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 June 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 June 30, 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
June 30, 1997
Page
Number
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements..................................... 3
Consolidated Financial Statements:
Consolidated Balance Sheets at June 30, 1997 and
December 31, 1996........................................ 4
Consolidated Statements of Earnings for the Three
and Six Months Ended June 30, 1997 and 1996.............. 5
Consolidated Statements of Changes in Cash Resources
for the Six Months Ended June 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...................... 13
PART 2 OTHER INFORMATION........................................ 22
SIGNATURES....................................................... 22
<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 six months ended June 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)
June 30, December 31,
1997 1996
ASSETS
Cash and Investments .................. $ 229,616,714 $ 206,670,797
Accounts Receivable
Premiums Receivable ................. 177,407,073 63,873,697
Due From Insurance Companies ........ 20,617,795 33,905,128
Due From Associated Companies ....... 107,718 140,423
Accrued and Other Receivables ....... 4,533,731 3,329,893
------------- -------------
202,666,317 101,249,141
Reinsurance recoverable on outstanding
claims ................................ 71,642,210 33,112,946
Prepaid reinsurance premiums .......... 74,139,403 14,983,097
Capital Assets ........................ 6,258,199 4,801,086
Other Assets .......................... 3,493,023 5,335,477
Deferred Policy Acquisition Costs ..... 14,223,788 13,859,492
Goodwill .............................. 1,455,077 1,329,736
------------- -------------
Total Assets .......................... $ 603,494,731 $ 381,341,772
============= =============
LIABILITIES
Accounts Payable
Due to Insurance Companies .......... $ 104,033,136 $ 5,754,831
Accrued and Other Payables .......... 24,107,297 21,050,919
------------- -------------
128,140,433 26,805,751
Outstanding Claims .................... 163,102,998 127,044,804
Unearned Premiums ..................... 164,972,765 91,206,974
Bank Loans ............................ 44,872,000 48,000,000
Minority Interest in Subsidiary ....... 47,683,878 41,026,354
------------- -------------
Total Liabilities ..................... 548,772,074 334,083,883
============= =============
SHAREHOLDERS' EQUITY
Capital Stock ......................... 17,469,388 17,416,431
Contributed Surplus ................... 2,774,606 2,774,606
Retained Earnings ..................... 34,743,748 27,401,236
Cumulative Translation Adjustment ..... (265,084) (334,384)
------------- -------------
Total Shareholders' Equity ............ $ 54,722,658 $ 47,257,890
------------- -------------
Total Liabilities and Shareholders' ... $ 603,494,731 $ 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
June 30, June 30,
1997 1996
Gross Premiums Written $149,834,571 $109,859,879
============ ============
Net Premiums Earned $77,126,355 $51,072,513
Net Investment and Other Income 10,108,734 5,599,771
---------- ---------
Total Revenues 87,235,089 56,672,285
---------- ----------
Net Claims Incurred 60,858,371 39,951,261
General and Administrative Expenses 19,435,633 10,763,139
Interest Expense 1,080,411 1,401,585
--------- ---------
Total Expenses 81,374,415 52,115,985
---------- ----------
Income Before Undernoted Items 5,860,674 4,556,300
Provision for Income Taxes 2,114,072 978,351
Minority Interest 1,010,984 398,376
--------- -------
Net Earnings $2,735,618 $3,179,573
========== =========
Earnings Per Share - Basic $ 0.49 $ 0.61
====== ======
Earning Per Share - Fully Diluted $ 0.44 $ 0.56
====== ======
See Notes to Consolidated Financial Statements
-5-
<PAGE>
GORAN CAPITAL INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Canadian GAAP, stated in U.S. Dollars)
For the Six Months Ending
June 30, June 30,
1997 1996
Gross Premiums Written $280,138,810 $151,281,496
