-----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, DJyR9b9qFfDDEpG2xSmj3IfDIAMY0lmnAPORZSmQb8xSveEiS+XOCZolout+cCqj k0LopRtDqDsdNByhF+B8gA== 0000925600-03-000013.txt : 20030613 0000925600-03-000013.hdr.sgml : 20030613 20030612191043 ACCESSION NUMBER: 0000925600-03-000013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030613 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GORAN CAPITAL INC CENTRAL INDEX KEY: 0000925600 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 000000000 STATE OF INCORPORATION: A6 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-24366 FILM NUMBER: 03742754 BUSINESS ADDRESS: STREET 1: 4720 KINGSWAY DR CITY: INDIANAPOLIS STATE: IN ZIP: 46205 BUSINESS PHONE: 3172596416 MAIL ADDRESS: STREET 1: 4720 KINGSWAY DR CITY: INDIANAPOLIS STATE: IN ZIP: 46205 10-K 1 doc1.txt 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, 2002. ------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THESECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________. COMMISSION FILE NUMBER:000-24366 --------- GORAN CAPITAL INC. ------------------ (Exact name of registrant as specified in its charter) CANADA Not Applicable - ------ --------------- State or other Jurisdiction of IRS Employer Identification No. Incorporation or Organization 2 Eva Road, Suite 200, Etobicoke, Ontario Canada M9C 2A8 - ------------------------------------------------------- -------- Address of Principal Executive Offices Zip Code Registrant's telephone number, including area code: (416) 622-0660 - Canada, (317) 259-6300 - USA ----------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered common stock OTC Bulletin Board, Toronto Stock Exchange - ------------- ----------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: None ----------- (Title of class) __________________ (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 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. [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No X --- The aggregate market value of the 2,333,854 shares of the Registrant's common stock held by non-affiliates, as of June 6, 2003 was $840,187. The number of shares of Registrant's no par common stock outstanding as of June 6, 2003 was 5,393,698. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the year ended December 31, 2002 are incorporated by reference in Parts II and IV hereof. EXCHANGE RATE INFORMATION The Company's accounts and financial statements are maintained in U.S. Dollars. In this Report all dollar amounts are expressed in U.S. Dollars except where otherwise indicated. The following table sets forth, for each period indicated, the average rates for U.S. Dollars expressed in Canadian Dollars during such period, the high and the low exchange rate during that period and the exchange rate at the end of such period, based upon the noon buying rate in New York City for cable transfers in foreign currencies, as certified for customs purposes by the Federal Reserve Bank of New York (the "Noon Buying Rate"): For The Years Ended December 31, 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Average .6370 .6446 .6733 .6724 .6745 Period End .6329 .6279 .6672 .6929 .6532 High .6583 .6669 .6965 .6929 .7061 Low .6231 .6279 .6416 .6625 .6376 ACCOUNTING PRINCIPLES The financial information contained in this document is stated in U.S. Dollars and is expressed in accordance with Canadian Generally Accepted Accounting Principles unless otherwise stated.
Table of Contents ITEM . . . . . . . . . PAGE PART I Item 1.. . . . . . . . Business 4 Item 2.. . . . . . . . Properties 19 Item 3.. . . . . . . . Legal Proceedings 20 Item 4.. . . . . . . . Submission of Matters to a Vote of Security Holders 21 PART II Item 5.. . . . . . . . Market for Registrant's Common Equity and Related Shareholder Matters 21 Item 6.. . . . . . . . Selected Consolidated Financial Data 22 Item 7.. . . . . . . . Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Item 7A. . . . . . . . Quantitative and Qualitative Disclosures About Market Risk 22 Item 8.. . . . . . . . Financial Statements and Supplementary Data 22 Item 9.. . . . . . . . Changes in and Disagreements with Accountants on Accounting And Financial Disclosure 22 PART III Item 10. . . . . . . . Directors and Executive Officers of the Registrant 22 Item 11. . . . . . . . Executive Compensation 23 Item 12. . . . . . . . Security Ownership of Certain Beneficial Owners and Management 28 Item 13. . . . . . . . Certain Relationships and Related Transactions 28 PART IV Item 14. . . . . . . . Controls and Procedures 30 Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 31 Signatures 38
PART I ITEM 1 - BUSINESS FORWARD-LOOKING STATEMENT All statements, trend analyses, and other information herein contained relative to markets for the Company's products and/or the Company's operations or financial results constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the Act). Forward-looking statements include statements which are predictive in nature, which depend upon or refer to future events or conditions, which include words such "anticipate," "could," "feel(s)," "believes," "plan," "estimate," "expect," "should," "intend," "will," and other similar expressions . In addition, any statements concerning future financial performance, ongoing business strategies or prospects and possible future Company actions which may be provided by management are also forward-looking statements as defined by the Act. Forward-looking statements are based on current expectations and projections about future events and are subject to known and unknown risks, uncertainties and other factors which may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, but are not limited to, the effect on customers, agents, employees and others due to SIG's and certain of its subsidiaries' receipt of going concern opinions from their accountants; general economic conditions, including prevailing interest rate levels and stock market performance; factors affecting the Company's nonstandard automobile operations such as rate increase approval, policy renewals, new business written, and premium volume; and the factors described in this section and elsewhere in this report. These forward-looking statements are not guaranties of future performance and the Company has no specific intention to update these statements. OVERVIEW OF BUSINESS Goran Capital Inc. ("Goran" or the "Company") is a Canadian federally incorporated holding company principally engaged in the business of underwriting property and casualty insurance through its NONSTANDARD AUTO GROUP Pafco General Insurance Company ("Pafco") and Superior Insurance Company ("Superior"), which maintain their headquarters in Indianapolis, Indiana. Goran owns approximately 73.8% of a U.S. holding company, Symons International Group, Inc. ("SIG"). SIG owns IGF Holdings, Inc. ("IGFH") and Superior Insurance Group Management, Inc. ("Superior Management") which are the holding companies for the insurance subsidiaries. Superior Management owns Superior Insurance Group, Inc. ("Superior Group") which is the management company for the insurance subsidiaries. SIG's revenue represents approximately 90% of Goran's consolidated revenues. Goran's other subsidiaries are Granite Reinsurance Company Ltd. ("Granite Re"), Granite Insurance Company ("Granite"), and Symons International Group (Florida) Inc. ("SIGF"). Granite Re is a specialized reinsurance company that underwrites niche products such as nonstandard automobile, crop, property casualty reinsurance and offers (on a non-risk bearing, fee basis), rent-a-captive facilities for Bermudian, Canadian and U.S. reinsurance companies. Through a rent-a-captive program, Granite Re offers the use of its capital and its underwriting facilities to write specific programs on behalf of its clients, including certain programs ceded from IGF and Pafco. Granite Re alleviates the need for a clients to establish its own insurance company and also offers this facility in an offshore environment. Granite, a Canadian federally licensed insurance company, sold its book of business in January 1990 to an affiliate which subsequently sold to third parties in June 1990. Granite currently has one outstanding claim and maintains an investment portfolio sufficient to support this claim liability. Goran anticipates that the outstanding claim will be resolved by 2004. SIGF, a Florida corporation, is primarily engaged in the operation of a property/casualty insurance brokerage and a flood insurance brokerage. As previously announced, IGF Insurance Company ("IGF") sold its crop insurance operations to Acceptance Insurance Companies Inc. ("Acceptance") on June 6, 2001 and is now in runoff. Accordingly, the financial statements included in this report reflect the results of the crop insurance segment as "discontinued operations." NONSTANDARD AUTOMOBILE INSURANCE Overview The Company's nonstandard automobile insurance operations are conducted by SIG and its subsidiaries (the "Nonstandard Auto Group"). Specifically, Pafco, Superior, Superior Guaranty Insurance Company ("Superior Guaranty") and Superior American Insurance Company ("Superior American") are engaged in the writing of insurance coverage for automobile physical damage and liability policies. Nonstandard insureds are those individuals who are unable to obtain insurance coverage through standard market carriers due to factors such as poor premium payment history, poor driving experience, and type of vehicle. The Nonstandard Auto Group offer several different policies, which are directed toward different classes of risk within the nonstandard market. Premium rates for nonstandard risks are higher than for standard risks. Since it can be viewed as a residual market, the size of the nonstandard private passenger automobile insurance market changes with the insurance environment and grows when standard coverage becomes more restrictive. Nonstandard policies have relatively short policy periods and low limits of liability. Also, since the nonstandard automobile insurance business typically experiences a lower rate of retention than standard automobile insurance, the number of new policyholders underwritten by nonstandard automobile insurance carriers each year is substantially greater than the number of new policyholders underwritten by standard carriers. Products The Nonstandard Auto Group offers both liability and physical damage coverage in the insurance marketplace, with policies having terms from three to twelve months. Most nonstandard automobile insurance policyholders choose the basic limits of liability coverage which, though varying from state to state, generally is $25,000 per person and $50,000 per accident for bodily injury to others and in the range of $10,000 to $20,000 for damage to cars or other property. Where permitted, Superior offers a tiered product covering the full spectrum of automobile insurance customers from nonstandard to ultra-preferred. Marketing The Nonstandard Auto Group business is concentrated in the states of Florida, California, Virginia, Georgia, Indiana and Nevada. SIG's insurance subsidiaries are authorized to write nonstandard automobile insurance in 12 additional states. States are selected for expansion or withdrawal based on a number of criteria, including the size of the nonstandard automobile insurance market, state-wide loss results, competition, capitalization of its companies and the regulatory climate. The following table sets forth the geographic distribution of gross premiums written by the Nonstandard Auto Group for the years indicated sorted in descending order of 2002 volume (in thousands):
State 2002 2001 1999 - ---------------------- -------- -------- -------- Florida. . . . . . . . $ 45,583 $ 49,162 $ 44,070 California . . . . . . 20,891 34,287 32,480 Virginia . . . . . . . 15,661 21,054 20,089 Colorado 1 . . . . . . 7,988 10,112 6,938 Georgia. . . . . . . . 6,565 15,481 13,670 Indiana. . . . . . . . 4,861 6,275 12,804 Nevada . . . . . . . . 1,493 1,980 3,707 Missouri . . . . . . . 698 839 1,929 Tennessee. . . . . . . 676 1,696 9,794 Iowa . . . . . . . . . 504 1,066 2,023 Kentucky . . . . . . . 406 3,135 5,034 Pennsylvania 2 . . . . 288 9,683 - Oklahoma . . . . . . . 274 635 1,090 Arizona. . . . . . . . 169 1,111 4,484 Other states . . . . . 204 2,972 15,310 -------- -------- -------- Total nonstandard auto 106,261 159,488 173,422 Other property . . . . 1,514 1,604 1,039 Reinsurance. . . . . . 3,619 32,094 7,638 -------- -------- -------- Total. . . . . . . . . $111,394 $193,186 $182,099 ======== ======== ======== 1. During May 2003, the Nonstandard Auto Group ceased writing business in Colorado. 2. Company All premiums in Pennsylvania were written by IGF, which has been precluded from writing other than renewal premium after July 30, 2001.
The Nonstandard Auto Group markets its nonstandard products exclusively through independent agencies. The Nonstandard Auto Group has several territory managers, each of whom resides in a specific marketing region and has access to the technology and software necessary to provide marketing, rating and administrative support to the agencies in his or her region. The Nonstandard Auto Group attempts to foster strong service relationships with its agents and customers. The Nonstandard Auto Group has automated certain marketing, underwriting and administrative functions and has allowed on-line communication with its agency force. In addition to delivering prompt service while ensuring consistent underwriting, the Nonstandard Auto Group provides state of the art point of sale rating software to agents, which permits them to rate risks in their offices. All new business applications are electronically uploaded directly from the agents' offices to the Nonstandard Auto Group through this software. In most states, an in-house developed point of sale product allows agents to order motor vehicle, credit and other reports on line at the time of sale. Most of the Nonstandard Auto Group's agents have limited authority to sell and bind insurance coverages in accordance with procedures established by SIG, which is a common practice in the nonstandard automobile insurance business. The Nonstandard Auto Group reviews all coverages bound by agents promptly and generally accepts coverages that fall within their stated underwriting criteria. The Nonstandard Auto Group has the right within a specified time period to cancel any policy even if the risk falls within the underwriting criteria. The Nonstandard Auto Group compensates agents by paying a commission based on a percentage of premiums produced. The Company believes having four individual U.S. companies licensed in various states allows it the flexibility to engage in multi-tiered marketing efforts in which specialized automobile insurance products are directed toward specific segments of the market. Since certain state insurance laws prohibit a single insurer from offering similar products with different commission structures or, in some cases premium rates, it is necessary to have multiple licenses in certain states in order to obtain the benefits of market segmentation. Underwriting The Nonstandard Auto Group utilizes many factors in determining its rates. Some of the characteristics used are type, age and location of the vehicle, number of vehicles per policyholder, number and type of convictions and accidents, limits of liability, deductibles, and, where allowed by law, credit, age, sex and marital status of the insured. The rate approval process varies from state to state. Some states allow filing and immediate use of rates, while others require approval by the state's insurance department prior to the use of the rates. Underwriting results of insurance companies are frequently measured by their combined ratios. However, investment income, federal income taxes and other non-underwriting income or expense are not reflected in the combined ratio. The profitability of property and casualty insurance companies depends on income from underwriting, investment and service operations. Underwriting results are generally considered profitable when the combined ratio is under 100% and unprofitable when the combined ratio is over 100%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion on the combined ratio. In an effort to maintain and improve underwriting profits, the territory managers monitor loss ratios of the agencies in their regions and meet periodically with the agents in order to address any adverse trends in loss ratios or other profitability indicators. Claims The Nonstandard Auto Group claims department handles claims on a regional and local basis from claim offices in Indianapolis, Indiana; Atlanta, Georgia; Tampa and West Palm Beach, Florida; and Anaheim, California. The Nonstandard Auto Group uses a combination of their own adjusters and independent appraisers and adjusters for estimating physical damage claims and limited elements of investigation. Reinsurance The Company follows the customary industry practice of reinsuring a portion of its risks. Insurance is ceded principally to reduce the Company's exposure on large individual risks and to provide protection against large losses, including catastrophic losses. Although reinsurance does not legally discharge the ceding insurer from its primary obligation to pay the full amount of losses incurred under policies reinsured, it does render the reinsurer liable to the insurer to the extent provided by the terms of the reinsurance treaty. As part of the Company's internal procedures, the financial condition of each prospective reinsurer is evaluated before business is ceded to that carrier. Based on the Company's review of its reinsurers' financial health and reputation in the insurance marketplace, the Company believes its reinsurers are financially sound and that they can meet their obligations under the terms of the respective reinsurance treaties. In 2002, Pafco and Superior maintained casualty excess of loss reinsurance on their nonstandard automobile insurance business covering 35.0% of $700,000 of losses on an individual occurrence basis in excess of $300,000 up to a maximum of $3,000,000 at 100.0%. As of December 31, 2002, amounts recoverable from reinsurers relating to
Reinsurance Recoverables as of Reinsurer A.M. Best Rating December 31, 2002(1) - --------------------------------------- ------------------ --------------------- National Union Fire Insurance Company of Pittsburgh, PA. . . . . . . . . . . A++ $ 42,688 Gerling Global Reinsurance Corporation of America . . . . . . . . . . . . . . B+ 1,197 Lloyds of London (Various Syndicates) . Not Rated 1,272 Transatlantic Reinsurance Company . . . A++ 1,131 (1) Only recoverables greater than $200,000 are shown. Total nonstandard automobile reinsurance recoverables as of December 31, 2002 were approximately $47,044,000. (2) An A.M. Best Rating of "A++" is the highest of 15 ratings. An A.M. Best Rating of "B+" is the sixth highest of 15 ratings.
nonstandard automobile operations follows (in thousands): Effective January 1, 2000, Pafco and Superior entered into an automobile quota share agreement with National Union Fire Insurance Company of Pittsburgh, PA. The amount of cession for Pafco is variable up to a maximum of 60% or $10 million and for Superior is variable up to a maximum of 75% or $60 million for all new and renewal business. In 2002, Pafco and Superior ceded 71% of their nonstandard automobile gross written premiums under this treaty. On April 29, 1996, Pafco also entered into a 100% quota share reinsurance agreement with Granite Re (no A.M. Best rating), whereby all of Pafco's commercial business from 1996 and thereafter was ceded effective January 1, 1996. This agreement was in effect during 2002. Neither Pafco nor Superior has any facultative reinsurance with respect to its nonstandard automobile insurance business. Competition The Nonstandard Auto Group competes with both large national and smaller regional companies in each state in which it operates. These competitors include companies that serve the agency market and companies that sell insurance directly to consumers. Direct writers may have certain competitive advantages over agency writers, including increased name recognition, increased loyalty of their customer base and, potentially, reduced acquisition costs. Specific primary competitors are Progressive Casualty Insurance Company and specialty subsidiaries of a number of insurance groups, including AIG, Allstate, American Financial Group and GMAC. Generally, these competitors are larger and have greater financial resources than the Company. RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES Loss reserves are estimates, established at a given point in time based on facts then known, of what an insurer predicts its exposure to be in connection with incurred losses. Loss adjustment expense ("LAE") reserves are estimates of the ultimate liability associated with the expense of settling all claims, including investigation and litigation costs resulting from such claims. The actual liability of an insurer for its losses and LAE reserves at any point in time will be greater or less than these estimates. The Company maintains reserves for the eventual payment of losses and LAE with respect to both reported and unreported claims. Nonstandard automobile reserves for reported claims are established on a case-by-case basis. The reserving process takes into account the type of claim, policy provisions relating to the type of loss and historically paid loss and LAE for similar claims. Loss and LAE reserves for claims that have been incurred but not reported are estimated based on many variables including historical and statistical information, inflation, legal developments, economic conditions, trends in claim severity and frequency and other factors that could affect the adequacy of loss reserves. The loss reserve development table below illustrates the change over time in the reserves the Company has established for loss and loss expenses as of the end of the indicated calendar years for the Nonstandard Auto Group. The table includes the loss reserves acquired from the acquisition of Superior in 1996 and the related loss reserve development thereafter. The first section shows the reserves as originally reported at the end of the stated year. The second section, reading down, shows the cumulative amounts paid as of the end of successive years with respect to the reserve liability. The third section, reading down, shows the re-estimates of the original recorded reserve as of the end of each successive year which is a result of sound insurance reserving practices of addressing new emerging facts and circumstances which indicate that a modification of the prior estimate is necessary. The last section compares the latest re-estimated reserve to the reserve originally established, and indicates whether or not the original reserve was adequate or inadequate to cover the estimated costs of unsettled claims. The loss reserve development table is cumulative and, therefore, ending balances should not be added since the amount at the end of each calendar year includes activity for both the current and prior years. The reserve for losses and loss expenses is an accumulation of the estimated amounts necessary to settle all outstanding claims as of the date for which the reserve is stated. The reserve and payment data shown below have been reduced for estimated subrogation and salvage recoveries. The Company does not discount its reserves for unpaid losses and loss expenses. No attempt is made to isolate explicitly the impact of inflation from the multitude of factors influencing the reserve estimates though inflation is implicitly included in the estimates. The Company regularly updates its reserve forecasts by type of claim as new facts become known and events occur which affect unsettled claims. Since the beginning of 1997, the Company, as part of its efforts to reduce costs and combine the operations of its Nonstandard Auto Group, emphasized a unified claim settlement practice as well as reserving philosophy for Superior and Pafco. Superior had historically provided strengthened case reserves and a level of IBNR that reflected the strength of the case reserves. Pafco had historically carried relatively lower case reserves with higher IBNR reserve. This change in claims management philosophy since 1997 combined with the growth in premium volume produced sufficient volatility in prior year loss patterns to warrant the Company to re-estimate its reserve for losses and loss expenses and record an additional reserve during 1997, 1998, and 1999. The effects of changes in settlement patterns, costs, inflation, growth and other factors have all been considered in establishing the current year reserve for unpaid losses and loss expenses.
Symons International Group, Inc. Nonstandard Automobile Insurance Only For The Years Ended December 31, (in thousands) 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 -------- -------- -------- -------- --------- --------- --------- --------- -------- --------- ------ Gross Reserves for Unpaid losses and LAE. . . . $27,403 $25,248 $71,748 $79,551 $101,185 $121,661 $141,260 $103,441 $79,047 $ 65,915 - --------------------------------------------------------------------------------------------------------------------------------- Deduct Reinsurance Recoverable. . 12,581 10,927 9,921 8,124 16,378 6,515 3,167 18,709 28,511 22,990 - --------------------------------------------------------------------------------------------------------------------------------- Reserve for Unpaid losses and LAE, net of reinsurance. . $17,055 14,822 14,321 61,827 71,427 84,807 114,829 138,093 84,732 50,536 42,925 - ------------------------------------------------------------------------------------------------------------------------------- Paid Cumulative as of: One Year Later. . . . . 10,868 8,875 7,455 42,183 59,410 62,962 85,389 81,444 57,696 36,291 - ------------------------------------------------------------------------------------------------------------------------------- Two Years Later. . . . . 15,121 11,114 10,375 53,350 79,319 89,285 111,042 107,534 79,316 - ------------------------------------------------------------------------------------------------------------------------------- Three Years Later. . . . . 16,855 13,024 12,040 58,993 86,298 98,469 121,907 118,316 -- - ------------------------------------------------------------------------------------------------------------------------------- Four Years Later. . . . . 17,744 13,886 12,822 61,650 89,166 102,854 127,390 -- -- - ------------------------------------------------------------------------------------------------------------------------------- Five Years Later. . . . . 18,195 14,229 13,133 62,621 90,477 105,252 -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Six Years Later. . . . . 18,408 14,330 13,375 63,031 91,345 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Seven Years Later. . . . . 18,405 14,426 13,418 63,534 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Eight Years Later. . . . . 18,460 14,386 13,648 -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Nine Years Later. . . . . 18,411 14,572 -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Ten Years Later. . . . . 18,420 -- -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Liabilities re - -estimated as of: One Year Later. . . . . 17,442 14,788 13,365 59,626 82,011 97,905 131,256 124,012 85,538 63,014 - ------------------------------------------------------------------------------------------------------------------------------- Two Years Later. . . . . 18,103 13,815 12,696 60,600 91,743 104,821 128,302 121,480 93,483 - ------------------------------------------------------------------------------------------------------------------------------- Three Years Later. . . . . 18,300 14,051 13,080 63,752 91,641 104,551 127,885 126,321 -- - ------------------------------------------------------------------------------------------------------------------------------- Four Years Later. . . . . 18,313 14,290 13,485 63,249 91,003 105,012 131,087 -- -- - ------------------------------------------------------------------------------------------------------------------------------- Five Years Later. . . . . 18,419 14,499 13,441 63,233 91,323 106,813 -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Six Years Later. . . . . 18,533 14,523 13,592 63,373 91,874 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Seven Years Later. . . . . 18,484 14,584 13,652 63,781 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Eight Years Later. . . . . 18,508 14,574 13,727 -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Nine Years Later. . . . . 18,494 14,615 -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Ten Years Later. . . . . 18,457 -- -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Net Cumulative (deficiency) or redundancy . . (1,402) 207 594 (1,954) (20,447) (22,006) (16,258) 11,772 (8,751) (12,478) - ------------------------------------------------------------------------------------------------------------------------------- Expressed as a percentage of unpaid losses and LAE. . . . . . (8.2%) 1.4% 4.1% (3.2%) (28.6%) (25.9%) (14.2%) 8.5% (10.3%) (24.7%) - ------------------------------------------------------------------------------------------------------------------------------- Revaluation of gross losses And LAE as of year-end 2002 - -------------------------------------------------------------------------------------------------------------------------------- Cumulative gross paid as of Year-end 2002 28,231 26,013 74,573 100,359 124,345 131,724 120,166 97,310 64,923 - ------------------------------------------------------------------------------------------------------------------------------ Gross liabilities Re estimated as of year-end 2002 28,280 26,101 74,857 100,925 126,303 137,704 130,453 115,537 98,478 - ------------------------------------------------------------------------------------------------------------------------------- Gross cumulative (deficiency) or redundancy (877) (853) (3,109) (21,374) (25,118) (16,043) 10,807 (12,096) (19,431) - -------------------------------------------------------------------------------------------------------------------------------
Activity in the liability for unpaid loss and LAE for nonstandard automobile insurance is summarized below (in thousands):
2002 2001 2000 ------- -------- --------- Balance at January 1, $81,142 $108,117 $152,455 Less Reinsurance Recoverables 30,600 23,252 13,527 ------- -------- --------- Net Balance at January 1, 50,542 84,865 138,928 Incurred related to Current Year 35,413 69,667 127,497 Prior Years 12,775 774 (14,118) ------- -------- --------- Total Incurred 48,188 70,441 113,379 Paid Related to Current Year 19,211 46,973 85,334 Prior Years 36,374 57,791 82,108 ------- -------- --------- Total Paid 55,585 104,764 167,442 Net Balance at December 31, 43,145 50,542 84,865 Plus Reinsurance Balance 24,059 30,600 23,252 ------- -------- --------- Balance at December 31, $67,204 $81,142 $108,117 ======= ======== =========
Reserve estimates are regularly adjusted in subsequent reporting periods as new facts and circumstances emerge to indicate that a modification of the prior estimate is necessary. The adjustment, referred to as "reserve development," is inevitable given the complexities of the reserving process and is recorded in the statements of operations in the period when the need for the adjustment becomes known. The foregoing reconciliation indicates unfavorable reserve development of $12,775,000 on the December 31, 2001 reserves. The anticipated effect of inflation is implicitly considered when estimating losses and LAE liabilities. While anticipated price increases due to inflation are considered in estimating the ultimate claims costs, increases in average claim severities is caused by a number of factors. Future severities are projected based on historical trends adjusted for implemented changes in underwriting standards, policy provisions, claims management practices and procedures and general economic trends. Anticipated severity trends are monitored relative to actual development and are modified if necessary. Liabilities for loss and LAE have been established when sufficient information has been developed to indicate the involvement of a specific insurance policy. In addition, reserves have been established to cover additional exposure on both known and unasserted claims. RATINGS A.M. Best currently assigns a "B-" rating to Superior and a "C" rating to Pafco. A.M. Best's ratings are based upon a comprehensive review of a company's financial performance, which is supplemented by certain data, including responses to A.M. Best's questionnaires, phone calls and other correspondence between A.M. Best analysts and company management, quarterly NAIC filings, state insurance department examination reports, loss reserve reports, annual reports, company business plans and other reports filed with state insurance departments. A.M. Best undertakes a quantitative evaluation, based upon profitability, leverage and liquidity, and a qualitative evaluation, based upon the composition of a company's book of business or spread of risk, the amount, appropriateness and soundness of reinsurance, the quality, diversification and estimated market value of its assets, the adequacy of its loss reserves and policyholders' surplus, the soundness of a company's capital structure, the extent of a company's market presence and the experience and competence of its management. A.M. Best's ratings represent an independent opinion of a company's financial strength and ability to meet its obligations to policyholders. A.M. Best's ratings are not a measure of protection afforded investors. "B-" and "C" ratings are A.M. Best's eighth and eleventh highest rating classifications, respectively, out of fifteen ratings. A "B-" rating is awarded to insurers which, in A.M. Best's opinion, "have, on balance, fair financial strength, operating performance and market profile when compared to the standards established by the A.M. Best Company" and "have an ability to meet their current obligations to policyholders, but their financial strength is vulnerable to adverse changes in underwriting and economic conditions." A "C" rating is awarded to insurers which, in A. M. Best's opinion, "have, on balance, weak financial strength, operating performance and market profile when compared to the standards established by the A.M. Best Company" and "have an ability to meet their current obligations to policyholders, but their financial strength is very vulnerable to adverse changes in underwriting and economic conditions." A.M. Best currently assigns an "E" rating (Under Regulatory Supervision) to IGF reflecting the significant regulatory constraint resulting from the Consent Order entered into between IGF and the Indiana Department Of Insurance (see "Regulatory Actions"). REGULATION General The Company's U.S. insurance businesses are subject to comprehensive, detailed regulation throughout the United States, under statutes which delegate regulatory, supervisory and administrative powers to state insurance commissioners. The primary purpose of such regulations and supervision is the protection of policyholders and claimants rather than shareholders or other investors. Depending on whether an insurance company is domiciled in the state and whether it is an admitted or non-admitted insurer, such authority may extend to such things as (i) periodic reporting of the insurer's financial condition; (ii) periodic financial examination; (iii) approval of rates and policy forms; (iv) loss reserve adequacy; (v) insurer solvency; (vi) the licensing of insurers and their agents; (vii) restrictions on the payment of dividends and other distributions; (viii) approval of changes in control; and (ix) the type and amount of permitted investments. The losses, adverse trends and uncertainties discussed in this report have been and continue to be matters of concern to the domiciliary and other insurance regulators of the Company's U.S. operating subsidiaries. (See "Regulatory Actions," "Risk-Based Capital Requirements," and "RISK FACTORS"). Regulatory Actions On June 6, 2001, IGF sold substantially all of its crop insurance assets to Acceptance. On June 24, 2001, following the sale of IGF's crop insurance assets and as a result of losses experienced by IGF in its crop insurance operations, the IDOI and IGF entered into a consent order (the "Consent Order") relating to IGF. IGF has discontinued writing new business and its operations are presently in run off. The IDOI has continued to monitor the status of IGF. The Consent Order prohibits IGF from taking any of the following actions without prior written consent of the IDOI: - - Sell or encumber any of its assets, property, or business in force; - - Disburse funds, except to pay direct unaffiliated policyholder claims and normal operating expenses in the ordinary course of business (which does not include payments to affiliates except for the reimbursement of costs for running IGF by the Company, and does not include payments in excess of $10,000); - - Lend its funds or make investments, except in specified types of investments; - - Incur debts or obligations, except in the ordinary course of business to unaffiliated parties; - - Merge or consolidate with another company; - - Enter into new, or amend existing, reinsurance agreements; - - Complete, enter into or amend any transaction or arrangement with an affiliate, and - - Disburse funds or assets to any affiliate. The Consent Order also requires IGF to provide the IDOI with monthly written updates and immediate notice of any material change regarding the status of litigation with Continental Casualty Company, statutory reserves, number of non-standard automobile insurance policies in-force by state, and reports of all non-claims related disbursements. IGF's failure to comply with the Consent Order could cause the IDOI to begin proceedings to have a rehabilitator or liquidator appointed for IGF or to extend the provisions of the Consent Order. Pafco has been subject to an agreed to order of the IDOI since February 17, 2000 that requires Pafco, among other matters, to: - - Refrain from doing any of the following without the IDOI's prior written consent: Selling assets or business in force or transferring property, except in the ordinary course of business; Disbursing funds, other than for specified purposes or for normal operating expenses and in the ordinary course of business (which does not include payments to affiliates, other than under written contracts previously approved by the IDOI, and does not include payments in excess of $10,000); Lending funds; Making investments, except in specified types of investments; Incurring debt, except in the ordinary course of business and to unaffiliated parties; Merging or consolidating with another company; or Entering into new, or modifying existing, reinsurance contracts. - - Reduce its monthly auto premium writings, or obtain additional statutory capital or surplus, such that the ratio of gross written premium to surplus and net written premium to surplus does not exceed 4.0 and 2.4, respectively; and provide the IDOI with regular reports demonstrating compliance with these monthly writings limitations. - - Continue to comply with prior IDOI agreements and orders to correct business practices under which Pafco must provide monthly financial statements to the IDOI, obtain prior IDOI approval of reinsurance arrangements and affiliated party transactions, submit business plans to the IDOI that address levels of surplus and net premiums written, and consult with the IDOI on a monthly basis. Pafco's inability or failure to comply with any of the above conditions could result in the IDOI requiring further reductions in Pafco's permitted premium writings or in the IDOI instituting future proceedings against Pafco. Restrictions on premium writings result in lower premium volume. Management fees payable to Superior Group are based on gross written premium; therefore, lower premium volume results in reduced management fees paid by Pafco to Superior Group. In March 2000, Pafco agreed with the Iowa Department of Insurance ("IADOI") that it will not write any new non-standard business in Iowa, until such time as Pafco has reduced its overall non-standard automobile policy counts in the state or: - - Has increased surplus; or - - Has achieved a net written premium to surplus ratio of less than three to one; or - - Has surplus reasonable to its risk. Pafco has continued to service existing policyholders and renew policies in Iowa and provide policy count information on a monthly basis in conformance with IADOI requirements. Superior and Pafco provide monthly financial information to the departments of insurance in certain states in which they write business at the states' request. On July 7, 2000, the FDOI issued a notice of its intent to issue an order (the "Notice") which principally addressed certain policy and finance fee payments by Superior to Superior Group. A formal administrative hearing to review the Notice and a determination that the order contemplated by the Notice not be issued was held in February 2001. The administrative law judge entered a recommended order on June 1, 2001 that was acceptable to the Company. On August 30, 2001, the FDOI rejected the recommended order and issued its final order which the Company believes improperly characterized billing and policy fees paid by Superior to Superior Group. On September 28, 2001, Superior filed an appeal of the final order to the Florida District Court of Appeal. On March 4, 2002, the FDOI filed a petition in the Circuit Court of the Second Judicial Circuit in and for Leon County, Florida seeking court enforcement of the FDOI's final order. Superior filed a motion with the FDOI for stay of the FDOI's final order. Superior also filed a motion for stay with the District Court of Appeal, which was denied pending a ruling from the FDOI. On April 5, 2002 the FDOI granted a stay of the final order that was conditional upon the cessation of the payment of billing fees by Superior to Superior Group and the posting of a $15 million appeal bond. Superior did not agree to the conditions imposed by the FDOI's conditional stay. On May 6, 2002 Superior filed a motion with the District Court of Appeal seeking a stay of the final order pending Superior's appeal or, in the alternative, a consolidation of the FDOI's enforcement action with the pending appeal. On June 19, 2002, the District Court of Appeal entered an order which struck the FDOI's conditional requirement for the stay that Superior post a $15 million appeal bond. However, the order denied Superior's request to consolidate the appeal with the enforcement action. On September 26, 2002, the District Court of Appeal affirmed the final order of the FDOI. On October 31, 2002 the Circuit Court entered a final order which granted the FDOI's petition for enforcement of the FDOI's final order and which requires Superior to comply with the FDOI final order. In accordance with the FDOI's final order, Superior ceased payment of finance and service fees as of October 1, 2002 and has requested repayment from Superior Group of $15 million of finance and service fees paid from 1997 through 1999 and additional finance and service fees paid thereafter in the approximate amount of $20 million. Without the payment of finance and service fee income to Superior Group or an amendment to the management agreement or reallocation of operational responsibilities, Superior Group could not operate profitably. Accordingly, on October 1, 2002, Superior Group discontinued the provision of certain claims services to Superior. Superior provided a number of proposals to the FDOI in an effort to establish an acceptable repayment plan in accordance with the final order. None of the proposals were acceptable to the FDOI. On March 21, 2003 the FDOI filed a Motion for Enforcement of Final Order Granting Petition to Enforce Agency Action in the Circuit Court which seeks to hold Superior in contempt for failing to obtain the immediate repayment of approximately $15 million from Superior Group. Superior Group presently does not have the ability to make a $15 million repayment, and Superior believes that this petition seeks to fashion a remedy not intended by the Circuit Court's November 1, 2002 order and contravenes the spirit of numerous discussion between the FDOI and Superior to resolve the issues during the pendency of Superior's appeal to the District Court of Appeal and the original enforcement action. Superior intends to vigorously defend the recent action brought by the FDOI. On September 10, 2002, the FDOI filed a petition in the Circuit Court of the Second Judicial Circuit in and for Leon County, Florida for an order to show cause and notice of automatic stay which sought the appointment of a receiver for the purpose of rehabilitation of Superior. The court entered an order to show cause, temporary injunction and notice of automatic stay on September 13, 2002 and a hearing was held on October 24, 2002. On November 1, 2002, the court entered an order that denied the FDOI's petition for appointment of a receiver. On November 8, 2002, the FDOI filed a motion for rehearing, which was denied on December 17, 2002. On November 20, 2002, the FDOI issued a notice and order to show cause which seeks to suspend or revoke Superior's certificate of authority principally based upon allegations that Superior did not comply with the FDOI's August 30, 2001 final order during the pendency of the appeal of the order to the District Court of Appeal. Superior believes that it has fully and timely complied with the final order and that the action brought by the FDOI is barred by res judicata. A formal administrative hearing to review the notice and a determination that the order or administrative action contemplated by the notice not be issued was held in May 2003. The administrative law judge has not yet issued a recommended order, which the FDOI may accept or reject. On March 21, 2003, the FDOI filed a Motion for Enforcement of Final Order Granting Petition to Enforce Agency Action in the Circuit Court of the Second Judicial Circuit in and for Leon County, Florida which seeks to hold Superior in contempt for failure to comply with the FDOI's final order during the pendency of Superior's appeal to the Florida District Court of Appeal. On May 7, 2003 a hearing was held on the Motion for Enforcement and an order has not yet been issued. On October 9, 2001, the State Corporation Commission of Virginia ("Virginia Commission") issued an order to take notice regarding an order suspending Superior's license to write business in that state. An administrative hearing for a determination that the suspension order not be issued was held March 5, 2002. On May 3, 2002, the hearing examiner issued his report and recommended that Superior's license not be suspended and that Superior file its risk based capital plans and monthly and quarterly financial information with the Virginia Bureau of Insurance ("Bureau"). On June 19, 2002 the Virginia Commission entered an order which adopted the findings of the hearing examiner, continued the matter until such time as the Bureau requests further action and requires the continued monitoring of the financial condition of Superior by the Bureau. On October 11, 2002, the Virginia Commission filed an administrative Rule to Show Cause. A hearing was scheduled for November 18, 2002 to determine whether Superior's license to transact insurance business in Virginia should be suspended. Because of Superior's improved financial condition, the Virginia Commission continued the hearing indefinitely. The nonstandard automobile insurance policies written in Virginia by Superior accounted for approximately 13.1% and 14.5% of the total gross written premiums of SIG in 2001 and in 2002, respectively. Insurance Holding Company Regulation The Company also is subject to laws governing insurance holding companies in Florida and Indiana, the domiciliary states of its insurance company subsidiaries. These laws, among other things, (i) require SIG to file periodic information with state regulatory authorities including information concerning its capital structure, ownership, financial condition and general business operations; (ii) regulate certain transactions between SIG, its affiliates and IGF, Pafco, Superior, Superior American and Superior Guaranty (the Insurers), including the amount of dividends and other distributions and the terms of surplus notes; and (iii) restrict the ability of any one person to acquire certain levels of SIG's voting securities without prior regulatory approval. Any purchaser of 10% or more of the outstanding shares of common stock of SIG would be presumed to have acquired control of Pafco and IGF unless the Indiana Commissioner of Insurance ("Indiana Commissioner") upon application, has determined otherwise. In addition, any purchaser of 5% or more of the outstanding shares of common stock of SIG will be presumed to have acquired control of Superior unless the Florida Commissioner of Insurance ("Florida Commissioner"), upon application, has determined otherwise. Dividend payments by the Company's U.S. insurance subsidiaries are subject to restrictions and limitations under applicable law, and under those laws an insurance subsidiary may not pay dividends without prior notice to, or approval by, the subsidiary's domiciliary insurance regulator. As a result of regulatory actions taken by the IDOI with respect to Pafco and IGF, those subsidiaries may not pay dividends without prior approval by the IDOI (see "Regulatory Actions" above). Further, payment of dividends may be constrained by business and regulatory considerations, and state insurance laws and regulations require that the statutory surplus of an insurance company following any dividend or distribution by such company be reasonable in relation to its outstanding liabilities and adequate for its financial needs. Accordingly, there can be no assurance that the IDOI or the FDOI would permit any of the Company's U.S. insurance subsidiaries to pay dividends at this time or in the future (see "RISK FACTORS"). While the non-insurance company subsidiaries are not subject directly to the dividend and other distribution limitations, insurance holding company regulations govern the amount which a subsidiary within the holding company system may charge any of the Insurers for services (e.g., management fees and commissions). These regulations may affect the amount of management fees which may be paid by Pafco and Superior to Superior Group. The management agreement between SIG and Pafco was assigned to Superior Group and provides for an annual management fee equal to 15% of gross premiums. A similar management agreement with a management fee of 17% of gross premiums was entered into between Superior and Superior Group. There can be no assurance that either the IDOI or the FDOI will not in the future require a reduction in these management fees. In addition, neither Pafco nor IGF may engage in any transaction with an affiliate, including the Company, without the prior approval of the IDOI (see "Regulatory Actions" above). Underwriting and Marketing Restrictions During the past several years, various regulatory and legislative bodies have adopted or proposed new laws or regulations to deal with the cyclical nature of the insurance industry, catastrophic events and insurance capacity and pricing. These regulations include (i) the creation of "market assistance plans" under which insurers are induced to provide certain coverages; (ii) restrictions on the ability of insurers to rescind or otherwise cancel certain policies in mid-term; (iii) advance notice requirements or limitations imposed for certain policy non-renewals; and (iv) limitations upon or decreases in rates permitted to be charged. Risk-Based Capital Requirements In order to enhance the regulation of insurer solvency, the NAIC has adopted a formula and model law to implement risk-based capital ("RBC") requirements for property and casualty insurance companies designed to assess minimum capital requirements and to raise the level of protection that statutory surplus provides for policyholder obligations, Indiana and Florida have substantially adopted the NAIC model law and Indiana directly, and Florida indirectly, have adopted the NAIC model Formula. The RBC formula for property and casualty insurers: (i ) underwriting, which encompasses the risk of adverse loss developments and inadequate pricing; (ii) declines in asset values arising from credit risk; (iii) declines in asset values arising from investment risks; (iv) off-balance sheet risk arising from adverse experience from non-controlled asset, guarantees for affiliates, contingent liabilities and reserve and premium growth. Pursuant to the model law, insurers having less statutory surplus that that required by the RBC calculation will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. The RBC model law provides for four levels of regulatory action. The extent of regulatory intervention and action increases as the level of surplus to RBC decreases. The first level, the Company Action Level (as defined by the NAIC), requires and insurer to submit a plan of corrective actions to the regulator if surplus falls below 200% of the RBC amount. The Regulatory action level re quires an insurer to submit a plan containing corrective actions and requires the relevant insurance commissioner to perform and examination or other analysis and issue a corrective order if surplus falls below 150% of the RBC amount. The Authorized Control Level gives the relevant insurance commissioner the option either to take the aforementioned actions or to rehabilitate or liquidate the insurer if surplus falls below 70% of the RBC amount. At the time of filing of the unaudited annual statutory financial statements of the Company's U.S. insurance subsidiaries with the FDOI and the IDOI for the year ended December 31, 2002, the RBC calculations for Pafco and Superior were in excess of 200% of the RBC amount, a level which required no corrective action. The RBC calculation for IGF as of December 31, 2002 was in excess of 100% of the RBC amount, which was above the authorized control level. In May 2003, pursuant to a reserve analysis completed by the consulting actuary engaged by BDO Seidman, LLP, the Company's and SIG's independent auditor, the loss and LAE reserves of Superior and Pafco were increased as of December 31, 2002. These reserve adjustments, along with resulting adjustments to the permitted carrying values of certain assets of Superior, investments in Superior American and Superior Guaranty, were recorded in the 2002 audited statutory financial statement filed for Superior with the FDOI. Based on the adjusted audited statutory financial statements, the surplus for Superior fell below 70% of the RBC amount and the surplus level for Pafco was above 150% of the RBC amount as of December 31, 2002. As a result, there may be additional regulatory actions taken by the insurance regulators in states in which the companies write business. The NAIC Insurance Regulatory Information System ("IRIS") was developed primarily to assist state insurance departments in executing their statutory mandate to oversee the financial condition of insurance companies. IRIS ratios consist of twelve ratios with defined acceptable ranges. They are used as an initial screening process for identifying companies that may be in need of special attention. Companies that have several ratios that fall outside of the acceptable range are selected for closer review by the NAIC. If the NAIC determines that more attention may be warranted, one of five priority designations is assigned and the insurance department of the state of domicile is then responsible for follow-up action. Based on the December 31, 2002 statutory financials filed with the NAIC, Pafco had values outside of the acceptable ranges for five IRIS tests. These included the two-year overall operating ratio, the investment yield ratio, the change in surplus ratio, the liabilities and liquid assets ratio, and the estimated current reserve deficiency to policyholders' surplus ratio. Based on the December 31, 2002 statutory financials filed with the NAIC, Superior had values outside of the acceptable ranges for six IRIS tests. These included the surplus aid to policyholders' surplus ratio, the two-year overall operating ratio, the change in surplus ratio, the liabilities to liquid assets ratio, the one-year reserve development to policyholders' surplus ratio, and the two-year reserve development to policyholders' surplus ratio. As of December 31, 2002, IGF had values outside of the acceptable ranges for five IRIS tests. These included the change in net writings ratio, the two-year overall operating ratio, the change in surplus ratio, the liabilities to liquid assets ratio, and the agent's balances to policyholders' surplus ratio. Guaranty Funds; Residual Markets The insurance company subsidiaries also may be required under the solvency or guaranty laws of most states in which they do business to pay assessments (up to certain prescribed limits) to fund policyholder losses or liabilities of insolvent or rehabilitated insurance companies. