UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended March 31, 1996
Commission file number 1-10861
GUARANTY NATIONAL CORPORATION
.............................
(Exact name of registrant as specified in its charter)
Colorado 84-0445021
........ ..........
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
9800 South Meridian Boulevard
Englewood, Colorado 80112
..................................................
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code (303) 754-8400
..........................
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
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
As of May 6, 1996, there were 14,961,354 shares of
Registrant's $1.00 par value common stock issued and outstanding
exclusive of shares held by registrant.
<PAGE>
GUARANTY NATIONAL CORPORATION
Form 10-Q Index
For the Quarter Ended March 31, 1996
Page
Number
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountants' Review Report 3
Consolidated Financial Statements:
Consolidated Balance Sheets at March 31, 1996 and
December 31, 1995 4
Consolidated Statements of Earnings for
the three months ended March 31, 1996 and 1995 5
Consolidated Statements of Cash Flows for
the three months ended March 31, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART 2. OTHER INFORMATION 14
SIGNATURES 15
<PAGE>
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Shareholders
Guaranty National Corporation
We have reviewed the accompanying consolidated balance sheet of
Guaranty National Corporation and subsidiaries (the "Company") as
of March 31, 1996, and the related consolidated statements of
earnings and cash flows for the three-month periods ended
March 31, 1996 and 1995. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information consists
principally of applying analytical procedures to financial data
and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to such consolidated financial
statements for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally
accepted auditing standards, the consolidated balance sheet of
the Company as of December 31, 1995, and the related consolidated
statements of earnings, changes in shareholders' equity and cash
flows for the year then ended (not presented herein); and in our
report dated February 20, 1996, we expressed an unqualified
opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1995 is fairly
stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Denver, Colorado
April 29, 1996
<PAGE>
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
(Unaudited)
<S>
Investments (Note 3): <C> <C>
Fixed maturities held to maturity, at
cost $ 83,317 $ 75,017
Fixed maturities available for sale,
at market 375,410 395,198
458,727 470,215
Equity securities, at market 86,933 85,085
Other long-term investments 12,377 11,521
Short-term investments 50,386 52,257
Total investments 608,423 619,078
Cash 17,962 6,794
Accrued investment income 6,953 7,603
Accounts receivable, (less allowance
of $400-1996 and 1995) 53,390 51,638
Reinsurance recoverables and
prepaids, (less allowance of
$200-1996 and 1995) (Note 4) 80,790 81,825
Property and equipment (less
accumulated depreciation of
$10,421-1996 and $9,326-1995) 31,912 31,573
Deferred policy acquisition costs 40,616 37,637
Goodwill (less accumulated
amortization of $5,542-1996
and $5,263-1995) 33,071 33,133
Deferred income taxes 5,851 4,216
Other assets 340 1,676
Total assets $879,308 $875,173
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses $291,950 $290,156
Unpaid loss adjustment expenses 64,008 64,478
Unearned premiums 155,193 146,205
Notes payable 102,250 103,000
Reinsurance payables and deposits 5,629 8,290
Other liabilities 45,119 47,493
Total liabilities 664,149 659,622
Commitments and contingencies (Note 5)
Shareholders' equity:
Preferred stock, $.10 par value;
authorized, 6,000,000 shares;
none issued and outstanding
Common stock, $1 par value;
authorized, 30,000,000 shares;
issued 14,961,354 shares-1996 and
1995 14,961 14,961
Capital in excess of par 121,050 121,050
Retained earnings 68,581 64,664
Deferred compensation on restricted
stock (610) (644)
Net unrealized investment gains 11,177 15,520
