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, 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 X No
As of November 12, 1997, there were 5,570,277 shares of Registrant's common
stock issued and outstanding exclusive of shares held by Registrant.
<PAGE>
Form 10-Q Index
September 30, 1997
Page
Number
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements........................................... 3
Consolidated Financial Statements:
Consolidated Balance Sheets at September 30, 1997 and
December 31, 1996........................................... 4
Consolidated Statements of Earnings for the Three
and Nine Months Ended September 30, 1997 and 1996.............. 5
Consolidated Statements of Changes in Cash Resources
for the Nine Months Ended September 30, 1997 and 1996.......... 7
Consolidated Statements of Shareholders' Equity................ 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............................................................. 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, 1997 and 1996 are not necessarily indicative of the results to be expected
for the entire year.
These quarterly interim financial statements are unaudited and are stated in
U.S. dollars.
-3-
<PAGE>
GORAN CAPITAL INC.
CONSOLIDATED BALANCE SHEETS
(Canadian GAAP, stated in U.S. Dollars)
September 30, December 31,
1997 1996
ASSETS
Cash and Investments $252,929,916 $206,670,797
Accounts Receivable
Premiums Receivable 162,913,234 63,873,697
Due From Insurance Companies 19,732,267 33,905,128
Due From Associated Companies 450,216 140,423
Accrued and Other Receivables 5,266,410 3,329,893
--------- ---------
188,362,127 101,249,141
Reinsurance recoverable on outstanding
claims 150,887,102 33,112,946
Prepaid reinsurance premiums 34,363,628 14,983,097
Capital Assets 11,187,031 4,801,086
Deferred Policy Acquisition Costs 12,973,105 13,859,492
Intangibles 41,254,096 1,329,736
Other Assets 4,144,386 5,335,477
---------- ---------
Total Assets $696,101,391 $381,341,772
============ ============
LIABILITIES
Accounts Payable
Due to Insurance Companies $111,752,271 $5,754,831
Accrued and Other Payables 19,968,697 21,050,919
---------- ----------
131,720,968 26,805,751
Outstanding Claims 219,286,169 127,044,804
Unearned Premiums 119,647,918 91,206,974
Bank Loans 6,206,475 48,000,000
--------- ----------
Total Liabilities 476,861,530 293,057,529
----------- -----------
Minority Interest:
Preferred Securities 135,000,000 ---
----------- ---
Equity in net assets of subsidiary 25,397,434 41,026,354
---------- ----------
SHAREHOLDERS' EQUITY
Capital Stock 17,459,640 17,416,431
Contributed Surplus 2,774,606 2,774,606
Retained Earnings 38,866,028 27,401,236
Cumulative Translation Adjustment (257,847) (334,384)
--------- ---------
Total Shareholders' Equity $58,842,427 $47,257,890
----------- -----------
Total Liabilities and Shareholders' $696,101,391 $381,341,772
============ ============
Equity
See Notes to Consolidated Financial Statements
-4-
<PAGE>
GORAN CAPITAL INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Canadian GAAP, stated in U.S. Dollars)
For the three months ending
September 30, September 30,
1997 1996
Gross Premiums Written $102,845,354 $71,812,920
============ ===========
Net Premiums Earned $76,474,256 $71,795,680
Fee Income 4,198,852 1,608,006
Net Investment Income/Net Realized
Gains and Losses 7,364,082 1,320,245
--------- ---------
Total Revenues 88,037,190 74,723,931
---------- ----------
Net Claims Incurred 57,159,387 49,684,080
General and Administrative Expenses 18,693,909 14,987,813
Amortization of Intangibles 393,536 210,695
Interest Expense 539,579 1,715,689
------- ---------
Total Expenses 76,786,411 66,598,277
---------- ----------