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer's financial strength and, in certain instances, may be offset against future premium taxes. Some state laws and regulations further require participation by the insurance company subsidiaries in pools or funds to provide some types of insurance coverage that they would not ordinarily accept. The Company recognizes its obligations for guaranty fund assessments when it receives notice that an amount is payable to the fund. The ultimate amount of these assessments may differ from that which has already been assessed. It is not possible to predict the future consequences of changes in state and federal regulation on the Company's operations and there can be no assurance that laws and regulations enacted in the future will not be more restrictive than existing laws. Employees At March 1, 2003, the Company and its subsidiaries employed approximately 233 full and part-time employees. None of the Company's employees is represented by either unions or collective bargaining agreements. The Company believes that relations with its employees are excellent. RISK FACTORS The following factors, in addition to the other information contained in this report, should be considered in evaluating the Company and its prospects. The Financial Condition of the Company Has Continued to Decline The Company reported losses from continuing operations of $(29,745,000), $(31,937,000) and $(63,224,000) for 2002, 2001 and 2000, respectively. Results from continuing operations before the effects of income taxes, minority interest and amortization expense were losses of $(21,589,000), $(20,188,000) and $(18,387,000) for 2002, 2001 and 2000 respectively. Further, the deficit in shareholder's equity increased from $(89,146,000) at December 31, 2001 to $(90,752,000) at December 31, 2002. There can be no assurance that the Company can continue in business if these operating losses continue. SIG's Accountants Have Issued Going Concern Opinions SIG's accountants have issued reports on their audits of the Consolidated Financial Statements of SIG as of December 31, 2002 and 2001 which express doubt as to SIG's ability to continue as a going concern given the recurring operating losses experienced by SIG over the past several years and SIG's net capital deficiency. Regulatory Actions May Affect the Company's Future Operations The Company's U.S. insurance company subsidiaries, their business operations, and their transactions with affiliates, including the Company, are subject to extensive regulation and oversight by the IDOI, the FDOI and the insurance regulators of other states in which the insurance company subsidiaries write business. Moreover, the U.S. insurance company subsidiaries' losses, adverse trends and uncertainties discussed in this report have been and continue to be matters of concern to the domiciliary and other insurance regulators of the Company's U.S. insurance company subsidiaries and have resulted in enhanced scrutiny and regulatory action by several regulators. (See "Regulatory Actions" and "Risk-Based Capital Requirements"). The primary purpose of insurance regulation is the protection of policyholders rather than shareholders. Failure to resolve issues with the IDOI and the FDOI, and with other regulators, in a manner satisfactory to the Company could impair the Company's ability to execute its business strategy or result in future regulatory actions or proceedings that could otherwise materially and adversely affect the Company's operations. The Company is Subject to a Number of Pending Legal Proceedings As discussed elsewhere in this report, the Company and/or its subsidiaries are involved in a number of pending civil legal proceedings (see "Legal Proceedings"). Although the Company believes that many of the allegations of wrongdoing are without merit and intends to vigorously defend the claims brought against it, there can be no assurance that such proceedings will not have a material adverse effect on the Company's financial position or results of operations. Furthermore, the existence of these lawsuits diverts the time and attention of management, and they are costly to defend. The Terms of the Trust Preferred Securities May Restrict SIG's Ability to Act SIG has issued through a wholly owned trust subsidiary $135 million aggregate principal amount in trust originated preferred securities ("Preferred Securities"). The Preferred Securities have a term of 30 years with annual interest at 9.5% paid semi-annually. The obligations of the Preferred Securities were expected to be funded from SIG's nonstandard automobile insurance management company. SIG elected to defer the semi-annual interest payments due in February and August 2000, 2001 and 2002 and the payment due in February 2003 and may continue to defer such payments for up to an aggregate of five years as permitted by the indenture for the Preferred Securities. All of the deferred interest (if all payments due in 2003 and 2004 are deferred) approximating $84 million will become due and payable in February 2005. Although there is no present default under the indenture that would accelerate the payment of the Preferred Securities, the indenture contains a number of covenants that may restrict SIG's ability to act in the future. These covenants include restrictions on SIG's ability to incur or guarantee debt, make payment to affiliates, repurchase its common stock, pay dividends on common stock or increase its level of certain investments other than investment-grade, fixed-income securities. There can be no assurance that compliance with these restrictions and other provisions of the indenture for the Preferred Securities will not adversely affect the cash flow of SIG and the Company. SIG May Not Be Able to Satisfy Its Obligations to the Holders of the Trust Preferred Securities SIG may continue to defer the semi-annual interest payments on the Preferred Securities for up to an aggregate of five (5) years as permitted by the indenture for the Preferred Securities. All of the deferred interest (approximately $84 million, if all payments due in 2003 and 2004 are deferred) will become due and payable in February 2005. SIG relies on the payment of finance and service fees by its subsidiaries to fund its operations, including its payment of interest on the Preferred Securities. Certain state regulators, including the FDOI, have issued orders prohibiting SIG's subsidiaries from paying such fees to SIG. In the event such orders continue, SIG may not have sufficient revenue to fund its operations or to pay the deferred interest on the Preferred Securities. Such failure to pay could result in a default under the indenture and acceleration of the payment of the Preferred Securities. Uncertain Pricing and Profitability One of the distinguishing features of the property and casualty industry is that its products are priced before losses are reported and final costs are known. Premium rate levels are related in part to the availability of insurance coverage, which varies according to the level of surplus in the industry. Increases in surplus have generally been accompanied by increased price competition among property and casualty insurers. The nonstandard automobile insurance business, in recent years, has experienced very competitive pricing conditions and there can be no assurance as to the Company's ability to achieve adequate pricing. Changes in case law, the passage of new statutes or the adoption of new regulations relating to the interpretation of insurance contracts can retroactively and dramatically affect the liabilities associated with known risks after an insurance contract is in place. New products also present special issues in establishing appropriate premium levels in the absence of experience with such products' performance. The level of claims cannot be accurately determined for periods after the sale of policies, therefore reserves are estimated and these estimates are used to set price. If they are low, then resulting rates could be inadequate. The number of competitors and the similarity of products offered, as well as regulatory constraints, limit the ability of property and casualty insurers to increase prices in response to declines in profitability. In states that require prior approval of rates, it may be more difficult for SIG's insurance subsidiaries to achieve premium rates that are commensurate with its underwriting experience with respect to risks located in those states. Accordingly, there can be no assurance that these rates will be sufficient to produce an underwriting profit. The reported profits and losses of a property and casualty insurance company are also determined, in part, by the establishment of, and adjustments to, reserves reflecting estimates made by management as to the amount of losses and LAE that will ultimately be incurred in the settlement of claims. The ultimate liability of the insurer for all losses and LAE reserved at any given time will likely be greater or less than these estimates, and material differences in the estimates may have a material adverse effect on the insurer's financial position or results of operations in future periods. Uncertainty Associated with Estimating Reserves for Unpaid losses and LAE The reserves for unpaid losses and LAE established by the Company's insurance subsidiaries are estimates of amounts needed to pay reported and unreported claims and related LAE based on facts and circumstances then known. These reserves are based on estimates of trends in claims severity, judicial theories of liability and other factors. Although the nature of the Company's U.S. nonstandard automobile insurance business is primarily short-tail, the establishment of adequate reserves is an inherently uncertain process, provides no assurance that the ultimate liability will not materially exceed the Company's reserves for losses and LAE and have a material adverse effect on the Company's results of operations and financial condition. Due to the inherent uncertainty of estimating these amounts, it has been necessary, and may over time continue to be necessary, to revise estimates of the Company's reserves for losses and LAE. The historical development of reserves for losses and LAE may not necessarily reflect future trends in the development of these amounts. Accordingly, it may not be appropriate to extrapolate redundancies or deficiencies based on historical information. Nature of Nonstandard Automobile Insurance Business The nonstandard automobile insurance business is affected by many factors that can cause fluctuation in the results of operations of this business. Many of these factors are not subject to the control of the Company or its subsidiaries. The size of the nonstandard market can be significantly affected by, among other factors, the underwriting capacity and underwriting criteria of standard automobile insurance carriers. In addition, an economic downturn in the states in which SIG writes business could result in fewer new car sales and reduced demand for automobile insurance. These factors, together with competitive pricing and other considerations, could result in fluctuations in SIG's underwriting results. Highly Competitive Business Nonstandard automobile insurance is a highly competitive business. Many of the Company's competitors have substantially greater financial resources than the Company and there can be no assurance that the Company will be able to compete effectively against such competitors in the future. The Company competes with both large national writers and smaller regional companies. These competitors include companies which, like the Company, serve the independent agency market and companies that sell insurance directly to consumers. Direct writers may have certain competitive advantages over agency writers, including increased name recognition, loyalty of the customer base to the insurer, and potentially reduced acquisition costs. In addition, certain competitors of the Company have from time to time decreased their prices in an apparent attempt to gain market share. Also, in certain states, assigned risk plans may provide nonstandard automobile insurance products at a lower price than private insurers. In addition, because the Company's nonstandard automobile insurance products are only marketed through independent insurance agencies which represent more than one insurance company, the Company faces competition within each agency. Reliance on Independent Insurance Agents The NAG market and sell their insurance products through independent, non-exclusive insurance agents and brokers. The agents and brokers also sell competitors' insurance products. The NAG' business depends, in part, on the marketing efforts of those agents and brokers and the NAG must offer insurance products that meet the requirements of their customers. If those agents and brokers fail to market the NAG' products successfully, the NAG' business may be adversely affected. Reliance upon reinsurance In order to reduce risk and to increase underwriting capacity, the Nonstandard Auto Group purchases reinsurance. Reinsurance does not relieve the Nonstandard Auto Group of liability to the insureds for the risks ceded to reinsurers. As such, the Nonstandard Auto Group is subject to credit risk with respect to the risks ceded to reinsurers. Although the Nonstandard Auto Group places reinsurance with reinsurers that it generally believes to be financially stable, a significant reinsurer's insolvency or inability to make payments under the terms of a reinsurance treaty could have a material adverse effect on SIG's, and the Company's, financial condition or results of operations. The amount and cost of reinsurance available to companies specializing in property and casualty insurance is subject, in large part, to prevailing market conditions beyond the control of such companies. The Nonstandard Auto Group's ability to provide insurance at competitive premium rates and coverage limits on a continuing basis depends upon their ability to obtain adequate reinsurance in amounts, and at rates, that will not adversely affect their competitive position. Due to continuing market uncertainties regarding reinsurance capacity, no assurances can be given as to the Nonstandard Auto Group's ability to maintain current reinsurance facilities, which generally are subject to annual renewal. If the Nonstandard Auto Group is unable to renew such facilities upon their expiration and is unwilling to bear the associated increase in net exposures, it may need to reduce its levels of underwriting commitments. ITEM 2 - PROPERTIES The Company's headquarters is located at 2 Eva Road, Suite 200, Etobicoke, Ontario, Canada in leased space. The Company's U.S. offices are located at 4720 Kingsway Drive, Indianapolis, Indiana in office space subleased from Superior Group. SIG's headquarters are located at 4720 Kingsway Drive, Indianapolis, Indiana in a building that is owned 100% by Pafco with no encumbrances. Superior Group leases office space at 4720 Kingsway Drive, Indianapolis, Indiana from Pafco. The building is an 80,000 square foot multilevel structure; approximately 50% of which is utilized by the Company and certain of its subsidiaries. The remaining space is leased to third parties at a price of approximately $10 per square foot. All corporate administration, accounting and management functions are contained at this location. Superior's operations are conducted at leased facilities in Atlanta, Georgia; Anaheim, California; and Tampa and West Palm Beach, Florida. Under a lease term that extends through 2003, Superior leases an office at 280 Interstate North Circle, N.W., and Suite 500, Atlanta, Georgia. Superior leases an office located at 5483 West Waters Avenue, Suite 1200, Tampa, Florida for a lease term extending through December 2007. Superior occupies a leased office located at 1745 West Orangewood, Anaheim, California for a lease term extending through May 2006. Superior occupies a leased office at 4500 PGA Blvd., Suite 304A, West Palm Beach, Florida for a lease term extending through September 2007. Claims activities are conducted in Atlanta, Indianapolis, Tampa and Anaheim. Underwriting, customer service, and accounting and administration activities are conducted in Indianapolis. SIGF is located at 2300 Glades Road, Suite 135E, Boca Raton, Florida in leased space. The Company considers all of its properties suitable and adequate for its current operations. ITEM 3 - LEGAL PROCEEDINGS Superior Guaranty is a defendant in a case filed on November 26, 1996, in the Circuit Court for Lee County, Florida entitled Raed Awad v. Superior Guaranty Insurance Company, et al., Case No. 96-9151 CA LG. The case purported to be brought on behalf of a class consisting of purchasers of insurance from Superior Guaranty. The plaintiffs alleged that the defendant charged premium finance service charges in violation of Florida law. The parties have reached a class settlement which has been approved by the court that is not expected to be material to Superior Guaranty. As previously reported, IGF, which is a wholly owned subsidiary of the Company, had been a party to a number of pending legal proceedings and claims relating to agricultural production interruption insurance policies (the "AgPI Program") which were sold during 1998. All of the policies of insurance which were issued in the AgPI Program were issued by and under the name of Mutual Service Casualty Insurance Company ("MSI"), a Minnesota corporation with its principal place of business located in Arden Hills, Minnesota. Sales of this product resulted in large underwriting losses by IGF. Approximately $29 million was paid through December 31, 2002 in settlement of legal proceedings and policyholder claims related to the AgPI Program. All AgPI policyholder claims were settled during 2000. However, on January 12, 2001 a case was filed in the Superior Court of California, County of Fresno, entitled S&W Seed Company, Dudley Silveira, Ric Blanchard and Darrell Silveira v. Mutual Service Casualty Insurance Company, IGF Insurance Company, and Dibuduo & Defendis Insurance Agency, Inc.; Case No. OICE CG 00137. The case was brought by four AgPI policyholders who had previously settled their AgPI claims pursuant to binding settlement agreements who now seek additional compensation by asserting through litigation that IGF and the third party carrier paid less than the policy limits they were promised when they purchased the policy and that each settling policyholder was forced to accept the lesser amount due to their economic duress - a legal theory recognized in California if certain elements can be established. The plaintiff's amended their complaint four times during 2002. A demurrer to the fourth amended complaint was filed by MSI and a motion to strike was filed by IGF, which were denied. IGF filed a motion for summary judgment to dismiss the claims in the plaintiff's fourth amended complaint on the basis that releases previously executed by the plaintiffs are binding. The court granted the motion for summary judgment. The cross claims between the selling brokers and MSI and IGF remain pending. The trial is scheduled to begin in August 2003. Superior Guaranty is a defendant in a case filed on October 8, 1999, in the Circuit Court for Manatee County, Florida entitled Patricia Simmons v. Superior Guaranty Insurance Company, Case No. 1999 CA-4635. The case purports to be brought on behalf of a class consisting of purchasers of insurance from Superior Guaranty. The Plaintiffs alleged that the defendant charged interest in violation of Florida law. The parties have settled the case in an amount that is not material to the Company's financial condition. The Company is a defendant in a case filed on February 23, 2000, in the United States District Court for the Southern District of Indiana entitled Robert Winn, et al. v. Symons International Group, Inc., et al., Cause No. IP 00-0310-C-B/S. Other parties named as defendants are SIG, three individuals who were or are officers or directors of the Company or of SIG, PricewaterhouseCoopers LLP and Schwartz Levitsky Feldman, LLP. The case purports to be brought on behalf of a class consisting of purchasers of the Company's stock or SIG's stock during the period February 27, 1998, through and including November 18, 1999. Plaintiffs allege, among other things, that defendants misrepresented the reliability of the Company's reported financial statements, data processing and financial reporting systems, internal controls and loss reserves in violation of Section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act") and SEC Rule 10b-5 promulgated thereunder. The individual defendants are also alleged to be liable as "controlling persons" under Sec.20 (a) of the 1934 Act. As previously reported in the Company's September 30, 2002 Form 10-Q, the Company, SIG and the individual defendants entered into an agreement with the plaintiffs for settlement. The settlement is subject to certain terms and conditions and court approval. As previously reported, SIG and two of its subsidiaries, IGFH and IGF, were parties to a "Strategic Alliance Agreement" dated February 28, 1998 (the "SAA") with Continental Casualty Company ("CNA"), pursuant to which IGF acquired certain crop insurance operations of CNA. The obligations of the Company, IGFH, IGF and CNA under the SAA are the subject of an action filed on June 4, 2001 and pending in United States District Court for the Southern District of Indiana, Indianapolis Division. Claims have also been asserted in the action against SIG, Granite Re, Pafco, Superior and certain members of the Symons family. Discovery is proceeding. Although the Company continues to believe that it has claims against CNA and defenses to CNA's claims which may offset or reduce amounts owing by the Company or its affiliates to CNA, there can be no assurance that the ultimate resolution of the claims asserted by CNA against the Company and its affiliates will not have a material adverse effect upon the Company's and its affiliates' financial condition or results of operations. Superior was a defendant in a case filed on May 8, 2001 in the United States District Court Southern District of Florida entitled The Chiropractic Centre, Inc. v. Superior Insurance Company, Case No. 01-6782. The case purported to be brought on behalf of a class consisting of healthcare providers improperly paid discounted rates on services to patients based upon a preferred provider contract with a third party. The plaintiff alleged that Superior breached a third party beneficiary contract, committed fraud and engaged in racketeering activity in violation of federal and Florida law by obtaining discounted rates offered by a third party with whom the plaintiff contracted directly. On September 30, 2002, the court issued an administrative order which dismissed the case. The court's order administratively closing the case could be temporary or permanent. Superior believes that the allegations of wrongdoing as alleged in the complaint were without merit and in the event the order is temporary, Superior intends to vigorously defend the claims brought against it. IGF is a defendant in a case filed on December 31, 2002 in the Circuit Court of Greene County, Missouri entitled Kevin L. Stevens v. Wilkerson Insurers, et al., Case No. 102CC5135. Other parties named as defendants are the Company, SIGF, Granite Re, Superior Group Management, Superior, Superior American, Superior Guaranty, Pafco and three individuals who were or are officers or directors of the Company. These defendants have filed motions to dismiss for lack of personal jurisdiction which are pending. The case purports to be brought on behalf of an IGF insured seeking to recover alleged damages based on allegations of bad faith, negligent claims handling and breach of fiduciary duties with respect to a claim which arose from an accident caused by the IGF insured. IGF believes that the allegations of wrongdoing as alleged in the complaint are without merit and intends to vigorously defend the claims brought against it. See footnote 15 ("Commitment and Contingencies") and footnote 14 ("Regulatory Matters") to the Company's consolidated financial statements in Part I of this report, incorporated herein by reference, for additional legal matters. The Company and its subsidiaries are named as defendants in various other lawsuits relating to their business and arising in the ordinary course of business. Legal actions arise from claims made under insurance policies issued by the Company's subsidiaries. The Company, through its claims reserves, reserves for both the amount of estimated damages attributable to these lawsuits and the estimate costs of litigation. The Company believes that the ultimate disposition of these lawsuits will not materially affect its operations or financial position. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Information regarding the trading market for the Company's common stock, the range of selling prices for each quarterly period since January 1, 2000, and the approximate number of holders of common stock as of December 31, 2002 and other matters is included under the caption "Market and Dividend Information" on page 43 of the 2002 Annual Report, included as Exhibit 13, which information is incorporated herein by reference. The following table sets forth certain information as of December 31, 2002 regarding securities of the Registrant authorized for issuance under the Company's equity compensation plans. As of December 31, 2002, all of the Company's equity compensation plans were approved by the Company's shareholders.
Number of securities remaining available for Number of securities Weighted-average future issuance under to be issued upon exercise price of equity compensation plans exercise of outstanding (excluding securities Plan category outstanding options options reflected in column (a)) - ----------------------------- ----------------------- ------------------ -------------------------- Equity compensation plans approved by shareholders . . 428,750 $ 0.85 442,250 Equity compensation plans not approved by shareholders . . -- -- -- Total . . . . . . . . . . . . 428,750 $ 0.85 442,250
he Company's Share Option Plan provides it with the authority to grant nonqualified stock options and incentive stock options to officers and key employees of the Company and its subsidiaries and nonqualified stock options to non-employee directors of the Company. Options have been granted at an exercise price equal to the fair market value of the Company's stock at date of grant. The outstanding stock options vest and become exercisable at varying terms ranging from immediate vesting to equal installments over terms up to 5 years. ITEM 6 - SELECTED FINANCIAL DATA The data included on page 4 of the 2002 Annual Report, included as Exhibit 13, under "Selected Financial Data" is incorporated herein by reference. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the 2002 Annual Report on pages 5 through 14 included as Exhibit 13 is incorporated herein by reference. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The discussion entitled "Quantitative and Qualitative Disclosures About Market Risk" included in the 2002 Annual Report on pages 12 through 13 included as Exhibit 13 is incorporated herein by reference. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements in the 2002 Annual Report included as Exhibit 13, and listed in Item 15 of this Report, are incorporated herein by reference. ITEM 9- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS OF THE REGISTRANT The following table sets forth certain information regarding current directors of the Company: NAME AGE DIRECTOR SINCE Ron L. Foxcroft 57 2001 John K. McKeating 67 1995 J. Ross Schofield 62 1992 David B. Shapira 56 1989 Douglas H. Symons 51 1989 G. Gordon Symons 81 1986 Robert C. Whiting 71 2002 Dr. Ron L. Foxcroft is the Chairman and Founder of Fox 40 International, Inc., a manufacturing and distribution company and Chairman of Hamilton Terminals Inc. Dr. Foxcroft was named by Profit Magazine as Entrepreneur of the Decade. Dr. Foxcroft received an honourary Doctor of Law Degree from McMaster University in Canada and was the recipient of the Award of Merit from B'Nai Brith Canada. John K. McKeating is the retired former President of Vision 2120, Inc., an optometry company J. Ross Schofield is the Chairman of Hargraft Schofield Ltd., an insurance brokerage company. David B. Shapira is the President, Medbers Limited, an investment holding company Douglas H. Symons served as the Company's Chief Operating Officer from July 1996 until he became its Chief Executive Officer in November 1999. Mr. Symons also served as Chief Executive Officer of the Company from 1989 until July 1996. Mr. Symons has been a director of Goran since 1989 and served as Goran's Chief Operating Officer and Vice President from 1989 until May 31, 2002 when he became Chief Executive Officer and President. Mr. Symons is the son of G. Gordon Symons. G. Gordon Symons has been Chairman of the Board of Directors of the Company since its formation in 1987. Mr. Symons founded the predecessor to Goran, the 73.8% shareholder of the Company, in 1964 and has served as the Chairman of the Board of Goran since its formation in 1986. Mr. Symons also served as the President of Goran until 1992 and the Chief Executive Officer of Goran until 1994. Mr. Symons currently serves as a director of Symons International Group Ltd. ("SIGL"), a Canadian corporation controlled by him, which together with members of the Symons family, controls Goran. Mr. Symons also serves as Chairman of the Board of Directors of all of the subsidiaries of Goran. Mr. Symons is the father of Douglas H. Symons. Robert C. Whiting is the President of Prime Advisors Ltd., a Bermuda based insurance consulting firm. From its inception until June 1994, Mr. Whiting served as President and Chairman of the Board of Jardine Pinehurst Management Co., Ltd., a Bermuda based insurance management and brokerage firm. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, as well as persons who own more than 10% of the outstanding common shares of the Company, to file reports of ownership with the Securities and Exchange Commission. Officers, directors and greater than 10% shareholders are required to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of copies of such forms received by it, or written representations from certain reporting persons that no reports were required for those persons, the Company believes that during 2002, all filing requirements applicable to its officers, directors and greater than 10% shareholders were met with the exception of a Form 4 for the acquisition of shares of the Company. EXECUTIVE OFFICERS Presented below is certain information regarding the executive officer of the Company who is not also a director. His age and positions with the Company are as follows: NAME AGE POSITION John G. Pendl 42 Vice President, Chief Financial Officer and Treasurer Mr. Pendl has served as Vice President, Chief Financial Officer and Treasurer since October 2002. From 1998 to September 2002, Mr. Pendl served as M&A Analyst and Divisional Controller for Collision Team of America, Inc., a subsidiary of Ford Motor Company. Mr. Pendl also held various corporate financial positions between 1991 and 1998, primarily with The Corange Group. Finally, Mr. Pendl served as a tax consultant with the firm of Price Waterhouse from 1984 through 1990. Mr. Pendl holds an MBA degree from Indiana University and is a Certified Public Accountant in the State of Indiana. ITEM 11 - EXECUTIVE COMPENSATION The following table shows the cash compensation paid by the Company or any of its subsidiaries and other compensation paid during the last three calendar years to the Company's Chief Executive Officer during 2002 and the Company's four other most highly paid executive officers during 2002 (the "named executive officers"). SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Awards - ------------------------------------------------------------------------------------- Securities Name and Principal Underlying All Other Position Year Salary Bonus OptionsC Compensation - --------------------- ---------- ---------- -------- -------- ------------------ G. Gordon Symons, . . 2002 $ 0 $ 0 0 $ 400,613R Chairman of the Board 2001 $ 0 $ 0 250,000 $ 448,672D 2000 $ 0 $ 0 0 $ 403,638O ---------- ---------- -------- -------- ------------------ Alan G. Symons,S. . . 2002 $ 0 $ 0 0 $ 464,119Q CEO and President . . 2001 $ 0 $ 0 200,000 $ 400,000H 2000 $ 0 $ 0 0 $ 401,638G ---------- ---------- -------- -------- ------------------ Douglas H. Symons,. . 2002 $ 461,463 $250,368I 0 $ 17,526E CEO and President . . 2001 $ 375,000 $ 0 60,000 $ 1,651N 2000 $ 375,000 $ 0 0 $ 45,846F ---------- ---------- -------- -------- ------------------ John G. PendlJ. . . . 2002 $ 72,361 $ 0 1,000 $ 1,981E Vice President, CFO . 2001 $ 14,807 $ 0 0 $ 0 - --------------------- ---------- ---------- -------- -------- ------------------ Gene S. YerantK . . . 2002 $ 235,105 $ 0 0 $ 262,371P President, Superior . 2001 $ 500,000 $ 912 0 $ 11,223M Insurance Group, Inc. 2000 $ 500,000 $250,000 100,000 $ 21,635L - --------------------- ---------- ---------- -------- ------- ---------------- Note A Salary, bonus and other compensation are stated in U.S. dollars as the majority of payments are actually made in U.S. dollars. Note B Aggregate amounts are not greater than the lesser of $50,000 and 10% of the total of the annual salary and bonus. Note C No stock appreciation rights, restricted shares, or restricted share units were granted during any of the past three completed fiscal years. Amounts reflect stock options granted during 2000, 2001 and 2002. Note D Includes $400,000 paid by a subsidiary of the Corporation, Granite Reinsurance Company Ltd., a Barbados company ("Granite Re"), to companies owned by Mr. G. Gordon Symons and $48,672 of other compensation paid by the Corporation and Granite Re. Note E Includes $1,981 of health and life insurance premiums and $15,545 of medical expense reimbursement paid by SIG. Note F Includes $43,510 of accrued vacation and $2,336 of health and life insurance premiums paid by SIG. Note G Includes a consulting fee paid to SIG Capital Fund, Ltd. of $400,000 and health insurance premiums of $1,638 paid by SIG. Note H Consulting fee of $400,000 paid to SIG Capital Fund, Ltd. Note I Includes $25,368 paid by SIG. Note J Mr. Pendl joined the Corporation on October 8, 2001. Note K Mr. Yerant joined the Corporation on January 10, 2000. Mr. Yerant's employment terminated May 20, 2002. Note L Includes $19,067 of relocation expenses and $2,568 of health and life insurance premiums paid by SIG. Note M Includes $1,990 of health and life insurance premiums paid by SIG. Note N Health and life insurance premiums paid by SIG. Note O Includes consulting fee of $400,000 paid by Granite Re and $1,638 of health and life insurance premiums paid by SIG. Note P Includes a severance payment of $250,000 and $12,371 of insurance premiums. Note Q Includes consulting fee of $182,051 paid to SIG Capital Fund, Ltd. and $282,068 paid pursuant to a consulting agreement effective May 31, 2002 between the Corporation, Granite and AGS Capital Ltd. Note R Includes consulting fee of $400,000 paid by Granite Re and $613 of health and life insurance premiums paid by SIG. Note S Alan G. Symons retired on May 31, 2002.
OPTION GRANTS IN LAST FISCAL YEAR The following table shows grants of options made during the fiscal year ended December 31, 2002 to each of the named executive officers:
Individual Grants Grant Date Value ------------------- Number of Securities Percent of total Underlying options granted to Options employees in fiscal Exercise of Expiration Grant Date Present Name granted year Base Price date Value $ - ----------------- ---------------- -------------------- ------------- ---------- -------------------- Douglas H. Symons -- -- -- -- ---------------- -------------------- ------------- ---------- G. Gordon. Symons -- -- -- -- ---------------- -------------------- ------------- ---------- Alan G. Symons. . -- -- -- -- ---------------- -------------------- ------------- ---------- John G. Pendl . . 1,000 3.8% $ .23 (Cdn) 10/1/2012 $ 230 (Cdn) ---------------- -------------------- ------------- ---------- -------------------- Gene S. Yerant. . -- -- -- -- -- - ----------------- ---------------- -------------------- ------------- ---------- --------------------
OPTION EXERCISES AND YEAR-END VALUES The following table shows unexercised stock options held by the Company's named executive officers at December 31, 2002. In addition, this table includes the number of shares covered by both exercisable and non-exercisable stock options. The closing TSX stock price as of December 31, 2002 was $.60 (Cdn), which was lower than the option exercise prices; therefore, there were no unexercised in-the-money options. There were no exercises of stock options by the named executive officers during 2002.
VALUE OF COMMON NUMBER OF UNEXERCISED UNEXERCISED IN THE SHARES OPTIONS AT FY END MONEY OPTIONS ($) ACQUIRED ON AGGREGATE EXERCISABLE/UNEXERCIS EXERCISABLE/ NAME EXERCISE VALUE REALIZED ABLE UNEXERCISABLE1 - ----------------- ----------- --------------------- ---------------------- -------------- G. Gordon Symons. 0 0 250,000/0 0/0 ----------- --------------------- ---------------------- -------------- Alan G. Symons. . 0 0 0/0 2 0/0 ----------- --------------------- ---------------------- -------------- Douglas H. Symons 0 0 60,000/0 0/0 ----------- --------------------- ---------------------- -------------- John G. Pendl . . 0 0 0/1,000 0/0 ----------- --------------------- ---------------------- -------------- Gene S. Yerant. . 0 0 0/0 3 0/0 - ----------------- ----------- --------------------- ---------------------- -------------- 1 Based on the TSX closing price as of December 31, 2002 of $.60 (Cdn.). 2 Alan G. Symons forfeited his options upon retirement. 3 Mr. Yerant forfeited his options upon termination of employment.
LONG TERM INCENTIVE PLAN AWARDS IN 2002 There were no long-term incentive plan awards to the Company's named executive officers in 2002. REPORT ON EXECUTIVE COMPENSATION The Corporation's Executive Compensation Policy (the "Policy") considers an individual's experience, market conditions (including industry surveys), individual performance and the overall financial performance of the Corporation. The Corporation's total compensation program for officers includes base salaries, bonuses and the grant of stock options pursuant to the Option Plan. The Corporation's primary objective is to achieve above-average performance by providing the opportunity to earn above-average total compensation (base salary, bonus, and value derived from stock options) for above-average performance. Each element of total compensation is designed to work in concert. The total program is designed to attract, motivate, reward and retain the management talent required to serve shareholder, customer and employee interests. The Corporation believes that this program also motivates the Corporation's officers to acquire and retain appropriate levels of share ownership. It is the opinion of the Compensation Committee that the total compensation earned by the Corporation's officers during 2002 achieves these objectives and is fair and reasonable. Compensation comprises base salary, annual cash incentive (bonus) opportunities, and long-term incentive opportunities in the form of stock options. Individual performance is determined in relation to short and long-term objectives that are established and maintained on an on-going basis. Performance of these objectives is formally reviewed annually and base salary adjusted as a result. Bonus rewards are provided upon the attainment of corporate financial performance objectives as well as the individual's direct responsibilities and their attainment of budget and other objectives. The Policy also strives to establish long-term incentives to executive officers by aligning their interests with those of the Corporation's shareholders through award opportunities that can result in the ownership of the Corporation's common shares. The compensation of Alan G. Symons, Chief Executive Officer of the Corporation until May 31, 2002, was determined pursuant to the arrangement between the Corporation and SIG Capital Fund, Ltd. Under the arrangement, a consulting fee was paid to SIG Capital Fund, Ltd. with respect to the provision of services by Alan G. Symons. Alan G. Symons was not paid a salary by the Corporation. Upon the resignation of Alan G. Symons, Douglas H. Symons was appointed Chief Executive Officer, President and Secretary of the Corporation. The Compensation Committee reviewed and increased the salary of Douglas H. Symons upon his appointment as Chief Executive Officer and President of the Corporation and approved the payment by the Corporation of the annual salary obligations of SIG and the Corporation. The Compensation Committee also approved a retention bonus in 2002 for Douglas H. Symons. During 2002, the board of directors did not grant any additional stock options to the Chief Executive Officer. The board of directors also approved the grant of 26,000 additional stock options to certain officers, directors and employees of the Corporation during 2002. COMPENSATION COMMITTEE Dr. Ron Foxcroft, Chairman J. Ross Schofield Douglas H. Symons COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company's Compensation Committee consisted of Dr. Ron Foxcroft, J. Ross Schofield and Douglas H. Symons. Neither Dr. Foxcroft nor Mr. Schofield has any interlocks reportable under Item 402(j)(3) of Regulation S-K. Douglas H. Symons has served as a director and executive officer of the Company since 1989. Douglas H. Symons is also an executive officer of each of the Company's subsidiaries. G. Gordon Symons, Chairman of the Company, is a director of each of the Company's subsidiaries and is empowered to determine the compensation of the executive officers of the Company's subsidiaries. Alan G. Symons was an executive officer and director of the Company and its subsidiaries until May 31, 2002. COMPENSATION OF DIRECTORS In 2002, the Company's directors received a flat annual fee of $10,000 for each director and a $1,000 fee for each committee meeting attended. In addition, committee chairmen received an additional $1,500 per quarter. During 2002, the Company also paid Robert C. Whiting a $10,000 fee for services as an officer of Granite Reinsurance Company Ltd., a subsidiary of the Company. EMPLOYMENT AGREEMENTS Certain of the Company's officers have entered into employment contracts with the Company or one of its subsidiaries. Douglas H. Symons, Chief Executive Officer of the Company, is subject to an employment agreement, with such agreement calling for a base salary of not less than $500,000 per year. This agreement became effective on May 31, 2002 and continues in effect for an initial period of two years. Upon the expiration of the initial two-year period, the term of the agreement is automatically extended from year to year thereafter and is cancelable upon six months' notice. This agreement contains customary restrictive covenants respecting confidentiality and non-competition during the term of employment and for a period of two years after the termination of the agreement. In addition to annual salary, Douglas H. Symons may earn a bonus in an amount ranging from 0 to 100% of base salary. At the discretion of the board, bonus awards may be greater than the amounts indicated if agreed upon financial targets are exceeded. Upon a change of control of the Company or Symons International Group, Inc. and in the event of a non-renewal of Douglas H. Symons' employment agreement, Douglas H. Symons is entitled to a severance amount equal to two years salary. Douglas H. Symons became the Chief Executive Officer and President of the Company on May 31, 2002, and the Company approved the payment of the Company's and Symons International Group, Inc.'s annual salary obligations under the employment agreement effective as of May 31, 2002. The Company and Granite Reinsurance Company Ltd. have entered into a consulting agreement with AGS Capital Ltd. under which Alan G. Symons, the Chief Executive Officer of the Company until May 31, 2002, provides certain consulting services to the Company and Granite Re. The agreement provides compensation in the amount of $500,000 per year, is for an initial term of one year, and the term of the agreement is automatically extended from year to year thereafter unless terminated upon ninety days' prior notice. The Company, Symons International Group, Inc. and Granite Reinsurance Company Ltd. have entered into an employment agreement with G. Gordon Symons, Chairman of the Board of the Company, pursuant to which G. Gordon Symons is entitled to receive from Granite Re an annual sum of $150,000. Upon a change of control of the Company or Symons International Group, Inc., G. Gordon Symons is entitled to a payment in the amount of $1,125,000. In the event Granite Re shall fail to pay the annual amount due under the agreement, the Company and Symons International Group, Inc. become jointly and severally liable for such amounts. The Company, Symons International Group, Inc., Granite Reinsurance Company Ltd., Goran Management Bermuda Ltd. ("Goran Bermuda") and G. Gordon Symons have entered into a consulting agreement pursuant to which Goran Bermuda, an entity controlled by G. Gordon Symons, is entitled to an annual sum of $250,000. Upon a change of control of the Company or Symons International Group, Inc., Goran Bermuda is entitled to a payment in the amount of $1,875,000. In the event Granite Re shall fail to pay the annual amount due under the agreement, the Company and Symons International Group, Inc. become jointly and severally liable for such amounts. The Company and Symons International Group, Inc. entered into an employment agreement with David N. Hafling under which he serves as Vice President and Chief Actuary of Symons International Group, Inc. The agreement became effective on October 15, 2001 and continues until December 31, 2004. The agreement is automatically renewed for one year periods thereafter unless earlier terminated upon 60 days advance notice. The agreement provides that Mr. Hafling will receive a base salary of not less than $150,000 annually and an annual bonus of up to $30,000. The Company and Symons International Group, Inc. entered into an employment agreement with Gregg F. Albacete, Vice President and Chief Information Officer of Symons International Group, Inc. The agreement became effective on January 26, 2000 for an initial term of three years and was automatically renewable for one-year periods thereafter unless sooner terminated. The agreement provided for a base salary of not less than $175,000 annually and an annual bonus of up to $75,000. This agreement terminated on January 31, 2003. The Company and Symons International Group, Inc. entered into an employment agreement with Gene S. Yerant under which he served as Executive Vice President of the Symons International Group, Inc. and President of Superior Insurance Group, Inc., a subsidiary of the Company. The agreement became effective on January 10, 2000 and was terminated on May 20, 2002. The agreement provided for a base salary of $500,000 annually and a bonus of up to 100% of salary based upon achievement of certain performance objectives. Following the termination of the employment of Gene S. Yerant on May 20, 2002, the Company and Symons International Group, Inc. entered into an agreement with Mr. Yerant which provided for two separation payments of $250,000 each, both of which were paid as of January 31, 2003. PERFORMANCE GRAPH The following performance graph compares the cumulative total shareholder return on the Corporation's common stock with the TSX/S&P Composite Index for the years 1998 through 2002. [GRAPHIC OMITED] Notwithstanding anything to the contrary set forth in any of the Corporation's previous filings under the Securities Act of 1993, as amended or the Securities Exchange Act of 1934, as amended, that may incorporate future filings (including this Management Proxy Circular, in whole or in part), the preceding Report on Executive Compensation and the historical Performance Graph shall not be incorporated by reference in any such filings. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table shows, as of April 21, 2003, the number and percentage of shares of common stock of the Company held by each person known to the Company to own beneficially more than five percent of the issued and outstanding common stock of the Company, and the ownership interests of each of the Company's directors and named executive officers, and all directors and executive officers of the Company as a group, in the common stock of the Company and in the common stock of the Company's 73.8% shareholder, Goran. Unless otherwise indicated in a footnote to the following table, each beneficial owner possesses sole voting and investment power with respect to the shares owne
SYMONS INTERNATIONAL GROUP, INC. GORAN CAPITAL INC. -------------------------------- ------------------- AMOUNT AND AMOUNT AND NATURE OF NATURE OF BENEFICIAL PERCENT OF BENEFICIAL PERCENT OF NAME OWNERSHIP CLASS OWNERSHIP CLASS - ------------------------------------- -------------------------------- ------------------- ---------- ----------- G. Gordon Symons1 . . . . . . . . . . 520,000 4.8% 2,375,524 42.1% -------------------------------- ------------------- ---------- ----------- Douglas H. Symons3. . . . . . . . . . 245,500 2.3% 311,455 5.7% -------------------------------- ------------------- ---------- ----------- Alan G. Symons2 . . . . . . . . . . . 72,691 * 568,065 10.5% -------------------------------- ------------------- ---------- ----------- J. Ross Schofield4. . .. . . . . . . 28,500 * 29,800 * -------------------------------- ------------------- ---------- ----------- David B. Shapira4 . . . . . . . . . . 28,500 * 115,000 2.1% -------------------------------- ------------------- ---------- ----------- John K. McKeating5. . . . . . . . . . 51,000 * 17,000 * -------------------------------- ------------------- ---------- ----------- Dr. Ron Foxcroft6. . . . . . . . . . . 0 0 31,000 * -------------------------------- ------------------- ---------- ----------- Robert C. Whiting7 . . . . . . . . . . 77,800 * 35,000 * -------------------------------- ------------------- ---------- ----------- Goran Capital Inc.. . . . . . . . . . 7,666,283 73.8% 0 0 -------------------------------- ------------------- ---------- ----------- All executive officers and directors as a group (9 persons) . . . . . . . 858,191 7.7% 3,487,844 60.5% - ------------------------------------- -------------------------------- ------------------- ---------- ----------- * Less than 1% of class. 1 With respect to the shares of SIG, 10,000 shares are owned directly and 510,000 shares may be purchased pursuant to stock options that are exercisable within 60 days. With respect to the shares of the Company, 479,111 shares are held by trusts of which Mr. Symons is the beneficiary, 1,646,413 of the shares indicated are owned by Symons International Group Ltd., of which Mr. Symons is the controlling shareholder, and 250,000 shares are subject to options exercisable within 60 days. 2 With respect to the shares of the Company, 387,215 are held by a trust over which Mr. Symons exercises limited direction, and 180,850 are owned directly. 3 With respect to shares of SIG, 35,500 shares are owned directly and 210,000 shares may be purchased pursuant to stock options that are exercisable within 60 days. With respect to shares of the Company, 251,455 shares are owned directly and 60,000 shares are subject to options that are exercisable within 60 days. 4 With respect to shares of SIG, 27,500 shares may be purchased pursuant to stock options exercisable within 60 days. With respect to shares of the Company, 15,000 shares may be purchased pursuant to stock options exercisable within 60 days. 5 With respect to shares of SIG, 47,000 shares may be purchased pursuant to stock options that are exercisable within 60 days. With respect to shares of the Company, 15,000 shares may be purchased pursuant to stock options exercisable within 60 days. 6 With respect to shares of the Company, 15,000 shares may be purchased pursuant to stock options that are exercisable within 60 days. 7 With respect to shares of SIG, 28,000 shares may be purchased pursuant to stock options exercisable within 60 days, and with respect to shares of the Company, 15,000 shares may be purchased pursuant to stock options exercisable within 60 days.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 1997, Symons International Group, Inc. a subsidiary of the Corporation ("SIG"), guaranteed a personal loan by an unrelated third party lender to Douglas H. Symons in the amount of $250,000. During 2002, the loan was renewed by the unrelated third party lender, and SIG did not renew its guarantee. As of December 31, 2002, Symons International Group Ltd., a private company ("SIGL"), was indebted to the Corporation in the amount of approximately (U.S.) $1,743,000. This indebtedness does not bear interest. During 2002, the Corporation paid SIGL $400,000 for consulting services which include reinsurance, investment banking and other miscellaneous matters. G. Gordon Symons, a director of the Corporation, is the majority shareholder of SIGL (which is an insider of the Corporation), and Alan G. Symons (who is an insider of the Corporation) and Douglas H. Symons (who is a director and officer of the Corporation) own a minority interest in SIGL. As of December 31, 2002, Symons Underwriting Managers Ltd., a private company ("SUML"), was indebted to the Corporation in the amount of approximately (Cdn.) $3,340,000. This indebtedness does not bear interest and is secured by the pledge of 100,000 shares of the Corporation. SIGL is the sole shareholder of SUML. SIG paid $12,967 to Stargate Solutions Group, Inc. ("Stargate") in 2002 for consulting and other services related to the Corporation's non-standard automobile operating system. Stargate is owned by Kirk Symons, son of G. Gordon Symons and brother of Alan G. Symons and Douglas H. Symons. Superior Insurance Group, Inc., a wholly owned subsidiary of the Corporation, owns a less than 1% limited partnership interest in Monument Capital Partners I. The amount of the investment was $100,000. Larry S. Wechter, a director of SIG until August 12, 2002, is Managing Director and Chief Executive Officer of Monument Advisors, Inc. and Alan G. Symons is a director of Monument Advisors, Inc. Monument Advisors, Inc. is the general partner of Monument Capital Partners I. The Corporation leases office space in Toronto, Canada from Tritech Financial Systems Inc. ("Tritech"). Tritech is owned by Robert T. Symons, son of G. Gordon Symons and brother of Alan G. Symons and Douglas H. Symons. The total amount paid during 2002 was $34,000. In 1999, Granite Reinsurance Company Ltd. issued a performance bond in favor of Tritech in the amount of $328,000. In August 2000 the creditor called the bond. The bond is secured by a guarantee from Tritech, a personal guarantee from Robert T. Symons and a pledge of 50,000 shares of the Corporation's common stock owned by Robert T. Symons. Tritech is paying interest on the outstanding balance at an annual rate of 7.5%. During 2002, Tritech paid interest to the Corporation on the bond of $24,600. During 2002, SIG paid David G. Symons approximately $7,076 for legal services. David G. Symons is the son of Alan G. Symons. INDEBTEDNESS OF OFFICERS AND DIRECTORS OF THE CORPORATION The following directors and officers of the Corporation and their associates were indebted to the Corporation, or its subsidiaries, in amounts exceeding (Cdn.) $25,000 during 2002. All amounts listed in this section are denominated in U.S. Dollars based upon the March 28, 2003 inter-bank market rate for currency exchange. The approximate aggregate indebtedness of all officers, directors, employees and former officers, directors and employees of the Corporation or any of its subsidiaries entered into primarily in connection with a purchase of securities of the Corporation or its subsidiary as of April 21, 2003 was $1,746,264. The aggregate indebtedness of all other indebtedness of all officers, directors, employees and former officers and directors and employees of the Corporation or any of its subsidiaries as of April 21, 2003 was $1,680,887.