Total shareholders' equity 215,159 215,551
Total liabilities and shareholders'
equity $879,308 $875,173
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
(Unaudited)
<S> <C> <C>
Revenue:
Premiums earned (Note 4) $115,470 $ 79,468
Net investment income 9,253 6,465
Realized investment gains (Note 3) 1,981 569
126,704 86,502
Expenses:
Losses and loss adjustment expenses
incurred (Note 4) 84,845 52,726
Policy acquisition costs 29,082 23,076
General and administrative 3,528 1,912
Interest 1,720 1,056
Other 288 197
119,463 78,967
Earnings before income taxes 7,241 7,535
Income taxes 1,454 1,767
Net earnings $ 5,787 $ 5,768
Earnings per common share $ 0.39 $ 0.48
Dividends per common share $ 0.125 $ 0.125
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
(Unaudited)
<S> <C> <C>
Operating Activities:
Premiums collected $120,610 $ 78,523
Net investment income collected 9,997 7,198
Losses and loss adjustment expenses paid (84,425) (50,943)
Policy acquisition costs and general and
administrative expenses paid (39,789) (31,720)
Interest paid (1,712) (481)
Other receipts (payments) 3,715 (1,150)
Net cash provided by operating activities 8,396 1,427
Investing Activities:
Maturities of fixed maturities held to
maturity 2,104
Maturities of fixed maturities available
for sale 15,508 162
Sales of fixed maturities available
for sale 22,323 1,262
Sales of equity securities 9,204 2,974
Net change in short-term investments 1,927 1,409
Purchases of fixed maturities held
to maturity (8,506) (2,537)
Purchases of fixed maturities available
for sale (24,011) (5,871)
Purchases of equity securities (8,761) (5,439)
Net change in other long-term investments (856) 270
Purchases of property and equipment (1,436) (949)
Net cash provided by (used in) investing
activities 5,392 (6,615)
Financing Activities:
Repayment of notes payable (750)
Dividends paid (1,870) (1,505)
Net cash used in financing activities (2,620) (1,505)
Net Increase (Decrease) in Cash 11,168 (6,693)
Cash, Beginning of Period 6,794 9,609
Cash, End of Period $ 17,962 $ 2,916
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NOTE 1 - GENERAL
The accompanying unaudited consolidated financial statements of
Guaranty National Corporation and subsidiaries (the "Company")
have been prepared in accordance with generally accepted
accounting principles applicable to interim reporting and do not
include all of the information and footnotes required for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 1996, are not
necessarily indicative of the results that may be expected for
the year ending December 31, 1996.
Although these financial statements are unaudited, they have
been reviewed by the Company's independent accountants, Deloitte
& Touche LLP, for conformity with accounting requirements for
interim financial reporting. Their report on such review is
included herein. These financial statements should be read in
conjunction with the financial statements and related notes
included in the Company's Annual Report to Shareholders and
Form 10-K for the year ended December 31, 1995, for the more
complete explanations therein.
Certain reclassifications have been made to the 1995 financial
statements to conform with presentations used in 1996.
NOTE 2 - EARNINGS PER SHARE
Earnings per common share has been computed using the weighted
average number of shares and equivalent shares outstanding of
14,963,367 and 12,064,834 for the three months ended March 31,
1996, and 1995, respectively. The common stock equivalents are
stock options which result in a dilutive effect from assumed
exercise of the options.
NOTE 3 - INVESTMENTS
At March 31, 1996, and December 31, 1995, the estimated
aggregate fair value of fixed maturities held to maturity was
$84,044,000 and $77,143,000, respectively, the cost of fixed
maturities available for sale was $371,282,000 and $383,135,000
respectively, and the cost of equity securities was $73,866,000
and $73,271,000 respectively. At March 31, 1996, and
December 31, 1995, the Company had investments in noninvestment
grade securities with a cost of $40,085,000 and $36,641,000
respectively, which are carried at fair values of $39,634,000 and
$36,356,000 respectively.