Income Before Undernoted Items 11,250,779 8,125,654
Provision for Income Taxes 3,855,449 3,132,898
Distributions on Preferred Securities 686,716 ---
Equity in earnings of subsidiary 2,586,334 833,133
--------- -------
Net Earnings $4,122,280 $4,159,623
========== ==========
Earnings Per Share - Basic $0.74 $0.79
===== =====
Earnings Per Share - Fully Diluted $0.69 $0.72
===== =====
See Notes to Consolidated Financial Statements
-5-
<PAGE>
GORAN CAPITAL INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Canadian GAAP, stated in U.S. Dollars)
For the Nine Months Ending
September 30, September 30,
1997 1996
Gross Premiums Written $382,984,164 $222,096,120
============ ============
Net Premiums Earned 219,239,586 $147,386,503
Fee Income 14,990,166 5,670,009
Net Investment Income/Net Realized
Gains and Losses 15,955,348 4,321,263
---------- ---------
Total Revenues 250,185,100 157,377,775
----------- -----------
Net Claims Incurred 164,703,777 106,232,444
General and Administrative Expenses 52,264,556 31,743,755
Amortization of Intangibles 687,021 210,695
Interest Expense 2,990,990 3,454,332
--------- ---------
Total Expenses 220,646,344 141,641,226
----------- -----------
Income Before Undernoted Items 29,538,756 15,736,549
Provision for Income Taxes 10,077,930 4,962,319
Distributions on Preferred Securities 686,716 ---
Equity in earnings of subsidiary 7,309,318 1,231,509
--------- ---------
Net Earnings $11,464,792 $9,542,721
=========== ==========
Earnings Per Share - Basic $2.06 $1.83
===== =====
Earnings Per Share - Fully Diluted $1.95 $1.69
===== =====
Weighted Average Shares Outstanding:
Primary 5,552,097 5,226,707
========= =========
Fully Diluted 6,285,245 5,712,159
========= =========
See Notes to Consolidated Financial Statements
-6-
<PAGE>
GORAN CAPITAL INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
CASH RESOURCES FOR THE NINE MONTHS ENDING
(Canadian GAAP, stated in U.S. Dollars)
September 30, September 30,
1997 1996
CASH PROVIDED BY OPERATING ACTIVITIES
Net Earnings For The Period $11,464,792 $9,542,721
Items Not Affecting Cash Resources:
Amortization 1,192,000 286,124
Loss (Gain) on Disposal of Investments (5,465,000) 388,058
Minority Interest in Net Income of
Consolidated Subsidiary 7,137,718 1,231,509
Net changes in operating assets and
liabilities:
Decrease (Increase) in Other Assets (136,510,781) (1,215,223)
Decrease (Increase) in Deferred Policy
Acquisition Costs 762,033 1,633,676
Increase(Decrease) in Deferred Income
Taxes --- 55,058
Increase (Decrease) in Unearned Premiums 29,259,299 (7,190,451)
Increase (Decrease) in Outstanding Losses 93,384,459 (535,678)
Decrease (Increase) in Accounts Receivable (88,021,444) 4,637,359
Increase (Decrease) in Accounts Payable 105,152,548 2,389,128
----------- ---------
Net Cash provided by Operations 18,355,624 11,222,281
---------- ----------
INVESTING ACTIVITIES:
Net Purchase of Marketable Securities (49,912,503) (15,043,179)
Acquisition of Subsidiary (61,000,000) (63,228,000)
Other Investing Activities 30,243 ---
Net Purchase of Capital Assets (3,807,023) (865,608)
----------- ---------
Net Cash Used by Investing Activities (114,689,283) (79,136,787)
------------- ------------
FINANCING ACTIVITIES:
Issue of Preferred Securities 130,100,000 ---
Increase (Reduction) of Borrowed Funds (41,362,845) 57,676,203
Increase (Decrease) in Minority Interest 2,474,099 18,319,390
Issue of Share Capital 199,478 445,035
------- -------
Net Cash Provided by Financing Activities 91,410,732 $76,440,628
---------- -----------
Change in Cash Resources During the Period (4,922,927) 8,526,122
Cash Resources, Beginning of Period 33,730,582 10,613,027
---------- ----------
Cash Resources, End of Period $28,807,655 $19,139,149