LARGEST LOAN BALANCE BALANCE AS OF NAME AND PRINCIPAL POSITION DATE OF LOAN DURING 2002 APRIL 21, 2003 --------------------- -------------- --------------- June 27, 1986 $115,8071 $0 June 30, 1986 $156,4951 $129,112 G. Gordon Symons Prior to 1997 $30,0242 $30,752 Chairman of the Board July 12, 2001 $832,7513 $29,733 - ---------------------------- --------------------- -------------- --------------- June 30, 1986 $6,6174 $0 February 25, 1988 $27,3094 $27,309 March 19, 1998 $15,2935 $15,293 October 28, 1999 $119,5006 $121,125 Alan G. Symons November 17, 2000 $1,145,8207 $1,149,398 CEO and President (14) July 26, 2002 $130,7947 $131,203 --------------------- -------------- --------------- Prior to 1997 $66,25613 $66,256 June 30, 1986 $9,79813 $0 February 24, 1988 $2,2198 $2,219 September 29, 1999 $119,5009 $121,125 October 20, 1999 $418,25010 $423,938 June 28, 2000 $80,00013 $80,000 Douglas H. Symons (15) November 17, 2000 $675,9347 $678,042 CEO, President and March 23, 2001 $103,37211 $103,630 Secretary June 4, 2001 $50,00013 $50,000 October 15, 2001 $202,72112 $180,317 July 26, 2002 $76,6547 $77,898 - ---------------------------- --------------------- -------------- 1 The loans by the Corporation to G. Gordon Symons in 1986 were made to facilitate the purchase of common shares of the Corporation. Such loans are collateralized by pledges of the common shares of the Corporation acquired, are payable on demand and are interest free. 2 The loan by the Corporation prior to 1997 was made to an entity controlled by G. Gordon Symons, is unsecured and bears no interest. 3 The loan by Granite Reinsurance Company Ltd. to G. Gordon Symons in the principal amount of $800,000 was made during 2001 at 6% interest. The principal amount was repaid on April 1, 2002. The balance remaining represents interest on the loan. 4 The loans by the Corporation to Alan G. Symons in 1986 and 1988 were made to facilitate the purchase of common shares of the Corporation, are collateralized by a pledge of the common shares of the Corporation acquired, are payable on demand and are interest free. 5 The loan by SIG to Alan G. Symons on March 19, 1998 was made to satisfy obligations to third parties. Such loan was inadvertently referred to in the Corporation's 2002 Proxy Statement as a loan by the Corporation. Such loan was secured by a pledge of his options to purchase shares in Superior Insurance Group Management, Inc. (formerly, GGS Management Holdings, Inc.), a subsidiary of the Corporation, and bore interest at the rate of 5.85% per year. The principal of the loan was repaid during 1999. The balance remaining represents interest on the loan. 6 The loan by SIG to Alan G. Symons on October 28, 1999 was made to pay third party indebtedness secured by common shares of the Corporation and SIG. Such loan was inadvertently referred to in the Corporation's 2002 Proxy Statement as a loan by the Corporation. Such loan is unsecured and bears interest at the rate of 6.5% per year and is payable on demand. 7 In April 1999, the Corporation guaranteed loans from an unrelated third party to Alan G. Symons and Douglas H. Symons in the approximate amounts of $1,552,000 and $945,000, respectively. Such guarantee was in place until November 17, 2000 at which time the Corporation made loans to Alan G. Symons and Douglas H. Symons in the amounts of $630,392 and $369,608 respectively. On April 19, 2001, the Corporation made additional loans to Alan G. Symons and Douglas H. Symons in the amounts of $470,250 and $279,750, respectively, and Alan G. Symons and Douglas H. Symons executed amended promissory notes in the aggregate amount of $1,100,642 and $649,358, respectively. These notes bear interest at variable rate based upon the Royal Bank of Canada's rate paid on deposits. At December 31, 2002, the total accrued interest on the amended promissory notes of Alan G. Symons and Douglas H. Symons was $45,178 and $26,576, respectively. The proceeds of all of such loans were used to reduce the principal outstanding on the third party loans. The Corporation's guarantee to the unrelated third party is with regard to the remaining balance of the third party loans ($358,189 and $212,748 to Alan G. Symons and Douglas H. Symons, respectively) secured by a pledge of certain shares of SIG owned by the Corporation. In turn, Alan G. Symons and Douglas H. Symons have executed guarantees in favor of the Corporation which are triggered in the event that the Corporation is required to perform its guarantee to such unrelated third party. The guarantees by Alan G. Symons and Douglas H. Symons are secured by all shares of SIG and the Corporation held respectively by Alan G. Symons and Douglas H. Symons. On July 26, 2002 additional loans were made to Alan G. Symons and Douglas H. Symons in the amounts of $125,480 and $74,520, respectively. These notes bear interest at variable rate based upon the Royal Bank of Canada's rate paid on deposits. At December 31, 2002, accrued interest on these loans was $5,314 and $3,134, respectively. 8 The loans by the Corporation to Douglas H. Symons in 1988 were made to facilitate the purchase of common shares of the Corporation. Such loans are collateralized by pledges of the common shares of the Corporation acquired, are payable on demand and are interest free. 9 The loan by SIG to Douglas H. Symons on September 29, 1999 was made to satisfy indebtedness to third parties. Such loan is unsecured, bears interest at the rate of 6.5% per year and is payable on demand. 10 The loan by the Corporation to Douglas H. Symons on October 20, 1999 was made to satisfy indebtedness to third parties. Such loan is unsecured, bears interest at the rate of 6.5% per year and is payable on demand. 11 The loan by the Corporation was an advance and bears interest at the Corporation's short term funds rate. 12 The loan by Symons International Group (Florida), Inc., a subsidiary of the Corporation, on October 15, 2001, was an advance against bonus for 2002. Such loan is unsecured, bears interest at the rate of 6% per year or the applicable federal rate, whichever is higher and was due no later than March 31, 2003. Douglas H. Symons was unable to repay the loan upon maturity and has agreed to enter into a repayment plan with the Corporation. 13 The loan by SIG represents an advance and does not bear interest. 14 Alan G. Symons retired on May 31, 2002. 15 Douglas H. Symons became CEO and President of the Corporation on May 31, 2002.
PART IV ITEM 14 - CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The Company and SIG maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the specified time periods. Within the 90 days prior to the date of filing this Annual Report on Form 10-K, the Company and SIG carried out evaluations, under the supervision and with the participation of the Company's and SIG's management, including the Company's CEO, the Company's CFO and SIG's CFO, of the effectiveness of the design and operation of the Company's and SIG's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company's CEO, the Company's CFO and SIG's CFO concluded that the Company's and SIG's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company and SIG (including their consolidated subsidiaries) required to be included in the Company's periodic SEC filings. CHANGES IN INTERNAL CONTROLS There have been no significant changes in the Company's or SIG's internal controls, or in other factors that could significantly affect internal controls, subsequent to the date of the evaluation described above ("EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES"). No corrective actions were required with regard to significant deficiencies and material weaknesses. ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The documents listed below are filed as a part of this Report, except as otherwise indicated: 1. Financial Statements. The following consolidated financial statements found on the pages of the 2002 Annual Report are incorporated into Item 8 of this Report by reference: Location in Description of Financial Statement Item 2002 Annual Report - ------------------------------------------- -------------------- Reports of Independent Accountants Page 42 Consolidated Balance Sheets, December 31, 2002 and 2001 Page 15 Consolidated Statements of Operations, Years Ended December 31, 2002, 2001 and 2000 Page 16 Consolidated Statements of Changes In Stockholders' Equity (Deficit), Years Ended December 31, 2002, 2001 and 2000 Page 17 Consolidated Statements of Cash Flows, Years Ended December 31, 2002, 2001 and 2000 Page 18 Notes to Consolidated Financial Statements, Years Ended December 31, 2002,2001 and 2000 Pages 19 - 40 2. Financial Statement Schedules. The following financial statement schedules are included beginning on page 27: Reports of Independent Accountants Schedule II - Condensed Financial Information of Registrant Schedule IV - Reinsurance Schedule V - Valuation and Qualifying Accounts Schedule VI - Supplemental Information Concerning Property - Casualty Insurance Operations 3. Exhibits. The Exhibits set forth on the Index to Exhibits are incorporated herein by reference. 4. Reports on Form 8-K: No reports on Form 8-K were filed during the fourth quarter of 2002. Board of Directors and Stockholders of Goran Capital Inc. and Subsidiaries The audit referred to in our report dated May 9, 2003, relating to the consolidated financial statements of Goran Capital, Inc. and subsidiaries, which is incorporated in Item 8 of this Form 10-K by reference to the annual report to shareholders for the year ended December 31, 2002 included the audit of the financial statement schedules listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based upon our audits. In our opinion, such financial statement schedules present fairly, in all material respects, the information set forth therein. /s/ BDO SEIDMAN, LLP BDO SEIDMAN, LLP Grand Rapids, Michigan May 9, 2003 GORAN CAPITAL INC.- CONSOLIDATED SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES. The information required by this schedule is included in note 3 of Notes to Consolidated Financial Statement.
GORAN CAPITAL INC. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT As Of December 31, 2002 and 2001 (in thousands, except share data) 2002 2001 --------- --------- Assets: Cash and Short-term Investments. . . . . . . . . $ 178 $ 2,618 Loans to Related Parties . . . . . . . . . . . . - 219 Capital and Other Assets . . . . . . . . . . . . 29 531 Investment in Subsidiaries, at Cost. . . . . . . 10,437 10,639 --------- --------- Total Assets . . . . . . . . . . . . . . . . . . 10,644 14,007 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Loans from Related Parties and Other Liabilities $ 8,325 $ 10,800 --------- --------- Total Liabilities. . . . . . . . . . . . . . . . 8,325 10,800 --------- --------- Stockholders' Equity: Common Shares. . . . . . . . . . . . . . . . . . 18,561 18,502 Cumulative Translation Adjustment. . . . . . . . 545 570 Deficit. . . . . . . . . . . . . . . . . . . . . (16,787) (15,865) --------- --------- Total Stockholders' Equity . . . . . . . . . . . 2,319 3,207 --------- --------- Total Liabilities and Stockholders' Equity . . . $ 10,644 $ 14,007 ========= =========
GORAN CAPITAL INC. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF EARNINGS (LOSS) AND ACCUMULATED DEFICIT For The Years Ended December 31, 2002, 2001 and 2000 (in thousands) 2002 2001 2000 --------- --------- --------- Revenues Management Fees . . . . . . . . . . . . . . . . . . . . $ -- $ -- $ -- Net Investment Income . . . . . . . . . . . . . . . . . 29 173 5 Non-Compete Fee Income. . . . . . . . . . . . . . . . . 1,500 875 -- --------- --------- --------- Total Revenues. . . . . . . . . . . . . . . . . . . . . 1,529 1,048 5 --------- --------- --------- Expenses: General, Administrative, Acquisition Expenses and Taxes 2,451 6,235 1,257 --------- --------- --------- Total Expenses. . . . . . . . . . . . . . . . . . . . . 2,451 6,235 1,257 --------- --------- --------- Net Loss. . . . . . . . . . . . . . . . . . . . . . . . (922) (5,187) (1,252) Deficit, Beginning of Year. . . . . . . . . . . . . . . (15,865) (10,678) (9,426) --------- --------- --------- Deficit End of Year . . . . . . . . . . . . . . . . . . $(16,787) $(15,865) $(10,678) ========= ========= =========
GORAN CAPITAL INC. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT For The Years Ended December 31, 2002, 2001 and 2000 (in thousands) 2002 2001 2000 -------- -------- -------- Cash Flows from Operations Net Loss . . . . . . . . . . . . . . . . . $ (922) $(5,187) $(1,252) Adjustments: Foreign Exchange Losses. . . . . . . . . . (118) (165) -- Non-Compete Agreement Receipts . . . . . . (1,500) 4,622 -- Items Not Involving Cash: Decrease (Increase) in Accounts Receivable (580) 3,987 (975) Decrease (Increase) in Other Assets. 3 (449) (485) Increase (Decrease) in Accounts Payable. . (240) 1,165 2,970 Translation Adjustment . . . . . . . . . . (25) (503) (89) -------- -------- -------- Net Cash Provided (Used) by Operations . . (3,382) 3,470 169 -------- -------- -------- Cash Flows From Financing Activities: Purchase of Investments. . . . . . . . . . (1,130) (218) (185) Sale of Investments. . . . . . . . . . . . 2,072 (831) -- -------- -------- -------- Net Cash Provided by Financing Activities. 942 (1,049) (185) -------- -------- -------- Net Increase (Decrease) in Cash. . . . . . (2,440) 2,421 (16) Cash at Beginning of Year. . . . . . . . . 2,618 197 213 -------- -------- -------- Cash at End of Year. . . . . . . . . . . . 178 2,618 $ 197 ======== ======== ======== Cash Resources are Comprised of: Cash . . . . . . . . . . . . . . . . . . . $ 171 $ 34 $ 56 Short-Term Investments . . . . . . . . . . 7 2,584 141 -------- -------- -------- $ 178 $ 2,618 $ 197 ======== ======== ========
Basis of Presentation The condensed financial information should be read in conjunction with the consolidated financial statements of Goran Capital Inc. The condensed financial information includes the accounts and activities of the parent company which acts as the holding company for the insurance subsidiaries.
GORAN CAPITAL INC.- CONSOLIDATED SCHEDULE IV - REINSURANCE For The Years Ended December 31, 2002, 2001 and 1999 (in thousands) Property and Liability Insurance 2002 2001 1999 --------- ---------- --------- Direct Amount . . . . . . . . . . . $107,775 $ 161,092 $168,626 --------- ---------- --------- Assumed From Other Companies. . . . 3,619 32,094 13,473 --------- ---------- --------- Ceded to Other Companies. . . . . . (77,403) (106,324) (78,637) --------- ---------- --------- Net Amounts . . . . . . . . . . . . $ 33,991 $ 86,862 $103,462 ========= ========== ========= Percentage of Amount Assumed to Net 10.6% 36.9% 13.0% --------- ---------- ---------
GORAN CAPITAL INC.- CONSOLIDATED SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS For The Years Ended December 31, 1999, 2001 and 2002 (in thousands) 2002 2001 1999 Allowance for Allowance for Allowance for Doubtful Accounts Doubtful Accounts Doubtful Accounts ------------------ ------------------ ------------------ Additions: Balance at Beginning of Period $1,526 $1,940 $1,479 Charged to Costs and Expenses(1) 1,448 6,122 9,623 Charged to Other Accounts - - - Deductions from Reserves 2,730 6,536 9,162 ------------------ ------------------ ------------------ Balance at End of Period $244 $1,526 $1,940 ================== ================== ================== (1) The Company continually monitors the adequacy of its allowance for doubtful accounts and believes the balance of such allowance at December 31, 2002, 2001 and 1999 was adequate.
GORAN CAPITAL INC.- CONSOLIDATED SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY - CASUALTY INSURANCE OPERATIONS For The Years Ended December 31, 2002, 2001 and 1999 (in thousands) CONSOLIDATED PROPERTY - CASUALTY ENTITIES Reserves For Unpaid Amorti- Claims zation of Deferred And Deferred Paid Claims Policy Claim Net Claims and Policy and Claim Acquisi- Adjust- Invest Adjustment Expenses Acqui- Adjust- tion ment Unearned Earned ment Incurred sition Ment Premium Year Costs Expense Premiums Premiums Income Related to: Costs Expense Written - ---- --------------------------------------------------------------------------------------------------------------- Current Prior Years Years ------- ------ 2000 6,454 113,149 62,386 145,532 12,171 132,781 (19,013) 37,453 174,412 182,099 2001 763 84,876 59,216 108,197 6,998 94,556 660 33,747 132,599 193,186 2002 - 72,809 35,797 41,037 4,388 38,497 13,016 19,624 57,893 111,394 Note: All amounts in the above table are net of the effects of reinsurance and related commission income, except for net investment income regarding which reinsurance is not applicable, premiums written, reserves for unpaid claims and claim adjustment expense and unearned premiums which are stated on a gross basis
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. GORAN CAPITAL INC. ____________________________ June 3, 2003 By: /s/ Douglas H. Symons Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on June 3, 2003, on behalf of the Registrant in the capacities indicated: (1) Principal Executive Officer: ____________________ /s/ Douglas H. Symons Chief Executive Officer (2) Principal Financial Officer: ____________________ /s/ John G. Pendl Chief Financial Officer, Principal Accounting Officer (3) The Board of Directors: ____________________ ____________________ ____________________ /s/ G. Gordon Symons /s/ J. Ross Schofield /s/ John K. McKeating Chairman of the Board Director Director ____________________ ____________________ /s/ Ron L. Foxcroft /s/ David B. Shapira Director Director ____________________ __________________ /s/ Douglas H. Symons /s/ Robert C. Whiting Director Director GORAN CAPITAL INC. CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION I, Douglas H. Symons, certify that: 1. I have reviewed this annual report on Form 10-K of Goran Capital Inc. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report. 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report. 4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company, and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. The Company's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: June 3, 2003 By: /s/ Douglas H. Symons -------------- ------------------------ Douglas H. Symons Chief Executive Officer GORAN CAPITAL INC. CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION I, John G. Pendl, certify that: 1. I have reviewed this annual report on Form 10-K of Goran Capital Inc. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report. 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report. 4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company, and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. The Company's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: June 3, 2003 By: /s/ John G. Pendl -------------- -------------------- John G. Pendl Chief Financial Officer EX-10.13(16) 3 doc2.txt EXHIBIT 10.13 (16) ADDENDUM NO. 2 TO AGGREGATE LOSS RATIO REINSURANCE AGREEMENT BETWEEN NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA (HEREINAFTER CALLED THE "RETROCEDENT") AND GRANITE REINSURANCE COMPANY, LTD. (HEREINAFTER CALLED THE "RETROCESSIONAIRE") It is understood and agreed that Addendum Number 3 to the Underlying Agreements, copies attached hereto, are accepted as part of the Underlying Agreements. It is understood and agreed that effective January 1st, 2002 the following articles are amended to read as follows: ARTICLE IV COVERAGE The Retrocessionaire shall be liable separately for each Reinsurance Agreement, for losses incurred (including all Loss Adjustment Expenses) in excess of a loss ratio of: (1) 79% for business effective prior to 2002, however excluding business in-force on December 31st, 2001; or (2) 78.675% for business effective in 2002. All terms and conditions of the Underlying Agreements, copies attached hereto, shall apply. ARTICLE VI PREMIUMS For business effective as described in ARTICLE IV (1): The Retrocedent shall pay an initial deposit premium of $10,000 within 15 days of receipt of the first cash premium payment received on any of the Underlying Agreements. The final premium shall be 12.5% of the premium cash payments received. The difference between that premium and the deposit premium shall be paid to the Retrocessionaire. In addition the Retrocedent shall pay 100% of the payment received upon the finalization of the liabilities in accordance with the Underlying Agreements. The aformentioned payments shall be made within 30 days of the finalization of all liabilities on the Underlying Agreements. However, no payment shall be made after the deposit premium unless all conditions of this agreement have been complied with. For business effective as described in ARTICLE IV (2): The Retrocedent shall pay an initial deposit premium of $10,000 within 30 days of receipt of the first cash premium payment received on any of the Underlying Agreements. The final premium shall be .375% of the premiums reported on the account statement(s) of the Underlying Agreement. Upon the finalization of all liabilities on the Underlying Agreement the Retrocedent shall pay the Retrocessionaire the difference between the final premium and the deposit premium, as well as, 100% of the Profit Account Balance. However, no payment shall be made unless all conditions of this agreement have been complied with. ARTICLE VII DEFINITIONS Loss Ratio shall mean losses paid and outstanding, including IBNR and allocated loss adjustment expenses, divided by earned premium calculated separately; (1) For business effective as described in ARTICLE IV (1), the combined sum of Superior Insurance Company from January 1st, 2001 to the date of calculation and Pafco General Insurance Company from January 1st, 2000 to the date of calculation. (2) For business as described in ARTICLE IV (2), from January 1st, 2002 to the date of calculation. Profit Account Balance, shall mean for business effective as described in ARTICLE IV (2): Cash payments received by the Retrocedent on the Underlying Agreements, minus 3.375% of the total premiums reported on the Underlying Agreements, minus Cash payments made on the Underlying Agreements. ARTICLE VIII REPORTS AND ACCOUNTING The Retrocedent shall forward to the Retrocessionaire a copy of all reports received in accordance with the Underlying Agreements within 30 days of their receipt. In the event the paid loss (including all loss adjustment expenses) are in excess of (1) 79% on business as described in ARTICLE IV (1), or (2) 78.625% on business as described in ARTICLE IV (2), of the earned premium on any individual agreement, the Retrocessionaire shall pay such excess within 30 days of receipt of the accounts statement, however, not in excess of the limit of liability. Any amounts otherwise due shall be reduced by the amount of Investment Allowance in the Underlying Agreement that would have been due but was not paid. IN WITNESS WHEREOF: the parties hereto have caused this Agreement to be executed by their Authorized representatives. In:________________________________this_________day of______________________2002 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA By:_______________________________ Title:______________________________ And in_____________________________this_________day of _____________________2002 GRANITE REINSURANCE COMPANY, LTD. By:_______________________________ Title:______________________________ EX-10.13(17) 4 doc3.txt Exhibit 10.13 (17) ADDENDUM NO. 2 to AGGREGATE LOSS RATIO REINSURANCE AGREEMENT between NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA (hereinafter called the "Retrocedent") and GRANITE REINSURANCE COMPANY, LTD. (hereinafter called the "Retrocessionaire") It is understood and agreed that addendum numbers 4 and 5 to the Underlying Agreements, copies attached hereto, are accepted as part of the Underlying Agreements. It is understood and agreed that effective January 1st, 2002 the following articles are amended to read as follows: ARTICLE IV COVERAGE The Retrocessionaire shall be liable separately for each Reinsurance Agreement, for losses incurred (including all Loss Adjustment Expenses) in excess of a loss ratio of (1) 79% for business effective prior to 2002, or (2) 78.625% for business effective in 2002. Exposures that have been commuted shall not be included in determining the loss ratio if the loss ratios are less than 79% and 78.625% respectively. All terms and conditions of the Underlying Agreements, copies attached hereto, shall apply. ARTICLE VI PREMIUMS For business effective prior to 2002: The Retrocedent shall pay an initial deposit premium of $10,000 within 15 days of receipt of the first cash premium payment received on any of the Underlying Agreements. The final premium shall be 12.5% of the premium cash payments received. The difference between that premium and the deposit premium shall be paid to the Retrocessionaire. In addition the Retrocedent shall pay 100% of the payment received upon the finalization of the liabilities in accordance with the Underlying Agreements. The aforementioned payments shall be made within 30 days of the finalization of all liabilities on the Underlying Agreements and this Agreement. However, no payment shall be made after the deposit premium unless all conditions of this agreement have been complied with. For business effective 2002: The final premium shall be .375% of the premiums reported on the account statement(s) of the Underlying Agreements. In addition the Retrocedent shall pay 100% of the Profit Account Balance. The aforementioned payments shall be made within 30 days of finalization of all liabilities on the Underlying Agreements and this Agreement. However no payment shall be made after the deposit premium unless all conditions of this Agreement have been complied with. ARTICLE VII DEFINITIONS Loss Ratio shall mean losses paid and outstanding, including IBNR and allocated loss adjustment expenses, divided by earned premium calculated separately for business effective prior to 2002 and business effective in 2002 for each Underlying Agreement. Exposures that are commuted are not to be included in determining loss ratio if the results are less than 79% and 78.625% respectively. For business effective in 2002: Profit Account Balance shall mean: Cash payments received by the Retrocedent on the Underlying Agreements, minus 3.375% of the total premiums reported on the Underlying Agreements, minus Cash payments made on the Underlying Agreements ARTICLE VIII REPORTS AND ACOCUNTING The Retrocedent shall forward to the Retrocessionaire a copy of all reports received in accordance with the Underlying Agreements within 30 days of their receipt. In the event the paid loss (including all loss adjustment expenses) are in excess of (1) 79% on business effective prior to 2002, or (2) 78.625% on business effective in 2002, of the earned premium on any individual agreement, the Retrocessionaire shall pay such excess within 30 days of receipt of the account statement, however, not in excess of the limit of liability. Furthermore, no payment shall be made in excess of an amount that would result in a profit return to the Retrocedent in excess of 3.375% of the premium ceded of the Underlying Agreements. Any amounts otherwise due shall be reduced by the amount of Investment Allowance in the Underlying Agreement that would have been due but was not paid. IN WITNESS WHEREOF: the parties hereto have caused this Agreement to be executed by their Authorized representatives. In:_________________________________this_________day of__________________2002 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA By:_________________________________Title:______________________________ And in:_____________________________this__________day of_________________2002 GRANITE REINSURANCE COMPANY, LTD. By:_________________________________Title:______________________________ EX-10.13(18) 5 doc4.txt EXHIBIT 10.13 (18) ADDENDUM NO. 3 TO QUOTA SHARE REINSURANCE AGREEMENT EFFECTIVE JANUARY 1ST 2000 BETWEEN SUPERIOR INSURANCE COMPANY AND ITS WHOLLY-OWNED INSURANCE SUBSIDARIES (HEREAFTER CALLED THE "COMPANY" AND NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. (HEREAFTER CALLED THE "REINSURER") It is understood and agreed that effective January 1st, 2002 the following articles are amended to read as follows: ARTICLE II TERM AND TERMINATION The agreement commences at 12:01 a.m. Eastern Standard Time, January 1, 2000 and shall remain in force until 11:59 p.m. Eastern Standard time, December 31, 2002. Either party may terminate effective on the first day of any calendar quarter with 60 days advance written notice. The Reinsurer shall remain liable for loss under reinsured policies effective prior to the termination date. ARTICLE IV QUOTA SHARE PARTICIPATION The aggregate quota share cession shall be at the option of the Company and subject to a maximum of 70%. However, the maximum cession will be limited to $80,000,000 of new written premium (ie.not including in-force cession from December 31st, 2001) for the calendar year 2002. In the event this produces more than $80,000,000 for the calendar year, the dollar amount of cessions shall be reduced to $80,000,000 plus the cession of in-force business from December 31st, 2001. The average quota share percent applicable for the Company shall be the ratio of the adjusted dollar cession to the gross subject written premium for the Company for that year. Each quarter shall be adjusted by an equal pro-rata percent to produce the dollar cession applicable. This limit can be increased by mutual agreement between the Reinsurer and the Company. The Company shall notify the Reinsurer prior to the last day of the calendar quarter of the quota share percent for that quarter. That percent shall also apply to the in-force business at the beginning of the quarter. It is agreed that the cession for any one quarter, including the change in in-force, shall not exceed 35% of the total cession for the calendar year. In the event the declared percent cession for a calendar quarter produces premiums in excess of 35% of the premium ceded for the calendar year the cessions for that quarter shall be adjusted to the dollar amount that would equal 35% of the premium ceded for the year. The Reinsurer's liability for aggregate losses, including allocated loss adjustment expenses (and unallocated loss adjustment expenses where applicable under REPORTS AND ACOCUNTING), shall be limited to 97% of earned premium ceded for all business from January 1st, 2002 to the calculation date. ARTICLE VI PREMIUM AND COMMISSION For business effective prior to 2002, however, excluding business in-force on December 31st, 2001: The Company will pay the Reinsurer a premium equal to the pro rata share of premium applicable on all policies ceded and the Reinsurer shall allow the company a minimum and provisional ceding commission of 18% on such premium. The ceding commission slides 1 for 1 for each 1.0% decrease in the Loss Ratio below 79% up to a maximum ceding commission of 31% at a 66% loss ratio. This calculation shall be from January 1st, 2001 to date for all business ceded effective in all calendar quarters including the in-force business from December 31st, 2000. For business in-force on December 31st, 2001 and with effective dates in 2002: The Company will pay the Reinsurer a premium equal to the pro rata share of premium applicable on all policies ceded. This would be the sum of new written premiums in the quarter plus or minus the change in unearned premium ceded at the beginning of the quarter as the result of a change in the percent ceded. The Reinsurer shall allow the company a minimum and provisional ceding commission of 18% on such premium. The ceding commission slides 1 for 1 for each 1.0% decrease in the Loss Ratio below 78.625% up to a maximum ceding commission of 31% at a 65.625 loss ratio. This calculation shall be from January 1st, 2002 to date of calculation. The first payment, if any, shall be made within 75 days of March 31st 2003. Subsequent payments due either party shall be made within 75 days of March 31st of all years subsequent to 2003 until all liabilities are finalized. ARTICLE VIII DEFINITIONS Loss Ratio shall mean losses paid and outstanding, including IBNR and allocated loss adjustment expenses with dates of loss in the period being calculated, divided by earned premium for the period being calculated. Premium shall mean the premium charged the insured, net of return premium, however, uncollectable premium shall not be deemed a return premium. Allocated loss adjustment expenses shall be as defined under statutory accounting practices. Unallocated loss adjustment expenses shall be as defined under statutory accounting practices. For business effective prior to 2002, however, excluding business in-force on December 31st, 2001: Funds withheld balance shall mean: Previous Funds Withheld Balance, plus 97% of ceded written premium, minus ceding commission, minus ceded paid losses (including allocated loss adjustment expenses), minus ceded paid unallocated loss adjustment expenses, if applicable. For business in-force on December 31st, 2001 and with effective dates in 2002: Loss fund shall mean paid losses from the end of the prior quarter to the settlement date. If that amount is not available for a partial month it shall be deemed to be pro-rata of the previous month. Average Daily Cash Balance shall mean Cash payments received by the Reinsurer, minus Cash payments paid by the Reinsurer, minus 3.375% of the total premiums reported. ARTICLE IX REPORTS AND ACCOUNTING For business effective prior to 2002, however, excluding business in-force on December 31st, 2001: Within 45 days after the end of each calendar quarter, the company shall furnish an account statement to the Reinsurer, for their share on the Business Covered including the following: 1. Written premiums-credit 2. Commission-debit 3. Net losses (including allocated loss adjustment expenses) paid by the company - debit 4. Reserve for outstanding losses including incurred but not reported (including allocated loss adjustment expenses). 5. Unearned Premium In the event the loss ratio is in excess of 85%, the Reinsurer shall be liable for unallocated loss adjustment expenses equal to 1% of earned premium for each Loss Ratio point in excess of 85%, however, not in excess of 6% of earned premium. When applicable, the coverage for unallocated loss adjustment expenses shall be included in the maximum limit of 97% of earned premium ceded referred to in QUOTA SHARE PARTICIPATION AND LIMIT. The forgoing shall be a combined account for all business effective in all calendar quarters plus the in-force business. The Company shall report this information separately for all business effective in each calendar quarter plus a report for the in-force business. The Company will pay the Reinsurer 3% of the premium with the balance, if any, being held in a Funds Withheld Balance for subsequent payment of losses, commission adjustments and return premiums. Amounts due the Company shall be withdrawn from the Funds Withheld Balance and if the Funds Withheld Balance is negative, the Reinsurer shall pay the amount due. For all business in-force on December 31st, 2001 and effective in 2002: Within 75 days after the end of each calendar quarter, the company shall furnish an account statement to the Reinsurer, for their share on the Business Covered including the following: 1. New written premiums-credit Change in unearned premium cession - credit or debit (First quarter only: total unearned premium on December 31st, 2001.) Total written premium 2. Commission-debit 3. Net losses (including allocated loss adjustment expenses) paid by the Company-debit 4. Change in Loss Fund-credit or debit 5. Reserve for outstanding losses including incurred but not reported (including allocated loss adjustment expenses). 6. Unearned Premium In the event the Loss Ratio is in excess of 85%, the Reinsurer shall be liable for unallocated loss adjustment expenses equal to 1% of earned premium for each Loss Ratio point in excess of 85%, however, not in excess of 6% of earned premium. When applicable, the coverage for unallocated loss adjustment expenses shall be included in the maximum limit of 97% of earned premium ceded referred to in QUOTA SHARE PARTICIPATION AND LIMIT. The forgoing shall be a combined account for all business ceded in all calendar quarters. The Company shall provide a separate report for paid and outstanding losses for each accident quarter (ie. all losses with dates of loss in a calendar quarter). The Company shall pay any credit balance with the account statement. The Reinsurer shall pay any debit balance within 30 days of receipt of the account statement. It is understood and agreed that effective January 1st, 2002 the following article is added to this agreement. ARTICLE VI-A INVESTMENT ALLOWANCE For business in-force on December 31st 2001 and with effective dates in 2002: The Reinsurer will calculate notional investment income annually and pay the Company within 75 days of March 31 of the subsequent calendar year. The investment income shall equal the product of the average of the 1 year US Treasury bill rate times the Average Daily Cash Balance for the calendar year. The average US Treasury bill rate shall be the average of the rate on the last business day of each calendar quarter for the year applicable. Notwithstanding the foregoing no payment is due in the event the loss ratio is in excess of 78.625%. IN WITNESS WHEREOF: the parties hereto have caused this Agreement to be executed by their authorized representative: In:________________________________this_______day of_________________2002 SUPERIOR INSURANCE COMPANY AND ITS WHOLLY-OWNED INSURANCE SUBSIDIARIES By:________________________________Title:____________________________ And in:_____________________________this______day of___________________2002 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. By:________________________________Title:____________________________ EX-10.13(19) 6 doc5.txt EXHIBIT 10.13 (19) ADDENDUM NO. 3 TO QUOTA SHARE REINSURANCE AGREEMENT EFFECTIVE JANUARY 1ST 2000 BETWEEN PAFCO GENERAL INSURANCE COMPANY (HEREAFTER CALLED THE "COMPANY") AND NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. (HEREAFTER CALLED THE "REINSURER") It is understood and agreed that effective January 1st, 2002 the following articles are amended to read as follows: ARTICLE II TERM AND TERMINATION The agreement commences at 12:01 a.m. Eastern Standard Time, January 1, 2000 and shall remain in force until 11:59 p.m. Eastern Standard time, December 31, 2002. Either party may terminate effective on the first day of any calendar quarter with 60 days advance written notice. The Reinsurer shall remain liable for loss under reinsured policies effective prior to the termination date. ARTICLE IV QUOTA SHARE PARTICIPATION The aggregate quota share cession shall be at the option of the Company and subject to a maximum of 75%. However, the maximum cession will be limited to $20,000,000 of new written premium (ie.not including in-force cession from December 31st, 2001) for the calendar year 2002. In the event this produces more than $20,000,000 for the calendar year, the dollar amount of cessions shall be reduced to $20,000,000 plus the cession of in-force business from December 31st, 2001. The average quota share percent applicable for the Company shall be the ratio of the adjusted dollar cession to the gross subject written premium for the Company for that year. Each quarter shall be adjusted by an equal pro-rata percent to produce the dollar cession applicable. This limit can be increased by mutual agreement between the Reinsurer and the Company. The Company shall notify the Reinsurer prior to the last day of the calendar quarter of the quota share percent for that quarter. That percent shall also apply to the in-force business at the beginning of the quarter. It is agreed that the cession for any one quarter, including the change in in-force, shall not exceed 35% of the total cession for the calendar year. In the event the declared percent cession for a calendar quarter produces premiums in excess of 35% of the premium ceded for the calendar year the cessions for that quarter shall be adjusted to the dollar amount that would equal 35% of the premium ceded for the year. The Reinsurer's liability for aggregate losses, including allocated loss adjustment expenses (and unallocated loss adjustment expenses where applicable under REPORTS AND ACOCUNTING), shall be limited to 97% of earned premium ceded for all business from January 1st, 2002 to the calculation date. ARTICLE VI PREMIUM AND COMMISSION For business effective prior to 2002, however, excluding business in-force on December 31st, 2001: The Company will pay the Reinsurer a premium equal to the pro rata share of premium applicable on all policies ceded and the Reinsurer shall allow the company a minimum and provisional ceding commission of 18% on such premium. The ceding commission slides 1 for 1 for each 1.0% decrease in the Loss Ratio below 79% up to a maximum ceding commission of 31% at a 66% loss ratio. This calculation shall be from January 1st, 2000 to date for all business ceded effective in all calendar quarters including the in-force business from December 31st, 2000. For business in-force on December 31st, 2001 and with effective dates in 2002: The Company will pay the Reinsurer a premium equal to the pro rata share of premium applicable on all policies ceded. This would be the sum of new written premiums in the quarter plus or minus the change in unearned premium ceded at the beginning of the quarter as the result of a change in the percent ceded. The Reinsurer shall allow the company a minimum and provisional ceding commission of 18% on such premium. The ceding commission slides 1 for 1 for each 1.0% decrease in the Loss Ratio below 78.625% up to a maximum ceding commission of 31% at a 65.625 loss ratio. This calculation shall be from January 1st, 2002 to date of calculation. The first payment, if any, shall be made within 75 days of March 31st 2003. Subsequent payments due either party shall be made within 75 days of March 31st of all years subsequent to 2003 until all liabilities are finalized. ARTICLE VIII DEFINITIONS Loss Ratio shall mean losses paid and outstanding, including IBNR and allocated loss adjustment expenses with dates of loss in the period being calculated, divided by earned premium for the period being calculated. Premium shall mean the premium charged the insured, net of return premium, however, uncollectable premium shall not be deemed a return premium. Allocated loss adjustment expenses shall be as defined under statutory accounting practices. Unallocated loss adjustment expenses shall be as defined under statutory accounting practices. For business effective prior to 2002, however, excluding business in-force on December 31st, 2001: Funds withheld balance shall mean: Previous Funds Withheld Balance, plus 97% of ceded written premium, minus ceding commission, minus ceded paid losses (including allocated loss adjustment expenses), minus ceded paid unallocated loss adjustment expenses, if applicable. For business in-force on December 31st, 2001 and with effective dates in 2002: Loss fund shall mean paid losses from the end of the prior quarter to the settlement date. If that amount is not available for a partial month it shall be deemed to be pro-rata of the previous month. Average Daily Cash Balance shall mean Cash payments received by the Reinsurer, minus Cash payments paid by the Reinsurer, minus 3.375% of the total premiums reported. ARTICLE IX REPORTS AND ACCOUNTING For business effective prior to 2002, however, excluding business in-force on December 31st, 2001: Within 45 days after the end of each calendar quarter, the company shall furnish an account statement to the Reinsurer, for their share on the Business Covered including the following: 1. Written premiums-credit 2. Commission-debit 3. Net losses (including allocated loss adjustment expenses) paid by the company - debit 4. Reserve for outstanding losses including incurred but not reported (including allocated loss adjustment expenses). 5. Unearned Premium In the event the loss ratio is in excess of 85%, the Reinsurer shall be liable for unallocated loss adjustment expenses equal to 1% of earned premium for each Loss Ratio point in excess of 85%, however, not in excess of 6% of earned premium. When applicable, the coverage for unallocated loss adjustment expenses shall be included in the maximum limit of 97% of earned premium ceded referred to in QUOTA SHARE PARTICIPATION AND LIMIT. The forgoing shall be a combined account for all business effective in all calendar quarters plus the in-force business. The Company shall report this information separately for all business effective in each calendar quarter plus a report for the in-force business. The Company will pay the Reinsurer 3% of the premium with the balance, if any, being held in a Funds Withheld Balance for subsequent payment of losses, commission adjustments and return premiums. Amounts due the Company shall be withdrawn from the Funds Withheld Balance and if the Funds Withheld Balance is negative, the Reinsurer shall pay the amount due. For all business in-force on December 31st, 2001 and effective in 2002: Within 75 days after the end of each calendar quarter, the company shall furnish an account statement to the Reinsurer, for their share on the Business Covered including the following: 1. New written premiums-credit Change in unearned premium cession - credit or debit (First quarter only: total unearned premium on December 31st, 2001.) Total written premium 2. Commission-debit 3. Net losses (including allocated loss adjustment expenses) paid by the Company-debit 4. Change in Loss Fund-credit or debit 5. Reserve for outstanding losses including incurred but not reported (including allocated loss adjustment expenses). 6. Unearned Premium In the event the Loss Ratio is in excess of 85%, the Reinsurer shall be liable for unallocated loss adjustment expenses equal to 1% of earned premium for each Loss Ratio point in excess of 85%, however, not in excess of 6% of earned premium. When applicable, the coverage for unallocated loss adjustment expenses shall be included in the maximum limit of 97% of earned premium ceded referred to in QUOTA SHARE PARTICIPATION AND LIMIT. The forgoing shall be a combined account for all business ceded in all calendar quarters. The Company shall provide a separate report for paid and outstanding losses for each accident quarter (ie. all losses with dates of loss in a calendar quarter). The Company shall pay any credit balance with the account statement. The Reinsurer shall pay any debit balance within 30 days of receipt of the account statement. It is understood and agreed that effective January 1st, 2002 the following article is added to this agreement. ARTICLE VI-A INVESTMENT ALLOWANCE For business in-force on December 31st 2001 and with effective dates in 2002: The Reinsurer will calculate notional investment income annually and pay the Company within 75 days of March 31 of the subsequent calendar year. The investment income shall equal the product of the average of the 1 year US Treasury bill rate times the Average Daily Cash Balance for the calendar year. The average US Treasury bill rate shall be the average of the rate on the last business day of each calendar quarter for the year applicable. Notwithstanding the foregoing no payment is due in the event the loss ratio is in excess of 78.625%. IN WITNESS WHEREOF: the parties hereto have caused this Agreement to be executed by their authorized representative: In:________________________________this_______day of_________________2002 PAFCO GENERAL INSURANCE COMPANY By:________________________________Title:____________________________ And in:_____________________________this______day of___________________2002 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. By:________________________________Title:____________________________ EX-10.13(20) 7 doc6.txt Exhibit 10.13 (20) ADDENDUM NO. 4 to QUOTA SHARE REINSURANCE AGREEMENT EFFECTIVE JANUARY 1ST 2000 between SUPERIOR INSURANCE COMPANY AND ITS WHOLLY-OWNED INSURANCE SUBSIDARIES (hereafter called the "Company") and NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. (hereafter called the "Reinsurer") It is understood and agreed that this addendum amends addendum Number 3 and effective January 1st, 2002 the following articles or parts thereof are amended to read as follows. ARTICLE II TERM AND TERMINATION The agreement commences at 12:01 a.m. Eastern Standard Time, January 1, 2000 and shall remain in force until 11:59 p.m. Eastern Standard Time, December 31, 2002. Either party may terminate effective on the first day of any calendar month with 20 days advance written notice. The Reinsurer shall remain liable for loss under reinsured policies effective prior to the termination date. However, in the event the Company fails to pay the Reinsurer on or before October 15, 2002 for the monthly account statements from January through September 2002 this addendum is cancelled ab initio and the agreement is terminated as of the expiration date heretofore applicable which is December 31, 2001. ARTICLE IV QUOTA SHARE PARTICIPATION The aggregate quota share cession shall be at the option of the Company and subject to a maximum of 75% for the year 2002. However, the maximum cession will be limited to $60,000,000 of written premium. In the event the quota share percent selected by the Company produces more than $60,000,000 for the calendar year, the dollar amount of written premium ceded shall be reduced to $60,000,000. This limit can be increased by mutual agreement between the Reinsurer and the Company. The Company shall notify the Reinsurer prior to the last day of the calendar quarter of the quota share percent for that quarter. It is agreed that the cession for any one quarter, shall not exceed 40% of the total cession for the calendar year. In the event the declared percent cession for a calendar quarter produces premiums in excess of 40% of the premium ceded for the calendar year the cessions for that quarter shall be adjusted to the dollar amount that would equal 40% of the premium ceded for the year. The Reinsurer's liability for aggregate losses, including allocated loss adjustment expenses (and unallocated loss adjustment expenses where applicable under REPORTS AND ACCOUNTING), shall be limited to 97% of earned premium ceded for all business from January 1st, 2002 to the calculation date. ARTICLE VI PREMIUM AND COMMISSION For business effective prior to 2002. The Company will pay the Reinsurer a premium equal to the pro rata share of premium applicable on all policies ceded and the Reinsurer shall allow the company a minimum and provisional ceding commission of 18% on such premium. The ceding commission slides 1 for 1 for each 1.0% decrease in the Loss Ratio below 79% up to a maximum ceding commission of 31% at a 66% loss ratio. This calculation shall be from January 1st, 2001 to date for all business ceded effective in all calendar quarters including business effective in 2002 plus the in-force business. For business effective in 2002. The Company will pay the Reinsurer a premium equal to the pro rata share of premium applicable on all policies ceded. The Reinsurer shall allow the company a minimum and provisional ceding commission of 18% on such premium. The ceding commission slides 1 for 1 for each 1.0% decrease in the Loss Ratio below 78.625% up to a maximum ceding commission of 31% at a 65.625 loss ratio. This calculation shall be from January 1st, 2002 to date of calculation. The first payment, if any shall be made within 90 days of March 31, 2004. Subsequent payments due either party shall be made within 90 days of March 31 of all years subsequent to 2004 until all liabilities are finalized. ARTICLE VI-A INVESTMENT ALLOWANCE The Reinsurer will calculate a Notional Investment Allowance quarterly. The Investment Allowance shall equal the product of 24.75% of the one year US Treasury bill rate in effect on the first business day of each calendar quarter times the Average Daily Cash Balance. The Reinsurer will pay the Company the Investment Allowance within 90 days of March 31st, 2004 and subsequent balances, if any, within 90 days of each subsequent March 31st. Notwithstanding the foregoing, no payment is due in the event the Loss Ratio is in excess of 78.625%. ARTICLE VIII DEFINITIONS Loss Ratio shall mean: Losses paid and outstanding (including IBNR as determined by the Reinsurer), and allocated loss adjustment expense divided by earned premium for the period being calculated. Premium shall mean the premium charged the insured, net of return premium, however, uncollectable premium shall not be deemed a return premium. Allocated loss adjustment expenses shall be as defined under statutory accounting practices. Unallocated loss adjustment expenses shall be as defined under statutory accounting practices. For business effective prior to 2002: Funds withheld balance shall mean: Previous Funds Withheld Balance, plus 97% of ceded written premium, minus ceding commission, minus ceded paid losses (including allocated loss adjustment expenses), minus ceded paid unallocated loss adjustment expenses, if applicable. For business effective in 2002: Loss fund shall mean 66% of the paid losses for the prior month. Average Daily Cash Balance shall mean Cash payments received by the Reinsurer, plus Investment Allowance from the prior quarter, minus Cash payments paid by the Reinsurer, minus 3.375% of the total premiums reported ARTICLE IX REPORTS AND ACCOUNTING For business effective prior to 2002: Within 45 days after the end of each calendar quarter, the company shall furnish an account statement to the Reinsurer, for their share on the Business Covered including the following: 1. Written premium-credit 2. Commission-debit 3. Net losses (including allocated loss adjustment expenses) paid by the company-debit 4. Reserve for outstanding losses including incurred but not reported (including allocated loss adjustment expenses). 