Realized investment gains (losses), which includes gains
(losses) on calls of fixed maturities, for the three months ended
March 31, 1996 and 1995, as well as a write down for other-than-
temporary investment impairments of approximatley $134,000, for
the three months ended March 31, 1996, are as follows (in
thousands):
<TABLE>
<CAPTION>
March 31, March 31,
Three Months Ended 1996 1995
<S> <C> <C>
Fixed maturities held to
maturity:
Gains $ $
Losses (8)
(8)
Fixed maturities
available for sale:
Gains 660 28
Losses (20)
640 28
Equity securities:
Gains 1,806 1,059
Losses (465) (510)
1,341 549
Total $1,981 $ 569
</TABLE>
<PAGE>
NOTE 4 - REINSURANCE
In the ordinary course of business, the Company reinsures
certain risks, generally on an excess of loss basis with other
insurance companies. Such reinsurance arrangements serve to
limit the Company's maximum loss per occurrence on individual
risks to $400,000, and for catastrophes to $500,000. Reinsurance
does not discharge the primary liabilitiy of the original
insurer. Amounts recoverable from reinsurers are recognized and
estimated in a manner consistent with the claim liabilities
arising from the reinsured policies and incurred but not reported
losses.
Premiums, losses, and loss adjustment expenses, including the
effect of reinsurance, are comprised of (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
1996 1995
Written Earned Written Earned
<S> <C> <C> <C> <C>
Premiums:
Direct $125,202 $118,556 $ 86,617 $ 76,946
Assumed 11,837 9,559 7,961 14,125
Ceded (13,426) (12,645) (12,756) (11,603)
Net $123,613 $115,470 $ 81,822 $ 79,468
% Assumed to Net 9.58% 9.73%
</TABLE>
<TABLE>
<CAPTION>
Losses and loss
adjustment expenses: Incurred Incurred
<S> <C> <C>
Direct $ 86,357 $ 51,067
Assumed 4,162 8,113
Ceded (5,674) (6,454)
Net $ 84,845 $ 52,726
</TABLE>
NOTE 5 - COMMITMENTS AND CONTINGENCIES
As part of the 1995 Viking acquisition, the Company will pay
the Seller, as additional purchase price, two- thirds of any
favorable loss development up to $15,000,000, and one-third of
any favorable development between $15,000,000 and $20,000,000.
The amounts payable will be reduced by 35% to compensate for the
applicable tax rate. Included in the cost of the acquisition,
was $3,250,000 paid to the Seller as additional purchase price,
in anticipation of favorable development of Viking's recorded
1994 and prior accident year loss and loss adjustment expense
reserves. The Company and the Seller will initially settle any
additional purchase price as of December 31, 1998, and will
finalize the settlement as of December 31, 2001. If adverse
development results, the Seller will repay to the Company an
offsetting amount, after allowance for the tax adjustment, not to
exceed the initial $3,250,000 paid to the Seller at the time of
acquisition.
Any payments to or receivables from the Seller, as a result
of the positive or negative loss development, will include
accrued interest from the acquisition closing date at an annual
rate equal to 6.28%, for the initial loss development settlement
payment as of December 31, 1998. For the final loss development
settlement payment, as of December 31, 2001, the interest rate
will equal the mid-term Applicable Federal Rate (as defined in
the Internal Revenue Service Code) in effect as of January 1,
1999.
Management estimates that a payment in excess of the
$3,250,000 already paid will ultimately be made to the Seller,
and has included an estimated amount of approximately $2,000,000,
as well as the corresponding interest payable, in the
accompanying balance sheet. Loss and loss adjustment expense
reserves of Viking were recorded at the date of acquisition at
amounts consistent with the Company's estimates of the additional
purchase price that will be paid.
