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 March 31, 1997
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
Box 11, Suite 1101
Toronto, Ontario M5H 3M7
4720 Kingsway Drive
Indianapolis, Indiana 46205
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (416) 594-1155 (Canada)
(317) 259-6400 (U.S.)
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 No
As of March 31, 1997, there were 5,569,652 shares of Registrant's common stock
issued and outstanding exclusive of shares held by Registrant.
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Form 10-Q Index
For The Quarter Ended March 31, 1997
Page
Number
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements.................................. 3
Consolidated Financial Statements:
Consolidated Balance Sheets at March 31, 1997 and
December 31, 1996.................................. 4
Consolidated Statements of Earnings for the Three
Months Ending March 31, 1997 and 1996................. 6
Consolidated Statements of Changes in Cash Resources
for the Three Months Ending March 31, 1997 and 1996... 7
Consolidated Statements of Retained Earnings for
the Three Months Ending March 31, 1997 and 1996.... 8
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..................................... 23
SIGNATURES.................................................... 24
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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 months ended March 31, 1997 and
1996 are not necessarily indicative of the results to be expected for the entire
year.
These quarterly interim financial statements are unaudited.
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GORAN CAPITAL INC
CONSOLIDATED BALANCE SHEETS
ASSETS March 31, December 31,
Cash and Investments 1997 1996
Accounts Receivable
Premiums Receivable $227,810,309 $206,670,797
Due From Insurance Companies
Due From Associated Companies 113,456,874 63,873,697
Accrued and Other Receivables 19,520,005 33,905,128
Sub-total 96,848 140,423
Reinsurance recoverable on 4,288,682 3,329,893
outstanding claims 137,362,408 101,249,141
Prepaid reinsurance premiums
Capital Assets 28,236,000 33,112,946
Other Assets 50,642,000 14,983,097
Deferred Policy Acquisition Costs 5,472,848 4,801,086
Goodwill 2,934,439 5,335,477
Total Assets 13,931,934 13,859,492
LIABILITIES 1,595,000 1,329,736
Accounts Payable 467,984,939 381,341,772
Due to Insurance Companies
Accrued and Other Payables
Sub-total 52,035,721 5,754,831
26,117,824 21,050,919
78,153,545 26,805,751
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Capital Assets 5,472,848 4,801,086
Other Assets 2,934,439 5,335,477
Deferred Policy Acquisition Costs 13,931,934 13,859,492
March 31, December 31,
1997 1996
Outstanding Claims 110,415,929 127,044,804
Unearned Premiums 132,480,197 91,206,974
Bank Loans 48,000,000 48,000,000
Minority Interest in Subsidiary 46,971,567 41,026,354
Total Liabilities 416,021,238 334,083,883
SHAREHOLDERS' EQUITY
Capital Stock 17,427,651 17,416,431
Contributed Surplus 2,774,606 2,774,606
Retained Earnings 32,008,130 27,401,236
Cumulative Translation Adjustment (246,686) (334,384)
Total Shareholders' Equity 51,963,700 47,257,890
Total Liabilities and Shareholders'
Equity 467,984,939 381,341,772
See Notes to Consolidated Financial
Statements
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GORAN CAPITAL INC.
