital I (the "Trust"), a Delaware business trust the beneficial interests represented by the common securities of which are owned by the Company, proposed to sell, pursuant to Rule 144A and Regulation D under the Securities Act of 1933 (the "Securities Act"), $100 million aggregate liquidation amount of Capital Securities, Series A (the "Capital Securities"), the proceeds of which would be used to purchase Junior Subordinated Deferrable Interest Debentures, Series A (the "Junior Subordinated Debentures") of the Company. No assurance can be given as to the timing of the consummation of the offering. The Company expects to use the net proceeds of the proposed sale of Junior Subordinated Debentures (approximately $96.25 million) to contribute $50 million to its insurance subsidiaries and to fund an escrow account in an amount equal to two interest payments on the Junior Subordinated Debentures (which funds will be applied to make such payments), and expects to apply the balance of such proceeds to reduce the amount outstanding under the Company's bank credit facility (the "Credit Facility"). The Junior Subordinated Debentures will mature in 2027, which may be shortened to a date not earlier than a date in 2016 in certain circumstances upon the occurrence of a Tax Event (as defined). The Junior Subordinated Debentures will be unsecured and rank junior and be subordinated to all Senior Indebtedness (as defined) of the Company. 3 Holders of the Capital Securities will be entitled to receive preferential cumulative cash distributions, payable semi-annually. The distribution rate and the distribution payment dates and other payment dates for the Capital Securities will correspond to the payments and payment dates on the Junior Subordinated Debentures. Subject to certain exceptions, the Company will have the right to defer payments of interest on the Junior Subordinated Debentures by extending the interest payment period thereon for up to 10 consecutive semi-annual periods. The Company will guarantee (the "Guarantee") the Trust's obligations under the Capital Securities, but only to the extent of funds held by the Trust. The Capital Securities will be subject to mandatory redemption upon repayment of the Junior Subordinated Debentures at maturity or their earlier redemption. The Junior Subordinated Debentures will be redeemable at the option of the Company commencing in 2007, or in certain circumstances within 90 days following the occurrence of a Tax Event. The Company will have the right at any time to terminate the Trust and, after satisfaction of the liabilities to creditors of the Trust, cause the Junior Subordinated Debentures to be distributed to the holders of the Capital Securities. Each holder of Capital Securities will have the right, upon a Change of Control (as defined), to cause a repurchase of the Capital Securities held by such holder. The Capital Securities will not have been registered under the Securities Act and may not be offered or sold by any purchaser thereof absent registration or an applicable exemption therefrom. The Company and the Trust are expected to agree to use their best efforts to file a registration statement relating to an exchange offer pursuant to which another series of capital securities, junior subordinated debentures and guarantee covered by such registration statement and containing substantially the same terms as the Capital Securities, the Junior Subordinated Debentures and the Guarantee will be offered in exchange for the Capital Securities, the Junior Subordinated Debentures and the Guarantee. CORPORATE STRUCTURE The Company, which was incorporated in 1989, is a Delaware corporation whose principal executive offices are located at 500 West Fifth Street, Winston- Salem, North Carolina 27152, telephone number (910) 770-2000. The Company's principal insurance subsidiaries are Integon Preferred Insurance Company, Integon National Insurance Company, Integon Casualty Insurance Company, Integon Indemnity Corporation, Integon General Insurance Corporation, New South Insurance Company, Integon Specialty Insurance Company (collectively, the "Domestic Insurance Subsidiaries") and Carolina National, Ltd. (together with the Domestic Insurance Subsidiaries, the "P&C Subsidiaries"). In addition, through Salem Underwriters, Inc. ("Salem"), the Company offers premium financing for the Company's insureds in North Carolina. 4 GENERAL The Company's business is focused on the writing of nonstandard automobile insurance. The following table sets forth the net premiums written by line of business of the P&C Subsidiaries for the periods indicated:
YEARS ENDED DECEMBER 31, -------------------------- 1996 1995 1994 -------- -------- -------- (IN THOUSANDS) Nonstandard Automobile........................... $722,941 $568,110 $334,604 Specialty Automobile............................. 49,773 26,347 3,694 Preferred Risk Automobile........................ 24,842 24,576 24,025 Other............................................ 433 1,414 1,144 -------- -------- -------- Total.......................................... $797,989 $620,447 $363,467 ======== ======== ========
Detailed below are the loss, expense and combined ratios for the P&C Subsidiaries on a statutory and GAAP basis, for the periods indicated:
YEARS ENDED DECEMBER 31, ----------------------------- 1996 1995 1994(1) -------- ------- ---------- (IN THOUSANDS) STATUTORY BASIS Loss Ratio................................... 79.4% 73.2% 70.8% Expense Ratio................................ 22.1 21.5 21.7 -------- ------- ------- Combined Ratio............................... 101.5% 94.7% 92.5% ======== ======= ======= GAAP BASIS Loss Ratio................................... 80.0% 73.4% 70.4% Expense Ratio................................ 22.4 21.6 22.0 -------- ------- ------- Combined Ratio............................... 102.4% 95.0% 92.4% ======== ======= =======
- -------- (1) Statutory and GAAP ratios for 1994 are computed including Bankers and Shippers' results for the period after the acquisition date of October 18, 1994. MARKETING Management believes that concentrating on nonstandard automobile insurance offers greater opportunities for profit than the marketing of a broad range of insurance products. The Company is currently pursuing a strategy of restricting growth and improving underwriting profitability through price increases impacting most of its new business and renewal business. The Company selects areas for expansion of its business based on a number of criteria, including the size of the nonstandard automobile insurance market, state-wide loss results, competition and the regulatory climate. The Company offers both liability and physical damage coverage in the nonstandard automobile insurance marketplace, with policies having terms of six or 12 months. Most nonstandard automobile insurance policyholders choose the basic limits of liability coverage, which, though varying from state to state, generally are $25,000 per person and $50,000 per accident for bodily injury, and in the range of $10,000 to $20,000 for property damage. Management is continuing its strategy of the Company being a low-cost provider of nonstandard automobile insurance while maintaining a commitment to provide excellent service to both agents and insureds. The Company is continuing to invest in technology and information systems personnel, which will enhance its current ability to automate certain marketing, underwriting, claims and administrative functions to ensure that the Company will be able to continue to provide excellent service to its agents and insureds. While such increased 5 investment in technology has resulted, and may in the future result, in an increase in the Company's expense ratio, management believes that continuing such investment is essential for the Company to maintain a competitive position in the industry. Management emphasizes quality service through established standards in all phases of its operations and believes, based on surveys of agents, insureds and claimants conducted for the Company by an independent research firm, this approach has enabled the Company to maintain strong relationships with its agents and customers. The Company's renewed focus on technology includes the enhancement of the computer software that provides on-line communication with its agency force. Management believes that the efficiency, convenience and reliability of the computer system is highly valued by its agents. In addition, to deliver prompt service while ensuring consistent underwriting, the Company provides its agents rating software, which includes automated underwriting procedures enabling agents to rate policies accurately while the customer is in the agent's office. Generally, the agent has the authority to sell and bind insurance coverage for a limited period of time in accordance with procedures established by the Company. The Company generally reviews all coverages bound by its agents within seven business days of receipt of the application and decides whether to accept the insurance as quoted. If a claim is made on the policy prior to the Company's acceptance of the application, the Company may be liable for any loss reported up to the policy limit. These losses have historically been immaterial to the Company's results of operations. The Company continually reviews its agency relationships and may terminate agents whose underwriting results are not profitable and are not expected to be profitable for the Company. As part of its marketing strategy, the Company also utilizes Salem, its wholly-owned premium finance company and the largest premium finance company in North Carolina. Salem currently finances premiums only for customers of its subsidiaries in North Carolina. Such financing provides customers the alternative of a down payment with monthly installments rather than paying the premium in a lump sum. Salem has financed direct premiums written of approximately $164.5 million, $164.5 million and $168.0 million for the years ended December 31, 1996, 1995 and 1994, respectively. In all other states in which the Company does business, it utilizes installment pay plans through its Domestic Insurance Subsidiaries in lieu of premium financing. UNDERWRITING Management believes that most classes of nonstandard automobile insurance risks can be written profitably if they are priced adequately. The Company seeks to classify risks into narrowly defined segments through the utilization of all available underwriting criteria. The Company maintains an extensive, proprietary database, which contains statistical records with respect to its insureds on driving and repair experience by location, class of driver and type of automobile. Management believes this database gives the Company the ability to be more precise in the underwriting and pricing of its products. 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 traffic convictions or accidents, limits of liability, deductibles and, where allowed by law, age, sex and marital status of the insured. Factors also include trends in costs of automobile repair, which are increasing due to more expensive components as well as general price inflation. The rate approval process varies from state to state. Some states generally require approval of the insurance department prior to the use of the rates, while others allow rates to be used after filing. The automation of the Company's underwriting process is highly integrated with the agency force. For example, the Company provides a rating software package to agents for automated underwriting in their offices. In addition, in many instances the agent has access to the automated retrieval of motor vehicle reports, which, in conjunction with the rating software, is designed to obtain more accurate underwriting, pricing and policy issuance at the point of sale. The Company believes the automated underwriting system improves efficiencies for the agent and the Company, further linking the agent to the Company, and improves the accuracy and consistency of the underwriting decisions. 6 CLAIMS DIVISION Management believes that the employment of salaried claims personnel, as opposed to the utilization of independent adjusters, results in reduced ultimate loss payments, lower loss adjustment expenses and improved customer service. Approximately 95% of the claims handled by the Company for the year ended December 31, 1996 were handled by salaried claims personnel, as compared to 95% and 85% in 1995 and 1994. The Company maintains 91 field claims offices, which are staffed with the salaried claims personnel. In addition to utilizing independent adjusters when required by an unusual volume of claims from catastrophes, the Company also uses them when it is not cost effective to utilize salaried claims personnel, such as when the Company expands into a new state or when claims volume is not sufficient to support such personnel. The Company's claims strategy also includes extensive training of adjusters, continuously surveying claimant satisfaction, providing automation to field claims adjusters and focusing on improving processes to reduce claims settlement times and improve service. SPECIALTY AUTO, PREFERRED RISK AUTO AND OTHER PRODUCTS SPECIALTY AUTO The Company's Specialty Auto Division writes local and intermediate business automobile insurance in 23 states. These policies are designed primarily for tradespeople and artisans, including contractors, landscapers and other proprietors, who have small fleets or lightweight single vehicles. This division also writes motorcycle insurance in 17 states. Business auto and motorcycle insurance require the same underwriting and claims-handling skills as nonstandard automobile insurance. The Company plans to expand these programs through increased penetration within existing states and expansion into new states. PREFERRED RISK AUTO AND OTHER PRODUCTS The Company writes preferred risk automobile insurance in North Carolina, and until December 31, 1995 and April 1, 1996, respectively, also wrote mobile homeowners and homeowners insurance in North Carolina. The preferred risk automobile insurance line provides customers who meet certain strict underwriting criteria with competitive rates. Agents are qualified by the Company to write these lines based on their historic loss ratios as well as the number of years the agent has been in business. Effective January 1, 1996, the Company's mobile homeowners insurance was 100% reinsured. The Company discontinued writing new homeowners business effective April 1, 1996 and began non-renewing existing policies in force on January 1, 1997. Effective January 1, 1997, the Company reinsured 100% of its homeowners property business under a quota share agreement. The Company intends to continue to offer preferred risk automobile insurance in North Carolina. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES Loss reserves are estimates of what an insurer expects to pay claimants. The P&C Subsidiaries are required to maintain reserves for payment of estimated loss and loss adjustment expenses for both reported claims ("Case Reserves") and claims which have been incurred but not yet reported ("IBNR"). The ultimate liability incurred by the P&C Subsidiaries may be different from current reserve estimates. The policy of the P&C Subsidiaries is to reserve for the ultimate probable expenditure for claims. The P&C Subsidiaries establish initial reserves for newly reported claims using amounts developed from historical averages. The case-by-case reserve amounts are determined by claim adjusters handling the claims, based on the adjusters' judgment and experience, and the nature and extent of the damages, liability and other criteria established by the Company. More experienced claims personnel establish reserves on larger, more complicated cases. With respect to LAE, certain formula calculations are utilized. The Company's claims department regularly monitors the adequacy of reserves for losses that have been reported to the Company and adjusts such reserves as necessary. 7 Loss and LAE reserves for IBNR claims are estimated based on many variables, including historical and statistical information, inflation, legal developments, economic conditions, general trends in claim severity and frequency and other factors that could affect the adequacy of loss reserves. The chief actuary, senior claims and financial officers of the Company review reserves quarterly and IBNR reserves are adjusted as necessary. Adjustments in aggregate reserves, if any, are reflected in the operating results of the period during which such adjustments are made. Although claims for which reserves are established may not be paid for several years, the reserves for losses and LAE are not discounted, except as required to calculate taxable income for federal income tax purposes. The following table provides a reconciliation of beginning and ending loss and LAE reserve balances of the P&C Subsidiaries for each of the years in the three-year period ended December 31, 1996 as computed in accordance with GAAP. These reserves differ from such reserves calculated in accordance with statutory accounting practices ("SAP") primarily due to reinsurance receivable on unpaid losses and LAE, which are not included under SAP. RECONCILIATION OF LIABILITY FOR LOSS AND LOSS ADJUSTMENT EXPENSES
YEARS ENDED DECEMBER 31, --------------------------- 1996 1995 1994 -------- -------- -------- (IN THOUSANDS) Gross reserves for losses and LAE at the beginning of the year...................................... $416,740 $395,300 $255,364 Deduct: Reinsurance receivable.................... 181,952 193,519 147,882 Add: Bankers and Shippers net reserves at acquisition date................................. -- -- 75,804 -------- -------- -------- Reserves for losses and LAE, net of reinsurance receivable....................................... 234,788 201,781 183,286 -------- -------- -------- Add: Provision for losses and LAE for claims occurring in: Current year.................................... 583,782 419,143 249,688 Prior years..................................... 1,929 (3,170) (14,240) -------- -------- -------- Total incurred losses and LAE................. 585,711 415,973 235,448 -------- -------- -------- Deduct: Loss and LAE payments for claims occurring in: Current year.................................... 359,053 262,129 159,850 Prior years..................................... 154,531 120,837 57,103 -------- -------- -------- Total loss and LAE payments................... 513,584 382,966 216,953 -------- -------- -------- Reserves for losses and LAE at end of year, net of reinsurance receivable........................... 306,915 234,788 201,781 Add: Reinsurance receivable ...................... 171,116 181,952 193,519 -------- -------- -------- Gross reserves for losses and LAE at end of year.. $478,031 $416,740 $395,300 ======== ======== ========
See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for an explanation of the increased losses and LAE in 1996. 8 The following table sets forth the development of loss and LAE reserves of the P&C subsidiaries for the ten-year period ended December 31, 1996: ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSES DEVELOPMENT
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 ------- ------- ------- -------- -------- -------- -------- -------- -------- -------- Gross Unpaid Losses and LAE.............. $55,926 $72,548 $98,138 $117,696 $150,307 $186,865 $226,238 $255,364 $395,300 $416,740 Deduct: Reinsurance Recoverable........ 38,112 52,748 69,303 82,389 101,761 115,103 138,081 147,882 193,519 181,952 Add: Bankers and Shippers net reserves at acquisition date.. -- -- -- -- -- -- -- 75,804 -- -- ------- ------- ------- -------- -------- -------- -------- -------- -------- -------- Unpaid Losses and LAE, Net of Reinsurance... 17,814 19,800 28,835 35,307 48,546 71,762 88,157 183,286 201,781 234,788 Liability reestimated as of: One year later....... 17,116 19,155 29,938 42,539 49,770 66,225 74,215 169,046 198,611 236,717 Two years later...... 16,411 21,423 33,828 45,878 52,087 60,246 70,195 166,233 188,399 Three years later.... 17,837 23,414 35,222 47,674 46,797 56,352 67,360 156,416 Four years later..... 19,310 24,280 36,979 44,789 44,798 55,632 62,185 Five years later..... 20,239 25,399 35,782 43,992 44,759 53,297 Six years later...... 21,097 25,148 35,266 44,663 43,359 Seven years later.... 20,916 24,779 35,796 44,191 Eight years later.... 20,634 25,142 35,937 Nine years later..... 21,105 25,520 Ten years later...... 21,478 Cumulative redundancy (deficiency)......... (3,664) (5,720) (7,102) (8,884) 5,187 18,465 25,972 26,870 13,382 (1,929) Cumulative redundancy (deficiency) as a percentage of unpaid losses and LAE....... (21)% (29)% (25)% (25)% 11% 26% 29% 15% 7% (1)% Paid (cumulative) as of: One year later....... $ 9,409 $12,659 $20,154 $ 25,372 $ 23,463 $ 32,140 $ 36,304 $ 57,103 $120,837 $154,531 Two years later...... 12,448 16,276 24,747 33,428 34,658 41,961 49,850 81,569 159,336 Three years later.... 14,276 18,146 29,173 38,829 39,022 46,781 59,187 94,470 Four years later..... 15,024 20,404 32,569 40,420 41,107 50,285 63,591 Five years later..... 16,820 22,784 33,122 41,227 42,688 52,098 Six years later...... 18,913 22,868 33,465 42,284 43,560 Seven years later.... 18,854 23,030 34,073 42,896 Eight years later.... 18,983 23,546 34,530 Nine years later..... 19,490 23,992 Ten years later...... 19,917 1996 -------- Gross Unpaid Losses and LAE.............. $478,031 Deduct: Reinsurance Recoverable........ 171,116 Add: Bankers and Shippers net reserves at acquisition date.. -- -------- Unpaid Losses and LAE, Net of Reinsurance... 306,915 Liability reestimated as of: One year later....... Two years later...... Three years later.... Four years later..... Five years later..... Six years later...... Seven years later.... Eight years later.... Nine years later..... Ten years later...... Cumulative redundancy (deficiency)......... Cumulative redundancy (deficiency) as a percentage of unpaid losses and LAE....... Paid (cumulative) as of: One year later....... Two years later...... Three years later.... Four years later..... Five years later..... Six years later...... Seven years later.... Eight years later.... Nine years later..... Ten years later......
The fourth line of the preceding table sets forth the estimated net liability for unpaid losses and LAE for each of the indicated years. This liability represents the estimated amount of losses and LAE for claims arising in that year and all prior years that are unpaid as of the balance sheet date, including losses incurred but not yet reported to the Company. The preceding table also shows the reestimated amount of the previously recorded liability net of reinsurance based on experience as of the end of each succeeding year, including cumulative payments made. The lower portion of the table shows the cumulative amounts paid as of successive years for such claims. The estimates change as more information becomes known about the frequency and severity of claims for each year. A redundancy (deficiency) exists when the liability estimate is greater (less) than the reestimated liability at each December 31. The cumulative redundancy (deficiency) depicted in the table, for any particular calendar year, shows the aggregate change in estimates over the period of years subsequent to the calendar year reflected at the top of the respective columns. The Company has experienced a cumulative reserve deficiency due to adverse developments in the 1995 accident year, which was partially offset by favorable developments in the 1989 through 1994 accident years. Reserves were increased in late 1996 for the 1996 and prior accident years. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." 9 Reserves are necessarily based on estimates and there can be no assurance that the ultimate liability will not exceed such estimates. Management believes that the Company's reserves at December 31, 1996 are adequate. Conditions and trends that have historically affected the Company's claims may not necessarily occur in the future. Accordingly, it would not be appropriate to extrapolate future deficiencies or redundancies based on the results set forth above. INVESTMENTS It is the Company's investment policy to invest primarily in investment- grade fixed income securities, as defined by the National Association of Insurance Commissioners ("NAIC"). The Company's investment objective is to maximize total return while maintaining safety of capital together with adequate liquidity for its insurance operations. The investments of each Domestic Insurance Subsidiary are also reviewed and approved by the investment committee of the board of directors of such subsidiary. As of December 31, 1996, 99.5% of the Company's investment portfolio consisted of fixed maturity securities and cash and cash equivalents. As of such date, approximately 99.5% of the Company's fixed maturity securities portfolio consisted of investment grade securities (rated Baa or better by Moody's or the equivalent). The investments of the Company are managed by an investment advisory firm, which is an affiliate of Head & Company L.L.C. ("Head Company"), which in turn is an affiliate of John C Head III and the Company. See "Item 13. Certain Relationships and Related Transactions--Transactions with Directors, Officers and Affiliates of Head & Company L.L.C." The following table sets forth certain information concerning the Company's investment portfolio as of December 31, 1996 and December 31, 1995:
DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------- ------------------- AMORTIZED MARKET AMORTIZED MARKET TYPE OF INVESTMENT COST VALUE (1) COST VALUE (1) ------------------ --------- --------- --------- --------- (IN THOUSANDS) Fixed maturities: Available for sale: Bonds and notes: U.S. government obligations(2).... $ 97,801 $ 97,357 $ 86,361 $ 89,210 Obligations of states and political subdivisions(2)........ 172,281 172,925 161,116 164,729 Foreign obligations............... 11,422 11,541 30,788 32,193 Public utilities.................. 21,427 21,376 8,083 8,540 All other corporate bonds......... 152,825 151,440 107,604 110,105 Collateral-backed securities(2)(3)................. 66,696 66,672 71,267 73,087 Redeemable preferred stock......... -- -- 4,000 4,080 -------- -------- -------- -------- 522,452 521,311 469,219 481,944 -------- -------- -------- -------- Other long-term investments......... 2,679 2,743 2,088 2,114 Cash and short-term investments..... 43,838 43,838 21,046 21,046 -------- -------- -------- -------- Total........................... $568,969 $567,892 $492,353 $505,104 ======== ======== ======== ========
- -------- (1) The Company obtains market value information primarily through an independent pricing service. Market values are also obtained, to a lesser extent, from the Company's investment advisors. The advisors utilize financial market data systems and broker quotes to provide such prices. 10 (2) The Company invests in floating rate and stepped rate structured notes. At December 31, 1996 and 1995, the market value of the floating rate investments were $43.0 million and $9.7 million, respectively, and the market value of the stepped rate structured notes were $.4 million and $10.7 million, respectively. (3) The Company's investment policy prohibits investments in certain mortgage- backed securities, such as interest only, principal only, residuals, Z bonds and inverse floaters. At December 31, 1996, the Company held $27.1 million in collateralized mortgage obligations compared to $29.5 million at December 31, 1995. The fixed maturity securities portfolio is composed primarily of intermediate-term, investment-grade securities. Moody's uses 10 symbols to indicate the relative investment quality of a rated bond. Issuers of "Aaa" rated bonds, the highest rating assigned by Moody's, are deemed to be of the best quality because interest payments are protected by a large or by an exceptionally stable margin and principal is secure. Issuers of "Aa" rated bonds are deemed to be of high quality by all standards; the quality of these bonds differs from "Aaa" bonds only in a small degree. Issuers of "Aa" rated bonds are deemed to have a strong capacity to pay interest and repay principal, but are rated lower than "Aaa" bonds because margins of protection may not be as large or there may be other elements which create a somewhat larger long-term risk. Issuers of "A" rated bonds are deemed to possess many favorable investment attributes. Factors giving security to principal and interest are considered adequate but elements which suggest a susceptibility to impairment in the future may be present. Issuers of "Baa" rated bonds are deemed to be neither highly protected nor poorly secured. Interest payment and principal security appear adequate but certain protective elements may be lacking or may be unreliable over any great length of time. The table below contains additional information concerning the investment ratings of the Company's investment portfolio at December 31, 1996:
TYPE/RATINGS OF INVESTMENT(1) CARRYING AMOUNT(2) PERCENTAGE ----------------------------- ------------------ ---------- (IN THOUSANDS) Fixed maturities: Available for sale: Government and Agencies.......................... $116,629 20.5% Aaa.............................................. 160,973 28.3% Aa............................................... 70,527 12.4% A(3)............................................. 165,665 29.2% Baa.............................................. 4,961 .9% -------- ----- Total Baa or Better............................ 518,755 91.3% Ba and Below..................................... 2,556 0.5% -------- ----- Subtotal....................................... 521,311 91.8% Other long-term investments...................... 2,743 0.5% Cash and cash equivalents........................ 43,838 7.7% -------- ----- Total.......................................... $567,892 100.0% ======== =====
- -------- (1) The ratings set forth above are based on the ratings, if any, assigned by Moody's. If Moody's ratings were unavailable, the equivalent ratings supplied by Standard & Poor's or the NAIC were used where available. The percentage of rated securities that were not assigned a rating by Moody's at December 31, 1996 was 10.6%. (2) Carrying amount is estimated market value for bonds. (3) The "A" category includes $25.6 million of securities which were not rated by Moody's or Standard & Poor's, but were rated "1" by the NAIC. 11 The table below sets forth the contractual maturity profile of the Company's fixed maturity securities portfolio as of December 31, 1996:
MATURITY/AVERAGE LIFE CARRYING AMOUNT(1) PERCENTAGE --------------------- ------------------ ---------- (IN THOUSANDS) Available for sale: 1 year or less............................... $ 2,038 .4% More than 1 year through 5 years............. 110,778 21.2 More than 5 years through 10 years........... 223,521 42.9 More than 10 years........................... 118,302 22.7 -------- ----- 454,639 87.2 Collateral Backed Securities................. 66,672 12.8 -------- ----- Total...................................... $521,311 100.0% ======== =====
- -------- (1) Carrying amount is estimated market value. The Company's net investment income, average invested assets and return on average invested assets for each of the three years ended December 31, 1996 were as follows:
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- -------- -------- (IN THOUSANDS) Net investment income...................... $ 31,970 $ 29,937 $ 17,914 Average invested assets(1)................. 541,792 472,999 333,839 Pre-tax return on average invested assets.. 5.9% 6.3% 6.3%(2) After tax return on average invested assets.................................... 4.1% 4.7% 4.9%(2)
- -------- (1) Includes fixed maturity securities valued at amortized cost. (2) Returns for 1994 have weighted for Bankers and Shippers' net investment income using cash and invested assets at the October 18, 1994 acquisition date. FACTORS AFFECTING BUSINESS REGULATION The Domestic Insurance Subsidiaries, and the Company as their indirect parent, are subject to the insurance laws and regulations of North Carolina, and the laws and regulations of the other states in which the Domestic Insurance Subsidiaries are licensed to do business. The Company's subsidiaries collectively are licensed to do business as insurance companies in 50 states. The insurance laws and regulations, as well as the level of supervisory authority that may be exercised by the various state insurance departments, vary by jurisdiction, but generally grant broad powers to supervisory agencies or state regulators to examine and supervise insurance companies and insurance holding companies with respect to every significant aspect of the conduct of the insurance business, including the establishment of premium rates. These laws and regulations generally require insurance companies to maintain minimum standards of business conduct and solvency, meet certain financial tests, file certain reports with regulatory authorities, including information concerning their capital structure, ownership, management and financial condition, require prior approval of certain changes of control of domestic insurance companies and their direct and indirect parents and the payment of extraordinary dividends and distribution. In addition, these laws and regulations require approval for certain inter-company transfers of assets and certain transactions between insurance companies and their direct and indirect parents and affiliates, and generally require that all such transactions have terms no less favorable than terms that would result from transactions between parties negotiating at arm's length. Further, many states have enacted laws that restrict an insurer's underwriting discretion, such as the ability to terminate policies, terminate agents or reject insurance coverage applications, and many state regulators have the power to reduce, or to disallow increases in, premium 12 rates. These laws may adversely affect the ability of an issuer to earn a profit on its underwriting operations. In general, such laws and regulations are for the protection of policyholders rather than security holders. Each Domestic Insurance Subsidiary is required to file quarterly and annual financial statements prepared using SAP in each jurisdiction in which it is licensed, and is subject to single and aggregate risk limits and other statutory restrictions concerning the types and quality of investments and the filing and use of policy forms and premium rates. Additionally, the Domestic Insurance Subsidiaries' accounts and operations are subject to periodic examination by the insurance commissioner of the state of domicile and by other state insurance regulatory authorities. The North Carolina insurance laws and regulations, including insurance holding company laws, impose restrictions on the amount of dividends that may be paid by the Domestic Insurance Subsidiaries. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources." Permission for the payment of dividends in excess of amounts permitted pursuant to such restrictions must be obtained from the North Carolina Insurance Commissioner, who has the discretion to deny any request for such approval. Most states have enacted legislation regulating insurance holding companies. The insurance holding company laws and regulations vary by state, but generally require an insurance holding company and its insurance company subsidiaries licensed to do business in the state to register and file certain reports with the regulatory authorities, including information concerning capital structure, ownership, financial condition, certain inter-company transactions and general business operations. State holding company laws also require prior notice or regulatory agency approval of direct or indirect changes of control of an issuer or its holding company and of certain material inter-company transfers of assets within the holding company structure. Insurance holding company laws and regulations provide that no person may acquire control of the Company, and thus indirect control of its insurance subsidiaries, without obtaining the prior approval of the insurance commissioner in the state in which the insurance company is domiciled. Any purchaser of 10% or more of the voting stock of an insurance holding company is generally deemed to have acquired control of that company and is required to obtain the approval of the appropriate insurance commissioners before consummating such purchase. The Restated Certificate of Incorporation of the Company provides that no stockholder of the Company may cast votes with respect to 10% or more of the voting stock of the Company unless such stockholder's acquisition or ownership of such voting stock has been previously approved by the North Carolina Insurance Commissioner. Most states in which the Domestic Insurance Subsidiaries transact business have guaranty fund laws pursuant to which insurers doing business in such states are assessed by a state insurance guaranty association in order to fund liabilities to policyholders and claimants of insolvent insurance companies. Since the likelihood and amount of any particular assessment generally cannot be determined until an insolvency has occurred, potential liabilities for assessments are generally not reflected on the books of insurers. During each of the three years ended December 31, 1996, 1995 and 1994, the amounts of such insolvency assessments of the Domestic Insurance Subsidiaries were approximately $195,000, $191,000 and $104,000, respectively. The property and casualty insurance business has been the subject of much legislative activity in various states seeking to address the issues of affordability and availability of different lines of insurance. Private passenger automobile insurance has received attention from legislatures in an effort to stem premium increases for such coverage. The enactment of such legislation in the states in which the Domestic Insurance Subsidiaries do business may have an adverse effect on their profitability. Or, conversely, such legislation may cause standard insurers to tighten underwriting criteria, causing the nonstandard market to grow. An insurer's profitability may also be adversely affected by court decisions. Premium rates are established using actuarial methods to permit an insurer to earn an underwriting profit. A court decision may undermine or change the assumptions used in the analysis so as to impact the projected level of profitability. 