<PAGE>
The Company is subject to litigation in the normal course
of operating its insurance business. The Company is not engaged
in any litigation which it believes would have a material impact
on its financial condition or future results of operations.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results for the Quarters Ended March 31, 1996 and March 31, 1995
Guaranty National Corporation and its subsidiaries (the
"Company") manage their property and casualty business in three
operating units. Gross premiums written and GAAP combined ratios
by operating unit for the quarters ended March 31, 1996, and
1995, are summarized below:
Three Months Ended
March 31,
1996 1995
(Dollars in thousands)
Personal Lines:
Gross premiums written $ 65,282 $ 37,391
GAAP combined ratio 101.0% 99.5%
Commercial Lines:
Gross premiums written $ 51,964 $ 47,209
GAAP combined ratio 104.4% 97.0%
Collateral Protection:
Gross premiums written $ 19,793 $ 9,978
GAAP combined ratio 97.5% 95.7%
Total:
Gross premiums written $137,039 $ 94,578
GAAP combined ratio 101.6% 97.7%
On July 18, 1995, the Company completed its acquisition of
Viking Insurance Company of Wisconsin ("Viking"). The Viking
acquisition has enabled the Company to increase its nonstandard
private passenger automobile premiums, as well as allow the
Company to expand its personal lines business into new
territories, strengthen its personal lines market share position
in existing states, and provide further flexibility in marketing
the Company's personal lines products. Calendar year 1996 is the
first full year in which Viking's operating results are included
in the consolidated financial statements. During 1995, Viking's
operating results were included in the financial statements from
the acquisition closing date forward.
Personal lines gross premiums written, which includes the
Guaranty National and Viking divisions, increased 75% for the
first quarter of 1996 compared to the first quarter of 1995. The
Viking division accounted for all of the growth, or $34,367,000
of the total personal lines gross premiums written. The Guaranty
National division's gross premiums written decreased 17%, or
$6,476,000. The decrease in this division was primarily a result
of the ongoing effort to reduce business in unprofitable
territories, such as Texas and Illinois. As a result of the
overall reduction in business, the Guaranty National division's
policies in-force at March 31, 1996 declined 12% compared to
March 31, 1995.
The personal lines loss and loss adjustment expense ratio for
the first quarter of 1996 was 75.5% compared to 73.1% for the
first quarter of 1995. The increased loss and loss adjustment
expense ratio was caused by continued higher levels of claim
frequency, as noted in 1995. However, the loss and loss
adjustment expense ratio for the first quarter of 1996 was an 8.2
and 3.9 point improvement over the same ratio for the third and
fourth quarters of 1995, respectively. The personal lines
expense ratio was 25.5% for the first quarter of 1996, compared
to 26.4% for the first quarter of 1995. The lower expense ratio
was primarily caused by reduced contingent commissions under a
new contingent plan, which was effective January 1, 1996.
Commercial lines achieved a 10% growth in gross premiums written
for the first quarter of 1996 compared to the first quarter of
1995, primarily as a result of a 38% increase in the specialty
division. The majority of the growth in the specialty division
came from its personal automobile physical damage program in
California, which was implemented in mid-1995. This program
accounted for approximately 59% of the specialty division's
premium growth during the first
<PAGE>
three months of 1996. The remaining growth in the specialty
division was from higher production in existing specialty
programs, which was slightly offset by lower production in the
umbrella line of business.
For several years, the Company has strived to reduce commercial
automobile liability gross premiums written, which are written
primarily through the general commercial division. As a result
of the Company's efforts, commercial automobile liability gross
premiums written decreased to 36% of total commercial lines
premiums for the first quarter of 1996 compared to 42% for the
first quarter of 1995. This decrease reflects growth in other,
more profitable commercial coverages, such as commercial
automobile physical damage, general liability and property.
The commercial lines loss and loss adjustment expense ratio for
the first quarter of 1996 was 71.3% compared to 65.6% for the
same period last year. The losses incurred component increased
by 4.7 points and the loss adjustment expenses component
increased 1.0 point. These fluctuations were principally caused
by increased claim frequency and severity within the commercial
unit, primarily related to specialty automobile programs, as well
as several large property fire losses.
The commercial lines expense ratio increased 1.7 points for the
first quarter of 1996, due mainly to an increase in the accrual
for contingency commissions, as well as a slightly higher front-
end commission rate on the rapidly growing commercial programs
written through the specialty division. The commercial lines
overall GAAP combined ratio increased 7.4 points for the first
quarter of 1996 compared to the first quarter of 1995. The
higher GAAP combined ratio resulted from the combination of
increases in both the loss and expense ratios, discussed above.
However, the 104.4% total commercial GAAP combined ratio reported
for the first quarter of 1996 was a significant improvement over
the 108.0% total commercial GAAP combined ratio reported for the
fourth quarter of 1995.