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDING
March 31, March 31,
1997 1996
Gross Premiums Written $130,304,239 $41,421,617
Net Premiums Earned 65,638,975 24,518,311
Net Investment and Other Income 9,273,846 1,463,249
Total Revenues 74,912,821 25,981,559
Net Claims Incurred 46,686,018 16,597,102
General and Administrative Expenses 14,428,499 5,992,803
Interest Expense 1,371,000 337,059
Total Expenses 62,485,518 22,926,964
Income Before Undernoted Items 12,427,303 3,054,595
Provision for Income Taxes 4,108,409 851,069
Minority Interest 3,712,000 0
Net Earnings 4,606,894 2,203,526
Earnings Per Share - Basic $0.83 $0.43
Earnings Per Share - Fully Diluted $0.82 $0.40
See Notes to Consolidated Financial Statements
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GORAN CAPITAL INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
CASH RESOURCES
FOR THE THREE MONTHS ENDING
March 31, March 31,
1997 1996
CASH PROVIDED BY OPERATING ACTIVITIES
Net Earnings For The Period $4,606,894 $2,203,526
Items Not Affecting Cash Resources:
Amortization 517,840 29,470
Loss (Gain) on Disposal of Investments (957,720) (35,631)
Minority Interest in Net Income of 3,712,000 0
Consolidated Subsidiary
Decrease (Increase) in Reinsurance 4,876,946 8,743,638
Recoverable on Outstanding Claims
Decrease (Increase) in Prepaid Reinsurance (35,658,903) (18,483,679)
Premiums
Decrease (Increase) in Other Assets 2,401,038 (1,802,826)
Decrease (Increase) in Deferred Policy (72,442) 798,564
Acquisition Costs
Decrease (Increase) in Goodwill (265,264) 0
Increase (Decrease) in Deferred Income 0 18,195
Taxes
Increase (Decrease) in Unearned Premiums 41,273,223 19,377,162
Increase (Decrease) in Outstanding Losses (16,628,875) (11,529,006)
Decrease (Increase) in Accounts Receivable (36,113,267) 3,539,274
Increase (Decrease) in Accounts Payable 51,347,794 (420,052)
Sub-Total 19,039,264 2,438,634
FINANCING ACTIVITIES:
Increase (Reduction) of Borrowed Funds 0 (5,523,782)
Increase (Decrease) in Minority Interest 2,304,000 0
Issue of Share Capital 11,220 160,753
Sub-Total 2,315,220 (5,363,028)
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Amortization 517,840 29,470
Loss (Gain) on Disposal of Investments (957,720) (35,631)
Minority Interest in Net Income of 3,712,000 0
Consolidated Subsidiary
Decrease (Increase) in Reinsurance 4,876,946 8,743,638
Recoverable on Outstanding Claims
March 31, March 31,
1997 1996
INVESTING ACTIVITIES:
Net Purchase of Marketable Securities (16,257,262) (3,098,119)
Net Purchase of Capital Assets (1,025,084) 476,700
Other 87,698 61,937
Sub-Total (17,194,648) (2,559,482)
Effect of Exchange Rate Changes on Cash
Resources
Change in Cash Resources During the Period 4,159,836 (5,483,877)
Cash Resources, Beginning of Period 33,730,582 10,613,027
Cash Resources, End of Period 37,890,417 5,129,151
Cash Resources are Comprised of:
Cash $20,629,818 ($1,370,741)
Short-Term Investments 17,260,599 6,499,892
Sub-total 37,890,417 5,129,151
See Notes to Consolidated Financial Statements
GORAN CAPITAL INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
March 31, March 31,
1997 1996
Retained Earnings (Deficit), Beginning of $27,401,236 ($3,895,014)
Period
Net Earnings For The Period 4,606,894 2,203,526
Retained Earnings (Deficit), End of Period 32,008,130 (1,691,488)
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GORAN CAPITAL INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For The Three Months Ended March 31, 1997
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 67% owned subsidiary, 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")), and its wholly-owned
subsidiaries, 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
specifications 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. All material intercompany amounts have been eliminated.
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 $1.3 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
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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 $16.9 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.
The acquisition of Superior was accounted for under the purchase method of
accounting, and the results of its operations have been included subsequent to
April 30, 1996.
On November 5, 1996, SIG effectuated an initial public offering of 3,450,000
common stock shares at $12.50 per share. The proceeds of the offering were used
to increase the capitalization of IGF by $9,000,000, repay $7,500,000
indebtedness of SIG, primarily certain amounts owed to Goran and its
wholly-owned subsidiary, Granite Re, repay a bank debt of $7,500,000 and pay
Goran a dividend of $3,500,000. The remaining funds were retained for general
corporate purposes, including acquisitions.
NOTE 3 - REINSURANCE
In order to reduce risk and increase its underwriting capacity, the Company
purchases reinsurance. Reinsurance does not relieve the Company of its ultimate
liability to its insureds for the risks ceded to reinsurers. As such, the
Company is subject to credit risk with respect to risks ceded to reinsurers
should a reinsurer fail. Effective January 1, 1996 reinsurance was 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 all of its Multi-Peril Crop Insurance ("MPCI") business which
has a back-end underwriting gain or loss feature. The Company reinsures
stop-loss protection to third party reinsurers. Regarding the crop hail line of
business, the Company has placed a 40% quota share treaty, as well as an excess
of loss (stop-loss) protection, with third party reinsurers. Effective January
1, 1997, the Company ceded 20% of its new and renewal nonstandard automobile
business and 40% of its crop hail business under certain quota share
arrangements. The cession of nonstandard automobile premiums was necessary to
maintain compliance with certain debt covenants regarding the ratio of premiums
to statutory surplus.