13 In expanding its operations into additional states, the Company carefully considers the legislative and regulatory environment in that state before commencing operations and will not do business in states where the climate is not conducive to the operation of its business. Salem is subject to laws governing the operation of premium finance companies. These laws pertain to such matters as books and records that must be kept, forms, licensing, fees and charges. For example, in North Carolina, the maximum rate of interest Salem may charge is one percent per month on the outstanding principal balance; the maximum late payment fee is five percent of the amount of the overdue payment; and the maximum set-up fee is $15.00 per finance agreement. Carolina National, Ltd. is subject to the laws and regulations of Bermuda. RESIDUAL MARKETS Many states require that companies writing private passenger automobile insurance in that state participate in a residual market mechanism, alternatively referred to as the shared market. Although regulations vary by state, residual market mechanisms are generally designed to provide insurance coverage for consumers who are unable to obtain insurance in the voluntary automobile insurance market. Companies participate in the administration, profit and/or loss associated with those consumers' policies as provided by state regulations. North Carolina requires that motorists of the state carry a certain minimum amount of automobile liability insurance. The NCRF was established in 1973 as a non-profit legal entity to provide automobile liability insurance to motorists who otherwise would not be covered. All insurance companies licensed to write automobile insurance in the state must be members of the NCRF. The Domestic Insurance Subsidiaries are thus required to provide up to the maximum liability coverage allowed by the NCRF to any eligible North Carolina resident applying for coverage. The maximum liability coverage available under the NCRF for each motorist is $100,000 for bodily injury per individual, $300,000 for bodily injury per accident and $50,000 for property damage. The member companies may select whether to retain such risk or to cede the risk to the NCRF. The premium rates for business ceded to the NCRF are approved by the Board of Governors of the NCRF and are filed with the North Carolina Insurance Department. Generally, such rates have been at levels higher than that of the voluntary insurance market. For the year ended December 31, 1996, the Company ceded approximately $162.8 million, or 83.2% of its automobile liability direct premiums written in North Carolina, to the NCRF. Business ceded to the NCRF is then retroceded to all member companies in the same proportion as business is ceded to the NCRF by member companies. However, pursuant to recommendations made by the North Carolina Insurance Commissioner, each insurer may, and the Company does, exclude the assumed business from its SAP financial statements. The Company remains secondarily liable for the losses with respect to business ceded to the NCRF, as is the case with all reinsurance transactions, and as a result, maintains direct reserves on its books for the NCRF for GAAP reporting purposes and a corresponding reinsurance receivable. While the business retroceded by the NCRF is technically assumed by the Company, no risk is transferred back to the Company because North Carolina laws provide that cumulative losses incurred by the NCRF are recoverable either through direct surcharges to North Carolina motorists or by assessments of the member insurers which are subsequently recouped from individual policyholders. As of September 30, 1996, the NCRF had a cumulative operating surplus of $105.2 million. As of December 31, 1996, the Company had $147.9 million of reinsurance recoverables on unpaid losses from the NCRF, arising out of the reinsurance ceded by the Domestic Insurance Subsidiaries to the NCRF. The reinsurance recoverables represent ceded reserves for reported NCRF claims and incurred but not reported NCRF claims. The Company reports all transactions between the Company and the NCRF on a monthly basis. Such transactions involve premium collections, allowances for expenses, claims paid and recoupments. This report generates either a payable to or a receivable from the NCRF, which is generally settled with the NCRF within 60 days from the date of the report. To date, all paid NCRF losses have been reimbursed by the NCRF on a timely basis. 14 Many states utilize assigned risk plans as the residual market mechanism. Assigned risk plan applicants are assigned on a rotating basis to all automobile insurers based on the individual insurer's share of the automobile insurance market in each of those states. Insurers then issue and service those individual insurance risks assigned to them and accept the profit or loss from those policies. Coverage is provided for both automobile liability and physical damage risks. In some jurisdictions, credits for writing certain classes of business may be used to offset assignments under assigned risk plans. Some states utilize a joint underwriting association as the residual market mechanism. Certain carriers service the business associated with such plan and all automobile insurers are charged or credited with any loss or profit associated with such business. A.M. BEST RATING A.M. Best, publisher of Best's Insurance Reports, Property-Casualty, has assigned a consolidated "A" (Excellent) rating to the Domestic Insurance Subsidiaries based on 1995 results, subject to a "negative outlook". This rating was issued on the basis of a number of factors, including a review concluded in May 1996. A.M. Best ratings are prepared for the protection of policyholders and not investors. A.M. Best currently is conducting its annual review of the Company's rating based on a number of factors, including 1996 results. See "Certain Considerations--Importance of Maintaining Statutory Surplus and Ratings." REINSURANCE In accordance with insurance industry practice, the Domestic Insurance Subsidiaries reinsure a portion of their exposure and pay to the reinsurers a portion of the premiums received on all policies reinsured. Insurance is ceded principally to reduce net liability on individual risks and to provide protection for individual loss occurrences, including catastrophic losses. Although reinsurance does not legally discharge the ceding insurer from primary liability for the full amount of the policies ceded, the assuming reinsurer is liable to the extent of the coverage ceded. Reserves for losses and LAE and a corresponding reinsurance receivable to the extent of reinsurance ceded are reported under GAAP. In 1996, the largest net per risk exposure retained by the P&C Subsidiaries on any one individual risk was $350,000. The Company's net per casualty risk exposure retention on personal lines auto was $350,000 and excess of loss coverage on specialty auto lines with net casualty risk exposure was $250,000. Effective January 1, 1997, the Company's net per casualty risk exposure on personal lines increased to $500,000 and excess of loss coverage on specialty auto lines was increased to $350,000. Casualty risks exceeding the net risk exposure retention are covered on an excess of loss basis, up to $7.0 million for 1995 and 1996 and $10.0 million in 1997. All property risks on homeowners policies up to $500,000 were reinsured on a 75% quota share basis through 1996. All additional property risks over $500,000 are covered by excess of loss reinsurance. Effective January 1, 1997, the Company ceded 100% of such homeowners' property risks pursuant to a quota share agreement. The Company discontinued writing new homeowners business effective April 1, 1996 and began non-renewing existing policies in force on January 1, 1997. Catastrophic reinsurance serves to protect the insurer from significant aggregate loss exposure arising from a single event such as windstorm, hail, tornado, hurricane, riot, vandalism, earthquake, freezing temperatures or other extraordinary events. In 1996, the P&C Subsidiaries retained per occurrence risk arising from such a single event up to $2.0 million, and 95% of the per occurrence risk in excess of $2.0 million up to $9.0 million was reinsured. Such coverage limits have not been changed for 1997. Based upon the resulting net retained exposures as compared to the statutory surplus of the P&C Subsidiaries, the Company believes that it has established appropriate reinsurance coverage. The Company also believes that, based on its review of its reinsurers' financial statements and reputation in the reinsurance marketplace, its unaffiliated reinsurers are financially sound and that the terms of the Company's reinsurance policies are consistent with customary industry practice. Reinsurance earned premiums ceded by the Company to all reinsurers, excluding the NCRF, were $23.1 million, $60.8 million and $26.9 million, for the years ended December 31, 1996, 1995 and 1994, respectively. 15 NATURE OF BUSINESS; COMPETITION The nonstandard automobile insurance business is affected by many factors that can cause fluctuations in the results of operations of the P&C Subsidiaries. Many of these factors are not subject to the control of the Company. An economic downturn in the states where the Company writes business could result in fewer new car sales, less demand for automobile insurance and lower policy amounts. Economic upturns generally result in more driving with a resulting increase in accidents. Severe adverse weather conditions could adversely affect the Company's business. For example, certain recent weather conditions, such as Hurricanes Fran and Bertha, as well as severe winter weather, adversely affected earnings for the year ended December 31, 1996. These factors, together with competitive pricing, could result in fluctuations in the Company's underwriting results and net income. The Company competes with both large national writers and smaller regional companies in each state in which it operates. Certain of these competitors are larger and have greater financial resources, higher ratings, superior technological resources and greater access to sources of capital than the Company. In addition, certain of such competitors have from time to time decreased prices in order to gain market share. The Company's recent losses and resulting efforts to improve profitability through reduced growth, significant rate increases and implementation of more restrictive policy terms and underwriting criteria may adversely impact the Company's competitive position, insofar as its competitors may be able to offer more attractive policy rates and terms. EMPLOYEES As of December 31, 1996, the Company employed approximately 2,300 full-time employees. Employees of the Company are not covered by any collective bargaining agreement. The Company considers its relationship with its employees to be excellent. CERTAIN CONSIDERATIONS This Form 10-K contains forward-looking statements that inherently involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below. RESULTS FOR THE QUARTER AND YEAR ENDED DECEMBER 31, 1996 The Company recorded a net loss of $16.4 million and net loss to common stockholders of $17.8 million for the fourth quarter of 1996, compared to net income of $10.5 million and net income available to common stockholders of $9.2 million for the fourth quarter of 1995. For the year ended December 31, 1996, the Company recorded net income of $170,000 and a net loss to common stockholders of $5.4 million, compared to net income of $34.0 million and net income available to common stockholders of $28.4 million in 1995. While the Company is implementing a plan to improve profitability, which includes the introduction of premium rate increases, increasing minimum policy down payments and implementing underwriting restrictions, there can be no assurances as to the effect of such measures on the Company's results in future quarterly and annual periods. LIMITED DIVIDENDS AVAILABLE FROM DOMESTIC INSURANCE SUBSIDIARIES The Company, a holding company whose principal asset is the capital stock of the P&C Subsidiaries and Salem, relies primarily on dividends from the Domestic Insurance Subsidiaries to meet its obligations for payment of interest and principal on outstanding debt obligations, dividends to stockholders and corporate expenses. The ability of the Domestic Insurance Subsidiaries to pay dividends to the Company is restricted by the insurance laws of North Carolina, under which the maximum amount of ordinary dividends that a Domestic Insurance Subsidiary may pay to the Company at any point in time without regulatory approval is the lesser of (a) 10% of the policyholders' statutory surplus of such Domestic Insurance Subsidiary as of the preceding December 31 or (b) the statutory net income of such Domestic Insurance Subsidiary for the preceding calendar year, less the amount of dividends paid during the preceding 12 months. In 1996, the maximum amount of ordinary dividends payable by the Company's Domestic Insurance Subsidiaries was approximately $22.3 million. The Company's Domestic Insurance Subsidiaries paid approximately $4.8 million of ordinary dividends in 1996. 16 After taking into account dividends paid in 1996 and the statutory net income of the P&C Subsidiaries for 1996, an aggregate of only $7.9 million is available for the payment of dividends by the Company's Domestic Insurance Subsidiaries in 1997 without regulatory approval. However, the Company's Credit Facility also restricts the ability of the P&C Subsidiaries to pay dividends to the Company and restricts the ability of the Company to incur additional indebtedness (see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources--Sources of Funds"), and no dividends may currently be paid under the terms thereof. Commencing in 1997, and taking into account the proposed issuance of the Junior Subordinated Debentures, annual debt service and preferred stock dividend requirements of the Company are estimated to be approximately $29.4 million, including the interest payments on the Junior Subordinated Debentures estimated to be $10.0 million. In addition, corporate expenses in 1996 were $5.5 million and common stock dividends were $5.7 million. Accordingly, unless the Domestic Insurance Subsidiaries receive approval for the payment of extraordinary dividends from the North Carolina Insurance Commissioner, additional borrowings (including borrowings under the Credit Facility), the issuance of additional securities or obtaining other funds, including from Salem, will be necessary to pay debt service, including interest, on the Junior Subordinated Debentures, as well as dividends on the Company's outstanding preferred stock and common stock and other expenses of the Company. No assurance can be given that there will be no further or additional regulatory actions or developments restricting the ability of the Company and the Domestic Insurance Subsidiaries to pay dividends or otherwise advance funds to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources-- Regulation." HIGH LEVERAGE The Company has substantial indebtedness and is highly leveraged. At December 31, 1996, the Company had total indebtedness of $194.8 million (including $44.0 million of short-term debt under the Credit Facility) and stockholders' equity of $215.4 million. Additionally, because the Company may not receive dividends from the Domestic Insurance Subsidiaries in the near future without approval from the North Carolina Insurance Commissioner, the Company may be required, to the extent permitted under the Company's debt instruments, to incur additional indebtedness to fund its interest payments, stockholder dividends and operating expenses. The Company's Credit Facility currently restricts the Company's ability to borrow thereunder if its premiums written to statutory surplus ratio exceeds 3.25x or its debt to total capitalization ratio exceeds 55%. The Company's premiums written to statutory surplus ratio for the year ended December 31, 1996 was approximately 3.248x and its debt to total capitalization ratio was 47.5%. In addition, the proposed terms of the Junior Subordinated Debentures restrict the Company's ability to incur indebtedness. Accordingly, additional indebtedness to fund operating expenses may not be available. IMPORTANCE OF MAINTAINING STATUTORY SURPLUS AND RATINGS The capacity for the Company's growth in premiums, like that of other insurance companies, is in part a function of its statutory surplus. Maintaining appropriate levels of statutory surplus is considered important by the Company's management, state insurance regulatory authorities, and the agencies that rate insurers' financial strength. Failure to maintain certain levels of statutory capital and surplus could result in increased scrutiny or, in some cases, action taken by state regulatory authorities and/or downgrades in an insurer's ratings. The Company's Domestic Insurance Subsidiaries' financial strength are rated "A" (Excellent) by A.M. Best based on a number of factors, including their 1995 results of operations, subject to a "negative outlook." This rating was issued on the basis of a review concluded in May 1996. A.M. Best's ratings are based on factors considered to be of concern to policyholders and are not directed toward protection of investors. A.M. Best currently is conducting its annual review of the financial strength rating of the Domestic Insurance Subsidiaries based on a number of factors, including their 1996 results of operations. There can be no assurance that the Domestic Insurance Subsidiaries will be able to maintain their current A.M. Best ratings. In early December 1996, Standard & Poor's placed the Company's senior debt and preferred stock ratings on CreditWatch with negative 17 implications, and on December 31, 1996 lowered such ratings to BB+ and BB- from BBB- and BB+, respectively. In taking such action, Standard & Poor's stated that the downgrades reflected greater-than-anticipated deterioration in the Company's operating performance and the resultant weaker cash flow available to the Company to service its debt. Standard & Poor's also stated its view that the Company's combined ratio is not expected to rebound to or remain at historic levels because of continued strong competition in the nonstandard auto marketplace. Standard & Poor's current ratings outlook is stable. The Company's senior debt and preferred stock are currently rated "Ba2" and "ba3," respectively, by Moody's. Any further downgrade in ratings could materially adversely affect the Company's business and the value of the Company's securities. In addition, increased public and regulatory concerns regarding the financial stability of participants in the insurance industry have resulted in greater emphasis being placed by policyholders and independent agents upon insurance company ratings and has created some measure of competitive advantage for insurance carriers with higher ratings. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES The amounts established and to be established by the Company for loss and LAE reserves are estimates of future costs based on many variables, including historical and statistical information, inflation, legal developments, economic conditions and estimates of future trends in claims severity and frequency. The Company has in the past experienced and may in the future experience cumulative deficiencies in reserving for losses and LAE. In December 1996, the Company increased its loss and LAE reserves by $12.5 million, primarily with respect to the 1996 accident year, with $1.9 million attributable to prior accident years. In each case, such reserve increases reflected the Company's determination that prior reserve levels for such years were not adequate. The establishment of appropriate reserves is an inherently uncertain process, and although, following the recent reserve increases, the Company believes adequate provision has been made for the Company's loss and LAE reserves, there can be no assurance that future adjustments to loss and LAE reserves will not be required. Shortfalls in the Company's reserve estimates could materially adversely affect the Company. COMPETITION The Company competes with both large national writers and smaller regional companies in each state in which it operates. Certain of these competitors are larger and have greater financial resources, higher ratings, superior technological resources and greater access to sources of capital than the Company. In addition, certain of such competitors have from time to time decreased prices in order to gain market share. The Company's recent losses and resulting efforts to improve profitability through reduced growth, significant rate increases and implementation of more restrictive policy terms and underwriting criteria may adversely impact the Company's competitive position, insofar as its competitors may be able to offer more attractive policy rates and terms. REGULATION AND LEGAL PROCEEDINGS The Company is subject to extensive regulation and supervision in the jurisdictions in which it does business. This regulatory oversight includes, by way of example, matters relating to licensing and examination, rate setting, trade practices, policy forms, limitations on the nature and amount of certain investments, claims practices, mandated participation in shared markets and guaranty funds, reserve adequacy, insurer solvency, transactions between affiliates, the amount of dividends that may be paid, and restrictions on underwriting standards. Such regulation and supervision are primarily for the benefit and protection of policyholders and not for the benefit of investors. In recent years, the automobile insurance industry has been under pressure from certain state regulators, legislators and special interest groups to reduce, freeze or set rates at levels that may not correspond with underlying costs, including initiatives to roll back automobile and other personal lines rates. This activity has adversely affected, and may in the future adversely affect, the profitability of the Company's business in various states because increasing costs of litigation, combined with rising automobile repair costs, continue to increase the costs of providing automobile insurance coverage. Adverse legislative and regulatory activity constraining 18 the Company's ability to adequately price automobile insurance coverage may occur in the future. The impact of the automobile insurance regulatory environment on the Company's results of operations in the future is not predictable. In recent years the state insurance regulatory framework has come under increased federal scrutiny, and certain state legislatures have considered or enacted laws that alter and, in many cases, increase state authority to regulate insurance companies and insurance holding company systems. Further, the National Association of Insurance Commissioners ("NAIC") and state insurance regulators are re-examining existing laws and regulations, specifically focusing on insurance company investments, issues relating to the solvency of insurance companies, risk-based capital guidelines, interpretations of existing laws, the development of new laws, and the definition of extraordinary dividends. It is presently not possible to predict the outcome of any of the above matters, or their potential effect on the Company. Various regulatory, governmental and other legal actions are currently pending involving or affecting the Company and its subsidiaries and specific aspects of the conduct of their businesses. Additionally, the Company and certain of its subsidiaries are defendants in numerous legal actions and proceedings of a character normally incident to their businesses and certain of these complainants seek damages of unspecified amounts. VOLATILITY OF UNDERWRITING RESULTS Nonstandard automobile insurers such as the Company are subject to volatility in their underwriting results, primarily as a result of the frequency and severity of claims, as well as due to expense ratio fluctuations. The Company has experienced, and can be expected in the future to experience, losses from weather-related events, including hurricanes, wind and hail, and severe winter weather, and the frequency and severity of such events are inherently unpredictable. The Company's loss experience is also affected by such factors as changes in automobile repair costs, medical costs, driving habits and macroeconomic conditions, all of which are largely beyond the Company's control. To the extent geographically concentrated in the eastern United States, an area from which the Company drew approximately 75% of its business in 1995 and 1996, based on nonstandard net premiums written, the effect of any one of these factors on the Company may be accordingly exacerbated. The Company's expense levels have also been significantly affected in recent periods by the need for additional technology investments, including those for beginning the modifications necessary to accommodate the Year 2000, and may in the future be affected by additional such expenditures. POLICYHOLDER RENEWALS Nonstandard automobile insurance is highly price sensitive. Due to the nature of the Company's policyholders (for example, insureds seeking the least expensive insurance which satisfies the requirements of state laws), the renewal rate of the Company's policyholders is lower than that typically experienced by preferred and standard risk insurance companies. The success of the Company's business, therefore, depends on its ability to replace non- renewing insureds with new policyholders. The Company monitors rates of retention and the cancellation of its policies and attempts to refine its products in response to loss experience and rates of retention in particular markets. Although a majority of the Company's insureds will likely remain nonstandard risks because of, among other things, their desire for minimum policy limits, many of the Company's insureds may seek to obtain standard or preferred policies in order to reduce their cost of insurance. In addition, the recent actions taken by the Company to improve profitability, including the implementation of significant rate increases and more restrictive policy and payment terms, may have the effect of reducing the Company's renewal rates and decreasing premium volumes in certain states or lines of business. There can be no assurance that the Company will be successful in its efforts to improve its renewal rates or to replace non-renewing policyholders. 19 DEPENDENCE ON KEY PERSONNEL The success of the Company is dependent on the efforts and abilities of its management, including its Chairman, Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, and the ability of the Company to attract and retain qualified personnel. There can be no assurance as to the effect upon the Company's performance of future changes in senior management, including the choice of a successor chief executive officer, the timing of which is not certain. The Company is presently seeking a successor chief executive officer. INVESTMENTS Because a significant portion of the Company's revenues are generated from its invested assets, the performance of its investment portfolio may materially affect the Company's results of operations and financial condition. Total pre-tax net realized investment gains were $2.7 million and $9.7 million in 1996 and 1995, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." All of the Company's fixed income securities have been designated as "available for sale" pursuant to GAAP. Fixed income securities designated as "available for sale" are carried in the Consolidated Financial Statements at estimated market value, as determined in the aggregate. As of December 31, 1996, the aggregate market value of fixed income securities "available for sale" was less than amortized cost by $1.1 million. Future declines in the market value of such securities could have a material adverse impact on the Company's financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources--Investments." HOLDING COMPANY STRUCTURE The operations of the Company are conducted through the P&C Subsidiaries. Except to the extent that the Company may itself be a creditor with recognized claims against the P&C Subsidiaries, claims of creditors of such subsidiaries will have priority with respect to the assets and earnings of such subsidiaries over the claims of creditors of the Company. Statutory liabilities of the P&C Subsidiaries, including loss reserves and unearned premium reserves, aggregated $687.4 million at December 31, 1996 and assets of such subsidiaries totaled $933.3 million at such date. In addition, in the event of a default on the Company's debt or an insolvency, liquidation or other reorganization of the Company, creditors of the Company will have no right to proceed against the assets of the P&C Subsidiaries or to cause their liquidation under Federal and state bankruptcy laws. If any of the Company's Domestic Insurance Subsidiaries were to be liquidated, such liquidation would be conducted under the insurance laws of North Carolina by the North Carolina Insurance Commissioner as the receiver with respect to such subsidiary's property and business. ITEM 2. PROPERTIES The Company owns its 410,000 square foot corporate headquarters buildings, associated parking facilities and a 13,500 square foot child care facility located in downtown Winston-Salem, North Carolina. The Company also owns a 191,000 square foot office complex in Burlington, North Carolina. The Domestic Insurance Subsidiaries rent various small office facilities, primarily field claims offices, throughout its marketing territories. ITEM 3. LEGAL PROCEEDINGS The Company is a party to various lawsuits primarily incident to the ordinary course of its business that would not materially affect the financial position and results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. 20 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table sets forth, for the calendar quarters indicated, the high and low prices of the Company's common stock, par value $.01 per share ("Common Stock"), reported by the New York Stock Exchange under the symbol "IN." On January 24, 1997 the closing price of the Common Stock was 14 5/8.
1996 HIGH LOW ---- ------ ------ First Quarter $22.13 $19.13 Second Quarter 20.50 17.25 Third Quarter 21.25 18.38 Fourth Quarter 20.63 16.00
1995 HIGH LOW ---- ------ ------ First Quarter $14.75 $11.75 Second Quarter 17.38 13.13 Third Quarter 18.13 15.88 Fourth Quarter 21.25 15.88
The Company's Board of Directors' policy is to review dividends in the first quarter of each year after completion of the fiscal year-end financial results. The declaration and payment of future dividends to holders of Common Stock will be at the discretion of the Board of Directors and will depend upon many factors, including the Company's financial condition, earnings and capital requirements of the Company's Domestic Insurance Subsidiaries, legal requirements and regulatory constraints. Accordingly, there is no requirement or assurance that dividends will be declared or paid in the future. For a discussion of restrictions on the ability of the Domestic Insurance Subsidiaries to pay dividends to the Company and the ability of the Company to pay dividends, see "Item 1. Business--Certain Considerations--Limited Dividends Available from Domestic Insurance Subsidiaries" and "--High Leverage" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." 21 ITEM 6. SELECTED FINANCIAL INFORMATION
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------ 1996 1995 1994 1993 1992 ----------- ----------- ----------- ---------- ---------- (IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS) OPERATING RESULTS Direct premiums written.............. $ 935,011 $ 797,373 $ 545,483 $ 395,767 $ 341,957 Net premiums written.. 797,989 620,447 363,467 246,393 193,459 Total revenues........ 783,411 627,458 369,587 267,510 215,287 Income from continuing operations........... 170 36,619 22,538 43,286 31,324 Net income............ 170 33,995 23,188 44,196 30,110 Net income (loss) available to common stockholders......... (5,400) 28,425 22,306 44,196 29,772 Operating earnings (loss)............... (1,592) 30,315 23,259 37,008 28,734 PER SHARE Income from continuing operations........... $ (.34) $ 1.86 $ 1.38 $ 2.53 $ 1.94 Net income............ (.34) 1.73 1.42 2.58 1.87 Weighted average shares outstanding... 15,850 19,635 15,750 17,119 15,918 Dividends paid........ $ .36 $ .36 $ .36 $ .32 $ .16 Operating earnings.... (.45) 1.54 1.42 2.16 1.78 FINANCIAL POSITION Cash and invested assets............... $ 567,892 $ 505,104 $ 420,919 $ 244,588 $ 242,249 Total Assets.......... 1,356,799 1,241,679 1,152,123 656,721 584,070 Short-term debt....... 44,000 16,000 21,000 16,049 -- Notes payable......... 150,760 150,807 150,812 75,826 74,808 Stockholders' equity.. 215,391 234,847 195,259 127,462 115,820 GAAP COMBINED RATIO(1) Loss ratio............ 80.0% 73.4% 70.4% 62.1% 57.0% Expense ratio......... 22.4 21.6 22.0 21.9 24.1 ----------- ----------- ----------- --------- --------- Combined ratio........ 102.4% 95.0% 92.4% 84.0% 81.1% ----------- ----------- ----------- --------- --------- SELECTED INSURANCE COMPANY STATUTORY DATA(2) Loss ratio............ 79.4% 73.2% 70.8% 63.0% 57.0% Expense ratio......... 22.1 21.5 21.7 22.0 20.9 ----------- ----------- ----------- --------- --------- Combined ratio........ 101.5% 94.7% 92.5% 85.0% 77.9% ----------- ----------- ----------- --------- --------- Statutory net income.. $ 6,882 $ 41,814 $ 37,883(3) $ 35,097 $ 39,267 Statutory surplus..... 245,919 226,832 198,589 103,033 105,395 Net premiums written to statutory surplus.............. 3.248x(3) 2.7x 2.6x(4) 2.4x 1.8x
- -------- (1) Ratios for 1993 exclude the effect of non-recurring items relating to the settlement of a premium rate dispute. (2) Combined ratio for 1994 is computed including the results of Bankers and Shippers for the period after the acquisition date of October 18, 1994. (3) After giving effect to the application of the proceeds of the sale of the Junior Subordinated Debentures, the pro forma ratio would have been 2.7x. (4) Includes results of Bankers and Shippers and Integon Preferred Insurance Company for the full year 1994. 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following section contains forward-looking statements regarding future profit levels, premium growth, cash flows and other matters, which involve risks and uncertainties that may affect the Company's actual results of operations. The following important factors, among others, could cause actual results to differ materially from those set forth in the forward looking statements: claims frequency, claims severity, severe adverse weather conditions, the cost of automobile repair, economic activity, competitive pricing and the regulatory environment in which the Company operates. See "Item 1. Business-- Certain Considerations." RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995 Net premiums written increased 28.6% from $620.4 million in 1995 to $798.0 million in 1996. Of that amount, nonstandard automobile insurance net premiums written increased from $568.1 million in 1995 to $722.9 million in 1996, or 27.3%. The increase in nonstandard automobile insurance net premiums written is attributable, in part, to a shift in the Company's business towards states with higher premium rates. Certain states' premium rates are generally higher because of competitive conditions, higher expected losses and expenses or higher limits of liability required. The increase is also attributable to the Company insuring a greater percent of its customers with 12 month policies instead of six month policies. Unit growth and, to a lesser extent, rate increases also contributed to the increase in net premiums written. Specialty auto products net premiums written increased 88.9% from $26.3 million in 1995 to $49.8 million in 1996. Premiums earned on all lines of business increased 29.1% from $567.0 million in 1995 to $732.0 million in 1996 and reflects the increase in net premiums written. Loss and LAE increased 40.8% from $416.0 million in 1995 to $585.7 million in 1996. The loss ratio, defined as loss and LAE as a percentage of premiums earned, increased from 73.4% in 1995 to 80.0% in 1996. Inadequate pricing, and changes in product design and underwriting criteria, undertaken during 1996 contributed to the increase in loss and LAE and resulted in the Company attracting some new insureds with higher loss characteristics than previously experienced. The Company's loss and LAE were adversely affected by an increase in the frequency and severity of claims. In particular, during the first and third quarters, respectively, the Company was impacted by severe winter weather and Hurricanes Fran and Bertha, which accounted for an increase in loss and LAE of approximately $12.0 million. The increase in loss and LAE also included a $12.5 million increase in the Company's loss and LAE reserves in the fourth quarter of 1996 due to actual loss and LAE being in excess of original expectations, primarily for the 1996 accident year, with $1.9 million being attributable to prior accident years. The Company believes that the severity trends noted above reflect general increases in the costs of repairing automobiles, attributable to air bags, advanced technology and anti-lock brakes and other more expensive components in an increasing number of vehicles insured by the Company, as well as to general price inflation. To some extent, the Company's pricing in 1996 did not adequately factor in such cost increases. Policy acquisition and other underwriting expenses increased 33.7% from $122.7 million in 1995 to $164.0 million in 1996. The expense ratio, defined as policy acquisition and other underwriting expenses as a percentage of premiums earned, increased from 21.6% in 1995 to 22.4% in 1996. The increase in policy acquisition and other underwriting expenses was due to an increase in personnel-related and other information systems costs. Such costs were incurred primarily to enhance the Company's operations, and also included expenditures for beginning the modifications necessary to accommodate the Year 2000. Bad debt expense during 1996 increased from $8.1 million in 1995 to $16.1 in 1996 due in part to increased net premiums written and the extension of 23 more favorable credit terms to its insureds. During the fourth quarter of 1996, the Company, in addition, wrote-off $3.5 million in deferred acquisition costs as a result of the increase in the loss ratio in the last several months of the year. Other income less other expenses resulted in expenses of $.8 million in 1996 and income of $2.5 million in 1995. The decrease in income primarily reflects the fact that 1995 results included $.9 million of income from the sale of a joint venture. Net investment income increased 6.8% from $29.9 million in 1995 to $32.0 million in 1996 as a result of the $68.8 million increase in average invested assets. This higher level of invested assets was partially offset by a decrease in comparable investment yields and a higher percentage of tax-exempt securities, which resulted in a pre-tax yield on the investment portfolio of 5.9% in 1996 compared to 6.3% in 1995. The percentage of cash and invested assets invested in tax-exempt securities was 25.5% and 24.3% in 1996 and 1995, respectively. In addition to the variances discussed above, the Company realized investment gains of $2.7 million in 1996 after a $2.0 million write- down of bonds in its investment portfolio, compared to $9.7 million of realized investment gains in 1995. Interest expense increased from 3.5% from $14.5 million in 1995 to $15.0 million in 1996 due to increased short-term borrowings to pay parent company expenses. Federal income taxes decreased $18.4 million from $16.3 million incurred in 1995 to a $2.1 million tax benefit in 1996. The tax benefit is a result of the Company having a loss from operations before federal income tax. Income before extraordinary items decreased $36.4 million from $36.6 million in 1995 to $.2 million in 1996. YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994 Net premiums written increased 70.7% from $363.5 million in 1994 to $620.4 million in 1995. Nonstandard auto insurance net premiums written increased 69.8% from $334.6 million in 1994 to $568.1 million in 1995. Premiums earned on all lines of business increased 69.5% from $334.5 million in 1994 to $567.0 million in 1995. Nonstandard auto insurance premiums earned increased $216.6 million, or 70.2%, over the amount earned in 1994. The growth in premium volume is due to the acquisition of Bankers and Shippers in October 1994 and increased market penetration in most of the Company's existing territories as well as entrance into new markets. Loss and LAE increased 76.7% from $235.4 million in 1994 to $416.0 million in 1995. The loss ratio increased from 70.4% in 1994 to 73.4% in 1995. The increase in the loss ratio was due primarily to increased severity of physical damage claims resulting from newer automobiles that are more complicated and expensive to repair. Policy acquisition and other underwriting expenses increased 66.7% from $73.6 million in 1994 to $122.7 million in 1995. The expense ratio decreased from 22.0% in 1994 to 21.6% in 1995. The decrease in the expense ratio was due primarily to increased operating efficiencies. Net investment income increased 67.1% from $17.9 million in 1994 to $29.9 million in 1995. The average balance of invested assets increased 41.7% from 1994 to 1995 due primarily to the acquisition of Bankers and Shippers and operating cash flow. The overall pre-tax yield for the Company was 6.3% in 1994 and 1995. The Company significantly reduced investments in tax-exempt securities to 24.3% of total cash and invested assets at December 31, 1995 compared to 57.4% at December 31, 1994. The after-tax yield was 4.7% in 1995 compared to 4.9% in 1994. Other income less other expenses resulted in income of $2.5 million and $.4 million in 1995 and 1994, respectively. The increase in income in 1995 was primarily due to lower corporate expenses of $1.3 million and 24 $.7 million of income associated with a joint venture that was sold during the year. The decrease in corporate expenses was due to lower legal expenses and reduced costs associated with directors' compensation. A settlement was reached in litigation early in the year which reduced legal expenses and a reduction in Board members in 1995 resulted in lower compensation expense compared to 1994. Interest expense increased from $8.4 million in 1994 to $14.5 million in 1995 due to the issuance in October 1994 of 9.5% Senior Notes due 2001 in connection with the acquisition of Bankers and Shippers and short-term borrowings under the committed credit facility in 1995. Federal income taxes increased $6.6 million from $9.7 million in 1994 to $16.3 million in 1995. The effective tax rate increased from 30.0% in 1994 to 30.8% in 1995 due primarily to higher underwriting income and decreased holdings of tax-exempt securities in 1995. Underwriting income is taxed at the statutory rate of 35.0% while net investment income is taxed at a lower effective rate due to the investment in tax-exempt securities. Income before extraordinary items increased $14.1 million from $22.5 million in 1994 to $36.6 million in 1995. Additionally, there were net realized investment losses of $1.1 million in 1994 compared to net realized investment gains of $9.7 million in 1995. Adjusting for these factors, income before extraordinary gains increased $7.1 million from $23.2 million to $30.3 million. Additional factors affecting results have been discussed above. LIQUIDITY AND CAPITAL RESOURCES SOURCES OF FUNDS: The major sources of operating funds for Integon Corporation, the parent company, have been (i) dividends from its subsidiaries, (ii) reimbursements of costs and expenses in connection with the management agreement among the Company and its subsidiaries pursuant to which the Company provides certain services to such subsidiaries, (iii) tax sharing payments from the operating subsidiaries to the Company and (iv) borrowings under credit facilities. The Company files a consolidated federal income tax return including its subsidiaries and receives payments pursuant to a tax sharing agreement among the Company and its subsidiaries. Taxes are computed for each subsidiary and paid to the Company as if such subsidiary were filing a tax return on a stand-alone basis, thereby providing additional funds to the Company because the aggregate of such payments generally exceeds taxes to be paid by the Company on a consolidated basis. Subject to the limitations on dividends described below, the foregoing sources are expected to be available for future needs of Integon Corporation. Such dividends are limited pursuant to the North Carolina insurance laws and regulations. In determining the ability of its insurance subsidiaries to pay dividends, the Company monitors its subsidiaries' operating leverage based on the level of net premiums written to statutory surplus. In addition, the P&C Subsidiaries' ability to pay dividends is limited by the terms of the Company's Credit Facility, which requires the P&C Subsidiaries to maintain a net premiums written to statutory surplus of 3.25x. The P&C Subsidiaries' premium written to statutory surplus ratio for the year ended December 31, 1996 was approximately 3.248x. See "--Financing Activities." Dividends will be retained by the subsidiaries as needed to comply with the covenants of the Company's Credit Facility and, in any event, may be retained to fund growth. The maximum amounts of dividends from the Domestic Insurance Subsidiaries that could be payable during 1997 without the approval by the North Carolina Insurance Commissioner is approximately $7.9 million. However, the payment of dividends is further restricted by the terms of the Company's Credit Facility. See "--Financing Activities." As of December 31, 1996, Integon Corporation had approximately $1.4 million of cash and cash equivalents that were available for general corporate purposes, including debt service, dividend payments and working capital. 