5. Unearned Premium In the event the loss ratio is in excess of 85%, the Reinsurer shall be liable for unallocated loss adjustment expenses equal to 1% of earned premium for each Loss Ratio point in excess of 85%, however, not in excess of 6% of earned premium. When applicable, the coverage for unallocated loss adjustment expenses shall be included in the maximum limit of 97% of earned premium ceded referred to in QUOTA SHARE PARTICIPATION AND LIMIT. The forgoing shall be a combined account for all business effective in all calendar quarters plus the in-force business. The Company shall report this information separately for all business effective in each calendar quarter plus a report for the in-force business. The Company will pay the Reinsurer 3% of the premium with the balance, if any, being held in a Funds Withheld Balance for subsequent payment of losses, commission adjustments and return premium. Amounts due the Company shall be withdrawn from the Funds Withheld Balance and if the Funds Withheld Balance is negative, the Reinsurer shall pay the amount due. For all business effective in 2002: Within 20 days after the end of each calendar month, the company shall furnish an account statement to the Reinsurer, for their share on the Business Covered including the following: 1. Written premiums 2. Earned premiums-credit* 3. Commission-debit (Provisional commission 18% of earned premiums) 4. Net losses (including allocated loss adjustment expenses) paid by the Company-debit 5. Change in Loss Fund-credit or debit 6. Reserve for outstanding losses including incurred but not reported (including allocated loss adjustment expenses). 7. Unearned Premium * Written premiums minus change in Unearned Premium In the event the Loss Ratio is in excess of 85%, the Reinsurer shall be liable for unallocated loss adjustment expenses equal to 1% of earned premium for each Loss Ratio point in excess of 85%, however, not in excess of 6% of earned premium. When applicable, the coverage for unallocated loss adjustment expenses shall be included in the maximum limit of 97% of earned premium ceded referred to in QUOTA SHARE PARTICPATION AND LIMIT. The forgoing shall be a combined account for all business ceded in all calendar months. The Company shall provide a separate report for paid and outstanding losses for each accident month (ie. all losses with dates of loss in a calendar month). The Company shall pay any credit balance with the account statement. The Reinsurer shall pay any debit balance within 30 days of receipt of the account statement. IN WITNESS WHEREOF: the parties hereto have caused this Agreement to be executed by their authorized representatives: In:__________________________________this_________day of__________________2002 SUPERIOR INSURANCE COMPANY By:___________________________________Title:_____________________________ And in:______________________________this__________day of__________________2002 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA By:___________________________________Title:____________________________ EX-10.13(21) 8 doc7.txt Exhibit 10.13 (21) ADDENDUM NO. 4 to QUOTA SHARE REINSURANCE AGREEMENT EFFECTIVE JANUARY 1ST 2000 between PAFCO GENERAL INSURANCE COMPANY (hereafter called the "Company") and NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. (hereafter called the "Reinsurer") It is understood and agreed that this addendum amends addendum Number 3 and effective January 1st, 2002 the following articles or parts thereof are amended to read as follows. ARTICLE II TERM AND TERMINATION The agreement commences at 12:01 a.m. Eastern Standard Time, January 1, 2000 and shall remain in force until 11:59 p.m. Eastern Standard Time, December 31, 2002. Either party may terminate effective on the first day of any calendar month with 20 days advance written notice. The Reinsurer shall remain liable for loss under reinsured policies effective prior to the termination date. However, in the event the Company fails to pay the Reinsurer on or before October 15, 2002 for the monthly account statements from January through September 2002 this addendum is cancelled ab initio and the agreement is terminated as of the expiration date heretofore applicable which is December 31, 2001. ARTICLE IV QUOTA SHARE PARTICIPATION The aggregate quota share cession shall be at the option of the Company and subject to a maximum of 60% for the year 2002. However, the maximum cession will be limited to $10,000,000 of written premium. In the event the quota share percent selected by the Company produces more than $10,000,000 for the calendar year, the dollar amount of written premium ceded shall be reduced to $10,000,000. This limit can be increased by mutual agreement between the Reinsurer and the Company. The Company shall notify the Reinsurer prior to the last day of the calendar quarter of the quota share percent for that quarter. It is agreed that the cession for any one quarter, shall not exceed 40% of the total cession for the calendar year. In the event the declared percent cession for a calendar quarter produces premiums in excess of 40% of the premium ceded for the calendar year the cessions for that quarter shall be adjusted to the dollar amount that would equal 40% of the premium ceded for the year. The Reinsurer's liability for aggregate losses, including allocated loss adjustment expenses (and unallocated loss adjustment expenses where applicable under REPORTS AND ACCOUNTING), shall be limited to 97% of earned premium ceded for all business from January 1st, 2002 to the calculation date. ARTICLE VI PREMIUM AND COMMISSION The Company will pay the Reinsurer a premium equal to the pro rata share of premium applicable on all policies ceded. The Reinsurer shall allow the Company a minimum and provisional ceding commissions of 18% on such premium. The actual ceding commission shall be the combined sum of Section A and Section B as specified below subject to a minimum of 18% and a maximum of 31% of the combined sum of ceded premiums. The actual commission shall be the commission ratio times the ceded premium determined as follows: Section A: 97.000% minus actual loss ratio equals commission ratio Section B: 96.625% minus actual loss ratio equals commission ratio The above ratio shall be carried to three decimal places. The adjustment, if any on Section A shall be done quarterly with a debit or credit to the Funds Withheld Balance. The first adjustment and payment for Section B shall be made within 90 days of March 31, 2004. Subsequent adjustments and payments shall be made within 90 days of all years subsequent to 2004 until all liabilities are finalized. In the event the Section A or Section B commission ratio is less than 18% and the combined commission ratio is in excess of 18% the amount that would otherwise be debited to the Funds Withheld Balance shall be paid to the Reinsurer. ARTICLE VI-A INVESTMENT ALLOWANCE For Section B business: The Reinsurer will calculate a Notional Investment Allowance quarterly. The Investment Allowance shall equal the product of 24.75% of the one year US Treasury bill rate in effect on the first business day of each calendar quarter times the Average Daily Cash Balance. The Reinsurer will pay the Company the Investment Allowance within 90 days of March 31st, 2004 and subsequent balances, if any, within 90 days of each subsequent March 31st. Notwithstanding the foregoing, no payment is due in the event the Loss Ratio is in excess of 78.625%. ARTICLE VIII DEFINITIONS Section A shall mean: All business effective prior to January 1, 2002 and loss liabilities on that business. Section B shall mean: All business effective in 2002 and loss liabilities on that business. Loss Ratio shall mean: Losses paid and outstanding (including IBNR as determined by the Reinsurer), and allocated loss adjustment expense divided by earned premium for the period being calculated. Premium shall mean the premium charged the insured, net of return premium, however, uncollectable premium shall not be deemed a return premium. Allocated loss adjustment expenses shall be as defined under statutory accounting practices. Unallocated loss adjustment expenses shall be as defined under statutory accounting practices. For Section A business: Funds withheld balance shall mean: Previous Funds Withheld Balance, plus 97% of ceded written premium, minus ceding commission, minus ceded paid losses (including allocated loss adjustment expenses), minus ceded paid unallocated loss adjustment expenses, if applicable. For Section B business: Loss fund shall mean 66% of the paid losses for the prior month. Average Daily Cash Balance shall mean Cash payments received by the Reinsurer, plus Investment Allowance from the prior quarter, minus Cash payments paid by the Reinsurer, minus 3.375% of the total premiums reported ARTICLE IX REPORTS AND ACCOUNTING For business effective prior to 2002: Within 45 days after the end of each calendar quarter, the company shall furnish an account statement to the Reinsurer, for their share on the Business Covered including the following: 1. Written premium-credit 2. Commission-debit 3. Net losses (including allocated loss adjustment expenses) paid by the company-debit 4. Reserve for outstanding losses including incurred but not reported (including allocated loss adjustment expenses). 5. Unearned Premium In the event the loss ratio is in excess of 85%, the Reinsurer shall be liable for unallocated loss adjustment expenses equal to 1% of earned premium for each Loss Ratio point in excess of 85%, however, not in excess of 6% of earned premium. When applicable, the coverage for unallocated loss adjustment expenses shall be included in the maximum limit of 97% of earned premium ceded referred to in QUOTA SHARE PARTICIPATION AND LIMIT. The forgoing shall be a combined account for all business effective in all calendar quarters plus the in-force business. The Company shall report this information separately for all business effective in each calendar quarter plus a report for the in-force business. The Company will pay the Reinsurer 3% of the premium with the balance, if any, being held in a Funds Withheld Balance for subsequent payment of losses, commission adjustments and return premium. Amounts due the Company shall be withdrawn from the Funds Withheld Balance and if the Funds Withheld Balance is negative, the Reinsurer shall pay the amount due. For all business effective in 2002: Within 20 days after the end of each calendar month, the company shall furnish an account statement to the Reinsurer, for their share on the Business Covered including the following: 1. Written premiums 2. Earned premiums-credit* 3. Commission-debit (Provisional commission 18% of earned premiums) 4. Net losses (including allocated loss adjustment expenses) paid by the Company-debit 5. Change in Loss Fund-credit or debit 6. Reserve for outstanding losses including incurred but not reported (including allocated loss adjustment expenses). 7. Unearned Premium * Written premiums minus change in Unearned Premium In the event the Loss Ratio is in excess of 85%, the Reinsurer shall be liable for unallocated loss adjustment expenses equal to 1% of earned premium for each Loss Ratio point in excess of 85%, however, not in excess of 6% of earned premium. When applicable, the coverage for unallocated loss adjustment expenses shall be included in the maximum limit of 97% of earned premium ceded referred to in QUOTA SHARE PARTICPATION AND LIMIT. The forgoing shall be a combined account for all business ceded in all calendar months. The Company shall provide a separate report for paid and outstanding losses for each accident month (ie. all losses with dates of loss in a calendar month). The Company shall pay any credit balance with the account statement. The Reinsurer shall pay any debit balance within 30 days of receipt of the account statement. IN WITNESS WHEREOF: the parties hereto have caused this Agreement to be executed by their authorized representatives: In:__________________________________this_________day of__________________2002 PAFCO GENERAL INSURANCE COMPANY By:___________________________________Title:_____________________________ And in:______________________________this__________day of__________________2002 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA By:___________________________________Title:____________________________ EX-10.13(22) 9 doc8.txt Exhibit 10.13 (22) ADDENDUM NO. 5 to QUOTA SHARE REINSURANCE AGREEMENT EFFECTIVE JANUARY 1ST 2000 between SUPERIOR INSURANCE COMPANY AND ITS WHOLLY-OWNED INSURANCE SUBSIDARIES (hereafter called the "Company") and NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. (hereafter called the "Reinsurer") Notwithstanding the condition of Article VII COMMUTATION it is understood and agreed that all liabilities emanating from losses on business effective prior to January 1st, 2002 are commuted effective September 30, 2002. The Reinsurer shall allow a payment equal to the amount of funds in the Funds Withheld Balance on September 30, 2002. The Company is granted permission to withdraw those funds and agrees to forever release and discharge the Reinsurer from any and all liabilities whether past, present or future on policies effective prior to January 1st, 2002. It is understood that no further reports are due to the Reinsurer for this business. IN WITNESS WHEREOF: the parties hereto have caused this Agreement to be executed by their authorized representative: In:_______________________________this___________day of__________________2002 SUPERIOR INSURANCE COMPANY By:_______________________________Title:______________________________ And in:____________________________this___________day of___________________2002 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA By:_______________________________Title:_____________________________ EX-10.26 10 doc9.txt Exhibit 10.26 EXECUTION COPY EXECUTION COPY CONSULTING AND NONCOMPETITION AGREEMENT This Consulting and Noncompetition Agreement ("Agreement") is made as of May 23, 2001 by and between Goran Capital Inc., a Canadian corporation, for itself and on behalf of all of its affiliates except Symons International Group, Inc., an Indiana corporation ("SIG") (collectively, "Goran") and Acceptance Insurance Companies Inc., a Delaware corporation, for itself and on behalf of all of its affiliates and assignees (collectively, "Purchaser"). Capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings ascribed to them in the Asset Purchase Agreement (the "Asset Purchase Agreement") dated as of May 23, 2001 by and among Goran, SIG, IGF Holdings, Inc., an Indiana corporation ("IGFH"), IGF Insurance Company, an Indiana insurance corporation ("IGF"), Acceptance and others. WHEREAS, pursuant to the Asset Purchase Agreement the Sellers sold and Purchaser purchased certain assets associated with the Business; WHEREAS, Goran is highly knowledgeable regarding the Business, has been involved in the direction and conduct of the Business for more than five years and is also highly knowledgeable regarding the Business of Sellers as generally conducted by them throughout the 2001 MPCI Crop Year and the 2001 Crop Hail Year (the "Sellers Business"); WHEREAS, Purchaser desires to induce Goran to provide Purchaser certain consulting services between the Closing and the third anniversary date of the Closing; WHEREAS, Purchaser desires to induce Goran not to engage in the Business in any form prior to the third anniversary date of the Closing; and WHEREAS, Goran and Purchaser jointly desire that Goran receive reasonable compensation (i) for its provision of consulting services to Purchaser and (ii) for agreeing not to engage in the Business in any form prior to the third anniversary date of the Closing. NOW, THEREFORE, Goran and Purchaser hereby agree as follows: 1. Confidential Information. (a) Goran acknowledges that: (i) The Business is a specialized form of insurance in a national market not capable of geographic description or limitation; and (ii) Because of the nature of Goran's knowledge, experience and relationships with respect to the Business, Goran has and will continue to receive, conceive, originate, discover or develop, information and data not generally known in the insurance industry and not freely available to persons who are not providing services to Sellers, regarding Sellers' agents, reinsurers, underwriting practices and experience, business operations, legal and regulatory affairs, business opportunities, procedures, policies, products, services, customer lists, financial data, pricing, trade secrets, management, market research and forecasts, product development, marketing strategy and activities and other operations, plans and perspectives of Sellers (collectively, "Confidential Information"). All such Confidential Information pertaining to the Business which is received, conceived, originated, discovered or developed at and before Closing shall be deemed "Proprietary Confidential Information" for purposes of this Agreement. All such Confidential Information other than Proprietary Confidential Information regardless of when received, conceived, originated, discovered or developed shall be deemed "Nonproprietary Confidential Information" for purposes of this Agreement. (b) Goran agrees that it will not use or disclose Proprietary Confidential Information at any time during or after termination of this Agreement and that it shall not use or disclose Nonproprietary Confidential Information at any time during the term of this Agreement. 2. Noncompetition. (a) From the Closing until the third anniversary date of the Closing, Goran will not directly or indirectly: (i) solicit, divert or interfere with any business, financial, insurance or other relationships which Sellers had, with respect to the Business, prior to Closing with any customer, agent, employee, vendor or reinsurer of Sellers prior to Closing, and which relationship Purchaser has not terminated; or (ii) induce or attempt to induce any customer, agent, employee, vendor or reinsurer of Sellers, with respect to the Business immediately prior to Closing, to terminate, reduce or alter their relationship with Purchaser in any way detrimental to Purchaser; or (iii) compete with Purchaser as an employer, agent, owner, resource, consultant or advisor to any entity providing products, services or advice directly related to any agricultural production risk or otherwise conducting Business. (b) Notwithstanding any other provision of this Agreement or any other contract, agreement or understanding of any kind whatsoever, Goran shall automatically and immediately forfeit all consideration paid or to be paid to it by Purchaser under this Agreement if it enters into any business, employment or other arrangement or activity that is detrimentally competitive the Business purchased by Purchaser pursuant to the Asset Purchase Agreement, or injurious to the financial interests of the Business purchased by Purchaser pursuant to the Asset Purchase Agreement, at any time prior to the third anniversary date of the Closing. 3. Consulting Services. Goran hereby agrees to be available to -------------------- Purchaser as reasonably requested by Purchaser, but in no event for more than 20 hours in any given calendar month, for the provision of consulting services related to the operation of the Business commencing on the date of the Closing and continuing until the third anniversary date of the Closing (the "Consulting Term"). 4. Additional Payment. For and in consideration of Goran's execution, ------------------- delivery and performance of this Agreement and subject to Paragraph 2 of this Agreement, Purchaser will pay Goran Four Million Five Hundred Thousand Dollars ($4,500,000) at Closing. 5. Assignment and Binding Effect. Goran may not transfer in any manner any ------------------------------ right to receive any portion of the consideration stated in Paragraph 4 of this Agreement ("Consideration"). Goran hereby consents to Purchaser's assignment of all of Purchaser's rights and obligations under this Agreement to any of Purchaser's affiliates or successors. This Agreement shall be and remain binding upon Goran and shall inure to the benefit of any successors in interest and assigns of Purchaser. 6. Remedies. Goran and Purchaser agree the restrictions contained in -------- paragraphs 1 and 2 under this Agreement are necessary for the protection of the legitimate business interests and goodwill of the Business purchased by Purchaser pursuant to the Asset Purchase Agreement, and Goran considers such restrictions to be reasonable for such purposes. Goran agrees that any breach of paragraph 1 or 2 will cause Purchaser substantial and irrevocable damage. In the event of any such breach, in addition to such other remedies as may be available, including the recovery of damages, Purchaser shall have the right to injunctive relief to restrain or enjoin any actual or threatened breach of the provisions of paragraphs 1 and 2. If Purchaser shall prevail in a legal proceeding to remedy a breach or threatened breach of this Agreement, Purchaser shall be entitled to recover reasonable attorneys' fees and costs incurred in connection with such proceeding, in addition to any other relief it may be granted. No remedy conferred upon any party by this Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and in addition to any other remedy given hereunder. The failure to enforce any of the provisions of this Agreement shall not be construed as a waiver of such provisions. A waiver or failure to enforce by Purchaser on any one occasion is effective only in that instance, and will not be construed as a bar to, or waiver of, any right on any other occasion. 7. Applicable Law. This Agreement, or any portion thereof, shall be --------------- interpreted in accordance with the laws of the State of Iowa, irrespective of the fact that Goran now is or may become organized in a different state or country. 8. Severability. If any provision(s) of this Agreement shall be held ------------ invalid or unenforceable, the validity and enforceability of all other provisions of this Agreement shall not be affected thereby. 9. Entire Agreement. This Agreement supersedes all prior agreements and ----------------- understandings between Goran and Purchaser concerning the subject matter hereof. When this Agreement becomes effective it shall contain the entire agreement of Purchaser and Goran relating to the subject matter hereof, and Purchaser and Goran will have made no agreements, representations or warranties relating to the subject matter of this Agreement that are not set forth herein. 10. Effectiveness and Termination. This Agreement is conditioned upon and ------------------------------- effective at Closing. If the Asset Purchase Agreement is terminated pursuant to its terms and conditions, this Agreement shall terminate concurrently with the Asset Purchase Agreement. Dated this 23rd day of May, 2001. GORAN CAPITAL INC. By: Name: Title: ACCEPTANCE INSURANCE COMPANIES INC. By: Name: John E. Martin ------------------ Title: President and Chief Executive Officer ------------------------------------------- EX-10.27 11 doc10.txt Exhibit 10.27 GRANITE REINSURANCE COMPANY LIMITED /ACCEPTANCE CROP HAIL RETROCESSION AGREEMENT THIS RETROCESSION AGREEMENT ("Crop Hail Agreement") is made and entered into as of May 23, 2001 by and between Acceptance Insurance Company, a Nebraska domestic insurance company ("Acceptance") and Granite Reinsurance Company Limited, a Barbados insurance company ("Granite"). W I T N E S S E T H : WHEREAS, affiliates of Acceptance and others have entered into a certain Asset Purchase Agreement (the "Asset Purchase Agreement") dated as of May 23, 2001; and WHEREAS, in conjunction with the Asset Purchase Agreement, Acceptance and others entered into a certain IGF/Acceptance Retrocession Agreement and an IGF/Acceptance Quota Share Reinsurance Agreement, both dated as of May 23, 2001 and attached hereto ("Acceptance's Assumption Agreements"); and WHEREAS, subject to the terms and conditions set forth in this Crop Hail Agreement, Acceptance desires to cede to Granite and desires to accept from Acceptance and to reinsure 100% of all risks reinsured by Acceptance under Acceptance's Assumption Agreements except MPCI risks reinsured by the Federal Crop Insurance Corporation and located within the United States ("Reinsured Contracts"). NOW, THEREFORE, in consideration of the premises and the mutual promises of the parties hereto, they hereby covenant and agree as follows: ARTICLE I EFFECTIVE TIME This Crop Hail Agreement shall be effective as of 12:01 a.m. Eastern Standard Time ("Effective Time") on the date of the Closing as defined in the Asset Purchase Agreement. If the Asset Purchase Agreement is terminated pursuant to its terms and conditions, this Retrocession Agreement shall terminate concurrently with the Asset Purchase Agreement and never shall be effective. ARTICLE II REINSURED OBLIGATIONS; REPRESENTATIONS OF PARTIES SECTION 2.01. DESCRIPTION OF REINSURED OBLIGATIONS. Subject to the provisions of this Crop Hail Agreement, Acceptance hereby assigns, transfers, sets over, cedes and reinsures to Granite, and Granite hereby reinsures on a 100% quota share basis from Acceptance, all liabilities and obligations for losses associated with the Reinsured Obligations. SECTION 2.02. REPRESENTATIONS. Granite represents, to the best of its knowledge and belief, that as of the Effective Time: (a) Granite is a corporation duly organized and validly existing in good standing under the laws of Barbados. Granite has the corporate power and authority to carry on their business substantially as it is now being conducted. (b) Granite has the requisite corporate power and authority to take, and has taken, all corporate action necessary to execute and deliver this Crop Hail Agreement, and to consummate the transactions contemplated hereby. This Crop Hail Agreement has been validly executed and delivered by Granite, and is a valid and binding agreement, enforceable against Granite in accordance with its terms. SECTION 2.03. REPRESENTATIONS. Acceptance represents, to the best of its knowledge and belief, that as of the Effective Time: (a) Acceptance is a corporation duly organized and validly existing in good standing under the laws of the State of Nebraska and is an authorized insurer in Nebraska and has the corporate power and authority to carry on its business substantially as it is now being conducted. (b) Acceptance has the requisite corporate power and authority and has taken all corporate action necessary to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement has been validly executed and delivered and is a valid and binding agreement of Acceptance, enforceable against Acceptance in accordance with its terms. SECTION 2.04. QUOTA SHARE BASIS. The parties acknowledge and agree that the reinsurance provided herein is on a 100% quota share basis. Granite agrees to assume all obligations and liabilities of Acceptance under the Reinsured Contracts, subject, however, to the same rights, offsets, counterclaims, cross-actions and defenses that are or may be possessed by the parties. It is expressly understood that no such offsets, counterclaims, cross-actions or defenses are or shall be waived, but that the same are expressly preserved and that the parties shall be duly subrogated thereto, whether the same be known to exist or are hereafter discovered. ARTICLE III INSOLVENCY SECTION 3.01. INSOLVENCY. (a) In the event of the insolvency of Acceptance, it is agreed that the liquidator, receiver, conservator or statutory successor of Acceptance shall give written notice to Granite of the pendency of a claim against Acceptance indicating the policy reinsured which claim would involve a possible liability on the part of Granite within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, Granite may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to Acceptance or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by Granite shall be chargeable, subject to the approval of the Court, against Acceptance as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to Acceptance solely as a result of the defense undertaken by Granite. (b) It is further understood and agreed that, in the event of the insolvency of Acceptance, the reinsurance under this Agreement shall be payable directly by Granite to Acceptance or to its liquidator, receiver or statutory successor, except (1) where this Agreement specifically provides another payee of such reinsurance in the event of the insolvency of Acceptance or (2) where Granite with the consent of the direct insured or insureds has assumed such policy obligations of Acceptance as direct obligations of Granite to the payees under such policies and in substitution for the obligations of Acceptance to such payees. ARTICLE IV CONSIDERATION FOR RETROCESSION CONTRACTS SECTION 4.01. CONSIDERATION. For and in consideration for this Retrocession Agreement Acceptance will remit to Granite all gross written premium with respect to the Reinsured Contracts, and Acceptance shall be deemed to have a fiduciary responsibility to Granite with respect to all such premium. Written premium with respect to the Reinsured Contracts paid to Acceptance before the Effective Time will be remitted to Granite on the date of the Closing. All gross written premiums with respect to the Reinsured Contracts paid to Acceptance after Closing will be remitted to Granite not less often than once each month. SECTION 4.02. COMMISSION AND TAXES. Acceptance's Assumption Agreements contain clauses that recover for companies ceding to Acceptance under such agreements all commissions due independent agents, premium tax paid or due and payable and all amounts due for bureau, boards and fees to associations. To the same extent that these amounts are deducted or paid then the net premium payable under this Crop Hail Agreement will be reduced accordingly. SECTION 4.03. LOSS ADJUSTMENT AND CLAIMS SETTLEMENT COSTS. Acceptance will manage and administrate the claims handling on behalf of companies ceding to Acceptance under Acceptance's Assumption Agreements. The cost associated thereto as per the Management and Service Agreement entered into as of May 23, 2001 by and between Acceptance and IGF Insurance Company. ARTICLE V LIABILITY SECTION 5.01. PAYMENT OF CLAIMS AND BENEFITS. From and after the Effective Time, Granite shall be responsible for (a) paying all losses due under the Reinsured Contracts in accordance with the terms of thereof; (b) paying all premium refunds with respect to premiums received under the Reinsured Contracts; and (c) paying all expenses in connection with the investigations, adjustment, appraisal or settlement of all claims under the Reinsured Contracts on or after the Effective Time. SECTION 5.02. ACTIONS ON OR AFTER EFFECTIVE TIME. If any legal or regulatory actions are threatened or filed in connection with any of the Reinsured Contracts on or after the Effective Time, the parties agree to provide each other with prompt notice thereof, within such time period as would allow the appropriate party the opportunity to answer, appear or to take any action necessary or to avoid a default judgment. The parties agree to cooperate with each other with respect to any such legal or regulatory actions, whether threatened or actual. SECTION 5.03. TAXES. Acceptance shall retain full responsibility for any tax liability relating to the Reinsured Contracts for all taxable periods or portions thereof. ARTICLE VI ERRORS AND OVERSIGHTS Each party to this Retrocession Agreement will act reasonably to comply with its terms. Clerical errors and oversights occasioned in good faith in carrying out this Retrocession Agreement will not prejudice either party and will be rectified promptly on an equitable basis. ARTICLE VII ARBITRATION SECTION 7.1 COMPULSORY ARBITRATION. (a) The parties intend this article to be enforceable in accordance with the Federal Arbitration Act (9 U.S.C. Section 1, et seq.), including any amendments to that Act which are subsequently adopted, notwithstanding any other choice of law provision set forth in this Agreement. In the event that either party refuses to submit to arbitration as required herein, the other party may request a United States Federal District Court to compel arbitration in accordance with the Federal Arbitration Act. Both parties consent to the jurisdiction of such court to enforce this article and to confirm and enforce the performance of any award of the arbitrators. (b) Any dispute or other matter in question between Granite and Acceptance arising out of or relating to the formation, interpretation, performance, or breach of this Agreement, whether such dispute arises before or after termination of this Agreement, shall be resolved by arbitration if the parties are unable to resolve the dispute through negotiation. Arbitration shall be initiated by the delivery of a written demand for arbitration by one party to the other. SECTION 7.2. PROCEDURE. (a) Each party shall appoint an individual as arbitrator and the two so appointed shall then appoint an umpire. If either party refuses or neglects to appoint an arbitrator within forty-five (45) days after the initial delivery of the demand for arbitration, the other party may appoint the second arbitrator. If the two arbitrators do not agree on an umpire within forty-five (45) days of their appointment, the parties shall petition the American Arbitration Association to appoint an umpire with the qualifications set forth below. The arbitrators shall be active or retired officers of insurance or reinsurance companies or Lloyd's of London Underwriters or reinsurance brokers; the arbitrators shall not have a personal or financial interest in the result of the arbitration. (b) The arbitration hearing shall be held in Omaha, Nebraska or such other place as may be mutually agreed. Each party shall submit its case to the arbitrators within forty-five (45) days of the selection of the umpire or within such longer period as may be agreed by the arbitrators. The arbitrators shall not be obliged to follow judicial formalities or the rules of evidence except to the extent required by law of the state of New York; they shall make their decisions according to the practice of the reinsurance business. The decision rendered by a majority of the arbitrators shall be final and binding on both parties. Such decision shall be a condition precedent to any right of legal action arising out of the arbitrated dispute which either party may have against the other. Judgment upon the award rendered may be entered in any court having jurisdiction thereof. Both parties shall abide by the final decision of such Court or of any appellate court in the event of an appeal. (c) Except as provided above, arbitration shall be based, insofar as applicable, upon the Commercial Arbitration Rules of the American Arbitration Association. SECTION 7.3. COSTS. Each party shall bear its own costs in connection with any such arbitration including, without limitation, all legal, accounting, and any other professional fees and expenses, the fees and expenses of its own arbitrator, and all other costs and expenses each party incurs to prepare for such arbitration. Other than set forth above, each side shall pay one-half of the fee and expenses of the umpire, and one-half of the other expenses that the parties jointly incur directly related to the arbitration proceeding. ARTICLE VIII TERMINATION SECTION 8.01. TERMINATION DATE. This Agreement can only be terminated by mutual consent. SECTION 8.02. APPROVALS. If the approval of any state insurance department is necessary for the effectiveness of this Retrocession Agreement, the parties will cooperate and use their best efforts to obtain such approvals. SECTION 8.03. COSTS OF TERMINATION. If this Retrocession Agreement is terminated pursuant to Section 8.01, neither party shall be liable to the other for any costs, expenses, causes of actions, fees or claims of any type due with respect to such termination. ARTICLE IX REGULATORY COMPLIANCE AND APPROVALS SECTION 9.01. COMPLIANCE. The parties agree to comply with all laws, regulations or directions of appropriate state insurance departments with regard to (a) any notification to policyholders under the Reinsured Contracts (including without limitation all content, description, timing or other requirements), (b) this Retrocession Agreement and (c) all service requirements to policyholders under the Reinsured Contracts. SECTION 9.02. REGULATORY APPROVALS. The parties agree that where formal approval is required by any state insurance regulatory agency, this Retrocession Agreement shall not be effective as to any and all Reinsured Contracts in effect in such state until such approval is obtained. ARTICLE X CONFIDENTIALITY SECTION 10.01. CONFIDENTIAL INFORMATION. During the course of performance under this Retrocession Agreement, the parties and their respective agents, employees and representatives will obtain or have access to certain proprietary or confidential information. The parties undertake and covenant, one to the other, that they will, and they will cause their respective agents, employees and representatives to, maintain the confidential information in a confidential manner in accordance with applicable local, state or federal laws, and in accordance with this Retrocession Agreement. ARTICLE XI RELATIONSHIP OF PARTIES SECTION 11.01. NO EMPLOYMENT RELATIONSHIP. The relationships between the parties hereto shall be that of independent contractors. Nothing herein shall be construed to create the relationship of employer and employee between the parties or any of their respective agents or employees. ARTICLE XII OTHER PROVISIONS SECTION 12.01. PARAGRAPH HEADINGS. The headings of the provisions of this Retrocession Agreement are for reference purposes and have no legal force or effect. SECTION 12.02. GOVERNING LAW. This Retrocession Agreement shall be construed and interpreted according to the laws of the State of Iowa. SECTION 12.03. OTHER ACTIONS. The parties will use their best efforts to cause the reinsurance contemplated under this Retrocession Agreement to be consummated and approved by all necessary regulatory bodies and to do such further acts, matters and deeds, and execute any and all additional instruments and agreements, that may be mutually agreed as necessary or reasonably required in order to carry this Retrocession Agreement into full effect. SECTION 12.04. COUNTERPARTS; FACSIMILE SIGNATURES. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. For purposes of this Agreement, facsimile signatures shall be deemed originals, and the parties agree to exchange original signatures as promptly as possible. SECTION 12.05. SET OFF. Granite and Acceptance shall have the right to offset any balance or amounts due from one party to the other under the terms of this Agreement. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise. SECTION 12.06. NOTICES. Until otherwise notified, all formal notices, requests, demands and other communications between the parties shall be directed to the parties at their respective addresses as follows: If to Reinsurer: Acceptance Insurance Company 535 West Broadway Council Bluffs, Iowa 51503 Attn: President If to Ceding Companies: IGF Insurance Company 4720 Kingsway Drive Indianapolis, Indiana 46205 Attn: President SECTION 12.07. ASSIGNMENT. This Retrocession Agreement is not assignable by either party without prior written consent of the other party and, where required, the prior approval of any appropriate state insurance department. Neither party's consent under this Section shall be unreasonably withheld. SECTION 12.08. WAIVER. Failure of Reinsurer or Ceding Companies to enforce any of its rights or remedies under this Retrocession Agreement shall not constitute a waiver of such rights or remedies exercisable hereunder. SECTION 12.09. SEVERABILITY. If any provision of this Retrocession Agreement should be determined to be invalid or otherwise unenforceable under law, the remainder of this Retrocession Agreement shall not be affected thereby. SECTION 12.10. AGREEMENT BINDING. This Retrocession Agreement is binding upon the parties hereto, their respective representatives, successors and assigns. SECTION 12.11. MULTIPLE COPIES. This Retrocession Agreement may be executed in multiple copies, and each shall have the same force and effect of the original. SECTION 12.11 JOINT AND SEVERAL LIABILITY. All rights and obligations of the Ceding Companies created under the terms of this Retrocession Agreement shall be joint and several. SECTION 12.12. INTEREST. Interest on the balance due and payable that is not paid when due, shall, in addition to the amount due, incur and pay interest on the amount due at 1 % per month on part thereof. IN WITNESS WHEREOF, this Retrocession Agreement has been duly executed. CEDING COMPANIES: IGF INSURANCE COMPANY, for itself and for CONTINENTAL CASUALTY INSURANCE COMPANY By Name Title REINSURER: ACCEPTANCE INSURANCE COMPANY By Name Title __________________________________ EX-10.28 12 doc11.txt Exhibit 10.28 MPCI STOP LOSS REINSURANCE CONTRACT TABLE OF CONTENTS ARTICLE - ------- Preamble 1 Term 2 Season 3 Business Covered 4 Territory 5 Exclusions 6 Reinsuring 7 Extra Contractual Obligations 8 Excess of Original Policy Limits 9 Definitions 10 Notice of Loss and Loss Settlements 11 Premium 12 Net Retained Lines 13 Offset 14 Access to Records 15 Errors and Omissions 16 Currency 17 Arbitration 18 Service of Suit 19 Insolvency ATTACHMENTS - ----------- Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance - U.S.A. Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance - Canada MPCI STOP LOSS REINSURANCE CONTRACT (hereinafter referred to as the "Contract") In consideration of the mutual covenants hereinafter contained and subject to all the terms and conditions hereinafter set forth GRANITE REINSURANCE COMPANY, LTD. (hereinafter referred to as "Reinsurer ") do hereby indemnify, as herein provided, ACCEPTANCE INSURANCE COMPANIES INC. (hereinafter referred to as the "Company" ) Wherever the word "Company" is used in this Contract, such term shall be held to include any and/or all of the subsidiary companies which are or may hereafter come under the management of the Company, provided that notice be given to the Reinsurer of any such subsidiary companies which may hereafter come under the management of the Company as soon as practicable, with full particulars as to how such acquisition is likely to affect this Contract. ARTICLE 1 TERM This Contract shall become effective as of July 1, 2000 and shall remain in full force and effect with respect to all Covered Business risks in force or attaching from that date through June 30, 2005. The Reinsurer shall be responsible for all losses in progress at June 30, 2005 in the same manner and to the same extent it would have been responsible had the Contract expired or terminated the day following the conclusion of the loss in progress. ARTICLE 2 SEASON The Season commences on July 1 of each year and continues through June 30 of the following year. ARTICLE 3 BUSINESS COVERED This Contract shall indemnify the Company, as set forth in the Reinsuring Article, in respect of the liability which may accrue to the Company under all policies, bonds, binders, certificates, contracts of insurance or reinsurance, co-insurance or co-indemnity, or other evidences of liability (hereinafter referred to as "policy(ies)" and/or "bond(s)", oral or written, issued or renewed before or after the effective time and date hereof, issued by or contracted for by the Company in respect of all business classified by the Company as Multi-Peril Crop Insurance (MPCI) business, as defined and reinsured by the FCIC and issued by the Company, IGF Insurance Company or Continental Casualty Company. This Contract shall also indemnify the Company, as set forth in Part II of Article 6, in respect of the indemnification obligations to the Company of IGF Insurance Company and IGF Holdings, Inc. under Article IX of that certain Asset Purchase Agreement dated as of May 23, 2001 ("APA"), but the Reinsurer shall not be liable for more than $36,400,000 minus the aggregate amounts paid to the Company pursuant to Article IX of the APA by IGF Insurance Company or IGF Holdings, Inc. in the aggregate under this sentence and such Part II; provided, however, that such aggregate dollar limitation on such liabilities shall not apply with respect to an indemnification obligation arising from or related to actual fraud committed by IGF Insurance Company, IGF Holdings, Inc. or the Reinsurer. ARTICLE 4 TERRITORY This Contract shall apply only to risks located in the United States of America. ARTICLE 5 EXCLUSIONS This Contract shall not apply to and specifically excludes: 1. Any loss or damage which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority, but not excluding loss or damage which would be covered under a standard policy form containing a standard war exclusion clause. 2. All liability of the Company excluded by the following clauses attached hereto: (a) Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance - U.S.A. (b) Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance - Canada. 3. Risks not reinsured by FCIC. 4. This Contract excludes all liability of the Company arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. "Insolvency fund" includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part. 5. Loss adjustment expense. For the purposes of this Contract, the term "loss adjustment expense" shall mean all loss adjustment expenses incurred by the Company, as defined by the FCIC. ARTICLE 6 REINSURING Part I: The Reinsurer shall be liable for 100% of the subject ultimate - ------- net loss in excess of: 1. 