The AgPI Debacle

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The IGF Insurance/AgPI disaster 1998 & later

In writing up the decline and fall of MSI it became apparent that no one business transaction did the company in, that it was a pattern of poor decisions. Having said that, the AgPI program, a new agricultural insurance product sold in 1998, was probably the biggest torpedo to hit this already-leaky ship. The Mutual Service Casualty annual statements are as usual circumspect in discussing this matter but it was a fronting program (er, excuse me, Reinsured Program) with a company called IGF whose parent firm, Symons International, was publicly-traded. Symons´ SEC filings remain available on the SEC´s EDGAR site and relate the sorry tale.

There was some anecdotal knowledge about this at MSI. Bad news wasn't dwelled upon in meetings, at least not in front of the children, but there was the inevitable scuttlebutt about how hideous a deal this had been. For the information below I've relied on publicly-available information. Because the disclosures in the Symons SEC filings are much more detailed than the footnotes in the MSI Annual Statements, this is told mostly from Symons side. The most interesting information isn't addressed; What went wrong? Whose fault was it? Was it bad product design? By whom? Fraudulent sales practices, as the Symons annuals mention? By whom? Who oversaw that? Couldn't we fight that in court? And, perhaps most importantly, why did this seem like an attractive deal from the MSI side and was there any hint of the problems to come? Those problems came in a hurry (lemons ripen early, we used to say in my venture capital days) and then unwound over a period of years.

An Early AgPI reference, from the 1997 10K:

This is the first hint of the AgPI product, from the 1997 10K (annual filing with the SEC).

The Company continues to explore growth opportunities and product diversification through new specialty coverages, including Crop Revenue Coverage (CRC) and specific named peril crop insurance. Further, IGF is in the initial stages of opening new markets and attracting new customers by developing timber, crop completion and agricultural production interruption coverages.

AgPI in the 1998 Annual

Considering that nearly all the AgPI product was sold in 1998 with only a tiny smattering sold in 1999, it doesn't get a lot of mention in the 1998 10K. However, this does describe the nature of the product:

AgPI® [Agriculture Production Interruption] protects agriculture based businesses that depend upon a steady flow of a crop (or crops to stay in business. This protection is available to those involved in agribusiness who are a step beyond the farm gate, such as elevator operators, custom harvesters, cotton gins and businesses that are dependent upon a single supplier of products, (i.e., popping corn).
These businesses have been able to buy normal business interruption insurance to protect against on-site calamities such as a fire, wind storm or tornado. But until now, they have been totally unprotected by the insurance industry if they encounter a production shortfall in their trade area which limited their ability to bring raw materials to their operation. AgPI® allows the agricultural business to protect against a disruption in the flow of the raw materials it depends on. AgPI® was formally introduced at the beginning of the 1998 crop year.

They had high hopes:

AgPI® is a new insurance product for 1998 and the Company expects to significantly expand this new product in future years. While the Company believes there is adequate information to establish pricing and little competition exits[sic], there is no assurance such pricing will be adequate and competition will not develop.

Yeah, don't worry, you've pretty much got the field to yourself on this one.

AgPI starts to go belly up: note from the 6/30/1999 10Q Quarterly Report

Well that didn't take long! Six months after year-end AgPI merits its own long footnote:

Losses on AgPI® Product
In 1998, the Company within its Crop segment (IGF), offered a new and unique crop insurance product called AgPI®. AgPI® is business interruption insurance that is primarily intended to protect businesses that depend upon a steady flow of crop (or crops) to stay in business. This product was sold to a variety of businesses involved in agribusiness, including farmers, as well as grain elevator operators, produce shippers, custom harvesters, cotton gins, agriculture chemical dealers and other processing businesses whose income is heavily dependent on a stable supply of raw product (i.e., cotton), or whose product sales are negatively affected if crop yields fall (i.e., ag chemical dealers).