=========== ===========
Cash Resources are Comprised of:
Cash $9,972,091 $6,369,897
Short-Term Investments 18,835,564 12,769,252
---------- ----------
Sub-total $28,807,655 $19,139,149
=========== ===========
See Notes to Consolidated Financial Statements
-7-
<PAGE>
<TABLE>
<CAPTION>
GORAN CAPITAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Canadian GAAP, stated in U.S. Dollars)
<S> <C> <C> <C> <C> <C>
Common Contributed Cumulative Retained Total
Stock Surplus Translation Earnings Stockholders'
Adjustment (Deficit) Equity
Balance at December 31, 1995 $16,874,923 -- $(357,777) $(3,895,014) $12,622,132
Issuance of common shares 482,199 -- -- -- 482,199
Increase in Contributed Surplus --- 3,081,000 --- --- 3,081,000
Change in cumulative
translation adjustment -- -- (40,757) -- (40,757)
Net Earnings -- -- -- 9,542,721 9,542,721
Balance at September 30, 1996 $17,357,122 $3,081,000 $(398,534) $5,647,707 $25,687,295
=========== ========== ========== ========== ===========
Issuance of common shares 59,309 -- -- -- 59,309
Change in contributed surplus -- (306,394) -- -- (306,394)
Change in cumulative
transaction adjustment -- -- 64,151 64,151
Net earnings -- -- -- 21,753,259 21,753,259
Balance at December 30, 1996 17,416,431 2,774,606 (334,383) 27,401,236 47,257,890
Issuance of common shares 43,209 -- -- -- 43,209
Change in contributed surplus -- -- -- -- --
Change in cumulative
translation adjustment -- -- 76,536 -- 76,536
Net earnings -- -- -- 11,464,792 11,464,792
Balance at September 30, 1997 $17,459,640 $2,774,606 $(257,847) $38,866,028 $58,842,427
=========== ========== ========== =========== ===========
See Notes to Consolidated Financial Statements
-8-
</TABLE>
<PAGE>
GORAN CAPITAL INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For The Three and Nine Months Ended September 30, 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 subsidiaries, IGF Insurance Company
("IGF"), Pafco General Insurance Company ("Pafco") and Superior Insurance
Company ("Superior")), and Goran's wholly-owned subsidiaries, Granite
Reinsurance Company Ltd., Granite Insurance Company and Symons International
Group - Florida. Prior to August 12, 1997, Pafco and Superior were 52% owned by
SIG. The consolidated condensed interim financial statements have been prepared
in accordance with Article of Regulation S-X and, therefore, do not include all
information and footnotes normally shown in full annual financial statements.
These unaudited consolidated condensed 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 - 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 Crop Insurance Corporation ("FCIC"), an agency
of the United States Department of Agriculture, all of its Multi-Peril Crop
Insurance ("MPCI") business which has an underwriting gain or loss feature. The
Company reinsures stop-loss protection to third party reinsurers on its MPCI and
crop hail business. Regarding the crop hail line of business, the Company also
carries 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, 40% of its crop hail business and 50% of its
crop hail business under certain quota share arrangements. Third party
reinsurers receive 90% of the ceded non-standard automobile business. Granite
Reinsurance Company Ltd. is a participant in the auto quota share treaty,
receiving 10% of the ceded nonstandard automobile business. Effective October 1,
1997, the automobile 20% quota share treaty was reduced to 10% due to increased
surplus and capital at Pafco and Superior. Granite Reinsurance Company Ltd. is
also a participant in the stop-loss protection on MPCI and crop hail business.
The effects of reinsurance are as follows:
-9-
<PAGE>
NOTE 2 (continued)
GORAN CAPITAL INC.