============ ============
Net Premiums Earned $142,765,330 $75,590,824
Net Investment and Other Income 19,382,580 7,063,020
---------- ---------
Total Revenues 162,147,910 82,653,844
----------- ----------
Net Claims Incurred 107,544,390 56,548,363
General and Administrative Expenses 33,864,132 16,755,942
Interest Expense 2,451,411 1,738,644
--------- ---------
Total Expenses 143,859,933 75,042,949
----------- ----------
Income Before Undernoted Items 18,287,977 7,610,895
Provision for Income Taxes 6,222,481 1,829,421
Minority Interest 4,722,984 398,376
--------- -------
Net Earnings $7,342,512 $5,383,098
========== ==========
Earnings Per Share - Basic $1.32 $1.04
===== =====
Earnings Per Share - Fully Diluted $1.26 $0.97
===== =====
Weighted Average Shares Outstanding:
Primary 5,552,097 5,172,105
========= =========
Fully Diluted 6,096,789 5,674,307
========= =========
See Notes to Consolidated Financial Statements
-6-
<PAGE>
GORAN CAPITAL INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
CASH RESOURCES FOR THE SIX MONTHS ENDING
(Canadian GAAP, stated in U.S. Dollars)
June 30, 1997 June 30, 1996
CASH PROVIDED BY OPERATING ACTIVITIES
Net Earnings For The Period 7,342,512 5,383,098
Items Not Affecting Cash Resources:
Amortization 1,352,741 155,152
Loss (Gain) on Disposal of Investments (1,783,346) (2,208,002)
Minority Interest in Net Income of 4,722,984 398,376
Consolidated Subsidiary
Net changes in operating assets &
liabilities:
Decrease (Increase) in Reinsurance (38,804,985) 17,918,189
Recoverable on Outstanding Claims
Decrease (Increase) in Prepaid Reinsurance (59,281,065) (36,161,069)
Premiums
Decrease (Increase) in Other Assets 1,798,027 (2,038,449)
Decrease (Increase) in Deferred Policy (479,700) 353,369
Acquisition Costs
Decrease (Increase) in Deferred Income
Taxes -- 36,520
Increase (Decrease) in Unearned Premiums 74,525,244 44,036,257
Increase (Decrease) in Outstanding Losses 37,116,057 (12,615,119)
Decrease (Increase) in Accounts Receivable (102,260,248) (8,875,820)
Increase (Decrease) in Accounts Payable 101,557,886 (640,589)
----------- ---------
Net Cash provided by Operations 25,806,106 5,741,915
---------- ---------
INVESTING ACTIVITIES:
Net Purchase of Marketable Securities (12,533,845) (12,895,528)
Acquisition of Subsidiary -- (66,389,000)
Net Purchase of Capital Assets (2,658,641) (536,098)
Other (13,536) (51,897)
-------- --------
Net Cash Used by Investing Activities (15,206,022) (79,872,523)
------------ ------------
FINANCING ACTIVITIES:
Increase (Reduction) of Borrowed Funds (2,728,319) 49,955,554
Increase (Decrease) in Minority Interest 2,304,000 21,200,670
Increase (Decrease) in Contributed Surplus 23,103 --
Issue of Share Capital 197,978 400,384
------- -------
Net Cash Provided by Financing Activities (203,273) 71,556,608
----------
Change in Cash Resources During the Period 10,396,846 (2,574,000)
Cash Resources, Beginning of Period 33,730,582 10,613,027
---------- ----------
Cash Resources, End of Period $44,127,428 $8,039,027
=========== ==========
Cash Resources are Comprised of:
Cash $18,868,870 $77,070
Short-Term Investments 25,258,558 7,961,957
---------- ---------
Sub-total $44,127,428 $8,039,027
=========== ==========
See Notes to Consolidated Financial Statements
-7-
<PAGE>
<TABLE>
GORAN CAPITAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Canadian GAAP, stated in U.S. Dollars)
<CAPTION>
Common Contributed Cumulative Retained Total
Stock Surplus Translation Earnings Stockholders'
Adjustment (Deficit) Equity
<S> <C> <C> <C> <C> <C>
Balance at 16,874,923 -- (357,777) (3,895,014) 12,622,132
December 31, 1995
Issuance of
common shares 352,315 -- -- -- 352,315
Change in
cumulative
translation
adjustment -- -- 22,800 -- 22,800
Net Earnings -- -- -- 5,383,098 5,383,098
-- -- -- --------- ---------
Balance at June 17,227,238 -- (334,977) 1,488,084 18,380,345
30, 1996
Issuance of
common shares 189,193 -- -- -- 189,193
Change in
contributed
surplus -- 2,774,606 -- -- 2,774,606
Change in
cumulative
transaction
adjustment -- -- 594 594
Net earnings -- -- -- 25,913,152 25,913,152