It's so cute how they're scrupulous about showing the Registered symbol on every mention of AgPI®. A product like this could have lots of market potential, especially if word gets around about how good a deal it is for the insureds! Matt's Suggested Motto: AgPI®: Don't Buy It Until You're Sure You Need It!®

A large number of policies were written through a third party insurance company under a fronting arrangement [Note: that would be MSC]. The Company directly wrote or reinsured 157 AgPI® policies written in 1998, 111 of which were purchased by California policyholders through a third party carrier. The policy form requires that the county in which crops reside must suffer a minimum level of crop loss before a loss recovery by a policyholder is possible. After the county loss test is met, then the policyholder must demonstrate an insurable economic loss on an individual basis under the policy.
The Company recognized approximately $7.6 million in written premium in 1998, of which $6 million was earned in 1998 with $1.6 million being earned in the first quarter of 1999. The lack of National Agricultural Statistical Service (NASS) and policyholder loss data, coupled with a Company awareness of adverse weather conditions and resultant crop damage in parts of the country with several AgPI® policyholders, led the Company to establish reserves at December 31, 1998, equal to 100% of the AgPI® earned premium.

This actually brings up a good question; did MSI actually recognize any earned premium on this deal, or was it all ceded to IGF & Symons? From MSI's point of view, earning $7.6M and paying out $41M would be gruesome enough, but was it even worse? Was it earned premium of $0 and losses of $41M? I've done spreadsheets where I had to format percentages with commas for things like 1,247.3%, but never have I had to format one to read a loss ratio of ∞%! Anyway, carrying on...

County loss data, as well as policyholder loss data, gradually became known starting in late April 1999. As of May 28, 1999, the filing date for the Company's first quarter 1999 Form 10-Q, it became apparent that the Company was experiencing unexpected adverse loss development on these policies and increased its incurred losses related to 1998 policies to $15 million. As of the filing date for this second quarter 1999 Form 10-Q, NASS data is complete, and the Company has received policyholder data on nearly all policies to determine loss liability, if any, under each of the 157 AgPI® policies. Based on the Company's latest analysis, the estimated gross ultimate incurred loss settlement and loss adjustment expense ("LAE") related to these policies totals $25 million. The Company recorded $6 million, $9 million, and $10 million of loss and LAE in 1998, the first quarter and second quarter of 1999, respectively.

An astounding number of these policies had claims:

The Company has tendered settlement payments to virtually all policyholders with a demonstrable loss under the policy. The Company believes that the claim payments tendered are consistent with policy language and applicable state law. In the event that a policyholder believes that the settlement offer is erroneous or insufficient according to the policy form, the policy form requires binding arbitration.
As of the date of this Form 10-Q, 128 policyholders have incurred an indemnifiable loss according to company calculations. As of the date of this Form 10-Q, 8 policyholders have accepted settlements and released the Company from liability, 3 policyholders have filed for arbitration, and 7 policyholders have instituted litigation against the Company. The policyholders seeking arbitration are requesting indemnification totaling the face amount of their policies plus punitive damages. Arbitration hearings will likely not begin until the year 2000 (See note 7).

The Chairman's Letter from 12/31/1999

Remember, these had been sold in 1998 and a few in 1999 yet were going bad in a hurry. This merited note in the Chairman's Letter to Shareholders. Mutual Service Casualty is the third-party insurance company referred to in the letter:

Our shareholders know that we had significant losses in our Crop Operations in 1998 and 1999, the most devastating losses coming from a relatively new program called AgPI. This is a form of business interruption insurance designed initially to fill a coverage requirement for processors of crops such as grain dealers and companies that purchase the products grown by the farms. This business produced in 1998 approximately $7 million of premium and we have paid losses or established loss reserves against liabilities totaling approximately $35 million. The reserves are established by our staff, then reviewed by professional actuaries and our auditors. The business was issued on policies of a third-party insurance company licensed in California and elsewhere, and reinsured to us. A portion of the losses incurred resulted from the actions of certain independent brokers who sold policies to insureds who knew they had losses before they applied for the coverage. The issuing company settled certain losses over our objections, which calls into question whether we have an obligation to meet liabilities of this magnitude. All of this business and its resultant losses, whether reserved or paid, arose in 1998. However, the major increase in reserves took place in 1999 when the magnitude of the loss could finally be estimated. The losses are excessive by any standard, but regardless of our feelings on the quantum of the losses and practices employed to write this business, we have to pay some losses and reserve for others. The Company is pursuing all applicable recovery rights.

Symons was having a brutal year. They'd lost $14M in 1998 and now lost $81M in 1999. A lot of it was AgPI but the nonstandard auto business was hurting too. Also, the company had grown very quickly and apparently had had some growing pains:

In the fourth quarter of 1998, the Company provided a $3.2 million reserve for potential processing errors in the crop business assumed from CNA.

Another Tough Year for Symons: the 2000 Annual & 10K

Lost another $88M. This is starting to hurt.

