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 Quarterly Period Ended September 30, 1996
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 (I.R.S. Employer
incorporation or organization) Identification No.)
181 University Avenue
Suite 1101 - Box 11
Toronto, Ontario Canada M5H 3M7
(Address of Principal Executive Offices)
Registrant's telephone number, including area code 416 594-1155 (Canada)
317 259-6400 (USA)
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 September 30, 1996, there were 5,348,812 shares of Registrant's common
stock issued and outstanding exclusive of shares held by Registrant.
<PAGE>
Form 10-Q Index
For The Quarter Ended September 30, 1996
Page
Number
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements . . . . . . . . . . . . . . . . . . . 3
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1995
and September 30, 1996. . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Operations for the Three and
Nine Months Ending September 30, 1996 and 1995 . . . . . . 5
Consolidated Statements of Changes in Cash Resources
for the Nine Months Ending September 30, 1996 and 1995 . . 7
Notes to Consolidated Financial Statements . . . . . . . . 9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 14
PART 2 OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . 21
Consolidated Analysis of Earnings per Share - US GAAP. . . 22
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
<PAGE>
GORAN CAPITAL INC.
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
In the opinion of management, the financial information reflects all
adjustments (consisting only of normal recurring adjustments) which are
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods. The results for the
three and nine months ended September 30, 1996 are not necessarily indicative
of the results to be expected for the entire year.
These quarterly interim financial statements are unaudited.
<PAGE>
<TABLE>
GORAN CAPITAL INC.
CONSOLIDATED BALANCE SHEET
(Canadian GAAP, stated in US $)
<CAPTION>
September 30, December 31,
1996 1995
<S> <C> <C>
ASSETS
Cash and Investments $193,197,461 $ 54,365,700
Investments Held In Trust 0 0
Accounts Receivable
Premiums Receivable 46,671,134 11,233,392
Due From Insurance Companies 27,361,557 34,836,681
Due From Associated Companies 527,205 0
Acrued and Other Receivables 3,431,409 1,231,418
Sub-total $ 77,991,305 $ 47,301,491
Capital Assets 4,832,451 2,088,056
Other Assets 4,616,481 1,417,137
Deferred Policy Acquisition Costs 13,948,879 7,640,728
Deferred Income Taxes 18,353 73,249
Goodwill 3,108,705 0
Total Assets $297,713,635 $112,886,362
LIABILITIES
Accounts Payable
Due to Insurance Companies $ 1,207,948 $ 1,986,381
Due to Associated Companies 0 188,334
Accrued and Other Payables 22,552,593 8,310,563
Sub-total $ 23,760,541 $ 10,485,278
Outstanding Claims 89,976,891 45,988,288
Unearned Premiums 65,044,172 26,895,391
Bank Loans 62,580,000 5,810,999
Subordinated Debentures 11,108,684 11,084,273
Minority Interest in Subsidiary 19,556,052 0
Total Liabilities $272,026,340 $100,264,230
SHAREHOLDERS' EQUITY
Capital Stock $ 17,357,122 $ 16,874,923
Contributed Surplus 3,081,000
Retained Earnings/(Deficit) 5,647,707 (3,895,014)
Cumulative Translation Adjustment (398,534) (357,777)
Total Shareholders' Equity $ 25,687,295 $ 12,622,132
Total Liabilities and Shareholders' Equity $297,713,635 $112,886,362
</TABLE>
<PAGE>
<TABLE>
GORAN CAPITAL INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDING
(Canadian GAAP, stated in US $)
<CAPTION>
September 30, September 30,
1996 1995
<S> <C> <C>
Gross Premiums Written $ 71,812,920 $ 30,637,058
Net Premiums Earned $ 71,795,680 $ 25,037,186
Net Investment and Other Income 2,928,251 2,053,893
Total Revenue $ 74,723,931 $ 27,091,079
Net Claims Incurred $ 49,684,080 $ 19,632,014
General and Administrative Expenses 15,198,508 4,900,072
Interest Expense 1,715,689 346,201
Total Expenses $ 66,598,277 $24,878,287
Income Before Undernoted Items $ 8,125,654 $ 2,212,792
Unusual Items 0 0
Provision For Income Taxes 3,132,898 767,650
Minority Interest 833,133 (4,488)
Net Income 4,159,623 1,449,630
Earnings Per Share - Basic $0.79 $0.28
Earnings Per Share - Fully Diluted $0.72 $0.24
</TABLE>
(See Notes To Consolidated Financial Statements)
<PAGE>
<TABLE>
GORAN CAPITAL INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDING
(Canadian GAAP, stated in US $)
<CAPTION>
September 30, September 30,
1996 1995
<S> <C> <C>
Gross Premiums Written $222,096,120 $116,683,954
Net Premiums Earned 147,386,503 59,699,697
Net Investment and Other Income 9,991,272 5,299,407
Total Revenue $157,377,775 $ 64,999,104
Net Claims Incurred $106,232,444 $ 43,345,630
General and Administrative Expenses 31,954,450 14,105,842
Interest Expense 3,454,332 1,066,180
Total Expenses $141,641,226 $ 58,517,652
Income Before Undernoted Items $ 15,736,549 $ 6,481,452
Unusual Items 0 0
Provision for Income Taxes 4,962,319 1,894,728
Minority Interest 1,231,509 0
Net Income $ 9,542,721 $ 4,586,724
Earnings Per Share - Basic $1.83 $0.91
Earnings Per Share - Fully Diluted $1.69 $0.81
</TABLE>
(See Notes to Consolidated Financial Statements)
<PAGE>
<TABLE>
GORAN CAPITAL INC.