25 The principal sources of funds for the Company's subsidiaries are net premiums collected, proceeds from investment income and from investments that have been sold, matured or repaid, and premium financing revenues. On a consolidated basis, net cash flows provided by operating activities for the year ended December 31, 1996 and 1995 were $75.6 and $54.0 million, respectively. Based on the Company's current financial plans, management believes that its subsidiaries will continue to realize positive cash flows from their operating activities and that the operating liquidity needs of such subsidiaries can be funded exclusively from such cash flow. USES OF FUNDS: Integon Corporation's principal uses of funds are the payment of corporate operating expenses, taxes, debt service and dividends on preferred and common stock. During 1996, Integon Corporation contributed $10.1 million of capital to the P&C Subsidiaries. The principal uses of funds of the Company's subsidiaries are the payment of claims on insurance policies, the payment of operating expenses, purchase of investments, tax sharing payments and, to the extent permissible, dividends to Integon Corporation. The Company and its subsidiaries are committed to using funds to continue its investment in new technology and to continue to expand information system personnel primarily to enhance operations, as well as to accomplish the modifications necessary to accommodate the Year 2000. FINANCING ACTIVITIES: In July 1996, the Company's Credit Facility was increased from $25.0 million to $75.0 million to reflect the increased size of the Company and to pay parent company expenses as the insurance subsidiaries retain earnings to fund future growth. The interest rate charged on the Credit Facility is based on the bids of the participating lenders and, in the case of Eurodollar loans, a margin percentage ranging from .55% to .675% is added. The facility fee ranges from .20% to .35% of the total amount of the facility. The Credit Facility contains certain covenants, including a limitation on net premiums written to statutory surplus of 3.25x and a maximum ratio of debt to total capitalization of 55%. The amount of the Credit Facility available, subject to the borrowing conditions thereunder, for future borrowings at December 31, 1996 was $31 million. The Company expects to use a portion of the proceeds from the sale of the Junior Subordinated Debentures to reduce the amount outstanding under the Credit Facility. See "Item 1. Business--Recent History; Strategy." The Company's interest expense also includes payments with respect to its 9 1/2% Senior Notes due October 15, 2001 (the "9 1/2% Senior Notes") and its 8% Senior Notes due August 15, 1999 (the "8% Senior Notes" and together with the 9 1/2% Senior Notes, the "Senior Notes"). The indentures governing the Senior Notes contain covenants that restrict the ability of the Company and its subsidiaries to dispose of the capital stock of any subsidiary and to incur indebtedness secured by the capital stock of any subsidiary. The Senior Notes are not redeemable by the Company prior to maturity. INVESTMENTS: In accordance with the Company's investment policy, the Company's investments at December 31, 1996 consisted primarily of investment- grade securities (rated Baa or better by Moody's or the equivalent). Consolidated cash and cash equivalents at December 31, 1996 amounted to $43.8 million, or 7.7% of total cash and invested assets. Management has determined that the entire fixed maturity securities portfolio should be classified as "available for sale." Fixed maturity securities classified as "available for sale" are carried at estimated market value. The market value and amortized cost of all fixed maturity securities at December 31, 1996 were $521.3 million and $522.5 million, respectively. Management believes that the securities in the Company's investment portfolio at December 31, 1996 are readily marketable. 26 REGULATION: Insurance laws and regulations impose certain restrictions on the amount of dividends that may be paid by insurance companies. The maximum amount of ordinary dividends that a North Carolina domiciled property and casualty insurance company may pay at any point in time without regulatory approval is the lesser of (a) 10% of the policyholders' statutory surplus of such property and casualty insurance company as of the preceding December 31 or (b) the statutory net income of such property and casualty insurance company for the preceding calendar year, less the amount of dividends paid during the preceding 12 months. The Company's insurance subsidiaries paid approximately $4.8 million of ordinary dividends in 1996, which was less than that available for payment in 1996. See "--Sources of Funds" for a discussion of the maximum amount of dividends payable in 1997. If the insurance subsidiaries are not able to pay ordinary dividends and their requests for the payment of extraordinary dividends are not granted, and if amounts needed are in excess of the available funds under the credit facility, additional borrowings, the issuance of additional securities or obtaining other funds could be necessary to pay debt service, preferred and common stock dividends and other expenses of the Company. 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT To The Board of Directors and Stockholders of Integon Corporation Winston-Salem, North Carolina We have audited the accompanying consolidated balance sheets of Integon Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our audits also included the financial statement schedules listed in the Index at Item 14. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Integon Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as whole, present fairly in all material respects the information set forth therein. Deloitte & Touche LLP Winston-Salem, North Carolina January 22, 1997 28 INTEGON CORPORATION AND SUBSIDIARIES BALANCE SHEETS DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 ---------- ---------- ASSETS Investments: Fixed maturities available for sale--at market (amortized cost $522,452 and $469,219)............. $ 521,311 $ 481,944 Other long-term investments......................... 2,743 2,114 ---------- ---------- 524,054 484,058 Cash and cash equivalents............................. 43,838 21,046 Reinsurance receivable................................ 185,077 199,826 Premiums due and uncollected (less allowance for doubtful accounts of $5,282 and $3,591).............. 248,537 199,087 Prepaid reinsurance premiums.......................... 48,909 56,726 Accounts receivable, primarily financing receivables (less allowance for doubtful accounts of $1,112 and $850)................................................ 32,957 28,277 Accrued investment income............................. 8,933 7,683 Deferred policy acquisition costs..................... 55,106 46,413 Property and equipment (less accumulated depreciation of $10,808 and $4,878)............................... 68,271 65,247 Goodwill (less accumulated amortization of $13,885 and $10,812)............................................. 106,957 110,976 Deferred income taxes................................. 22,044 12,934 Other assets.......................................... 12,116 9,406 ---------- ---------- $1,356,799 $1,241,679 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Unearned premiums..................................... $ 364,081 $ 305,911 Loss and loss adjustment expenses payable............. 478,031 416,740 Accrued expenses and other liabilities................ 104,536 117,374 Short-term debt....................................... 44,000 16,000 Notes payable......................................... 150,760 150,807 ---------- ---------- 1,141,408 1,006,832 ---------- ---------- Stockholders' Equity: $3.875 Convertible Preferred Stock--$.01 par value per share, 1,437,500 shares authorized, issued and outstanding.......................................... 14 14 Preferred Stock--$.01 par value per share, 562,500 shares authorized, issued and outstanding--none...... -- -- Common Stock--$.01 par value per share, authorized-- 35,000,000 shares; issued 17,303,321 and 17,271,707 shares............................................... 173 173 Class A Non-Voting Common Stock--$.01 par value per share, authorized 20,000,000 shares; issued and outstanding--none.................................... -- -- Additional paid-in capital............................ 147,891 147,296 Net unrealized appreciation (depreciation) of securities........................................... (700) 8,288 Retained earnings..................................... 105,834 116,897 Treasury stock--at cost, 1,567,200 shares............. (37,821) (37,821) ---------- ---------- 215,391 234,847 ---------- ---------- $1,356,799 $1,241,679 ========== ==========
The accompanying notes are an integral part of these statements. 29 INTEGON CORPORATION AND SUBSIDIARIES STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994 -------- -------- -------- REVENUES Net premiums written............................. $797,989 $620,447 $363,467 ======== ======== ======== Premiums earned.................................. $732,002 $567,018 $334,460 Net investment income............................ 31,970 29,937 17,914 Net realized investment gains (losses)........... 2,711 9,698 (1,110) Other income..................................... 16,728 20,805 18,323 -------- -------- -------- 783,411 627,458 369,587 -------- -------- -------- BENEFITS AND EXPENSES Loss and loss adjustment expenses................ 585,711 415,973 235,448 Policy acquisition and other underwriting expenses........................................ 164,015 122,653 73,565 Other expenses................................... 17,504 18,286 17,966 Amortization of goodwill......................... 3,072 3,096 1,985 Interest expense................................. 15,021 14,510 8,433 -------- -------- -------- 785,323 574,518 337,397 -------- -------- -------- INCOME (LOSS) FROM OPERATIONS BEFORE FEDERAL INCOME TAXES AND EXTRAORDINARY ITEMS............ (1,912) 52,940 32,190 Federal income tax (benefit)..................... (2,082) 16,321 9,652 -------- -------- -------- INCOME BEFORE EXTRAORDINARY ITEMS................ 170 36,619 22,538 Extraordinary items, net of federal income tax (benefit) of $0, $(276), and $350......................... -- (2,624) 650 -------- -------- -------- NET INCOME....................................... 170 33,995 23,188 Preferred stock dividends........................ 5,570 5,570 882 -------- -------- -------- Net income (loss) available to common stockholders.................................... $ (5,400) $ 28,425 $ 22,306 ======== ======== ======== EARNINGS PER COMMON SHARE Primary: Income (Loss) before extraordinary items....... $ (.34) $ 1.98 $ 1.38 Extraordinary items............................ -- (.17) .04 -------- -------- -------- NET INCOME (LOSS).............................. $ (.34) $ 1.81 $ 1.42 ======== ======== ======== Fully diluted: Income (Loss) before extraordinary items....... $ (.34) $ 1.86 $ 1.38 Extraordinary items............................ -- (.13) .04 -------- -------- -------- NET INCOME (LOSS).............................. $ (.34) $ 1.73 $ 1.42 ======== ======== ======== Weighted average common shares outstanding: Primary........................................ 15,850 15,701 15,750 ======== ======== ======== Fully diluted.................................. 15,850 19,635 15,750 ======== ======== ========
The accompanying notes are an integral part of these statements. 30 INTEGON CORPORATION AND SUBSIDIARIES STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, (IN THOUSANDS)
1996 1995 1994 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income................................... $ 170 $ 33,995 $ 23,188 Adjustments to reconcile net income to net cash provided by operating activities: Net realized investment (gains) losses..... (2,711) (9,698) 1,110 Depreciation and amortization.............. 9,786 7,351 4,085 Net amortization of discounts and premiums.................................. 1,382 (638) (214) Provision for deferred federal income taxes (benefit)................................. (4,098) 1,728 (2,984) Change in assets and liabilities net of effects from purchase of subsidiaries: Net (increase) decrease in reinsurance assets.................................. 22,566 38,616 (12,667) Increase in premiums due and uncollected............................. (49,450) (49,423) (24,961) Increase in deferred policy acquisition costs................................... (8,693) (9,906) (5,157) Increase in unearned premiums............ 58,170 21,082 30,596 Increase in loss and loss adjustment expenses payable........................ 61,291 21,440 25,689 Other, net............................... (12,827) (592) 2,663 --------- --------- --------- Net Cash Flows Provided by Operating Activities................................ 75,586 53,955 41,348 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Investment securities sold................... 657,090 566,424 213,609 Investment securities matured, called or redeemed.................................... 32,273 26,493 21,984 Investment securities purchased.............. (741,858) (651,928) (278,746) Property and equipment purchased............. (9,660) (5,289) (7,842) Sale of (investment in) joint venture........ -- 5,236 (4,868) Purchase of Bankers and Shippers Insurance Company (net of cash acquired).............. -- -- (116,071) Purchase of Integon Preferred Insurance Company (net of cash acquired).............. -- -- (7,367) Purchase of Integon Services Company (net of cash acquired).............................. -- -- (1,932) Other........................................ 950 (353) 2,290 --------- --------- --------- Net cash flows used in investing activities................................ $ (61,205) $ (59,417) $(178,943) --------- --------- ---------
The accompanying notes are an integral part of these statements. 31 INTEGON CORPORATION AND SUBSIDIARIES STATEMENTS OF CASH FLOWS--(CONTINUED) YEARS ENDED DECEMBER 31, (IN THOUSANDS)
1996 1995 1994 --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in book cash overdrafts... $ (8,309) $ 11,218 $ 15,413 Increase (decrease) in short-term debt........ 28,000 (5,000) 4,951 Common stock dividends........................ (5,663) (5,653) (5,649) Preferred stock dividends..................... (5,570) (5,570) (882) Issuance of debt.............................. -- -- 74,960 Purchase of treasury stock.................... -- -- (3,323) Issuance of convertible preferred stock....... -- -- 68,655 Other......................................... (47) (36) -- --------- --------- --------- Net cash flows provided by (used in) financing activities....................... 8,411 (5,041) 154,125 --------- --------- --------- Net increase (decrease) in cash and cash equivalents.................................. 22,792 (10,503) 16,530 Cash and cash equivalents at beginning of period..................................... 21,046 31,549 15,019 --------- --------- --------- Cash and cash equivalents at end of period.... $ 43,838 $ 21,046 $ 31,549 ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION Cash paid during the period for: Interest.................................... $ 14,577 $ 14,055 $ 6,687 Federal income taxes........................ 12,875 11,700 18,517
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES Increases in common stock and additional paid-in capital of $522, $146 and $731 in 1996, 1995 and 1994, respectively, were due to grants of common stock to non-employee directors. The accompanying notes are an integral part of these statements. 32 INTEGON CORPORATION AND SUBSIDIARIES STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994 -------- -------- -------- $3.875 CONVERTIBLE PREFERRED STOCK Balance at beginning of year.................... $ 14 $ 14 $ -- Issuance........................................ -- -- 14 -------- -------- -------- Balance at end of year.......................... $ 14 $ 14 $ 14 ======== ======== ======== PREFERRED STOCK Balance at beginning of year.................... $ -- $ -- $ -- Issuance........................................ -- -- -- -------- -------- -------- Balance at end of year.......................... $ -- $ -- $ -- ======== ======== ======== COMMON STOCK Balance at beginning of year.................... $ 173 $ 173 $ 172 Issuance........................................ -- -- 1 -------- -------- -------- Balance at end of year.......................... $ 173 $ 173 $ 173 ======== ======== ======== ADDITIONAL PAID-IN CAPITAL Balance at beginning of year.................... $147,296 $147,161 $ 77,544 Issuance of convertible preferred stock......... -- (11) 68,641 Issuance of common stock........................ 522 146 730 Other........................................... 73 -- 246 -------- -------- -------- Balance at end of year.......................... $147,891 $147,296 $147,161 ======== ======== ======== NET UNREALIZED APPRECIATION (DEPRECIATION) OF SECURITIES Balance at beginning of year.................... $ 8,288 $ (8,393) $ 6,776 Change during year.............................. (8,988) 16,681 (15,169) -------- -------- -------- Balance at end of year.......................... $ (700) $ 8,288 $ (8,393) ======== ======== ======== RETAINED EARNINGS Balance at beginning of year.................... $116,897 $ 94,125 $ 77,468 Net income...................................... 170 33,995 23,188 Common dividends................................ (5,663) (5,653) (5,649) Preferred dividends............................. (5,570) (5,570) (882) -------- -------- -------- Balance at end of year.......................... $105,834 $116,897 $ 94,125 ======== ======== ======== TREASURY STOCK Balance at beginning of year.................... $(37,821) $(37,821) $(34,498) Purchases on the open market.................... -- -- (3,323) -------- -------- -------- Balance at end of year.......................... $(37,821) $(37,821) $(37,821) ======== ======== ========
The accompanying notes are an integral part of these statements. 33 INTEGON CORPORATION AND SUBSIDIARIES CAPITAL STOCK ACTIVITY YEARS ENDED DECEMBER 31,
1996 1995 1994 ----------- ----------- ----------- $3.875 CONVERTIBLE PREFERRED STOCK Balance at beginning of year............ 1,437,500 1,437,500 -- Issuance................................ -- -- 1,437,500 ----------- ----------- ----------- Balance at end of year.................. 1,437,500 1,437,500 1,437,500 =========== =========== =========== PREFERRED STOCK Balance at beginning of year............ -- -- -- Issuance................................ -- -- -- ----------- ----------- ----------- Balance at end of year.................. -- -- -- =========== =========== =========== COMMON STOCK Balance at beginning of year............ 17,271,707 17,262,607 17,245,143 Shares issued under the 1992 Non- Employee Directors Stock Plan.......... -- 9,100 17,464 Shares issued under the Integon Corporation Omnibus Long-Term Performance Incentive Compensation Plan................................... 11,014 -- -- Exercise of stock options............... 20,600 -- -- ----------- ----------- ----------- Balance at end of year.................. 17,303,321 17,271,707 17,262,607 ----------- ----------- ----------- TREASURY STOCK Balance at beginning of year............ (1,567,200) (1,567,200) (1,389,400) Purchases on the open market............ -- -- (177,800) ----------- ----------- ----------- Balance at end of year.................. (1,567,200) (1,567,200) (1,567,200) ----------- ----------- ----------- Outstanding at end of year.............. 15,736,121 15,704,507 15,695,407 =========== =========== ===========
The accompanying notes are an integral part of these statements. 34 INTEGON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: The consolidated financial statements and notes are presented in accordance with generally accepted accounting principles ("GAAP") for property and casualty insurance companies. All material intercompany accounts and transactions have been eliminated for all periods presented. Integon Corporation (the "Company") has one segment that is engaged in the business of developing, marketing and financing property and casualty insurance products, primarily nonstandard auto. Certain reclassifications have been made to the 1995 and 1994 amounts to conform to the 1996 presentation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS: Included in cash and cash equivalents are investments that, at purchase, have a maturity of three months or less. INVESTMENTS: Investments are classified at the time of purchase based on the maturity of the investment. Investments, including redeemable preferred stock, that mature in one year or longer are classified as fixed maturity investments. The entire fixed maturity portfolio has been classified as "available for sale." Management determines the appropriate classification of debt securities at the time of purchase and reevaluates the designation as of each balance sheet date. Securities classified as "available for sale" are carried at estimated market value, with the unrealized gains and losses reported as a separate component of stockholders' equity, net of tax effect. The amortized cost of debt securities in these categories is adjusted for amortization of premiums and accretion of discounts. Such amortization and accretion are included in interest income from investments. Realized investment gains and losses, and declines in value judged to be other-than- temporary, are included in net realized investment gains (losses). The cost of securities sold is based on the specific identification basis. DEFERRED POLICY ACQUISITION COSTS: Commissions and other costs of acquiring insurance that are primarily related to and vary with the production of business are deferred. Deferred policy acquisition costs are amortized over the effective period of the related insurance policies in proportion to premiums earned. The average amortization period is less than one year. Also included in deferred policy acquisition costs was the value assigned to the insurance contracts in force at the acquisition date of Bankers and Shippers Insurance Company ("Bankers and Shippers"). The Company does not consider anticipated investment income in determining the recoverability of these costs. The deferral and amortization are summarized as follows:
YEARS ENDED DECEMBER 31, ------------------------------ 1996 1995 1994 --------- --------- -------- Beginning.................................. $ 46,413 $ 36,507 $ 17,969 Acquisition of Bankers and Shippers........ -- -- 13,381 Deferral................................... 149,219 111,858 68,345 Amortization............................... (140,526) (101,952) (63,188) --------- --------- -------- Ending..................................... $ 55,106 $ 46,413 $ 36,507 ========= ========= ========
35 INTEGON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) PROPERTY AND EQUIPMENT: Property and equipment consist primarily of office buildings, furniture, and equipment and are stated at cost less accumulated depreciation. Property and equipment are depreciated over the useful life of the assets using the straight-line method. Property and related improvements are depreciated over periods ranging from 15 to 45 years. Equipment is depreciated over 3 to 7 years. Depreciation expense for the years ended December 31, 1996, 1995 and 1994 was $6.3 million, $3.8 million, and $1.9 million, respectively. GOODWILL: Goodwill, which represents the excess of cost over the fair value of net assets acquired, is amortized on a straight-line basis over periods not exceeding 40 years. The realizability of goodwill and other intangibles is evaluated periodically. Such evaluation is based on various analyses, including cash flow and profitability projections that incorporate, as applicable, the impact on existing company businesses. The analyses necessarily involve significant management judgment to evaluate the capacity of the Company and its acquired businesses to perform within projections. CASH OVERDRAFT: The Company operates a cash management program, which at times results in book cash overdrafts supported by its cash equivalents and short-term investments. Included in other liabilities at December 31, 1996 and 1995 are cash overdrafts of $18.3 million and $26.6 million, respectively. RECOGNITION OF PREMIUM REVENUE: Premiums are recognized as revenue primarily on a pro rata basis over the period of risk. STATUTORY ACCOUNTING PRACTICES: Integon Corporation's insurance subsidiaries, domiciled in North Carolina, prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the North Carolina Insurance Department. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners, as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. Although prohibited by statutory accounting practices prescribed by North Carolina, the Company, during 1995, received written approval from the North Carolina Insurance Department to recognize anticipated salvage and subrogation in the determination of statutory unpaid loss reserves. As of December 31, 1996, that permitted transaction increased statutory surplus by $12.5 million over what it would have been had the prescribed accounting practice been followed. LOSS AND LOSS ADJUSTMENT EXPENSES PAYABLE: Loss and loss adjustment expenses payable represent the estimated liability on claims reported to the Company plus reserves for claims incurred but not yet reported and the estimated settlement expenses related to these claims. The liabilities for claims and related settlement expenses are determined using "case basis" evaluations and statistical analysis and represent estimates of the ultimate net cost of all losses incurred through the balance sheet date. Although considerable variability is inherent in such estimates, management believes that the liabilities for unpaid claims and related settlement expenses are adequate. The estimates are continually reviewed by management and, as adjustments to these liabilities become necessary, such adjustments are reflected in current operations. REINSURANCE: Premiums and loss and loss adjustment expenses ceded to other companies are reported as a reduction of premiums and loss and loss adjustment expenses, respectively. Amounts applicable to reinsurance ceded for unearned premium reserve and claim liabilities are reported as prepaid reinsurance premiums and reinsurance receivable, respectively. Expense allowances received in connection with reinsurance ceded are accounted for as reductions of the related policy acquisition costs and are deferred and amortized accordingly. Reinsurance premiums, commissions, and reserves related to assumed reinsurance are accounted for on bases 36 INTEGON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. FEDERAL INCOME TAX: Current income taxes are based upon amounts estimated to be payable or recoverable as a result of taxable operations for the current year. Deferred income tax assets and liabilities are recognized based on the differences between financial statements carrying amounts and income tax bases of assets and liabilities using enacted income tax rates and laws. EARNINGS PER COMMON SHARE: Primary earnings per common share are calculated by dividing net income (after deducting preferred stock dividend requirements) by the weighted average number of shares of common and common equivalent shares outstanding during the period. Common equivalent shares include the assumed exercise and conversion of stock options. Fully diluted earnings per share are computed by dividing net income by the weighted average number of shares of common and common equivalents and assumes conversion of the $3.875 Convertible Preferred Stock unless assumed conversion has the effect of increasing earning per share. STOCK-BASED COMPENSATION: The Company has adopted Statement of Financial Accounting Standard No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," and has elected to utilize the provisions of APB Opinion No. 25 (APB 25) and related Interpretations in measuring stock-based compensation for employees. While use of APB 25 is acceptable under the provisions of SFAS 123 the Company must provide all the disclosures required for SFAS 123's fair value based method of accounting for stock based compensation. In addition, SFAS 123 requires the Company to make pro forma disclosures of net income and earnings per share as if the fair value method had been applied. The disclosure provisions of SFAS 123 are effective for fiscal years beginning after December 15, 1995. NOTE B--ACQUISITIONS PURCHASE OF INTEGON PREFERRED INSURANCE COMPANY: In June 1994, the Company acquired AMSTATS Insurance Company for $8.2 million of cash and created goodwill of $1.2 million. The company's name has since been changed to Integon Preferred Insurance Company ("Integon Preferred"). The acquisition of Integon Preferred was accounted for by the purchase method of accounting. PURCHASE OF BANKERS AND SHIPPERS: In October 1994, the Company acquired Bankers and Shippers, which changed its name to Integon National Insurance Company, for a purchase price of $153.2 million. The transaction was financed through public offerings of $75.0 million principal amount of 9.5% Senior Notes due 2001, at a price of 99.947 to yield 9.51% and 1,437,500 shares of $3.875 Convertible Preferred Stock with an issue price of $50.00 per share, convertible at $19.05 per common share (collectively, the "Offerings"). The transaction was accounted for by the purchase method of accounting. 37 INTEGON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE B--ACQUISITIONS--(CONTINUED) The purchase price paid by the Company was allocated to the assets acquired and liabilities assumed in accordance with GAAP. Adjustments to the carrying value of the net assets acquired to record them at their fair value at the purchase date are as follows:
PURCHASE -------- Net assets acquired, seller's basis.............................. $103,518 Less historical goodwill......................................... (9,812) -------- 93,706 Reinsurance transaction.......................................... 26 Fair value adjustments: Goodwill....................................................... 57,890 Property and equipment......................................... 2,385 Deferred policy acquisition costs.............................. (10,966) Value assigned purchased insurance in force.................... 13,381 Deferred tax benefit........................................... (2,615) Capitalized software........................................... (1,528) Assigned risk reserve.......................................... (700) Employee and retiree benefits.................................. 1,621 -------- Net assets acquired, at fair value............................... $153,200 ========
The Company acquired the nonstandard private passenger automobile insurance business (the "Acquired Business") of Bankers and Shippers and its subsidiary, Bankers and Shippers Indemnity Company ("Bankers and Shippers Indemnity"). Simultaneously with the closing of the acquisition, Bankers and Shippers, Bankers and Shippers Indemnity and a subsidiary of TravelersGroup ("Travelers") entered into reinsurance agreements, pursuant to which Bankers and Shippers and Bankers and Shippers Indemnity ceded to Travelers all of the risks of the business written by Bankers and Shippers and its subsidiaries that were not related to the Acquired Business (the "Unrelated Business"). Bankers and Shippers transferred to Travelers the assets of the Unrelated Business, together with a portion of the cash and invested assets of Bankers and Shippers (the "B&S Portfolio"), which collectively was equal to the reserves and other liabilities of the Unrelated Business, adjusted to take into account a portion of the net unrealized losses in the B&S Portfolio as of the closing of the acquisition. The results of operations of Bankers and Shippers are included with the results of the Company from October 18, 1994. 38 INTEGON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE B--ACQUISITIONS--(CONTINUED) The following information is presented assuming the acquisition of Bankers and Shippers and the Offerings had occurred on January 1 of each year presented (unaudited):
YEARS ENDED DECEMBER 31, ------------------------- 1994 1993 ------------ ------------ Total revenue..................................... $ 503,292 $ 397,399 Income from continuing operations................. 27,138 49,182 Net income........................................ 27,788 50,092 Primary earnings per share: Income from continuing operations............... $ 1.37 $ 2.55 Net income...................................... 1.41 2.60 Weighted average common shares outstanding (in thousands)..................................... 15,750 17,119 Fully diluted earnings per share: Income from continuing operations............... $ 1.37 $ 2.35 Net income...................................... 1.41 2.39 Weighted average common shares outstanding (in thousands)..................................... 15,750 20,892
PURCHASE OF INTEGON SERVICES COMPANY: In December 1994, the Company acquired Integon Services Company ("ISC") at a purchase price equal to the net book value of ISC of approximately $3.0 million. Prior to such acquisition, ISC provided administrative and financial services to the Company pursuant to an agreement. See Note I. NOTE C--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and estimated fair values of financial instruments held by the Company at December 31, 1996 and 1995. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The table excludes cash and cash equivalents, short-term investments, reinsurance receivable, short-term debt, net premiums due and uncollected, and net accounts and notes receivable, all of which had fair values approximating carrying values. FIXED MATURITIES AVAILABLE FOR SALE: In determining fair value for fixed maturities, the Company obtains market value information through independent pricing services. Market values are also obtained, to a lesser extent, from the Company's investment advisors who utilize financial market data systems and broker quotes to provide prices. OTHER LONG-TERM INVESTMENTS: The fair values of some investments are estimated based on quoted market prices for similar investments. For other investments, a reasonable estimate of fair value is determined and is carried at the lower of cost or estimated market value. 39 INTEGON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE C--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED) NOTES PAYABLE--These estimates are based upon issues with similar current yields and credit ratings.