During the last year we replaced the entire senior and middle management of our non-standard operation, Superior Insurance Group.

They were closing and combining offices, shedding poor agents, dropping written premium in the non-standard segment from $236M to $174M, raising rates and reducing staff, from 541 to 390. Oh, also, their ratings suck:

A.M. Best has currently assigned a "B-" rating to Superior, a "C" rating to Pafco and an "NA-3" rating to IGF.

The 10K as usual gets into the gory details:

IGF is a party to a number of pending legal proceedings relating to a policy ("AgPI") offered in the now discontinued crop insurance operations. See Note 14 "Commitments and Contingencies" in the consolidated financial statements. During 2000 claims by policyholders prior to the end of the year relating AgPI were settled. 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 directly and/or through their agents made false representations, among other things, regarding AgPI. Discovery is proceeding. IGF remains a defendant/cross-claimant in six lawsuits pending in California state court (King and Fresno counties) only relating to cross claims and discovery is proceeding. Over the objections of IGF, the third party carrier settled in 2000 some of policyholder claims in the AgPI cases for amounts in excess of the policy limits. IGF and Mutual Service Casualty Insurance Company, the third party carrier of the AgPI policies, have submitted their claims against each other related to these settlements to binding arbitration. As of December 31, 2000, IGF had paid an aggregate of approximately $28.9 million to the policyholders involved in these legal proceedings of which approximately $5.2 million was incurred during 2000. The unpaid reserves as of December 31, 2000 were $10,912,000. The Company believes that it has meritorious defenses to any claims in excess of the amounts it has already paid and that the loss payments made and LAE reserves established with respect to the claims from AgPI as of December 31, 2000, are adequate with regard to all of the policies sold. However, there can be no assurance that the Company's ultimate liability with respect to these and any future legal proceedings involving such policies will not have a material adverse effect on the Company's results of operations or financial position.

The AgPI mention in the 2000 Mutual Service Casualty Annual Statement

MSI's disclosures weren't required to be as thorough as those of publicly-traded Symons.

IGF Insurance Company. Amount in dispute: $39,165,223.
$5,869,458 is included in reinsurance recoverable on paid losses, $5,295,765 is included in ceded reserves, and $28,000,000 was written off in 2000 due to the financial position of the reinsurer. (2000 AS, Note 14, P. 20.2)

For a long time, I thought this $39 million was all the losses on this deal. When I began reading the Symons documents, the references to the $29.7M in payments threw me for a while. I thought those losses were MSI's? How did Symons end up paying? After all, they didn't pay MSI. Finally, it dawned on me; MSI and Symons both paid claims, and the losses were even bigger than I had thought!

All Becomes Clear: It really is $70M in losses! Symons 10Q 6/30/2001

The 6/30/2001 10Q reiterates a lot of the stuff from the 2000 10K but adds this in. They reference $60M in losses, but MSI was claiming $39M due from Symons who themselves had paid out over $29M. I don't know, maybe this mathematical aptitude had something to do with the quality of the program?

A dispute arose between MSI and IGF with respect to the funding of the settlements of claims made on the AgPI Program. MSI and IGF currently are arbitrating their dispute over responsibility for over $60 million in claims paid by both companies to MSI's insureds. IGF is seeking a recovery of the $30 million in claims which it paid, and MSI is seeking a similar recovery of the claims which it paid. The arbitration commenced December 20, 2000. The parties subsequently selected an arbitration panel and had their first organizational meeting with the panel on May 22, 2001. At that meeting, MSI moved for an order requiring IGF to post pre-hearing security through the issuance of a letter of credit in the amount of $39 million. Over IGF's objection, in a two to one vote, the panel on June 9, 2001, ordered IGF to post the $39 million in security, which IGF was to have done by June 19, 2001.

There was no way in hell Symons could post a $39M bond. They say so, more politely, at the end of this paragraph:

On or about June 11, 2001, IGF filed a motion in the United States District Court for the District of New Jersey seeking to vacate the arbitration panel's order requiring security. On June 19, 2001, MSI filed a motion in the same court for a ruling confirming that order. On July 26, 2001, the parties presented oral arguments on their cross-motions for vacation and confirmation of the order. On August 6, 2001 the court denied IGF's motion to vacate the arbitration panel's order. As of this date, IGF has not posted the required letter of credit, and it is financially incapable of satisfying that requirement.