CONSOLIDATED STATEMENT OF CHANGES IN
CASH RESOURCES FOR THE NINE MONTHS ENDING
(Canadian GAAP, stated in US $)
<CAPTION>
September 30, September 30,
1996 1995
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES
Net Income For the Period $ 9,542,721 $ 4,586,724
Items Not Affecting Cash Resources:
Amortization 286,124 102,923
Loss(gain) on Disposal of Investments 388,058 (24,619)
Minority Interest in Net Income of
Consolidated Subsidiary 1,231,509 (1,789)
Decrease (increase) in Accounts Receivable 4,637,359 (24,010,569)
Decrease (increase) in Other Assets (1,215,223) 175,881
Decrease (increase) in Deferred Policy
Acquisition Costs 1,633,676 (1,498,328)
Increase (decrease) in Deferred Income
Taxes 55,058 74,250
Increase (decrease) in Accounts Payable 2,389,170 13,825,592
Increase (decrease) in Unearned Premiums (7,190,451) 5,953,159
Increase (decrease) in Outstanding Losses (535,678) 1,110,399
Sub-total $ 11,222,323 $ 293,621
FINANCING ACTIVITIES
Increase (reduction) of Borrowed Funds $ 57,676,203 $ 925,782
Increase (decrease) in Minority Interest 18,319,390 0
Issue of Share Capital 445,035 273,986
Sub-total $ 76,440,628 $ 1,199,768
INVESTING ACTIVITIES
Net Purchase of Marketable Securities $(15,043,179) $ (68,560)
Acquisition of Subsidiary (63,228,000) 0
Net Purchase of Capital Assets (865,608) (693,866)
Sub-Total $(79,136,787) $ (762,426)
Effect of Exchange Rate Changes on Cash
Resources $ (42) $ 217,048
Change in Cash Resources During the Year $ 8,526,122 $ 948,011
Cash Resources, Beginning of Year $ 10,613,027 $ 7,588,135
Cash Resources, End of Year $ 19,139,149 $ 8,536,146
Cash Resources are Comprised Of:
Cash $ 6,369,897 $ (93,097)
Short-Term Investments $ 12,769,252 $ 8,629,243
Sub-total $ 19,139,149 $ 8,536,146
</TABLE>
<PAGE>
<TABLE>
GORAN CAPITAL INC.
CONSOLIDATED STATEMENT OF DEFICIT
(Canadian GAAP, stated in US $)
<CAPTION>
September 30, September 30,
1996 1995
<S> <C> <C>
Retained Earnings (Deficit)
Beginning of Year $ (3,895,014) $(11,065,904)
Net Income For The Year $ 9,542,721 $ 4,586,724
Retained Earnings (Deficit)
End of Year $ 5,647,707 $ (6,479,180)
</TABLE>
<PAGE>
GORAN CAPITAL INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For The Three And Nine Months Ended September 30, 1996
NOTE 1 - BASIS OF PRESENTATION
The foregoing consolidated condensed financial statements are unaudited.
However, in the opinion of management, all adjustments necessary for a fair
presentation of the results of the interim period presented have been included.
All adjustments are of a normal and recurring nature. Results for any interim
period are not necessarily indicative of results to be expected for the year.
The consolidated financial statements include the accounts of Goran Capital
Inc. ("Goran" and "the Company") and its wholly-owned subsidiaries, Symons
International Group, Inc. ("SIG") (and its wholly owned subsidiary IGF
Insurance Company ("IGF"), as well as its 52% owned subsidiaries, Pafco
General Insurance Company ("Pafco") and Superior Insurance Company
("Superior")), Granite Reinsurance Company Ltd., Granite Insurance Company and
Symons International Group - Florida. The consolidated condensed interim
financial statements have been prepared in accordance with Form 10-Q specifi-
cations and, therefore, do not include all information and footnotes normally
shown in full annual financial statements.