140%, but not greater than 150%, of the Company's subject net retained premium income for each crop year. 2. The liability of the Reinsurer for the term of the treaty shall not exceed $40,000,000 in all without the payment of additional premium equal to a rate of 5% of subject net retained premium income for each year unearned. Part II: In addition, the Reinsurer shall be jointly and severally - -------- liable to the Company, to the same extent and on the same terms and conditions - ---- that IGF Insurance Company and IGF Holdings, Inc. shall be liable to the Company, against all damages, losses, liabilities, costs and expenses of every kind whatsoever incurred or suffered by the Company that result from, relate to or arise out of those matters specified by Article IX of the APA. Notwithstanding any other provision of this Contract, however, the Reinsurer shall not be liable to the Company under this Part II in excess of an aggregate of $36,400,000 minus the aggregate amounts paid to the Company pursuant to Article IX of the APA by IGF Insurance Company or IGF Holdings, Inc. in the aggregate under Article 3 and this Part II; provided, however, that such aggregate dollar limitation on such liabilities shall not apply with respect to an indemnification obligation arising from or related to actual fraud committed by IGF Insurance Company, IGF Holdings, Inc. or the Reinsurer. ARTICLE 7 EXTRA CONTRACTUAL OBLIGATIONS This Contract shall not protect the Company within the limits hereof, where the ultimate net loss includes any extra contractual obligations. The term "extra contractual obligations" is defined as those liabilities not covered under any other provision of this Contract and which arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Company to settle within the policy limit, or by reason of alleged or actual negligence, fraud, or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such action. The date on which any extra contractual obligation is incurred by the Company shall be deemed, in all circumstances, to be the date of the original disaster and/or casualty. ARTICLE 8 EXCESS OF ORIGINAL POLICY LIMITS This Contract shall not protect the Company, within the limits hereof, in connection with ultimate net loss in excess of the limit of its original policy, such loss in excess of the limit having been incurred because of failure by it to settle within the policy limit or by reason of alleged or actual negligence, fraud, or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such action. For the purpose of this Article, the word "loss" shall mean any amounts for which the Company would have been contractually liable to pay had it not been for the limit of the original policy. ARTICLE 9 DEFINITIONS A. The term "ultimate net loss" as used in this Contract shall mean the ratio of the net retained premium income into the net retained loss. An example of the calculation is as follows: net retained premium income equals $100 and the net retained loss equals $150 resulting in the calculation of $150 divided by $100 which equals 150%. B. The term "subject ultimate net loss" as used in this Contract shall mean the subject net retained premium on business the subject of this Contract, classified by the Company as MPCI. C. The term "net retained premium income" as used in this Contract shall mean gross premium income on Covered Business, less cessions to the FCIC's Assigned Risk, Developmental and Commercial Funds. D. The term "subject net retained premium income" as used in this Contract shall mean the net retained premium on Covered Business the subject of this Contract, classified by the Company as MPCI. E. The term "net retained loss" as used in this Contract shall mean the gross losses less all cessions to the FCIC's Assigned Risk and Developmental and Commercial Funds. ARTICLE 10 NOTICE OF LOSS AND SETTLEMENTS The Company shall give notice to the Reinsurer, as soon as reasonably practicable in the event ultimate net losses are likely to result in a claim being made upon the Reinsurer, based upon a reasonable estimate of the Company's subject net retained premium income, and the Company shall keep the Reinsurer advised of all subsequent developments. The Reinsurer agrees to abide by the loss settlements of the Company, such settlements to be construed as satisfactory proof of loss. Amounts falling to the share of the Reinsurer shall be immediately payable to the Company by the Reinsurer upon reasonable evidence of the amount paid or to be paid by the Company being presented to the Reinsurer. Should the ultimate net loss of the Company exceed the Company's estimated retention prior to the time that the subject net retained premium income of the Company is known, the Reinsurer shall make provisional settlement based on a reasonable estimate of the subject net retained premium income. Any provisional settlement shall be adjusted when the Company 's actual subject net retained premium income is known. In addition, the Company shall provide information regarding potential loss developments on July 15, August 30 and October 15 of each year, or as soon as information is available. INTEREST EXPENSE From the date following 10 days after demand by the Company for payments due under this clause, the amount outstanding shall bear interest at the rate of 1 % per month or part thereof until paid. Should Company withhold money due Reinsurer that is in excess of an actual paid loss, or should the Reinsurer pay to the Company any amount greater than the actual paid loss, or should Company withhold any amount pursuant to Part II of Article 6, the amount in excess of such actual paid losses, or in excess of sums properly due under Part II of Article 6, shall be repaid or paid to Reinsurer including interest thereon at the rate of 1 % per month or part thereof from the date such excess amount was paid or withheld until full payment hereunder including interest. ARTICLE 11 PREMIUM A. The Company will pay the Reinsurer a minimum and deposit premium of $6,000,000 at the signing of this treaty for the crop year 2001 and 2002 and shall pay a minimum deposit premium of $3,000,000 on January 1, 2003, a minimum deposit of $3,000,000 on January 1, 2004 and a minimum deposit of $3,000,000 on January 1, 2005. B. Within 30 days following the end of the calendar year the Company shall provide any other information which the Reinsurer may require to prepare their Annual Statement which is reasonably available to the Company. ARTICLE 12 NET RETAINED LINES This Contract applies only to that portion of any policy which the Company retains net for its own account (prior to deduction of any underlying reinsurance specifically permitted in this Contract), and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any policy which the Company retains net for its own account shall be included. The amount of the Reinsurer' liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurer(s), whether specific or general, any amounts which may have become due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise. ARTICLE 13 OFFSET The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise. ARTICLE 14 ACCESS TO RECORDS The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance. ARTICLE 15 ERRORS AND OMISSIONS Any inadvertent error, omission or delay in complying with the terms and conditions of this Contract shall not be held to relieve either party hereto from any liability which would attach to it hereunder if such error, omission or delay had not been made, provided such error, omission or delay is rectified immediately upon discovery. ARTICLE 16 CURRENCY Whenever the word "Dollars" or the "$" sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company. [RESERVED] ARTICLE 17 SERVICE OF SUIT It is agreed that in the event of the failure of the Reinsurer to pay any amount claimed to be due under this Contract, the Reinsurer, at the request of the Company, shall submit to the jurisdiction of any court of the State of Iowa which shall be the exclusive forum for any proceeding arising under this Reinsurance Contract, including, but not limited to, its negotiation, execution or performance, and all matters arising hereunder shall be determined in accordance with the law and practice of such court. Service of process upon Granite Reinsurance Company Limited in such suit may be made at any office of Symons International Group, Inc. or any of its affiliates, or upon any officer or director of Granite Reinsurance Company wherever found (hereinafter "agent for service of process"), and in any suit instituted against any Reinsurer(s) upon this Contract, the Reinsurer(s) shall abide by the final decision of such court or of any appellate court in the event of an appeal. The above named are authorized and directed to accept service of process on behalf of the Reinsurer(s) in any such suit and/or upon the request of the Company to give a written undertaking to the Company that the agent for service of process shall enter a general appearance on behalf of the Reinsurer(s) in the event such a suit shall be instituted. Further, pursuant to any statute of any state, territory or district of the United States of America which makes provision therefor, the Reinsurer(s) hereby designate the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as their true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract and hereby designate the agent for service of process as the firm to whom the said officer is authorized to mail such process or a true copy thereof. The provisions of this Article shall survive any termination of this Agreement. ARTICLE 18 INSOLVENCY (All references to the insolvency of the Company herein are also applicable to the insolvency of each and every insurance carrier collectively referred to as the "Company.") In the event of the insolvency of the Company, this reinsurance shall be payable directly to the Company, or to its liquidator, receiver, conservator or statutory successor on the basis of the liability of the Company without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company indicating the policy or bond reinsured, which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at their own expense, in the proceeding where such claim is to be adjudicated any defense or defenses that they may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of the reinsurance Contract as though such expense had been incurred by the Company. As to all reinsurance made, ceded, renewed or otherwise becoming effective under this Contract, the reinsurance shall be payable as set forth above by the Reinsurer to the Company or to its liquidator, receiver, conservator or statutory successor, (except as provided by Sections 4118(a)(1)(A) and 1114(c) of the New York Insurance Law) or except (1) where the Contract specifically provides another payee in the event of the insolvency of the Company, or (2) where the Reinsurer, with the consent of the direct insured or insureds, have assumed such policy obligations of the Company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the Company to such payees. Then, and in that event only, the Company, with the prior approval of the certificate of assumption on New York risks by the Superintendent of Insurance of the State of New York, is entirely released from its obligation and the Reinsurer pay any loss directly to payees under such policy. ARTICLE 19 REGULATORY COMPLIANCE AND APPROVALS The parties agree to comply with all laws, regulations or directions of appropriate state insurance departments with regard to (a) any notification to policyholders under the Reinsured Contracts (including without limitation all content, description, timing or other requirements), (b) this Reinsurance Contract Agreement and (c) all service requirements to policyholders under the Reinsured Contracts. The parties agree that where formal approval is required by any state insurance regulatory agency, this Reinsurance Contract shall not be effective as to any and all Reinsured Contracts in effect in such state until such approval is obtained. The Reinsurer has provided its Statutory Financial Statements and actuarial opinion for the year ended December 31, 2000 to the Company and the Reinsurer will provide the Company with copies of its Statutory Financial Statements and actuarial opinion for each subsequent calendar year by April 30 of the following year. GRANITE REINSURANCE COMPANY By:_______________________________________ Its:_______________________________________ ACCEPTANCE INSURANCE COMPANIES INC. By:_______________________________________ Its:_______________________________________ NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - U.S.A. 1. This Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurer formed for the purpose of covering Atomic or Nuclear Energy risks. 2. Without in any way restricting the operation of paragraph (1) of this clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: I. Nuclear reactor power plants including all auxiliary property on the site, or II. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such, or III. Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material", and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or IV. Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operations of paragraphs (1) and (2) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate (a) where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after 1st January 1960 this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof. 4. Without in any way restricting the operations of paragraphs (1), (2) and (3) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. It is understood and agreed that this clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard. 6. The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof. 7. Reassured to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. Note: Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that (a) all policies issued by the Reassured on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. (b) with respect to any risk located in Canada policies issued by the Reassured on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. 12/12/57 NMA 1119 NOTES: Wherever used herein the terms: "Reassured" shall be understood to mean "Company", "Reinsured ", "Reassured" or whatever other term is used in the attached reinsurance document to designate the reinsured company or companies. "Agreement" shall be understood to mean "Agreement", "Contract", "Policy" or whatever other term is used to designate the attached reinsurance document. "Reinsurer" shall be understood to mean "Reinsurer", "Underwriters" or whatever other term is used in the attached reinsurance document to designate the reinsurer or reinsurers. NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - CANADA 1. This Agreement does not cover any loss or liability accruing to the Reinsured directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurer formed for the purpose of covering Atomic or Nuclear Energy risks. 2. Without in any way restricting the operation of paragraph 1 of this clause, this Agreement does not cover any loss or liability accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: (1) Nuclear reactor power plants including all auxiliary property on the site, or (2) Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and critical facilities as such, or (3) Installations for fabricating complete fuel elements or for processing substantial quantities of radioactive materials, and for reprocessing, salvaging, chemically separating, storing or disposing of spent nuclear fuel or waste materials, or (4) Installations other than those listed in (3) above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operation of paragraphs 1 and 2 of this clause, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith, except that this paragraph 3 shall not operate: (a) where the Reinsured does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where the said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. 4. Without in any way restricting the operation of paragraphs 1, 2 and 3 of this clause, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. This clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reinsured to be the primary hazard. 6. The term "radioactive material" means uranium, thorium, plutonium, neptunium, their respective derivatives and compounds, radioactive isotopes of other elements and any other substances which may be designated by or pursuant to any law, act or statute, or law amendatory thereof as being prescribed substances capable of releasing atomic energy, or as being requisite for the production, use or application of atomic energy. 7. Reinsured to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. 8. Without in any way restricting the operation of paragraphs 1, 2, 3 and 4 of this clause, this Agreement does not cover any loss or liability accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer caused: (a) by any nuclear incident as defined in or pursuant to the Nuclear Liability Act or any other nuclear liability act, law or statute, or any law amendatory thereof or nuclear explosion, except for ensuing loss or damage which results directly from fire, lightning or explosion of natural, coal or manufactured gas; by contamination by radioactive material. NOTE: Without in any way restricting the operation of paragraphs 1, 2, 3 and 4 of this clause, paragraph 8 of this clause shall only apply to all original contracts of the Reinsured whether new, renewal or replacement which become effective on or after December 31, 1992. NMA 1980a (01.04.96) Form approved by Lloyd's Underwriters' Non-Marine Association Limited. NOTES: Wherever used herein the terms: "Reassured" shall be understood to mean "Company", "Reinsured ", "Reassured" or whatever other term is used in the attached reinsurance document to designate the reinsured company or companies. "Contract" shall be understood to mean "Agreement", "Contract", "Policy" or whatever other term is used to designate the attached reinsurance document. "Reinsurer" shall be understood to mean "Reinsurer", "Underwriters" or whatever other term is used in the attached reinsurance document to designate the reinsurer or reinsurers. EX-10.29 13 doc12.txt Exhibit 10.29 CONSULTING AGREEMENT with an effective date of May 31, 2002 BETWEEN: GORAN CAPITAL INC., a body politic and corporate duly incorporated, having its head office in Toronto Canada and GRANITE REINSURANCE COMPANY LTD., a body politic and corporate duly incorporated, having its office at Bishop's Court Hill, P.O. Box 111, St. Michael, Barbados, West Indies (hereinafter referred to as the "Companies") AND: AGS CAPITAL LTD., a body politic and corporate duly incorporated, with offices at 20 Eagle Road, Toronto Ontario M82 4HS, (hereinafter referred to as the "Consultant") WHEREAS the Companies actively engaged internationally in the business of insurance and reinsurance; WHEREAS the Consultant, through its President, has expertise in the field of insurance and reinsurance and is desirous of entering into this Agreement with respect to providing international consulting services on demand to the Companies as outlined in Appendix A and additional appendix as maybe attached hereto in writing; WHEREAS the Companies wishes to engage the services offered by the Consultant and the Consultant is willing to enter into an agreement to provide services on the terms and conditions described herein: NOW, THEREFORE, BE IT AGREED AS FOLLOWS: 1. PREAMBLE The whereas clauses mentioned above shall form an integral part of this Agreement as it fully-recited at length herein. 2. ENGAGEMENT 2.1 The Companies hereby retains the services of the Consultant and the Consultant hereby accepts such engagement. 2.2 During the term of this Agreement, the Consultant shall, at its sole costs, make available to the Companies and provide upon its request a duly qualified representative for purposes of fulfilling the Consultant's obligations under this Agreement. 3. TERM (A) This is an annual renewable contract, unless notice is given by either party at least 90 days before June 1st of any year. The contract shall then expire on the 1st of June following notice. At any time prior to the 90-day notice period, the Company, at it's option, may choose to extend this contract for an additional one-year term. (B) Change of control, should Gordon Symons and or Douglas Symons no longer control the appointment of board members of Goran, and in order to cause continuity of these very important projects, this contract shall automatically extend for a further two year term, from the date of the last renewal. 4. NATURE OF CONSULTING SERVICES 4.1 The Consultant agrees to provide consulting services on behalf of the Companies as and when requested by the Companies during the term of this Agreement and, without limiting the generality of such services, to furnish a representative to oversee and supervise the business activities outlined in Appendix A. The essence of this contract is to utilize the experience and knowledge of Alan G. Symons, his previous duties with the Companies and personnel. Alan G. Symons shall be assigned as the consultant performing the services to the Companies, however, it is understood and agreed that certain work may be performed by others under the control of AGS Capital Ltd. At all times, Alan G. Symons shall effect direct supervision over the work performed. Any substitution of Alan G. Symons to perform the services being contracted for under this agreement without the written consent of the Companies shall render the contract null and void. 4.2 The Consultant and its representative warrant to perform such services as requested to the best of its talents, efforts and abilities in accordance with standard business practices. 4.3 This agreement may not be assigned by either party. 5. COMPENSATION The Companies shall compensate the Consultant for services rendered under this Agreement at an annual rate of FIVE HUNDRED THOUSAND dollars (U.S.) ($500,000.00 U.S.), payable in equal monthly installments, in arrears, and in each successive calendar year of the term, the annual rate shall be increased by the greater of (1) 2.5% or (2) the U.S. consumer price index for the immediately preceding calendar year. The Companies shall not be responsible to the Consultant for any ordinary operating expenses of the Consultant such as general administrative, rent, staff, overhead, etc. 5. INSURANCE The Companies will continue to provide for the Consultant and one assistant to participate in the life, medical and dental plans of its subsidiary, Symons International Group, Inc. ("SIG"). 7. REIMBURSEMENT FOR OUT-OF-POCKET EXPENSES The parties recognize that in the course of performing its services hereunder, the Consultant may incur out-of-pocket expenses. The Consultant agrees to submit, at designated intervals to be determined by the parties hereto, invoices with original vouchers attached thereto, to the Companies. The Consultant agrees that the said expenses shall be reasonable and necessary, in the opinion of the Companies, as well as be incurred in the direct performance of its services hereunder, failing which they may not be reimbursed to the Consultant. 8. BONUS In addition to the forgoing, the Companies will pay a bonus immediately upon completion of certain projects and the financial benefit to the Companies has been received as outlined in the attached or future appendix to this agreement. 9. INDEPENDENT CONSULTANT 9.1 It is understood that the Consultant is retained by the Companies only for the purposes set forth herein and its relation to the Companies shall be of an independent Consultant. 9.2 The Consultant agrees that it shall not be considered under the provisions of this Agreement or otherwise as having a joint venture or partnership status with the Companies or being entitled to participate in any plans, arrangements, benefits, or distributions of the Companies. 9.3 Notwithstanding items 9.1 and 9.2, the consultant is engaged to render services in accordance with the terms of this agreement in an expeditious and professional manner and to keep the Companies fully informed of the status of the matters entrusted to them for their assistance on a monthly basis. 10. CONFIDENTIALITY As an essential condition of the Agreement, the Consultant warrants that it shall not, at any time, either during the term of this Agreement or thereafter, divulge to any competitor person, or competitor corporation, any information or documentation received by it during the course of its engagement and all such information shall be kept strictly confidential and shall not in any manner be revealed to competitor person or competitor corporation. At the termination of this Agreement, the Consultant agrees if requested of same to return and give to the Companies all documentation relating to the Companies in its possession and/or control. 11. TERMINATION The Companies shall have the right to terminate the services hereunder of the Consultant "for cause" at any time which shall be defined and limited to acts of dishonesty, fraud or gross negligence of the Consultant or its representative committed from and after the effective date of this agreement. 12. INTEREST ON MONIES DUE Any balance due either party past due greater than 30 days shall bear interest at 1% per month or part thereof until fully paid. 13. NOTICE All notices called for or contemplated hereunder shall be in writing and shall be sent by certified or registered mail or by courier to the addresses mentioned in the heading of this Agreement. All notices will be deemed given when received if delivered by courier, and if sent by mail then five (5) business days after mailing. Either party may change their address by written notice to the other party. 14. SET OFF There shall be no right of set off against the base compensation included under Section 5, but up to 50% of any additional compensation such as that contemplated under Section 8 can be at the Company's option set off against balances due the Companies. 15. ENTIRE AGREEMENT This Agreement constitutes the entire understanding between the parties with respect to the subject matter hereof, superseding all negotiations, previous agreements, verbal or written, and no variation hereof shall be of any force and effect unless reduced to writing and signed by the parties hereto. WHEREOF, THE PARTIES HAVE SIGNED HEREIN BELOW: GRANITE REINSURANCE COMPANY LTD. AGS CAPITAL LTD. PER: /S/ G. GORDON SYMONS PER: /S/ ALAN G. SYMONS ----------------------- --------------------- DATE: MAY 31, 2002 DATE: MAY 31, 2002 -------------- -------------- GORAN CAPITAL, INC. PER: /S/ DOUGLAS H. SYMONS ------------------------ DATE: MAY 31, 2002 -------------- WITNESS: WITNESS: ___________________________________ ___________________________ APPENDIX A The consultant is hereby engaged for the following projects on behalf of the Companies. The consultant shall not represent the Company with respect to any other matters other than the following without prior written consent. (A) The Consultant shall: Assist the management of IGF Insurance Company with respect to the run-off of its crop insurance operations and the collection of debts and obligations due to IGF. (B) Manage the litigation known as AgPi. Should the litigation result in IGF or other affiliates to IGF including but not limited to Granite Re and Goran, being awarded compensation of a calculated value, the Consultant will be entitled to 10% on the net proceeds over $1 million (U.S.) (C) Manage the litigation between Toronto Dominion Bank and Granite Insurance Company. Should the litigation result in compensation of a calculated value, the Consultant will be entitled to a bonus of 10% on net proceeds over $1 million (CAN). (D) At the request of the Company, the Consultant shall work with designated representatives of the Companies to acquire or restructure outstanding trust preferred securities due 2027 and shall not assist directly or indirectly any other person or entity other than the Companies with respect to all matters associated with the purchase or restructuring of the trust preferred securities. EX-10.30 14 doc13.txt Exhibit 10.30 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is entered into effective as of the 31st day of May, 2002 with respect to the following: Goran Capital Inc. ("Goran"), and Symons International Group, Inc. ("SIG"), jointly and severally, and their respective subsidiaries (collectively, the "Company") consider it essential to its best interests and the best interests of its stockholders to foster the continuous employment of its key management personnel and, accordingly, the Company desires to employ Douglas H. Symons ("Executive"), upon the terms and conditions hereinafter set forth; and The Executive desires to continue to be employed by the Company, upon the terms and conditions contained herein. NOW, THEREFORE, in consideration of the covenants and agreements set forth below, the parties agree as follows: 1. EMPLOYMENT 1.1 Term of Agreement. The Company agrees to continue to employ ------------------- Executive as Chief Executive Officer and President of Goran Capital Inc. and Symons International Group, Inc. for an initial term of two (2) years, unless such employment is terminated pursuant to Section 3 below; provided, however, -------- ------- that the term of this Agreement shall automatically be extended without further action of either party for additional one (1) year periods thereafter unless, not later than six (6) months prior to the end of the then effective term, either the Company or the Executive shall have given written notice that such party does not intend to extend this Agreement ("Notice of Non-Renewal"). If Company gives Executive such a Notice of Non-Renewal, Executive's employment shall terminate as of the expiration date of this Agreement. 1.2 Terms of Employment. During the term of this Agreement as set forth in -------------------- Section 1.1, Executive agrees to be a full-time employee of the Company and further agrees to devote substantially all of Executive's working time and attention to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities associated with Executive's positions and to use Executive's best efforts to perform faithfully and efficiently such responsibilities. Executive shall perform such duties and responsibilities as may be determined from time to time by the Board of Directors of the Company, which duties shall be consistent with the positions, which shall grant Executive authority, responsibility, title and standing comparable to Executive's positions in a stock insurance holding company of similar standing. Executive's primary place of work will be at the Company's U.S. headquarters in Indianapolis, Indiana, but it is understood and agreed that Executive's duties may require travel. In the event Executive is relocated to another Company location, the Company agrees to pay for the cost of Executive's move (including temporary lodging expenses) and to facilitate the sale of Executive's Indianapolis home so that Executive will be enabled to purchase a new home in Executive's new location that is comparable in price to Executive's existing home and have Executive's family join Executive at such new location within two (2) months of Executive's transfer or such other period as is reasonable considering market and location. Nothing herein shall prohibit Executive from devoting time to civic and community activities or managing personal investments, as long as the foregoing do not interfere with the performance of Executive's duties hereunder. 2. COMPENSATION, BENEFITS AND PREREQUISITES 2.1 Salary. Company shall pay Executive an annual salary, in equal ------ bi-weekly installments, in the amount of Five Hundred Thousand Dollars ($500,000). Executive's salary as payable pursuant to this Agreement may be increased from time to time as mutually agreed upon by Executive and the Company. Notwithstanding any other provision of this Agreement, Executive's salary paid by Company for any year covered by this Agreement shall not be less than such salary paid to Executive for the immediately preceding calendar year. All salary and bonus amounts paid to Executive pursuant to this Agreement shall be in U.S. dollars. 2.2 Bonus. The Company and Executive understand and agree that the ----- Company expects to achieve financial improvement during the term of this Agreement and that Executive will make a material contribution to that improvement which will require certain personal and familial sacrifices on the part of Executive. Accordingly, it is the desire and intention of the Company to reward Executive for the attainment of that improvement through bonus and other means (including, but not limited to, stock options, stock appreciation rights and other forms of incentive compensation). Therefore, the Company will pay Executive a lump-sum bonus (subject to normal withholdings) within thirty (30) business days from receipt by Company of its consolidated, annual audited financial statements in an amount which shall be determined in accordance with the following Bonus Table. All amounts used for calculation purposes in this section shall be based on the audited, consolidated financial statements of SIG (or any successor thereto), with such financial statements having been prepared in accordance with applicable generally accepted accounting principles, applied on a consistent basis with that of prior years. BONUS TABLE ----------- If Audited Net % of Annual Salary Income (as a % of Payable to Executive Budgeted Net Income) Is As Bonus - -------------------------- --------- Less Than 75% -0- 75% or more, but less than 85% 25% 85% or more, but less than 90% 30% 90% or more, but less than 95% 35% 95% or more, but less than 96% 50% 96% or more, but less than 97% 60% 97% or more, but less than 98% 70% 98% or more, but less than 99% 80% 99% or more, but less than 100% 90% 100% or more of budget 100% 2.3 Employee Benefits. Executive shall be entitled to receive all ------------------ benefits and perquisites which are provided to other executives of Company under the applicable Company plans and policies, and to future benefits and perquisites made generally available to executive employees of the Company with duties and compensation comparable to that of Executive upon the same terms and conditions as other Company participants in such plans. 2.4 Additional Perquisites. During the term of this Agreement, Company ---------------------- shall provide Executive with: (a) Not less than five (5) weeks paid vacation during each calendar year. (b) A vehicle commensurate with Executive's position. (c) A golfing membership at various country clubs, or in the event of Executive's relocation, other comparable country club, including payment by the Company of all charges incurred by Executive at such club. (4) A resident membership at the social club of Executive's choice, or in the event of Executive's relocation, other comparable social club, including payment by the Company of all charges incurred by Executive at such club. 2.5 Expenses. During the period of his employment hereunder, Executive -------- shall be entitled to receive reimbursement from the Company (in accordance with the policies and procedures in effect for the Company's employees) for all reasonable travel, entertainment and other business expenses incurred by him in connection with his services hereunder. 3. TERMINATION OF EXECUTIVE'S EMPLOYMENT 3.1 Termination of Employment and Severance Pay. Executive's ------------------------------------------------ employment under this Agreement may be terminated by either party at any time for any reason; provided, however, that if Executive's employment is terminated -------- ------- by the Company for any reason other than for Cause (as such term is defined herein), Executive shall receive, as severance pay an amount equal to salary plus bonus as set forth herein. Executive shall receive one (1) years current salary paid in regular bi-weekly payments (the "Salary Continuation") plus a lump sum payment equal to one (1) years current salary (the "Lump Sum Payment") plus, for a period of two (2) years following the date of termination, an annual amount equal to the average of the bonus amounts earned by the Executive for the two (2) year period preceding the date of termination. The Lump Sum Payment shall be paid to Executive within five (5) business days of Executive's termination for any reason other than for Cause. Executive and his family shall continue to be covered by Company's health and dental plan for the period of two years for the date of termination of employment upon the same terms and conditions under which Executive and his family were covered at the time of his termination. Further, if Executive shall be terminated without Cause, receipt of Salary Continuation and the Lump Sum Payment described above is conditioned upon execution by Executive and the Company of a mutual waiver and release agreement substantially in the form of Exhibit A attached hereto. Further, Executive shall receive Salary Continuation and the Lump Sum Payment in accordance with this Section 3.1 if Executive shall terminate this Agreement due to a breach thereof by the Company or if Executive is directed by the Company (including, if applicable, any successor) to engage in any act or action constituting fraud or any unlawful conduct relating to the Company or its business as may be determined by application of applicable law. If Executive shall become entitled to receive Salary Continuation pursuant to this Section 3.1; (a) all stock options of SIG and Goran (including any subsidiary of either SIG or Goran) existing as of the date hereof previously granted Executive shall vest in full and become exercisable as of the date of Executive's termination; and (b) Executive shall have not less than one hundred eighty (180) days from the date of termination of his employment with Company in which to exercise any unexercised stock options previously granted to Executive. 3.2 Cause. For purposes of this Agreement including, but not limited ----- to, this Section 3, "Cause" shall mean: (a) the Executive being convicted in the United States of America, any State therein, or the District of Columbia, or in Canada or any Province therein (each, a "Relevant Jurisdiction"), of a crime for which the maximum penalty may include imprisonment for one year or longer (a "felony") or the Executive having entered against him or consenting to any judgment, decree or order (whether criminal or otherwise) based upon fraudulent conduct or violation of securities laws; (1) the Executive's being indicted for, charged with or otherwise the subject of any formal proceeding (criminal or otherwise) in connection with any felony, fraudulent conduct or violation of securities laws, in a case brought by a law enforcement or securities regulatory official, agency or authority in a Relevant Jurisdiction; (2) the Executive engaging in fraud, or engaging in any unlawful conduct relating to the Company or its business, in either case as determined under the laws of any Relevant Jurisdiction; or (3) the Executive breaching any provision of this Agreement. 3.3 Change of Control. Notwithstanding any other provisions of this ------------------- Agreement, if (i) a Change of Control shall occur; and (ii) within twelve (12) --- months of any such Change of Control, Executive (a) receives a Notice of Non-Renewal, (b) is terminated for any reason other than for Cause, or (c) Company (including its successors, if any) is in breach of this Agreement, then Executive shall receive the Lump Sum Payment plus his current salary (in bi-weekly payments) as severance pay until the expiration of fifty-two (52) weeks from Executive's Date of Termination. The receipt by Executive of payments pursuant to this Section 3.3 is specifically conditioned, and no payments pursuant to this Section 3.3 shall be made to Executive if he is, at the time of his Termination, in breach of any provision (specifically including, but not limited to, the provisions of this Agreement pertaining to non-competition and confidentiality) of this Agreement and, further, if such payments have already begun, the continuation of payments to Executive pursuant to this Section 3.3 shall cease at the time Executive shall fail to comply with the non-competition and confidentiality provisions of Article 4 herein. "Change of Control" shall mean the inability of the Symons family to cause the election of a majority of the members of the Board of Directors of either Goran, SIG or their respective successors. 3.4 Disability. So long as otherwise permitted by law, if Executive ---------- has become permanently disabled from performing his duties under this Agreement, the Company's Chairman of the Board, may, in his discretion, determine that Executive will not return to work and terminate his employment as provided below. Upon any such termination for disability, Executive shall be entitled to such disability, medical, life insurance, and other benefits as may be provided generally for disabled employees of Company during the period he remains disabled. Permanent disability shall be determined pursuant to the terms of Executive's long term disability insurance policy provided by the Company. If Company elects to terminate this Agreement based on such permanent disability, such termination shall be for Cause. 3.5 Indemnification. Executive shall be indemnified by Company to the --------------- maximum extent permitted by applicable law for actions undertaken for, or on behalf of, the Company and its subsidiaries. 4. NON-COMPETITION, CONFIDENTIALITY AND TRADE SECRETS 4.1 Noncompetition. In consideration of the Company's entering into -------------- this Agreement and the compensation and benefits to be provided by the Company to Executive hereunder, and further in consideration of Executive's exposure to proprietary information of the Company, Executive agrees as follows: (2) Until the date of termination or expiration of this Agreement for any reason (the "Date of Termination") Executive agrees not to enter into competitive endeavors and not to undertake any commercial activity which is contrary to the best interests of the Company or its affiliates, including, directly or indirectly, becoming an employee, consultant, owner (except for passive investments of not more than five percent (5%) of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a national securities exchange or in an over-the-counter securities market), officer, agent or director of, or otherwise participating in the management, operation, control or profits of (a) any firm or person engaged in the operation of a business engaged in the acquisition of insurance businesses or (b) any firm or person which either directly competes with a line or lines of business of the Company accounting for five percent (5%) or more of the Company's gross sales, revenues or earnings before taxes or derives five percent (5%) or more of such firm's or person's gross sales, revenues or earnings before taxes from a line or lines of business which directly compete with the Company. (b) If Executive's employment is terminated by Executive, or by reason of Executive's disability, by the Company for Cause, or pursuant to a Notice of Non-Renewal as outlined in Section 1.1, then for two (2) years after the Date of Termination, Executive agrees not to become, directly or indirectly, an employee, consultant, owner (except for passive investments of not more than five percent (5%) of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a national securities exchange or in an over-the-counter securities market), officer, agent or director of, or otherwise to participate in the management, operation, control or profits of, any firm or person which directly competes with a business of the Company which at the Date of Termination produced any class of products or business accounting for five percent (5%) or more of the Company's gross sales, revenues or earnings before taxes at the Date of Termination. (c) Executive acknowledges and agrees that damages for breach of the covenant not to compete in this Section 4.1 will be difficult to determine and will not afford a full and adequate remedy, and therefore agrees that the Company shall be entitled to an immediate injunction and restraining order (without the necessity of a bond) to prevent such breach or threatened or continued breach by Executive and any persons or entities acting for or with Executive, without having to prove damages, and to all costs and expenses (if a court or arbitrator determines that the Executive has breached the covenant not to compete in this Section 4.1, including reasonable attorneys' fees and costs, in addition to any other remedies to which the Company may be entitled at law or in equity. It is agreed that the provisions of this covenant not to compete are reasonable and necessary for the operation of the Company and its subsidiaries. However, should any court or arbitrator determine that any provision of this covenant not to compete is unreasonable, either in period of time, geographical area, or otherwise, the parties agree that this covenant not to compete should be interpreted and enforced to the maximum extent which such court or arbitrator deems reasonable. 4.2 CONFIDENTIALITY. EXECUTIVE SHALL NOT KNOWINGLY DISCLOSE OR --------------- REVEAL TO ANY UNAUTHORIZED PERSON, DURING OR AFTER THE TERM, ANY TRADE SECRET OR OTHER CONFIDENTIAL INFORMATION (AS OUTLINED IN THE INDIANA UNIFORM TRADE SECRETS ACT) RELATING TO THE COMPANY OR ANY OF ITS AFFILIATES, OR ANY OF THEIR RESPECTIVE BUSINESSES OR PRINCIPALS, AND EXECUTIVE CONFIRMS THAT SUCH INFORMATION IS THE EXCLUSIVE PROPERTY OF THE COMPANY AND ITS AFFILIATES. EXECUTIVE AGREES TO HOLD AS THE COMPANY'S PROPERTY ALL MEMORANDA, BOOKS, PAPERS, LETTERS AND OTHER DATA, AND ALL COPIES THEREOF OR THEREFROM, IN ANY WAY RELATING TO THE BUSINESS OF THE COMPANY AND ITS AFFILIATES, WHETHER MADE BY EXECUTIVE OR OTHERWISE COMING INTO EXECUTIVE'S POSSESSION AND, ON TERMINATION OF EXECUTIVE'S EMPLOYMENT, OR ON DEMAND OF THE COMPANY AT ANY TIME, TO DELIVER THE SAME TO THE COMPANY. ANY IDEAS, PROCESSES, CHARACTERS, PRODUCTIONS, SCHEMES, TITLES, NAMES, FORMATS, POLICIES, ADAPTATIONS, PLOTS, SLOGANS, CATCHWORDS, INCIDENTS, TREATMENT, AND DIALOGUE WHICH EXECUTIVE MAY CONCEIVE, CREATE, ORGANIZE, PREPARE OR PRODUCE DURING THE PERIOD OF EXECUTIVE'S EMPLOYMENT AND WHICH IDEAS, PROCESSES, ETC. RELATE TO ANY OF THE BUSINESSES OF THE COMPANY, SHALL BE OWNED BY THE COMPANY AND ITS AFFILIATES WHETHER OR NOT EXECUTIVE SHOULD IN FACT EXECUTE AN ASSIGNMENT THEREOF TO THE COMPANY, BUT EXECUTIVE AGREES TO EXECUTE ANY ASSIGNMENT THEREOF OR OTHER INSTRUMENT OR DOCUMENT WHICH MAY BE REASONABLY NECESSARY TO PROTECT AND SECURE SUCH RIGHTS TO THE COMPANY. 5. MISCELLANEOUS 5.1 Amendment. This Agreement may be amended only in writing, signed --------- by both parties. 5.2 Entire Agreement. This Agreement contains the entire understanding ---------------- of the parties with regard to all matters contained herein. There are no other agreements, conditions or representations, oral or written, expressed or implied, with regard to the employment of Executive or the obligations of the Company or the Executive. This Agreement supersedes all prior employment contracts and non-competition agreements between the parties. 5.3 Notices. Any notice required to be given under this Agreement ------- shall be in writing and shall be delivered either in person or by certified or registered mail, return receipt requested. Any notice by mail shall be addressed as follows: If to the Company, to: Symons International Group, Inc. Attention: Secretary 4720 Kingsway Drive Indianapolis, Indiana 46205 AND Goran Capital Inc. Attention: Secretary 4720 Kingsway Drive Indianapolis, Indiana 46205 If to Executive, to: Douglas H. Symons 7436 Glenvista Place Fishers, Indiana 46038 or to such other addresses as one party may designate in writing to the other party from time to time. 5.4 Waiver of Breach. Any waiver by either party of compliance with ------------------ any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement. 5.5 Due Authority. The Company represents and warrants that the -------------- execution of this Agreement and the performance by the Company of the terms and conditions of this Agreement have been duly and validly authorized by Company and, further, that no other authorization or consent is required to be obtained by Company for its performance hereunder. 5.6 VALIDITY. THE INVALIDITY OR UNENFORCEABILITY OF ANY PROVISION OF -------- THIS AGREEMENT SHALL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF ANY OTHER PROVISION OF THIS AGREEMENT, WHICH SHALL REMAIN IN FULL FORCE AND EFFECT. 5.7 Governing Law. This Agreement shall be interpreted and enforced in ------------- accordance with the laws of the State of Indiana, without giving effect to conflict of law principles. 5.8 Headings. The headings of articles and sections herein are -------- included solely for convenience and reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 5.9 Counterparts. This Agreement may be executed by either of the ------------ parties in counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute a single instrument. 5.10 SURVIVAL. COMPANY'S OBLIGATIONS UNDER SECTIONS 3.1, 3.3 AND 3.5 -------- AND EXECUTIVE'S OBLIGATIONS UNDER SECTION 4 SHALL SURVIVE THE TERMINATION AND EXPIRATION OF THIS AGREEMENT IN ACCORDANCE WITH THE SPECIFIC PROVISIONS OF THOSE PARAGRAPHS AND SECTIONS AND THIS AGREEMENT IN ITS ENTIRETY SHALL BE BINDING UPON, AND INURE TO THE BENEFIT OF, THE SUCCESSORS AND ASSIGNS OF THE PARTIES HERETO. 5.11 Miscellaneous. No provision of this Agreement may be modified, ------------- waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior subsequent time. IN WITNESS WHEREOF, the parties have executed this Agreement this 25th day of April, 2003. SYMONS INTERNATIONAL GROUP, INC. By:_________________________________ Title:________________________________ GORAN CAPITAL INC. By:_________________________________ Title:_______________________________ DOUGLAS H. SYMONS ("EXECUTIVE") ___________________________________ ------ EXHIBIT A --------- AGREEMENT OF RELEASE AND WAIVER ----------------------------------- This Agreement of Release and Waiver ("Release"), dated as of the date indicated below, is made and entered into by and between Douglas H. Symons ("Employee") and Symons International Group, Inc. ("SIG"). WHEREAS, SIG maintains a policy of providing discretionary severance pay for certain of its employees in the event of termination of employment; and WHEREAS, the purpose of said Policy is to enable SIG, in its sole discretion, to provide protection against future unemployment by making severance pay benefits available to certain of its employees in the event of their termination of employment; and WHEREAS, pursuant to this Policy, Employee was offered discretionary severance pay by SIG in connection with Employee's termination of employment, receipt of which was conditioned, among other things, on Employee executing this Release. NOW, THEREFORE, in consideration of the severance payment in the amount of $_______________, less applicable federal and state deductions, and for other good and valuable consideration, Employee, for himself, his representatives, successors, and assigns, does hereby unconditionally and forever: (a) waive any rights Employee may have and release and discharge SIG and each of its present or former affiliates, and each of SIG and its affiliates' respective subsidiaries, shareholders, officers, directors, employees, agents, successors and assigns of and from any and all claims, actions, causes of action, rights, demands, attorneys' fees, wages, bonus payments, penalties, debts or damages of every kind or nature whatsoever, arising out of or relating in any way to Employee's employment or termination of employment with SIG, including, without limitation, claims that Employee is entitled to receive additional compensation, bonus payments, or other benefits under any employee benefit plan or benefit arrangements of SIG, except for: (i) Claims relating to medical, hospital or other benefits available under the terms of the SIG Medical Plan, by virtue of any valid election made by employee pursuant to the Consolidated Omnibus Budget Reconciliation Act ("COBRA"); (ii) Claims for amounts which are payable pursuant to the terms of the SIG Medical Plan to or on behalf of Employee with respect to medical expenses of Employee or Employee's dependents incurred on or before the date of Employee's termination of employment with SIG; and (iii) Employee's entitlement to accrued and unpaid wages and vacation benefits, less applicable federal and state deductions, up to Employee's last date of employment with SIG. (b) acknowledge and agree that Employee is forever releasing SIG from all claims arising on or before the date of execution of this Release that SIG has in any way discriminated against Employee by reason of Employee's age, race, sex, national origin, religion, physical or mental disability or any other legally protected status or condition. In this connection, Employee understands that in consideration of the payment referred to above, Employee will not file any federal, state or local lawsuit claiming discrimination and, in the event that such a lawsuit has been filed, Employee will withdraw such lawsuit. Employee also waives the right to receive any financial benefit, including monetary recovery and/or reinstatement from any lawsuit, charge of discrimination or settlement related to such rights and claims as Employee hereby waives, whether the lawsuit or charge of discrimination is filed or the settlement is reached by a federal, state or local agency, or any other party or entity. Without limiting the foregoing, Employee hereby specifically releases SIG from any and all claims under Title VII of the Civil Rights Act of 1964, the Employee Retirement Income Security Act of 1974, the Age Discrimination In Employment Act of 1967, the Rehabilitation Act of 1973, the Americans With Disabilities Act of 1990, the Family and Medical Leave Act of 1993 and any other federal, state or local statute, rule or regulation precluding or relating to discrimination in employment; (c) acknowledge and agree that Employee is forever releasing SIG from all claims arising on or before the date of execution of this Release that SIG breached any express or implied contractual or other obligation to Employee or that SIG unlawfully terminated or constructively discharged Employee, including, without limitation, any claims for wrongful discharge, breach of contract, or under any other contract theory of recovery; (d) acknowledge and agree that Employee is forever releasing SIG from any and all tort claims arising on or before the date of execution of this Release, including, without limitation, claims for defamation, invasion of privacy, intentional or negligent infliction of emotion distress or under any other tort theory of recovery; and (e) agree not to demand or apply for employment with SIG in the future. Without limiting the foregoing, in consideration of the payment described above and the agreement by SIG not to disclose, without Employee's consent, any information to prospective employers about Employee other than the dates of Employee's employment and Employee's job title/position, Employee agrees to discharge and unconditionally release SIG from defamation claims related to Employee's termination of employment. In addition, Employee further acknowledges and agrees that Employee shall immediately repay the severance payment referred to above if Employee should ever breach any provision of this Release or this Release is found to be unenforceable. Employee also acknowledges and agrees that Employee shall pay to SIG the total amount of any and all attorney's fees and expenses that are incurred by SIG in enforcing any of the terms of this Release subsequent to the effective date of this Release. Employee further acknowledges and agrees that this Release and the consideration given by SIG are not to be construed as an admission by SIG of any liability whatsoever. In the event any one or more of the provisions contained in this Release shall for any reason be held to be invalid, illegal or unenforceable in any vent, such invalidity, illegality, or unenforceability shall not affect any other provision of this Release. EMPLOYEE ACKNOWLEDGES THAT HE HAS BEEN ADVISED THAT LEGAL COUNSEL COULD BE SOUGHT CONCERNING THIS DOCUMENT AND THAT EMPLOYEE HAS TWENTY-ONE (21) DAYS FROM RECEIPT OF THIS DOCUMENT WITHIN WHICH TO EXECUTE THIS AGREEMENT OF RELEASE AND WAIVER. EMPLOYEE ACKNOWLEDGES THAT EMPLOYEE HAS CAREFULLY READ THIS RELEASE AND FULLY UNDERSTANDS THAT BY EXECUTING THIS RELEASE EMPLOYEE IS RELEASING SIG FROM CLAIMS ARISING OUT OF OR IN CONNECTION WITH EMPLOYEE'S EMPLOYMENT AND/OR TERMINATION OF EMPLOYMENT WITH SIG. EMPLOYEE MAY REVOKE THIS AGREEMENT OF RELEASE AND WAIVER, IN WRITING, WITHIN SEVEN (7) DAYS FROM THE DATE OF EXECUTION HEREOF. Dated this __________ day of ____________________, 20_____. EMPLOYEE: __________________________________________ Printed Name: Douglas H. Symons Witness:_____________________________ EX-13 15 doc14.txt [GRAPHIC OMITED] [GRAPHIC OMITED] GORAN CAPITAL INC. 2002 ANNUAL REPORT GORAN CAPITAL INC. ANNUAL REPORT TO SHAREHOLDERS DECEMBER 31, 2002 BUSINESS ACTIVITIES Goran Capital Inc. ("Goran") owns subsidiaries engaged in a number of business activities. The most extensive of these is the property and casualty insurance business conducted in the United States, Canada and Barbados, on both a direct and reinsurance basis through a number of subsidiaries collectively referred to in this report as Goran. The common stock of Goran trades on The Toronto Stock Exchange under the symbol "GNC.TO" and the OTC Bulletin Board under the symbol "GNCNF.OB." Goran owns 73.8% of Symons International Group, Inc. ("SIG") which trades on the OTC Bulletin Board under the symbol "SIGC.OB." SIG owns insurance companies principally engaged in the nonstandard automobile insurance market. Superior Insurance Company and Pafco General Insurance Company underwrite nonstandard automobile insurance in the United States. Nonstandard automobile insurance is marketed and sold through independent agents to drivers who are unable to obtain coverage from insurers at standard or preferred rates. Prior to 2001, the Company was also engaged in the crop insurance business. On June 6, 2001, the Company exited the crop insurance business when IGF Insurance Company sold its crop insurance operations to a third party. Accordingly, the financial statements included in this report reflect the results of the crop insurance segment as "discontinued operations." Granite Reinsurance Company Ltd. underwrites finite (limited risk) reinsurance in Bermuda, the United States and Canada. All dollar amounts shown in this report are in U.S. currency unless otherwise indicated. The conversion rates between U.S. and Canadian dollars for transactions occurring during the year 2002 was 1.57021 and for balances as of December 31, 2002 the rate is 1.57690.