-- -- -- ---------- ----------
Balance at 17,416,431 2,774,606 (334,383) 27,401,236 47,257,890
December 31, 1996
Issuance of
common shares 52,957 -- -- -- 52,957
Change in
contributed
surplus -- -- -- -- --
-- -- --
Change in
cumulative
translation
adjustment -- -- 69,299 -- 69,299
Net earnings -- -- -- 7,342,512 7,342,512
-- -- -- --------- ---------
Balance at June $17,469,388 $2,774,606 $(265,084) $34,743,748 $54,722,658
30, 1997 =========== ========== ========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
-8-
<PAGE>
GORAN CAPITAL INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For The Three and Six Months Ended June 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 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 - 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 on its MPCI 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 and
40% of its crop hail business and 50% of its crop hail business under certain
quota share arrangements. Granite Reinsurance Company Ltd. is a participant in
the 20% quota Share treaty, receiving 10% of the ceded nonstandard automobile
business.
The effects of reinsurance are as follows:
-9-
<PAGE>
NOTE 3
GORAN CAPITAL INC.
Analysis of Effects of Reinsurance
(Canadian GAAP, stated in U.S. Dollars)
For The Three Months Ended
June 30, June 30,
1997 1996
Premiums Written
Gross $149,834,571 $109,859,879
Ceded (63,704,812) (52,095,108)
------------ ------------
Net $ 86,129,759 $ 57,764,771
============ ============
Premiums Earned
Gross $ 85,025,315 $ 95,350,334
Ceded (7,898,960) (44,277,821)
----------- ------------
Net $ 77,126,355 $ 51,072,513
============ ============
Claims Incurred
Gross $ 97,040,081 $ 49,368,258
Ceded (36,181,709) (9,416,997)
------------ -----------
Net $ 60,858,371 $ 39,951,261
============ ============
For the Six Months Ended
June 30, June 30,
1997 1996
Premiums Written
Gross $280,138,810 $151,281,496
Ceded (122,756,815) (68,177,443)
------------- -------------
Net $157,381,995 $ 83,104,053
============= =============
Premiums Earned
Gross $212,362,290 $143,302,477
Ceded ( 69,596,960) ( 67,711,653)
------------- -------------
Net $142,765,330 $ 75,590,824
============ =============
Claims Incurred
Gross $158,797,710 $ 78,437,241
Ceded ( 51,253,320) (21,888,877)
------------- -------------
Net $107,544,390 $ 56,548,363
============ =============
June 30, December 31,
1997 1996
Unearned Premiums
Gross $164,972,765 $ 91,206,974
Ceded ( 74,139,403) ( 14,983,097)
------------ ------------
Net $ 90,883,362 $ 76,223,877
============ ============
Outstanding Claims
Gross $163,102,998 $127,044,804
Ceded ( 71,642,210) ( 33,112,946)
------------ ------------
Net $ 91,460,788 $ 93,931,858
============ ============
-10-
<PAGE>
NOTE 4 - CAPITAL STOCK
For the three and six months ended June 30, 1997, 625 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
June 30, June 30,
1997 1996
Reported Net Earnings $ 2,735,618 $ 3,179,573
US/Canada GAAP Differences
Discounting on Outstanding Claims (385) --
Deferred Income Taxes -- (657,967)
-- ---------
Revised Net Earnings 2,734,233 2,521,606
========= =========
Earnings Per Share $0.46 $0.46
EPS - Before Extraordinary Items $0.46 $0.46
EPS - Fully Diluted $0.46 $0.46
Dividends Per Share $0.00 $0.00
Reported Total Assets 603,494,731 369,048,502
US/Canada GAAP Differences
Loans to Purchase Shares 808 (2,003)
Deferred Income Taxes 737,544 676,486
Outstanding Claims ceded -- --
Unearned Premiums ceded -- --
Unrealized gain (loss)on investments 2,439,548 (257,978)
--------- ---------
Revised Total Assets 606,672,631 369,465,006
=========== ===========
Reported Shareholders' Equity 54,722,658 18,376,016
US/Canada GAAP Differences
Deferred Income Taxes 737,544 676,486
Discounting on Claims (2,804) (4,720)
Loans to Purchase Shares 808 (2,003)
Unrealized Gain (Loss) on Investments 2,439,548 (257,978)
--------- ---------
Revised Shareholders' Equity 57,897,755 18,787,801
========== ==========
For The Six Months Ended
June 30, June 30,
1997 1996
Reported Net Earnings 7,342,512 5,383,098