Analysis of Effects of Reinsurance
(Canadian GAAP, stated in U.S. Dollars)
For The Three Months Ended
September 30, September 30,
1997 1996
Premiums Written
Gross $102,845,354 $71,812,920
Ceded (31,927,349) (4,251,610)
------------ -----------
Net $70,918,005 $67,561,310
=========== ===========
Premiums Earned
Gross $141,968,658 $89,850,429
Ceded (65,494,402) (18,054,749)
------------ ------------
Net $76,474,256 $71,795,680
=========== ===========
Claims Incurred
Gross $150,716,971 $61,831,599
Ceded (93,557,584) (12,147,519)
------------ ------------
Net $57,159,387 $49,684,080
=========== ===========
For the Nine Months Ended
September 30, September 30,
1997 1996
Premiums Written
Gross $382,984,164 $222,096,120
Ceded (154,684,164) (71,430,757)
------------- ------------
Net $228,300,000 $150,665,363
============ ============
Premiums Earned
Gross $354,330,948 $233,152,905
Ceded (135,091,362) (85,766,402)
------------- ------------
Net $219,239,586 $147,386,503
============ ============
Claims Incurred
Gross $309,514,681 $140,268,840
Ceded (144,810,904) (34,036,396)
------------- ------------
Net $164,703,777 $106,232,444
============ ============
September 30, December 31,
1997 1996
Unearned Premiums
Gross $119,647,918 $ 91,206,974
Ceded (34,363,489) (14,983,097)
------------ ------------
Net $85,284,429 $ 76,223,877
=========== ============
Outstanding Claims
Gross $219,286,169 $127,044,804
Ceded (83,952,154) (33,112,946)
------------ ------------
Net $135,334,016 $ 93,931,858
============ ============
-10-
<PAGE>
NOTE 3 - 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.
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 certain expenses. IGF alleges the FCIC wrongfully sought to
hold IGF responsible for these expenses. The FCIC 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. On October 27,
1997, IGF reached an agreement with the FCIC to settle the case, with both
parties dismissing all claims against one another which were subject to the
litigation. The FCIC has agreed to pay IGF a lump sum payment of $60,000.
NOTE 4 - CAPITAL STOCK
For the three and nine months ended September 30, 1997, 0 and 164,457 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.
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:
For The Three Months Ended
September 30, September 30,
1997 1996
Reported Net Earnings $4,122,280 $4,159,623
US/Canada GAAP Differences
Discounting on Outstanding Claims (116)
Deferred Income Taxes --- 472,266
--- -------
Revised Net Earnings $4,122,164 $4,631,889
========== ==========
Earnings Per Share $0.63 $0.81
EPS - Before Extraordinary Items $0.63 $0.81
EPS - Fully Diluted $0.63 $0.81
Dividends Per Share --- ---
-11-
<PAGE>
For The Nine Months Ended
September 30, September 30,
1997 1996
Reported Net Earnings $11,464,792 $9,542,721
US/Canada GAAP Differences
Discounting on Outstanding Claims 37,777 ---
Deferred Income Taxes --- (164,960)
--- ---------
Revised Net Earnings $11,502,568 $9,377,761
=========== ==========
Earnings Per Share $1.87 $1.66
EPS - Before Extraordinary Items $1.87 $1.66
EPS - Fully Diluted $1.87 $1.66
Dividends Per Share --- ---
Reported Total Assets $696,101,391 $387,886,110
US/Canada GAAP Differences
Loans to Purchase Shares (587,554) (564,528)
Deferred Income Taxes 2,128,086 2,737,000
Unrealized Gain (Loss) on Investments 5,890,746 95,398
--------- ------
Revised Total Assets $703,532,669 $390,153,980
============ ============
Reported Shareholders' Equity $58,842,427 $25,687,295
US/Canada GAAP Differences
Deferred Income Taxes 2,128,086 2,737,000
Discounting on Claims (1,212,012) (1,330,201)
Loans to Purchase Shares (587,554) (564,528)
Unrealized Gain (Loss) on Investments 5,890,746 95,398
--------- ------
Revised Shareholders' Equity $65,061,693 $26,624,963
=========== ===========
-12-
<PAGE>
NOTE 6 - PREFERRED SECURITY OFFERING
On August 12, 1997, SIG issued $135 million in Trust Originated Preferred
Securities ("Preferred Securities"). These Preferred Securities were offered
through a wholly-owned trust subsidiary of SIG and are backed by Senior
Subordinated Notes to the Trust from SIG. These Preferred Securities were
offered under Rule 144A of the SEC ("Offering") and, pursuant to the
Registration Rights Agreement executed at closing. SIG filed a Form S-4
Registration Statement with the SEC on September 16, 1997 to effect the Exchange
Offer. The S-4 Registration Statement was declared effective on September 30,
1997 and the Exchange Offer successfully closed on October 31, 1997. The
proceeds of the Offering were used to repurchase the remaining minority interest
in GGSH for $61 million, repay the balance of the GGS Senior Credit Facility of
$44.9 million and, pursuant to the Registration Rights Agreement executed at
closing, SIG expects to contribute the balance, after expenses, of approximately
$24 million to the nonstandard automobile insurers of which $10.5 million was
contributed in the third quarter. Expenses of the issue will aggregate 4.9
million and will be amortized over the term of the Preferred Securities (30
years). In the third quarter, the Company wrote-off the remaining unamortized
costs of the GGS Senior Credit Facility of approximately $1.4 million pre-tax or
approximately $0.11 per share.