Also, Symons had sold off IGF to the largest crop/hail insurer in the country and now MSI was alleging that these weasels has misappropriated the funds. If you look around in later years, MSI wasn't the only entity troubled by this transaction, and the "piercing the corporate veil" aspects of the action under Indiana law are interesting cases for Indiana jurisprudence enthusiasts.

On June 25, 2001, MSI filed a complaint for preliminary and permanent injunctive relief and damages (the "MSI Complaint") against the Company, IGF, IGF Holdings, Inc. ("IGFH"), Granite Reinsurance Company Ltd. ("Granite Re"), Goran Capital Inc. ("Goran") and certain affiliates of those companies, as well as certain members of the Symons family, and Acceptance in the United States District Court for the Southern District of Indiana, Indianapolis Division. The MSI Complaint alleges that the previously reported June 6, 2001 transfer of IGF's assets to Acceptance and the payments by Acceptance to the Company, Goran and Granite Re violated Indiana law and are voidable. In addition, the MSI Complaint alleges that Acceptance, the Company, Goran, IGFH and the Symons family are liable to MSI for the entire $39 million claim which MSI is asserting against IGF in arbitration proceedings on theories of successor liability and "piercing the corporate veil." The MSI Complaint seeks preliminary and permanent injunctive relief against the defendants, an order voiding the various transactions between and among the defendants and an order determining that the defendants are directly responsible to MSI for MSI's $39 million claim against IGF.
On July 26, 2001, the Company, IGF, IGFH, Goran, Granite Re and their affiliates filed answers to the MSI Complaint. In those answers, each of the defendants denied the material allegations contained in the MSI Complaint and asserted certain affirmative defenses to that complaint. Each of those defendants also filed briefs in opposition to MSI's Motion for Preliminary Injunctive Relief. A hearing on MSI's Motion for Preliminary Injunctive Relief was held Thursday, August 2, 2001. On August 3, 2001, the court denied MSI preliminary injunctive relief.

Finally, they note that, if MSI wins this, they're hosed:

On July 26, 2001, the Company, IGF, IGFH, Goran, Granite Re and their affiliates filed answers to the MSI Complaint. In those answers, each of the defendants denied the material allegations contained in the MSI Complaint and asserted certain affirmative defenses to that complaint. Each of those defendants also filed briefs in opposition to MSI's Motion for Preliminary Injunctive Relief. A hearing on MSI's Motion for Preliminary Injunctive Relief was held Thursday, August 2, 2001. On August 3, 2001, the court denied MSI preliminary injunctive relief.

This is pretty much how it plays out from here. One of my rules to live by is, Never Buy Anything From An Asshole. I don't know how the IGF and Symons people appeared to whoever from MSI dealt with them, but the corollary Never Go Into Business With A Weasel might have applied here. You can't write the language in the documents tight enough and when things go south, the legal process is protracted, excruciating and expensive.

Another Tough Chairman's Letter, 12/31/2001

It was another unkind year for Symons and there's another tough chairman's letter to shareholders:

Dear Fellow Shareholder:
Hopefully, this year will be the last that I will have to report poor results on behalf of management. The year was a very tough one due to a poor market coupled with the closing of IGF and the sale of the crop assets. We exited the crop operations after three years of very difficult times. This exit from the industry resulted from poor crop/hail results, as well as from a product called AgPI, which was the result of a third party insurance company and several brokers causing irreparable harm to us. The government-sponsored MPCI product continually reducing government subsidies and, at the same time, increasing the overhead cost of companies through reporting and government mandated risk management also hurt the business. We set out to sell the operations in December of 2000 and on June 6, 2001 successfully sold IGF's crop assets to Acceptance Insurance Companies, Inc. In return for a fee, we also agreed that Symons International Group and all of its subsidiaries would stay out of the crop business for a certain period of time.

Symons was still supposed to post that $39 million letter of credit, but they couldn't:

On November 7, 2001, the arbitration panel considered a petition for default judgment against IGF based on IGF's failure to post the pre-hearing security. On November 23, 2001, the arbitration panel issued an order denying MSI's motion for default judgment and requiring IGF to place $600,000 in an escrow account to cover MSI's prospective legal expenses. The panel also continued its original order that required IGF to post the $39 million security. IGF has deposited $600,000 into an escrow account as required by the arbitration panel but has not posted the $39 million letter of credit and is financially unable to do so.

And you thought you only wrote "going concern" letters in CPA classes to get through the exam!