These unaudited consolidated financial statements have been prepared by the
Company in accordance with accounting principles generally accepted in Canada
(CDN GAAP). These principles also conform in all material respects with
accounting principles generally accepted in the United States (US GAAP) except
as disclosed in Note 5.
NOTE 2 - ACQUISITION, FORMATION OF SUBSIDIARY AND PUBLIC OFFERING
In January, 1996, Pafco adopted a Plan of Reorganization whereby it transferred
its wholly owned subsidiary, IGF, to Pafco's parent, SIG. After adoption of
the Plan of Reorganization in January, 1996, Pafco formed a wholly owned
subsidiary, IGF Holdings, Inc. ("IGF Holdings") and formally submitted the
Plan of Reorganization to the Indiana Department of Insurance for regulatory
approval. Once approval was obtained from the Indiana Department of Insurance
on April 26, 1996, Pafco transferred the outstanding shares of the capital
stock of IGF to IGF Holdings. IGF Holdings, in turn, made a distribution to
Pafco of $7.5 Million in cash and a subordinated promissory note in the
principle amount of $3.5 Million.
Subsequent to that distribution, Pafco then completed the steps in the Plan by
transferring the outstanding capital stock of IGF Holdings to Pafco's parent,
SIG.
SIG purchased Superior from Interfinancial, Inc. on April 30, 1996 for a
purchase price of approximately $66 Million, resulting in goodwill on the
transaction of approximately $3.2 Million. Simultaneously with the execution
of the Superior purchase agreement, Goran, SIG, GGS Management Holdings, Inc.
("GGSH") and GS Capital Partners II, L.P., a Delaware limited partnership,
entered into an agreement (the "GSCP Agreement") to capitalize GGSH and to
cause GGSH to issue its capital stock to SIG and to various funds affiliated
with Goldman Sachs & Co. (collectively, "GS Funds"), so as to give SIG a 52%
ownership interest and the GS Funds a 48% ownership interest in GGSH.
Pursuant to the GSCP Agreement, (a) SIG contributed to GGSH (i) Pafco common
stock with a book value determined in accordance with US GAAP of at least $15.3
Million as reflected on an Audited Post-Closing Balance Sheet of Pafco, (ii)
its right to acquire Superior pursuant to the Superior Purchase Agreement and
(iii) certain fixed assets, including office furniture and equipment, having a
value of approximately $350,000 and (b) the GS Funds contributed to GGSH $21.2
Million in cash.
SIG, through Symons International Group, Inc. (Florida) ("SIGF"), its
specialized surplus lines underwriting unit based in Florida, provided certain
commercial insurance products through retail agencies, principally in the
southeast United States. SIGF writes these specialty products through a number
of different insurers including Pafco, United National Insurance Group, Munich
American Reinsurance Corp. and underwriters at Lloyd's of London. Effective
January 1, 1996, SIG transferred to Goran all of the issued and outstanding
shares of capital stock of SIGF.
On November 5, 1996, SIG effectuated an initial public offering of 30% of it's
common stock. The proceeds of the offering were used to increase the
capitalization of IGF, repay indebtedness of SIG, primarily certain amounts
owed to Goran and Granite Re, and pay Goran a dividend of $3,500,000. The
remaining funds were retained for general corporate purposes, including
acquisitions. At the closing of the offering, Goran paid off its subordinated
debentures in full mainly with the proceeds it received from SIG.
NOTE 3 - REINSURANCE
In order to reduce risk and increase its underwriting capacity, the Company
purchases reinsurance. Reinsurance does not relieve the Company of liability
to its insureds for the risks ceded to reinsurers from financial failure of the
reinsurers. As such, the Company is subject to credit risk with respect to
risks ceded to reinsurers. Effective January 1, 1996 reinsurance is placed as
follows: For the nonstandard automobile segment, the Company only purchases
excess of loss and catastrophic protections which result in minimum ceded
premium in proportion to gross written premiums. For the crop segment, the
Company reinsures to the federal government Federal Crop Insurance
Corporation ("FCIC") program a significant portion of its Multi-Peril
Crop Insurance ("MPCI") business and the Company reinsures stop-loss protection
to third party reinsurers on MPCI crop hail.
The effects of reinsurance on the Company's premiums and claims incurred are as
follows:
<PAGE>
<TABLE>
NOTE 3
GORAN CAPITAL INC.