The excess of the acquisition price over the minority interest liability
aggregated approximately $ 37,896,000 and was assigned to goodwill as the fair
market value of acquired assets approximating their carrying value. Goodwill
will be amortized over 25 years to match management's expectations of the
expected benefit period.
The Preferred Securities have a term of 30 years with semi-annual interest
payments commencing February 15, 1997 at 9.50%. The Preferred Securities may be
redeemed in whole or in part after 10 years.
SIG shall not, and shall not permit any subsidiary, to incur directly or
indirectly, any indebtedness unless, on the date of such Incurrence (and after
giving effect thereto), the Consolidated Coverage Ratio exceeds 2.5 to 1. The
Coverage Ratio is the aggregate of net earnings, plus interest expense, income
taxes, depreciation, and amortization divided by interest expense for the same
period.
Assuming this offering took place at January 1, 1997, the proforma effect of
this offering on the Company's consolidated statement of earnings for the nine
months ended is as follows:
September 30, 1997
Unaudited
Revenues $ 250,185,000
Net earnings $ 9,512,000
Net earnings per common share $ 1.71
-13-
<PAGE>
The aforementioned proforma results do not include the effects of the write-off
of the debt issuance cost recorded in the third quarter. The aforementioned
proforma amounts are dilutive because of the additional reserve adjustment to
the non-standard auto operations in the second quarter and the non-inclusion of
investment income on the additional proceeds from the offering. The Company
expects based on projected premium volumes and results of operations for the
non-standard division that this transaction will be accretive to earnings in
future years.
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
Symons International Group, Inc., 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 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 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.
-14-
<PAGE>
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 1,300 independent agencies in 40 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 Generally Accepted Accounting
Principles (GAAP), 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 does 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 GAAP 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
1998, 1997 and 1996, the Buy-up Expense Reimbursement Payment has been set at
27%, 29% and 31%, respectively, of the MPCI Premium. For GAAP 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.
On June 9, 1997, the Secretary of Agriculture announced that the USDA would
transfer to the private sector CAT coverage. At this time, the Company has
received approximately 17,000 policies that were formerly written by USDA
offices, although there can be no assurance that the Company will receive this
number of policies. Based on historical FSA CAT transfer per-policy averages,
the Company has preliminarily estimated that it will receive approximately an
additional $2 to $3 million in premiums from such transferred policies, however,
there can be no assurance that this number will be realized. This estimate
assumes that IGF will retain 100% of such premiums.
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.
-15-
<PAGE>
In addition to crop hail insurance, the Company also sells Named Peril
Coverages. 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 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 protects itself with 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 (all winter wheat type policies
are recognized in 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
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
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<PAGE>
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, 1997, the Company recorded net
earnings of $ 4,122,280 and $ 11,464,792 or $0.74 and $2.06 per share,
respectively. This is approximately a 1% decrease and a 20.1% increase from 1996
comparable amounts of $ 4,159,623 and $9,542,721 or $0.79 and $1.83 per share.
The improved earnings for the nine months ended were attributable to continued
premium growth and improved expense ratios of the nonstandard automobile
insurance segment and continued growth and profit in the crop insurance segment.
The modest decrease for the three months ended relates to the initial public
offering on November 5, 1996 of Goran's subsidiary, Symons International Group,
Inc., which reduced its ownership of SIG from 100% to 67%.