US/Canada GAAP Differences
Discounting on Outstanding Claims 37,893 --
Deferred Income Taxes 0 (637,226)
- ---------
Revised Net Earnings 7,380,405 4,745,872
========= =========
Earnings Per Share $1.24 $0.85
EPS - Before Extraordinary Items $1.24 $0.85
EPS - Fully Diluted $1.24 $0.85
Dividends Per Share $0.00 $0.00
Reported Total Assets 603,494,731 369,048,502
US/Canada GAAP Differences
Loans to Purchase Shares (587,937) (561,683)
Deferred Income Taxes 2,898,544 2,176,047
Unrealized Gain (Loss) on Investments 2,316,548 (339,046)
--------- ---------
Revised Total Assets 608,121,886 370,323,820
=========== ===========
Reported Shareholders' Equity 54,722,658 18,376,016
US/Canada GAAP Differences
Deferred Income Taxes 2,898,544 2,176,047
Discounting on Claims (1,212,801) (1,323,497)
Loans to Purchase Shares (587,937) (561,683)
Unrealized Gain (Loss) on Investments 2,316,548 (339,046)
--------- ---------
Revised Shareholders' Equity 58,137,012 18,327,837
========== ==========
-11-
<PAGE>
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 Events
On August 12, 1997, SIG issued $ 135,000,000 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 SIG will ultimately file a
Form S-1 Registration Statement. 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 SIG expects to
contribute the balance, after expenses, of approximately $24 million to the
nonstandard automobile insurers. 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 will write-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 $34,000,000 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 due at 9.50%. The Preferred Securities may be redeemed in whole or in
part after 10 years.
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 six
months ended is as follows:
June 30, 1997
Unaudited
Revenues $ 163,147,910
Net earnings $ 6,339,522
Net earnings per common share $ 1.14
-12-
<PAGE>
The aforementioned proforma results do not include the effects of the write-off
of the debt issuance cost to be 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
GGS Management Holdings, Inc. ("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 farmers rely on credit
to
-13-
<PAGE>
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.
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 39 states.
MPCI is a government-sponsored program with accounting treatment which differs
in certain respects from the more traditional property and casualty insurance
lines. For income statement purposes under US generally accepted accounting
principles, gross premiums written consist of the aggregate amount of MPCI
premiums paid by farmers for buy-up coverage (MPCI coverage in excess of CAT
Coverage), and any related federal premium subsidies, but do not include MPCI
premium on CAT Coverage (the minimum available level of MPCI Coverage). By
contrast, net premiums written do not include any MPCI premiums or subsidies,
all of which are deemed to be ceded to the FCIC as a reinsurer. The Company's
profit or loss from its MPCI business is determined after the crop season ends
on the basis of a complex profit sharing formula established by law and the
FCIC. For generally accepted accounting principles income statement purposes,
any such profit or loss sharing earned or payable by the Company is treated as
an adjustment to commission expense and is included in policy acquisition and
general and administrative expenses.
The Company also receives from the FCIC (i) an expense reimbursement payment
equal to a percentage of gross premiums written for each Buy-Up Coverage policy
it writes ("Buy-Up Expense Reimbursement Payment"), (ii) an LAE reimbursement
payment equal to 13.0% of MPCI Imputed Premiums for each CAT Coverage policy it
writes (the "CAT LAE Reimbursement Payment"), and (iii) a small excess LAE
reimbursement payment of two hundredths of one percent (.02%) of MPCI Retention
(as defined herein) to the extent the Company's MPCI loss ratios on a per state
basis exceed certain levels (the "MPCI Excess LAE Reimbursement Payment"). For
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.