TABLE OF CONTENTS Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Chairman's Report to Stockholders 3 Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . 5 Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 15 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 19 Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Stockholder Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Board of Directors and Executive Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Subsidiaries and Branch Offices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
FINANCIAL HIGHLIGHTS 1 (In thousands, except per share data) For the years ended December 31,
2002 2001 2000 1999 1998 --------- --------- --------- --------- --------- Gross premiums written. . . . . . . . . . . . . $111,394 $193,186 $182,099 $236,401 $303,745 Net operating earnings (loss) from continuing operations 2. . . . . . . . . . . . . . . . . . $(18,187) $(19,011) $(12,417) $(49,883) $ 471 Net loss from discontinued operations . . . . . . . . . . . . . . . . . . $ -- $ (2,156) $(17,041) $(15,373) $ (9,421) Net loss. . . . . . . . . . . . . . . . . . . . $(29,745) $(34,093) $(80,265) $(62,373) $(11,936) Basic operating earnings (loss) per share from continuing operations 2. $ (3.37) $ (3.34) $ (2.13) $ (8.49) $ 0.08 Basic loss per share from discontinued operations. . . . . . . . . . . . $ -- $ (0.38) $ (2.93) $ (2.61) $ (1.61) Basic loss per share. . . . . . . . . . . . . . $ (5.51) $ (5.99) $ (13.79) $ (10.61) $ (2.04) Stockholders' equity (deficit). . . . . . . . . . . . . . . . . . . $(90,752) $(89,146) $(72,668) $(12,887) $ 49,725 Return on average equity 3. . . . . . . . . . . N/A N/A N/A N/A (21.7%) Book value (deficit) per share. . . . . . . . . . . . . . . . . . . . . $ (16.82) $ (15.65) $ (12.48) $ (2.19) $ 8.51 Market Value per share. . . . . . . . . . . . . $ 0.22 $ 0.61 $ 0.34 $ 2.00 $ 10.38 1. The financial statements of the Company have been prepared in accordance with Canadian GAAP presented in U.S. dollars. 2. Operating earnings and per share amounts exclude amortization, interest, taxes, realized capital gains and losses, minority interest, and any extraordinary items. 3. Return on average equity cannot be calculated due to the accumulated deficit in stockholders' equity in 2002, 2001, 2000 and 1999.
[GRAPHIC OMITED] [GRAPHIC OMITED] CORPORATE STRUCTURE - ------ Chairman's Report to Stockholders - ------------------------------------ May 27, 2003 Dear Fellow Stockholder: Despite a difficult market that permeated the insurance industry since September 11, 2001, we are seeing improvement in our company's operations as a result of key changes we have made. The company reached a pinnacle in its operations in the late 1990's. We were writing premiums in excess of $500 million and realizing pre-tax profits in excess of $20 million. The latter part of that era saw a change in the underwriting of insurance in those fields that we were most active, nonstandard auto insurance and crop insurance. The largest writer in the nonstandard field with premiums in the area of $10 billion decided in the latter half of the 90's that it would undertake a program of rate cutting to gain market share of the business. This forced other nonstandard insurers to reduce or hold the rates at levels that were not economical in an attempt to maintain business that would be otherwise lost. The results were that we, like others in the same field of insurance activity, struggled with increasing losses. This came at a time when the markets were unable to effectively increase rates to meet the added cost of deteriorating loss experience. We cut costs of operations in an effort to produce a profitable portfolio of this class of business. We took the dramatic step of releasing employees, including several of the top personnel in the company. We culminated these changes in 2002 by appointing Douglas Symons as Chief Executive Officer of Goran Capital Inc. Further, the company stopped writing business in jurisdictions where rates were inadequate and concentrated on renewing the business that was performing best. We received some help earlier on when the principal writer of nonstandard auto insurance decided that the loss of profits they encountered by their zeal to capture a larger share of the business was not favoring them. This return to a more normal market assisted us, and along with other changes we made, we now see improving results. We put the business of IGF on the block two years ago and sold it to a leading writer of this class of insurance. 2002 was their first full year with the business they acquired from us. They were hit with net losses that exceeded earned premiums by approximately $50 million, which is an indication of the feast or famine nature of the crop insurance business. It has been a hard grind over the past several years. Not only have we had to deal with the matters I mentioned, the insurance industry has been in turmoil since September 11, 2001 when terrorist losses exceeded $150 billion. We have reduced the number of staff from 342 to 209 and our marketing, claims, and accounting departments have been placed under new management. They are doing an admirable job and with the strong executive team Douglas has assembled, I am encouraged that we are on the road back to sensibility and profits. The Board of Directors has stuck with us through these trying times and I would be remiss if I did not thank them and congratulate the executives of the company and our employees for the brightening picture I feel they are bringing to us. /s/ G. Gordon Symons Chairman SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF GORAN CAPITAL INC. The selected consolidated financial data presented below is derived from the consolidated financial statements of the Company and its subsidiaries for the years ended December 31. This information should be read in conjunction with the consolidated financial statements of the Company and the notes thereto, included elsewhere in this report. All information is in thousands, except share, per share and ratio data.
2002 2001 2000 1999 1998 --------- --------- --------- --------- --------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Gross Premiums Written. . . . . . . . . . . $111,394 $193,186 $182,099 $236,401 $303,745 Net Premiums Earned . . . . . . . . . . . . 41,037 108,197 145,532 261,800 281,276 Fee Income. . . . . . . . . . . . . . . . . 10,318 12,425 14,239 15,335 16,431 Net Investment Income . . . . . . . . . . . 4,390 6,998 12,171 13,125 13,126 Loss from Continuing Operations 4 . . . . . (29,745) $(31,937) $(63,224) $(47,000) $ (2,515) Loss from Discontinued Operations . . . . . -- $ (2,156) $(17,041) $(15,373) $ (9,421) --------- --------- --------- --------- --------- Net Loss. . . . . . . . . . . . . . . . . . (29,745) $(34,093) $(80,265) $(62,373) $(11,936) ========= ========= ========= ========= ========= PER COMMON SHARE DATA: Basic Loss from Continuing Operations. . . . . . . . . . . . . . . . $ (5.51) $ (5.61) $ (10.86) $ (8.00) $ (0.43) Basic Loss from Discontinued Operations. . . . . . . . . . . . . . . . -- $ (0.38) $ (2.93) $ (2.61) $ (1.61) Basic Net Loss. . . . . . . . . . . . . . . $ (5.51) $ (5.99) $ (13.79) $ (10.61) $ (2.04) Basic Weighted Average Shares Outstanding . 5,394 5,696 5,822 5,876 5,841 GAAP RATIOS: Loss and LAE Ratio 1. . . . . . . . . . . . 125.5% 88.0% 78.2% 92.6% 81.2% Expense Ratio 2 . . . . . . . . . . . . . . 36.8% 37.7% 38.7% 31.5% 23.3% Combined Ratios 3 . . . . . . . . . . . . . 162.3% 125.7% 116.9% 124.1% 104.5% CONSOLIDATED BALANCE SHEET DATA: Investments . . . . . . . . . . . . . . . . $ 58,479 $113,795 $148,890 $225,168 $236,144 Total Assets. . . . . . . . . . . . . . . . 161,966 376,319 440,032 519,922 570,989 Losses and LAE. . . . . . . . . . . . . . . 72,809 84,876 113,149 157,425 140,484 Trust Preferred Securities. . . . . . . . . 67,994 94,540 112,000 135,000 135,000 Total Shareholders' Equity (Deficit). . . . (90,752) (89,146) (72,668) (12,887) 49,725 Book Value (Deficit) Per Share. . . . . . . $ (16.82) $ (15.65) $ (12.48) $ (2.19) $ 8.51 1. Loss and LAE ratio: The ratio of loss and loss adjustment expenses ("LAE") incurred during the period, as a percentage of premiums earned. 2. Expense ratio: The ratio of policy acquisition, general and administrative expenses less billing fees, as a percentage of premiums earned. 3. Combined ratio: The sum of the loss and LAE ratio plus the expense ratio as a percentage of premiums earned. 4. Loss from continuing operations for the year 2000 includes a write-down of $33.5 million for goodwill. See Note 6 to the consolidated financial statements for additional information.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS All statements, trend analyses, and other information herein contained relative to markets for the Company's products and/or the Company's operations or financial results constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the Act). Forward-looking statements include statements which are predictive in nature, which depend upon or refer to future events or conditions, which include words such "anticipate," "could," "feel(s)," "believes," "plan," "estimate," "expect," "should," "intend," "will," and other similar expressions . In addition, any statements concerning future financial performance, ongoing business strategies or prospects and possible future Company actions which may be provided by management are also forward-looking statements as defined by the Act. Forward-looking statements are based on current expectations and projections about future events and are subject to known and unknown risks, uncertainties and other factors which may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, but are not limited to, the effect on customers, agents, employees and others due to SIG's and its subsidiaries' receipt of going concern opinions from their accountants; general economic conditions, including prevailing interest rate levels and stock market performance; factors affecting the Company's nonstandard automobile operations such as rate increase approval, policy renewals, new business written, and premium volume; and the factors described in this section and elsewhere in this report. These forward-looking statements are not guaranties of future performance and the Company has no specific intention to update these statements. OVERVIEW Goran Capital Inc. (the "Company" or "Goran") owns insurance companies that underwrite and market nonstandard private passenger automobile insurance. The Company's principal insurance company subsidiaries are Pafco General Insurance Company ("Pafco"), Superior Insurance Company ("Superior") and IGF Insurance Company ("IGF"). STRATEGIC ALIGNMENT As previously announced, in the fourth quarter of 2000, management initiated a strategic review of the Company's U.S. operations. This review resulted in a plan to divest of the Company's crop insurance segment, allowing management to focus on nonstandard automobile insurance. In June 2001, the Company sold its crop insurance segment and adopted a plan to wind-down the remaining crop insurance segment obligations. Accordingly, financial results of the crop insurance segment are presented as discontinued operations in the Company's financial statements. Continuing operations of the Company consist primarily of the nonstandard automobile insurance segment. NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS The Company's nonstandard automobile insurance operations are conducted by SIG and its subsidiaries. Specifically, Pafco, Superior, Superior Guaranty Insurance Company ("Superior Guaranty") and Superior American Insurance Company ("Superior American"), are engaged in the writing of insurance coverage for automobile physical damage and liability policies for nonstandard risks. Nonstandard risk insureds are those individuals who are unable to obtain insurance coverage through standard market carriers due to factors such as poor premium payment history, driving experience or violations, particular occupation or type of vehicle. The U.S. insurance company subsidiaries offer several different policies that are directed towards different classes of risk within the nonstandard market. Premium rates for nonstandard risks are higher than for standard risks. Since it can be viewed as a residual market, the size of the nonstandard private passenger automobile insurance market changes with the insurance environment, for example, expanding when the standard coverage becomes more restrictive. Nonstandard policies have relatively short policy periods and low limits of liability. Due to the low limits of coverage, the period of time that elapses between the occurrence and settlement of losses under nonstandard policies is shorter than many other types of insurance. Also, since the nonstandard automobile insurance business typically experiences lower rates of retention than standard automobile insurance, the number of new policyholders underwritten by nonstandard automobile insurance carriers each year is substantially greater than the number of new policyholders underwritten by standard carriers. RESULTS OF OPERATIONS CONSOLIDATED OVERVIEW Years Ended December 31, 2002 and 2001 The loss on continuing operations was $(29,745,000) or $(5.51) per share (basic and diluted) and $(31,937,000) or $(5.61) per share (basic and diluted) for 2002 and 2001, respectively. The loss before income taxes and distributions on minority interest was $(21,675,000) and $(21,568,000) for 2002 and 2001, respectively. Operating earnings (loss) from continuing operations, measured as income (loss) before amortization, interest, taxes, realized capital gains and losses and minority interest was $(18,187,000) or $(3.37) per share (basic and diluted) and $(19,011,000) or $(3.34) per share (basic and diluted) in 2002 and 2001, respectively. The loss from discontinued operations was $0 and $(2,156,000) for 2002 and 2001, respectively. Although the Company has taken a number of actions to address factors contributing to these past losses, there can be no assurance that operating losses will not continue. See "Liquidity and Capital Resources" for further discussion of recent trends and uncertainties that are reasonably likely to have a material effect on the Company's financial condition and results of operations. Year Ended December 31, 2000 For the year 2000, the Company reported a loss on continuing operations of $(63,224,000) or $(10.86) per share (basic and diluted) which includes a one-time write down of goodwill in the amount of $33,464,000. Loss before income taxes and distribution on minority interest was $(53,347,000). Operating earnings (loss) from continuing operations, measured as income/(loss) before amortization, interest, taxes, realized capital gains and losses, minority interest, and any extraordinary items, was $(12,417,000) or $(2.13) per share (basic and diluted). The loss from discontinued operations was $(17,041,000). GORAN CAPITAL INC. Goran Capital Inc. is an investment holding company that holds subsidiary investments and engages in the identification and evaluation of potential investment opportunities. The net loss was $(922,000) and $(5,187,000) for 2002 and 2001, respectively. The higher loss in 2001 is attributable mainly to higher legal costs and an increase in reserves for uncollectibility of certain loans during 2001. Net cash flow was $(2,475,000) and $2,421,000 for 2002 and 2001, respectively. SYMONS INTERNATIONAL GROUP, INC. YEARS ENDED DECEMBER 31, 2002 AND 2001 Gross Premiums Written Gross premiums written decreased 33.1% or $53,317,000 in 2002 from 2001 levels. Premium rate increases of approximately 11.0% were implemented throughout 2002 and were offset by a reduction in policies in force of 46.9%. The primary reasons for this decline were SIG's withdrawal from certain highly competitive markets, additional strict underwriting initiatives intended to increase profitability, and the regulatory and strategic actions accompanied with a reduction in policies in force. Net Premiums Written Net premiums written represent the portion of premiums retained by SIG's insurance subsidiaries after consideration for risk sharing through reinsurance contracts. As a result of declines in surplus in SIG's insurance subsidiaries and to manage overall risk retention, in 2000 SIG's insurance subsidiaries entered into a reinsurance agreement to cede a portion of their gross written premiums to National Union Fire Insurance Company ("National") of Pittsburgh, Pennsylvania, an unrelated third party. During 2002, SIG's insurance subsidiaries ceded approximately 71.7% of their gross written premiums on new and renewal business to reinsurers under a quota share reinsurance contract that was effective January 1, 2000. Net Premiums Earned Net premiums earned decreased 51.1% or $39,285,000 for the year ended December 31, 2002 as compared to the same period in 2001. Premiums are earned ratably over the term of the underlying insurance contracts. The reduction in net premiums earned reflects the overall reduction in gross premiums written and the increase in ceded premiums. Fee Income Fee income is derived from installment billings and other services provided to policyholders. For the year ended December 31, 2002, fee income decreased 24.0% or $2,954,000. The reduction in fee income is attributed to the reduction of insurance policies in force of 46.9% and the overall decline in written premium. Net Investment Income Net investment income decreased 34.1% or $2,147,000 in 2002 as compared to 2001. This decrease reflects the decline in invested assets during a period of declining premiums, the liquidation of investments to pay prior year losses settled in 2002 and to settle the reinsurance payable to National. Furthermore, return on investments deteriorated due to a highly volatile market dominated by unfavorable economic conditions due to the worldwide recession. Net Realized Capital Losses Net realized capital losses were $(2,807,000) and $(1,185,000) in 2002 and 2001, respectively. Capital losses resulted primarily from the continued liquidation of longer duration fixed income securities in 2002 in order to fund operational expenses, claim payments and reinsurance payments to AIG under unfavorable market conditions and permanent impairment of other than temporary investments. Losses and Loss Adjustment Expenses SIG's loss and LAE ratio for the year ended December 31, 2002, was 127.9% of net premiums earned as compared to 91.5% of net premiums earned for 2001. A portion of LAE, unallocated loss adjustment expense ("ULAE"), is not ceded as part of the quota share reinsurance contract mentioned above and accounts for approximately 5 points of the increased loss ratio in 2002 with the remainder of the increase due to adverse loss experience. Policy Acquisition and General and Administrative Expense SIG reduced policy acquisition and general and administrative expenses for the year 2002 to $20,677,000 from the 2001 level of $40,535,000, a reduction of approximately 49.0%. This reduction reflects the decline in gross written premiums, an increase in ceding commissions associated with the quota share reinsurance contract and overall operating expense reduction initiatives. As a percentage of gross premiums earned, SIG experienced a decrease in its operating expense ratio, net of fee income, from 36.7% in 2001 to 30.1% in 2002. Amortization of Deferred Financing Costs Amortization expense totaled $171,000 for the years-ended December 2002 and 2001. Income Taxes At December 31, 2002, SIG's net deferred tax assets were fully offset by a 100% valuation allowance that resulted in no tax benefit in 2002. YEARS ENDED DECEMBER 31, 2001 AND 2000 Gross Premiums Written Gross premiums written decreased 7.7% or $13,369,000 in 2001 from 2000 levels. Premium rate increases of approximately 24.8% were implemented throughout 2001 that were offset by a reduction in policies in force of 23.3%. The decline in gross premiums also resulted from SIG's exit of certain highly competitive markets and instituting other underwriting initiatives intended to increase profitability, which had the effect of reducing premium. Regulatory action in certain states also limited premiums written. Net Premiums Written Net premiums written represent the portion of premiums retained by SIG after consideration for risk sharing through reinsurance contracts. As a result of losses in SIG's insurance subsidiaries and to manage overall risk retention, SIG's insurance subsidiaries entered into a reinsurance agreement to cede a portion of their gross written premiums to a third party. During 2001, SIG's insurance subsidiaries ceded approximately 54% of their gross written premiums on new and renewal business to the reinsurers, under a quota share reinsurance contract that was effective January 1, 2000. In addition, SIG's insurance subsidiaries ceded a portion of their unearned premium reserve bringing the total cession to 79% in 2001. Net Premiums Earned Net premiums earned decreased 44.1% or $60,759,000 for the year ended December 31, 2001 as compared to the same period in 2000. Premiums are earned ratably over the term of the underlying insurance contracts. The reduction in net premiums earned is reflected of the overall reduction in gross premiums written and the increase in ceded premiums. Fee Income Fee income is derived from installment billings and other services provided to policyholders. For the year ended December 31, 2001, fee income decreased 13.0% or $1,845,000 as compared to the same period in 2000. The reduction in fee income was attributed to the reduction of insurance policies in force of 23.3% and the overall decline in written premium. Net Investment Income Net investment income decreased 37.6% or $3,788,000 in 2001 as compared to 2000. This decrease reflected the decline in invested assets during a period of declining premiums and the liquidation of investments to pay prior year losses settled in 2001. Furthermore, return on investments deteriorated due to a highly volatile market dominated by unfavorable economic conditions due to the worldwide recession and effects from the September 2001 terrorist attacks. Net Realized Capital Losses Net realized capital losses were $(1,185,000) and $(5,972,000) in 2001 and 2000, respectively. Capital losses resulted from the liquidation of longer duration fixed income securities in 2001 in order to rebalance the investment activities in the portfolio. These transactions resulted in higher cash proceeds that were reinvested in shorter duration investment instruments. Capital losses were also realized due to the continued liquidation of investments to fund operations and claim payments under unfavorable market conditions. Losses and Loss Adjustment Expenses SIG's loss and LAE ratio for the year ended December 31, 2001, was 91.5% of net premiums earned as compared to 82.3% of net premiums earned for 2000. A portion of LAE, ULAE, is not ceded as part of the quota share reinsurance contract mentioned above and accounts for approximately 4 points of the increased loss ratio in 2001 with the reminder of the increase due to adverse loss expense. Policy Acquisition and General and Administrative Expense SIG reduced policy acquisition and general and administrative expenses for the year 2001 to $40,535,000 from the 2000 level of $67,538,000, a reduction of approximately 40%. This reduction is reflected the decline in gross written premiums, an increase in ceding commissions associated with the quota share reinsurance contract and overall operating expense reduction initiatives. As a percentage of gross premiums earned, SIG experienced a decrease in its operating expense ratio, net of fee income, from 38.8% in 2000 to 36.7% in 2001. This decrease in the expense ratio is the result of reduced operating expense initiatives and an increase in ceding commissions earned under the quota share reinsurance contract. Amortization of Intangibles Amortization expense decreased nearly 100%, or $34,806,000, in 2001 as compared to 2000 as the goodwill was written to zero at December 31, 2000. Income Taxes At December 31, 2001, SIG's net deferred tax assets were fully offset by a 100% valuation allowance that resulted in no tax benefit in 2001. SYMONS INTERNATIONAL GROUP (FLORIDA), INC. Goran's wholly owned subsidiary, Symons International Group (Florida), Inc. ("SIGF"), is primarily engaged in the operation of a property/casualty insurance brokerage and a flood insurance brokerage. The property casualty/insurance brokerage operations were acquired effective on November 1, 2001 via an asset purchase transaction. The net commission revenue from this operation was $802,000 in 2002. Historically, SIGF was a specialized surplus lines underwriting unit. By late 1998, SIGF's operations no longer fit the Company's strategic operating plan of concentrating on the business segments of nonstandard automobile and reinsurance. Accordingly, the majority of the book of business was sold effective January 1, 1999. A small amount of premium remained after the sale. The premium volume from this operation was $1,218,000, $1,619,000 and $6,427,000 as of December 31, 2000, 1999 and 1998, respectively. The net loss was $48,000, $861,000 and $2,937,000 as of December 31, 2000, 1999 and 1998, respectively. GRANITE INSURANCE COMPANY Granite Insurance Company ("Granite") is a Canadian federally licensed insurance company which is presently servicing its investment portfolio and one outstanding claim. Granite stopped writing business on December 31, 1989. Granite sold its book of Canadian business in January 1990 to an affiliate which was subsequently sold to third parties in June 1990. The outstanding claims continue to be settled in accordance with actuarial estimates. Granite's invested assets decreased to $2.3 million at December 31, 2002 from $2.5 million at December 31, 2001. This was the result of claims and operating expenses paid during 2002. Total net outstanding claims were $42,000 and $88,000 at December 31, 2002 and 2001, respectively. Management expects that the run-off of the one outstanding claim will be completed by 2004. Granite recorded a net gain (loss) of $(367,000), $827,000 and $(117,000) in 2002, 2001 and 2000, respectively. GRANITE REINSURANCE COMPANY LTD. During 2002 Granite Reinsurance Company Ltd. ("Granite Re") was managed by Atlantic Security Ltd. of Bermuda and a corporate services management company in Barbados. Granite Re underwrites finite risk, stop loss and quota share reinsurance, through various programs in Bermuda, the United States and Canada. During 2002, 2001 and 2000, Granite Re participated in certain quota share and stop loss programs for the now discontinued crop operations. These programs were in accordance with third party placements. Net premiums earned were $3.5 million in 2002, $31.5 million in 2001 and $7.8 million in 2000. Net earnings (loss) were $(1.6) million in 2002, $0.5 million in 2001 and $7.5 million in 2000. The net earnings for 2000 were primarily related to favorable development in the losses incurred on its quota share reinsurance, which is assumed from a related insurer and interest income on a book of business assumed from a nonaffiliate. Granite Re's capital and surplus was $12.1 million and $14.8 million as of December 31, 2002 and 2001, respectively. LIQUIDITY AND CAPITAL RESOURCES The primary source of funds for Goran is through dividend and other funding from Granite Re. The primary sources of funds for SIG are fees from policyholders and management fees from SIG's subsidiaries. Superior Insurance Group, Inc. ("Superior Group") collects billing fees charged to Pafco policyholders who elect to make their premium payments in installments, and managing general agent ("MGA") fees charged to Superior policyholders. Superior Group also receives management fees under its management agreement with its insurance subsidiaries. When the Florida Department of Insurance ("FDOI") approved the acquisition of Superior by Superior Group, it prohibited Superior from paying any dividends (whether extraordinary or not) for four years from the date of acquisition (May 1, 1996) without the prior written approval of the FDOI, which restriction expired in April 2000. As a result of regulatory actions taken by the Indiana Department of Insurance ("IDOI") with respect to Pafco and IGF, those subsidiaries may not pay dividends without prior approval by the IDOI. Pafco cannot pay extraordinary dividends, within the meaning of the Indiana Insurance Code, without the prior approval of the Indiana Insurance Commissioner. The management fees charged to Pafco and Superior are subject to review by the IDOI and FDOI, respectively. The nonstandard automobile insurance subsidiaries' primary source of funds is premiums, investment income and proceeds from the maturity or sale of invested assets. Such funds are used principally for the payment of claims, payment of claims settlement costs, operating expenses (primarily management fees), commissions to independent agents, premium taxes, dividends and the purchase of investments. There is variability in cash outflows because of uncertainties regarding settlement dates for liabilities for unpaid losses. Accordingly, the Company maintains investment programs intended to provide adequate funds to pay claims. Due to reduced premium volume during 2002 and 2001, SIG liquidated investments to pay claims. SIG historically has tried to maintain duration averages of 3.5 years. However, the reduction in new funds due to lower premium volume caused SIG to shorten the duration of its investments. SIG may incur additional costs in selling longer term bonds to pay claims, as claim payments tend to lag premium receipts. Due to the decline in premium volume, SIG experienced a reduction in its investment portfolio, but to date has not experienced any problems meeting its obligations for claims payments. On August 12, 1997, SIG issued through a wholly owned trust subsidiary $135 million aggregate principal amount in trust originated preferred securities (the "Preferred Securities"). The Preferred Securities have a term of 30 years with semi-annual interest payments of $6.4 million that commenced February 15, 1998. SIG may redeem the Preferred Securities in whole or in part 10 years after the issue date. SIG elected to defer the semi-annual interest payments due in February and August 2000, 2001 and 2002. SIG elected to defer the semi-annual interest payments due in February 2003. SIG expects to continue this practice through 2003 and 2004. The unpaid interest installment amounts accrue interest at 9.5%. The following table sets forth (in thousands) SIG's obligations under the Preferred Securities as of December 31, 2002:
Payments due by Period Less than 1 - 3 3 - 5 More than Contractual Obligation Total 1 year years years 5 years Interest payments under the Preferred Securities $378,929 - $ 96,779 $25,650 $256,500 Principal payments under the Preferred Securities $135,000 - - - $135,000
SIG may continue to defer the semi-annual interest payments for up to an aggregate of five (5) years as permitted by the indenture for the Preferred Securities. All of the deferred interest (approximately $84 million, if all payments due in 2003 and 2004 are deferred) will become due and payable in February 2005. SIG relies on the payment of finance and service fees by its subsidiaries to fund its operations, including its payment of interest on the Preferred Securities. Certain state regulators, including the FDOI, have issued orders prohibiting SIG's subsidiaries from paying such fees to SIG. In the event such orders continue, SIG may not have sufficient revenue to fund its operations or to pay the deferred interest on the Preferred Securities. Such failure to pay could result in a default under the indenture and acceleration of the payment of the Preferred Securities. The trust indenture contains certain restrictive covenants based upon SIG's consolidated coverage ratio of earnings before interest, taxes, depreciation and amortization (EBITDA). If SIG's EBITDA falls below 2.5 times consolidated interest expense (including Preferred Securities distributions) for the most recent four quarters, the following restrictions become effective: - - SIG may not incur additional indebtedness or guarantee additional indebtedness. - - SIG may not make certain restricted payments including making loans or advances to affiliates, repurchasing common stock or paying dividends in excess of a stated limitation. - - SIG may not increase its level of non-investment grade securities defined as equities, mortgage loans, real estate, real estate loans and non-investment grade fixed income securities. These restrictions currently apply, as SIG's consolidated coverage ratio was (0.95) in 2002, and will continue to apply until SIG's consolidated coverage ratio complies with the terms of the trust indenture. SIG complied with these additional restrictions as of December 31, 2001 and 2002 and was in compliance as of May 9, 2003. Net cash used by the Company's operating activities was $(68,801,000) and $(23,490,000) in 2002 and 2001, respectively. Beginning in the fourth quarter of 2001 and continuing in January and February 2002, SIG experienced sustained adverse loss experience on a substantial portion of its new business written in certain markets. In late February and early March 2002, SIG commenced further analysis of loss ratios by individual agency and a review of claim settlement procedures. Based on this and other analysis, during 2002 SIG took a number of actions to improve its financial position and operating results including: - - Eliminated reinstatements in all markets, i.e., upon policy cancellation, the insured must obtain a new policy at prevailing rates and underwriting guidelines; - - Terminated or placed on new-business-moratorium several hundred agents whose loss ratios were abnormally high when compared to the average for the remaining agents (these agents accounted for approximately 16% of SIG's total gross written premium in 2001); - - Increased underwriting requirements in certain markets including higher down payments, new policy fees, and shorter policy terms; - - Hired a new vice president of claims with significant auto claims experience to improve the claims function. The above actions were followed by: - - Replacement of the president of the non-standard automobile business; - - Consolidation of all underwriting activities, premium accounting and agency licensing to Indianapolis, IN from Atlanta, GA; - - Closing of regional offices in Denver, CO; Virginia Beach and Alexandria, VA; Glendale, CA and Jacksonville, FL; - - Replacement of the claims department national litigation manager; - - Replacement of the marketing manager and the product manager; - - Heavy focus on the improvement of process and customer service; and - - Continued transition to an improved policy processing system. Shareholders' equity reflected a deficit of $(90,752,000) at December 31, 2002, which does not reflect the statutory surplus upon which the Company conducts its various insurance operations. The Company's U.S. insurance subsidiaries, not including IGF, had statutory surplus of approximately $13.0 million as reflected in the Company's U.S. insurance subsidiaries' annual statutory financial statements filed on February 28, 2003. Following the inclusion in the reserve amounts pursuant to the consulting actuary's analysis, SIG's insurance subsidiaries had statutory surplus of $3.0 million as of December 31, 2002. In May 2003, pursuant to a reserve analysis completed by the consulting actuary engaged by BDO Seidman, LLP, the Company's and SIG's independent auditor, it was determined that the loss and LAE reserves of Superior and Pafco should be increased as of December 31, 2002. These reserve adjustments, along with resulting adjustments to the permitted carrying values of certain assets, were recorded in the 2002 audited statutory financial statements filed for Superior and Pafco with the FDOI and the IDOI, respectively. EFFECTS OF INFLATION Due to the short term that claims are outstanding in the majority of the product lines the Company underwrites, inflation does not pose a significant risk to the Company. SIGNIFICANT ACCOUNTING POLICIES The Company's financial statements reflect the selection and application of accounting policies that require management to make significant estimates and assumptions. Management believes that the most critical judgment area in the application of its accounting policies is the reserves for losses and LAE. These reserves include estimates for reported unpaid losses and LAE and losses incurred but not reported. These reserves are not discounted. Reserves are established using individual case-basis evaluations and statistical analysis as claims are reported. Those estimates are subject to the effects of trends in loss severity and frequency. While management believes the reserves make reasonable provisions for unpaid loss and LAE obligations, those provisions are necessarily based on estimates and are subject to variability. Changes in the estimated reserves are charged or credited to operations, as additional information on the estimated amount of a claim becomes known during the course of its settlement. The gross reserve for losses and LAE is reported net of anticipated receipts for salvage and subrogation. See Note 7 to the Consolidated Financial Statements for additional disclosure regarding the reserve for losses and LAE. The variation between the estimated loss and LAE and actual experience can be material. PRIMARY DIFFERENCES BETWEEN GAAP AND SAP The financial statements contained herein have been prepared in conformity with Canadian Generally Accepted Accounting Principles ("GAAP") which differ from Statutory Accounting Practices ("SAP") prescribed or permitted for insurance companies by regulatory authorities in the following respects: (i) certain assets are excluded as "Nonadmitted Assets" under statutory accounting; (ii) costs incurred by the Company relating to the acquisition of new business are expensed for statutory purposes; (iii) the investment in wholly-owned subsidiaries is consolidated for GAAP rather than valued on the statutory equity method in which the net income or loss and changes in unassigned surplus of the subsidiaries is reflected in net income for the period rather than recorded directly to unassigned surplus; (iv) fixed maturity investments are reported at amortized cost or market value based on their National Association of Insurance Commissioners ("NAIC") rating; (v) the liability for losses and loss adjustment expenses and unearned premium reserves are recorded net of their reinsured amounts for statutory accounting purposes; (vi) deferred income taxes are recognized as specified by statutory guidance; and (vii) credits for reinsurance are recorded only to the extent considered realizable. NEW ACCOUNTING STANDARDS The NAIC adopted the Codification of Statutory Accounting Principles guidance (the "Codification"), which replaced the Accounting Practices and Procedures manual, as the NAIC's primary guidance on statutory accounting effective January 1, 2001. The IDOI and the FDOI have adopted the Codification. The changes in statutory accounting principles resulting from codification that affected the Company's U.S. insurance subsidiaries, among other things, limit the statutory carrying value of electronic data processing equipment and deferred tax assets in determining statutory surplus. In June 2001, the Financial Accounting Standards Board (the "Board") finalized FASB Statements No. 141, Business Combinations, No. 142, Goodwill and Other Intangible Assets, and No. 143, Accounting for Asset Retirement Obligations. In August 2001, the Board issued FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. In December 2002, the Board issued FASB Statement No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. These new standards are effective in 2002 and are not expected to have a material impact on the Company's financial position or results of operations. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Insurance company investments must comply with applicable laws and regulations that prescribe the kind, quality and concentration of investments. In general, these laws and regulations permit investments, within specified limits and subject to certain qualifications in federal, state and municipal obligations, corporate bonds, preferred and common securities, real estate mortgages and real estate. The investment portfolios of the Company at December 31, 2002, consisted of the following (in thousands):
Cost or Type of Investment. . . . . . . . . . . . . . . . . . . Amortized Cost Market Value - ------------------------------------------------------- --------------- ------------- Fixed maturities: United States Treasury securities and other obligations of the United States government or its agencies. . . . $ 17,814 $ 18,355 Obligations of states and political subdivisions. . . . 4,863 5,041 Corporate securities. . . . . . . . . . . . . . . . . . 13,358 13,720 --------------- ------------- Total fixed maturities. . . . . . . . . . . . . . . . . 36,035 37,116 Equity securities: Common stocks . . . . . . . . . . . . . . . . . . . . . 10,778 7,331 Short-term investments. . . . . . . . . . . . . . . . . 8,495 8,495 Other investments . . . . . . . . . . . . . . . . . . . 3,171 3,171 --------------- ------------- Total investments . . . . . . . . . . . . . . . . . . . $ 58,479 $ 56,113 =============== =============
The following table sets forth the composition of the fixed maturity securities portfolio of the Company by time to maturity as of December 31, (in thousands):
2002 2001 ------- ------- Time to Maturity Market Value Percent Market Value Percent - ---------------------- ------------- ------ ------------ ------- 1 year or less $ 9,234 24.9% $ 7,998 10.2% More than 1 year through 5 years 12,077 32.5 26,343 33.6 More than 5 years through 10 years 7,512 20.2 20,554 26.2 More than 10 years 3,288 8.9 4,091 5.2 -------- ------- ------- ------- 32,111 86.5 58,986 75.2 Mortgage-backed securities 5,005 13.5 19,380 24.8 -------- ------- ------- ------- Total $ 37,116 100.0% $78,366 100.0% ======== ======= ======= =======
The following table sets forth the ratings assigned to the fixed maturity securities of the Company as of December 31, (in thousands):
2002 2001 ------ ------- Rating1 Market Value Percent Market Value Percent - ---------------------------- ---------------- -------- -------- ------- Aaa or AAA $ 25,045 67.5% $51,754 66.1% Aa or AA 971 2.6 3,357 4.3 A 4,262 11.4 9,655 12.3 Baa or BBB 5,479 14.8 7,617 9.7 Ba or BB 281 0.8 4,883 6.2 Other below investment grade 1,078 2.9 1,100 1.4 -------- ------ ------- ----- Total $ 37,116 $100.0% $78,366 100% ======== ======= ======= ===== 1. Ratings are assigned by Standard & Poor's Corporation, and when not available, are based on ratings assigned by Moody's Investors Service, Inc.
The investment results of the Company for the periods indicated are set forth below (in thousands):
Years Ended December 31, 2002 2001 2000 ---------- --------- --------- Net investment income 1 . . . . . . . . . . . . $ 3,794 $ 6,998 $ 12,171 Average investment portfolio 2. . . . . . . . . $ 86,137 $131,343 $187,243 Pre-tax return on average investment portfolio. 4.4% 5.3% 6.5% Net realized gains (losses) . . . . . . . . . . $ (2,806) $ (1,177) $ (5,970) 1. Includes dividend income received in respect of holdings of common stock. 2. Average investment portfolio represents the average (based on amortized cost) of the beginning and ending investment portfolio.
If interest rates were to increase 10% from the December 31, 2002 levels, the decline in fair value of the fixed maturity securities would not significantly affect the Company's ability to meet its obligations to policyholders and debtors. MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT The Company's investment strategy is to invest available funds in a manner that will maximize the after-tax yield of the portfolio while emphasizing the stability and preservation of the capital base. The Company seeks to maximize the total return on investments through active investment management utilizing third-party professional administrators, in accordance with pre-established investment policy guidelines established and reviewed regularly by the board of directors of the Company. Accordingly, the entire portfolio of fixed maturity securities is available to be sold in response to changes in market interest rates, changes in relative values of individual securities and asset sectors, changes in prepayment risks, changes in credit quality, and liquidity needs, as well as other factors. The portfolio is invested in types of securities and in an aggregate duration, which reflect the nature of the Company's liabilities and expected liquidity needs diversified among industries, issuers and geographic locations. The Company's fixed maturity and common equity investments are substantially in public companies. The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates. The Company has assumed its available for sale securities are similar enough to aggregate those securities for presentation purposes. The table presents principal cash flows and related weighted-average interest rates for investment securities and debt obligations by expected maturity date (in thousands).
Cost or Amortized Cost --------------------------------------------------------------------Market 2003 2004 2005 2006 2007 Thereafter Total Value ------- ------- ------- ------- ------- ------------ -------- ------- ASSETS Available for sale. . $9,018 $4,428 $4,456 $4,728 $2,928 $ 10,477 $36,035 $37,116 Average interest rate 6.80% 7.20% 6.45% 5.95% 5.95% 6.98% 6.25% 6.25% LIABILITIES Preferred securities. -- -- -- -- -- $ 67,994 $67,994 $ 4,533 Average interest rate -- -- -- -- -- 9.5% 9.5% 9.5%
REVISED ESTIMATE OF LOSS RESERVES RECORDED IN PRIOR YEARS SIG revised its estimate of the loss reserves recorded in prior years. At the end of 2001, SIG's net loss and LAE reserves for nonstandard auto insurance were $50,542,000. As claims that occurred prior to year-end 2001 were reported, investigated and settled during 2002, SIG reevaluated and, as necessary, revised its estimates of loss reserves. Based on current information, reserves at the end of 2001 should have been $63,317,000. In part the reserve increase was the result of an unanticipated increase in claim frequency during the fourth quarter of 2001. Because of the normal lag between the occurrence of an accident and the reporting of that accident, SIG did not realize its claim frequency for the fourth quarter of 2001 had increased until those claims were reported during 2002. SIG believes that the frequency increase was caused by an increase in miles driven which resulted from (1) a significant decrease in the price of gasoline, (2) a reluctance of people to fly on commercial airlines because of the September 11, 2001 terrorist attacks, and (3) a general improvement in economic conditions. In addition, during 2002 Superior experienced an unusual number of reopened claims from older accident quarters. At year-end 2001 SIG believed that these claims were closed with no outstanding liability. In response to this unusual activity SIG took appropriate action to enhance its claims function. In May 2003, pursuant to a reserve analysis completed by the consulting actuary engaged by BDO Seidman, LLP, the Company's and SIG's independent auditor, it was determined that the loss and LAE reserves of Superior and Pafco should be increased as of December 31, 2002. These reserve adjustments, along with resulting adjustments to the permitted carrying values of certain assets, were recorded in the 2002 audited statutory financial statements filed for Superior and Pafco with the FDOI and the IDOI. In the statutory financial statements of the Company's U.S. insurance subsidiaries, the estimates of gross loss and LAE reserves were $59,971,000 and of net loss and LAE reserves were $37,886,000. Following the adjustment pursuant to the consulting actuary's analysis, the revised estimates of gross loss and LAE reserves were $67,204,000 and net loss and LAE reserves were $43,145,000. These reserves are based on analysis of historical data. Based on actions taken to enhance SIG's claim function, management anticipates that the majority of claims will be adjusted and settled more quickly which will reduce the overall costs while those claims of a questionable nature will be investigated more thoroughly. Also, SIG is focusing on reducing defense costs and is negotiating more favorable rates from attorneys. Finally, SIG is taking steps to increase the amounts of salvage and subrogation it collects as an offset to paid losses while reducing the expenses associated with collecting those amounts. The business written by the Company did not expose it to highly uncertain exposures such as claims for asbestos-related illnesses, environmental remediation or product liability. The surplus lines insurance written by the Company also did not include these types of highly uncertain exposures.