The collateral protection unit's gross premiums written
increased by $9,815,000, or 98%, for the first quarter of 1996
compared to the first quarter of 1995. The notable growth is due
to this unit's continued expansion into the Northeastern United
States, as well as its two newest products: GAP and mortgage
fire. Gross premiums written from the GAP and mortgage fire
products for the first quarter of 1996 were $2,806,000 and
$1,858,000, respectively. This compares to $92,000 gross
premiums written from the GAP program, and no premiums written
from the mortgage fire program, during the first quarter of 1995.
The Company does not expect the same percentage increase in
premium growth over the remainder of 1996.
The GAAP combined ratio for the collateral protection unit
increased to 97.5% for the first quarter of 1996 compared to
95.7% for the first quarter of 1995. The loss ratio component
increased 23.2 points in the first quarter of 1996 compared to
the first quarter of 1995. The increased loss ratio was a result
of higher loss frequency, particularly in the business written in
the Northeastern United States and Puerto Rico. However, agents
for the collateral protection unit participate in their higher
loss ratio through reduced agent contingent commissions. The
unit's expense ratio decreased 21.4 points for the first quarter
of 1996, compared to the first quarter of 1995, due to these
lower agency commissions.
The Company operates under a reinsurance contract that provides
both excess of loss and property catastrophe coverage up to
$6,000,000 per occurrence for all major lines of business. For
1996, this primary reinsurance contract serves to limit the
Company's maximum loss per occurrence on individual risks to
$400,000, and for catastrophes to $500,000. The Company also has
purchased an additional layer of catastrophe coverage up to 95%
of $14,000,000 per loss occurrence, for total catastrophe
protection of $20,000,000. The Company continues to utilize
facultative reinsurance for certain risks, primarily umbrella and
property coverages.
The Company's insurance operating units in total showed
$463,000 of redundant development on 1995 and prior loss
reserves, net of reinsurance, in the first quarter of 1995
compared to $1,108,000 of adverse development in the first
quarter of 1995 on 1994 and prior loss reserves, net of
reinsurance. This development equates to (0.2%) and 0.6% of net
loss reserves carried at the end of the previous years 1995 and
1994, respectively. The redundant development in the first
quarter of 1996 was caused primarily by personal automobile
incurred but not reported losses being less than expected.
<PAGE>
For the first three months of 1996 and 1995, the Company's
catastrophe losses were immaterial. In addition, during the
first quarter of 1996, the Company's known exposure to
environmental losses, such as asbestos and pollution
contamination, did not materially change from year end 1995.
Overall, the Company reported net earnings for the first
quarter of 1996 of $5,787,000, or $0.39 per share, compared to
net earnings of $5,768,000, or $0.48 per share, for the first
quarter of 1995. Although net earnings remained flat when
compared to the first quarter of 1995, they represent an
improvement over the previous two quarters, primarily as a result
of the progress made by the commercial and personal lines units.
Net earnings (loss) for the quarters ended September 30, 1995 and
December 31, 1995, were ($4,113,000), or ($0.29) per share, and
$2,423,000, or $0.16 per share, respectively. Earnings per share
decreased $0.09 for the first quarter of 1996 compared to the
same quarter in 1995, despite flat net earnings, due to an
increase in average shares outstanding resulting from the shares
issued during 1995 for a European private placement and
conversion of subordinated notes to common stock.
The Company's interest expense increased 63% for the first
quarter of 1996 compared to the first quarter of 1995, due to an
overall increase in borrowings during 1995. The 1995 borrowings
were used to finance the Viking acquisition, and are pursuant to
a reducing, revolving credit facility, which provides for a
floating interest rate. In order to reduce the risk of changing
interest rates, the Company hedged $80,000,000 of the total
borrowings until 1998 via two interest rate swap agreements.
These agreements give the Company a fixed interest rate of
approximately 6.5% on the total notional amount hedged.