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<PAGE>
For the three months ended
September 30,
(in thousands)
1997 1996
Nonstandard-Automobile Insurance
Operations:
(in thousands)
Gross premiums written $77,505 $56,836
======= =======
Net premiums written $61,789 $56,489
======= =======
Net premiums earned $61,059 $54,701
Fee income 4,380 2,486
Net investment income 2,702 2,780
Net realized capital gain/(loss) 3,837 (834)
----- -----
TOTAL REVENUES 71,978 59,133
------ ------
Losses and loss adjustment expenses 44,873 38,300
Policy acquisition and general and
administrative expenses 18,170 15,922
------ ------
TOTAL EXPENSES 63,043 54,222
------ ------
Earnings before income taxes $8,935 $4,911
====== ======
GAAP Ratios
(Nonstandard Automobile Only):
Loss and LAE Ratio 73.5% 70.0%
Expense ratio, net of billing fees 22.6% 24.6%
----- -----
Combined ratio 96.1% 94.6%
===== =====
Crop Insurance Operations:
(in thousands)
Gross premiums written $23,997 $14,796
======= =======
Net premiums written $4,576 $7,941
====== ======
Net premiums earned $10,985 $14,393
Net investment income 52 46
Other income (181) (895)
Net realized capital gain (loss) (55) ---
---- ---
TOTAL REVENUES 10,801 13,544
------ ------
Losses and loss adjustment expenses 9,030 9,642
Policy acquisition and general and
administrative expenses (2,609) (1,741)
Interest expense 40 242
-- ---
TOTAL EXPENSES 6,461 8,143
----- -----
Earnings before income taxes $4,340 $5,401
====== ======
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<PAGE>
For the nine months ended
September 30,
(in thousands)
1997 1996
Nonstandard-Automobile Insurance
Operations:
(in thousands)
Gross premiums written $243,052 $119,126
======== ========
Net premiums written $195,632 $118,578
======== ========
Net premiums earned $189,303 $107,545
Fee income 11,584 4,819
Net investment income 7,796 4,215
Net realized capital gain/(loss) 5,521 (622)
----- -----
TOTAL REVENUES 214,204 115,957
------- -------
Losses and loss adjustment expenses 143,897 77,131
Policy acquisition and general and
administrative expenses 53,662 31,617
------ ------
TOTAL EXPENSES 197,559 108,748
------- -------
Earnings before income taxes $16,645 $7,209
======= ======
GAAP Ratios
(Nonstandard Automobile Only):
Loss and LAE Ratio 76.0% 71.7%
Expense ratio, net of billing fees 22.2% 24.9%
-----
Combined ratio 98.2% 96.6%
===== =====
Crop Insurance Operations:
(in thousands)
Gross premiums written $132,353 $95,332
======== =======
Net premiums written $21,256 $22,894
======= =======
Net premiums earned $18,753 $20,615
Net investment income 144 142
Other income 3,406 253
Net realized capital gain (55) 16
---- ---
TOTAL REVENUES 22,248 21,026
------ ------
Losses and loss adjustment expenses 13,299 16,086
Policy acquisition and general and
administrative expenses (8,635) (6,114)
Interest expense 1 469
-- ---
TOTAL EXPENSES 4,729 10,441
----- ------
Earnings before income taxes $17,519 $10,585
======= =======
Statutory Capital and Surplus:
Pafco $23,418
=======
IGF $40,552
=======
Superior $71,455
=======
Consolidated Gross Premiums Written increased 43.2% in the third quarter and
72.4% year-to-date due to growth in both the nonstandard auto and crop segments.
Gross Premiums Written for the nonstandard auto segment increased 36.4% in the
third quarter and 104% year-to-date. While a portion of this increase relates to
four additional months of premium in 1997 of Superior, additional premium growth
relates to internal growth due to improved service, certain product
improvements, tougher uninsured motorist laws in states such as California and
Florida and entrance into new states such as Nevada and Oregon. Such increase
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<PAGE>
was primarily due to volume rather than rate increases, although the Company
adjusts rates on an ongoing basis. Gross Premiums Written for the crop segment
increased 62.2% in the third quarter and increased 38.8% year-to-date. Such
year-to-date increases were due to continued industry privatization and
aggressive marketing efforts. Remaining gross written premiums represent
commercial business which was ceded 100% effective January 1, 1996 to an
affiliate, Granite Reinsurance Company Ltd.