Analysis of Effects of Reinsurance
(US $)
<CAPTION>
For The Nine Months Ended For The Three Months Ended
September 30 September 30 September 30 September 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Premiums Written
Gross $222,096,120 $116,683,954 $ 71,812,920 $30,637,058
Ceded (71,430,757) (50,915,928) (4,251,610) (9,143,492)
Net $150,665,363 $ 65,768,026 $ 67,561,310 $21,493,566
Premiums Earned
Gross $233,152,905 $110,567,530 $ 89,850,429 $34,667,635
Ceded (85,766,402) (50,867,833) (18,054,749) (9,630,448)
Net $147,386,503 $ 59,699,697 $ 71,795,680 $25,037,186
Claims Incurred:
Gross $140,268,840 $115,181,798 $ 61,831,599 $80,490,441
Ceded $(34,036,396) (71,836,169) (12,147,519) (60,858,426)
Net $106,232,444 $ 43,345,630 $ 49,684,080 $19,632,014
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
<S> <C> <C>
Unearned Premiums
Gross $ 86,806,864 $33,158,805
Ceded (21,762,692) (6,263,414)
Net $ 65,044,172 $26,895,391
Outstanding Claims
Gross $158,386,674 $87,654,793
Ceded (68,409,783) (41,666,505)
Net $ 89,976,891 $45,988,288
</TABLE>
NOTE 4 - CAPITAL STOCK
For the three and nine months ended September 30, 1996, 16,750 common shares
and 288,583 common shares, respectively, were issued by the Company pursuant to
warrants previously issued to debenture holders and pursuant to an established
Company Employee Stock Option Plan.
NOTE 5 - UNITED STATES ACCOUNTING PRINCIPLES
These unaudited consolidated financial statements have been prepared in
accordance with CDN GAAP. The difference between CDN GAAP and US GAAP are as
follows:
<TABLE>
GORAN CAPITAL INC.
SELECTED FINANCIAL DATA
<CAPTION>
September 30, September 30,
1996 1995
<S> <C> <C>
Reported Net Income $ 9,542,721 $ 4,586,724
US/Canada GAAP Differences
Discounting on Outstanding Claims 0 0
Deferred Income Taxes (164,960) 166,921
Revised Net Income $ 9,377,761 $ 4,753,645
Earnings Per Share $ 1.66 $ 0.86
Reported Total Assets $297,713,635 $123,375,416
US/Canada GAAP Differences
Loans to Purchase Shares (564,528) (612,563)
Deferred Income Taxes 2,737,000 1,985,447
Outstanding Claims Ceded 68,409,783 40,452,183
Unearned Premiums Ceded 21,762,692 5,772,201
Unrealized Loss on Investments 95,398 (573,953)
Revised Total Assets $390,153,980 $170,398,730
Reported Shareholders' Equity $ 25,687,295 $ 10,038,312
US/Canada GAAP Differences
Deferred Income Taxes 2,737,000 1,985,447
Discounting on Claims (1,330,201) (1,181,319)
Loans to Purchase Shares (564,528) (612,563)
Unrealized Gain (Loss)On Investments 95,398 (573,953)
Revised Shareholders' Equity $ 26,624,963 $ 9,655,924
</TABLE>
<PAGE>
NOTE 6 - CONTINGENT LIABILITY
One of the Company's subsidiaries, IGF, is the administrator of a run-off book
of business. The FCIC has requested that IGF take responsibility for the
claims liabilities of these policies under its administration. IGF has
requested reimbursement of certain expenses from the FCIC with respect to this
run-off activity. IGF instituted litigation against the FCIC on March 23, 1995
in the United States District Court for the Southern District of Iowa seeking
$4.3 Million as reimbursement for these expenses. The FCIC has counterclaimed
for approximately $1.2 Million in claims payments for which the FCIC contends
IGF is responsible for as successor to the run-off book of business. While the
final result of this lawsuit cannot be predicted with certainty, the Company
believes that the final resolution of this lawsuit will not have a material
adverse effect on the financial condition of the Company.
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMPANY
The Company underwrites and markets nonstandard private passenger automobile
insurance and crop insurance, finite (limited risk) reinsurance and certain
commercial insurance products.
Nonstandard Automobile Insurance Operations
The Company owns 52% of GGS Management Holdings, Inc. ("GGSH") with the
remainder owned by certain funds affiliated with Goldman Sachs & Co. GGSH
through its wholly owned subsidiaries, Pafco and Superior, is engaged
in the writing of insurance coverage on automobile physical damage and
liability policies for "nonstandard risks". Nonstandard insureds are those
individuals who are unable to obtain insurance coverage through standard market
carriers due to factors such as poor premium payment history, driving
experience, record of prior accidents or driving violations, particular
occupation or type of vehicle.
The Company offers several different policies which 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 and grows 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 incurrence 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.
Crop Insurance Operations
The two principal components of the Company's crop insurance business are
Multi-Peril Crop Insurance ("MPCI") and private named peril, primarily crop
hail insurance. The majority of the Company's crop insurance business consists
of MPCI. Crop insurance is purchased by farmers to reduce the risk of crop
loss from adverse weather and other uncontrollable events. Farms are subject
to drought, floods and other natural disasters that can cause widespread crop
losses and, in severe cases, force farmers out of business. Historically, one
out of every twelve acres planted by farmers has not been harvested because of
adverse weather or other natural disasters. Because many farmers rely on
credit to finance their purchases of such agricultural inputs as seed,
fertilizer, machinery and fuel, the loss of a crop to a natural disaster can
reduce their ability to repay these loans and to find sources of funding for
the following year's operating expenses.