The effects of reinsurance on the Company's premiums and claims incurred are as
follows:
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NOTE 3
GORAN CAPITAL INC.
Analysis of Effects of Reinsurance
March 31, March 31,
1997 1996
Premiums Written
Gross 130,304,239 41,421,617
Ceded (59,052,003) (16,082,335)
Net 71,252,236 25,339,282
Premiums Earned
Gross 127,336,975 47,952,143
Ceded (61,698,000) (23,433,832)
Net 65,638,975 24,518,311
Claims Incurred
Gross 61,757,629 29,068,982
Ceded (15,071,611) (12,471,880)
Net 46,686,018 16,597,102
March 31, December 31,
1997 1996
Unearned Premiums
Gross 132,480,197 91,206,974
Ceded (50,642,000) (14,983,097)
Net 81,838,197 76,223,877
Outstanding Claims
Gross 110,415,929 127,044,804
Ceded (28,236,000) (33,112,946)
Net 82,179,929 93,931,858
NOTE 4 - CAPITAL STOCK
For the three months ended March 31, 1997, 163,832 common shares were issued by
the Company pursuant to warrants previously issued to debenture holders and
pursuant to an established Company Employee Stock Option Plan.
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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:
March 31, March 31,
1997 1996
Reported Net Earnings 4,606,894 2,203,526
US/Canada GAAP Differences
Discounting on Outstanding Claims 38,277 0
Deferred Income Taxes 0 20,741
Revised Net Earnings 4,645,171 2,224,267
Earnings Per Share $0.78 $0.39
EPS - Before Extraordinary Items $0.78 $0.39
EPS - Fully Diluted $0.78 $0.39
Dividends Per Share $0.00 $0.00
Reported Total Assets 467,984,939 164,089,609
US/Canada GAAP Differences
Loans to Purchase Shares (588,745) (559,680)
Deferred Income Taxes 2,161,000 1,499,561
Unrealized Loss on Investments (123,000) (81,068)
Revised Total Assets 469,434,194 164,948,423
Reported Shareholders' Equity 51,963,700 14,940,270
US/Canada GAAP Differences
Deferred Income Taxes 2,161,000 1,499,561
Discounting on Claims (1,209,998) (1,318,777)
Loans to Purchase Shares (588,745) (559,680)
Unrealized Gain (Loss) on Investments (123,000) (81,068)
Revised Shareholders' Equity 52,202,957 14,480,306
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NOTE 6 - CONTINGENT LIABILITY
The Company and its subsidiaries, are named as defendants in various lawsuits
relating to their business. Legal actions arise from claims made under insurance
policies issued by the subsidiaries. These actions were considered by the
Company in establishing its loss reserves. The Company believes that the
ultimate disposition of these lawsuits will not materially affect the Company's
operations or financial position.
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.
NOTE 7 - SUBSEQUENT EVENT
IGF has agreed to purchase the business of Southwest Crop Managing General
Agency ("Southwest"), a subsidiary of Southwest Crop Insurance Company of Honey
Grove, Texas. The Southwest book of business has a premium volume of
approximately $15 million.
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<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.
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 occurrence and settlement
of losses under nonstandard policies is shorter than many other types of
insurance. Also, since the nonstandard automobile insurance business typically
experiences lower rates of retention than standard automobile insurance, the
number of new policyholders underwritten by nonstandard automobile insurance
carriers each year is substantially greater than the number of new policyholders
underwritten by standard carriers.
The Company follows the customary industry practice of reinsuring a portion of
its risks and paying for that protection based upon premiums received on all
policies subject to such reinsurance. As part of its internal procedures, the
Company evaluates the financial condition of each prospective reinsurer before
it cedes business to that carrier. Based on the Company's review of its
reinsurers' financial health and reputation in the insurance marketplace, the
Company believes its reinsurers are financially sound and that they therefore
can meet their obligations to the Company under the terms of the reinsurance
treaties.
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
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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
1997 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 31 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
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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
1997 and 1996, the Buy-Up Expense Reimbursement Payment has been set at 29% and
31%, respectively, of the MPCI Premium. 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
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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 the applicable rate 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. 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. The Company also recognizes the MPCI
underwriting gain or loss during each 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 third and fourth quarters, a reconciliation amount is
recognized for the underwriting gain or loss based on final premium and loss
information.