CONSOLIDATED BALANCE SHEETS As of December 31, 2002 and 2001 (U.S. dollars in thousands, except share data) 2002 2001 ---------- ---------- ASSETS: Investments: Fixed maturities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,035 $ 77,325 Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,778 21,610 Short-term investments, at amortized cost, which approximates market. . . 8,495 13,266 Mortgage loans, at cost . . . . . . . . . . . . . . . . . . . . . . . . . - - Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . 3,171 1,594 ---------- ---------- Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,479 113,795 Investments in and advances to related parties. . . . . . . . . . . . . . . . 83 1,130 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . 2,131 11,263 Receivables, net of allowances of $1,526 and $1,940 . . . . . . . . . . . . . 28,302 47,441 Reinsurance recoverable on paid and unpaid losses, net. . . . . . . . . . . . 24,628 29,284 Prepaid reinsurance premiums. . . . . . . . . . . . . . . . . . . . . . . . . 25,470 40,039 Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . - 763 Property and equipment, net of accumulated depreciation . . . . . . . . . . . 7,084 9,907 Deferred securities issuance costs. . . . . . . . . . . . . . . . . . . . . . 2,119 4,376 Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,309 2,421 Assets of discontinued operations . . . . . . . . . . . . . . . . . . . . . . 10,361 115,900 ---------- ---------- TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 161,966 $ 376,319 ========== ========== LIABILITIES AND STOCKHOLDER'S DEFICIT: LIABILITIES: Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . $ 72,809 $ 84,876 Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,797 59,216 Reinsurance payables. . . . . . . . . . . . . . . . . . . . . . . . . . . 17,128 58,868 Distributions payable on preferred securities . . . . . . . . . . . . . . 24,793 23,252 Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,250 7,250 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,673 21,563 Liabilities of discontinued operations. . . . . . . . . . . . . . . . . . 14,274 115,900 ---------- ---------- TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184,724 370,925 ---------- ---------- MINORITY INTEREST: Company-obligated mandatorily redeemable preferred stock of trust subsidiary holding solely parent debentures . . . . . . . . . . . . . . . . . . . . . . 67,994 94,540 ---------- ---------- STOCKHOLDERS' DEFICIT: Common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,502 18,502 Contributed surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,864 42,465 Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . (1,023) (763) Retained (deficit). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (179,095) (149,350) ---------- ---------- TOTAL STOCKHOLDERS' (DEFICIT) . . . . . . . . . . . . . . . . . . . . . . . . (90,752) (89,146) ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) . . . . . . . . . . . . . . . . $ 161,966 $ 376,319 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, 2002, 2001, and 2000 (U.S. dollars in thousands, except per share data) 2002 2001 2000 --------- ---------- --------- Gross premiums written. . . . . . . . . . . . . . . . . . . . . . . . . . . $111,394 $ 193,186 $182,099 Less ceded premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . (77,403) (106,324) (78,637) --------- ---------- --------- NET PREMIUMS WRITTEN. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,991 $ 86,862 $103,462 ========= ========== ========= NET PREMIUMS EARNED . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,037 $ 108,197 $145,532 Fee income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,318 12,425 14,239 Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,390 6,998 12,171 Other income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 1,750 - Net realized capital gain (loss). . . . . . . . . . . . . . . . . . . . . . (3,402) (1,177) (5,970) --------- ---------- --------- TOTAL REVENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,343 128,193 165,972 --------- ---------- --------- Expenses: Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . 51,513 95,216 113,768 Policy acquisition and general and administrative expenses. . . . . . . . . 25,419 53,165 70,591 Amortization of deferred securities issuance costs and intangibles. . . . . 86 1,380 34,960 --------- ---------- --------- TOTAL EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,018 149,761 219,319 --------- ---------- --------- LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST. . . . . . . . . . . . . . . . . . . . . (21,675) (21,568) (53,347) --------- ---------- --------- Income taxes: Current income tax expense (benefit). . . . . . . . . . . . . . . . . . . . - - 487 Deferred income tax expense (benefit) . . . . . . . . . . . . . . . . . . . - - (2,636) --------- ---------- --------- TOTAL INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - (2,149) --------- ---------- --------- LOSS FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21,675) (21,568) (51,198) Minority interest: Earnings in consolidated subsidiary . . . . . . . . . . . . . . . . . . . . - - -- Distributions on preferred securities, net of tax of nil in 2002 and 2001, $4,489 in 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,070) (10,369) (12,026) --------- ---------- --------- LOSS FROM CONTINUING OPERATIONS . . . . . . . . . . . . . . . . . . . . . . (29,745) (31,937) (63,224) Discontinued operations: Loss on disposal of discontinued segment less applicable taxes of nil . . . - - (900) Loss from operations of discontinued segment, less applicable income taxes of nil in 2002, 2001 and 1999. . . . . . . . . . . . . . . . . . . . - (2,156) (16,141) --------- ---------- --------- LOSS FROM DISCONTINUED OPERATIONS . . . . . . . . . . . . . . . . . . . . . - (2,156) (17,041) --------- ---------- --------- NET LOSS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(29,745) $ (34,093) $(80,265) ========= ========== ========= Weighted average shares outstanding - basic and fully diluted . . . . . . . 5,394 5,696 5,822 ========= ========== ========= Net loss from continuing operations per share - basic and fully diluted . . $ (5.51) $ (5.61) $ (10.86) ========= ========== ========= Net loss of discontinued operations per share - basic and fully diluted . . $ - $ (0.38) $ (2.93) ========= ========== ========= Net loss per share - basic and fully diluted. . . . . . . . . . . . . . . . $ (5.51) $ (5.99) $ (13.79) ========= ========== =========
The accompanying notes are an integral part of the consolidated financial statements
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) for the years ended December 31, 2002, 2001 and 2000 (U.S. dollars in thousands, except number of shares) Retained Cumulative Total Common Stocks Contributed Earnings Translation Stockholders' Shares Amount Surplus (Deficit) Adjustment Equity ---------- --------- --------- ---------- ------------ --------- Balance at January 1, 2000. . . . 5,876,398 $ 19,317 $ 2,775 $ (34,992) $ 13 $(12,887) ========== ========= ========= ========== ============ ========= Preferred securities purchase . . 20,973 20,973 Purchase of common shares . . . . (100,000) (185) (185) Comprehensive income (loss): Net loss. . . . . . . . . . . . . (80,265) Change in cumulative translation adjustment . . . . . . . . . . . (304) ______ _____ _______ Comprehensive income (loss) . . . (80,265) (304) (80,569) ---------- --------- --------- ---------- ----------- ------- Balance at December 31, 2000. . . 5,776,398 $ 19,132 $ 23,748 $(115,257) $ (291) $(72,668) ========== ========= ========= ========== ============ ========= Preferred securities purchase . . -- -- 18,717 18,717 Purchase of common shares . . . . (382,700) (218) (218) Reclassification of organization expense . . . . . . . . . . . . . (412) (412) Comprehensive income (loss): Net loss. . . . . . . . . . . . . (34,093) Change in cumulative translation adjustment . . . . . . . . . . . (472) ______ _____ _______ Comprehensive income (loss) . . . (34,093) (472) (34,565) ---------- --------- --------- ---------- ----------- ------- Balance at December 31, 2001. . . 5,393,698 $ 18,502 $ 42,465 $(149,350) $ (763) $(89,146) ========== ========= ========= ========== ============ ========= Preferred securities purchase . . 28,399 28,399 Comprehensive income (loss): Net loss. . . . . . . . . . . . . (29,745) Change in cumulative translation adjustment . . . . . . . . . . . (260) ______ _____ _______ Comprehensive income (loss) . . . (29,745) (260) (30,005) ---------- --------- --------- ---------- ----------- -------- Balance at December 31, 2002. . . 5,393,698 $ 18,502 $ 70,864 $(179,095) $ (1,023) $(90,752) ========== ========= ========= ========== ============ =========
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2002, 2001 and 2000 (U.S. dollars in thousands) 2002 2001 2000 --------- --------- --------- Cash flows from operating activities Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(29,745) $(34,093) $(80,265) Adjustments to reconcile net loss to net cash provided by (used in) operations: Minority interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- Depreciation, amortization, impairment and other . . . . . . . . . . . . . 3,745 3,892 38,983 Deferred income tax expense. . . . . . . . . . . . . . . . . . . . . . . . -- -- (2,635) Net realized capital (gain) loss . . . . . . . . . . . . . . . . . . . . . 3,402 1,177 5,970 Net changes in operating assets and liabilities (net of assets acquired): Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,139 6,929 14,153 Reinsurance recoverable on losses, net . . . . . . . . . . . . . . . . . . 4,656 15,559 (40,053) Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . 14,569 (15,265) (23,896) Deferred policy acquisition costs. . . . . . . . . . . . . . . . . . . . . 763 5,691 7,454 Other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . (6,778) 7,509 (9,816) Losses and loss adjustment expenses. . . . . . . . . . . . . . . . . . . . (12,067) (28,273) (44,276) Unearned premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,419) (3,170) (18,175) Reinsurance payables . . . . . . . . . . . . . . . . . . . . . . . . . . . (41,740) (4,764) 58,142 Distribution payable on preferred securities . . . . . . . . . . . . . . . 5,471 7,989 10,454 Deferred income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,000) 7,250 -- Net assets from discontinued operations. . . . . . . . . . . . . . . . . . (3,797) 6,079 34,548 --------- --------- --------- Net cash provided by (used in) operations: . . . . . . . . . . . . . . . . (68,801) (23,490) (49,412) --------- --------- --------- Cash flow from investing activities net of assets acquired: Net sales (purchases) of short-term investments. . . . . . . . . . . . . . 4,771 4,328 15,040 Proceeds from sales, calls and maturities of fixed maturities. . . . . . . 75,108 67,105 77,641 Purchases of fixed maturities. . . . . . . . . . . . . . . . . . . . . . . (30,437) (35,105) (10,181) Proceeds from sales of equity securities . . . . . . . . . . . . . . . . . 10,374 12,707 16,736 Purchase of equity securities. . . . . . . . . . . . . . . . . . . . . . . (3,824) (12,494) (25,408) Proceeds from repayment of mortgage loans. . . . . . . . . . . . . . . . . -- 1,870 120 Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . (681) (1,314) (1,663) Net investing activities from discontinued operations. . . . . . . . . . . 5,663 (5,306) (150) Net proceeds from sales (purchases) of other investments . . . . . . . . . (2,013) (217) (415) --------- --------- --------- Net cash provided by (used in) investing activities: . . . . . . . . . . . 58,961 31,574 71,720 --------- --------- --------- Cash flow from financing activities net of assets acquired: Purchase of affiliate preferred securities . . . . . . . . . . . . . . . . (2,395) (2,497) (2,027) Other financing activities . . . . . . . . . . . . . . . . . . . . . . . . 9 (630) -- Redemption of share capital. . . . . . . . . . . . . . . . . . . . . . . . -- -- (185) Net financing activities from discontinued operations. . . . . . . . . . . 2,047 (48) (16,473) Loans from and (repayments to) related parties . . . . . . . . . . . . . . 1,047 3,124 (2,608) --------- --------- --------- Net cash provided by (used in) financing activities: . . . . . . . . . . . 708 (51) (21,293) --------- --------- --------- Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . (9,132) 8,033 1,015 Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . 11,263 3,230 2,215 --------- --------- --------- Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . 2,131 $ 11,263 $ 3,230 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. GORAN CAPITAL INC. AND SUBSIDIARIES ________________________________________________________________________________ 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: Goran Capital Inc. ("Goran" or the "Company") is the parent company of the Goran group of companies. The consolidated financial statements include the accounts of all subsidiary companies of Goran as described in "Basis of Presentation" below. The following is a description of the significant accounting policies and practices employed: a. BASIS OF PRESENTATION: The consolidated financial statements are prepared in accordance with Canadian Generally Accepted Accounting Principles. In addition, the consolidated financial statements are also used to satisfy the Company's financial filing requirements in the U.S. Consequently, the consolidated financial statements include disclosures that are not necessarily required under Canadian GAAP and contain references to U.S. GAAP accounting pronouncements. Note 20, presents a reconciliation of Canadian and U.S. GAAP. The consolidated financial statements include the accounts, after intercompany eliminations, of the Company and its wholly owned subsidiaries as follows: 1. Symons International Group, Inc. ("SIG") is a 73.8% owned subsidiary of Goran. SIG's subsidiaries are as follows: - Superior Insurance Group Management, Inc ("Superior Group Management"), a holding company for the nonstandard automobile operations which includes: Superior Insurance Group, Inc. ("Superior Group"), a management company for the nonstandard automobile operations; Superior Insurance Company ("Superior"), an insurance company domiciled in Florida; Superior American Insurance Company ("Superior American"), an insurance company domiciled in Florida; Superior Guaranty Insurance Company ("Superior Guaranty"), an insurance company domiciled in Florida; Pafco General Insurance Company ("Pafco"), an insurance company domiciled in Indiana; - IGF Holdings, Inc. ("IGFH"), a holding company - IGF Insurance Company ("IGF"), an insurance company domiciled in Indiana (See Note 23); 2. Granite Reinsurance Company Ltd. ("Granite Re"), a finite risk reinsurance company domiciled in Barbados. 3. Granite Insurance Company ("Granite"), a Canadian federally licensed insurance company. 4. Symons International Group (Florida), Inc. ("SIGF"), a Florida domestic corporation. b. USE OF ESTIMATES: The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. c. SIGNIFICANT ESTIMATES: The most significant estimates in the Company's balance sheet are the determination of prepaid policy acquisition costs and the reserve for insurance losses and loss adjustment expenses ("LAE"). Management's estimate of prepaid policy acquisition costs is based on historical studies and assumptions made regarding costs incurred. Management's estimate of insurance losses and LAE is based on past loss experience and consideration of current claim trends as well as prevailing social, economic and legal conditions. Actual results could differ from those estimates. d. PREMIUMS: Premiums are recognized as income ratably over the life of the policies and are stated net of ceded premiums. Unearned premiums are computed on the daily pro rata basis. e. INVESTMENTS: Fixed maturities and equity securities are carried at amortized cost for fixed maturities and cost for equity securities. Real estate is carried at cost, less an allowance for depreciation. Mortgage loans are carried at outstanding principal balance. Realized gains and losses on sales of investments are recorded on the trade date and are recognized in net income on the specific identification basis. Interest and dividend income are recognized as earned. f. CASH AND CASH EQUIVALENTS: For presentation in the statement of cash flows, the Company includes in cash and cash equivalents all cash on hand and demand deposits with original maturities of three months or less. g. DEFERRED POLICY ACQUISITION COSTS: Deferred policy acquisition costs are comprised of agents' commissions, premium taxes, certain other costs and investment income which are related directly to the acquisition of new and renewal business, net of expense allowances received in connection with reinsurance ceded, which have been accounted for as a reduction of the related policy acquisition costs. These costs are deferred and amortized over the terms of the policies to which they relate. Acquisition costs that exceed estimated losses and loss adjustment expenses and maintenance costs are charged to expense in the period in which those excess costs are determined. h. PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost. Depreciation for buildings is based on the straight-line method over 31.5 years. Depreciation of other property and equipment is based on the straight-line method over their estimated useful lives ranging from three to seven years. Asset and accumulated depreciation accounts are relieved for dispositions, with resulting gains or losses included in net income. i. INTANGIBLE ASSETS: Intangible assets consist primarily of debt acquisition costs and, prior to 2001, goodwill. Deferred debt acquisition costs are amortized over the term of the debt. Prior to 2000, goodwill was amortized over a 25-year period on a straight-line basis based on management's estimate of the expected benefit period. See Note 6 regarding the goodwill impairment charge recorded in 2000. j. ASSET IMPAIRMENT POLICY: The Company reviews the carrying values of its long-lived and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. See Note 6 regarding the goodwill impairment charge recorded in 2000. Any long-lived assets held for disposal are reported at the lower of carrying amounts or fair value, less expected costs to sell. k. LOSSES AND LOSS ADJUSTMENT EXPENSES: Reserves for losses and LAE include estimates for reported unpaid losses and LAE, including a portion attributable to losses incurred but not reported. These reserves have not been discounted. Reserves are established using individual case-basis evaluations and statistical analysis as claims are reported. Those estimates are subject to the effects of trends in loss severity and frequency. While management believes the reserves make reasonable provisions for unpaid loss and LAE obligations, those provisions are necessarily based on estimates and are subject to variability. Changes in the estimated reserves are charged or credited to operations, as additional information on the estimated amount of a claim becomes known during the course of its settlement. The gross reserve for losses and LAE is reported net of anticipated receipts for salvage and subrogation of approximately $4,535,000 and $5,822,000 at December 31, 2002 and 2001, respectively. l. PREFERRED SECURITIES: Preferred Securities represent company-obligated mandatorily redeemable securities of SIG's trust subsidiary holding solely parent debentures and are reported at their liquidation value under minority interest. Distributions on these securities are charged against consolidated earnings. m. INCOME TAXES: The Company uses the liability method of accounting for deferred income taxes. Under the liability method, companies will establish a deferred tax liability or asset for the future tax effects of temporary differences between book and taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. n. REINSURANCE: Reinsurance premiums, commissions, and reserves related to reinsured business are accounted for on a basis consistent with those used in accounting for the original policies and the terms of the reinsurance contracts. Premiums ceded to other companies have been reported as a reduction of premium income. o. EARNINGS PER SHARE: The Company's basic earnings per share calculations are based upon the weighted average number of shares of common stock outstanding during each period. As the Company has reported losses in 2002, 2001, and 2000, common stock equivalents are anti-dilutive. Therefore, fully diluted earnings per share is the same as basic earnings per share. p. STOCK-BASED COMPENSATION: As discussed further in note 18, the Company accounts for stock-based employee compensation using the intrinsic value method under APB Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations as permitted under SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). Accordingly no compensation expense is recognized if the market price of the underlying stock does not exceed the exercise price at the date of grant. However, SFAS 123, "Accounting for Stock-Based Compensation," ("SFAS 123") as amended by SFAS 148 requires the Company to present pro forma information as if it had accounted for its stock-based compensation under the fair value method of SFAS 123. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation.
2002 2001 2000 --------- --------- --------- Net (loss) as reported . . . . . . . . . . . . . . . . . $(29,745) $(31,937) $(63,224) Add: Compensation expense for stock-based compensation included in reported net income, net of related tax effects . . . . . . . . . . . . . . . -- -- -- Deduct: Total stock-based compensation expense determined under fair-value-based method, net of related tax effects. . . . . . . . . . . . . . . . . . . . . . . (164) (706) (452) --------- --------- --------- Pro forma net income . . . . . . . . . . . . . . . . . . $(29,909) $(32,643) $(63,676) ========= ========= ========= Earnings per share: Basic, as reported . . . . . . . . . . . . . . . . . . . $ (5.51) $ (5.99) $ (13.79) Basic, pro forma . . . . . . . . . . . . . . . . . . . . $ (5.54) $ (6.11) $ (13.86) Diluted, as reported . . . . . . . . . . . . . . . . . . $ (5.51) $ (5.99) $ (13.79) Diluted, pro forma . . . . . . . . . . . . . . . . . . . $ (5.54) $ (6.11) $ (13.86)
Q. NEW ACCOUNTING PRONOUNCEMENTS: In June 2001, the Financial Accounting Standards Board (the "Board") finalized FASB Statements No. 141, Business Combinations, No. 142, Goodwill and Other Intangible Assets, and No. 143, Accounting for Asset Retirement Obligations. In August 2001, the Board issued FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based Compensation - Transition and Disclosure which amends SFAS 123, Accounting for Stock-Based Compensation. These new standards are effective in 2002 and will not have a material impact on the Company's financial position or results of operations. R. RECLASSIFICATIONS: Certain amounts from prior periods have been reclassified to allow for comparability to the 2002 presentation. 2. CORPORATE REORGANIZATION AND ACQUISITIONS: On August 12, 1997, SIG purchased the remaining minority interest in Superior Group Management for $61 million in cash. The excess of the acquisition price over the minority interest liability was assigned to goodwill as the fair market value of assets and liabilities approximated their carrying value. See Note 6 regarding the goodwill impairment charge recorded in 2000. Effective on November 1, 2001, SIGF acquired the assets of a property casualty insurance brokerage located in Boca Raton, Florida. The purchase price of the assets was $150,000. 3. INVESTMENTS: Investments are summarized as follows (in thousands):
Cost or Amortized Unrealized Market December 31, 2002 (in thousands) Cost Gain (Loss) Value ---------- ------------- ------- Fixed Maturities: U.S. Treasury securities and other obligations of the U.S. government or its agencies . . . . . . . $ 17,814 $ 541 $ - $18,355 Obligations of states and political subdivisions . 4,863 183 (5) 5,041 Corporate securities . . . . . . . . . . . . . . . 13,358 1,211 (849) 13,720 ---------- ------------ -------- ------- Total fixed maturities . . . . . . . . . . . . . . 36,035 1,935 (854) 37,116 Equity securities. . . . . . . . . . . . . . . . . 10,778 126 (3,573) 7,331 Short-term investments . . . . . . . . . . . . . . 8,495 -- -- 8,495 Other investments. . . . . . . . . . . . . . . . . 3,171 -- -- 3,171 ---------- ------------ -------- ------- Total Investments. . . . . . . . . . . . . . . . . $ 58,479 $ 2,061 $(4,427) $56,113 ========== ============ ======== =======
Cost or Amortized Unrealized Market December 31, 2001 (in thousands) Cost Gain (Loss) Value ---------- ------------- ------- Fixed Maturities: U.S. Treasury securities and other obligations of the U.S. government or its agencies . . . . . . . $ 29,982 $ 609 $ (381) $ 30,210 Obligations of states and political subdivisions . 17,536 1,949 (47) 19,438 Corporate securities . . . . . . . . . . . . . . . 29,807 501 (1,590) 28,718 ---------- ------------ -------- -------- Total fixed maturities . . . . . . . . . . . . . . 77,325 3,059 (2,018) 78,366 Equity securities. . . . . . . . . . . . . . . . . 21,610 377 (3,664) 18,323 Short-term investments . . . . . . . . . . . . . . 13,266 -- -- 13,266 Other investments. . . . . . . . . . . . . . . . . 1,594 -- -- 1,594 ---------- ------------ -------- -------- Total Investments. . . . . . . . . . . . . . . . . $ 113,795 $ 3,436 $(5,682) $111,549 ========== ============ ======== ========
At December 31, 2002, The Standard & Poor's Corporation or Moody's Investor Services, Inc considered approximately 96.3% of the Company's fixed maturities investment grade. Securities with quality ratings, Baa and above are considered investment grade securities. In addition, the Company's investments in fixed maturities did not contain any significant geographic or industry concentration of credit risk. The amortized cost and estimated market value of fixed maturities at December 31, 2002, by contractual maturity, are shown in the table that follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty and securities may have to be liquidated to cover operational losses (in thousands):
Amortized Cost Market Value --------------- ------------- Maturity: Due in one year or less. . . . . . . . $ 9,018 $ 9,234 Due after one year through five years. 11,712 12,077 Due after five years through ten years 7,513 7,512 Due after ten years. . . . . . . . . . 2,964 3,288 Mortgage-backed securities . . . . . . 4,828 5,005 --------------- ------------- Total. . . . . . . . . . . . . . . . . $ 36,035 $ 37,116 =============== =============
Gains and losses realized on sales of investments are as follows (in thousands):
2002 2001 2000 -------- -------- -------- Proceeds from sales . $85,482 $81,682 $94,497 Gross gains realized. $ 2,503 $ 547 $ 1,361 Gross losses realized $(5,905) $(1,724) $(7,331)
Net investment income for the years ended December 31 are as follows (in thousands):
2002 2001 2000 ------- ------- -------- Fixed maturities. . . . . . . . $4,426 $6,202 $ 9,342 Equity securities . . . . . . . (489) 174 344 Cash and short-term investments 231 697 1,269 Mortgage loans. . . . . . . . . -- 65 -- Other . . . . . . . . . . . . . 59 769 1,318 ------- ------- -------- Total investment income . . . . 4,228 7,907 12,273 Investment expenses . . . . . . (434) (909) (102) ------- ------- -------- Net investment income . . . . . $3,794 $6,998 $12,171 ======= ======= ========
Investments with a market value of approximately $16,338,000 and $17,115,000 (amortized cost of approximately $16,190,000 and $16,799,000) as of December 31, 2002 and 2001, respectively, were on deposit in the United States and Canada. The deposits are required by various insurance departments and others to support licensing requirements and certain reinsurance contracts, respectively. 4. DEFERRED POLICY ACQUISITION COSTS: Policy acquisition costs are capitalized and amortized over the life of the policies. Policy acquisition costs are those costs directly related to the issuance of insurance policies including commissions, premium taxes, and underwriting expenses net of reinsurance commission income on such policies. Policy acquisition costs both acquired and deferred, and the related amortization charged to income were as follows (in thousands):
2002 2001 2000 --------- --------- --------- Balance, beginning of year $ 763 $ 6,454 $ 13,908 Costs deferred during year 18,861 28,056 29,999 Amortization during year . (19,624) (33,747) (37,453) --------- --------- --------- Balance, end of year . . . $ - $ 763 $ 6,454 ========= ========= =========
5. PROPERTY AND EQUIPMENT: Property and equipment at December 31 are summarized as follows (in thousands):
2002 Accumulated 2002 2001 Cost Depreciation Net Net ------- ------------- ------ ------ Land . . . . . . . . . . . . . $ 100 $ - $ 100 $ 100 Buildings. . . . . . . . . . . 4,279 1,877 2,402 2,655 Office furniture and equipment 2,249 1,824 425 815 Automobiles. . . . . . . . . . 102 72 30 47 Computer equipment . . . . . . 14,870 10,743 4,127 6,290 ------- ------------- ------ ------ Total. . . . . . . . . . . . . $21,599 $ 14,516 $7,084 $9,907 ======= ============= ====== ======
Accumulated depreciation at December 31, 2001 was $11,126,000. Depreciation expense related to property and equipment for the years ended December 31, 2002, 2001 and 2000 was $3,661,000; $3,741,000 and $3,507,000, respectively. 6. INTANGIBLE ASSETS: In accordance with SFAS No. 121, "Accounting for the Impairment of Long-lived Assets", SIG determined in 2000 that the carrying value of goodwill that resulted from the acquisition of Superior Group Management exceeded its fair value. This determination was made after considering the series of continued losses which the company had experienced, the reduction in the volume of premiums written and an evaluation of future cash flows. Based upon this assessment, a charge of $33,464,000 was recorded in the fourth quarter of 2000 to write-off the remaining carrying value of the goodwill. This charge is included as amortization expense in the accompanying financial statements for 2000. Intangible assets at December 31 are as follows (in thousands):
2002 Accumulated 2002 2001 Cost Amortization Net Net ------ ------------- ------ ------ Deferred debt acquisition costs $2,585 $ 466 $2,119 $4,376 ====== ============= ====== ======
Accumulated amortization at December 31, 2001 was $755,000. Amortization expense related to deferred debt acquisition costs and intangible assets for the years ended December 31, 2002, 2001 and 2000 was $86,000, $1,380,000 and $34,960,000, respectively. 7. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (IN THOUSANDS): Activity in the liability for unpaid losses and LAE is summarized as follows (in thousands):
2002 2001 2000 ------- -------- --------- Balance at January 1. . . . . $84,876 $113,149 $157,425 Less reinsurance recoverables 28,889 19,979 3,411 ------- -------- --------- Net balance at January 1. . . 55,987 93,370 154,014 ------- -------- --------- Incurred related to: Current year. . . . . . . . . 38,497 94,556 132,781 Prior years . . . . . . . . . 13,016 660 (19,013) ------- -------- --------- Total Incurred. . . . . . . . 51,513 95,216 113,768 ------- -------- --------- Paid related to: Current year. . . . . . . . . 19,211 69,917 89,612 Prior years . . . . . . . . . 38,682 62,682 84,800 ------- -------- --------- Total paid. . . . . . . . . . 57,893 132,599 174,412 ------- -------- --------- Net balance at December 31. . 49,607 55,987 93,370 Plus reinsurance recoverables 23,202 28,889 19,779 ------- -------- --------- Balance at December 31. . . . $72,809 $ 84,876 $113,149 ======= ======== =========
Reserve estimates are regularly adjusted in subsequent reporting periods as new facts and circumstances emerge to indicate that a modification of the prior estimate is necessary. The adjustment, referred to as "reserve development," is inevitable given the complexities of the reserving process and is recorded in the statements of operations in the period when the need for the adjustment becomes known. The foregoing reconciliation indicates unfavorable reserve development of $13,016,000 on the December 31, 2001 reserves. See "Revised Estimate of Loss Reserves recorded in Prior Years" above for an explanation of the adverse 2001 reserve development. The anticipated effect of inflation is implicitly considered when estimating losses and LAE liabilities. While anticipated price increases due to inflation are considered in estimating the ultimate claims costs, increases in average claim severities is caused by a number of factors. Future severities are projected based on historical trends adjusted for implemented changes in underwriting standards, policy provisions, claims management practices and procedures and general economic trends. Anticipated severity trends are monitored relative to actual development and are modified if necessary. Liabilities for loss and LAE have been established when sufficient information has been developed to indicate the involvement of a specific insurance policy. In addition, reserves have been established to cover additional exposure on both known and unasserted claims. 8. PREFERRED SECURITIES: On August 12, 1997, SIG's trust subsidiary issued $135 million in preferred securities ("Preferred Securities") bearing interest at an annual rate of 9.5%. The principal assets of the trust subsidiary are senior subordinated notes of SIG in the principal amount of $135 million with an interest rate and maturity date substantially identical to those of the Preferred Securities. Expenses of the issue aggregated $5.1 million and the portion attributable to Preferred Securities held by unrelated parties is amortized over the term of the Preferred Securities. The Preferred Securities represent SIG-obligated mandatorily redeemable securities of a trust subsidiary holding solely parent debentures and have a term of 30 years with semi-annual interest payments commencing February 15, 1998. SIG may redeem the Preferred Securities in whole or in part after 10 years. The annual Preferred Security obligations of approximately $13 million per year were to be funded from SIG's nonstandard automobile management company's management and billing fees in excess of its operating costs. Under the terms of the indenture, SIG is permitted to defer semi-annual interest payments for up to five years. SIG elected to defer the interest payments due in February and August 2000, 2001 and 2002 and February 2003. SIG expects to continue this practice through 2003 and 2004. All of the deferred interest (approximately $84 million, if all payments due in 2003 and 2004 are deferred) will become due and payable in February 2005. SIG relies on the payment of finance and service fees by its subsidiaries to fund its operations, including its payment of interest on the Preferred Securities. Certain state regulators, including the Florida Department of Revenue ("FDOI"), have issued orders prohibiting SIG's subsidiaries from paying such fees to SIG. In the event such orders continue, SIG may not have sufficient revenue to fund its operations or to pay the deferred interest on the Preferred Securities. Such failure to pay could result in a default under the indenture and acceleration of the payment of the Preferred Securities. The trust indenture for the Preferred Securities contains certain restrictive covenants. These covenants are based upon SIG's consolidated coverage ratio of earnings before interest, taxes, depreciation and amortization ("EBITDA"). If SIG's EBITDA falls below 2.5 times consolidated interest expense (including Preferred Security distributions) for the most recent four quarters the following restrictions become effective: - - SIG may not incur additional indebtedness or guarantee additional indebtedness. - - SIG may not make certain restricted payments including making loans or advances to affiliates, repurchasing common stock or paying dividends in excess of a stated limitation. - - SIG may not increase its level of non-investment grade securities defined as equities, mortgage loans, real estate, real estate loans and non-investment grade fixed income securities. These restrictions currently apply, as SIG's consolidated coverage ratio was (0.95) in 2002, and will continue to apply until SIG's consolidated coverage ratio complies with the terms of the trust indenture. SIG complied with these additional restrictions as of December 31, 2001 and 2002 and was in compliance as of May 9, 2003. During 2002, Granite Re purchased Preferred Securities bearing a principal amount of $26,500,000. During 2001, Granite Re purchased Preferred Securities bearing a principal amount of $17,460,000. During 2000, Granite Re and Granite purchased Preferred Securities bearing principal amounts of $18,000,000 and $5,000,000, respectively. As a result, the Company's balance sheet as of December 31, 2002 presents a net Preferred Securities balance of $67,994,000. The Company's total purchases of Preferred Securities resulted in a cumulative increase of $68,089,000 to the Company's consolidated stockholders' equity as of December 31, 2002. 9. CAPITAL STOCK: The Company's authorized share capital consists of: - - First Preferred shares: An unlimited number of first preferred shares of which none are outstanding at December 31, 2002 and 2001. - - Common Shares: An unlimited number of common shares of which 5,393,698 and 5,776,398 were outstanding as of December 31, 2002 and 2001, respectively. The Company did not issue any common shares during either 2002 or 2001. The Company purchased 382,700 of its common shares for an aggregate consideration of $218,000 during 2001. The Company purchased 100,000 of its common shares for an aggregate consideration of $185,000 during 2000. 10. INCOME TAXES: Goran and Granite file separate Canadian income tax returns. SIGF files a separate U.S. federal income tax return. SIG files a consolidated U.S. federal income tax return with its wholly owned subsidiaries. Intercompany tax-sharing agreements between SIG and its wholly owned subsidiaries provide that income taxes will be allocated based upon separate return calculations in accordance with the Internal Revenue Code of 1986, as amended. Granite Re is exempt from income tax for a period of 15 years from October 25, 1990. Thereafter, Granite Re will be subject to tax at a rate of 2% on the first Bds $250,000 of taxable income and zero percent in respect of all other taxable income in excess of Bds $250,000. A reconciliation of the differences between federal tax computed by applying applicable jurisdictional statutory rates to income before income taxes and the income tax provision is as follows (in thousands):
2002 2001 2000 -------- -------- --------- Computed income taxes (benefit) at statutory rate $(7,929) $(7,975) $(17,981) Goodwill. . . . . . . . . . . . . . . . . . . . . -- -- 12,176 Other . . . . . . . . . . . . . . . . . . . . . . 395 3,377 (4,154) Tax exempt (income) loss. . . . . . . . . . . . . 840 (223) (3,443) -------- -------- --------- Total . . . . . . . . . . . . . . . . . . . . . . $(6,694) $(4,821) $(13,402) Valuation allowance . . . . . . . . . . . . . . . 6,694 4,821 11,253 -------- -------- --------- Income tax expense. . . . . . . . . . . . . . . . $ -- $ -- $ (2,149) ======== ======== =========
The net deferred tax asset at December 31, 2002 and 2001 is comprised of the following (in thousands):
2002 2001 --------- --------- Deferred tax assets: Unpaid losses and loss adjustment expenses $ 1,131 $ 1,358 Unearned premiums. . . . . . . . . . . . . 656 1,159 Allowance for doubtful accounts. . . . . . 2,430 2,582 Unrealized losses on investments . . . . . -- 926 Net operating loss carryforwards . . . . . 22,535 23,268 Capital loss carryforwards . . . . . . . . 8,478 5,544 Accrued interest payable . . . . . . . . . 17,229 11,621 Other. . . . . . . . . . . . . . . . . . . 2,359 2,004 --------- --------- Deferred tax assets . . . $ 54,818 $ 48,462 --------- --------- Deferred tax liabilities: Deferred policy acquisition costs. . . . . $ 713 $ (168) Other. . . . . . . . . . . . . . . . . . . (877) (1,157) --------- --------- Deferred tax liabilities . . . . . . . . . $ (164) $ (1,325) --------- --------- $ 54,654 $ 47,137 Valuation allowance . . . (54,654) (47,137) --------- --------- Net deferred tax assets . $ -- $ -- ========= =========
At December 31, 2002 and 2001 the Company's net deferred tax assets were fully offset by a valuation allowance. The Company will continue to assess the valuation allowance and to the extent it is determined that such allowance is no longer required, the tax benefit of the corresponding portion of remaining net deferred tax assets will then be recognized. As of December 31, 2002, the Company has unused net operating loss carryovers available as follows (in thousands):
Goran & Year expiring. SIG Granite SIGF Total -------- -------- ------ ------- 2003 . . . . . $ 4,609 $ 4,609 2004 . . . . . 687 687 2005 . . . . . 1,266 1,266 2006 . . . . . 1,445 1,445 2007 . . . . . 1,835 1,835 2008 . . . . . 3,895 3,895 2009 . . . . . 1,216 1,216 2017 . . . . . $ 4,368 4,368 2018 . . . . . 1,295 1,295 2019 . . . . .$ 21,030 -- 600 21,630 2020 . . . . . 17,095 -- 45 17,140 2021 . . . . . 75 75 2022 . . . . . 225 225 Capital Losses -- 9,614 -- 9,614 -------- -------- ------ ------- Total. . . . . $ 38,125 $ 24,567 $6,928 $69,300 ======== ======== ====== =======
SIG's U.S. Federal income tax filings for years prior to 2000 have been examined by the U.S. Internal Revenue Service. 11. LEASES: The Company leases buildings, furniture, cars and equipment under operating leases. Operating leases generally include renewal options for periods ranging from two to seven years and require the Company to pay utilities, taxes, insurance and maintenance expenses. The following is a schedule of future minimum lease payments under cancelable and non-cancelable operating leases for each of the five years succeeding December 31, 2002 and thereafter, excluding renewal options (in thousands):
Year Ending December 31: 2003 . . . . . . . . . . $773 2004 . . . . . . . . . . 549 2005 . . . . . . . . . . 423 2006 . . . . . . . . . . 147 2007 and Thereafter. . . 104
Rental expense charged to operations in 2002, 2001 and 2000 amounted to $1,063,000, $1,749,000 and $1,848,000, respectively, including amounts paid under short-term cancelable leases. 12. REINSURANCE: The Company limits the maximum net loss that can arise from a large risk, or risks in concentrated areas of exposure, by reinsuring (ceding) certain levels of risks with other insurers or reinsurers, either on an automatic basis under general reinsurance contracts known as "treaties" or by negotiation on substantial individual risks. Such reinsurance includes quota share, excess of loss, stop-loss and other forms of reinsurance on essentially all property and casualty lines of insurance. The Company remains contingently liable with respect to reinsurance ceded, which would become an ultimate liability of the Company in the event that such reinsuring companies might be unable, at some later date, to meet their obligations under the reinsurance agreements. In addition, the Company assumes reinsurance on certain risk. Approximately 88% of uncollateralized amounts recoverable are with companies which maintain an A.M. Best rating of at least A+. Management believes amounts recoverable from reinsurers are collectible. Superior commuted the accident year 2001 and 2000 portions of the reinsurance treaty with National Union Fire Insurance Company of Pittsburgh, PA ("National"). Superior recognized the amounts received from National as a reduction of losses and LAE paid (thereby increasing losses and LAE incurred) to recognize the effect of releasing National from its obligations under the treaty. There was no effect on premiums earned, losses incurred, LAE incurred or commission in the current year income statement due to this commutation. IGF sold 100% of its 2001 crop year business to Acceptance Insurance Companies Inc. ("Acceptance"), effective June 6, 2001. The agreements are without recourse as they relate to the net profit or loss on the 2001 crop year book of business. The sale was approved by the Indiana Department of Insurance. Reinsurance activity for 2002, 2001 and 2000 is summarized as follows (in thousands):
Direct Assumed Ceded Net -------- --------- ---------- --------- 2002 -------- Premiums written . . . . . . $111,327 $ 67 $ (77,403) $ 33,991 Premiums earned. . . . . . . 129,370 212 (88,545) 41,037 Incurred losses and LAE. . . 114,056 147 (62,690) 51,513 Commission expenses (income) 11,038 (1) (24,656) (13,619) 2001 -------- Premiums written . . . . . . $191,915 $ 1,271 $(106,324) $ 86,862 Premiums earned. . . . . . . 163,828 2,484 (58,115) 108,197 Incurred losses and LAE. . . 132,532 2,616 (39,932) 95,216 Commission expenses (income) 18,979 151 (25,716) (6,586) 2000 -------- Premiums written . . . . . . $176,264 $ 5,835 $ (78,637) $103,462 Premiums earned. . . . . . . 195,360 4,918 (54,746) 145,532 Incurred losses and LAE. . . 150,101 4,828 (41,161) 113,768 Commission expenses (income) 21,234 1,041 (14,043) 8,232
Amounts recoverable from reinsurers relating to SIG's insurance subsidiaries' unpaid losses and LAE were $22,087,000 and $30,181,000 as of December 31, 2002 and 2001, respectively. These amounts are reported as assets and are not netted against the liability for loss and LAE in the accompanying Consolidated Balance Sheets. 13. RELATED PARTY TRANSACTIONS: The Company and its subsidiaries have entered into transactions with various related parties, including transactions with Symons International Group Ltd. ("SIGL"), the Company's majority shareholder. The following balances were outstanding at December 31 (in thousands):
2002 2001 --------- --------- Gross amounts due from (to) directors and officers. $ 1,705 $ 3,772 Other gross amounts due from (to) related parties . 10,460 8,844 --------- --------- Gross receivables (payables). . . . . . . . . . . . $ 12,165 $ 12,616 Reserve for uncollectibility. . . . . . . . . . . . (12,082) (11,486) ========= ========= Net receivables (payables). . . . . . . . . . . . . $ 83 $ 1,130 ========= =========
The following transactions occurred with related parties in the years ended December 31 (in thousands):
2002 2001 2000 ----- ------ ------ Consulting fees charged by various related parties $ 864 $ 800 $1,895 Management fees charged by SIGL. . . . . . . . . . $ 400 $(100) $ 900