The Company is currently negotiating the 1998 Standard Reinsurance Agreement
with the FCIC. The current government proposal is to reduce the Buy-Up Expense
Reimbursement Payment to 27 to 28% and reduce the profit sharing arrangement.
The negotiations are on-going and the ultimate results cannot be determined at
this time. There can be no assurance that the Company will negotiate terms which
are favorable to the Company.
On June 9, 1997, the Secretary of Agriculture announced that the USDA would no
longer provide CAT coverage through USDA offices in any state for the 1998 crop
year. This is to be implemented by a transferring of CAT policies to the various
members of the crop insurance industry. At this time, the Company has been
preliminarily informed that it will receive approximately 17,000 policies that
were formerly written by USDA offices, although there can be no assurance that
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<PAGE>
the Company will receive this number of policies. Based on historical, per-
policy averages, the Company has preliminarily estimated that it will receive
approximately an additional $6 to $7 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.
In addition to crop hail insurance, the Company also sells a small volume of
insurance against crop damage from other specific named perils. These products
cover specific crops and are generally written on terms that are specific to the
kind of crop and farming practice involved and the amount of actuarial data
available. The Company plans to seek potential growth opportunities in this
niche market by developing basic policies on a diverse number of named crops
grown in a variety of geographic areas and to offer these policies primarily to
large producers through certain select agents.
In order to reduce the Company's potential loss exposure under the MPCI program,
in addition to reinsurance obtained from the FCIC, the Company purchases
stop-loss reinsurance from other private insurers. Such private reinsurance
would not eliminate the Company's potential liability in the event a reinsurer
was unable to pay or losses exceeded the limits of the stop-loss coverage. For
crop hail insurance, the Company has in effect quota share reinsurance and
various layers of stop-loss reinsurance. Based on a review of the reinsurers'
financial health and reputation in the insurance marketplace, the Company
believes that the reinsurers for its crop insurance business are financially
sound and that they therefore can meet their obligations to the Company under
the terms of the reinsurance treaties.
Certain other conditions of the Company's crop business may effect comparisons
of the Company's results and operating ratios with that of other insurers,
including: (i) the seasonal nature of the business whereby profits are generally
recognized predominantly in the second half of the year, (ii) the short-term
nature of crop business whereby losses are known within a short time period, and
(iii) the limited amount of investment income associated with crop business. In
addition, cash flows from the crop business differ from cash flows from certain
more traditional lines.
In 1996, the Company instituted a policy of recognizing (i) 35% of its
estimated MPCI gross premiums written for each of the first and second quarters,
20% for the third quarter and 10% for the fourth quarter, (ii) commission
expense at a rate of 16% of MPCI gross premiums written recognized and (iii)
Buy-Up Expense Reimbursement at 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
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<PAGE>
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 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 six months ended June 30, 1997, the Company recorded net
earnings of $2,735,618 and $7,342,512 or $0.49 and $1.32 per share,
respectively. This is approximately a 13.9% decrease and a 36.3% increase from
1996 comparable amounts of $3,179,573 and $5,383,098 or $0.61 and $1.04 per
share, respectively. The improved year-to-date earnings were attributable to
continued premium growth of the nonstandard automobile segment and continued
growth and profit in the crop segment. The improvement for the three months
ended relates to the growth and profitability of the crop segment. The crop
segment demonstrated enhanced profitability due to higher volume as well as
normal crop underwriting expectations. Reinsurance operations at Granite Re and
commercial insurance results from SIG-FL continue to meet expectations.