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
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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 months ended March 31, 1997, the Company recorded net earnings of
$4,606,894 or $0.83 per share. This is approximately a 109% increase from 1996
comparable amount of $2,203,526 or $0.43 per share. The improved earnings were
attributable to continued 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
significantly higher volume and improved expense ratio from the acquisition of
Superior. The crop segment also demonstrated strong premium growth and enhanced
profitability due to higher volume as well as better loss experience in winter
wheat.
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<PAGE>
For The Period Ended March 31,
1997 1996
Nonstandard-Automobile Insurance
Operations:
Gross premiums written 75,066,000 17,922,000
Net premiums written 59,588,000 20,167,000
Net premiums earned 63,105,000 13,626,000
Net investment income 2,338,000 396,000
Other income, principally billing fees 2,899,000 591,000
Net realized capital loss 942,000 (52,000)
TOTAL REVENUES 69,284,000 14,561,000
Losses and loss adjustment expenses 45,268,000 8,565,000
Policy acquisition and general and 17,124,000 5,174,000
administrative expenses
Interest and amortization of 1,484,000 0
intangibles
TOTAL EXPENSES 63,876,000 13,739,000
Earnings before income taxes 5,408,000 822,000
GAAP Ratios
(Nonstandard Automobile Only):
Loss and LAE Ratio 71.7% 62.9%
Expense ratio, net of billing fees 22.5% 33.6%
Combined ratio 94.2% 96.5%
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<PAGE>
For The Period Ended March 31,
1997 1996
Crop Insurance Operations:
Gross premiums written 51,709,000 21,404,000
Net premiums written 7,201,000 263,000
Net premiums earned 10,000 159,000
Net investment income 49,000 162,000
Other income 2,139,000 373,000
Net realized capital gain (loss) 0 16,000
TOTAL REVENUES 2,198,000 710,000
Losses and loss adjustment expenses 0 397,000
Policy acquisition and general and (4,766,000) (1,833,000)
administrative expenses
Interest expense 11,000 95,000
TOTAL EXPENSES (4,755,000) (1,341,000)
Earnings before income taxes 6,953,000 2,051,000
Statutory Capital and Surplus:
Pafco 18,674,000 13,423,000
IGF 33,003,000 10,488,000
Superior 58,023,000 51,681,000
Consolidated gross premiums written increased 214.6% due to growth in both the
nonstandard auto and crop segments.
Gross premiums written for the nonstandard auto segment increased 318.8%. Such
increase was due primarily to gross premiums written from Superior of
$56,925,000 for the three months ended March 31, 1997, internal growth due to
improved service, certain product improvements and tougher uninsured motorist
laws in states such as California and Florida.
Gross premiums written for the crop segment increased 141.6%. Such increase was
due to continued industry privatization and aggressive marketing efforts.
Premiums reported in the first three months of each year generally do not
include significant crop hail premiums since most of the policies are written in
the second quarter. In the first quarter of 1997 the Company recorded
approximately $12,000,000 of crop hail gross premiums written as acreage reports
were processed faster than in prior years.
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<PAGE>
In 1997, the Company ceded $15,477,000 of nonstandard automobile premiums as
part of a 20% quota share treaty instituted January 1, 1997. No such treaty was
in effect during 1996. Due to the growth in premiums and the corresponding lag
in statutory earnings, the Company's subsidiaries needed to cede premiums in
excess of a ratio to statutory surplus of 3.15:1 in order to maintain compliance
with debt covenants. The Company was in compliance with all debt covenants as of
March 31, 1997. It is expected that such cession will continue as the Company
explores alternative financing plans.
Increases in net premiums earned for the three months ended March 31, 1997 as
compared to the corresponding period of the prior year reflects the strong
growth in written premiums offset by the effects of the nonstandard automobile
quota share.
Net investment income increased $3,042,388 for the three months ended March 31,
1997 as compared to the corresponding period of the prior year. Such increase
was due primarily to investment income from Superior of $1,825,000. The
remaining increase was due to greater invested assets and realized gains on
investment sales of $942,000 due primarily to a change in equity managers and a
repositioning of the portfolio.
Other income increased $4,768,209 for the three months ended March 31, 1997 as
compared to the corresponding period of the prior year. Such increase was due to
billing fee income on nonstandard automobile business at Superior of $2,111,000
and 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 due to
higher premium volume.