Net Premiums Written increased in the third quarter and year-to-date for 1997 as
compared to 1996 due to the growth in Gross Premiums Written offset by quota
share reinsurance.
In 1997, the Company ceded 15,716,000 and 47,420,000 of nonstandard automobile
premiums during the third quarter and year-to-date as part of a 20% quota share
treaty instituted January 1, 1997. No such treaty was in effect during 1996. In
1997, the Company ceded 3,610,000 and 15,415,000 of crop hail premiums during
the third quarter and year-to-date as part of a 40% quota share treaty
instituted January 1, 1997. In 1996, crop hail premiums were ceded at a rate of
10%. The nonstandard automobile quota share reinsurance treaty was reduced to
10% effective October 1, 1997 following additional capital contributions to the
insurance companies from the proceeds of the Preferred Securities Offering.
Net Premiums Earned increased for the three and nine months ended September 30,
1997 as compared to the corresponding periods of the prior year, reflecting the
strong growth in Gross Written Premiums offset by the effects of the nonstandard
automobile and crop hail quota share treaties.
Fee income increased $2,590,846 and $9,320,157 for the three and nine months
ended September 30, 1997 as compared to the corresponding periods of the prior
year. Such increases were due to billing fee income on nonstandard automobile
business from an increase in 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.
Net investment income/Net realized gains and losses increased $6,043,837 and
$11,634,085 for the three and nine months ended September 30, 1997 as compared
to the corresponding periods of the prior year. Realized gains were particularly
strong in the third quarter on the strength of the equity markets and
corresponding sales of securities that had reached targeted pricing levels. Such
increases were also due to investment income from Superior and greater invested
assets.
The Loss and LAE Ratio for the nonstandard automobile segment was 73.5% and
76.0% for the three and nine months ended September 30, 1997 as compared to
70.0% and 71.7% for the corresponding periods in 1996. The Crop Hail Loss Ratio
in 1997 is 67.1% compared to 51.3% in 1996. The increase in the Loss and LAE
Ratio for the nonstandard automobile segment reflects the recent growth in
premium volume in an effort to increase market share and improve economics of
scale. The $5.3 million reserve adjustment in the second quarter increases the
nine-month Loss & LAE Ratio 2.8%. The increase was also due to increased
severity in certain coverages. The increase in the crop hail loss ratio is the
result of storm damage in the third quarter in certain eastern states.
-20-
<PAGE>
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 $19,087,445 and $52,951,577 or 24.9% and 24.1% of Net Premium
Earned for the three and nine months ended September 30, 1997 compared to
$15,198,508 and $31,954,450 or 21.2% and 21.7% of Net Premium Earned in the
corresponding periods of 1996. Such increase was due to a higher mix of
nonstandard automobile premiums in 1997 as compared to 1996. The Expense Ratio,
net of billing fees, for the nonstandard automobile segment improved to 22.6%
and 22.2% for the three and nine months ended September 30, 1997 as compared to
24.6% and 24.9% for the corresponding periods in 1996, due to technological and
operational efficiencies, and continued economies of scale.
Due to the accounting for the crop insurance segment, operating expenses for the
three and nine months ended September 30, 1997 includes a contribution to
earnings of $2,609,000 and $8,035,000, as compared to comparable amounts of
$1,741,000 and $6,114,000 for the corresponding periods in 1996. Such increase
was due to greater Buy-up Expense Reimbursement Payments and MPCI underwriting
gain due to increased premium volumes.
The nonstandard automobile quota share treaty reduced premiums earned, losses
and LAE incurred and policy acquisition and general administrative expenses by
$14,912,000, $9,943,000 and $4,596,000, and $30,724,000, $20,855,000, and
$9,101,000, respectively, for the three and nine months ending September 30,
1997, for a net pre-tax earnings reduction of $373,000 and $768,000 in the three
and nine months ending September 30, 1997. Reduction in expenses reflects ceding
commission income net of a deferred acquisition cost adjustment.