-16-
<PAGE>
For The Three Months Ended June 30,
1997 1996
Nonstandard-Automobile Insurance Operations:
Gross premiums written $90,481,000 $44,368,000
=========== ==========
Net premiums written $74,255,000 $41,922,000
=========== ==========
Net premiums earned 65,139,000 $39,218,000
Net investment income 2,756,000 1,039,000
Other income, principally billing fees 4,305,000 1,742,000
Net realized capital loss 742,000 264,000
------- -------
TOTAL REVENUES 72,942,000 42,263,000
---------- ----------
Losses and loss adjustment expenses 53,756,000 30,266,000
Policy acquisition and general and 18,368,000 10,600,000
----------
administrative expenses
Interest and amortization of intangibles 1,227,000 696,000
--------- -------
TOTAL EXPENSES 73,351,000 41,562,000
---------- ----------
Earnings (loss) before income taxes $ (409,000) $701,000
========== ========
GAAP Ratios(Nonstandard Automobile Only):
Loss and LAE Ratio 82.5% 77.2%
Expense ratio, net of billing fees 21.6% 22.6%
----- -----
Combined ratio 104.1% 99.8%
====== =====
Without the reserve increase of $5.3 million, the ratios would have been as
follows:
Loss and LAE Ratio 74.4% 77.2%
Expense ratio, net of billing fees 21.6% 22.6%
----- -----
Combined ratio 96.0% 99.8%
===== =====
Crop Insurance Operations:
Gross premiums written $56,647,000 $59,133,000
=========== ===========
Net premiums written $9,479,000 $14,690,000
========== ===========
Net premiums earned $7,758,000 $6,063,000
Net investment income 43,000 (66,000)
Other income 1,448,000 775,000
Net realized capital gain (loss) -- --
-- --
TOTAL REVENUES 9,294,000 6,772,000
--------- ---------
Losses and loss adjustment expenses 4,269,000 6,047,000
Policy acquisition and general and (1,260,000) (2,433,000)
administrative expenses
Interest expense 13,000 25,000
TOTAL EXPENSES 3,022,000 3,639,000
--------- ---------
Earnings before income taxes $6,227,000 $3,133,000
========== ==========
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<PAGE>
For The Six Months Ended June 30,
1997 1996
Nonstandard-Automobile Insurance Operations:
Gross premiums written $165,547,000 $62,290,000
============ ===========
Net premiums written $133,843,000 $62,089,000
============ ===========
Net premiums earned $128,244,000 $52,844,000
Net investment income 5,094,000 1,435,000
Other income, principally billing fees 7,204,000 2,333,000
Net realized capital gain (loss) 1,684,000 212,000
--------- -------
TOTAL REVENUES 142,226,000 56,824,000
----------- ----------
Losses and loss adjustment expenses 99,024,000 38,831,000
Policy acquisition and general and 35,492,000 15,774,000
administrative expenses
Interest and amortization of intangibles 2,711,000 696,000
--------- -------
TOTAL EXPENSES 137,227,000 55,301,000
----------- ----------
Earnings before income taxes $4,999,000 $1,523,000
========== ==========
GAAP Ratios
(Nonstandard Automobile Only):
Loss and LAE Ratio 77.2% 73.5%
Expense ratio, net of billing fees 22.1% 25.4%
----- -----
Combined ratio 99.3% 98.9%
===== =====
Without the reserve increase of $5.3 million, the ratios would have been as
follows:
Loss and LAE Ratio 73.1% 73.5%
Expense ratio, net of billing fees 22.1% 25.4%
----- -----
Combined ratio 95.2% 98.9%
===== =====
Crop Insurance Operations:
Gross premiums written $108,356,000 $80,537,000
============ ===========
Net premiums written $16,680,000 $14,953,000
=========== ===========
Net premiums earned $ 7,768,000 $ 6,222,000
Net investment income 92,000 96,000
Other income 3,587,000 1,148,000
---------
Net realized capital gain (loss) -- 16,000
-- ------
TOTAL REVENUES 11,447,000 7,482,000
---------- ---------
Losses and loss adjustment expenses 4,269,000 6,444,000
Policy acquisition and general and (6,026,000) (4,266,000)
administrative expenses
Interest expense 24,000 120,000
------ -------
TOTAL EXPENSES (1,733,000) 2,298,000
----------- ---------
Earnings before income taxes $13,180,000 $5,184,000
=========== ==========
Statutory Capital and Surplus:
Pafco $17,273,000 $14,872,000
=========== ==========
IGF $36,760,000 $11,559,000
=========== ==========
Superior $65,018,000 $48,036,000
=========== ==========
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<PAGE>
Consolidated gross premiums written increased 36.3% in the second quarter and
85.1% year-to-date in comparison to 1996 due to growth in both the nonstandard
auto and crop segments. Gross premiums written for the nonstandard auto segment
increased 104% in the second quarter and 166% year-to-date. Such increase was
due primarily due to gross premiums written from Superior of $71,921,000 and
$128,846,000 for the three and six months ended June 30, 1997, respectively, as
compared to $25,202,000 in 1996 subsequent to its acquisition on April 30, 1996.