1996 1995 ------------------- ------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- FINANCIAL ASSETS: Fixed maturities available for sale Unaffiliated....................... $521,311 $521,311 $481,944 $481,944 Other long-term investments......... 2,743 2,743 2,114 2,114 FINANCIAL LIABILITIES: Notes payable....................... 150,760 150,867 150,807 159,427
NOTE D--INVESTMENTS Income by type of investment was as follows:
YEARS ENDED DECEMBER 31, -------------------------- 1996 1995 1994 -------- -------- -------- Fixed maturities--unaffiliated.................. $ 30,784 $ 27,519 $ 16,387 Fixed maturities--affiliated.................... -- 801 1,000 Short-term investments and cash equivalents..... 2,636 2,651 1,323 Other long-term investments..................... 60 151 132 -------- -------- -------- Investment income............................. 33,480 31,122 18,842 Less investment expenses........................ 1,510 1,185 928 -------- -------- -------- Net investment income......................... $ 31,970 $ 29,937 $ 17,914 ======== ======== ========
The Company had $2.3 million of securities producing income at a lower than contractual rate at December 31, 1996. Net realized investment gains (losses) are summarized as follows:
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- -------- -------- Fixed maturities: Gains..................................... $ 7,310 $ 13,248 $ 2,416 Losses.................................... (4,530) (3,519) (4,063) -------- -------- -------- 2,780 9,729 (1,647) Other long-term investments................. (69) (31) 537 -------- -------- -------- Net realized investment gains (losses)...... $ 2,711 $ 9,698 $ (1,110) ======== ======== ========
The changes in net unrealized appreciation (depreciation) of fixed maturities for the years ended December 31, 1996, 1995 and 1994 were $(13,866), $25,262 and $(22,421), respectively. 40 INTEGON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE D--INVESTMENTS--(CONTINUED) The amortized cost and estimated market values of investments in fixed maturities were as follows:
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- --------- December 31, 1996 Bonds and notes: U. S. government obligations..... $ 97,801 $ 794 $1,238 $ 97,357 Obligations of states and political subdivisions.......... 172,281 1,242 598 172,925 Foreign obligations.............. 11,422 119 -- 11,541 Public utilities................. 21,427 158 210 21,376 All other corporate bonds........ 152,825 795 2,179 151,440 Collateral-backed securities..... 66,696 414 438 66,672 -------- ------- ------ -------- $522,452 $ 3,522 $4,663 $521,311 ======== ======= ====== ======== December 31, 1995 Bonds and notes: U. S. government obligations..... $ 86,361 $ 2,849 $ -- $ 89,210 Obligations of states and political subdivisions.......... 161,116 3,743 130 164,729 Foreign obligations.............. 30,788 1,405 -- 32,193 Public utilities................. 8,083 457 -- 8,540 All other corporate bonds........ 107,604 2,520 19 110,105 Collateral-backed securities..... 71,267 1,822 2 73,087 Redeemable preferred stocks........ 4,000 80 -- 4,080 -------- ------- ------ -------- $469,219 $12,876 $ 151 $481,944 ======== ======= ====== ========
The amortized cost and estimated market value of fixed maturities at December 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
ESTIMATED AMORTIZED MARKET COST VALUE --------- --------- Fixed maturities: Due in one year or less.............................. $ 2,027 $ 2,038 Due after one year through five years................ 110,564 110,778 Due after five years through ten years............... 224,805 223,521 Due after ten years.................................. 118,360 118,302 -------- -------- Subtotal........................................... 455,756 454,639 Collateral-backed securities......................... 66,696 66,672 -------- -------- $522,452 $521,311 ======== ========
The Company maintains a diversified portfolio, and management believes a concentration of credit risk does not exist. Cash equivalent investments are primarily invested in mutual funds comprised of issues of the U.S. Treasury with an average maturity of less than 90 days. At December 31, 1996, fixed maturities with a carrying value of approximately $23.1 million were on deposit with state regulatory authorities, as required by law. 41 INTEGON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE E--FEDERAL INCOME TAX The provision for federal income taxes consists of the following:
YEARS ENDED DECEMBER 31, --------------------------- 1996 1995 1994 -------- -------- -------- Currently payable............................. $ 2,016 $ 15,328 $ 12,636 Deferred tax (benefit)........................ (4,098) 993 (2,984) -------- -------- -------- $ (2,082) $ 16,321 $ 9,652 ======== ======== ========
The Company and its subsidiaries file a consolidated federal income tax return. The components of the provision for deferred income taxes were as follows:
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- -------- -------- Unearned premium reserve.................... $ (5,139) $ (4,402) $ (2,133) Deferred policy acquisition costs........... 3,043 3,468 1,805 Goodwill.................................... 620 2,132 132 Loss reserves............................... (1,861) (788) (829) Provision for legal expenses................ 2 (348) 2 Reserve for rate dispute.................... (222) (280) -- Investments, net............................ (177) 210 (458) Bad debt reserve............................ (725) 190 (542) Adjustment for North Carolina Reinsurance Facility................................... (93) 123 (55) Other items, net............................ 454 688 (906) -------- -------- -------- $ (4,098) $ 993 $ (2,984) ======== ======== ========
A reconciliation between the federal income tax rate and the effective tax rate is as follows:
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- -------- -------- Statutory federal income tax rate........... 35% 35% 35% Federal income tax (benefit) at statutory rate....................................... $ (670) $ 18,529 $ 11,267 Tax-preferenced investment income........... (1,941) (2,942) (2,767) Amortization of goodwill.................... 593 645 570 Other items, net............................ (64) 89 582 -------- -------- -------- Provision for federal income taxes.......... $ (2,082) $ 16,321 $ 9,652 ======== ======== ========
Federal income taxes recoverable of $3,948 have been included in other assets at December 31, 1996. Federal income taxes payable of $7,730 have been included in accrued expenses and other liabilities at December 31, 1995. 42 INTEGON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE E--FEDERAL INCOME TAX--(CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components comprising the Company's net deferred tax assets were as follows:
DECEMBER 31, ----------------- 1996 1995 -------- -------- Deferred tax liabilities: Reinsurance recoverable on unpaid losses................... $ 59,891 $ 63,705 Prepaid reinsurance premiums............................... 17,118 19,854 Deferred policy acquisition costs.......................... 19,287 16,245 Premiums due and uncollected............................... 4,886 6,288 Net unrealized appreciation of securities.................. -- 4,463 Goodwill................................................... 2,884 2,264 Other items, net........................................... 1,203 1,249 -------- -------- Total deferred tax liabilities........................... 105,269 114,068 -------- -------- Deferred tax assets: Loss reserves.............................................. 72,214 74,168 Unearned premium reserve................................... 40,788 38,385 Accrued expenses and other liabilities..................... 4,886 6,288 Adjustment for North Carolina Reinsurance Facility......... 2,301 2,208 Postretirement benefits.................................... 1,289 1,512 Bad debt reserve........................................... 2,221 1,495 Investments, net........................................... 179 435 Net unrealized depreciation of securities.................. 377 -- Other items, net........................................... 3,058 2,511 -------- -------- Total deferred tax assets................................ 127,313 127,002 -------- -------- Net deferred tax assets...................................... $ 22,044 $ 12,934 ======== ========
For financial reporting purposes, a valuation allowance was not recognized to offset the deferred tax assets. The Company believes it is more likely than not that the deferred tax assets will be realized based on the available evidence of the existence of sufficient taxable income in carryback and carryforward periods under existing tax law. NOTE F--DEBT Notes payable consist of the following:
DECEMBER 31, --------------------------------------- 1996 1995 ------------------- ------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- 9.5% Senior Notes due October 15, 2001, $75,000 face amount, effective yield 9.51%; interest payable semiannually.. $ 74,970 $ 74,993 $ 74,965 $ 82,262 8% Senior Notes due August 15, 1999, $75,000 face amount, effective yield 8.05%; interest payable semiannually.. 74,912 74,991 74,883 76,518 Promissory Note........................ 878 883 959 647 -------- -------- -------- -------- $150,760 $150,867 $150,807 $159,427 ======== ======== ======== ========
43 INTEGON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE F--DEBT--(CONTINUED) The estimated fair value of the notes payable is based upon issues with similar current yields and credit ratings. Short-term debt consists of borrowings under a revolving line of credit ("Credit Facility"). In 1996, the maximum amount of the Credit Facility was increased from $25.0 million to $75.0 million and the term of the Credit Facility was extended to 1999. The interest rate charged on the Credit Facility is based on the bids of the participating lenders and in the case of Eurodollar loans a margin percentage ranging from .55% to .675% is added. The facility fee ranges from .20% to .35% of the total amount of the facility. The weighted average interest rate of all outstanding loans at December 31, 1996 and 1995 was 6.37% and 6.93%, respectively. At December 31, 1996 and 1995, borrowings under the Credit Facility were $44.0 million and $16.0 million, respectively. The Credit Facility contains certain covenants including a limitation on net premiums written to statutory surplus of 3.25x and a maximum amount of debt to total capitalization of 55%. As of December 31, 1996, these ratios were 3.248x and 47.5%, respectively. NOTE G--REINSURANCE The Company is involved in the cession of insurance to other insurance companies. Ceded unearned premiums and ceded loss and loss adjustment expenses payable are reported in the financial statements as prepaid reinsurance premiums and reinsurance receivable, respectively. To the extent of reinsurance ceded, the Company has transferred insurance risk to the reinsurer; however, the Company remains liable to the extent the reinsuring companies cannot meet their obligations under these reinsurance treaties. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk to minimize its exposure to significant losses from reinsurer insolvencies. Under statute, the Company is required to participate in the North Carolina Reinsurance Facility (the "NCRF"). The Company's insurance subsidiaries cede business to the NCRF. The balance sheets reflect the following amounts related to reinsurance ceded:
DECEMBER 31, ----------------- 1996 1995 -------- -------- Reinsurance receivable: NCRF.................................................. $160,809 $174,918 Other................................................. 24,268 24,908 -------- -------- $185,077 $199,826 ======== ======== Prepaid reinsurance premiums: NCRF.................................................. $ 43,689 $ 42,787 Other................................................. 5,220 13,939 -------- -------- $ 48,909 $ 56,726 ======== ========
44 INTEGON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE G--REINSURANCE--(CONTINUED) The impact of reinsurance on the income statements is shown below:
YEARS ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Net premiums written: Direct.................................. $ 935,011 $ 797,373 $ 545,483 Assumed................................. 40,138 21,777 3,413 Ceded--NCRF............................. (162,791) (168,339) (160,735) Ceded--Other............................ (14,369) (30,364) (24,694) --------- --------- --------- Net..................................... $ 797,989 $ 620,447 $ 363,467 ========= ========= ========= Premiums earned: Direct.................................. $ 882,986 $ 778,570 $ 513,005 Assumed................................. 33,992 19,230 5,295 Ceded--NCRF............................. (161,889) (169,977) (156,981) Ceded--Other............................ (23,087) (60,805) (26,859) --------- --------- --------- Net..................................... $ 732,002 $ 567,018 $ 334,460 ========= ========= ========= Loss and loss adjustment expenses: Direct.................................. $ 731,397 $ 590,215 $ 399,091 Assumed................................. 30,154 13,317 (338) Ceded--NCRF............................. (148,576) (155,544) (155,154) Ceded--Other............................ (27,264) (32,015) (8,151) --------- --------- --------- Net..................................... $ 585,711 $ 415,973 $ 235,448 ========= ========= =========
Under the NCRF's operating guidelines, all business ceded to it by member companies is then assigned back to the member companies. Under North Carolina law, member companies do not participate in any gain or loss resulting from the NCRF's operations. Accordingly, the Company has not reflected approximately $123,063, $112,691 and $110,746, for the periods ended December 31, 1996, 1995 and 1994, respectively, of assigned premiums earned and related incurred losses and other expenses from the NCRF in the financial statements. Adjustment services are provided on claims ceded to the NCRF for a fee established by the NCRF. These fees are reflected, as earned, as a reduction of loss adjustment expenses in the financial statements. Fees earned were approximately $17,221, $18,075 and $18,279, for the periods ended December 31, 1996, 1995, and 1994, respectively. North Carolina law provides that cumulative losses incurred by the NCRF are recoverable either through direct surcharges to North Carolina motorists or by assessments of the member insurers, which are subsequently recouped from individual policyholders. The net reinsurance receivable on paid claims less ceded premiums due from the NCRF was approximately $12,897 and $17,849, at December 31, 1996 and 1995, respectively. As of September 30, 1996, the NCRF had a cumulative operating surplus of $105,205. 45 INTEGON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE H--LOSS AND LOSS ADJUSTMENT EXPENSES PAYABLE The following table provides a reconciliation of beginning and ending loss and loss adjustment expense reserve balances:
YEARS ENDED DECEMBER 31, --------------------------- 1996 1995 1994 -------- -------- -------- Gross reserves for losses and LAE at beginning of year............................................. $416,740 $395,300 $255,364 Deduct: Reinsurance receivable.................... 181,952 193,519 147,882 Add: Bankers and Shippers net reserves at -- -- 75,804 acquisition date................................. -------- -------- -------- Reserves for losses and LAE, net of reinsurance receivable....................................... 234,788 201,781 183,286 -------- -------- -------- Add: Provisions for losses and LAE for claims occurring in: Current year.................................... 583,782 419,143 249,688 Prior years..................................... 1,929 (3,170) (14,240) -------- -------- -------- Total incurred losses and LAE................. 585,711 415,973 235,448 -------- -------- -------- Deduct: Loss and LAE for claims occurring in: Current year.................................... 359,053 262,129 159,850 Prior years..................................... 154,531 120,837 57,103 -------- -------- -------- Total loss and LAE payments................... 513,584 382,966 216,953 -------- -------- -------- Reserves for losses and LAE at end of year, net of reinsurance receivable........................... 306,915 234,788 201,781 Add: Reinsurance receivable....................... 171,116 181,952 193,519 -------- -------- -------- Gross reserves for losses and LAE at end of year.. $478,031 $416,740 $395,300 ======== ======== ========
NOTE I--TRANSACTIONS WITH RELATED PARTIES ADVISORY SERVICES: Effective December 1, 1990, the Company entered into an Investment Advisory Agreement with Head Asset Management L.L.C. ("Head Asset Management"), an affiliate of Head & Company L.L.C. ("Head Company"), a managing member of which is John C Head III, the Chairman of the Board and Chief Executive Officer of the Company. In accordance with the terms of the agreement, Head Asset Management provides investment advisory and related services to the Company and its subsidiaries. In consideration of the services provided by Head Asset Management, the Company pays Head Asset Management a fee at the rate of $1.50 per $1,000 (15 basis points) on the market value of all invested assets managed by Head Asset Management. The Investment Advisory Agreement may be terminated upon 90 days prior written notice by either party. For the years ended December 31, 1996, 1995 and 1994, the Company paid $779, $685 and $409, respectively, in fees under the Investment Advisory Agreement. Mr. Head and Edward W. Ross, former Vice Chairman of the Board of Directors, provided advisory services to the Company pursuant to consulting agreements entered into with the Company effective January 1, 1993 for which each received $300 per year plus reimbursement of out-of-pocket expenses. These agreements terminated on December 31, 1995. Pursuant to these agreements, the Company paid Messrs. Head and Ross, respectively, as follows: 1995--$317 and $300; and 1994--$314 and $309. In connection with the acquisition of Bankers and Shippers by the Company, the Company paid an advisory fee to Head Company in the amount of $620. 46 INTEGON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE I--TRANSACTIONS WITH RELATED PARTIES--(CONTINUED) AUTOMOBILE WARRANTY BUSINESS: The Company, as of December 31, 1992, had guaranteed to fund up to $8.1 million of claims in connection with the sale of Integon International, Ltd. ("International"), a subsidiary of the Company, that was sold to an affiliate of John C Head III. Revaluations by management of the estimated ultimate liabilities associated with the guarantee resulted in reductions of the liability by $.9 million, ($.6 million after federal income tax benefit), and $1.0 million ($.7 million after federal income tax benefit) in 1995 and 1994, respectively. The reductions to the liability and resulting gains have been reported as extraordinary items. NOTES RECEIVABLE: To effect the restructuring, the Company loaned $10.0 million to Integon Life Corporation ("ILC"), an affiliate. ILC prepaid the note in full in September 1995. Interest income of $.8 million and $1.0 million was recorded for the years ended December 31, 1995 and 1994, respectively. SERVICES/LEASE AGREEMENTS: The Company was a party to a services agreement with an affiliate, ISC, under which the Company purchased certain services needed for operations. These services were charged based upon direct costs incurred. The Company expensed $17.3 million for the year ended December 31, 1994 for these services. In December 1994, the Company purchased ISC from an affiliate of John C Head III for approximately $3.0 million. ISC was also a party to a services agreement with ILC pursuant to which ISC provided the same type of services provided to the Company. Effective February 1, 1995, ISC and ILC mutually agreed to terminate such services agreement, and the Company entered into a services agreement with ILC's subsidiary, Integon Life Insurance Corporation ("ILIC"), pursuant to which ILIC purchases certain administrative and financial services from the Company. Services provided under the services agreement were charged based upon direct costs incurred. ILIC paid approximately $2.6 million for such services in 1995. The services agreement has been terminated. In connection with the sale of ILC to PennCorp Financial Group, Inc. ("PennCorp"), upon recommendation of the Company's non-affiliated directors, the Company entered into an intercompany agreement, dated January 20, 1995 (the "Intercompany Agreement"), with ILC, ILIC, ISC and PennCorp pursuant to which the parties, among other things, made certain agreements regarding (i) the payment and administration of certain employee-related liabilities and (ii) payments in connection with any adjustments to the Company's or its subsidiaries', on the one hand, and ILC's or its subsidiaries', on the other hand, tax returns for the periods dating from the acquisition of the Company in 1990 to the Restructuring. On December 31, 1993, the Company purchased its home office buildings and associated parking facilities as well as furniture and equipment from ILIC for $38.0 million and $2.3 million, respectively. Simultaneously with the acquisition, the Company entered into a five-year lease agreement with ILIC at an annual rate of approximately $.7 million. The Company can terminate the lease upon 180 days notice. Pursuant to the Intercompany Agreement, the Company acknowledged that from the date of the acquisition by PennCorp, ILIC will only be liable for rent under the lease agreement through January 25, 1997 and that such lease payments shall not exceed $1.3 million. 47 INTEGON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE I-- TRANSACTIONS WITH RELATED PARTIES--(CONTINUED) Effective December 31, 1993, the Company also entered into a one-year lease agreement with ILIC, whereby ILIC agreed to lease certain furniture and equipment for an amount equal to the sum of the depreciation charge of such furniture and equipment plus interest on the remaining net book value of such property. Absent termination, the agreement automatically renews annually by either party. The agreement was terminated. Effective August 31, 1994, one of the Company's non-insurance subsidiaries purchased certain computer and telecommunications equipment from ILIC for its net book value of approximately $3.2 million. Certain of the equipment purchased was being used by the Company and leased from ILIC prior to the date of purchase. NOTE J--STOCKHOLDERS' EQUITY COMMON STOCK: The amount of Common Stock authorized to be issued by the Company is 55,000,000 shares, par value of $.01 per share, consisting of (i) 35,000,000 shares of Common Stock, and (ii) 20,000,000 shares of Class A Non- Voting Common Stock. PREFERRED STOCK: The Company is authorized to issue 2,000,000 shares of preferred stock, $.01 par value, in series as designated by the Board of Directors of the Company. On October 12, 1994, the Company issued 1,437,500 shares of $3.875 Convertible Preferred Stock with an issue price of $50.00 per share. Dividends at an annual rate of $3.875 per share are cumulative from the date of original issue and are payable quarterly in arrears out of legally available funds on each March 15, June 15, September 15 and December 15, when, as and if declared by the Board of Directors. The liquidation value is $50 per share plus accrued and unpaid dividends. The Convertible Preferred Stock is convertible into Common Stock at any time at the option of the holder at an initial conversion price of $19.05 per share, subject to adjustment in certain events. The Convertible Preferred Stock may be redeemed at the option of the Company, in whole or in part, after September 15, 1997 at $52.33 per share and thereafter at prices that decline ratably annually to $50.00 per share after September 15, 2003, in each case plus accrued and unpaid dividends. The Convertible Preferred Stock is non-voting, except that holders will be entitled to vote separately as a class (together with stock ranking on a parity) to elect two directors if the equivalent of six or more quarterly dividends (whether or not consecutive) on the Convertible Preferred Stock are in arrears. These voting rights will continue until the dividend arrearage on the Convertible Preferred Stock and other stock ranking on a parity with it has been paid in full. See Note Q. NOTE K--RESTRICTIONS, COMMITMENTS AND CONTINGENCIES RESTRICTIONS: The net assets of the Company's property and casualty insurance subsidiaries available for distribution to the Company are limited to the amounts that such assets, as determined in accordance with statutory accounting practices, exceed minimum statutory capital requirements. Payment of dividends is restricted and may be subject to approval by insurance regulatory authorities. The maximum amount of dividends that may be paid by the Company's insurance subsidiaries within any calendar year without prior regulatory approval is the lesser of (a) 10% of the policyholders' statutory surplus as of the preceding December 31 or (b) its statutory net income for the preceding calendar year, less the amount of dividends paid during the preceding twelve months. 48 INTEGON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE K--RESTRICTIONS, COMMITMENTS AND CONTINGENCIES--(CONTINUED) Statutory surplus (capital and surplus) and statutory net income (including Bankers and Shippers results for the full year 1994) as determined in accordance with statutory accounting practices for the Company's insurance subsidiaries are shown below:
DECEMBER 31, -------------------------- 1996 1995 1994 -------- -------- -------- Statutory surplus............................... $245,919 $226,832 $198,589 Statutory net income............................ 6,882 41,814 37,883
Each of the Company's domestic insurance subsidiaries is required to maintain minimum statutory capital and surplus of $4.5 million according to North Carolina law. At December 31, 1996, capital and surplus of these subsidiaries ranged from $7.6 million to $98.5 million. The maximum amounts of dividends from the Domestic Insurance Subsidiaries that could be payable during 1997 without the approval by the North Carolina Insurance Commissioner is approximately $7.9 million. However, the payment of dividends is further restricted by the terms of the Company's Credit Facility. See Note F. COMMITMENTS AND CONTINGENCIES: The Company is party to various lawsuits primarily incident to the ordinary course of its business that would not materially affect the financial position and the results of operations of the Company. In July 1995, ILC, a former affiliate, paid the Company a nominal amount for the Company to acquire the common stock of International. The Company is now liable for any claims that may arise out of the business reinsured by International. However, management believes that the transfer of International will not have any material effect on the financial condition or results of operations of the Company. The Company executed an indemnity letter in favor of certain former subsidiaries that were sold in which the Company agreed to indemnify, reimburse and hold harmless the subsidiaries for, among other things, (i) certain employment related liabilities provided any such liability arises solely on account of such subsidiaries' affiliation with the Company and its subsidiaries prior to the Restructuring under the Internal Revenue Code of 1986, as amended, or the Employment Retirement Income Security Act of 1974, as amended, and (ii) taxes assessed against such subsidiaries by reason of their being a member of an affiliated group of which the Company was a member. As of December 31, 1996, no amounts have been paid or requested to be paid under the indemnity letter. NOTE L--EMPLOYEE BENEFIT PLANS RETIREE BENEFITS: Prior to December 31, 1994, the Company provided postretirement life and health benefits for employees who retired at age 55 or later with 10 or more years of service. Spouses, surviving spouses and dependent children are eligible for life and health benefits. Retired home office employees under age 65 are covered by a health maintenance organization under which benefits are generally paid at 100% after various co-payments. Retirees under this plan contribute to their own benefits and their dependents' benefits. 49 INTEGON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE L--EMPLOYEE BENEFIT PLANS--(CONTINUED) Retired employees under age 65, outside the service area, are covered by a self-insured indemnity plan which has a deductible with 80%-20% coinsurance. Under this plan, retirees only contribute toward dependent coverage. Retired employees 65 and older are covered under a self-insured type plan which has a deductible with 80%-20% coinsurance that coordinates with Medicare. Under this plan retirees only contribute toward dependent coverage. Effective January 1, 1995, the Company amended its retirement benefit plan. The Company will continue to provide medical and reduced life benefits to current retirees and active, full-time employees who had attained age 55 with 10 years or more of service on or before December 31, 1994. Medical benefits are provided until age 65 or covered by Medicare, whichever comes first, and reduced life retirement benefits will continue to be available to active, full-time employees who were at least age 45 on or before December 31, 1994. No retiree medical and life insurance benefits will be available to employees who did not attain age 45 on or before December 31, 1994 or who were hired after December 31, 1994. The plan amendment reducing the benefits available to employees who were at least age 45 on or before December 31, 1994, resulted in the reduction of the accumulated postretirement benefit obligation of $787, which is being recognized as a reduction in benefit expense on a straight line basis over periods of 6 to 7 years. The curtailment of retiree benefits to employees under age 45 resulted in a reduction to the accumulated postretirement benefit obligation of $973 which was recognized in 1994 and is reflected in the accrued postretirement benefit cost at December 31, 1994. Postretirement benefits are accrued (but not funded) for eligible retirees. The accrued postretirement benefit cost was as follows:
DECEMBER 31, -------------- 1996 1995 ------ ------ Accumulated postretirement benefit obligation Retirees................................................. $1,739 $1,742 Fully eligible active plan participants.................. 812 756 Other active plan participants........................... 631 520 ------ ------ Unfunded status............................................ 3,182 3,018 Unrecognized prior service cost............................ (562) (199) Unrecognized net gain...................................... 2,014 2,008 ------ ------ Accrued postretirement benefit cost........................ $4,634 $4,827 ====== ======
The components of the expense for postretirement benefits were as follows:
YEARS ENDED DECEMBER 31, --------------------------- 1996 1995 1994 -------- -------- -------- Service costs.................................. $ 72 $ 59 $ 238 Interest costs................................. 221 210 250 Amortization of gain........................... (69) (34) -- Amortization of past service cost.............. (113) (33) -- -------- ------- ------- Net periodic costs............................. $ 111 $ 202 $ 488 ======== ======= =======
50 INTEGON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE L--EMPLOYEE BENEFIT PLANS--(CONTINUED) The postretirement benefit liability as of December 31, 1996 was calculated assuming an annual trend rate in medical care inflation of 8.0% in 1997 grading down to 5.5% in 2000 and thereafter. The liability as of December 31, 1995 was calculated assuming an annual trend rate in medical care inflation of 9.0% in 1996, grading down to 5.5% in 2000 and thereafter. Mortality rates were calculated by referencing the 1983 group annuity mortality table (set back six years for females). Contribution increases were assumed to match the rates of inflation for medical care. The net cost of the postretirement benefits discounted value was based on a 7.5% rate in 1996 and 1995. If the medical care inflation assumption increased by 1.0%, the accumulated postretirement benefit obligation would increase $329 or 7.1% and the 1996 service and interest expense would increase $24 or 8.2%. DEFERRED COMPENSATION: The liability for deferred compensation agreements for certain officers was $488 and $548 as of December 31, 1996 and 1995, respectively. Expenses for the periods ended December 31, 1996, 1995 and 1994, were $27, $34 and $20, respectively. RETIREMENT SAVINGS PLAN: All full-time, permanent employees who attain age 21 and complete one year of service are eligible to participate in the Integon Employees' Retirement Savings Plan (the "Retirement Savings Plan"). Under the Retirement Savings Plan, participants are eligible to reduce their compensation by up to 10%, which is contributed to the trust established for the Retirement Savings Plan. The Company matches 50% of contributions (up to 3% of employees' compensation). The matching contributions for the periods ended December 31, 1996, 1995 and 1994 were $1,142, $923 and $492, respectively. Participants are fully vested in all contributions. The Retirement Savings Plan also provided for a discretionary Company profit sharing contribution, which was determined annually by the Board of Directors for the succeeding plan year. Participants vested 20% for each completed year of service, or became 100% vested in the event of death, attainment of age 65, disability or plan termination. Profit sharing contributions for the years ended December 31, 1995 and 1994 were $1,012 and $488, respectively. Effective January 1, 1996, the Retirement Savings Plan was amended to discontinue the discretionary profit sharing contributions and it has been replaced by the Employee Stock Ownership Plan. EMPLOYEE STOCK OWNERSHIP PLAN: Effective January 1, 1996, all full-time, permanent employees who attain age 21 and complete one year of service are eligible to participate in the Integon Corporation Employee Stock Ownership Plan ("ESOP"). Each year the Board of Directors will have the discretion to set the amount for the Company to contribute. The Company will make monthly contributions to the trust fund. The trust will primarily buy shares of Integon Corporation Common Stock with the Company's contribution. Allocations will be made to participants on a quarterly basis. The discretionary contribution for 1996 has been set by the Board of Directors at 2.75% of employees' eligible compensation. Participants vest 20% for each completed year of service, or become 100% vested in the event of death, attainment of age 65, permanent disability or plan termination. The Company's contribution for the year ended December 31, 1996 was $1.2 million. EMPLOYEE STOCK PURCHASE PLAN: In September 1995, the Company established the Integon Corporation Employee Investment Program. The Program is designed to provide employees with a convenient and 51 INTEGON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE L--EMPLOYEE BENEFIT PLANS--(CONTINUED) economical way to purchase shares of the Corporation's Common Stock, through payroll deduction, and to reinvest their cash dividends in additional shares of Common Stock. NOTE M--STOCK OPTION AND INCENTIVE PLANS At December 31, 1996, the Company had two stock-based compensation plans, which are described below. The Company applies APB Opinion No. 25 and related Interpretations in accounting for these plans. Accordingly, no compensation cost has been recognized for stock options issued under either the 1992 Stock Option Plan or the Omnibus Long-Term Performance Incentive Compensation Plan. Had compensation cost for stock based compensation under these two plans been determined consistent with SFAS No. 123, the Company's net income and earnings per share for the years ended December 31, 1996 and 1995 would have been reduced to the pro forma amounts indicated below:
1996 1995 ----- ------- Net income: As reported.............................................. $ 170 $33,995 Pro forma................................................ $(332) $33,836 Primary earnings per share: As reported.............................................. $(.34) $ 1.81 Pro forma................................................ $(.37) $ 1.80 Fully diluted earnings per share: As reported.............................................. $(.34) $ 1.73 Pro forma................................................ $(.37) $ 1.72
1992 STOCK OPTION PLAN: The 1992 Stock Option Plan ("1992 Plan") is a fixed stock option plan which was adopted in February 1992. Under the 1992 Plan, the Company may grant options to its employees for up to 1,430,000 shares of common stock. The exercise price of each option equals the closing market price of the Company's common stock on the date of grant, and an option's maximum term is ten years. The options become exercisable in 20% increments on each anniversary date of the grant. The fair value of each option under the 1992 Plan is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1996 and 1995, respectively: dividend yield of 1.80% and 2.06%; expected volatility of 32.58% and 32.94%; risk-free interest rates of 5.95% and 5.93%; and expected lives of 5 years. A summary of the status of the Company's fixed stock option plan as of December 31, 1996, 1995 and 1994 and changes during the years ended on those dates is presented below:
1996 1995 1994 -------------------- -------------------- ------------------ WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE - ------------- --------- --------- --------- --------- ------- --------- Outstanding at beginning of year................ 1,172,160 $17.50 883,300 $17.52 653,900 $17.65 Granted................. 219,300 19.95 291,700 17.50 230,200 17.19 Exercised............... (20,600) 15.48 -- -- -- -- Forfeited............... (37,760) 19.75 (2,840) 21.43 (800) 30.25 --------- --------- ------- Outstanding at end of year................... 1,333,100 17.88 1,172,160 17.50 883,300 17.52 ========= ========= ======= Options exercisable at year-end............... 685,600 416,592 238,140 Weighted average fair value of options granted during the year................... $ 6.56 $ 5.64 $ --
52 INTEGON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE M--STOCK OPTION AND INCENTIVE PLANS--(CONTINUED) The following table summarizes information about fixed stock options outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------- -------------------------- NUMBER WEIGHTED-AVG. NUMBER OUTSTANDING REMAINING WEIGHTED-AVG. EXERCISABLE WEIGHTED-AVG. RANGE OF EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE - ------------------------ ----------- ---------------- -------------- ----------- -------------- $15 to $21.............. 1,231,200 7.0 years $16.86 614,660 $15.81 $30 to $31.............. 101,900 6.4 30.19 70,940 30.18