Since 1990, Congress has considered major reform of its crop insurance and
disaster assistance policies, resulting in the enactment of the 1994 and 1996
Reform Acts. The 1994 Reform Act required farmers for the first time to
purchase at least CAT Coverage in order to be eligible for other federally
sponsored farm benefits, including but not limited to low interest loans and
crop price supports. The 1994 Reform Act also authorized for the first time
the marketing and selling of CAT Coverage by the local USDA offices. However,
the 1996 Reform Act limits the role of the USDA offices in the delivery of MPCI
coverage beginning in July, 1996, which is the commencement of the 1997 crop
year, and also eliminates the linkage between CAT Coverage and qualification
for certain federal farm program benefits. The limitation of the USDA's role
in the delivery system for MPCI should provide the Company with the opportunity
to realize increased revenues from the distribution and servicing of its MPCI
product. As a result of this limitation, the FCIC has transferred to the
Company approximately 8,900 insureds for CAT Coverage who previously purchased
such coverage from USDA field offices. The Company has not experienced any
material negative impact in 1996 from the delinkage mandated by the 1996 Reform
Act. The Company believes that any future potential negative impact of the
delinkage mandated by the 1996 Reform Act will be mitigated by, among other
factors, the likelihood that farmers will continue to purchase MPCI to provide
basic protection against natural disasters since ad hoc federal disaster relief
programs have been reduced or eliminated. In addition, the Company believes
that (i) many lending institutions will likely continue to require this
coverage as a condition to crop lending, and (ii) many of the farmers who
entered the MPCI program as a result of the 1994 Reform Act have come to
appreciate the reasonable price of the protection afforded by CAT Coverage and
will remain with the program regardless of delinkage. There can, however, be
no assurance as to the ultimate effect which the 1996 Reform Act may have on
the business or operations of the Company.
The Company, like other private insurers participating in the MPCI program,
generates revenues from the MPCI program in two ways. First, it markets,
issues and administers policies, for which it receives administrative fees; and
second, it participates in a profit-sharing arrangement in which it receives
from the government a portion of the aggregate profit, or pays a portion of the
aggregate loss, in respect of the business it writes. The Company writes MPCI
and crop hail insurance through approximately 1,200 independent agencies in 29
states.
MPCI is a government-sponsored program with accounting treatment which differs
in certain respects from the more traditional property and casualty insurance
lines.
For income statement purposes under US generally accepted accounting
principles, gross premiums written consist of the aggregate amount of MPCI
premiums paid by farmers for buy-up coverage (MPCI coverage in excess of CAT
Coverage), and any related federal premium subsidies, but do not include MPCI
premium on CAT Coverage (the minimum available level of MPCI Coverage). By
contrast, net premiums written do not include any MPCI premiums or subsidies,
all of which are deemed to be ceded to the FCIC as a reinsurer. The Company's
profit or loss from its MPCI business is determined after the crop season ends
on the basis of a complex profit sharing formula established by law and the
FCIC. For generally accepted accounting principles income statement purposes,
any such profit or loss sharing earned or payable by the Company is treated as
an adjustment to commission expense and is included in policy acquisition and
general and administrative expenses.
The Company also receives from the FCIC (i) an expense reimbursement payment
equal to a percentage of gross premiums written for each Buy-Up Coverage policy
it writes ("Buy-Up Expense Reimbursement Payment"), (ii) an LAE reimbursement
payment equal to 13.0% of MPCI Imputed Premiums for each CAT Coverage policy it
writes (the "CAT LAE Reimbursement Payment"), and (iii) a small excess LAE
reimbursement payment of two hundredths of one percent (.02%) of MPCI Retention
(as defined herein) to the extent the Company's MPCI loss ratios on a per state
basis exceed certain levels (the "MPCI Excess LAE Reimbursement Payment"). For
1994, 1995 and 1996, the Buy-Up Expense Reimbursement Payment has been set at
31% of the MPCI Premium, but it is scheduled to be reduced to 29% in 1997, 28%
in 1998 and 27.5% in 1999. For generally accepted account principles income
statement purposes, the Buy-Up Expense Reimbursement Payment is treated as a
contribution to income and reflected as an offset against policy acquisition
and general and administrative expenses. The CAT LAE Reimbursement Payment and
the MPCI Excess LAE Reimbursement Payment are, for income statement purposes,
recorded as an offset against LAE, up to the actual amount of LAE incurred by
the Company in respect of such policies, and the remainder of the payment, if
any, is recorded as Other Income.