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 and tougher uninsured motorist
laws in states such as California and Florida. The year-to-date increase 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 decreased
4.2% in the second quarter and increased 34.5% year-to-date. The year-to-date
increase was due to continued industry privatization and aggressive marketing
efforts, while the decrease in the second quarter is a reflection of timing of
processing of acreage reports. 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 second 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 $15,876,000 and $31,353,000 of nonstandard automobile
premiums during the second 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 $6,903,000 and $11,905,00 of crop hail premiums during
the second 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 is not expected
to continue in effect subsequent to the Offering of the Preferred Securities.
Net premiums earned increased for the three and six months ended June 30, 1997
as compared to the corresponding periods of the prior year, reflecting the
strong growth in written premiums offset by the effects of the nonstandard
automobile and crop hail quota share treaties.
Net investment income increased $3,427,917 and $6,470,305 for the three and six
months ended June 30, 1997 as compared to the corresponding periods of the prior
year. Such increases were due primarily to investment income from Superior and
greater invested assets. The second quarter of 1996 included a one-time gain
from the sale of investments of $2,200,000.
Other income increased $1,081,046 and $5,849,255 for the three and six months
ended June 30, 1997 as compared to the corresponding periods of the prior year.
Such increases were due to billing fee income on nonstandard automobile business
at Superior and 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 was 82.5% and 77.2% for
the three and six months ended June 30, 1997 as compared to 77.2% and 73.5% for
the corresponding periods in 1996. The Company, as part of management's actions
to reduce costs and combine operations of the nonstandard automobile division,
combined the claims management as well as the reserving philosophies of Superior
Insurance Company with Pafco General Insurance Company, the two nonstandard
automobile insurance companies in the Group. In order to align the different
reserving philosophies of its two subsidiaries, the Company adopted the more
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<PAGE>
conservative methodology for the combined business which required an increase of
reserves of $5.3 million. This adjustment increased the second quarter and
year-to-date 1997 loss ratio by 8.1% and 4.1%. While the Company believes those
actions were necessary, the establishment and monitoring of reserve levels are a
highly subjective process involving numerous estimates and assumptions.
Therefore, actual results may differ from current estimates. The crop hail loss
ratio in 1997 is 54.2% compared to 61.0% in 1996.
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 $19,435,633 and $33,864,132 or 25.2% and 23.7% of net premium
earned for the three and six months ended June 30, 1997 compared to $10,763,139
and $16,755,942 or 21.1% and 22.1% 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 21.6% and 22.1% for the three
and six months ended June 30, 1997 as compared to 22.6% and 25.4% for the
corresponding periods in 1996, due to technological and operational
efficiencies, economies of scale and tighter expense controls.
Due to the accounting for the crop insurance segment, operating expenses for the
three and six months ended June 30, 1997 includes a contribution to earnings of
$1,260,000 and $6,026,000, as compared to comparable amounts of $2,433,000 and
$4,266,000 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
$12,442,000, $8,631,000 and $3,501,000, and $15,812,000, $10,912,000 and
$4,505,000, respectively, for the three and six months ending June 30, 1997, for
a net pre-tax earnings reduction of $310,000 and $395,000 in the three and six
months ending June 30, 1997. Reduction in expenses reflects ceding commission
income net of a deferred acquisition cost adjustment.
Interest expense decreased $321,174 and increased $712,767 for the three and six
months ended June 30, 1997 as compared to the corresponding periods in the prior
year due primarily to interest incurred since April 30, 1996 on the GGS Senior
Credit Facility. The GGS Senior Credit Facility will be repaid with the proceeds
from SIG's Offering of the Preferred Securities.