Amortization of intangibles includes goodwill from the acquisition of Superior,
additional goodwill from the acquisition of the minority interest position in
GGSH, debt or preferred security issuance costs and organizational costs. The
increase in the third quarter of 1997 reflects the effects of the Preferred
Securities Offering.
Interest expense primarily represents interest incurred since April 30, 1996 on
the GGS Senior Credit Facility. The GGS Senior Credit Facility was repaid with
the proceeds from the Preferred Securities Offering.
Income tax expense was 34.3% and 34.1% of pre-tax income for the three and nine
months ended September 30, 1997 as compared to 31.5% and 38.6% in 1996.
Distributions on Preferred Securities are calculated at a rate of 9.5% net of
income taxes & minority interest.
Financial Condition and Capital Reserves and Liquidity
The Company's total assets of $696,101,391 at September 30, 1997 increased
$314,759,619 from $ 381,341,772 as of December 31, 1996. The primary reasons for
this increase were an increase of $46,259,119 in cash and invested assets and
increases in receivables and reinsurance assets due to growth in premium volume
and premium due on installment sales, which generates billing fee income and
timing of crop operations and an increase in goodwill due to the acquisition of
the minority interest portion of GGSH. The increase in cash and invested assets
was due to the increase in cash flow from operations and proceeds from the
Preferred Securities Offering. The Company did not significantly change its
investment mix or philosophy in 1997.
Net cash provided by operating activities in 1997 aggregated $18,355,624
compared to $11,222,281 in 1996. This increase in funds provided was caused by
additional cash of $ 2,881,098 from net earnings adjusted for non-cash expenses
and realized gains or
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<PAGE>
losses, continued premium growth which results in increased cash flow as loss
payments lag receipt of premiums.
Net cash used in investing activities increased from $79,136,787 in 1996 to
$114,689,283 in 1997 reflecting investment of remaining proceeds from the
Preferred Securities Offering and cash flow from operations.
In 1997, financing activities provided cash of $96,310,732 compared to cash
provided of $76,440,628 in 1996, with funds in 1997 being primarily from the
Preferred Securities Offering while 1996 funds were provided from the financing
of the acquisition of Superior.
-22-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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
certain expenses. IGF alleges the FCIC wrongfully sought to
hold IGF responsible for these expenses. The FCIC
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. On October
27, 1997, IGF reached an agreement with the FCIC to settle
the case, with both parties dismissing all claims against
one another which were subject to the litigation. The FCIC
has agreed to pay IGF a lump sum payment of $60,000.
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
Form 8-K filed on August 26, 1997 regarding issuance of
Preferred Securities and acquisition of remaining 48%
minority interest in GGSH. Form 8-KA filed on October 3,
1997 regarding issuance of Preferred Securities and
acquisition of the remaining 48% minority interest in GGSH.
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 12, 1997 By: /s/ Alan G. Symons
Alan G. Symons
President
Dated: November 12, 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:
September 30, September 30,
1997 1996
TSE Trading
Activity
Volume Value Average Price
Period Covered # (US $) (US $) (US $)
January to
September, 1997 2,183,863 $64,075,401 $29.34 A $12.81
September 30, September 30,
1997 1996
Proceeds from Exercise of Warrants
and Options (US $) $3,551,952 $917,657
========== ========
Shares Repurchased - Treasury
Method 121,060 71,653
======= ======
Shares Outstanding - Weighted
Average 5,552,097 5,226,707
Add: Options and Warrants
Outstanding 733,148 485,452
Less: Treasury Method - Shares
Repurchased (121,060) (71,653)
--------- --------
Shares Outstanding for US GAAP
Purposes 6,164,185 5,640,506
--------- ---------
Net Earnings in Accordance with US
GAAP $11,464,792 $9,377,761
=========== ==========
Earnings Per Share - US GAAP
(Primary and Fully Diluted) $1.86 $1.66
===== =====
-24-