In addition to MPCI, the Company offers stand alone crop hail insurance, which
insures growing crops against damage resulting from hail storms and which
involves no federal participation, as well as its proprietary product which
combines the application and underwriting process for MPCI and hail coverages.
This product tends to produce less volatile loss ratios than the stand alone
product since the combined product generally insures a greater number of acres,
thereby spreading the risk of damage over a larger insured area.
Approximately half of the Company's hail policies are written in combination
with MPCI. Although both crop hail and MPCI provide coverage against hail
damage, under crop hail coverages farmers can receive payments for hail damage
which would not be severe enough to require a payment under an MPCI policy.
The Company believes that offering crop hail insurance enables it to sell more
policies than it otherwise would.
In addition to crop hail insurance, the Company also sells a small volume of
insurance against crop damage from other specific named perils. These products
cover specific crops and are generally written on terms that are specific to
the kind of crop and farming practice involved and the amount of actuarial data
available. The Company plans to seek potential growth opportunities in this
niche market by developing basic policies on a diverse number of named crops
grown in a variety of geographic areas and to offer these policies primarily to
large producers through certain select agents.
In order to reduce the Company's potential loss exposure under the MPCI
program, in addition to reinsurance obtained from the FCIC, the Company
purchases stop-loss reinsurance from other private insurers. Such private
reinsurance would not eliminate the Company's potential liability in the event
a reinsurer was unable to pay or losses exceeded the limits of the stop-loss
coverage. For crop hail insurance, the Company has in effect quota share
reinsurance and various layers of stop-loss reinsurance. Based on a review of
the reinsurers' financial health and reputation in the insurance marketplace,
the Company believes that the reinsurers for its crop insurance business are
financially sound and that they therefore can meet their obligations to the
Company under the terms of the reinsurance treaties.
Certain other conditions of the Company's crop business may effect comparisons
of the Company's results and operating ratios with that of other insurers,
including: (i) the seasonal nature of the business whereby profits are
generally recognized predominantly in the second half of the year, (ii) the
short-term nature of crop business whereby losses are known within a short time
period, and (iii) the limited amount of investment income associated with crop
business. In addition, cash flows from the crop business differ from cash
flows from certain more traditional lines.
In 1996, the Company instituted a policy of recognizing (i) 35% of its
estimated MPCI gross premiums written for each of the first and second
quarters, 20% for the third quarter and 10% for the fourth quarter, (ii)
commission expense at a rate of 16% of MPCI gross premiums written recognized
and (iii) Buy-Up Expense Reimbursement at a rate of 31% of MPCI gross premiums
written recognized along with normal operating expenses incurred in connection
with premium writings. In the third quarter, if a sufficient volume of
policyholder acreage reports have been received and processed by the Company,
the Company's policy is to recognize MPCI gross premiums written for the first
nine months based on a re-estimate which takes into account actual gross
premiums processed. The Company followed the foregoing approach for the 1996
third quarter. If an insufficient volume of policies has been processed, the
Company's policy is to recognize in the third quarter 20% of its full year
estimate of MPCI gross premiums written, unless other circumstances require a
different approach. The remaining amount of gross premiums written is
recognized in the fourth quarter, when all amounts are reconciled. In prior
years, recognition of MPCI gross premiums written was 30%, 30%, 30% and 10%,
for the first second, third and fourth quarters, respectively.
Commencing with its June 30, 1995 financial statements, the Company also began
recognizing MPCI underwriting gain or loss during the first and second
quarters, as well as the third quarter, reflecting the Company's best estimate
of the amount of such gain or loss to be recognized for the full year, based
on, among other things, historical results, plus a provision for adverse
developments. In the fourth quarter, a reconciliation amount is recognized for
the underwriting gain or loss based on final premium and loss information.
Surplus Lines and Finite Reinsurance Operations
Through its specialized surplus lines underwriting unit, Goran writes third
party property and casualty insurance coverage in Pafco and other insurance
companies under contract with SIG Florida.
The Company's wholly-owned subsidiary, Granite Re, underwrites finite risk
reinsurance and stop-loss reinsurance. This reinsurance involves a defined
maximum risk at the time of entering into a contract. The Company participates
in various programs of reinsurance in Bermuda, the United States and Canada.
Reinsurance normally requires that a substantial premium be paid upon the
purchase of cover. Such premiums are invested in high grade bonds, some of
which are pledged to support the liabilities assumed under the reinsurance
program.
Regulation
The Company's admitted 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. Depending on whether the 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
insolvency, (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 Company's MPCI program is federally regulated and supported by the federal
government by means of premium subsidies to farmers, expense reimbursement and
federal reinsurance pools for private insurers. Consequently, the MPCI program
is subject to oversight by the legislative and executive branches of the
federal government, including the FCIC. The MPCI program regulations generally
require compliance with federal guidelines with respect to underwriting, rating
and claims administration. The Company is required to perform continuous
internal audit procedures and is subject to audit by several federal government
agencies.