OMNIBUS LONG-TERM PERFORMANCE INCENTIVE COMPENSATION PLAN: In February 1996, the Company adopted the Omnibus Long-Term Performance Incentive Compensation Plan ("Omnibus Plan"), an incentive compensation plan designed to attract and retain both key employees and non-employee directors. The Omnibus Plan allows for the grant of incentive compensation awards for up to 1,000,000 shares of common stock and is administered by the Compensation and Personnel Committee ("Compensation Committee") of the Board of Directors. The type of awards available under the Omnibus Plan in 1996 included: (i) non- qualified stock options to key employees and non-employee directors, (ii) performance awards to key employees payable in cash and/or performance restricted stock, (iii) unit awards to key employees payable in unit restricted stock or cash, (iv) common stock awards for non-employee directors, and (v) common stock, deferral restricted stock and deferral stock options in lieu of cash compensation for non-employee directors. The non-qualified performance stock options become exercisable based on the attainment of specific performance goals for performance cycles established by the Compensation Committee. Options granted under this plan become fully exercisable no later than 9 1/2 years after the effective date and expire 10 years after such effective date. The exercise price of options granted equals the closing market price of the Company's common stock on the date of grant. The fair value of each option under the Omnibus Plan was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 6.85%, dividend yield of 1.96%, volatility of 32.83% and expected lives of 8.5 years. A summary of the status of the performance stock options issued under the Omnibus Plan as of December 31, 1996 and the changes during the year then ended is presented below:
1996 ---------------- WEIGHTED- AVERAGE EXERCISE FIXED OPTIONS SHARES PRICE ------------- ------ --------- Outstanding at beginning of year......................... -- $ -- Granted.................................................. 93,475 18.38 Exercised................................................ -- -- Forfeited................................................ -- -- ------ ------ Outstanding at end of year............................... 93,475 18.38 ====== ====== Options exercisable at year-end.......................... -- Weighted average fair value of options granted during the year.................................................... $ 7.76
53 INTEGON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE M--STOCK OPTION AND INCENTIVE PLANS--(CONTINUED) As of December 31, 1996, the 93,475 performance options outstanding under the Omnibus Plan have an exercise price of $18.38 and a weighted average remaining contractual life of 9.4 years. None of the performance options are currently vested. During 1996 and 1995, the Company also issued 74,000 and 98,000 unit awards, respectively to key employees. The initial dollar value of all such awards was $13.00. The Company established multipliers applicable to such units. Multipliers are numbers used to obtain the final dollar value for a particular unit award based on growth in the Company's net written premiums and average combined operating ratio for the three year period commencing on the first day of the fiscal year in which such unit is awarded and ending on the last day of the second fiscal year following the year in which the unit is awarded. Due to an amendment to the Omnibus Plan at the end of the measurement period, the awards, if any, will be paid out to participants in the form of Common Stock rather than restricted stock. Generally, if a participant terminates employment prior to the end of the measurement period, the units awarded will be forfeited. See Note Q. Prior to being replaced by the Omnibus Plan, the 1992 Non-Employee Directors Stock Plan provided for annual grants of shares of common stock equal to $10 in unrestricted shares and 1,650 restricted shares. During 1995 and 1994, grants of restricted shares totaled 6,600 and 13,200, respectively. Under the Omnibus Plan, each non-employee director is eligible to receive an annual award of up to 1,650 shares of common stock. During 1996, non-employee directors received 7,858 shares of common stock under this provision of the Omnibus Plan. NOTE N--LEASE COMMITMENTS The Company has operating lease commitments with terms greater than one year for equipment and office space, some with options to renew at the end of the lease periods. The minimum rental commitments under all such noncancelable leases at December 31, 1996 were as follows: 1997--$3.0 million; 1998--$2.0 million; 1999--$1.3 million; 2000--$.1 million and 2001--$.1 million. Total rental expense incurred by the Company for 1996, 1995 and 1994 was $2.9 million, $4.3 million and $2.9 million, respectively. NOTE O--EXTRAORDINARY ITEMS Extraordinary items net of federal income tax expense (benefit) is composed of the following: Automobile Warranty Business--The amounts for 1995 represent reductions of the estimated ultimate liabilities relating to a guarantee associated with the sale of International (see Note I). Litigation Settlement--On April 27, 1995, Integon Corporation paid to Southmark Corporation $3.8 million ($3.2 million after tax benefit) pursuant to a settlement of all claims and counterclaims asserted in a legal action commenced by Southmark Corporation against Integon Corporation on December 3, 1993 in the United States District Court for the Southern District of New York. Pursuant to the terms of the settlement, the Southmark action has been dismissed with prejudice. 54 INTEGON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE P--QUARTERLY FINANCIAL DATA (UNAUDITED)
1996 1995 ----------------------------------- ------------------------------------ 1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH -------- -------- -------- -------- -------- -------- -------- -------- Revenues................ $178,820 $191,276 $205,121 $208,194 $142,655 $152,201 $162,599 $170,003 Income from continuing operations............. 3,385 8,297 4,871 (16,383) 7,044 9,120 9,910 10,545 Extraordinary items..... -- -- -- -- (2,624) -- -- -- Net income.............. 3,385 8,297 4,871 (16,383) 4,420 9,120 9,910 10,545 Primary per share information: Income from continuing operations............ .13 .44 .22 (1.13) .36 .49 .55 .58 Extraordinary items.... -- -- -- -- (.17) -- -- -- Net income............. .13 .44 .22 (1.13) .19 .49 .55 .58 Fully diluted per share information: Income from continuing operations............ .13 .42 .22 (1.13) .36 .46 .51 .53 Extraordinary items.... -- -- -- -- (.17) -- -- -- Net income............. .13 .42 .22 (1.13) .19 .46 .51 .53 Cash dividends paid per common share.......... .09 .09 .09 .09 .09 .09 .09 .09 Market price:(1) High................... 22.13 20.50 21.25 20.63 14.75 17.38 18.13 21.25 Low.................... 19.13 17.25 18.38 16.00 11.75 13.13 15.88 15.88
- -------- (1) The Company's Common Stock trades on the New York Stock Exchange. The number of Common Stock shareholders of record at January 24, 1997 was 264. NOTE Q--SUBSEQUENT EVENTS STOCKHOLDERS RIGHTS PLAN: On January 22, 1997, the Board of Directors adopted a Shareholder Rights Plan (the "Rights Plan") and declared a dividend of one preferred share purchase right with respect to each share of common stock outstanding at the close of business on February 11, 1997. Each right entitles the holder to purchase one-thousandth of a share of a newly authorized series of the Company's preferred stock at a purchase price of $70. Each one-thousandth of a share of such preferred stock is intended to be the economic and voting equivalent of one share of common stock. The rights are not presently exercisable, and initially will be evidenced by the Company's common stock certificates and will trade automatically with the common stock. In the event any person or group commences a tender or exchange offer that if consummated would result in such person or group becoming the beneficial owner of 20 percent or more of Integon's common stock, then after a specified period separate rights certificates will be distributed and each right will entitle its holder to purchase one-thousandth of a share of such preferred stock at a purchase price of $70. In the event a person or group acquires beneficial ownership of 20 percent or more of the Company's common stock, then after a specified period each right (other than Rights beneficially owned by such person or group, which become void) will entitle its holder to purchase, at the purchase price, shares of the Company's common stock, (or, at the option of the Board, such preferred stock) having a market value equal to twice the purchase price. Additionally, if after any such person or group acquires beneficial ownership of 20 percent or more of Integon's common stock, the Company is acquired in a merger or other business combination or 50 percent or more of its consolidated assets or earning power are sold, each right (other than rights beneficially owned by such person or group, which will have become void) will entitle its holder to purchase, at the purchase price, shares of common stock of the person or group with whom the Company engaged in such transaction having a market value equal to twice the purchase price. 55 INTEGON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE Q--SUBSEQUENT EVENTS--(CONTINUED) Under certain circumstances, the Company may, at its option, exchange for each outstanding right (other than voided rights) one share of common stock or one-thousandth of a share of such preferred stock. The Company may also, at its option, redeem the rights at a price of $.01 per right at any time prior to a specified period of time after a person or group has become the beneficial owner of 20 percent or more of its common stock. The rights will expire on January 22, 2007, unless earlier redeemed. OMNIBUS LONG-TERM PERFORMANCE INCENTIVE COMPENSATION PLAN: In January 1997, the Omnibus Plan was amended and restated. The Amended and Restated Omnibus Plan provides for (i) non-qualified stock options, (ii) performance awards payable in cash or deferred compensation that is denominated in Common Stock share units or both and (iii) units to key employees payable in cash and common stock. As amended, any future stock options granted under the Omnibus Plan will be subject to terms and conditions set by the Compensation and Personnel Committee of the Board of Directors. All stock options will expire no later than 10 years after the effective date of the option. Unit awards granted under the Amended and Restated Omnibus Plan will be valued annually and paid at the end of the three year cycle rather than valued using a three year average, and restricted stock will no longer be granted under the Omnibus Plan. Common Stock will be granted in lieu of restricted stock. 56 INTEGON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) SCHEDULE I -- SUMMARY OF INVESTMENTS INTEGON CORPORATION DECEMBER 31, 1996 (IN THOUSANDS)
AMORTIZED MARKET CARRYING COST VALUE VALUE --------- -------- -------- Fixed maturities Bonds and notes U.S. government obligations...................... $ 97,801 $ 97,357 $ 97,357 Obligations of states and political subdivisions. 172,281 172,925 172,925 Foreign obligations.............................. 11,422 11,541 11,541 Public utilities................................. 21,427 21,376 21,376 All other corporate bonds........................ 152,825 151,440 151,440 Collateral-backed securities..................... 66,696 66,672 66,672 -------- -------- -------- Total fixed maturities........................... 522,452 521,311 521,311 -------- -------- -------- Other long-term investments........................ 2,679 2,743 2,743 Cash and cash equivalents.......................... 43,838 43,838 43,838 -------- -------- -------- Total.......................................... $568,969 $567,892 $567,892 ======== ======== ========
57 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT INTEGON CORPORATION (PARENT COMPANY) BALANCE SHEETS DECEMBER 31, (IN THOUSANDS)
1996 1995 ASSETS: -------- -------- Fixed maturities available for sale-at market............ $ -- $ 1,031 Other long-term investments.............................. 883 964 Cash and cash equivalents................................ 1,355 677 Investment in subsidiaries............................... 370,739 358,054 Furniture and equipment.................................. 659 557 Goodwill................................................. 51,233 53,724 Deferred income taxes.................................... 1,807 2,224 Other assets............................................. 4,866 4,972 -------- -------- $431,542 $422,203 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: LIABILITIES: Accrued expenses and other liabilities................. $ 21,391 $ 20,549 Short-term debt........................................ 44,000 16,000 Notes payable.......................................... 150,760 150,807 -------- -------- 216,157 187,356 -------- -------- STOCKHOLDERS' EQUITY: Preferred stock........................................ 14 14 Common stock........................................... 173 173 Additional paid-in capital............................. 147,891 147,296 Net unrealized appreciation (depreciation) of securi- ties.................................................. (700) 8,288 Retained earnings...................................... 105,834 116,897 Treasury stock......................................... (37,821) (37,821) -------- -------- 215,391 234,847 -------- -------- $431,542 $422,203 ======== ========
58 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED) INTEGON CORPORATION (PARENT COMPANY) STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------- 1996 1995 1994 ------- ------- ------- REVENUES: Dividends -- affiliated........................... $ 5,208 $19,644 $20,800 Net investment income............................. 317 1,110 1,405 Net realized investment gains (losses)............ (34) 210 106 Other income...................................... 126 956 177 ------- ------- ------- 5,617 21,920 22,488 ------- ------- ------- EXPENSES: Operating and administrative...................... 5,511 4,720 6,065 Interest expense.................................. 15,021 14,510 8,433 Amortization of goodwill.......................... 1,544 1,563 1,569 ------- ------- ------- 22,076 20,793 16,067 ------- ------- ------- INCOME (LOSS) BEFORE FEDERAL INCOME TAXES, EQUITY IN EARNINGS OF SUBSIDIARIES AND EXTRAORDINARY ITEMS. (16,459) 1,127 6,421 Federal income tax benefit.......................... (6,272) (6,360) (4,250) INCOME (LOSS) BEFORE EQUITY IN EARNINGS OF SUBSIDIARIES AND EXTRAORDINARY ITEMS............. (10,187) 7,487 10,671 Equity in earnings of subsidiaries (net of dividends 10,357 29,132 11,867 to parent of $5,208, $19,644 and $20,800)........ ------- ------- ------- INCOME BEFORE EXTRAORDINARY ITEMS................... 170 36,619 22,538 Extraordinary items................................. -- (2,624) 650 ------- ------- ------- NET INCOME.......................................... $ 170 $33,995 $23,188 ======= ======= =======
59 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED) INTEGON CORPORATION (PARENT COMPANY) STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- ------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income..................................... $ 170 $33,995 $ 23,188 Equity in earnings of subsidiaries............. (15,565) (48,776) (32,667) Net realized investment gains (losses)......... 37 (210) (106) Provision for deferred federal income tax expense (benefit)............................. 1,378 305 (475) Amortization of goodwill and deferred loan costs......................................... 1,946 1,999 1,790 Depreciation of furniture and equipment........ -- 131 615 Net amortization of discounts and premium...... 257 (159) 56 Net (increase) decrease in other assets and 781 (5,459) 5,066 liabilities................................... -------- ------- --------- Net cash flows used in operating activities.. (10,996) (18,174) (2,533) -------- ------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Dividends from subsidiaries.................... 5,208 19,644 20,800 Investment securities sold..................... 1,035 10,431 5,012 Investment securities matured, called, or redeemed.................................... -- 350 500 Investment in subsidiaries..................... (27,461) (661) (164,620) Furniture and equipment sold (purchased)....... (1,123) 2,536 (1,493) Net decrease in short-term investments......... -- -- 2,000 Other.......................................... 769 9 -- -------- ------- --------- Net cash flows provided by (used in) $(21,572) $32,309 $(137,801) investing activities...................... -------- ------- ---------
60 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT INTEGON CORPORATION (PARENT COMPANY) STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------- 1996 1995 1994 ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in book cash overdrafts.................. $ 185 $ 2,515 $ -- Increase (decrease) in short-term debt............ 28,000 (5,000) 4,951 Common stock dividends............................ (5,933) (5,765) (5,760) Preferred stock dividends......................... (5,570) (5,570) (882) Issuance (repayment) of debt...................... (46) (36) 74,960 Contribution (purchase) of treasury stock......... 16,610 -- (3,323) Issuance of preferred stock....................... -- -- 68,655 ------- ------- ------- Net cash flows provided by (used in) financing activities..................................... 33,246 (13,856) 138,601 ------- ------- ------- Net increase (decrease) in cash and cash equiva- lents.......................................... 678 279 (1,733) Cash and cash equivalents at beginning of peri- od............................................. 677 398 2,131 ------- ------- ------- Cash and cash equivalents at end of period...... $ 1,355 $ 677 $ 398 ======= ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: Cash paid during the period for: Interest........................................ $14,577 $14,055 $ 6,687 Federal income taxes............................ 12,875 11,700 18,517
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Increases in common stock and additional paid-in capital of $522, $146 and $731 in 1996, 1995 and 1994, respectively, were due to grants of common stock to non-employee directors. Dividends from subsidiaries and furniture and equipment purchased includes $244 in leasehold improvements for the year ended December 31, 1995. Investment in subsidiaries includes $16,610 of treasury stock contributed to the Company's subsidiaries in 1996. 61 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED) INTEGON CORPORATION (PARENT COMPANY) NOTES TO CONDENSED FINANCIAL INFORMATION The condensed financial information of Integon Corporation (Parent Company) should be read in conjunction with the financial statements of Integon Corporation and subsidiaries and the notes thereto incorporated elsewhere herein by reference. Investment in subsidiaries is accounted for by using the equity method of accounting. During 1994, the Company purchased 177,800 shares of its Common Stock at a cost of $3.3 million and are reflected as Treasury Stock on the Company's balance sheet. During 1996, the Company contributed 880,000 shares of treasury stock to its subsidiaries. As of December 31, 1996 and 1995, the Company's balance sheet reflected Treasury Stock of $37.8 million. 62 SCHEDULE IV -- REINSURANCE INTEGON CORPORATION (IN THOUSANDS)
PERCENT OF AMOUNT GROSS ASSUMED PREMIUM CEDED ASSUMED NET TO NET -------- -------- ------- -------- ---------- For the year ended December 31, 1996........................... $935,011 (177,160) 40,138 $797,989 5.0% For the year ended December 31, 1995........................... $797,373 (198,703) 21,777 $620,447 3.5% For the year ended December 31, 1994........................... $545,483 (185,429) 3,413 $363,467 .9%
63 SCHEDULE V -- VALUATION AND QUALIFYING ACCOUNTS INTEGON CORPORATION (IN THOUSANDS)
CHARGED BEGINNING TO CHARGE ENDING BALANCE EXPENSE OFFS BALANCE --------- ------- ------ ------- As of December 31, 1996 and for the year ended: Allowance for doubtful accounts for financed contracts.................................. $ 850 9,065 8,803 $1,112 Allowance for doubtful accounts for premiums due and uncollected........................ $3,591 19,834 18,143 $5,282 As of December 31, 1995 and for the year ended: Allowance for doubtful accounts for financed contracts.................................. $ 847 8,005 8,002 $ 850 Allowance for doubtful accounts for premiums due and uncollected........................ $4,092 9,145 9,646 $3,591 As of December 31, 1994 and for the year ended: Allowance for doubtful accounts for financed contracts.................................. $ 563 7,518 7,234 $ 847 Allowance for doubtful accounts for premiums due and uncollected........................ $2,705 Add Bankers and Shippers balance at acqui- 125 sition date.............................. ------ Total................................... $2,830 8,710 7,448 $4,092
64 SCHEDULE VI--SUPPLEMENTAL INFORMATION INTEGON CORPORATION (IN THOUSANDS)
LOSS AND LOSS ADJUSTMENT EXPENSES INCURRED RELATED TO -------------------- RESERVES FOR UNPAID AMORTIZATION DEFERRED LOSS AND OF DEFERRED PAID LOSSES POLICY LOSS NET POLICY AND LOSS NET ACQUISITION ADJUSTMENT UNEARNED EARNED INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUM COSTS EXPENSES PREMIUMS PREMIUMS INCOME YEAR YEARS COSTS EXPENSES WRITTEN ----------- ---------- -------- -------- ---------- ---------- --------- ------------ ----------- -------- As of December 31, 1996 and for the year ended..... $55,106 $478,031 $364,081 $732,002 $31,970 $ 583,782 $ 1,929 $140,526 $513,584 $797,989 As of December 31, 1995 and for the year ended..... $46,413 $416,740 $305,911 $567,018 $29,937 $ 419,143 $ (3,170) $101,952 $382,966 $620,447 As of December 31, 1994 and for the year ended..... 36,507 395,300 284,829 334,460 17,914 249,688 (14,240) 63,188 216,953 363,467
65 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 is incorporated by reference from a definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year covered by this report. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated by reference from a definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year covered by this report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated by reference from a definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year covered by this report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TRANSACTIONS WITH DIRECTORS, OFFICERS AND AFFILIATES OF HEAD & COMPANY L.L.C. Effective as of December 1, 1990, the Company entered into an Investment Advisory Agreement with Head Asset Management L.L.C. ("Head Asset Management"), an affiliate of Head Company and John C Head III pursuant to which Head Asset Management manages the Company's investment assets and provides investment advisory related services to the Company and its subsidiaries. The fee paid by the Company to Head Asset Management for services rendered pursuant to the Investment Advisory Agreement is an annual fee at the rate of $1.50 per $1,000 (15 basis points) on the market value of all invested assets managed by Head Asset Management in the Company's portfolio. The fee is payable in quarterly installments in advance. The Investment Advisory Agreement may be terminated upon 90 days' prior written notice by either party. If such agreement is terminated, the Company believes that it could obtain similar services on comparable terms. The Company paid approximately $778,729 in fees under the Investment Advisory Agreement in 1996. On March 1, 1996, the Company made an interest-free loan to Mr. Yorke in the amount of $550,000 in connection with his relocation. The loan was repaid in full on August 9, 1996. In July 1996, the Company entered into an Information Products Agreements with Equifax Services, Inc. for certain products and services. Mr. Smith is the President of Equifax Services, Inc. The Company paid approximately $5.0 million for services rendered by Equifax Services, Inc. during 1996. The term of the agreement is for two years and will expire on June 30, 1998. Either party may terminate the agreement in the event of a material breach upon 60 days' notice. CONFLICTS OF INTEREST Conflicts of interest between or among the Company and Head Company and their affiliates, respectively could arise with respect to transactions involving business dealings between such parties, potential acquisitions of businesses or properties and other matters. Because Head Company and certain of its affiliates specialize in making investments in, and providing services to, insurance companies and related concerns, particular conflicts may arise between the Company and Head Company and its affiliates with respect to insurance-related acquisitions and investment opportunities. The Company has not instituted a formal plan or arrangement to address potential conflicts of interest that may arise between or among the Company and Head Company and their affiliates. However, the Company intends to continue to seek approval from its non-affiliated independent directors on any business transactions between the Company and such affiliates. Directors of the Company have a fiduciary obligation to act in the best interest of the Company's stockholders and to deal fairly and in good faith with the Company. 66 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this report.
PAGE REFERENCE --------- FORM 10-K --------- 1. Financial Statements Independent Auditors' Report........................................ 28 Balance Sheets...................................................... 29 Statements of Operations............................................ 30 Statements of Cash Flows............................................ 31 Statements of Stockholders' Equity.................................. 33 Notes to Financial Statements....................................... 35 2. Financial Statement Schedules Independent Auditors' Report........................................ 27 Schedule I -- Summary of Investments................................ 57 Schedule II -- Condensed Financial Information of Registrant........ 58 - 62 Schedule IV -- Reinsurance.......................................... 63 Schedule V -- Valuation and Qualifying Accounts..................... 64 Schedule VI -- Supplemental Information............................. 65
All other financial statement schedules are omitted as the required information is inapplicable or the information required therein is included elsewhere in the financial statements or notes thereto or in another schedule. 3. Exhibits
FILED HEREWITH (*), NONAPPLICABLE (NA), OR INCORPORATED BY REFERENCE FROM -------------------------- INTEGON EXHIBIT REGISTRATION NO. NUMBER EXHIBIT OR REPORT ------- ------- ------------------ 2.1 Stock Purchase Agreement dated July 27, 1994 between Integon Corporation and The 1994 Third Quarter Travelers Indemnity Company.............. 2.1 Form 10-Q 2.2 Stock Purchase Agreement dated as of October 21, 1994 between Integon Corporation and Integon Partners II L.P., as amended December 15, 1994............. 2.2 1994 Form 10-K 3.1 Certificate of Incorporation of the Company currently in effect, and all amendments thereto....................... 4.1 33-58022 3.2 By-laws of the Company, as currently in effect................................... 4.2 33-93744 4.1 Specimen Common Stock Certificate........ 4.1 33-42463 4.2 Indenture dated as of August 15, 1993 between the Company and The First National Bank of Chicago, as Trustee, relating to the Company's 8% Senior Notes due 1999, including form of such Notes... 4.2 33-54676 4.3 Indenture dated October 15, 1994 between the Company and the First National Bank of Chicago, as Trustee, relating to the 1994 Third Quarter Company's 9 1/2% Senior Notes due 2001... 4.2 Form 10-Q 4.4 Certificate of Designation of the 4.1 1994 Third Quarter Company's Preferred Stock................ Form 10-Q
67
FILED HEREWITH (*), NONAPPLICABLE (NA), OR INCORPORATED BY REFERENCE FROM --------------------------------- INTEGON EXHIBIT REGISTRATION NO. NUMBER EXHIBIT OR REPORT ------- --------------------------------- 10.1 Investment Advisory Agreement dated as of December 1, 1990 between the Company and Head Asset Management L.P. ............................... 10.9 33-42463 10.2 Indemnity and Guaranty dated September 1, 1985 between Old Integon and American Security Insurance Company (assumed by the Company)............................ 10.15 33-42463 +10.3 Form of Employee Deferred Compensation Agreement entered into by Old Integon (assumed by the Company) and each of James T. Lambie and Arthur S. Lyon, Jr. ............ 10.31 33-42463 +10.4 Integon Corporation Severance Policy, as amended.................. 10.19 1992 Form 10-K +10.5 1992 Stock Option Plan, as amended.. 10.8 1995 Form 10-K 10.6 Tax Allocation Agreement dated as of August 1, 1990 among the Company and its subsidiaries.................... 10.45 33-42463 10.7 Amendment to Tax Allocation Agreement among the Company and its subsidiaries ....................... 10.30 1991 Form 10-K 10.8 Management Agreement among the Company and its subsidiaries........ 10.31 1991 Form 10-K 10.9 Amendment No. 1 to Investment Advisory Agreement dated as of December 1, 1990 between the Company and Head Asset Management L.P. ..... 10.40 1991 Form 10-K 10.10 Integon Corporation Relocation Policy.............................. 10.48 1991 Form 10-K 10.11 Amendment No. 1 to Management Agreement dated November 13, 1992 among the Company and its subsidiaries........................ 10.64 33-54676 10.12 Amendment No. 2 to Investment Advisory Agreement dated as of December 1, 1990 between the Company 1993 Second Quarter and Head Asset Management L.P....... 19.1 Form 10-Q 10.13 Addendum to Tax Allocation Agreement dated as of August 1, 1990 and amended on February 13, 1992........ 10.41 1993 Form 10-K 10.14 Addendum to Management Agreement dated as of February 13, 1992 and amended November 13, 1992........... 10.42 1993 Form 10-K 10.15 Indemnity Letter between the Company and Integon Partners II dated February 13, 1992................... 10.1 33-82766 10.16 Agreement between Jupiter Industries, John C Head III and Madie Ivy........................... 10.52 1993 Form 10-K 10.17 Amended and Restated Credit Agreement between the Company and The Chase Manhattan Bank, N.A., as Agent dated October 12, 1993 and amended and restated as of July 26, 1996 Second Quarter 1996................................ 10.1 Form 10-Q 10.18 Amendment to Management Agreement dated February 13, 1992 and amended December 31, 1993................... 10.52 1994 Form 10-K 10.19 Amendment to Management Agreement dated February 13, 1992 and amended June 3, 1994........................ 10.53 1994 Form 10-K 10.20 Amendment to Management Agreement dated February 13, 1992 and amended October 18, 1994.................... 10.54 1994 Form 10-K 10.21 Amendment to Tax Allocation Agreement dated August 1, 1990 and amended December 31, 1993........... 10.55 1994 Form 10-K 10.22 Amendment to Tax Allocation Agreement dated August 1, 1990 and amended June 3, 1994................ 10.56 1994 Form 10-K
68
FILED HEREWITH (*), NONAPPLICABLE (NA), OR INCORPORATED BY REFERENCE FROM --------------------------- INTEGON EXHIBIT REGISTRATION NO. NUMBER EXHIBIT OR REPORT ------- ------- ------------------- 10.23 Amendment to Tax Allocation Agreement dated August 1, 1990 and amended October 18, 1994 10.57 1994 Form 10-K 10.24 Assignment and Assumption Agreement dated January 20, 1995 between the Company and Integon Life Corporation.... 10.59 1994 Form 10-K 10.25 Intercompany Agreement dated January 20, 1995 between PennCorp Financial Group, Inc., the Company, Integon Life Corporation, Integon Life Insurance Corporation and Integon Services Company................................. 10.60 1994 Form 10-K 10.26 Registration Rights Agreement dated October 17, 1994 between the Company and Head Insurance Investors L.P............ 10.64 1994 Form 10-K 10.27 Letter dated January 20, 1995 from the Company to Integon Life Corporation regarding the Allocation Agreement dated March 11, 1993.......................... 10.65 994 Form 10-K 10.28 Letter Agreement dated July 25, 1995 by and among Integon Corporation, Integon Life Corporation and PennCorp Financial 1995 Second Quarter Group, Inc.............................. 10.2 Form 10-Q 10.29 Amendment to Intercompany Agreement dated September 29, 1995 between PennCorp Financial Group, Inc., the Company, Integon Life Insurance Corporation, Integon Services Company 1995 Third Quarter and Salem Holdings Corporation.......... 10.1 Form 10-K +10.30 Amended and Restated Integon Corporation Omnibus Long-Term Performance Incentive Compensation Plan....................... * NA +10.31 Integon Corporation Annual Incentive Award Program........................... 10.49 1995 Form 10-K 10.32 Letter Agreement dated December 1, 1996 between James T. Lamere and the Company. * NA 10.33 Agreement between Equifax Financial Services, Inc. and the Company dated, July 15, 1996........................... * NA 11.1 Computation of Earnings per Shares...... * NA 21.1 Subsidiaries of the Company............. * NA 23.1 Consent of Independent Auditors......... * NA 27.1 Financial Data Schedule................. **
- -------- + Management contracts and compensatory plans or arrangements required to be filed as exhibits. ** Contained in the EDGAR filing of the Form 10-K. (b) Reports on Form 8-K. Form 8-K filed January 23, 1997 69 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on January 27, 1997. INTEGON CORPORATION /s/ John C Head III By -------------------------------- JOHN C HEAD III Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on January 27, 1997. SIGNATURES TITLE /s/ Donald F. McKee Senior Vice President Finance and - ------------------------------------- Administration and Chief Financial DONALD F. MCKEE Officer (Principal Financial Officer) /s/ John C Head III Chairman of the Board, Chief Executive - ------------------------------------- Officer (Principal Executive Officer) JOHN C HEAD III /s/ Lester L. Coleman Director - ------------------------------------- LESTER L. COLEMAN /s/ Charles H. Jamison Director - ------------------------------------- CHARLES H. JAMISON Director - ------------------------------------- JOHN B. MCKINNON Director - ------------------------------------- DEREK V. SMITH /s/ Frederick B. Whittemore Director - ------------------------------------- FREDERICK B. WHITTEMORE /s/ Ronald N. Zebeck Director - ------------------------------------- RONALD N. ZEBECK 70 EX-10.30 2 AMENDED & RESTATED INTEGON OMNIBUS COMPENSATION PLAN EXHIBIT 10.30 INTEGON CORPORATION AMENDED AND RESTATED OMNIBUS LONG-TERM PERFORMANCE INCENTIVE COMPENSATION PLAN ARTICLE 1 - PURPOSE AND TERM OF PLAN - --------- ------------------------- 1.1 Purpose. The purposes of the Plan are to aid the Company in attracting ------- and retaining Key Employees through a competitive compensation package, to stimulate the efforts of such Key Employees and to strengthen their desire to remain with the Company, to aid the Company in attracting superior individuals to serve as Nonemployee Directors and to provide appropriate compensation to such Nonemployee Directors for their Service. Towards this end, the Plan provides that the Committee may grant (i) non-qualified stock options (i.e., options that are not incentive stock options within the meaning of Section 422 of the Code) to Key Employees and Nonemployee Directors, (ii) Performance Awards to Key Employees payable in cash or deferred compensation that is denominated in Common Stock share units or both and (iii) Units to Key Employees payable in cash and Common Stock, all as more fully described herein. The Plan also provides (i) for the grant of Common Stock to Nonemployee Directors as part of such Nonemployee Directors' annual compensation and (ii) that such Nonemployee Directors may take their remaining compensation in the form of cash, Common Stock, Restricted Stock or non-qualified stock options. 1.2 Term. The Plan replaces and supersedes the Integon Corporation 1992 Non- ---- Employee Directors Stock Plan, except with respect to shares of Common Stock issued and outstanding under such 1992 Non-Employee Directors Stock Plan which will continue to be governed by the terms of such plan. The Plan shall become effective as of February 8, 1996; provided that for purposes of Article 9, the Plan shall become effective on June 1, 1995. Awards shall not be granted under Articles 8 and 9 of the Plan after May 16, 2001, except that the Committee may grant Performance Awards and value Units after such date in recognition of performance for Performance Periods and Unit Periods commencing prior to such date. Notwithstanding the foregoing, the Plan is hereby amended and restated for all Awards granted hereunder after December 31, 1996. In addition, with respect to Awards made under Article 9 prior to January 1, 1997, the amendments effected hereby shall be applicable only to Unit Periods commencing after December 31, 1996. ARTICLE 2 - DEFINITIONS - --------- ----------- 2.1 Annual Dollar Value. "Annual Dollar Value" of a Unit means the dollar ------------------- value (with fractions of a cent rounded up to the nearest cent) resulting from multiplying the Initial Dollar Value of such Unit by the applicable Multiplier for the applicable Unit Period and dividing such product by three (3). As an example, using the chart of Multipliers attached as Exhibit A hereto, for a Unit with an Initial Dollar Value of $13.00, the Annual Dollar Value of such Unit would be $4.95 ($13.00 multiplied by 114.1% and divided by 3) for the applicable Unit Period if the Growth in Net Written Premiums and Combined Operating Ratio for such Unit Period were H% and CC.5%, respectively. 2.2 Award. "Award" means any form of cash, deferred compensation that is ----- denominated in Common Stock share units, Common Stock, stock options, Performance Awards, Deferral Restricted Stock, Deferral Stock Options or Units granted under Articles 7, 8, 9 or 10 of the Plan to a Participant selected by the Committee pursuant to such terms, conditions, restrictions and/or limitations, if any, as the Committee may establish. 2.3 Award Date. "Award Date" shall have the meaning given such term in ---------- Section 8.4. 2.4 Award Payment Date. "Award Payment Date" means the date the Performance ------------------ Awards for a Performance Period shall be paid to Participants. The Award Payment Date for a Performance Period shall occur as soon as administratively possible following the completion of the certifications required pursuant to Subsection 8.6.3. 2.5 Board. "Board" means the Board of Directors of Integon. ----- 2.6 Cause. "Cause" means, in the case of a Nonemployee Director, termination ----- of such Nonemployee Director's Service by Integon's shareholders for cause pursuant to the Bylaws of Integon. "Cause" means, in the case of a Key Employee, termination of such Key Employee's employment by the Company because of (a) the willful and continued failure by the Participant to perform substantially all of his or her duties with the Company (other than any such failure resulting from the Participant's incapacity due to physical or mental illness) after a demand for substantial performance is delivered to the Participant by the Chairman of the Board or the CEO that specifically identifies the manner in which the Participant has not substantially performed his or her duties, or (b) the willful engaging by the Participant in illegal conduct that is materially and demonstrably injurious to the Company. For purposes of this definition, no act, or failure to act, on the Participant's part shall be considered "willful" unless done, or omitted to be done, by the Participant in bad faith and without reasonable belief that the Participant's action or omission was in, or not opposed to, the best interest of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Participant in good faith and in the best interest of the Company. The Participant's attention to matters -2- not directly related to the business of the Company shall not provide a basis for termination for Cause as long as the Board has approved the Participant's engagement in such activities. Notwithstanding the foregoing, the Participant shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Participant a copy of a resolution duly adopted by the affirmative vote of not less than three quarters of the entire membership of the Board at a meeting called and held for the purpose (after reasonable notice to the Participant and an opportunity for the Participant, together with the Participant's counsel, to be heard before the Board), finding that in the good faith opinion of the Board the Participant was guilty of the conduct set forth above in (a) or (b) of this definition and specifying the particulars thereof in detail. 