Income tax expense was 36.1% and 34.0% of pre-tax income for the three and six
months ended June 30, 1997 as compared to 21.4% and 24.0% in 1996. The increase
was due to a higher proportion of earnings in U.S. operations and sales of tax
exempt securities in 1996 as part of the restructuring of the investment
portfolio.
Financial Condition and Capital Reserves and Liquidity
The Company's total assets of $603,494,731 at June 30, 1997 increased
$222,152,959 from $ 381,341,772 as of December 31, 1996. The primary reasons for
this increase were an increase of $22,945,917 in cash and invested assets and
increases in receivables and reinsurance assets due to growth in premium volume.
The increase in cash and invested assets was due to the increase in cash flow
from operations. The Company did not significantly change its investment mix or
philosophy in 1997.
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<PAGE>
Net cash provided by operating activities in 1997 aggregated 25,806,106 compared
to $5,741,915 in 1996. This increase in funds provided was caused by additional
cash of 7,906,267 from net earnings adjusted for non-cash expenses and realized
gains or losses, continued premium growth and the normal receipt of funds from
the FCIC in the first quarter on the crop insurance operations.
Net cash used in investing activities decreased from $79,872,523 in 1996 to
$15,206,222 in the second quarter of 1997 reflecting the acquisition of Superior
in 1996 offset in part by the application of funds received from operating
activities.
In 1997, financing activities utilized cash of $203,237 compared to cash
provided of $71,556,608 in 1996. The Company paid principal of $3,128,000 on its
term debt as scheduled. The contribution from the GS Funds of $2,304,000
represents a contribution to GGS Holdings that was ultimately contributed to the
insurance subsidiaries for surplus. The Company also contributed cash to
maintain its 52% share. The crop insurance segment had no need to borrow funds
on its revolver in 1997 due to the proceeds it received from the initial public
offering and continued growth and profitable operations.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
One of the Company's subsidiaries, IGF Insurance Company ("IGF"),
is the administrator of a run-off book of business. The Federal
Crop Insurance Corporation ("FCIC") has requested that IGF take
responsibility for the claims liabilities of these policies under
its administration. IGF has requested reimbursement of certain
expenses from the FCIC with respect to this run-off activity. IGF
instituted litigation against the FCIC on March 23, 1995 in the
United States District Court for the Southern District of Iowa
seeking $4.3 million (US) as reimbursement for these expenses. The
FCIC has counterclaimed for approximately $1.2 million (U.S.) in
claims payments for which the FCIC contends IGF is responsible for
as successor to the run-off book of business. While the final
result of this litigation cannot be predicted with certainty, the
Company believes that the final resolution of this lawsuit will
not have a material adverse effect on the financial condition of
the Company.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
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: August 12, 1997 By:__/s/ Alan G. Symons____
Alan G. Symons
President
Dated: August 12, 1997 By:__/s/ Gary P. Hutchcraft
Gary P. Hutchcraft
Vice President, Treasurer
and Chief Financial Officer
-22-
GORAN CAPITAL INC. - Consolidated Exhibit 11.01
Analysis of Earnings Per Share
As At:
June 30, June 30,
TSE Trading 1997 1996
Activity
Volume Value Average Price
Period Covered # (US $) (US $) (US $)
January to 911,654 $21,942,539 $24.07 (A) $11.78
June, 1997
June 30, June 30,
1997 1996
Proceeds from Exercise of Warrants $3,562,823 (B) $957,948
and Options (US $) ---------- --------
Shares Repurchased - Treasury 148,026 (B)/(A) 81,304
------- ------
Method
Shares Outstanding - Weighted 5,552,097 5,172,105
Average
Add: Options and Warrants 544,692 502,202
Outstanding
Less: Treasury Method - Shares (148,026) (81,304)
--------- --------
Repurchased
Shares Outstanding for US GAAP 5,948,763 (C) 5,593,003
--------- ---------
Purposes
Net Earnings in Accordance with US $7,380,404 (D) $4,745,872
========== ==========
GAAP
Earnings Per Share - US GAAP $1.24 (D)/(C) $0.85
===== =====
(Primary and Fully Diluted)
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<PAGE>