Pretax net investment income increased $2,788,000 in the first
quarter of 1996 compared to 1995, while after-tax net investment
income increased to $7,201,000 from $5,154,000 for the same
period. These increases are due to an increase in average
invested assets, which resulted primarily from the addition,
effective July 18, 1995, of the Viking investment portfolio and
positive operating cash flow. Viking's investment portfolio
amounted to approximately $177,400,000 at the date of
acquisition.
The investment yield, on an after-tax basis, for the quarter
remained constant at approximately five percent. After-tax
realized investment gains in the first quarters of 1996 and 1995
were $1,288,000 and $370,000, respectively, despite recording
other-than-temporary investment impairments of $87,000, after-
tax, for the three month period ending March 31, 1996. No other-
than-temporary investment impairments were recorded during the
comparable period in the prior year. The increase was primarily
attributable to sales from the Company's equities portfolio, as
well as the fixed maturities available for sale portfolio.
During the first quarter of 1996, the strong equity market
enabled the Company to take the realized gains without reducing
its total investments in equities. The sale of fixed maturities
available for sale securities were made in order to reduce the
Company's average duration of its bond portfolio. The Company's
overall investment portfolio continues to be invested primarily
in fixed maturities and short-term investments which represented
84% of the portfolio at both March 31, 1996 and December 31,
1995.
Securities are classified as available for sale and recorded at
fair value, unless they meet the Company's criteria for
classification as held to maturity. Such criteria include
investment grade bonds with stated maturities of less than 10
years. The Company classified all of Viking's investment
portfolio, added as of the acquisition date, as securities
available for sale. The unrealized investment gains on fixed
maturities available for sale and on equity securities as of
March 31, 1996, were $4,128,000 and $13,067,000, respectively.
This compares to unrealized investment gains on fixed maturities
available for sale and on equity securities as of December 31,
1995 of $12,063,000 and $11,814,000, respectively. The market
value of the Company's fixed maturity investments generally
varies inversely with changes in the general level of interest
rates. The market value of Federal agency and other mortgage
pool securities is subject to additional market value volatility
due to the impact of changes in prepayment rates on the mortgages
which underlie such securities.
The Company's holdings in noninvestment grade bonds for the
first quarter of 1996 were approximately seven percent of total
invested assets, compared to approximately six percent of total
invested assets at December 31, 1995. Total investments held by
the Company include highly rated fixed maturities (rated AAA or
AA) of 55% at both March 31, 1996 and December 31, 1995. The
Company continues to maintain a low level of real estate related
investments, consisting primarily of federal agency mortgage
pools.
<PAGE>
Liquidity and Capital Resources
Positive cash flow from operations of $8,396,000 was generated
for the first quarter of 1996 compared to $1,427,000 for the
first quarter of 1995. The increase in cash flow was primarily
the result of higher premiums collected and increased net
investment income. These increases in cash inflows were
partially offset by higher levels of loss and loss adjustment
expense payments, acquisition expenses related to premium
production, and interest expense payments in 1996 compared to
1995. In addition, there are three particular items which
affected the increase in cash flow for the first quarter of 1996.
First, operating cash flow generated from Viking accounted for
approximately $2,000,000 of the overall increase. Second, the
Company paid lower agent contingent commissions of $3,110,000 in
the first quarter of 1996 compared to $5,982,000 for the same
period last year, due to higher loss ratios and lower
profitability in 1995 over 1994. Finally, during the first
quarter of 1995 the Company made a nonrecurring payment of
$1,346,000 to Chicago Insurance Company, for collateral
protection business ceded to them as part of a quota share
reinsurance agreement, which resulted in decreased cash flow.
There was no payment of this nature made during the first quarter
of 1996.
Net cash from investing activities was $5,392,000 for the first
quarter of 1996. This compares to net cash used in investing
activities for the first quarter of 1995 of $6,615,000. The
increase in funds from investing activities during the first
three months of 1996, relates to increased proceeds received from
maturities of fixed maturities, as well as increased sales of
both fixed maturities and equity securities. The increased
maturity and sale activities were offset by approximately
$29,043,000 of increased investments made in fixed maturities,
equity securities and other long-term investments, as well as
larger property and equipment purchases, during the first quarter
of 1996 compared to the same period in the prior year.