2.7 CEO. "CEO" means the Chief Executive Officer of Integon. --- 2.8 Change In Control. "Change In Control" means the following: ----------------- 2.8.1 A tender offer or exchange offer is made whereby the effect of such offer is to take over and control the affairs of Integon and such offer is consummated for the ownership of securities of Integon representing 50% or more of the combined voting power of Integon's then-outstanding voting securities; 2.8.2 Integon is merged or consolidated with another corporation and, as a result of such merger or consolidation, outstanding securities representing less than 50% of the voting power of the surviving or resulting corporation shall then be owned in the aggregate by the former shareholders of Integon other than affiliates within the meaning of the Exchange Act of any party to such merger or consolidation; 2.8.3 Integon transfers all or substantially all of its assets to another corporation or entity that is not a wholly owned Subsidiary of Integon; 2.8.4 Any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of Integon representing 50% or more of the combined voting power of Integon's then-outstanding securities; or 2.8.5 As the result of a tender offer, merger, consolidation, sale of assets, or contested election, or any combination of such transactions, the persons who were members of the Board immediately before the transaction cease to constitute at least a majority thereof. -3- 2.9 Change In Control Price. "Change In Control Price" means the highest ----------------------- closing price per share paid for the purchase of Common Stock during the ninety (90) day period ending on the date the Change In Control occurs on the primary securities exchange on which the Common Stock is then traded, or the merger or tender price if higher. 2.10 Change in Ownership. "Change in Ownership" means a Change In Control that ------------------- results directly or indirectly in Integon's Common Stock ceasing to be actively traded on the primary securities exchange on which the Common Stock is traded immediately prior to such Change in Control. 2.11 Code. "Code" means the Internal Revenue Code of 1986, as amended from ---- time to time, including regulations thereunder and successor provisions and regulations thereto. 2.12 Combined Operating Ratio. "Combined Operating Ratio" means, for the ------------------------ Company on a consolidated basis for any period, the sum of (i) the statutory expense ratio, plus (ii) the statutory loss ratio rounded to the nearest one- half percentage point (0.5%). 2.13 Committee. "Committee" means the Compensation and Personnel Committee of --------- the Board, unless and until its members are not qualified to serve on the Committee pursuant to the provisions of the Plan, in which case the Board will designate the members of the Committee; provided that the Committee shall at all times consist of two or more Directors, each of whom is both a "disinterested person" within the meaning of Rule 16b-3 under the Exchange Act and an "outside director" within the meaning of the definition of such term as contained in Treasury Regulation Section 1.162-27(e)(3), or any successor definition; provided further that no Director shall be appointed a member of the Committee who has received any Award other than an Award under Article 10 in the year prior to such appointment; provided further that no Committee member may receive an Award other than pursuant to Article 10. 2.14 Common Stock. "Common Stock" means common stock, $.01 par value per ------------ share, of Integon, which may be newly issued shares, shares issued and outstanding, treasury stock or shares owned by a Subsidiary. 2.15 Company. "Company" means Integon and its Subsidiaries. ------- 2.16 Covered Employee. "Covered Employee" means an Employee who is a "covered ---------------- employee" within the meaning of Section 162(m) of the Code. 2.17 Deferral Restricted Stock. "Deferral Restricted Stock" means Common Stock ------------------------- of the Company that is subject to the risk of forfeiture and other conditions set forth in Section 10.3.2. -4- 2.18 Deferral Restriction Period. "Deferral Restriction Period" means, for --------------------------- Deferral Restricted Stock, the period ending 3 years after the Effective Date of such Deferral Restricted Stock. 2.19 Deferral Stock Options. "Deferral Stock Options" means options to ---------------------- purchase shares of Common Stock having the terms and conditions set forth in Section 10.3.3. 2.20 Director. "Director" means a director of Integon. -------- 2.21 Disability. "Disability" means a disability as determined under the ---------- Salary Continuation Plan of Integon or any successor or replacement long-term disability plan maintained by the Company. 2.22 Effective Date. "Effective Date" means the date an Award is determined to -------------- be effective by the Committee upon the grant of such Award. 2.23 Employee. "Employee" means any employee of Integon or any Subsidiary but -------- excludes Directors who are not also employees of Integon or any Subsidiary. 2.24 Exchange Act. "Exchange Act" means the Securities Exchange Act of 1934, ------------ as amended from time to time, including rules promulgated thereunder and successor provisions and rules thereto. 2.25 Final Dollar Value. "Final Dollar Value" of a Unit means the sum of the ------------------ Annual Dollar Value of such Unit for each of the three Unit Periods in the three-year Unit Cycle for such Unit. 2.26 Growth in Net Written Premiums. "Growth in Net Written Premiums" means ------------------------------ the annual percentage increase, rounded to the nearest whole percentage point, in the Net Written Premiums of the Company calculated for the applicable Unit Period by subtracting the Net Written Premiums for the immediately prior fiscal year ("Starting Premiums") from the Net Written Premiums for the subject fiscal year and dividing such difference by the Starting Premiums. 2.27 Initial Dollar Value. "Initial Dollar Value" of a Unit means the dollar -------------------- value established for such Unit by the Committee prior to the Award of such Unit. 2.28 Initial Election Date. "Initial Election Date" means, for each --------------------- Nonemployee Director, the later to occur of (i) the date of Integon's 1996 annual shareholders' meeting or (ii) the date of the Nonemployee Director's initial election or appointment to the Board. 2.29 Insurance Subsidiary. "Insurance Subsidiary" means a Subsidiary engaged -------------------- in the business of issuing insurance policies. -5- 2.30 Integon. "Integon" means Integon Corporation, a Delaware corporation. ------- 2.31 Key Employee. "Key Employee" means a senior level Employee of the Company ------------ who holds a position of responsibility in a managerial, administrative, or professional capacity. 2.32 Multiplier. "Multiplier" means the number, established by the Committee ---------- in the manner set forth in this Plan, that is used to obtain the Annual Dollar Value for a particular Unit based upon targeted levels of Growth in Net Written Premiums and Combined Operating Ratio for each Unit Period in the Unit Cycle for such Unit. 2.33 Negative Discretion. "Negative Discretion" means the discretion ------------------- authorized by the Plan to be applied by the Committee in determining the size of an Award for a Performance Period if, in the Committee's sole judgment, such application is appropriate. Negative Discretion may only be used by the Committee to eliminate or reduce the size of an Award under Article 8. By way of example and not by way of limitation, in no event shall any discretionary authority granted to the Committee by the Plan, including but not limited to Negative Discretion, be used to: (a) grant Awards for a Performance Period if the Performance Goals for such Performance Period have not been attained; or (b) increase an Award above the maximum amount payable under Article 8 of this Plan. 2.34 Net Written Premiums. "Net Written Premiums" means the aggregate for each -------------------- Insurance Subsidiary, but without duplication for Insurance Subsidiaries that are Subsidiaries of Insurance Subsidiaries, of the amount of premiums written (after deducting or adding premiums on business ceded to or assumed from others) as determined in accordance with Statutory Accounting Practices. 2.35 Nonemployee Director. "Nonemployee Director" means a member of the Board -------------------- who is not an Employee. 2.36 Participant. "Participant" means any Key Employee or Nonemployee Director ----------- who has been selected for a grant of stock options pursuant to Article 7, any Key Employee who, for a Performance Period, has been selected to participate in the Performance Award Program pursuant to Article 8, any Key Employee who has been selected for a grant of Units pursuant to Article 9 and/or any Nonemployee Director who is eligible to receive a grant of Common Stock pursuant to Article 10, or who elects to receive Common Stock, Deferral Restricted Stock or Deferral Stock Options pursuant to Article 10. 2.37 Performance Awards. "Performance Awards" means the cash and deferred ------------------ compensation denominated in Common Stock share units granted to Key Employees pursuant to Article 8. -6- 2.38 Performance Criteria. "Performance Criteria" means the one or more -------------------- criteria that the Committee shall select for purposes of establishing the Performance Goal(s) for a Performance Period. The Performance Criteria that will be used to establish such Performance Goal(s) shall be limited to the following: return on net assets, return on shareholders' equity, return on assets, return on capital, shareholder returns, profit margin, earnings per share, net earnings, operating earnings, Common Stock price per share and sales or market share. To the extent required by Section 162(m) of the Code, the Committee shall, within the first 90 days of a Performance Period (or, if longer, within the maximum period allowed under Section 162(m) of the Code), define in an objective fashion the manner of calculating the Performance Criteria it selects to use for such Performance Period. 2.39 Performance Goals. "Performance Goals" means, for a Performance Period, ----------------- the one or more goals established by the Committee for a Performance Period based upon Performance Criteria. The Committee is authorized at any time during the first 90 days of a Performance Period, or at any time thereafter (but only to the extent the exercise of such authority after the first 90 days of a Performance Period would not cause the Awards granted to the Covered Employees for the Performance Period to fail to qualify as "performance-based compensation" under Section 162(m) of the Code), in its sole and absolute discretion, to adjust or modify the calculation of a Performance Goal for such Performance Period in order to prevent the dilution or enlargement of the rights of Participants, (a) in the event of, or in anticipation of, any unusual or extraordinary corporate item, transaction, event or development; (b) in recognition of, or in anticipation of, any other unusual or nonrecurring events affecting the Company or the financial statements of the Company, or in response to, or in anticipation of, changes in applicable laws, regulations, accounting principles, or business conditions; and (c) in view of the Committee's assessment of the business strategy of the Company, performance of comparable organizations, economic and business conditions, and any other circumstances deemed relevant. 2.40 Performance Period. "Performance Period" means the one or more periods of ------------------ time at least one year in length, which may be of varying and overlapping durations, as the Committee may select, over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participant's right to the payment of a Performance Award. 2.41 Performance Restricted Period. "Performance Restricted Period" means with ----------------------------- respect to Common Stock share units credited to a three-year deferred compensation account for a particular Performance Award the three-year period commencing on the Award Date of such Performance Award and with respect to Common Stock share units credited to a five-year deferred compensation account -7- for a particular Performance Award the five-year period commencing on the Award Date of such Performance Award. 2.42 Plan. "Plan" means this Integon Corporation Omnibus Long-Term Performance ---- Incentive Compensation Plan, as amended and restated hereby. 2.43 Retirement. "Retirement" means, in the case of a Key Employee, a ---------- voluntary termination by such Key Employee from employment by the Company, (i) on or after attainment of age 65, (ii) on or after the attainment of age 60 if the Participant has 10 years of employment with the Company or (iii) when the sum of the Participant's age and the Participant's years of employment with the Company equals or exceeds 80. "Retirement" means, in the case of a Nonemployee Director, the termination of such Nonemployee Director's Service at the end of such Nonemployee Director's scheduled term as a Director, or at any earlier time with the consent of the Board. 2.44 Rule 16b-3. "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange ---------- Act, or any successor or replacement provision. 2.45 Service. "Service" means service as a Director. ------- 2.46 Statutory Accounting Practices. "Statutory Accounting Practices" means, ------------------------------ with respect to any Insurance Subsidiary, the statutory accounting practices prescribed or permitted by the insurance department or similar governmental authority charged with regulating insurance companies or insurance holding companies in its state of domicile, consistent with the past practices of such Insurance Subsidiary. 2.47 Subsidiary. "Subsidiary" means a corporation or other business entity in ---------- which Integon directly or indirectly has an ownership interest of 50% or more. 2.48 Unit. "Unit" means an Award under this Plan representing a promise by the ---- Corporation to pay an amount in accordance with Article 9. 2.49 Unit Grant Notice. "Unit Grant Notice" means notice to Key Employees of ----------------- grants of Units pursuant to Article 9. 2.50 Unit Cycle. "Unit Cycle" means, for a particular Unit, the three-year ---------- period commencing on the first day of the Company's fiscal year in which such Unit is awarded and ending on the last day of the Company's second fiscal year following the fiscal year in which such Unit is awarded. -8- 2.51 Unit Period. "Unit Period" means, for a particular Unit, each one of the ----------- Company's fiscal years in the three-year Unit Cycle for such Unit. ARTICLE 3 - ELIGIBILITY - --------- ----------- 3.1 In General. Only Key Employees and Nonemployee Directors are eligible to ---------- participate in Awards under Article 7. Only Key Employees are eligible to participate in Awards under Articles 8 and 9 of the Plan. Only Nonemployee Directors shall participate in Awards under Article 10 of the Plan. For purposes of Articles 7, 8 and 9 of the Plan, the Committee shall select, from time to time, Participants from those Key Employees and Nonemployee Directors who, in the opinion of the Committee, can further the Plan's purposes. Once a Participant is so selected, the Committee shall determine the type or types of Awards to be made to the Participant and shall establish in the related Stock Option Agreement or Unit Grant Notice the terms, conditions, restrictions, and/or limitations, if any, applicable to the Awards in addition to those set forth in this Plan and the administrative rules and regulations issued by the Committee. ARTICLE 4 - PLAN ADMINISTRATION - --------- ------------------- 4.1 Responsibility. The Committee shall have total and exclusive -------------- responsibility to control, operate, manage, and administer the Plan in accordance with its terms. 4.2 Authority of the Committee. The Committee shall have all the authority -------------------------- that may be necessary or helpful to enable it to discharge its responsibilities with respect to the Plan. Without limiting the generality of the preceding sentence, the Committee shall have the exclusive right to: (a) interpret the Plan; (b) determine eligibility for participation in the Plan; (c) decide all questions concerning eligibility for and the amount of Awards payable under the Plan; (d) construe any ambiguous provision of the Plan; (e) correct any defect; (f) supply any omission; (g) reconcile any inconsistency; (h) issue administrative guidelines as an aid to the administration of the Plan and make changes in such guidelines as it from time to time deems proper; (i) make regulations for carrying out the Plan and make changes in such regulations as it from time to time deems proper; (j) determine whether Awards should be granted singly, in combination, or in tandem; (k) to the extent permitted under the Plan, grant waivers of Plan terms, conditions, restrictions, and limitations; (l) accelerate the vesting, exercise, or payment of an Award, other than Awards made under Article 10, or the Performance Period, Performance Cycle or Unit Period of an Award when such action or actions would be in the best interest of the Company; (m) grant Awards in replacement of Awards previously granted under this Plan or any other executive compensation plan of the Company; (n) establish and administer the Performance Goals and certify whether, -9- and to what extent, they have been attained; and (o) take any and all other action it deems necessary or advisable for the proper operation or administration of the Plan. 4.3 Discretionary Authority. The Committee shall have full discretionary ----------------------- authority in all matters related to the discharge of its responsibilities and the exercise of its authority under the Plan including without limitation its construction of the terms of the Plan and its determination of eligibility for participation and Awards under the Plan. It is the intent of the Plan that the decisions of the Committee and its action with respect to the Plan shall be final, binding and conclusive upon all persons having or claiming to have any right or interest in or under the Plan. 4.4 Section 162(m) of the Code. With regard to all Covered Employees, the -------------------------- Plan shall, for all purposes, be interpreted and construed so as to ensure compliance with Section 162(m) of the Code. 4.5 Action by the Committee. The Committee may act only by a majority of its ----------------------- members. Any determination of the Committee may be made, without a meeting, by a writing or writings signed by all of the members of the Committee. In addition, the Committee may authorize any one or more of its members or the General Counsel of the Company to execute and deliver documents on behalf of the Committee. 4.6 Delegation of Authority. The Committee may delegate some or all of its ----------------------- authority under the Plan to any person or persons provided that any such delegation be in writing; provided, however, that only the Committee may select and grant Awards to Participants who are subject to Section 16 of the Exchange Act or are Covered Employees. ARTICLE 5 - FORMS OF AWARDS - --------- --------------- 5.1 In General. Awards may be paid in the form of stock options pursuant to ---------- Article 7, Performance Awards in cash or deferred compensation denominated in shares of Common Stock share units pursuant to Article 8, Units in the form of Common Stock or cash pursuant to Article 9, and cash, Common Stock, Deferral Restricted Stock, and Deferral Stock Options pursuant to Article 10. All Awards shall be subject to the terms, conditions, restrictions and limitations of the Plan. The Committee may, in its sole judgment, subject an Award, except awards granted pursuant to Article 10, to such other terms, conditions, restrictions and/or limitations (including, but not limited to, the time and conditions of exercise and restrictions on transferability and vesting), provided they are not inconsistent with the terms of the Plan. Awards under a particular Article of the Plan need not be uniform. Any combination of Awards may be granted at one time and on more than one occasion to the same Key Employee or Nonemployee Director. For -10- purposes of the Plan, the value of any Award granted in the form of Common Stock shall be the closing price at which a share of Common Stock shall have been sold on the date of the grant's Effective Date, or on the next preceding trading day if such date was not a trading date, on the primary securities exchange on which the Common Stock is then traded. ARTICLE 6 - SHARES SUBJECT TO PLAN - --------- ---------------------- 6.1 Available Shares. The maximum number of shares of Common Stock that shall ---------------- be available for grant of Awards under the Plan during its term, shall not exceed 1,000,000. (Such amount shall be subject to adjustment as provided in Section 6.2.) Any shares of Common Stock subject to Awards that terminate by expiration, forfeiture, cancellation or surrender for any reason without the issuance of such shares shall become again available for grant under the Plan; provided that if such shares of Common Stock subject to Awards are settled in cash in lieu of Common Stock or are exchanged with the Committee's permission for Awards not involving Common Stock, such shares shall not be available again for grant under the Plan. The maximum number of shares available for issuance under the Plan shall not be reduced to reflect any dividends or dividend equivalents that are reinvested into additional shares of Common Stock. 6.2 Adjustment to Shares. -------------------- 6.2.1 In General. The provisions of this Subsection 6.2.1 are subject to the limitation contained in Subsection 6.2.2. If there is any change in the number of outstanding shares of Common Stock through the declaration of stock dividends, stock splits or the like, the number of shares available for Awards, the shares subject to any Award, the number of Common Stock share units held in a three-year or five-year deferral compensation account and the option prices or exercise prices of Awards shall be automatically adjusted. If there is any change in the number of outstanding shares of Common Stock through any change in the capital account of Integon, or through a merger, consolidation, separation (including a spin-off or other distribution of stock or property), reorganization (whether or not such reorganization comes within the meaning of such term in Section 368(a) of the Code) or partial or complete liquidation, the Committee shall make appropriate adjustments in the maximum number of shares of Common Stock which may be issued under the Plan and any adjustments and/or modifications to outstanding Awards as it, in its sole discretion, deems appropriate. In the event of any other change in the capital structure or in the Common Stock of Integon, the Committee shall also be authorized to make such appropriate adjustments in the maximum number of shares of Common Stock available for issuance under the Plan and any adjustments and/or modifications to outstanding -11- Awards as it, in its sole discretion, deems appropriate. The maximum number of shares available for issuance under the Plan shall be automatically adjusted to the extent necessary to reflect any dividend equivalents paid in the form of Common Stock. 6.2.2 Covered Employees. In no event shall the Award of any Participant who is a Covered Employee be adjusted pursuant to Subsection 6.2.1 to the extent it would cause such Award to fail to qualify as "performance-based compensation" under Section 162(m) of the Code. ARTICLE 7 - STOCK OPTIONS - --------- ------------- 7.1 In General. Awards may be granted by the Committee to Key Employees and ---------- Nonemployee Directors in the form of non-qualified stock options (i.e., stock options that are not incentive stock options within the meaning of Section 422 of the Code). All Awards under the Plan granted to Covered Employees in the form of stock options are intended to qualify as "performance-based compensation" under Section 162(m) of the Code. 7.2 Terms and Conditions of Stock Options. A stock option shall be ------------------------------------- exercisable in whole or in such installments and at such times as may be determined by the Committee and may contain such other terms and conditions as determined by the Committee. All stock options granted under this Plan shall expire no later than 10 years after the Effective Date of such option. The price at which Common Stock may be purchased upon exercise of a stock option shall be not less than 100% of the fair-market value of the Common Stock, as determined by the Committee, on the Effective Date of the option. 7.3 Option Agreements. Each Award of a stock option under this Plan shall be ----------------- evidenced by a written agreement (a "Stock Option Agreement") signed by the Participant and containing such terms and conditions as the Committee may determine from time to time pursuant to this Plan. 7.4 Additional Terms and Conditions. The Committee may, by way of the Stock ------------------------------- Option Agreement or otherwise, establish such other terms, conditions, restrictions and/or limitations, if any, with respect to any stock option Award, provided they are not inconsistent with the Plan. 7.5 Exercise. Upon exercise, the option price of a stock option may be paid -------- in cash, shares of Common Stock, a combination of the foregoing, or such other consideration as the Committee may deem appropriate. The Committee shall establish appropriate methods for accepting Common Stock, whether restricted or unrestricted, and may impose such conditions as it deems appropriate on the use of such Common Stock to exercise a stock option. Subject to Section 11.1, stock options awarded under the Plan may be exercised by way of a -12- broker-assisted exercise program, provided such program is available at the time of the option's exercise. The Committee may permit a Participant to satisfy any amounts required to be withheld under the applicable federal, state, and local tax laws in effect from time to time by electing to have the Company withhold a portion of the shares of Common Stock to be delivered for the payment of such taxes. 7.6 Termination of Employment or Service. Stock options granted to a Key ------------------------------------ Employee under Article 7 of this Plan that remain outstanding on the date of such Key Employee's termination of employment with the Company shall cease to be exercisable and shall terminate and be forfeited on the date of such Employee's termination of employment, except as otherwise provided in this Section 7.6 and Section 7.8. Stock options granted to a Nonemployee Director under Article 7 of this Plan that remain outstanding on the date of such Nonemployee Director's termination of Service shall cease to be exercisable and shall terminate and be forfeited on the date of such Nonemployee Director's termination of Service, except as otherwise provided in this Section 7.6 and Section 7.8. Notwithstanding the foregoing, (i) stock options granted under Article 7 of this Plan to a Key Employee, who immediately prior to acceptance of employment with the Company served as a Nonemployee Director, shall continue to be exercisable after the date of such Key Employee's termination of employment if at such time such Key Employee continues to serve as a Director and (ii) such stock options shall cease to be exercisable and shall terminate and be forfeited on the date of such Participant's termination of Service, except as otherwise provided in this Section 7.6 and Section 7.8. To the extent permitted under Rule 16b-3, on the date of a Participant's termination of employment or Service with the Company because of death, Disability or Retirement, all of such Participant's unexercised stock options granted under this Plan shall remain exercisable, to the extent such options were exercisable at the time of termination, for an additional period of up to one year after the date of such Participant's termination (but in no event beyond the original expiration date of such stock options). If a Participant's employment or Service with the Company terminates for any other reason, other than for Cause, all of such Participant's unexercised stock options granted under this Plan shall remain exercisable for a period of up to 90 days after the Participant's termination (but not beyond the original expiration date of such options) to the same extent as they were exercisable on the date of Participant's termination. 7.7 No Shareholder Rights. A Participant shall have neither rights to --------------------- dividends nor other rights of a shareholder with respect to stock options granted under this Plan until such Participant has exercised the option and received shares of Common Stock upon payment in full. -13- 7.8 Change in Control. Notwithstanding any contrary provision in the Plan, ----------------- upon a Change in Control, no additional terms, conditions, restrictions, or limitations shall be placed upon any stock option granted under this Article 7, and each stock option outstanding shall become immediately exercisable as to all of the shares of Common Stock covered thereby. In addition, upon a Change in Ownership, each outstanding stock option granted under this Article 7 shall be converted into the right to receive, as soon as practicable but in no event later than thirty (30) days after the Change in Ownership, for each share of Common Stock purchasable under such stock option an amount in cash equal to the difference between the Change In Control Price and the per share exercise price of such stock option. In the event that the exercise price of an outstanding stock option is equal to or greater than the Change In Control Price, such stock option shall have a value of zero, shall be cancelled, and the owner thereof shall not be entitled to receive any payment. 7.9 Maximum Award Payable. Notwithstanding any provision contained in the --------------------- Plan to the contrary, the maximum number of shares of Common Stock for which stock options may be granted under the Plan in any calendar year to any one Participant is 45,000 shares of Common Stock. ARTICLE 8 - PERFORMANCE AWARD PROGRAM - --------- ------------------------- 8.1 Eligibility. Only Key Employees shall be eligible to receive Performance ----------- Awards. Within the first 90 days of a Performance Period (or, if longer, within the maximum period allowed under Section 162(m) of the Code), the Committee shall select those Key Employees who will be Participants for such Performance Period. However, designation of a Key Employee as a Participant for a Performance Period shall not in any manner entitle the Participant to receive a Performance Award for the Performance Period. The entitlement of any Participant to payment of a Performance Award for such Performance Period shall be decided solely in accordance with the provisions of this Article 8. Moreover, designation of a Key Employee as a Participant for a particular Performance Period shall not require designation of such Key Employee as a Participant in any subsequent Performance Period, and designation of one Key Employee as a Participant shall not require designation of any other Key Employee as a Participant in such Performance Period or in any other Performance Period. All of the Performance Awards issued under the Performance Award Program to Covered Employees are intended to qualify as "performance-based compensation" under Section 162(m) of the Code. 8.2 Calculation of Performance Incentive Base Salary. Within the first 90 ------------------------------------------------ days of a Performance Period (or, if longer, within the maximum period allowed under Section 162(m) of the Code), the Committee shall calculate the Participant's Performance Incentive -14- Base Salary for the Performance Period then beginning. The Performance Incentive Base Salary for any Performance Period shall be the Participant's base salary as of the date the Performance Goal(s) for such Performance Period is set by the Committee. Once the Performance Incentive Base Salary is determined, the Performance Incentive Base Salary will not change for that Performance Period. 8.3 Procedure for Determining Awards. With regard to a particular Performance -------------------------------- Period, the Committee shall, using its full discretion, select the length of such Performance Period. Within the first 90 days of a Performance Period (or, if longer, within the maximum period allowed under Section 162(m) of the Code), the Committee shall establish in writing for such Performance Period (i) the specific Performance Criteria that will be used to establish the Performance Goal(s) for such Performance Period and the kind(s) and/or level(s) of such Performance Goal(s) and (ii) an award matrix, detailing the Performance Award for each Participant if such Performance Goals are attained. The amount of a Participant's Performance Award will equal the product of the Participant's Incentive Base Salary and the percentage derived from the award matrix (the "Performance Formula"); provided, however, that in determining the size of an individual Award to be paid for a Performance Period, the Committee may, through the use of Negative Discretion, reduce or eliminate the amount of the Award earned under the Performance Formula for the Performance Period if, in its sole discretion, such reduction or elimination is appropriate. 8.4 Performance Awards: Cash or Deferred Compensation. Of the Performance ------------------------------------------------- Award determined to be payable for any Participant at the end of any Performance Period, 20% must be placed into a deferred compensation account that is denominated in Common Stock share units. The deferred compensation may be a three-year account or a five-year account, at the Participant's election. Each Participant shall have the option to receive the remaining 80% of the Performance Award in any combination of the following three forms: cash, a credit to a three-year deferred compensation account that is denominated in Common Stock share units or a five-year deferred compensation account that is denominated in Common Stock share units. Each Participant who has received an award in a year shall make and deliver to the Company by December 31 of such year a written election with respect to the next year as to such method of payment of the Performance Award that may be granted for such next year and each other Participant shall make and deliver to the Company a written election as to the method of payment of a Performance Award within 10 days after receipt of written notice that such Participant is eligible to receive a Performance Award. Unless otherwise changed in writing by a Participant, the most recent annual election made by a Participant shall apply to subsequent years. Amounts contributed to a Participant's three-year deferred compensation account for a particular Performance -15- Award shall be denominated in Common Stock share units as follows: the amount of cash compensation credited to the three-year deferred compensation account shall be multiplied by 1.5 and divided by average of the closing price (the "Award Date Price") per share of Common Stock, on the primary securities exchange on which shares of Common Stock are traded, over the final 30 calendar days of the Performance Period for which the Performance Award was made. Amounts contributed to a Participant's five-year deferred compensation account for a particular Performance Award shall be denominated in Common Stock share units as follows: the amount of cash compensation credited to five-year deferred compensation account shall be multiplied by 2.0 and divided by the Award Date Price. The amount of share units credited to either a three-year deferred compensation account or the five-year deferred compensation account in excess of the quotient of (i) the cash compensation credited to such account with respect to a particular Performance Award divided by (ii) the applicable Award Date Price is defined as the "Restricted Performance Amount", and such quotient is defined as the "Vested Performance Amount." The final day of the Performance Period for a Performance Award is defined as the "Award Date." 8.4.1 Any amounts that the Participant elects, pursuant to Section 8.4, be paid in cash shall be paid on the Award Payment Date; 8.4.2 Amounts credited to a Participant's three-year deferred compensation account with respect to a particular Performance Award shall be paid to the Participant promptly after the third anniversary of the Award Date of such Performance Award. At the election of the Participant, submitted in writing prior to such third anniversary, such amounts shall be paid in shares of Common Stock equal to the Common Stock share units credited to such account or in cash in an amount equal to the product of the number of Common Stock share units credited to such account multiplied by the closing trading price per share of Common Stock on the primary securities exchange on which the Common Stock is traded on such third anniversary date (or, if such date is not a trading day, the next preceding trading day). 8.4.3 Amounts credited to a Participant's five-year deferred compensation account with respect to a particular Performance Award shall be paid to the Participant promptly after the fifth anniversary of the Award Date of such Performance Award. At the election of the Participant, submitted in writing prior to such fifth anniversary, such amounts shall be paid in shares of Common Stock equal to the Common Stock share units credited to such account or in cash in an amount equal to the product of the number of Common Stock share units credited to such account multiplied by the closing trading price per share of Common Stock on the primary -16- securities exchange on which the Common Stock is traded on such fifth anniversary date (or, if such date is not a trading day, the next preceding trading day). 8.5 Deferred Compensation Accounts: Terms and Conditions. Deferred ---------------------------------------------------- Compensation Accounts and shares of Common Stock to be issued pursuant thereto shall be subject to the following terms and conditions: 8.5.1 Except as provided in this Section 8.5, the Participant shall not have, with respect to the Common Stock share units credited to a three- year or five-year deferred compensation account, any of the rights of a shareholder of the Company holding shares of the Common Stock; provided, however, that in the event of the payment of any cash dividends on the Common Stock based on a record date occurring while amounts are credited to a three-year or five-year deferred compensation account, the amount of such account shall be increased by a number of Common Stock share units equal to the quotient of the amount of such cash dividend per share of Common Stock divided by the closing price per share of Common Stock on the primary securities exchange on which the Common Stock is traded on the record date for such dividend, or the next preceding trading day if such record date is not a trading day on such exchange. 