The loss ratio for the nonstandard automobile segment in 1997 was 71.7% as
compared to 62.9% in 1996. The increase in the loss ratio primarily reflects the
significant growth in volume since the first quarter of 1996 and has decreased
from 77.2% in the fourth quarter of 1996 and 73.7% for all of 1996. Crop hail
loss ratios in the first quarter do not have a significant impact on
consolidated earnings.
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 offset by increases in
reinsurance commission income. Policy acquisition and general and administrative
expenses rose to $14,428,499 or 22.0% of net premium earned for the three months
ended March 31, 1997 compared to $5,992,803 or 24.4% of net premium earned in
the corresponding period of 1996. There is a disproportionate relationship
between increased operating expenses and increased net retention of business.
The expense ratio, gross of billing fees, for the nonstandard segment improved
to 27.1% in 1997 as compared to 38.0% in 1996, due to technological and
operational efficiencies, economies of scale and tighter expense controls.
Due to the unique accounting for the crop insurance segment, operating expenses
for the three months ended March 31, 1997 includes a contribution to earnings of
$4,766,000, as compared to a comparable amount of $1,833,000 for 1996. Such
increase was due to greater Buy-up Expense Reimbursement Payments
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<PAGE>
and MPCI underwriting gain due to increased premium volumes. The MPCI
underwriting gain was also increased by improved loss experience on winter
wheat.
Interest expense increased $1,033,941 for the three months ended March 31, 1997
as compared to the corresponding period in the prior year due primarily to
interest incurred since April 30, 1996 on the $48 Million of debt incurred to
purchase Superior.
The Superior acquisition debt is effectively fixed at 8.85% through January
1997, 9.08% through April 1997, 9.24% through July 1997, and 8.80% through
October 1999 through an interest rate swap agreement.
Income tax expense was 33.1% of pre-tax income in 1997 as compared to 27.9% in
1996. The increase in the effective tax rate was due primarily to a higher
proportion of taxable U.S. earnings.
The remaining operations of Goran (Granite Reinsurance Company Ltd., Granite
Insurance Company and Symons International Group, Inc. - Florida) provided
pre-tax earnings of approximately $640,000 in 1997 compared to $620,000 in 1996.
Financial Condition
The Company's total assets of $467,984,939 at March 31, 1997 increased
$86,643,167 from $381,341,772 as of December 31, 1996. Cash and invested assets
increased to $227,810,309 at March 31, 1997 from $206,670,797 at December 31,
1996 due to improved cash flow from operations.
The Company's shareholders' equity increased from $47,257,890 at December 31,
1996 to $51,963,700 at March 31, 1997. Long term debt to equity was .53 to 1 at
December 31, 1996 and .48 to 1 at March 31, 1997. Both ratios exclude the
minority interest portion of long-term debt.
Net cash provided by operating activities improved to $19,039,000 in 1997 from
$2,439,000 in 1996 due to improved earnings and premium growth. This additional
cash flow was used to increase invested assets. The contribution from the
minority interest owner in 1997 was made to increase the capitalization of GGSH,
and the Company also contributed its 52% share.
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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 April 4, 1997
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.
(2) The Company filed a Form 8-K on April 22, 1997
relating to the unaudited pro-forma consolidated
financial statements of operations of the Company.
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<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: March 31, 1997 By:_/s/ Alan G. Symons______
Alan G. Symons
President
Dated: March 31, 1997 By:_/s/ Gary P. Hutchcraft___
Gary P. Hutchcraft
Vice President, Treasurer and
Chief Financial Officer
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<PAGE>
GORAN CAPITAL INC. - Consolidated Exhibit 11.01
Analysis of Earnings Per Share
As At March 31, 1997
March 31, 1997 March 31, 1996
TSE Trading
Activity
Volume Value Average Price
Period Covered # (US $) (US $) (US $)
January to 633,310 $15,491,602 $24.46 (A) $11.46
March 1997
March 31, 1997 March 31, 1996
Proceeds from Exercise of $3,533,293 (B) $1,195,394
Warrants and Options (US $)
Shares Repurchased - Treasury 144,444 (B)/(A) 104,278
Method
Shares Outstanding - Weighted 5,533,776 5,085,046
Average
Add: Options and Warrants 545,317 704,160
Outstanding
Less: Treasury Method - Shares (144,444) (104,278)
Repurchased
Shares Outstanding for US GAAP 5,934,649 (C) 5,684,928
Purposes
Net Earnings in Accordance with $4,645,171 (D) $2,224,267
US GAAP
Earnings Per Share - US GAAP $0.78 (D)/(C) $0.39
(Primary and Fully Diluted)
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