Results of Operations
For the three and nine months ended September 30, 1996, the Company recorded
net income of $4,159,623 and $9,542,721, or $0.79 and $1.83 per share. This is
approximately a 187% and 108% increase from 1995 comparable amounts of
$1,449,630 and $4,586,724, or $0.28 and $0.91 per share. The improved earnings
were attributable to substantial improvement in the results of the nonstandard
automobile segment and continued growth and profit in the crop segment. The
nonstandard automobile segment demonstrated significant improvement due to the
acquisition of Superior and improved results from Pafco. Results of operations
in 1996 include the results of Superior since the acquisition on April 30, 1996
and the 48% minority interest in the nonstandard automobile segment beginning
May 1, 1996, of the GS Funds.
Gross premiums written increased 134% to $71,812,920 for the three months ended
September 30, 1996 from $30,637,058 for the comparable period in the prior
year, and increased 90% to $222,096,120 for the nine months ended September 30,
1996 from $116,683,954 for the comparable period in the prior year.
Gross premiums written for the nonstandard auto segment increased from
$34,909,000 to $119,126,000 for the nine months ended September 30, 1996 as
compared to the corresponding period of the prior year. Such increase was due
to the acquisition of Superior which generated gross premiums written of
$66,141,000 subsequent to the acquisition, elimination of quota share
reinsurance, internal growth due to improved service and certain product
improvements.
Gross premiums written for the crop segment increased 35% from $70,374,000 to
$95,332,000 for the nine months ended September 30, 1996 as compared to the
corresponding period of the prior year. Such increase was due to farmers
electing higher crop price levels to be insured under MPCI buy-up coverages,
an increase in MPCI policies in force, together with an increase of
$9,344,000 or 57% in crop hail premiums for the first nine months of 1996
compared for the same period in 1995.
Decrease in gross premiums written of $3,763,000 for the nine months ended
September 30, 1996 as compared to the corresponding period of the prior year
for the other business is due to the cessation of the quota share treaty
reinsured through Granite Reinsurance Company Ltd. The treaty will continue
to run-off, resulting in earned premiums this year, and investment income and
claims incurred until completion of the run-off.
Increases in net premiums earned for the three and nine months ended September
30, 1996 as compared to corresponding periods of the prior year reflect the
strong growth in premiums written.
Net investment and other income increased $874,358 and $4,691,865 for the three
and nine months ended September 30, 1996 as compared to the corresponding
periods of the prior year. The increase in investment income was due
primarily to the acquisition of Superior, which generated net investment income
of $3,098,000 subsequent to the acquisition. The remaining increase was due to
greater invested assets. The increase in other income was due to increased
billing fee income on nonstandard automobile business due to an increase in the
in-force policy count. There was also an increase in the receipt of CAT
Coverage fees and CAT LAE reimbursement payments following the 1995
introduction of CAT Coverages.
Loss and loss adjustment expenses were $49,684,080 and $106,232,444 or 69.2%
and 72.1% of net premiums earned for the three and nine months ended September
30, 1996 versus $19,632,014 and $43,345,630 or 78.4% and 72.6% of net premiums
earned for the corresponding periods of 1995. The loss ratios for 1996 have
decreased over the prior year due to decreases in both the nonstandard
automobile and crop hail loss ratios.
The loss ratio for the nonstandard automobile segment for the nine month period
ended September 30, 1996 was 71.7% as compared to 75.5% for the same period in
1995. Crop hail loss ratios were 49.9% and 51.5% for the nine month periods
ended September 30, 1996 and 1995.
Policy acquisition and general and administrative expenses have increased as a
result of the increased volume of business produced by the Company combined
with a higher percentage of net premiums retained and corresponding reductions
in reinsurance commission income. Policy acquisition and general and
administrative expenses rose to $15,198,508 and $31,954,450 or 21.2% and 21.7%
of net premium earned for the three and nine months ended September 30, 1996
compared to $4,900,072 and $14,105,842 or 19.6% and 23.6% of net premium earned
in the corresponding period of 1995. There is a disproportionate relationship
between increased operating expenses and increased net retention of business.
The expense ratio for the nonstandard segment improved to 29.4% for the first
nine months of 1996 as compared to 38.3% in 1995, due to technological and
operational efficiencies and tighter expense controls.
Due to the unique accounting for the crop insurance segment, operating expenses
for the nine months ended September 30, 1996 includes $20,915,000 and
$7,336,000 as compared to comparable amounts of $13,816,000 and $4,900,000 for
1995 for buy-up expense reimbursement payments and MPCI underwriting gain.