8.5.2 The Restricted Performance Amount with respect to a particular Performance Award shall vest on a straight-line basis with such amount credited to a three-year deferred compensation account fully vesting three years after the applicable Award Date and such amount credited to a five- year deferred compensation account fully vesting five years after the applicable Award Date. The Vested Performance Amount shall be fully vested as of the Award Date. Upon a Participant's termination of employment during an unexpired Performance Restriction Period, any amount credited to a three-year or five-year deferred compensation account that has not yet vested shall be forfeited by that Participant. 8.6 Payment of Awards. ----------------- 8.6.1 Condition to Receipt of Awards. Except as provided in Sections 8.7 and 8.9, a Participant must be employed by the Company on the Performance Period's Award Payment Date to be eligible for an Award for such Performance Period. 8.6.2 Limitation. A Participant shall be eligible to receive an Award for a Performance Period only if: (i) the Performance Goals for such Performance Period are achieved; and (ii) the Performance Formula as applied against such Performance Goals determines that all or some portion of the -17- Performance Award has been earned by that Participant for the Performance Period. 8.6.3 Certification. Following the completion of a Performance Period, the Committee shall meet to review and certify in writing whether, and to what extent, the Performance Goals for the Performance Period have been achieved. If the Committee certifies that the Performance Goals have been achieved, it shall, based upon application of the Performance Formula to the Performance Goals for such Performance Period, also calculate and certify in writing for each Participant what percentage of the Performance Award has been earned for the Performance Period. The Committee shall then determine the size of each Participant's Award for the Performance Period. 8.6.4 Timing of Award Payments. The Performance Awards granted by the Committee for a Performance Period shall be paid to Participants on the Award Payment Date for such Performance Period, subject to deferral pursuant to Section 8.4. 8.6.5 New Participants. Participants who commence employment by the Company after the Committee's selection of Participants for the Performance Period, as well as Key Employees who are selected by the Committee to be Participants after such date, shall, in the event Awards are paid for the Performance Period, be entitled to a pro rata Award. The amount of the pro rata Award shall be determined by multiplying the Award the Participant would have otherwise been paid if he or she had been a Participant for the entire Performance Period by a fraction, the numerator of which is the number of full months he or she was eligible as a Participant to participate in the Performance Award Program during the Performance Period and the denominator of which is the total number of full months in the Performance Period. For purposes of this calculation, a partial month of participation shall: (i) be treated as a full month of participation to the extent a Participant participates in the Performance Award Program for 15 or more days of such month; and (ii) not be taken into consideration to the extent the Participant participates in the Performance Award Program for less than 15 days of such month. 8.7 Termination of Employment During Performance Period. In the event a --------------------------------------------------- Participant's employment terminates prior to the Award Date for a Performance Period, such Participant shall not receive any amount in connection with such Performance Award and such Performance Award shall terminate. Notwithstanding the preceding sentence, if (i) such Participant's employment terminates because of death, Disability or Retirement or (ii) if such Participant served as a Nonemployee Director immediately prior to his -18- acceptance of employment with the Company, upon the termination of such employment prior to the Award Date for a Performance Period, such Participant shall receive, if Awards are paid for such Performance Period, a pro rata Performance Award determined by multiplying the Performance Award the Participant would have otherwise been paid if he or she had been a Participant through the Award Date for the Performance Period by a fraction, the numerator of which is the number of full months he or she was a Participant during such Performance Period and the denominator of which is the total number of full months in the Performance Period. For purposes of this calculation, a partial month of participation shall: (1) be treated as a full month of participation to the extent a Participant participates in the Performance Award Program on 15 or more days of such month; and (2) not be taken into consideration to the extent the Participant participates in the Performance Award Program for less than 15 days of such month. Such pro rata Performance Award shall be paid in the form of cash no more than 120 days after the Award Payment Date for such Performance Award. 8.8 Maximum Award Payable. Notwithstanding any provision contained in the --------------------- Plan to the contrary, the maximum Performance Award payable to any one Participant under the Plan for a Performance Period, before adjustments to account for deferral of payment pursuant to Section 8.4 is $700,000. 8.9 Change of Control, Liquidation or Dissolution. ---------------------------------------------- 8.9.1 Dissolution, Liquidation. In the event of a proposed dissolution or liquidation of the Company, all vested amounts in a three-year or five- year deferred compensation account shall be paid to the Participants in cash in an amount equal to the product of (i) the sum of the Vested Performance Amount plus the vested portion of the Restricted Performance Amount multiplied by (ii) the Change in Control Price, as though such dissolution or liquidation constituted a Change in Control. All other amounts in such account shall be forfeited. 8.9.2 Change in Control; Current Awards. Upon a Change in Control, any Participant in the Performance Award Program shall be paid, as soon as practicable but in no event later than thirty (30) days after the Change in Control, for an Award for each Performance Period in which the Participant was selected to participate and during which the Change in Control occurs ("Current Performance Period"). The amount of such payment for an Award shall be determined by assuming that the Performance Goal for such Current Performance Period was attained at a level of 100% or the equivalent thereof and determining the Performance Award that would have been payable for such Performance Period had the Performance Goal been attained at a level of 100% or the equivalent thereof. -19- 8.9.3 Change in Control; Deferred Compensation. Notwithstanding any contrary provision in the Plan, upon a Change in Control, no additional terms, conditions, restrictions or limitations shall be placed on a three- year or five-year deferred compensation account, and all vested amounts in a three-year or five-year deferred compensation account shall be paid to Participants in cash, in an amount equal to the product of (i) the sum of the Vested Performance Amount plus the vested portion of the Restricted Performance Amount multiplied by (ii) the Change in Control Price. All other amounts in such account shall be forfeited. ARTICLE 9 - UNIT AWARD PROGRAM - --------- ------------------ 9.1 In General. Awards may be granted by the Committee to Key Employees in ---------- the form of Units. All Awards under the Plan granted to Covered Employees in the form of Units are intended to qualify as "performance-based compensation" under Section 162(m) of the Code. 9.2 Eligibility. Only Key Employees shall be eligible to receive Awards of ----------- Units; provided that no Key Employee is eligible to receive an Award of Units in any calendar year in which that Key Employee is a Participant for purposes of a Performance Award under Article 8. Within the first 90 days of any Unit Cycle (or, if longer, within the maximum period allowed under Section 162(m) of the Code), the Committee shall select those Key Employees who will be Participants for purposes of Awards of Units for such Unit Cycle. The entitlement of any Participant to payment of an Award of Units for such Unit Cycle shall be decided solely in accordance with the provisions of this Article 9. Designation of a Key Employee as a Participant for a particular Unit Cycle shall not require designation of such Key Employee as a Participant in any subsequent Unit Cycle, and designation of one Key Employee as a Participant shall not require designation of any other Key Employee as a Participant in such Unit Cycle or in any other Unit Cycle. 9.3 Procedure for Determining Unit Awards. With regard to grants of Units in ------------------------------------- any particular Unit Cycle, the Committee shall, using its full discretion, within the first 90 days of a Unit Cycle (or, if longer, within the maximum period allowed under Section 162(m) of the Code), establish in writing (i) Multipliers, which shall be a function of Combined Operating Ratio for each Unit Period within the Unit Cycle and Growth in Net Written Premiums for each Unit Period within the Unit Cycle, (ii) the Initial Dollar Value of all Units to be awarded in such Unit Cycle and (iii) the number of Units to be granted to each Participant. In establishing such Multipliers, the Committee shall consider return on equity implied by targeted Combined Operating Ratios and Growth in Net Written Premiums. An example of a chart establishing such Multipliers is attached as Exhibit A hereto. -20- 9.4 Unit Grant Notice. As soon as administratively practicable following a ----------------- grant of Units to a Key Employee, the Company shall provide such Key Employee a Unit Grant Notice which shall contain, among other things, a copy of the chart adopted by the Committee establishing the Multipliers applicable to such Units, the number of Units granted to the Participant and the Initial Value thereof. 9.5 Nontransferability of Units. No Unit granted pursuant to the Plan shall --------------------------- be transferable otherwise than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code. 9.6 Additional Terms and Conditions. The Committee may, by way of the Unit ------------------------------- Grant Notice or otherwise, establish other terms, conditions, restrictions and/or limitations, if any, with respect to any grant of Units, provided they are not inconsistent with the Plan. 9.7 Valuation and Payment of Units. ------------------------------ 9.7.1 Annual Certification. Following the completion of a Unit Period for any Unit, the Committee shall meet to review and certify in writing the determination of the applicable Multiplier for such Unit. Based upon such Multiplier so calculated, the Committee shall calculate and notify each Participant of the Annual Dollar Value of the Unit. In the event the Multiplier for any Unit Period is zero, the value of the Units to which such Multiplier applies shall be zero. 9.7.2 Three-year Certification. Upon the determination of the Annual Dollar Value for the third fiscal year of the Unit Cycle for a Unit, the Committee shall certify in writing the Final Dollar Value of the Unit and notify the Participant thereof. 9.7.3 Conversion to Common Stock and Rights to Cash. As soon as administratively possible following the certification of the Multiplier applicable to Units for the third year of the Unit Cycle, the Company shall cause to be issued in the name of such Participant, and promptly deliver to such Participant, a certificate (the "Share Certificate") evidencing a number of shares of Common Stock equal to the quotient of (i) sixty percent (60%) of the sum of the Final Dollar Value of such Units divided by (ii) the average closing price per share of the Common Stock over the final 30 calendar days of the Unit Cycle on the primary securities exchange on which such shares are traded, rounded down to the nearest whole share (the remaining dollar amount not so converted into shares of common stock due to rounding is referred to herein as the "Fractional Amount"). -21- 9.7.4 At the time the Share Certificate is delivered to the Participant, the Company shall pay to such Participant in cash an amount equal to forty percent (40%) of the Final Dollar Value of such Units plus the Fractional Amount with respect to Share Certificates then delivered, less applicable withholding for state and federal taxes (including taxes with respect to the Share Certificates). 9.7.5 If the amount to be paid pursuant to paragraph 9.7.3 with respect to any Units held by such Participant is not sufficient to satisfy the Company's obligation to make withholding, pursuant to applicable federal and state law, for applicable taxes, the Company shall, at the request of the Participant, deduct and withhold from the Share Certificate the whole number of shares of Common Stock having a value (based on the closing price at which a share of Common Stock shall have sold on the final trading day of the Unit Cycle as reported on the listing of the primary securities exchange on which such shares are traded), rounded up to the nearest share, equal to such deficiency and shall deliver, in lieu of the Share Certificate, a new certificate evidencing such remaining shares of Common Stock. 9.8 New Participants. Key Employees selected by the Committee to be ---------------- Participants for a Unit Cycle who commence employment with the Company after the Committee's initial selection of Participants for the Unit Cycle, as well as Key Employees who are selected by the Committee to be Participants for a Unit Cycle after such date, shall be entitled to a pro rata Award for the Unit Period in which such employment or selection commences. The amount of the pro rata Award shall be determined by multiplying the Award the Participant would otherwise have been paid if he or she had been a Participant for the entire Unit Period (i.e., the Annual Dollar Value for such Unit Period) by a fraction, the numerator of which is the number of full months he or she was eligible as a Participant to participate in the Unit Award Program during the Unit Period and the denominator of which is twelve (12). For purposes of this calculation, a partial month of participation shall: (i) be treated as a full month of participation to the extent a Participant participates in the Unit Award Program for 15 or more days of such month; and (ii) not be taken into consideration to the extent the Participant participates in the Unit Award Program for less than 15 days of such month. The amount of such Award will be deemed the Annual Dollar Value for such Unit Period for the purpose of determining both such amount and the Final Dollar Value. 9.9 Forfeiture Upon Cessation of Employment. A Participant who ceases, at any --------------------------------------- time before the expiration of the Unit Cycle for any Units awarded to such Participant, to be a full-time employee of the Company (defined as any employee of the Company employed on the basis of 40 hours per work week, or 2,080 hours per year, or the equivalent thereof) for any reason shall forfeit all rights to -22- receive any payment pursuant to this Plan with respect to such Units; provided, however, in the event that cessation of such Participant's employment results from such Participant's death, Disability or Retirement, all Units applicable to such Participant, including Units for which the Unit Cycle shall not have elapsed, for which payment had not previously been made to such Participant pursuant to the term of this Plan shall, upon such event, be converted into the right to receive an amount in cash equal to the sum of (i) with respect to Units awarded to such Participant for which an applicable Unit Period shall have elapsed, the sum of the Annual Dollar Value for each elapsed Unit Period in the Unit Cycle and (ii) with respect to Units awarded to such Participant for which the applicable Unit Period shall not have elapsed, a pro rata portion of the Annual Dollar Value for the then-current Unit Period based on the portion of such Unit Period that had elapsed. Amounts, if any, payable under this Section 9.9 shall be paid as soon as administratively possible; provided that amounts payable hereunder with regard to Units for which the Unit Cycle shall not have elapsed shall not be paid until after the Annual Dollar Value for such Units for such Unit Cycle have been determined pursuant to this Article 9. 9.10 Change of Control, Liquidation or Dissolution. --------------------------------------------- 9.10.1 Dissolution, Liquidation. In the event of a proposed dissolution or liquidation of the Company, each Unit awarded under the Plan shall terminate as of a date to be fixed by the Committee. At least thirty (30) days' written notice of the date so fixed shall be given to each Participant holding outstanding Units for which a Unit Period has elapsed (or other person entitled to receive payment in respect of such Units). On such date fixed by the Committee, the Company shall make payments to such Participants (or other persons entitled to receive payment in respect of such Units) in cash based on the Final Dollar Value of such Units being the sum of the Annual Dollar Value for such Units for the Unit Periods then elapsed. 9.10.2 Change in Control. Notwithstanding any contrary provision in the Plan, upon a Change in Control, no additional terms, conditions, restrictions, or limitations shall be placed upon any Award granted under Article 9, and all Units, including Units for which the Unit Period shall not have elapsed, for which payment had not previously been made to a Participant pursuant to the term of this Plan shall, upon the Change of Control, be converted into the right to receive within thirty (30) days after such Change of Control occurs an amount in cash equal to the Final Dollar Value thereof. For the purpose of determining such Final Dollar Value, the Annual Dollar Value of a Unit with respect to any unelapsed Unit Period shall be determined by assuming that the Multiplier for such Unit Period is 100%. -23- 9.11 Maximum Award Payable. Notwithstanding any provision contained in the --------------------- Plan to the contrary, the maximum Final Dollar Value of Units that may be awarded under the Plan in any calendar year to any Participant is $375,000. ARTICLE 10 - NONEMPLOYEE DIRECTOR AWARDS ---------- --------------------------- 10.1 In General. Nonemployee Directors are eligible to (i) receive automatic ---------- grants of shares of Common Stock as part of the compensation for such Nonemployee Directors' Service and (ii) elect to receive Common Stock, Deferral Restricted Stock, or Deferral Stock Options in lieu of other cash compensation for Service. 10.2 Common Stock. ------------ 10.2.1 Awards of Common Stock. Each Nonemployee Director serving as a Director on the next day following the end of Integon's annual shareholder's meeting in each year ("Director Grant Date") shall automatically be awarded 1,650 shares of Common Stock on such Director Grant Date (or a portion of such shares of Common Stock if such Participant did not serve as a Director the entire period between the annual shareholders' meeting preceding the Director Grant Date and the Director Grant Date, which portion of such shares shall equal the portion of such period the Participant did serve as a Director). 10.2.2 Rule 16b-3(c)(2)(ii)(B). The provisions of Section 10.2 shall not ----------------------- be altered or amended more than once every six months except as necessary to comply with the Code, the Employee Retirement Income Security Act, or the rules and regulations thereunder. 10.3 Common Stock, Deferral Restricted Stock, and Deferral Stock Options. ------------------------------------------------------------------- 10.3.1 Election. Each year, on the date of Integon's scheduled annual shareholders' meeting (or, for Nonemployee Directors whose Initial Election Date shall fall within the period of six months after such scheduled annual meeting, on such Initial Election Date), each Nonemployee Director may, subject to any approval by the shareholders of the Company required by Rule 16b-3, make an irrevocable election to receive, in lieu of all or any part of the cash compensation to which such member would otherwise be entitled as a member of the Board (other than reimbursement of expenses and/or individual meeting fees) for the period from the annual shareholders' meeting to the day prior to the following annual meeting, either (i) Common Stock, (ii) Deferral Restricted Stock or (iii) Deferral Stock Options, but not in any combination of the three, provided, however, that a -24- Participant may make his or her first election on, or at any time prior to, his or her Initial Election Date. An election made hereunder shall be effective, beginning on the Initial Election Date or the annual meeting dates following such a Initial Election Date, for the grant of such number of: (i) shares of Common Stock, (ii) shares of Deferral Restricted Stock or (iii) Deferral Stock Options, as is determined by the Committee at the Effective Date to constitute an amount of Common Stock, Deferral Restricted Stock, or Deferral Stock Options equivalent to the cash compensation elected to be foregone. In making such determination of equivalency for purposes of Common Stock and Deferral Restricted Stock, the Committee shall use the average of the closing price at which a share of Common Stock shall have been traded over the 30 calendar days ending with the date of the grant of such Common Stock or Deferral Restricted Stock on the primary securities exchange on which the Common Stock is then traded. In making such determination of equivalency for purposes of Deferral Stock Options, the Committee shall rely upon the Black-Scholes option pricing model, determining such equivalency as of the Effective Date of such Deferral Stock Option. Each such election shall be in writing and shall be delivered to the Secretary of the Company. The Effective Date of any such Deferral Award shall be the date six months after such Nonemployee Director's Initial Election Date and, for subsequent elections on the date of Integon's annual shareholders' meeting, the date six months after such meeting. 10.3.2 Terms and Conditions of Deferral Restricted Stock. 10.3.2.1 Subject to the provisions of the Plan, until the expiration of the Deferral Restriction Period, the Participant shall not be permitted to hold, sell, assign, transfer, pledge or otherwise encumber shares of Deferral Restricted Stock. 10.3.2.2 Except as provided in this Section 10.3, the Participant shall have, with respect to the shares of Deferral Restricted Stock, all of the rights of a shareholder of the Company holding shares of the Common Stock, including, if applicable, the right to vote the shares and the right to receive any cash dividends. Dividends payable in Common Stock shall be paid in the form of additional whole shares of Deferral Restricted Stock on which such dividend was paid (based on the closing price per share of the Common Stock on the primary securities exchange which the Common Stock -25- is traded as of the record date for such dividend, or the next preceding trading day if the record date is not a trading day on such exchange), held subject to the same conditions and restrictions of the underlying Deferral Restricted Stock, with any fractional share amounts paid in cash on the payment date of such dividend. 10.3.2.3 Except to the extent otherwise provided in this Section 10.3, upon a Participant's termination of Service during an unexpired Deferral Restriction Period, all shares subject to such unexpired Deferral Restriction Period held by that Participant shall be forfeited. In the event of the termination of Service of a Participant in the Deferral Restricted Period because of death, Disability or Retirement, the unexpired Deferral Restriction Period applicable to Deferral Restricted Stock held by that Participant shall lapse and shares of such Deferral Restricted Stock shall become free of all restrictions and become fully vested and transferable. Notwithstanding any contrary provision in the Plan, upon a Change in Control, no additional terms, conditions, restrictions, or limitations shall be placed upon any Deferral Restricted Stock granted under this Article 10, and the unexpired Deferral Restriction Period applicable to each share of Deferral Restricted Stock outstanding under this Plan shall lapse and each share of such Deferral Restricted Stock shall become free of all restrictions and become fully vested and transferable. 10.3.2.4 Each Deferral Restricted Stock award shall be confirmed by, and be subject to the terms of, a Deferral Stock Agreement. 10.3.2.5 Deferral Restricted Stock Certificates. Shares of Deferral Restricted Stock shall be evidenced in such manner as the Committee may deem appropriate, including book-entry registration or issuance of one or more stock certificates. Any certificate issued in respect of shares of Deferral Restricted Stock shall be registered in the name of such Participant and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Deferral Restricted Stock, substantially in the following form: "The transferability of this certificate and the shares of stock represented hereby are subject to -26- the terms and conditions (including forfeiture) of the Integon Corporation Amended and Restated Omnibus Long-Term Performance Incentive Compensation Plan. Copies of such Plan and Agreement are on file at the offices of Integon Corporation, 500 West Fifth Street, Winston-Salem, North Carolina 27152." The Committee may require that the certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed and that, as a condition of any Award of Deferral Restricted Stock, the Participant shall have delivered a stock power, endorsed in blank, relating to the Common Stock covered by such Award. If and when the applicable Deferral Restriction Period expires without a prior forfeiture of the Deferral Restricted Stock, unlegended certificates for such shares shall be delivered to the Participant upon surrender of the legended certificates. 10.3.3 Terms and Conditions of Deferral Stock Options. 10.3.3.1 Exercise Price. The price at which Common Stock may be purchased upon exercise of a Deferral Stock Option shall be not less than 100% of the fair-market value of the Common Stock, as determined by the Committee, on the date of grant of such Deferral Stock Options. 10.3.3.2 Vesting. Subject to the provisions of Sections 10.3.3.3 and 10.3.3.4, after one year from the Effective Date of such Deferral Stock Option, such Deferral Stock Option shall become exercisable for all shares of Common Stock covered thereby. 10.3.3.3 Acceleration due to Termination of Service, Change in Control. If the Service of any Participant ends during the one- year period for which cash compensation has been waived, such Participant's rights in such Deferral Stock Option shall be as follows: 10.3.3.3.1 Upon the termination of such Nonemployee Director's Service because of death, Disability or Retirement during such one-year period, each unexercised Deferral -27- Stock Option held by that Nonemployee Director shall become immediately exercisable as to 100% of the shares of Common Stock covered thereby; 10.3.3.3.2 Upon the termination of such Nonemployee Director's Service during such one-year period for any reason other than death, Disability or Retirement, a portion of the shares of Common Stock covered thereby shall become immediately exercisable as follows: 10.3.3.3.2.1 The shares of Common Stock covered by a Deferral Stock Option attributable to the election to forgo cash compensation for the one-year period in which such Participant's Service terminates shall be prorated and such Option shall become immediately exercisable to the extent of that portion of the shares of Common Stock attributable to the time of Service during that 1 year period; and 10.3.3.3.2.2 As to the balance of the shares of Common Stock covered by such Deferral Stock Option for such 1 year period, such option shall lapse immediately. Notwithstanding any contrary provision in the Plan, upon a Change in Control, no additional terms, conditions, restrictions, or limitations shall be placed upon any Deferral Stock Option granted under this Article 10, and each Deferral Stock Option outstanding shall become immediately exercisable as to all of the shares of Common Stock covered thereby. In addition, upon a Change in Ownership, each outstanding Deferral Stock Option granted under this Article 10 shall be converted into the right to receive, as soon as practicable but in no event later than thirty (30) days after the Change in Ownership, for each share of Common Stock purchasable under such Deferral Stock Option an amount in cash equal to the difference between the Change In Control Price and the per share exercise price of such Deferral Stock Option. In the event that exercise price of an outstanding Deferral Stock Option is equal to or greater than the Change In Control Price, such Deferral Stock Option shall have a value of zero, shall be cancelled, and the owner -28- thereof shall not be entitled to receive any payment. 10.3.3.4 Term of Exercisability. Once any portion of a Deferral Stock Option becomes exercisable, it shall remain exercisable only for the lesser of (i) 10 years after the date of grant (or such lesser number of years as the Committee shall determine) or (ii) 1 year (or such greater number of years as the Committee shall determine) after the Service of a Participant terminates for any reason. 10.3.3.5 Exercise and Payment. Upon exercise, the option price of a Deferral Stock Option may be paid in cash, shares of Common Stock, a combination of the foregoing, or such other consideration as the Committee may deem appropriate. The Committee shall establish appropriate methods for accepting Common Stock, whether restricted or unrestricted, and may impose such conditions as it deems appropriate on the use of such Common Stock to exercise a stock option. Subject to Section 15.8, stock options awarded under the Plan may be exercised by way of a broker-assisted exercise program, provided such program is available at the time of the option's exercise. The Committee may permit a Participant to satisfy any amounts required to be withheld under the applicable federal, state and local tax laws in effect from time to time, by electing to have the Company withhold a portion of the shares of Common Stock to be delivered for the payment of such taxes. 10.3.3.6 Option Agreements. Each Award of a Deferral Stock Option under this Plan shall be evidenced by a written agreement signed by the Nonemployee Director and containing such terms and conditions as the Committee may determine from time to time pursuant to this Plan. 10.3.4 Rule 16b-3 Compliance. The grant of Common Stock, Deferral Restricted Stock, and Deferral Stock Options is intended to comply in all respects with Rule 16b-3(d)(1) of the Exchange Act such that the grant of all Common Stock, Deferral Restricted Stock, and Deferral Election Stock Options issued under the Plan shall be exempt from Section 16(b) of the Exchange Act. ARTICLE 11 - MISCELLANEOUS - ---------- ------------- 11.1 Withholding Taxes. The Company shall be entitled to deduct from any ----------------- payment under the Plan, regardless of the form of such payment, the amount of all applicable income and employment taxes -29- required by law to be withheld with respect to such payment or may require the Participant to pay to it such tax prior to and as a condition of the making of such payment. In accordance with any applicable administrative guidelines it establishes, the Committee may allow a Participant to pay the amount of taxes required by law to be withheld from an Award by withholding from any payment of Common Stock due as a result of such Award, or by permitting the Participant to deliver to the Company, shares of Common Stock having a fair-market value, as determined by the Committee, equal to the amount of such required withholding taxes. 11.2 Amendments to Awards. The Committee may at any time unilaterally amend -------------------- any unexercised, unearned, or unpaid Award, except Awards made under Article 10, including, but not by way of limitation, Awards earned but not yet paid, to the extent it deems appropriate; provided, however, that any such amendment which, in the opinion of the Committee, is adverse to the Participant shall require the Participant's consent. 11.3 Regulatory Approvals and Listings. Notwithstanding anything contained in --------------------------------- this Plan to the contrary, the Company shall have no obligation to issue or deliver certificates of Common Stock evidencing any Award resulting in the payment of Common Stock prior to (i) the obtaining of any approval from any governmental agent that the Company shall, in its sole discretion, determine to be necessary or advisable, (ii) the admission of such shares to listing on the stock exchange on which the Common Stock may be listed and (iii) the completion of any registration or other qualification of said shares under any state or federal law or ruling of any governmental body that the Company shall, in its sole discretion, determine to be necessary or advisable. 11.4 No Right to Continued Employment or Grants. Participation in the Plan ------------------------------------------ shall not give any Key Employee or Nonemployee Director any right to remain in the employ or Service of the Company. Integon, or, in the case of employment with a Subsidiary, the Subsidiary, reserves the right to terminate any Employee at any time, subject to the provisions of any employment agreement with such Key Employee. Further, except as provided in Article 10, the adoption of this Plan shall not be deemed to give any Key Employee, Nonemployee Director or any other individual any right to be selected as a Participant or to be granted an Award. 11.5 Amendment/Termination. The Committee may suspend or terminate the Plan at --------------------- any time with or without prior notice. In addition, except as otherwise expressly provided, the Committee may, from time to time and with or without prior notice, amend the Plan in any manner, but may not without shareholder approval adopt any amendment that would require the vote of the shareholders of Integon pursuant to Section 16 of the Exchange Act or Section 162(m) of the Code, but only insofar as such amendment affects Covered Employees. Upon a Change In Control no action, including, -30- but not by way of limitation, the amendment, suspension or termination of the Plan, shall be taken which would affect the rights of any Participant or the operation of the Plan with respect to any Award to which the Participant may have become entitled hereunder on or prior to the date of the Change In Control or to which he or she may become entitled as a result of such Change In Control. 11.6 Governing Law. The Plan shall be governed by and construed in ------------- accordance with the laws of the State of North Carolina, except as superseded by applicable federal law. 11.7 No Right, Title, or Interest in Company Assets. No Participant shall have ---------------------------------------------- any rights as a shareholder as a result of participation in the Plan until the date of issuance of a stock certificate in his or her name and, in the case of shares of Common Stock, such rights are granted to the Participant under the Plan. To the extent any person acquires a right to receive payments from the Company under the Plan, such rights shall be no greater than the rights of an unsecured creditor of the Company and the Participant shall not have any rights in or against any specific assets of the Company. All of the Awards granted under the Plan shall be unfunded. 11.8 Section 16 of the Exchange Act. In order to avoid any Exchange Act ------------------------------ violations, the Committee may, from time to time, impose additional restrictions upon an Award, including but not limited to, restrictions regarding tax withholdings and restrictions regarding the Participant's ability to exercise Awards under any broker-assisted exercise program. 11.9 No Guarantee of Tax Consequences. No person connected with the Plan in -------------------------------- any capacity, including, but not limited to, Integon and its Subsidiaries and their directors, officers, agents and employees makes any representation, commitment, or guarantee that any tax treatment, including, but not limited to, federal, state and local income, estate and gift tax treatment, will be applicable with respect to amounts deferred under the Plan, or paid to or for the benefit of a Participant under the Plan, or that such tax treatment will apply to or be available to a Participant on account of participation in the Plan. 11.10 Compliance with Section 162(m). If any provision of the Plan would cause ------------------------------ the Awards granted to a Covered Person not to qualify as "performance-based compensation" under Section 162(m) of the Code, that provision, insofar as it pertains to the Covered Person, shall be severed from, and shall be deemed not to be a part of this Plan, but the other provisions hereof shall remain in full force and effect. -31- 11.11 Funding of Cash Payments. The Company shall fund cash payments under this ------------------------ Plan from its general assets and shall not maintain any designated or segregated fund for such purposes. 11.12 Legal Fees. Integon shall pay all legal fees and related expenses ---------- incurred by a Participant in seeking to obtain or enforce any payment, benefit or right he or she may be entitled to under the Plan after a Change in Control or a Change in Ownership; provided, however, the Participant shall be required to repay any such amounts to Integon to the extent a court of competent jurisdiction issues a final and non-appealable order setting forth the determination that the position taken by the Participant was frivolous or advanced in bad faith. -32- EXHIBIT A SAMPLE CHART OF MULTIPLIERS Combined Operating Ratio
FF.0% EE.5% EE.0% DD.5% DD.0% CC.5% CC.0% BB.5% BB.0% AA.5%** --------------------------------------------------------------------------------------------------------- A%* 71.8% 81.9% 91.9% 101.9% 111.9% 122.0% 132.0% B% 75.7% 86.2% 96.6% 107.0% 117.3% 127.7% 138.0% C% 79.1% 90.1% 101.0% 111.9% 122.8% 133.5% 144.2% D% 71.3% 82.7% 94.0% 105.3% 116.6% 127.9% 139.2% 150.4% E% 73.0% 84.4% 95.9% 107.4% 118.9% 130.4% 141.9% 153.4% Growth in F% 74.7% 86.3% 97.9% 109.6% 121.3% 132.9% 144.6% 156.3% Net Written G% 76.4% 88.2% 100.0% 111.8% 123.6% 135.5% 147.3% 159.2% Premiums H% 78.2% 90.1% 102.1% 114.1% 126.0% 138.1% 150.1% 162.1% I% 79.9% 92.1% 104.2% 116.4% 128.5% 140.7% 152.9% 165.1% J% 81.7% 94.0% 106.4% 118.7% 131.1% 143.4% 155.8% 168.1% K% 70.9% 83.4% 96.0% 108.5% 121.0% 133.6% 146.1% 158.7% 171.2% L% 72.5% 85.2% 97.9% 110.7% 123.4% 136.1% 148.9% 161.6% 174.3% M% 74.1% 87.0% 99.9% 112.9% 125.8% 138.7% 151.7% 164.6% 177.5% N% 75.7% 88.8% 102.0% 115.1% 128.2% 141.3% 154.5% 167.6% 180.7% ---------------------------------------------------------------------------------------------------------