Given the financial position and loss experience of the Company over the past several years as described above, the Company's accountants have issued an opinion based on their audit of the December 31, 2001 Consolidated Financial Statements which includes an emphasis paragraph that raises the question of whether or not the Company can continue as a going concern. The Company's plans to improve financial results are described above.

Is spinning your recent failures an MBA class?

With his family's company now smaller and a plan established for its future, Alan G. Symons has decided it's time to move on. Symons, 55, left his job as president and CEO of Goran Capital Inc. and vice chairman of subsidiary Symons International Group Inc. May 31 to operate AGS Capital LLC, a business consulting company. "I've always had fun in [consulting]," he said. "It's what gets me up early in the morning and keeps me up late at night." Until recently, most of Symons' early-morning and late-night work and everything in between was spent on Symons International, the Indianapolis-based insurance company that has struggled with huge losses in recent years.

MSI Chimes In with the 2001 Annual Statement:

Remember, they wrote off $28M in 2000? Here's another $13.2M. That's where I get my $41M figure from for the MSI losses.

Under Uncollectible Reinsurance:
IGF Insurance      $13,244,904 (2001 AS, p. 14.6)

Not much new in 2002 Symons 10K, 12/31/2002

Lost another $35M. Headcount down to a couple of hundred. Still have a going concern note from the auditors. Departments of insurance getting restive. There's an almost wistful chairman's letter this time around.

Dear Fellow Shareholder: 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.

He noted the sale of IGF and how the acquiring company had had a tough time. He's right; there's a government publication on the failure of the acquiring firm and crop insurance generally.

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.

The final filing: 3/31/2003's 10Q

There's not much quotable material here. The AgPI lawsuits are now pretty much boilerplate from report to report. There are developments on other lawsuits, and actions to cease business in some states by the states' insurance departments. And then...silence. Symons never filed another SEC report.

This must be what The End looks like

The main item of interest to me was the August 2003 scheduled trial. Unfortunately, Symons didn't file any reports after that date and MSI doesn't mention it in their Annual Statements, so I'm assuming nothing interesting happened.

8/29/2003: Under the August 29, 2003 order entered by the Circuit Court of the Second Judicial Circuit in and for Leon County, Florida the Florida Department of Financial Services (the "Department") will act as Rehabilitator of the Company. [Symons subsidiary Superior Insurance Company]

10/17/2003: [Symons] announced on October 27, 2003 that IGF Insurance Company and Pafco General Insurance Company, the Indiana domiciled insurance company subsidiaries, have consented to Orders of Rehabilitation of the companies, respectively. Under the October 17, 2003 orders entered by the Marion County Circuit Court in the State of Indiana, the Indiana Insurance Commissioner will act as rehabilitator of the companies.

11/19/2003: Change In Registrant's Certifying Accountant, aka, the CPAs quit:
On November 19, 2003, Goran Capital Inc. (the “Company”) was advised by BDO Seidman, LLP (“BDO”) of its resignation as independent accountant of the Company. During the audit of the Company’s December 31, 2002 year ended financial statements, the Company was advised that BDO disagreed with the Company’s reserve for loss and loss adjustment expenses based upon an analysis of the reserves performed by the consulting actuary engaged by BDO. The Company made an adjustment to its reserves prior to BDO’s issuance of opinion on the December 31, 2002 financial statements with respect to its insurance company subsidiaries. BDO’s report with respect to the years ended December 31, 2001 and December 31, 2002 contained a going concern opinion.

Years later, 7/2010, from the SEC: Symons International Group, Inc., CIK No. 1013698, is an Indiana corporation located in Indianapolis, Indiana, with a class of securities registered with the Commission pursuant to Exchange Act Section 12(g). The company is delinquent in its periodic filings with the Commission, having not filed any periodic reports since it filed a Form 10-Q for the period ended March 31, 2003, which reported a net loss of over $5 million for the prior three months [Matt's note: Hey! An improvement!]. As of June 21, 2010, the company’s stock (symbol “SIGC”) was quoted on the Pink Sheets, had six market makers, and was eligible for the “piggyback” exception of Exchange Act Rule 15c2-11(f)(3).

therefore...IT IS ORDERED that, pursuant to Section 12(j) of the Securities Exchange Act of 1934, 15 U.S.C. § 78l(j): the REGISTRATION of the registered securities of Symons International Group, Inc., is REVOKED;

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