Approximately 86% and 91% of the amounts due from officers and directors were non-interest-bearing on December 31, 2002 and 2001, respectively. SIG paid $1,846,000 in 2000 for consulting and other services to a vendor owned in part by a relative of certain directors of the Company. The consulting and other services were for the conversion of SIG's nonstandard automobile operating system. SIG capitalized these costs as part of its nonstandard automobile operating system. Approximately 90% of these payments were for services provided by consultants and vendors unrelated to the Company. In 1989, the Company fully reserved a loan owed by a subsidiary of SIGL. SIGL guaranteed the loan and pledged shares of Goran ("escrowed shares") as security for the loan. The outstanding loan balance was $3,340,000 (Canadian dollars) for the periods ending December 31, 2002 and 2001. This loan balance continues to be guaranteed by SIGL and is secured with 100,000 shares of Goran owned by SIGL. The Company leases office space in Canada from Tritech Financial Systems Inc. ("Tritech"). Tritech is owned by a relative of certain directors of the Company. The rent paid was $34,000, $35,000 and $40,000 for 2002, 2001 and 2000, respectively. In 1999, Granite Re issued a performance bond in favor of Tritech in the amount of $328,000. In August 2000 the creditor called the bond. The bond is secured by a guarantee from Tritech, a personal guarantee from its president (a relative of certain directors of the Company) and 50,000 shares of Goran's common stock. Tritech is paying interest on the outstanding balance at a rate of 7.5%. Interest received during the years ended December 31, 2002 and 2001 was $24,600 and $24,600, respectively. Superior Group obtained a line of credit from Granite Re in the amount of $2.5 million and $1 million in December 31, 2001 and October 2002, respectively. At December 31, 2002, $2.98 million was outstanding under the line. This note bears interest at the rate of prime plus 5.25% for a total of 9.5% at December 31, 2002. Interest only payments are due monthly. Of the $2.98 million outstanding at December 31, 20002, $2.5 million is due December 20, 2004 and $480,000 is due November 30, 2004. 14. REGULATORY MATTERS: Two of the Company's insurance company subsidiaries, Pafco and IGF, are domiciled in Indiana and prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the Indiana Department of Insurance ("IDOI"). While neither Pafco nor IGF has surplus from which to pay dividends, statutory requirements place limitations on the amount of funds that can be remitted to the Company from Pafco and IGF. The Indiana statute allows 10% of surplus in regard to policyholders or 100% of net income, whichever is greater, to be paid as dividends only from earned surplus; however, the consent orders with the IDOI, described below, prohibit the payment of any dividends by Pafco and IGF. Another insurance company subsidiary, Superior, and Superior's insurance company subsidiaries, Superior American and Superior Guaranty, are domiciled in Florida and prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the FDOI. The Florida statute also contains limitations with regard to the payment of dividends. Superior, Superior American and Superior Guaranty may pay dividends of up to 10% of surplus or 100% of net income, whichever is greater, from earned surplus. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. On June 6, 2001, IGF sold substantially all of its crop insurance assets to Acceptance. On June 29, 2001, following the sale of IGF's crop insurance assets and as a result of losses experienced by IGF in its crop insurance operations, the IDOI and IGF entered into a consent order (the "Consent Order") relating to IGF. IGF has discontinued writing new business and its operations are presently in run off. The IDOI has continued to monitor the status of IGF. The Consent Order prohibits IGF from taking any of the following actions without prior written consent of the IDOI: - - Sell or encumber any of its assets, property, or business in force; - - Disburse funds, except to pay direct unaffiliated policyholder claims and normal operating expenses in the ordinary course of business (which does not include payments to affiliates except for the reimbursement of costs for running IGF by the Company, and does not include payments in excess of $10,000); - - Lend its funds or make investments, except in specified types of investments; - - Incur debts or obligations, except in the ordinary course of business to unaffiliated parties; - - Merge or consolidate with another company; - - Enter into new, or amend existing, reinsurance agreements; - - Complete, enter into or amend any transaction or arrangement with an affiliate, and - - Disburse funds or assets to any affiliate. The Consent Order also requires IGF to provide the IDOI with monthly written updates and immediate notice of any material change regarding the status of litigation with Continental Casualty Company, statutory reserves, number of non-standard automobile insurance policies in-force by state, and reports of all non-claims related disbursements. IGF's failure to comply with the Consent Order could cause the IDOI to begin proceedings to have a rehabilitator or liquidator appointed for IGF or to extend the provisions of the Consent Order. Pafco has been subject to an agreed to order of the IDOI since February 17, 2000 that requires Pafco, among other matters, to: - - Refrain from doing any of the following without the IDOI's prior written consent: Selling assets or business in force or transferring property, except in the ordinary course of business; Disbursing funds, other than for specified purposes or for normal operating expenses and in the ordinary course of business (which does not include payments to affiliates, other than under written contracts previously approved by the IDOI, and does not include payments in excess of $10,000); Lending funds; Making investments, except in specified types of investments; Incurring debt, except in the ordinary course of business and to unaffiliated parties; Merging or consolidating with another company; or Entering into new or modifying existing, reinsurance contracts. - - Reduce its monthly auto premium writings, or obtain additional statutory capital or surplus, such that the ratio of gross written premium to surplus and net written premium to surplus does not exceed 4.0 and 2.4, respectively; and provide the IDOI with regular reports demonstrating compliance with these monthly writings limitations. - - Continue to comply with prior IDOI agreements and orders to correct business practices under which Pafco must provide monthly financial statements to the IDOI, obtain prior IDOI approval of reinsurance arrangements and affiliated party transactions, submit business plans to the IDOI that address levels of surplus and net premiums written, and consult with the IDOI on a monthly basis. Pafco's inability or failure to comply with any of the above conditions could result in the IDOI requiring further reductions in Pafco's permitted premium writings or in the IDOI instituting future proceedings against Pafco. Restrictions on premium writings result in lower premium volume. Management fees payable to Superior Group are based on gross written premium; therefore, lower premium volume results in reduced management fees paid by Pafco to Superior Group. In March 2000, Pafco agreed with the Iowa Department of Insurance ("IADOI") that it would not write any new non-standard business in Iowa, until such time as Pafco has reduced its overall non-standard automobile policy counts in the state or: - - Has increased surplus, or - - Has achieved a net written premium to surplus ratio of less than three to one, or - - Has surplus reasonable to its risk. Pafco has continued to service existing policyholders and renew policies in Iowa and provide policy count information on a monthly basis in conformance with IADOI requirements. Superior and Pafco provide monthly financial information to the departments of insurance in certain states in which they write business at the states' request. On July 7, 2000, the FDOI issued a notice of its intent to issue an order (the "Notice") which principally addressed certain policy and finance fee payments by Superior to Superior Group. A formal administrative hearing to review the Notice and a determination that the order contemplated by the Notice not be issued was held in February 2001. The administrative law judge entered a recommended order on June 1, 2001 that was acceptable to the Company. On August 30, 2001, the FDOI rejected the recommended order and issued its final order which the Company believes improperly characterized billing and policy fees paid by Superior to Superior Group. On September 28, 2001, Superior filed an appeal of the final order to the Florida District Court of Appeal. On March 4, 2002, the FDOI filed a petition in the Circuit Court of the Second Judicial Circuit in and for Leon County, Florida seeking court enforcement of the FDOI's final order. Superior filed a motion with the FDOI for stay of the FDOI's final order. Superior also filed a motion for stay with the District Court of Appeal, which was denied pending a ruling from the FDOI. On April 5, 2002 the FDOI granted a stay of the final order that was conditional upon the cessation of the payment of billing fees by Superior to Superior Group and the posting of a $15 million appeal bond. Superior did not agree to the conditions imposed by the FDOI's conditional stay. On May 6, 2002 Superior filed a motion with the District Court of Appeal seeking a stay of the final order pending Superior's appeal or, in the alternative, a consolidation of the FDOI's enforcement action with the pending appeal. On June 19, 2002, the District Court of Appeal entered an order which struck the FDOI's conditional requirement for the stay that Superior post a $15 million appeal bond. However, the order denied Superior's request to consolidate the appeal with the enforcement action. On September 26, 2002, the District Court of Appeal affirmed the final order of the FDOI. On October 31, 2002 the Circuit Court entered a final order which granted the FDOI's petition for enforcement of the FDOI's final order and which requires Superior to comply with the FDOI final order. In accordance with the FDOI's final order, Superior ceased payment of finance and service fees as of October 1, 2002 and has requested repayment from Superior Group of $15 million of finance and service fees paid from 1997 through 1999 and additional finance and service fees paid thereafter in the approximate amount of $20 million. Without the payment of finance and service fee income to Superior Group or an amendment to the management agreement or reallocation of operational responsibilities, Superior Group could not operate profitably. Accordingly, on October 1, 2002, Superior Group discontinued the provision of certain claims services to Superior. Superior is currently exchanging proposals with the FDOI to establish an acceptable repayment plan in accordance with the final order. On September 10, 2002, the FDOI filed a petition in the Circuit Court of the Second Judicial Circuit in and for Leon County, Florida for an order to show cause and notice of automatic stay which sought the appointment of a receiver for the purpose of rehabilitation of Superior. The court entered an order to show cause, temporary injunction and notice of automatic stay on September 13, 2002 and a hearing was held on October 24, 2002. On November 1, 2002, the court entered an order that denied the FDOI's petition for appointment of a receiver. On November 8, 2002, the FDOI filed a motion for rehearing, which was denied on December 17, 2002. On November 20, 2002, the FDOI issued a notice and order to show cause which seeks to suspend or revoke Superior's certificate of authority principally based upon allegations that Superior did not comply with the FDOI's August 30, 2001 final order during the pendency of the appeal of the order to the District Court of Appeal. Superior believes that it has fully and timely complied with the final order and that the action brought by the FDOI is barred by res judicata A formal administrative hearing to review the notice and a determination that the order or administrative action contemplated by the notice not be issued was held in May 2003. The administrative law judge has not yet issued a recommended order, which the FDOI may accept or reject. On March 21, 2003, the FDOI filed a Motion for Enforcement of Final Order Granting Petition to Enforce Agency Action (the "Motion for Enforcement") in the Circuit Court of the Second Judicial Circuit in and for Leon County, Florida which sought to hold Superior in contempt for failure to comply with the FDOI's final order during the pendency of Superior's appeal to the Florida District Court of Appeal. On May 7, 2003 a hearing was held on the Motion for Enforcement and an order has not yet been issued. On October 9, 2001, the State Corporation Commission of Virginia ("Virginia Commission") issued an order to take notice regarding an order suspending Superior's license to write business in that state. An administrative hearing for a determination that the suspension order not be issued was held March 5, 2002. On May 3, 2002, the hearing examiner issued his report and recommended that Superior's license not be suspended and that Superior file its risk based capital plans and monthly and quarterly financial information with the Virginia Bureau of Insurance ("Bureau"). On June 19, 2002 the Virginia Commission entered an order which adopted the findings of the hearing examiner, continued the matter until such time as the Bureau requests further action and requires the continued monitoring of the financial condition of Superior by the Bureau. On October 11, 2002, the Virginia Commission filed an administrative Rule to Show Cause. A hearing was scheduled for November 18, 2002 to determine whether Superior's license to transact insurance business in Virginia should be suspended. Because of Superior's improved financial condition, the Virginia Commission continued the hearing indefinitely. The nonstandard automobile insurance policies written in Virginia by Superior accounted for approximately 14.5% and 13.1% of the total gross written premiums of the Company in 2002 and 2001, respectively. The Company's U.S. operating subsidiaries, their business operations, and their transactions with affiliates, including the Company, are subject to regulation and oversight by the IDOI, the FDOI, and the insurance regulators of other states in which the subsidiaries write business. The Company is a holding company and all of its operations are conducted by its subsidiaries. Regulation and oversight of insurance companies and their transactions with affiliates is conducted by state insurance regulators primarily for the protection of policyholders and not for the protection of other creditors or of shareholders. Failure to resolve issues with the IDOI and the FDOI or other state insurance regulators in a mutually satisfactory manner could result in future regulatory actions or proceedings that materially and adversely affect the Company. Risk-Based Capital Requirements In order to enhance the regulation of insurer solvency, the NAIC has adopted a formula and model law to implement risk-based capital ("RBC") requirements for property and casualty insurance companies designed to assess minimum capital requirements and to raise the level of protection that statutory surplus provides for policyholder obligations, Indiana and Florida have substantially adopted the NAIC model law and Indiana directly, and Florida indirectly, have adopted the NAIC model formula. The RBC formula for property and casualty insurers: (i ) underwriting, which encompasses the risk of adverse loss developments and inadequate pricing; (ii) declines in asset values arising from credit risk; (iii) declines in asset values arising from investment risks; (iv) off-balance sheet risk arising from adverse experience from non-controlled asset, guarantees for affiliates, contingent liabilities and reserve and premium growth. Pursuant to the model law, insurers having less statutory surplus that that required by the RBC calculation will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. The RBC model law provides for four levels of regulatory action. The extent of regulatory intervention and action increases as the level of surplus to RBC decreases. The first level, the Company Action Level (as defined by the NAIC), requires and insurer to submit a plan of corrective actions to the regulator if surplus falls below 200% of the RBC amount. The Regulatory action level re quires an insurer to submit a plan containing corrective actions and requires the relevant insurance commissioner to perform and examination or other analysis and issue a corrective order if surplus falls below 150% of the RBC amount. The Authorized Control Level gives the relevant insurance commissioner the option either to take the aforementioned actions or to rehabilitate or liquidate the insurer if surplus falls below 70% of the RBC amount. At the time of filing of the unaudited annual statutory financial statements of the Company's U.S. insurance subsidiaries with the FDOI and the IDOI for the year ended December 31, 2002, the RBC calculations for Pafco and Superior were in excess of 200% of the RBC amount, a level which requires no corrective action. The RBC calculation for IGF as of December 31, 2002 was in excess of 100% of the RBC amount, which is above the authorized control level. In May 2003, pursuant to a reserve analysis completed by the consulting actuary engaged by BDO Seidman, LLP, the Company's and SIG's independent auditor, the loss and LAE reserves of Superior and Pafco were increased as of December 31, 2002. These reserve adjustments, along with resulting adjustments to the permitted carrying values of certain assets of Superior, investments in Superior American and Superior Guaranty, were recorded in the 2002 audited statutory financial statement filed for Superior and Pafco with the FDOI and IDOI, respectively. Based on the adjusted audited statutory financial statements, the surplus for Superior fell below 70% of the RBC amount and the surplus level for Pafco was above 150% of the RBC amount as of December 31, 2002. As a result, there may be additional regulatory actions taken by the insurance regulators in states in which the companies write business. The NAIC Insurance Regulatory Information System ("IRIS") was developed primarily to assist state insurance departments in executing their statutory mandate to oversee the financial condition of insurance companies. IRIS ratios consist of twelve ratios with defined acceptable ranges. They are used as an initial screening process for identifying companies that may be in need of special attention. Companies that have several ratios that fall outside of the acceptable range are selected for closer review by the NAIC. If the NAIC determines that more attention may be warranted, one of five priority designations is assigned and the insurance department of the state of domicile is then responsible for follow-up action. Based on the December 31, 2002 statutory financials filed with the NAIC, Pafco had values outside of the acceptable ranges for five IRIS tests. These included the two-year overall operating ratio, the investment yield ratio, the change in surplus ratio, the liabilities and liquid assets ratio, and the estimated current reserve deficiency to policyholders' surplus ratio. Based on the December 31, 2002 statutory financials filed with the NAIC, Superior had values outside of the acceptable ranges for six IRIS tests. These included the surplus aid to policyholders' surplus ratio, the two-year overall operating ratio, the change in surplus ratio, the liabilities to liquid assets ratio, the one-year reserve development to policyholders' surplus ratio, and the two-year reserve development to policyholders' surplus ratio. As of December 31, 2002, IGF had values outside of the acceptable ranges for five IRIS tests. These included the change in net writings ratio, the two-year overall operating ratio, the change in surplus ratio, the liabilities to liquid assets ratio, and the agent's balances to policyholders' surplus ratio. 15. COMMITMENTS AND CONTINGENCIES: Superior Guaranty is a defendant in a case filed on November 26, 1996, in the Circuit Court for Lee County, Florida entitled Raed Awad v. Superior Guaranty Insurance Company, et al., Case No. 96-9151 CA LG. The case purported to be brought on behalf of a class consisting of purchasers of insurance from Superior Guaranty. The plaintiffs alleged that Superior Guaranty charged premium finance service charges in violation of Florida law. The parties have reached a class settlement which has been approved by the court that is not expected to be material to Superior Guaranty. As previously reported, IGF, which is a wholly owned subsidiary of the Company, had been a party to a number of pending legal proceedings and claims relating to agricultural production interruption insurance policies (the "AgPI Program") which were sold during 1998. All of the policies of insurance which were issued in the AgPI Program were issued by and under the name of Mutual Service Casualty Insurance Company ("MSI"), a Minnesota corporation with its principal place of business located in Arden Hills, Minnesota. Sales of this product resulted in large underwriting losses by IGF. Approximately $29 million was paid through December 31, 2002 in settlement of legal proceedings and policyholder claims related to the AgPI Program. All AgPI policyholder claims were settled during 2000. However, on January 12, 2001 a case was filed in the Superior Court of California, County of Fresno, entitled S&W Seed Company, Dudley Silveira, Ric Blanchard and Darrell Silveira v. Mutual Service Casualty Insurance Company, IGF Insurance Company, and Dibuduo & Defendis Insurance Agency, Inc.; Case No. OICE CG 00137. The case was brought by four AgPI policyholders who had previously settled their AgPI claims pursuant to binding settlement agreements who now seek additional compensation by asserting through litigation that IGF and the third party carrier paid less than the policy limits they were promised when they purchased the policy and that each settling policyholder was forced to accept the lesser amount due to their economic duress - a legal theory recognized in California if certain elements can be established. The plaintiff's amended their complaint four times during 2002. A demurrer to the fourth amended complaint was filed by MSI and a motion to strike was filed by IGF, which were denied. IGF filed a motion for summary judgment to dismiss the claims in the plaintiff's fourth amended complaint on the basis that releases previously executed by the plaintiffs are binding. The court granted the motion for summary judgment. The cross claims between the selling brokers and MSI and IGF remain pending. The trial is scheduled to begin in August 2003. Superior Guaranty is a defendant in a case filed on October 8, 1999, in the Circuit Court for Manatee County, Florida entitled Patricia Simmons v. Superior Guaranty Insurance Company, Case No. 1999 CA-4635. The case purported to be brought on behalf of a class consisting of purchasers of insurance from Superior Guaranty. The Plaintiff alleged that the defendant charged interest in violation of Florida law. The parties have settled the case in an amount that is not material to the Company's financial condition. The Company is a defendant in a case filed on February 23, 2000, in the United States District Court for the Southern District of Indiana entitled Robert Winn, et al. v. Symons International Group, Inc., et al., Cause No. IP 00-0310-C-B/S. Other parties named as defendants are SIG, three individuals who were or are officers or directors of the Company or of SIG, PricewaterhouseCoopers LLP and Schwartz Levitsky Feldman, LLP. The case purports to be brought on behalf of a class consisting of purchasers of the Company's stock or SIG's stock during the period February 27, 1998, through and including November 18, 1999. Plaintiffs allege, among other things, that defendants misrepresented the reliability of the Company's reported financial statements, data processing and financial reporting systems, internal controls and loss reserves in violation of Section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act") and SEC Rule 10b-5 promulgated thereunder. The individual defendants are also alleged to be liable as "controlling persons" under Sec.20 (a) of the 1934 Act. As previously reported in the Company's September 30, 2002 Form 10-Q, the Company, SIG and the individual defendants entered into an agreement with the plaintiffs for settlement. The settlement is subject to certain terms and conditions and court approval. As previously reported, SIG and two of its subsidiaries, IGFH and IGF, were parties to a "Strategic Alliance Agreement" dated February 28, 1998 (the "SAA") with Continental Casualty Company ("CNA"), pursuant to which IGF acquired certain crop insurance operations of CNA. The obligations of SIG, IGFH, IGF and CNA under the SAA are the subject of an action filed on June 4, 2001 and pending in United States District Court for the Southern District of Indiana, Indianapolis Division. Claims have also been asserted in the action against the Company, Granite Re, Pafco, Superior and certain members of the Symons family. Discovery is proceeding. Although the Company continues to believe that it has claims against CNA and defenses to CNA's claims which may offset or reduce amounts owing by the Company or its affiliates to CNA, there can be no assurance that the ultimate resolution of the claims asserted by CNA against the Company and its affiliates will not have a material adverse effect upon the Company's and its affiliates' financial condition or results of operations. Superior was a defendant in a case filed on May 8, 2001 in the United States District Court Southern District of Florida entitled The Chiropractic Centre, Inc. v. Superior Insurance Company, Case No. 01-6782. The case purported to be brought on behalf of a class consisting of healthcare providers improperly paid discounted rates on services to patients based upon a preferred provider contract with a third party. The plaintiff alleged that Superior breached a third party beneficiary contract, committed fraud and engaged in racketeering activity in violation of federal and Florida law by obtaining discounted rates offered by a third party with whom the plaintiff contracted directly. On September 30, 2002, the court issued an administrative order which dismissed the case. The court's order administratively closing the case could be temporary or permanent. Superior believes that the allegations of wrongdoing as alleged in the complaint were without merit and in the event the order is temporary, Superior intends to vigorously defend the claims brought against it. IGF is a defendant in a case filed on December 31, 2002 in the Circuit Court of Greene County, Missouri entitled Kevin L. Stevens v. Wilkerson Insurers, et al., Case No. 102CC5135. Other parties named as defendants are the Company, SIGF, Granite Re, Superior Group Management, Superior, Superior American, Superior Guaranty, Pafco and three individuals who were or are officers or directors of the Company. Motions to dismiss The Company, SIGF, Granite Re, Superior Group Management, Superior, Superior American, Superior Guaranty and certain named individuals for lack of personal jurisdiction are pending. The case purports to be brought on behalf of an IGF insured seeking to recover alleged damages based on allegations of bad faith, negligent claims handling and breach of fiduciary duties with respect to a claim which arose from an accident caused by the IGF insured. IGF believes that the allegations of wrongdoing as alleged in the complaint are without merit and intends to vigorously defend the claims brought against it. See Note 14 to the Consolidated Financial Statements, Regulatory Matters, for additional contingencies involving insurance regulatory matters. The Company and its subsidiaries are named as defendants in various other lawsuits relating to their business and arising in the ordinary course of business. Legal actions arise from claims made under insurance policies issued by the Company's subsidiaries. The Company, through its claims reserves, reserves for both the amount of estimated damages attributable to these lawsuits and the estimate costs of litigation. The Company believes that the ultimate disposition of these lawsuits will not materially affect the Company's operations or financial position. 16. SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid/(received) for income taxes and interest are summarized as follows (in thousands):
2002 2001 2000 ----- ----- -------- Cash paid/(received) for federal income taxes, net of refunds $ -- $ -- $(6,134) Cash paid for interest. . . . . . . . . . . . . . . . . . . . $ -- $ -- $ --
17. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS: The following outlines the methodologies and assumptions used to determine the estimated fair value of the Company's financial instruments. Considerable judgment is required to develop these fair values and, accordingly, the estimates shown are not necessarily indicative of the amounts that would be realized in a one-time, current market exchange of all of the Company's financial instruments. 1. Fixed Maturity, Equity Securities, and Other Investments: Fair values for fixed maturity and equity securities are based on quoted market prices. 2. Short-term Investments, and Cash and Cash Equivalents: The carrying value for assets classified as short-term investments, and cash and cash equivalents in the accompanying Consolidated Balance Sheets approximates their fair value. 3. Short-term Debt: The carrying value for short-term debt approximates fair value. 4. Preferred Securities: There is not an active market for the Preferred Securities; however, the estimated market value of the entire issue as of December 31, 2002 was approximately $9,000,000. 18. STOCK OPTION PLANS: In June 1986, Goran adopted the Goran Capital Inc. 1986 Share Option Plan (the "Goran Share Option Plan"). The Goran Share Option Plan provides Goran the authority to grant nonqualified stock options and incentive stock options to officers and key employees of Goran and its subsidiaries and nonqualified stock options to non-employee directors of Goran. Options have been granted at an exercise price equal to the fair market value of the Goran stock at date of grant. The outstanding stock options vest and become exercisable at varying terms ranging from immediate vesting to equal installments over terms up to 5 years. Information regarding the Goran Share Option Plan is summarized below (in Canadian dollars):
2002 2001 2000 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------- ------ -------- ------ --------- ------ Outstanding at the beginning of the year. . . . . . . . . 791,187 $ 2.09 195,937 $ 8.36 660,708 $14.17 Granted . . . . . . . . . . . 26,000 $ 0.35 633,750 $ 0.90 100,000 $ 2.35 Exercised . . . . . . . . . . -- -- -- -- -- -- Forfeited/Surrendered . . . . (388,437) $ 3.34 (38,500) $14.16 (564,771) $14.15 --------- -------- --------- Outstanding at the end of the Year . . . . . . . . . . . . 428,750 $ 0.85 791,187 $ 2.09 195,937 $ 8.36 ========= ======== ========= Options exercisable at year End. . . . . . . . . . . . . 340,917 $ 0.89 682,520 $ 2.29 88,605 $14.62 Available for future grant. . 442,250 -- 79,813 -- 675,063 --
On November 1, 1996, SIG adopted the Symons International Group, Inc. 1996 Stock Option Plan (the "SIG Stock Option Plan"). The SIG Stock Option Plan provides SIG the authority to grant nonqualified stock options and incentive stock options to officers and key employees of SIG and its subsidiaries and nonqualified stock options to nonemployee directors of SIG and Goran. Options have been granted at an exercise price equal to the fair market value of the SIG's stock at date of grant. All of the outstanding stock options vest and become exercisable in three equal installments on the first, second and third anniversaries of the date of grant. Information regarding the SIG Stock Option Plan is summarized below:
2002 2001 2000 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------- ------- ---------- ------- ---------- ------- Outstanding at the beginning of the year . . . 1,271,333 $0.8283 1,344,833 $0.9400 213,033 $6.3125 Granted . . . . . . . . . . -- -- -- -- 1,287,000 $0.5436 Exercised . . . . . . . . . -- -- -- -- -- -- Forfeited/Surrendered . . . (386,333) $1.4650 (73,500) $2.8474 (155,200) $5.0391 ---------- ---------- ---------- Outstanding at the end of the year . . . . . . . . . 885,000 $0.5503 1,271,333 $0.8283 1,344,833 $0.9400 ========== ========== ========== Options exercisable at year end. . . . . . . . . . . . 590,167 $ .5520 465,333 $1.3180 73,500 $6.3125 Available for future grant. 615,000 -- 228,667 -- 155,167 --
Options Options Outstanding Exercisable Weighted weighted Weighted Average Average Average Range of Number Remaining Exercise Number Exercise Exercise Prices Outstanding Life (in years) Price Exercisable Price - ---------------- ----------- --------------- ------- ----------- ------ 0.50 - $0.8750. 884,500 7.4 $ 0.5477 763,000 $ 0.5477 6.3125. . . . . 500 5.5 $ 6.3125 500 $ 6.3125 ----------- ----------- 885,000 7.4 763,500 ============ ========
The Board of Directors of Superior Group Management adopted the GGS Management Holdings, Inc. Stock Option Plan (the "Superior Group Management Stock Option Plan"), effective April 30, 1996. The Superior Group Management Stock Option Plan authorizes the granting of nonqualified and incentive stock options to such officers and other key employees as may be designated by the Board of Directors of Superior Group Management. Options granted under the Superior Group Management Stock Option Plan have a term of ten years and vest at a rate of 20% per year for the five years after the date of the grant. The exercise price of any options granted under the Superior Group Management Stock Option Plan is subject to the following formula: 50% of each grant of options having an exercise price determined by the Board of Directors of Superior Group Management at its discretion, with the remaining 50% of each grant of options subject to a compound annual increase in the exercise price of 10%, with a limitation on the exercise price escalation as such options vest. Information regarding the Superior Group Management Stock Option Plan is summarized below:
2002 2001 2000 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price -------- ------ ------- ------ ------- ------ Outstanding at the beginning of the year. . . . . . . . . 83,332 $57.65 83,432 $54.42 92,232 $51.75 Granted . . . . . . . . . . . -- -- -- -- -- -- Forfeited . . . . . . . . . . (55,555) $57.65 (100) $57.65 (8,800) $51.48 -------- ------- ------- Outstanding at the end of the year . . . . . . . . . . . . 27,777 $57.65 83,332 $57.65 83,432 $54.42 ======== ======= ======= Options exercisable at year end. . . . . . . . . . . . . 27,777 $57.65 83,332 $57.65 66,726 $54.42 Available for future grant. . 83,334 -- 27,779 -- 27,679 --
Options Options Outstanding Exercisable Weighted weighted Weighted Average Average Average Range of Number Remaining Exercise Number Exercise Exercise Prices Outstanding Life (in years) Price Exercisable Price - ---------------- ----------- --------------- --------- ----------- ------- 44.17 . . . . . 13,889 3.1 $ 44.17 13,889 $ 44.17 71.14 . . . . . 13,888 3.1 $ 71.14 13,888 $ 71.14
The Company accounts for stock-based employee compensation using the intrinsic value method under APB Opinion No. 25, "Accounting for Stock Issued to Employees" and interpretations as permitted under SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). Accordingly, no compensation cost is recorded if the current market price of the underlying stock does not exceed the exercise price at the date of grant. See Note 1 for a pro forma disclosure of the affect stock-based compensation would have had on net loss and net loss per share had the Company applied the fair value accounting provisions of SFAS 123 to stock-based employee compensation and non-employee director compensation. For purposes of applying SFAS 123, the fair value of each option grant was estimated using the Black-Scholes option-pricing model with the following assumptions:
SIG Goran SIG Goran SIG Goran 2002 2002 2001 2001 2000 2000 Grants Grants Grants Grants Grants Grants ------ --------- ------ ----------- ----------- Risk-free interest rates --- 2.28% --- 2.34% 5.00% 5.00% Dividend yields --- --- --- --- --- --- Volatility factors --- 132% --- 156% 106% 106% Weighted average expected life --- 3 years --- 2.6 years 4.0 years 5.0 years Weighted average fair value per share --- $ 0.22 --- $ 0.68 $ 0.40 $ 1.31
The Goran stock options are granted and denominated in Canadian dollars. The pro-forma stock based compensation for these options are translated at the average rate for the year. The weighted average fair value per share is translated at the year-end rate. 19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED): Quarterly financial information is as follows (in thousands):
First Second Third Fourth Total -------- -------- -------- --------- --------- 2002 Gross written premiums . . . . . . . . . . . . $45,082 $23,626 $17,618 $ 25,068 $111,394 Net premiums written . . . . . . . . . . . . . 14,109 7,656 4,337 7,889 33,991 Net premiums earned. . . . . . . . . . . . . . 13,093 11,892 7,757 8,295 41,037 Total revenues . . . . . . . . . . . . . . . . 17,273 15,594 12,557 9,919 55,343 Net operating earnings (loss) from continuing operations 1. . . . . . . . . . . . . . . . . (3,246) (5,686) (1,744) (7,511) (18,187) Net loss from continuing operations. . . . . . (5,967) (8,386) (3,322) (12,070) (29,745) Basic operating earnings (loss) per share from continuing operations 1 . . . . . . . . . . . (0.60) (1.05) (0.32) (1.39) (3.37) Net loss from continuing operations per share - - basic and diluted. . . . . . . . . . . . . . (1.11) (1.56) (0.62) (2.24) (5.51) First Second Third Fourth Total -------- -------- -------- --------- ------- 2001 Gross written premiums . . . . . . . . . . . . $48,338 $49,950 $27,348 $ 67,550 $193,186 Net premiums written . . . . . . . . . . . . . 16,945 27,702 14,684 27,531 86,862 Net premiums earned. . . . . . . . . . . . . . 18,844 26,411 22,943 39,999 108,197 Total revenues . . . . . . . . . . . . . . . . 22,912 31,444 29,671 44,166 128,193 Net operating earnings (loss) from continuing Operations 1. . . . . . . . . . . . . . . . . (5,803) (1,338) (6,677) (5,193) (19,011) Net loss from continuing operations. . . . . . (9,547) (3,940) (9,041) (9,409) (31,937) Basic operating earnings (loss) per share from Continuing operations 1 . . . . . . . . . . . (1.00) (.23) (1.16) (.95) (3.34) Net loss from continuing operations per share - - basic and diluted. . . . . . . . . . . . . . (1.65) (.68) (1.57) (1.71) (5.61) 1. Operating earnings (loss) and per share amounts exclude amortization, interest, taxes, realized capital gains and losses, minority interest and any extraordinary items.
20. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP") The consolidated financial statements are prepared in accordance with Canadian GAAP. Material differences between Canadian and U.S. GAAP are described below. There were no material differences in net earnings or earnings per share in 2002, 2001 and 2000. 1. Receivables from sale of capital stock: The SEC Staff Accounting Bulletins require that accounts or notes receivable arising from transactions involving capital stock be presented as deductions from stockholders' equity and not as assets. Accordingly, in order to comply with U.S. GAAP stockholders' equity would be reduced by $1,258,000 at December 31, 2002 and 2001, to reflect the loans due from certain stockholders which relate to the purchase of common shares of the Company. 2. Unrealized gain (loss) on investments: U.S. GAAP requires that unrealized gains and losses on investment portfolios be included as a component in determining stockholders' equity. In addition, SFAS No. 115 permits prospective recognition of unrealized gains (losses) on investment portfolio for year-ends commencing after December 15, 1993. As a result, stockholders' equity would be decreased by $2,366,000 and $2,246,000 for the years ended December 31, 2002 and 2001, respectively. 3. Discontinued operations: U.S. GAAP requires the netting of all assets and liabilities of discontinued operations and the presentation of those net assets as a single line item in the consolidated balance sheets for all periods presented. There is no impact on stockholders' equity. 4. Changes in stockholder's equity: A reconciliation of stockholders' equity (deficit) from Canadian GAAP to U.S. GAAP is as follows (in thousands):
2002 2001 --------- --------- Stockholders' equity in accordance with Canadian GAAP . $(84,941) $(89,146) Add (deduct) effect of difference in account for: Receivables from sale of capital stock (see note a) (1,258) (1,258) Unrealized gain (loss) on investments (see note b). (2,366) (2,246) --------- --------- Stockholders' equity in accordance with U.S. GAAP . . . $(88,565) $(92,650) ========= =========
5. Comprehensive Income: U.S. GAAP requires the presentation of a statement of comprehensive income. Canadian GAAP does not require a similar disclosure. The Company's comprehensive income is as follows (in thousands):
2002 2001 --------- --------- Net Income (Loss) per Statement of Operations. $(29,745) $(34,093) Purchase of Preferred Securities . . . . . . . 28,399 18,717 Change in cumulative translation adjustment. . (260) (472) Unrealized gain (loss) on investments. . . . . (2,366) (2,246) --------- --------- Comprehensive Income (Loss). . . . . . . . . . $ (3,972) $(18,094) ========= =========
21. MANAGEMENT'S PLANS SIG reported net losses of $(35.3) million and $(32.9) million for the years 2002 and 2001, respectively, and is a party to a number of legal proceedings and claims. While shareholders' equity at December 31, 2002 is a deficit of approximately $(179) million, SIG has partially offsetting thirty-year mandatorily redeemable trust preferred stock outstanding of $135 million, which are not due for redemption until 2027. Accumulated interest of approximately $84 million will be due in February 2005. SIG's insurance subsidiaries, excluding IGF, have statutory surplus of approximately $3.0 million. Management has initiated substantial changes in operational procedures in an effort to return SIG to profitable levels and to improve its financial condition. SIG has and is continuing to raise its rates in a market environment where increasing rates and withdrawal from the market by other companies show positive trends for improving profitability of nonstandard automobile insurance underwriters. During January and February 2002, SIG experienced sustained adverse loss experience on a substantial portion of its new business written in certain markets. In late February and early March 2002, SIG commenced further analysis of loss ratios by individual agency and a review of claim settlement procedures. Based upon this and other analysis, SIG took a number of actions to improve the financial position and operating results of SIG including: - - Eliminated reinstatements in all markets, i.e., upon policy cancellation, the insured must obtain a new policy at prevailing rates and underwriting guidelines; - Terminated or placed on new business moratorium several hundred agents whose loss ratios were abnormally high when compared to the average for the remaining agents (these agents accounted for approximately 16% of the total gross written premium in 2001); - - Increased underwriting requirements in certain markets including: higher down payments, new policy fees, and shorter policy terms; - - Hired a consultant with significant auto claims experience to review processes and suggest modifications to the claims function. The above actions were followed by: - - Replacement of the president of the non-standard automobile business; - - Hiring of an experienced vice president of claims; - - Consolidation of all underwriting, premium accounting and agency licensing activities in Atlanta, GA into Indianapolis, IN; - - Closing of regional offices in Denver, CO; Virginia Beach and Alexandria, VA; Glendale, CA; and Jacksonville , FL; - - Replacement of the national litigation manager; - - Replacement of the marketing manager and the product manager; - - Heavy focus on the improvement of process and customer service; - - Continued transition to an improved policy processing system. These actions resulted in improved operations and a lower expense ratio. SIG's employee staffing level decreased 40% from 346 to 209 at December 31, 2001 and 2002, respectively. SIG continues to review all job functions in an effort to improve efficiencies. Management believes that despite the historical losses, it has developed a business plan that can improve SIG's operating results and financial condition in 2003. 22. DISCONTINUED OPERATIONS As previously announced, IGF sold its crop insurance operations to Acceptance on June 6, 2001. This business was predominantly written through IGF. The divestiture of the crop insurance segment transferred ownership of certain crop insurance accounts, effective with the 2001 crop cycle. Management does not expect any remaining crop business to be material to the consolidated financial statements and accordingly has discontinued reporting crop insurance as a business segment. The results of the crop insurance segment have been reflected as "Discontinued Operations" in the accompanying consolidated financial statements. Summarized results of operations and financial position for discontinued operations were as follows (in thousands):
Year Ended December 31, 2002 2001 2000 -------- --------- --------- Gross premiums written. . . . . . . . . . . . . . . . . . $ (314) $256,722 $241,748 ======== ========= ========= Net premiums written. . . . . . . . . . . . . . . . . . . $ (5) $ (308) $ 26,466 ======== ========= ========= Net premiums earned. . . . . . . . . . . . . . . . $ 8 $ (308) $ 26,531 Net investment and fee income. . . . . . . . . . . 1,058 1,657 1,229 Net realized capital gain. . . . . . . . . . . . . (2,935) 799 10 -------- --------- --------- Total revenues. . . . . . . . . . . . . . . . . . . . . . (1,869) 2,148 27,770 -------- --------- --------- Loss and loss adjustment expenses. . . . . . . . . 204 3,559 40,690 Policy acquisition and general and administrative expenses. . . . . . . . . . . . . . . . . . . . . . (2,073) 654 2,059 Interest and amortization expense. . . . . . . . . -- 91 1,162 -------- --------- --------- Total expenses. . . . . . . . . . . . . . . . . . . . . . (1,869) 4,304 43,911 -------- --------- --------- Loss before income taxes. . . . . . . . . . . . . . . . . -- (2,156) (16,141) Income taxes: Current income tax (benefit). . . . . . . . . . . -- -- -- Deferred income tax expense . . . . . . . . . . . -- -- -- Total income tax expense (benefit). . . . . . . . . . . . -- -- -- Loss from operations of discontinued segment. . . . . . . -- -- (16,141) Loss on disposal of discontinued segment. . . . . . . . . -- (2,156) (900) -------- --------- --------- Net loss from discontinued operations . . . . . . . . . . $ -- $ (2,156) $(17,041) ======== ========= =========
- ------------------------------------------------------------------------------- MANAGEMENT RESPONSIBILITY - ------------------------------------------------------------------------------- Management recognizes its responsibility for conducting the Company's affairs in the best interests of all its shareholders. The consolidated financial statements and related information in this Annual Report are the responsibility of management. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles, which involve the use of judgement and estimates in applying the accounting principles selected. Other financial information in this Annual Report is consistent with that in the consolidated financial statements. The Company maintains a system of internal controls, which is designed to provide reasonable assurance that accounting records are reliable and to safeguard the Company's assets. The independent accounting firm of BDO Seidman, LLP has audited and reported on the Company's consolidated financial statements for 2002, 2001 and 2000. Their opinion is based upon audits conducted by them in accordance with generally accepted auditing standards to obtain assurance that the consolidated financial statements are free of material misstatements. The Audit Committee of the Board of Directors, the members of which include outside directors, meets with the independent external auditors and management representatives to review the internal accounting controls, the consolidated financial statements and other financial reporting matters. In addition to having unrestricted access to the books and records of the Company, the independent external auditors also have unrestricted access to the Audit Committee. The Audit Committee reports its findings and makes recommendations to the Board of Directors. [GRAPHIC OMITED] [GRAPHIC OMITED] Douglas H. Symons Chief Executive Officer June 3, 2003 BOARD OF DIRECTORS AND STOCKHOLDERS OF GORAN CAPITAL INC. Goran Capital inc. Toronto, Canada We have audited the accompanying consolidated balance sheets of Goran Capital Inc. and subsidiaries (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for the years ended December 31, 2002, 2001 and 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and Canada. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Goran Capital Inc. and subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for the years ended December 31, 2002, 2001 and 2000 in conformity with accounting principles generally accepted in Canada. /s/ BDO SEIDMAN, LLP Grand Rapids, Michigan May 9, 2003 COMMENTS BY AUDITOR FOR U.S. READERS ON CANADA - U.S. REPORTING DIFFERENCES In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by conditions and events that cast substantial doubt on the company's ability to continue as a going concern, such as those described in Notes 14, 15 and 21 to the financial statements. Our report to the stockholders dated May 9, 2003 is expressed in accordance with Canadian reporting standards which do not permit a reference to such events and conditions in the auditors' report when these are adequately disclosed in the financial statements. /s/ BDO SEIDMAN, LLP Grand Rapids, Michigan May 9, 2003 STOCKHOLDER INFORMATION Registrar and Transfer Agent Independent Public Accountants CIBC Mellon Trust Company BDO Seidman LLP Toronto, Ontario Grand Rapids, Michigan Annual Meeting of Stockholders 2 Eva Road, Suite 200 Toronto, Ontario Canada M9C 2A8 July 8, 2003 10:00 A.M. (EDT) ANNUAL REPORT ON FORM 10-K A copy of the Annual Report on Form 10-K for Goran Capital Inc. for the year ended December 31, 2002, filed with the Securities and Exchange Commission, may be obtained, without charge, upon request to the individual and address noted under Shareholder Inquiries. MARKET AND DIVIDEND INFORMATION As of July 1, 2001 Goran Capital Inc.'s common stock began trading on the OTC Bulletin Board under the symbol GNCNF.OB. Prior to this date Goran Capital Inc.'s stock was traded on the NASDAQ Stock Market's National Market. The shares also trade on the Toronto Stock Exchange. As of December 31, 2002 there were approximately 100 common stockholders of record, including many brokers holding shares for the individual clients. The number of individual stockholders on the same date is estimated to be 800. The number of commons shares outstanding on December 31, 2002 totaled 5,393,698. Information relating to the common shares is available through the Toronto Stock Exchange and the U.S. OTC Bulletin Board. The following table sets forth the high and low closing sale prices for the common shares for each quarter of 2002, 2001 and 2000.
TORONTO STOCK EXCHANGE 2002 2001 2000 QUARTER ENDED High Low High Low High Low - ------------- ----- ----- ----- ----- ----- ---- March 31. . . $1.35 $0.70 $2.70 $0.90 $4.15 $1.50 June 30 . . . $0.80 $0.45 $1.75 $0.80 $3.50 $1.75 September 30. $0.50 $0.25 $1.15 $0.53 $2.84 $1.95 December 31 . $0.70 $0.14 $1.25 $0.60 $2.25 $ .50
U.S. OTC BULLETIN BOARD TRADING PRICES
2002 2001 2000 QUARTER ENDED High. Low High Low High Low - ------------- ----- ----- ----- ----- ----- ---- March 31. . . $0.85 $0.41 $1.88 $0.75 $2.88 $1.05 June 30 . . . $0.43 $0.32 $1.14 $0.58 $2.44 $1.16 September 30. $0.25 $0.18 $0.80 $0.35 $1.95 $1.25 December 31 . $0.42 $0.08 $0.81 $0.41 $1.38 $0.34
U.S. OTC Bulletin Board quotations reflect inter-dealer prices without retail mark-up, mark-down or commission and may not represent actual transactions. Goran Capital Inc. did not declare or pay cash dividends on its common stock during the years ended December 31, 2002, 2001 and 2000. Goran Capital Inc. does not plan to pay cash dividends on its common stock in the foreseeable future. See Management's Discussion and Analysis of Financial Condition and Results of Operations and the Notes to the Consolidated Financial Statements for additional discussion regarding restrictions on the payment of dividends. Shareholder inquiries should be directed to: DOUGLAS H. SYMONS President, Chief Executive Officer and Secretary Goran Capital Inc. Tel: (317) 259-6413 E-mail: dsymons@sigins.com BOARD OF DIRECTORS G. GORDON SYMONS Chairman of the Board Goran Capital Inc. Symons International Group, Inc. DOUGLAS H. SYMONS President, Chief Executive Officer and Secretary Goran Capital Inc. President, Chief Executive Officer and Secretary Symons International Group, Inc. J. ROSS SCHOFIELD President, Schofield Insurance Brokers DAVID B. SHAPIRA President, Medbers Limited JOHN K. MCKEATING Former President, Vision 2120, Inc. RON L. FOXCROFT President, Fluke Transportation Group ROBERT C. WHITING President, Prime Advisors, Inc. EXECUTIVE OFFICERS DOUGLAS H. SYMONS President, Chief Executive Officer, Chief Operating Officer and Secretary Goran Capital Inc. President, Chief Executive Officer and Secretary Symons International Group, Inc. JOHN G. PENDL Vice President, Chief Financial Officer and Treasurer Goran Capital Inc. COMPANY, SIG AND SUBSIDIARY OFFICES HEAD OFFICE - CANADA Goran Capital Inc. 2 Eva Road, Suite 200 Toronto, Ontario Canada M9C 2A8 Tel: 416-622-0660 Fax: 416-622-8809 US OFFICE Goran Capital Inc. 4720 Kingsway Drive Indianapolis, Indiana 46205 Tel: 317-259-6400 Fax: 317-259-6395 Website: www.gorancapital.com -------------------- SIG CORPORATE OFFICE Symons International Group, Inc. 4720 Kingsway Drive Indianapolis, Indiana 46205 Tel: 317-259-6300 Fax: 317-259-6395 Website: www.sigins.com -------------- OTHER SUBSIDIARY OFFICES Superior Insurance Group, Inc. 4720 Kingsway Drive Indianapolis, Indiana 46205 Tel: 317-259-6300 Fax: 317-259-6395 Website: www.sigauto.com --------------- Pafco General Insurance Company 4720 Kingsway Drive Indianapolis, Indiana 46205 Tel: 317-259-6300 Fax: 317-259-6395 Superior Insurance Company 4720 Kingsway Drive Indianapolis, Indiana 46205 Tel: 317-259-6300 Fax: 317-259-6395 Superior Insurance Company 280 Interstate North Circle, N.W., Suite 500 Atlanta, Georgia 30339 Tel: 770-952-4885 Fax: 770-988-8583 IGF Insurance Company 4720 Kingsway Drive Indianapolis, Indiana 46205 Tel: 317-259-6300 Fax: 317-259-6395 Superior Insurance Company - Claims Office 1745 West Orangewood Road, Suite 210 Orange, California 92826 Tel: 714-978-6811 Fax: 714-978-0353 Superior Insurance Company - Claims Office 5483 W. Waters Avenue, Suite 1200 Tampa, Florida 33634 Tel: 813-887-4878 Fax: 813-243-0268 Superior Insurance Company- Claims Office 4500 PGA Boulevard, Suite 304A Palm Beach Gardens, Florida 33418 Tel: 561-622-7831 Fax: 561-622-9741 EX-99.1 CHARTER 16 doc15.txt Exhibit 99.1 CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Douglas H. Symons, Chief Executive Officer of Goran Capital Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: (1)the Annual Report on Form 10-K of the Company for the year ended December 31, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: April 15, 2003 By: /s/ Douglas H. Symons ------------------------ Douglas H. Symons Chief Executive Officer EX-99.2 BYLAWS 17 doc16.txt Exhibit 99.2 CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, John G. Pendl, Chief Financial Officer of Goran Capital Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: (1)the Annual Report on Form 10-K of the Company for the year ended December 31, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: April 15, 2003 By: /s/ John G. Pendl -------------------- John G. Pendl Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----