Interest expense increased $1,369,488 and $2,388,152 for the three and nine
months ended September 30, 1996 as compared to the corresponding periods in the
prior year due primarily to interest incurred since April 30, 1996 on the $48
Million of debt incurred to purchase Superior and the $7.5 Million IGF Holdings
Note. The latter note was repaid in full from the proceeds of the Offering.
The Superior acquisition debt was tied to a one month LIBOR through November
15, 1996 and was effectively fixed at 8.31% through an interest rate swap. The
rate was subsequently converted to a three month LIBOR and effectively fixed at
9.02% through July 30, 1997 through extension of the swap agreement.
Income tax expense was 38% and 32% of pre-tax income for the three and nine
months ended September 30, 1996 as compared to 35% and 29% for the
corresponding periods of the prior year.
Financial Condition
The Company's total assets of $297,713,635 at September 30, 1996 increased
$184,837,273 from $112,886,362 as of December 31, 1995. This increase is
principally due to the acquisition of Superior which had assets of $164 Million
at the date of acquisition and growth in business in the nonstandard automobile
and crop segments.
The Company's shareholders' equity increased from $12,622,132 at December 31,
1995 to $25,687,295 at September 30, 1996. The long term debt to equity ratio
has increased during 1996 as long term debt was increased by $48,000,000 due to
the acquisition of Superior. Long term debt to equity was 1.34 to 1 at
December 31, 1995 and 2.87 to 1 at September 30, 1996. However, including
minority interest as a component of equity reduces this ratio to 1.63 to 1.
Subsequent to the offering, the Company's debt to equity ratio, exclusive of
minority interest, was reduced to approximately 1.13 to 1 due to the additional
equity of SIG from the offering proceeds and payoff of the subordinated
debentures.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
One of the Company's subsidiaries, IGF Insurance Company ("IGF"),
is the administrator of a run-off book of business. The Federal
Crop Insurance Corporation ("FCIC") has requested that IGF
take responsibility for the claims liabilities of these policies
under its administration. IGF has requested reimbursement of
certain expenses from the FCIC with respect to this run-off
activity. IGF instituted litigation against the FCIC on March
23, 1995 in the United States District Court for the Southern
District of Iowa seeking $4.3 million (US) as reimbursement for
these expenses. The FCIC has counterclaimed for approximately
$1.2 million (U.S.) in claims payments for which the FCIC
contends IGF is responsible for as successor to the run-off
book of business. While the final result of this litigation
cannot be predicted with certainty, the Company believes that the
final resolution of this lawsuit will not have a material adverse
effect on the financial condition of the Company.
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
11.01 computation of earnings per share in accordance
with United States Generally Accepted Accounting
Principles.
(b) Reports on Form 8-K
(1) The Company filed a Form 8-K on February 9, 1996
announcing the agreement to form a non-standard auto
insurance joint venture with investment funds
affiliated with Goldman Sachs, as well as the
execution of an agreement for such joint venture to
acquire, subject to regulatory approval, Superior
Insurance Company and subsidiaries.
(2) The Company filed Form 8-Ks on May 15, 1996,
July 15, 1996 and July 31, 1996 relating to the
formation of GGS Management Holdings, Inc. and the
acquisition of Superior Insurance Company and related
historical and pro-forma financial statements of
businesses acquired.
<PAGE>
<TABLE>
GORAN CAPITAL INC. Exhibit 11.01
CONSOLIDATED ANALYSIS OF EARNINGS PER SHARE - US GAAP
FOR THE NINE MONTHS ENDING
<CAPTION>
September 30, September 30,
1996 1995
TSE Trading Activity:
<S> <C> <C>
Period Covered Jan - Sept Jan - Sept
Volume Number 1,401,646 1,022,325
Value (US $) $17,950,765 $5,835,040
Average Price (US $) $12.81 $5.71
Proceeds from Exercise
of Warrants and
Options (US $) $917,657 $1,378,750
Shares Repurchased - Treasury 71,653 241,563
Shares Outstanding - Weighted Average 5,226,707 4,997,702
Add: Option & Warrants Outstanding 485,452 789,835
Less Treasury Method - Shares
Repurchased (71,653) (241,563)
Shares Outstanding for US GAAP Purposes 5,640,506 5,545,974
Net Earnings in Accordance with US GAAP $9,377,761 $4,753,645
Earnings Per Share - US GAAP
(Primary and Fully Diluted) $ 1.66 $ 0.86
Earnings Per Share - CDN GAAP
Basic $ 1.83 $ 0.91
Fully Diluted $ 1.69 $ 0.81
</TABLE>
<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.
Dated: November 15, 1996 By:_/s/ Alan G. Symons_____
Alan G. Symons
President
Dated: November 15, 1996 By:_/s/ Gary P. Hutchcraft_
Gary P. Hutchcraft
Vice President, Treasurer
and Chief Financial Officer