________________ * or less ** or greater No payments shall be due with respect to Units to the extent Growth in Net Written Premiums is less than A%, Combined Operating Ratio is greater than EE.5% or with respect to boxes in the chart left blank. The foregoing chart has been prepared on an arbitrary basis and is provided to illustrate the application of the Plan. Letters have been substituted for numbers in Growth in Net Written Premiums and Combined Operating Ratio to avoid any implication that the foregoing chart presents a projection of the Company's operating results. EX-10.32 3 LTR AGREEMENT BETWEEN JAMES LAMER & CO. EXHIBIT 10.32 November 25, 1996 Integon Corporation 500 West Fifth Street Winston-Salem, NC 27152 Dear Sirs: As we have discussed, we have decided it is in our mutual interest for me to resign my position as a director, Chief Executive Officer, and President of Integon Corporation ("Integon") and as a director and officer of its subsidiaries, and you have agreed to accept my resignation from these positions effective as of December 1, 1996; provided however, that I shall remain an active full-time employee of Integon until September 15, 1997, at which time I will resign from all active full-time employment with lntegon to take early retirement. I acknowledge that such resignation will be voluntary and without good cause attributable to Integon within the meaning of N.C.G.S. Section 96- 14(l). In this connection, we have agreed that it would be mutually desirable to set forth our obligations to each other upon and following the date hereof, including, without limitation, any obligations under (i) the Severance Agreement dated January 1, 1996, between Integon Corporation and me, (the "Severance Agreement"), (ii) the Integon Corporation 1992 Stock Option Plan (the "Stock Option Plan"), (iii) the Integon Retirement Savings Plan (the "Savings Plan"), (iv) the Integon Corporation Employee Stock Ownership Plan (the "ESOP"), (v) the Integon Corporation Long Range Performance Incentive Compensation Plan and the Integon Corporation Omnibus Long-Term Performance Incentive Compensation Plan (the "Omnibus Plan"), and (vi) the Deferred Compensation Agreement dated December 15, 1987 and amended on August 1, 1990 between Integon Corporation and me (the "Deferred Compensation Agreement"). Accordingly, we hereby agree as follows: (1) I hereby resign, effective December 1, 1996, as President and Chief Executive Officer and as a director of Integon as well as from each officership and directorship held by me with any other subsidiary or affiliate of Integon, and agree that I will resign as a full-time employee on September 15, 1997, and that such resignation will be voluntary and without good cause attributable to Integon within the meaning of N.C.G.S. Section 96-14(l), and will be characterized as an early retirement under Integon's current retirement program. (2) In lieu of any amounts that may be due me under the Severance Agreement, Integon will pay me an aggregate amount of $975,000 representing an amount equal to three times my annual salary of $325,000, such amount to be paid in a lump sum on January 2, 1997. (3) In addition, Integon agrees to accelerate the vesting of all stock options granted to me under the Stock Option Plan in 1992 (165,000 options at $15.25), 1993 (12,000 options at $30.25), 1994 (12,000 options at $18.25) and 1995 (12,000 options at $17.125) effective as of December 1, 1996 and agrees that such options may be exercised either through a cash purchase or a cashless exercise. For purposes of the Stock Option Plan, my retirement date will be September 15, 1997. (4) Integon will pay me an aggregate amount of $36,250, representing an amount equal to my 1996 unused vacation, such aggregate amount to be paid on December 15, 1996. I will be eligible to earn vacation on a pro-rated basis through September 15, 1997. (5) In accordance with the provisions of the Savings Plan I will be entitled on September 15, 1997 to either (i) a lump sum distribution of all vested amounts held in my account at First Union, (ii)a distribution of all vested amounts held in my account at First Union in accordance with the Savings Plan's installment distribution options, or (iii) leave all vested amounts in my account at First Union until I elect either (i) or (ii) above subject to the Savings Plan provisions. I agree to repay any loan made under the Savings Plan to me in full on September 15, 1997. This paragraph is specifically subject to the terms and conditions of the Savings Plan, and to the extent that this paragraph conflicts with the provisions set forth in the Savings Plan, the provisions of the Savings Plan shall govern. I acknowledge that I will not be eligible to participate in the Savings Plan after September 15, 1997. (6) In accordance with the provisions of the ESOP Plan I will be entitled on September 15, 1997, to either (i) a lump sum distribution of all vested amounts held in my account in a single payment of shares of Integon Common Stock and cash, for any fractional share, or (ii) leave all vested amounts in my account until I elect to receive a distribution in accordance with the terms of the ESOP Plan. This paragraph is specifically subject to the terms and conditions set forth in the ESOP Plan, and to the extent that this paragraph conflicts with the provisions set forth in the ESOP Plan, the terms and conditions of the ESOP Plan shall govern. I acknowledge that I will not be eligible to participate in the ESOP Plan after September 15, 1997. (7) I agree that the provisions of the Long Range Performance Incentive Compensation Plan in effect on the date hereof shall govern the 16,000 units awarded to me in 1995, and the provisions of the Omnibus Plan in effect on the date hereof shall govern the 41,903 stock options granted to me under Article 7 of the Omnibus Plan on May 16, 1996 and any performance award that I may be eligible to receive for 1996 under Article 8 of the Omnibus Plan. For purposes of the Long Range Performance Incentive Compensation Plan and the Omnibus Plan, my termination date will be September 15, 1997, and my termination of employment with the Company will be characterized as termination by the Company without cause, as defined in the plan documents. I agree that I will not be eligible to participate in the Omnibus Plan during 1997. (8) In accordance with the provisions of the Deferred Compensation Agreement I acknowledge that I will receive a lump-sum payment of my deferred compensation amount on September 15, 1997. (9) Any amounts payable pursuant to paragraphs 2, 3, 4, 5, 6, 7 and 8 shall be subject to deduction for Federal, State and other governmental withholding tax requirements, as applicable. (10) Integon will continue to make available to me and my dependents the medical, dental, vision, disability, and life insurance benefits being received by us from Integon as of the date hereof, including healthcare spending accounts, through September 15, 1997, at which time I will be eligible for retirement and will be eligible to continue medical insurance coverage, group term life insurance coverage and dependent life coverage, if applicable, subject to the terms and conditions set forth in Integon's Retirement Program. Integon will provide long-term disability coverage to me through conversion to an individual policy on September 15, 1997. The converted policy will provide for a maximum benefit amount of $15,000 per month should disability occur prior to December 1, 1999 and while I am not covered by any successor employer. Integon will pay me a lump-sum amount of up to $68,580.00 representing 30 months of premiums at $2,286.00 per month and applicable payroll taxes on this amount, such amount to be payable on September 15, 1997. I will then be responsible for paying premiums on the converted policy directly to UNUM. (11) I agree that this Agreement is in full discharge of any obligations that Integon, its subsidiaries or affiliates may have to me and in recognition thereof I, for myself, my heirs, executors, administrators, successors and assigns (collectively referred to as "Releasors"), hereby release, acquit and forever discharge Integon, its subsidiaries and affiliates, and their respective present and former stockholders, directors, officers, employees and agents (collectively referred to as "Releasees"), and their respective executors, administrators, successors and assigns of and from all claims, actions, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims, alleged claims and demands whatsoever in law, admiralty or equity, which against any Releasee, Releasors ever had, now have or hereafter can, shall or may have, for, upon or by reason of any matter, cause or thing whatsoever from the beginning of the world to and including the day of the date of this release, except for any rights that I may have against Integon under this Agreement. Releasors further agree that they will not institute nor be a party to, whether directly or indirectly any civil action or administrative proceeding against Releasees under any federal, state or local authority or under any common law theory (whether founded in tort or in contract) including but not limited to 42 U.S.C. Section 198 1, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act, the Equal Pay Act of 1963, the North Carolina Handicapped Persons Protection Act, the Family and Medical Leave Act, the Employment Retirement Income Security Act of 1974, the Americans With Disabilities Act or any similar legislation, constitutional provision, executive order or regulation prohibiting employment discrimination or under any common law theory of wrongful discharge (whether founded in tort or in contract) in connection with any act, state of facts or occurrence or omission, whether or not previously asserted, either occurring before or existing on the date of the execution of this Agreement. In the event of the initiation of any proceeding by Releasors against Releasees asserting a claim released by this paragraph 11, Releasees shall be entitled to plead this release in bar to any such claim and to assert a counterclaim against Releasors alleging breach of this Agreement, including the release of claims set forth in this paragraph 11. Releasors shall indemnify and hold harmless Releasees of and from any loss or damage whatsoever, costs, direct and indirect, and attorneys' fees incurred in the defense of any such proceeding and prosecution of counterclaim. It is understood that the benefits provided hereunder by Integon to me are substantially in excess of benefits which would be provided to me in the absence of the release of claims set forth herein. I acknowledge such substantial and additional consideration and further acknowledge that I have received sufficient consideration for my execution of this Agreement specifically including but not limited to release of the claims contained herein. (12) I acknowledge and fully understand my continuing obligation under the Code of Ethics Agreement which I signed as an employee relating to confidential business, product and financial information. Following the date hereof, I agree that I will not disclose nor utilize in any manner, confidential information of Integon, its subsidiaries or affiliates without the prior written consent from Integon's Legal Counsel, or until the information is made public by Integon, its subsidiaries or affiliates. I further agree that for a period of twelve months following the termination of my employment (such period ending September 15, 1998), I will not, as an individual, proprietor, partner, joint venturer, shareholder (other than in a publicly traded company provided that I do not own more than 3% of the securities of such company), investor, consultant, advisor, broker, director, officer, agent, employee, trustee, beneficiary or in any other capacity whatsoever, directly or indirectly engage in, or participate with any other person or entity to engage in, any business or activity, whether consisting of a single transaction, or a series of transactions or continuous activity, similar to or competitive with the primary business or activity in which Integon engages, in any State in which Integon is doing business as of the date of this Agreement. (13) In the event that Integon or any of its respective subsidiaries or affiliates is named as a party in any law suit or regulatory proceeding or receives a regulatory inquiry and I have knowledge of the facts regarding such suit, proceeding or inquiry, I agree to cooperate with Integon and its subsidiaries and affiliates in responding to such, including but not limited to, participation in depositions, attendance at trial, etc. Integon shall reimburse my litigation-related expenses as incurred upon my submission of the documentation of same, including expenses for separate legal counsel if reasonably required in any proceeding in which I am now or may later be named as an individual defendant. In addition, Integon acknowledges and confirms that my resignation does not affect any rights that I may have under Article 8 of Integon Corporation's bylaws or any relevant directors and officers insurance policy under which I may be eligible to receive benefits. (14) Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in North Carolina by three (3) arbitrators in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Integon shall bear all costs and expenses arising in connection with any arbitration proceeding pursuant to this Section 14. (15) As a material inducement to the agreement by Integon to the terms set forth in this Agreement, I agree not to, directly or indirectly, make or publish any disparaging remarks about Integon, its subsidiaries, affiliates, directors, officers, or employees to any third parties, specifically including but not limited to parties with a business relationship with Integon, its subsidiaries or affiliates. nor will I disclose the existence, terms and nature of this Agreement to any third party other than my immediate family, legal or financial advisors that I have employed, or to the extent necessary in connection with securing employment. Integon, on behalf of its officers and directors, agrees not to make or publish any disparaging remarks about me. (16) For a period of twelve months subsequent to the termination of my employment (such period ending September 15, 1998), I agree not to directly or indirectly, personally or with any other employees, agents, or otherwise, on behalf of myself or any other person, firm, or corporation, solicit or cause any person under my control to solicit any employee, agent or broker of Integon or any employee, agent or broker of Integon's subsidiaries or affiliates, to terminate his or her employment or relationship with Integon or such subsidiary or affiliate. I further agree not to intentionally induce any policyholder of Integon or its subsidiaries to replace their policy with that of another company or directly or indirectly induce any employee, agent or broker of Integon or any of its subsidiaries to represent another insurance company in replacing any insurance policies of Integon or any of its subsidiaries. (17) I acknowledge that I have carefully read this Agreement and that I know and understand its contents. I agree that my signing of this Agreement acknowledges my intent to be bound by the provisions of this Agreement. I hereby specifically acknowledge the following: (a) I have been given at least 21 days during which to consider this Agreement; (b) I am hereby advised in writing that I have the right to and may consult with an attorney before executing this Agreement, and I acknowledge that I have had an opportunity to consult with my counsel and that I have exercised my right to do so; (c) I have 7 days following the execution of this Agreement to revoke this Agreement; (d) I recognize that I am specifically releasing, among other claims, any claims that I may have arising under the Age Discrimination in Employment Act of 1967 ("ADEA") and all amendments thereto; (e) I am not waiving any rights or claims that I may have which arise after the date this Agreement is executed; (f) I also acknowledge that this Agreement is intended by the parties to comply with the Older Worker's Benefit Protection Act of 1990 and all amendments thereto. (18) Integon agrees to pay my reasonable attorneys fees incurred in conjunction with the finalization of my severance arrangements. (19) This letter agreement replaces and supersedes all agreements whether written or oral between me, on the one hand, and Integon and its affiliates, on the other hand, including without limitation, the agreements and plans set forth in this letter, all of which agreements and plans, except as specifically provided for otherwise herein, are herewith terminated and are no longer in effect. If the foregoing correctly sets forth our agreements with respect to the subject matter covered hereby, please so indicate below, where upon this letter agreement shall constitute a binding agreement between us. Very truly yours, James T. Lambie Accepted and Agreed to: Integon Corporation By____________________________ Date__________________________ EX-10.33 4 AGREEMENT BETWEEN EQUIFAX FINANCIAL & CO. EXHIBIT 10.33 EQUIFAX June 24, 1996 INFORMATION PRODUCTS AGREE between EQUIFAX SERVICES INC. and INTEGON CORPORATION THIS INFORMATION PRODUCTS AGREEMENT ("Agreement") is made and entered into by and between Equifax Services Inc., ("Equifax"), with an address for the purposes of this Agreement at 1600 Peachtree Street, N.W. Atlanta, Georgia 30309, and Integon Corporation, ("Customer"), with an address for the purposes of this Agreement at 500 West Fifth Street, Winston-Salem, North Carolina 27152. WITNESSETH: WHEREAS, Customer is in the business of underwriting property and casualty insurance policies; and, WHEREAS, in order for Customer to underwrite such policies Customer requires the use of certain information relative to individual's previous insurance claims information and motor operators data; and, WHEREAS, Equifax has compiled databases of such claims information, motor operators data and obtains motor operator data from the state Department of Motor Vehicles, and is willing to provide them to Customer for the fees set forth herein; NOW THEREFOR, in consideration for the mutual convenants contained herein, the parties do hereby agree as follows: 1. PRODUCT DESCRIPTIONS: Equifax will furnish Customer with the following named, and individually described information products, systems, and services. Certain Products and Services offered by Equifax under this Agreement may be governed by the terms and conditions of other collateral agreements. A . COMPREHENSIVE LOSS UNDERWRITING EXCHANGE (C.L.U.E.): 1. C.L.U.E. Auto-Equifax will provide Customer with automobile claims history information from its C.L.U.E. personal automobile claims repository in a manner described in Section II herein. These claims contain information such as dollar amounts of losses by claim type, age of loss, carrier, policyholder, driver and vehicle identification information. C.L.U.E. information is based on claims information which has been provided to Equifax by insurance carriers. EQUIFAX B. Motor Vehicle Records (MVRs): 1. Equifax will order and return MVRs from certain states to Customer, as requested by Customer. Equifax will analyze all MVR orders to ensure that they conform to the input requirements of the various state Motor Vechicle Department's ("MVD") Systems. Each MVR order will fall into one of three categories: (a) MVR orders which do not conform to the requirements of a specific states' MVD system are considered rejected and are subject to a surcharge fee. Surcharge is the fee Equifax charges to process the MVR order. (b) MVR orders meeting input requirements, but which are not found by the state MVD are considered No-Hits ("No-Hits"). Customer will receive MVRs that are "No-Hits" as "No-Hits" are subject to registry charges in certain states and surcharge fees for all states. Registry is the fee imposed by the state MVD to obtain a motor vehicle report. The states which currently do not impose a registry charge on "No-Hits" are: Alaska, Iowa, Mississippi, North Carolina, South Carolina, Utah, and Washington. Equifax will apply a credit on Customer's invoice for the number of "No-Hits" for each state which does not impose a registry charge. (c) MVR orders meeting input requirements, and for which an MVR is obtained, are considered Hits ("Hits") and are subject to both registry and surcharge fees. 2. Standard Violation code ("SVC"): MVR abstracts will contain Equifax's SVC if Customer elects this feature. Customer Specific Codes ("CSCs") can be provided if desired by Customer, but must be based on a correlation to the SVC. 3. Driver History Database: Where the state allows, Equifax saves MVR information as it flows through our systems. We store the driver information in a database and provide customer access to it at a cost less than the state registry. II. SYSTEM DESCRIPTIONS: A. Ordering System: A communication session will be established with Customer's central data center at a predetermined, mutually agreed upon schedule, on a daily basis, and Customer will transmit to Equifax the appropriate product orders in mutually agreed upon formats. Micro 6X locations will call into the Equifax Network as necessary. B. Return System: Equifax will return information reports to Customer in electronic formats to be mutually agreed upon by the parties. These reports will be batch transmitted electronically to Customer's cental data center on a daily basis at a predetermined, mutually agreed upon schedule, or if applicable, returned, via the mail, or to Customer on a magnetic tape/cartridge. It shall be Customer's responsibility to distribute all information reports to its appropriate field office. C. MOTOR VEHICLE RECORDS: MVRs from states with data processing capabilities, ("Tape-Out States"), will be batch transmitted as described in B above. MVRs from states not having data processing capabilities, ("Paper-Out States"), will be mailed in paper format to the appropriate Customer location. Equifax will be responsible for mailing costs associated with delivering MVRs from "Paper-Out States". III. PRODUCT PRICING: Pricing is based on Customer's purchase from Equifax eighty five percent (85%) of its need for the types of products listed below, except Motor Vehicle Records (MVR) from those states where Customer purchases online MVR services from the state. A. COMPREHENSIVE LOSS UNDERWRITING EXCHANGE (C.L.U.E.): 1. C.L.U.E. Auto - Rates are per inquiry: 1996 1997 1997 1998 7/1 THRU 1/1 THRU 7/1 THRU 1/1 THRU 12/31 6/30 12/31 6/30 ----- ----- ----- ----- Household $2.15 $1.90 $1.80 $1.80 Household Plus $1.50 $1.50 $1.50 $1.50 B. MOTOR VEHICLE RECORDS (MVR): Customer will be billed a surcharge rate of $0.10 per MVR order for all states except, Alaska which will be billed at the rate of $1.00. Massachusetts and Hawaii will be at the published survey rates. Online MVRs will be billed at a rate of -- Surcharge + $0.30 if PC ordered, or surcharge plus $0.10 if Mainframe leased line on Advantis at Customer cost. In addition, Customer will be billed for state registry fees and applicable state taxes. IV. OTHER PRICING PROVISIONS: A. All rates quoted are exclusive of any taxes impose or that may be imposed by the various states. B. If Customer elects to use the Equifax-maintained, Minnesota MVR Database, there is no charge for State Registry. An additional $0.10 is added for each named driver when this service is used. This surcharge is subject to change in any amount, with thirty (30) day notice. C. If Customer elects to use electronic return of Hawaii MVRs, there is an add-on charge of $0.50 in addition to the Customer's MVR surcharge rate. This add-on charge is subject to change with thirty (30) day notice. D. The registry fees on automated MVRs from Canadian Provinces will be billed as the Province fee plus $0.45 (United States dollars). E. The Equifax West Virginia Database allows customers to identify drivers with or without violation activity. The system will identify drivers in the database with violation and automatically order an MVR. On those drivers with NO violation activity, Equifax will return a "clear" MVR from the database file at a cost less than state registry. If Customer elects to use the Equifax-maintained, West Virginia Database, there is no charge for State Registry on "clear" MVRs. An additional $3.00 fee is added when the resultant report is clear. This database fee is subject to change in any amount, with thirty (30) days notice. On non-clear reports, customer is billed only the surcharge rate plus state registry. F. If Customer elects to use the Equifax Driver History Database, customer will be billed as follows: Age of Data Report Charge 0-30 Days 50% of State Registry plus MVR Surcharge* 31-60 Days 50% of State Registry plus MVR Surcharge* 61-90 Days 50% of State Registry plus MVR Surcharge* 91-120 Days 35% of State Registry plus MVR Surcharge* * Refer to Section III.B of this agreement for the MVR Surcharge amount. Percentage of State Registry is based on registry fees as of 5/1/93. Excluding MVR Surcharge, Report Charge is subject to change in any amount with thirty (30) days notice. State Availability is subject to change without notice. G. If Customer elects to use Equifax Duplicate Check system, there is a search fee of $0.10 on each duplicate abstract found. This search fee is in addition to the Customer's MVR surcharge rate. H. If Customer elects to use the automated SR 22/26 feature, the charge is $0.50 if MVRs are processed through Equifax. The charge is $1.00 if Customer obtains MVRs from another source. This service is now available in the states of California and Ohio. I. Customer will be billed an MVR surcharge rate of $1.75 for each MVR ordered through the Equifax Iowa Laptop Service. This is in addition to the state registry fee. J. The Equifax California Prescreen Database allows customers to identify drivers with or without violation activity during the past 6 or 12 months. The system will identify drivers in the database with a violation and automatically order an MVR. On those drivers with NO violation activity, Equifax will return a "clear" MVR from the database file at a cost less than state registry via an indicator in the order record. Equifax will read the database for either a 6 month or 12 month period. If Customer elects to use the Equifax-maintained, California Prescreen Database, there is no charge for the State Registry on "clear" MVRs. An additional $0.35 fee is added when the resultant report is clear. This database fee is subject to change in any amount, with thirty (30) day notice. On "non-clear" reports, Customer is billed only the current surcharge rate plus state registry. Page 4 of 7 EQUIFAX K. The Equifax South Carolina Prescreen Database allows customers to identify drivers with or without violation activity during the past 6 or 12 months. The system will identify drivers in the database with a violation and automatically order an MVR. On those drivers with NO violation activity, Equifax will return a "clear" MVR from the database file at a cost less than state registry via an indicator in the order record. Equifax will read the database for either a 6 month or 12 month period. If Customer elects to use the Equifax-maintained, South Carolina Prescreen Database, there is no charge for the State Registry on "clear" MVRs. On "non-clear" reports, Customer is billed only the current surcharge rate plus state registry. L. The Equifax New Hampshire File allows customers to identify drivers with or without convictions over the past 6, 12 or 60 months. The system will identify drivers in the file with a conviction and automatically order an MVR. On those drivers with NO convictions, Equifax will return a "clear" MVR from the activity file at a cost less than state registry. If Customer elects to use the Equifax-maintained, New Hampshire Activity File, there is no charge for the State Registry on "clear" MVRs. An additional $1.00 plus Customer MVR Surcharge fee is added when the resultant report is clear on a 6 month search. An additional $2.00 plus Customer MVR Surcharge fee is added when the resultant report is clear on a 12 month search. An additional $4.00 plus Customer MVR Surcharge fee is added when the resultant report is clear on a 36 month search. This fee is subject to change in any amount, with thirty (30) day notice. On "non-clear" reports, Customer is billed only the current surcharge rate plus state registry. V. PERFORMANCE GUARANTEE: Should C.L.U.E., or MVRs ordered hereunder not be delivered to Customer within twenty-four (24) hours following the agreed upon return schedule, Equifax shall refund its product rates for surcharge only on C.L.U.E., or MVR exceeding this time frame. This guarantee does not apply to any delays in service caused by factors not solely within Equifax's control, including, but not limited to, natural disasters, state system problems and utility interruptions. Should Customer request such refunds they will contact their Equifax Account Executive within fifteen (15) days of such performance occurrence. VI. BILLING/INVOICING Equifax shall furnish Customer with a monthly billing statement by account number (each entity within Customer's locations may have single or multiple accounts), which is due and payable upon receipt. Statement becomes delinquent thirty (30) days from date of receipt. Interest shall accrue on any unpaid balances at a rate of 1.5% per month. Should Customer have any billing discrepancies they will contact their Equifax Account Executive immediately. VII. FAIR INFORMATION PRACTICES: A. If customer uses information provided by Equifax to rate or declare an applicant/policyholder, not qualified for coverage, Customer will notify, in writing, said applicant/policyholder, specifying the Equifax information (product(s) that influenced this decision. Further, Customer will provide applicant/policyholder Equifax's address and toll free national telephone number such that Equifax can make full disclosure of any information reported or held by Equifax on said applicant/policyholder. Page 5 or 7 EQUIFAX VIII. TERM/TERMINATION: A. The term of this agreement is for two (2) years. This agreement shall become effective on the first day of the month following execution by Equifax and shall expire on June 30, 1998. Either party may terminate this Agreement in the event of a material breach or default of the other party's obligations hereunder. Such termination shall be effective sixty (60) days after the terminating party sends written notification to the party said to be in breach or default. Such termination shall not take place if the party said to be in breach or default cures the specified breach or default before the end of such sixty (60) day period. IX. CONFIDENTIALITY: A. Because Customer and Equifax will be participating in mutual discussions relating to plans, products, or services which may require disclosure of information considered by either party to be confidential, proprietary, and/or a trade secret (hereinafter, "Information"), including pricing agreements related to the service, each party mutually agrees to keep such Information strictly confidential. The above-mentioned Information shall mean all Information specifically identified prior to disclosure as being confidential, proprietary, except such information as may: (1) have been already known by the party receiving the Information; (2) be publicly revealed by the party originally disclosing such Information; (3) become generally known in the trade or industry through no fault of the party receiving the Information; or (4) be independently developed by Party receiving the Information. B. The parties agree to keep all such Information confidential and in trust for each other for as long as the Information remains competitively sensitive or advantageous to the party who originally disclosed such Information to any person, except as may be expressly authorized by this Agreement or in writing by the party who originally disclosed such Information. C. Each party shall make use of such Information only for the purpose(s) for which it was disclosed and shall disclose such Information only to those of its employees who have a need to know in order to accomplish the purpose(s) of this Agreement. Upon termination of this Agreement, each Party shall return to the other Party all manuals, instructional materials, and reports of a general nature regarding the services provided hereunder. Page 6 of 7 EQUIFAX X. GENERAL: A. This Agreement shall not be modified in any way, except in writing executed by an authorized representative of the parties. B. If any provision of this Agreement shall be held to be invalid, illegal, or unenforceable, the validity, legality, or enforceability of the remaining provisions shall not in any way be affected or impaired thereby. C. This Agreement shall not be assignable by either party without the prior written consent of the other party, and any attempt to assign any rights, duties or obligations hereunder without such consent shall be void. D. This offer expires on July 15, 1996 unless signed by Customer and Equifax. ACCEPTED AND AGREED TO: ACCEPTED AND AGREED TO: EQUIFAX SERVICES INC. INTEGON CORPORATION By: /s/ David T. Lee By: /s/ Steven C. Andrews ---------------------------- --------------------------- Name: David T. Lee Name: Steven C. Andrews -------------------------- ------------------------- Title: Vice President Title: Chief Operating Officer -------------------------- ------------------------- Date: 7/10/96 Date: 7/9/96 -------------------------- ------------------------- Page 7 of 7 EQUIFAX ADDENDUM TO THE INFORMATION PRODUCTS AGREEMENT BETWEEN EQUIFAX SERVICES INC. AND INTEGON CORPORATION THIS ADDENDUM TO THE INFORMATION PRODUCTS AGREEMENT ("Agreement") is made and entered into by and between Equifax Services Inc., ("Equifax"), with an address for the purposes of this Addendum at 1600 Peachtree Street, N.W. Atlanta, Georgia 30309, and Integon Corporation, ("Customer"), with an address for the purposes of this Addendum at 500 West Fifth Street, Winston-Salem, North Carolina 27152. This Addendum is subject to the terms and conditions of the above mentioned Agreement. The Agreement is hereby amended as follows: Section I. PRODUCT DESCRIPTIONS, add a new paragraph C. National Credit File (NCF): "C. NATIONAL CREDIT FILE (NCF): Equifax will provide Customer with credit history information from its national repository of consumer credit records. These reports will contain identification, employment, public record, collection, trade account activity, consumer statement and inquiry history information segments, as well as summary segment. 1. Casualty Loss Score (CLS) - Optional scoring is available as an add- on service to NCF. The Casualty Loss Score and associated reason codes are designed to focus underwriting attention on credit reports which resemble those found to have statistically higher risks of claim frequency and unfavorable loss ratio over a one-year period." Page 1 of 2 EQUIFAX Section III. PRODUCT PRICING, add a new paragraph C, National Credit File (NCF): "C. NATIONAL CREDIT FILE (NCF): Rates are per inquiry: NCF $1.10 (per report ordered) CLS $0.40 (per report scored)" Rates will become effective on the first day of the month following execution by both parties. ACCEPTED AND AGREED TO: ACCEPTED AND AGREED TO: EQUIFAX SERVICES INC. INTEGON CORPORATION By: /s/ David T. Lee By: /s/ Steven C. Andrews --------------------- --------------------------- Name: David T. Lee Name: Steven C. Andrews ------------------- ------------------------- Title: Vice President Title: Chief Operating Officer ------------------- ------------------------- Date: 7/10/96 Date: 7/9/96 ------------------- ------------------------- Page 2 of 2 EX-11.1 5 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11.1 INTEGON CORPORATION COMPUTATION OF EARNINGS PER SHARE (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- INCOME AVAILABLE TO COM- MON SHAREHOLDERS: Income before extraor- dinary items.......... $ 170 $ 36,619 $ 22,538 Preferred stock divi- 5,570 5,570 882 dends................. ---------- ---------- ---------- Income before extraor- dinary items available to common shareholders.......... (5,400) 31,049 21,656 Extraordinary items, -- (2,624) 650 net................... ---------- ---------- ---------- Net income available to common sharehold- $ (5,400) $ 28,425 $ 22,306 ers.................. ========== ========== ========== WEIGHTED AVERAGE SHARES OUTSTANDING: Primary: Common shares......... 15,726,852 15,701,007 15,716,044 Assumed exercise of 123,151 -- 34,132 stock options........ ---------- ---------- ---------- Total................ 15,850,003 15,701,007 15,750,176 ========== ========== ========== Fully diluted: Common shares......... 15,726,852 15,701,007 15,716,044 Assumed conversion of convertible preferred stock................ -- 3,772,966 -- Assumed exercise of 123,151 160,960 34,132 stock options........ ---------- ---------- ---------- Total................ 15,850,003 19,634,933 15,750,176 ========== ========== ========== EARNINGS PER COMMON SHARE: Primary: Income before extraor- dinary items......... $(.34) $1.98 $1,38 Extraordinary items, -- (.17) .04 net.................. ---------- ---------- ---------- Net income............ $(.34) $1.81 $1.42 ========== ========== ========== Fully diluted: Income before extraor- dinary items......... $(.34) $1.86 $1.38 Extraordinary items, -- (.13) .04 net.................. ---------- ---------- ---------- Net income............ $(.34) $1.73 $1.42 ========== ========== ==========
EX-21.1 6 SUBSIDIARIES OF THE COMPANY EXHIBIT 21.1 INTEGON CORPORATION'S SUBSIDIARIES Integon Non-Life Holdings Corporation Delaware Integon P&C Corporation Delaware Integon Indemnity Corporation North Carolina Integon General Insurance Corporation North Carolina New South Insurance Company North Carolina Integon Specialty Insurance Company North Carolina Integon Preferred Insurance Company North Carolina Integon National Insurance Company North Carolina Integon Casualty Insurance Company North Carolina Integon Services Company North Carolina Salem Underwriters, Inc. North Carolina Carolina National, Ltd. Bermuda EX-23.1 7 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the following Registration Statements of Integon Corporation and subsidiaries on Form S-8: No. 33-61000, pertaining to Integon 401(k) Plan; No. 33-93744, pertaining to Shareholder Investment Program; No. 33-58002, pertaining to 1992 Stock Option Plan; No. 33-94236, pertaining to Employee Investment Program; No. 333-3425, pertaining to Omnibus Plan, respectively, and in Registration Statement No. 33-91896 of Integon Corporation and subsidiaries on Form S-3 of our report dated January 22, 1997, appearing in this Annual Report on Form 10-K of Integon Corporation and subsidiaries for the year ended December 31, 1996. Deloitte & Touche, LLP Winston-Salem, North Carolina January 28, 1997 EX-27.1 8 FINANCIAL DATA SCHEDULE
7 This schedule contains summary financial information extracted from Integon Corporation's December 31, 1996 financial statements and is qualified in its entirety by reference to such financial statements. 1,000 U.S.DOLLARS 12-MOS DEC-31-1996 JAN-1-1996 DEC-31-1996 1 521,311 0 0 0 0 0 524,054 43,838 185,077 55,106 1,356,799 478,031 364,081 0 0 150,760 0 14 173 215,204 1,356,799 732,002 31,970 2,711 16,728 585,711 0 164,015 (1,912) (2,082) 170 0 0 0 170 (0.34) (0.34) 0 0 0 0 0 0 0
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