Cash used in financing activities was $2,620,000 and $1,505,000
for the first quarters of 1996 and 1995, respectively. During
the first quarter of 1996, the Company made a $750,000 principal
payment on its 6.5% term loan, which was entered into during 1994
in order to purchase furniture and fixtures for the home office
facility. This was the first principal payment made on this
loan, and future quarterly principal payments will amount to
approximately $187,500, until the loan is paid off on April 1,
1999. As of March 31, 1996, the Company had funds available of
$10,000,000 under the Company's reducing, revolving credit
facility, which was entered into in 1995 to be used in part to
fund the Viking acquisition. The Company declared and paid a
regular quarterly dividend of $0.125 per share in the first
quarters of 1996 and 1995.
The Company's level of short-term investments was relatively
unchanged at 8.3% and 8.4% of total invested assets at March 31,
1996, and December 31, 1995, respectively. The Company maintains
sufficient liquidity in its investment portfolio through its
short-term investment holdings to meet operating cash payment
requirements.
In February 1996, Viking purchased an office building in
Freeport, Illinois at a cost of approximately $1,000,000.
Management intends to move the current Viking Freeport operations
into this new building, from a leased facility, during the second
quarter of 1996.
In conjunction with the Viking acquisition, there is an
additional purchase price amount which may ultimately paid to the
seller depending on Viking's future loss development. The
Company has estimated this amount to be approximately $2,000,000,
and has included such amount within the balance sheet. See Note
5 to the Consolidated Financial Statements for further discussion
of this obligation. There are no other significant contingencies
and commitments known to management that would have a material
impact on the Company's liquidity, financial condition or future
results of operations.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is routinely engaged in litigation incidental to
its business; however, in the judgment of the Company's
management, there were no pending legal proceedings at March 31,
1996, net of reserves established therefore and giving effect to
reinsurance, that will have a materially adverse effect on the
results of the Company's operations.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the
Registrant during the quarter.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Guaranty National Corporation
By: s/Roger B. Ware
Roger B. Ware, President and
Chief Executive Officer
(Principal Executive Officer)
By: s/Michael L. Pautler
Michael L. Pautler, Senior
Vice President-Finance and
Treasurer
(Principal Financial Officer)
By: s/Shelly J. Hengsteler
Shelly J. Hengsteler
Controller and Assistant Treasurer
(Principal Accounting Officer)
DATE: May 6, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS FINANCIAL SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM GUARANTY NATIONAL CORPORATION'S FINANCIAL STATEMENTS FOR THE THREE
MONTHS ENDED MARCH 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 375,410
<DEBT-CARRYING-VALUE> 83,317
<DEBT-MARKET-VALUE> 84,044
<EQUITIES> 86,933
<MORTGAGE> 678
<REAL-ESTATE> 0
<TOTAL-INVEST> 608,423
<CASH> 17,962
<RECOVER-REINSURE> 77,227
<DEFERRED-ACQUISITION> 40,616
<TOTAL-ASSETS> 879,308
<POLICY-LOSSES> 355,958
<UNEARNED-PREMIUMS> 155,193
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 102,250
0
0
<COMMON> 136,011
<OTHER-SE> 79,148
<TOTAL-LIABILITY-AND-EQUITY> 879,308
115,470
<INVESTMENT-INCOME> 9,253
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<OTHER-INCOME> 0
<BENEFITS> 84,845
<UNDERWRITING-AMORTIZATION> 29,082
<UNDERWRITING-OTHER> 3,528
<INCOME-PRETAX> 7,241
<INCOME-TAX> 1,454
<INCOME-CONTINUING> 5,787
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,787
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.39
<RESERVE-OPEN> 286,339
<PROVISION-CURRENT> 85,308
<PROVISION-PRIOR> (463)
<PAYMENTS-CURRENT> 32,259
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</TABLE>
