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, 1998
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, 1998, there were 5,839,466 shares of Registrant's common stock
issued and outstanding exclusive of shares held by Registrant.
<PAGE>
Form 10-Q Index
For The Quarter Ended June 30, 1998
Page
Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Unaudited Consolidated Financial Statements:
Unaudited Consolidated Balance Sheets at
June 30, 1998 and December 31, 1997 ..............................3
Unaudited Consolidated Statements of Earnings for the
Three and Six Months Ended June 30, 1998 and 1997 ..............4-5
Unaudited Consolidated Statements of Shareholders'
Equity ...........................................................6
Unaudited Consolidated Statements of Changes in
Cash Resources for the Three and Six Months Ended
June 30, 1998 and 1997 ...........................................7
Condensed Notes to Unaudited Consolidated Financial
Statements .......................................................8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ..............................9
PART II OTHER INFORMATION ...............................................19
SIGNATURES ...............................................................20
INDEX TO EXHIBITS
Exhibit 11 - Computation of Per Share Earnings ............ .....21
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
GORAN CAPITAL INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(Canadian GAAP, stated in thousands of U.S. dollars)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
<S> <C> <C>
Cash and investments $271,079 $247,124
Accounts receivable:
Premiums receivable 239,482 89,762
Due from insurance companies 14,230 13,782
Due from associated companies -- 1,442
Accrued and other receivables 708 2,658
------- -------
TOTAL ACCOUNTS RECEIVABLE 254,420 107,644
Reinsurance recoverable on outstanding claims 106,809 94,424
Prepaid reinsurance premiums 111,526 36,607
Capital assets, net of accumulated depreciation 17,570 12,230
Deferred policy acquisition costs 18,727 11,849
Deferred income taxes 1,342 2,098
Intangibles 42,126 42,562
Other assets 7,506 6,310
------- -------
TOTAL ASSETS $831,105 $560,848
======= =======
LIABILITIES
Accounts Payable:
Due to insurance companies $156,054 $37,350
Accrued and other payables 26,356 27,266
------- -------
182,410 64,616
Outstanding claims 185,961 152,871
Unearned premiums 230,348 118,616
Bank loans 35 4,182
------- -------
598,754 340,285
------- -------
Minority interest:
Equity in net assets of subsidiaries 28,302 25,231
Preferred securities 135,000 135,000
------- -------
163,302 160,231
------- -------
SHAREHOLDERS' EQUITY
Capital stock 18,376 18,010
Contributed surplus 2,775 2,775
Retained earnings 48,131 39,839
Cumulative translation adjustment (233) (292)
------- -------
TOTAL SHAREHOLDERS' EQUITY 69,049 60,332
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $831,105 $560,848
======= =======
</TABLE>
See notes to consolidated financial statements
-3-
<PAGE>
GORAN CAPITAL INC.
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(Canadian GAAP, stated in thousands of U.S. dollars, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1998 1997
<S> <C> <C>
Gross premiums written $170,505 $147,445
Less ceded premiums (60,776) (63,711)
------- ------
Net premiums written 109,729 83,734
Change in net unearned premiums (10,111) (8,356)
------ ------
Net premiums earned 99,618 75,378
Fee income 4,901 5,753
Net investment income 3,720 3,603
Net realized capital gain 846 742
------- ------
Total Revenues 109,085 85,476
------- ------
Net claims incurred 71,187 59,343
General and administrative expenses 24,244 18,732
Interest expense 49 1,080
Amortization of intangibles 510 164
------- ------
Total expenses 95,990 79,319
------- ------
Earnings before undernoted items 13,095 6,157
Provision for income taxes 4,415 2,124
Distribution of preferred securities, net of tax 2,096 --
Minority interest 1,809 1,011
------- ------
Earnings from continuing operations 4,775 3,022
Loss from discontinued operations -- (286)
------- ------
Net Earnings $ 4,775 $ 2,736
======= ======
Earnings per share from continuing operations - basic $0.82 $0.54
==== ====
Earnings per share from continuing operations - fully diluted $0.78 $0.49
==== ====
Net earnings per share - basic $0.82 $0.49
==== ====
Net earnings per share - fully diluted $0.78 $0.44
==== ====
</TABLE>
See notes to consolidated financial statements
-4-
<PAGE>
GORAN CAPITAL INC.
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(Canadian GAAP, stated in thousands of U.S. dollars, except per share data)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
Gross premiums written $347,701 $275,359
Less ceded premiums (139,611) (124,835)
------- -------
Net premiums written 208,090 150,524
Change in net unearned premiums (36,587) (11,255)
------- -------
Net premiums earned 171,503 139,269
Fee income 11,390 10,791
Net investment income 6,896 6,885
Net realized capital gain 2,814 1,684
------- -------
Total Revenues 192,603 158,629
------- -------
Net claims incurred 126,489 104,514
General and administrative expenses 40,266 32,492
Interest expense 232 2,451
Amortization of intangibles 1,021 293
------- -------
Total expenses 168,008 139,750
------- -------
Earnings before undernoted items 24,595 18,879
Provision for income taxes 8,438 6,240
Distribution of preferred securities, net of tax 4,226 --
Minority interest 3,454 4,723
------- -------
Earnings from continuing operations 8,477 7,916
Loss from discontinued operations (185) (573)
------- -------
Net Earnings $ 8,292 $ 7,343
======= =======
Earnings per share from continuing operations - basic $1.46 $1.42
==== ====
Earnings per share from continuing operations - fully diluted $1.40 $1.36
==== ====
Net earnings per share - basic $1.42 $1.32
==== ====
Net earnings per share - fully diluted $1.37 $1.26
==== ====
</TABLE>
See notes to consolidated financial statements
-5-
<PAGE>
GORAN CAPITAL INC.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Canadian GAAP, stated in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Cumulative Retained Total
Common Contributed Translation Earnings Shareholders'
Stock Surplus Adjustment (Deficit) Equity
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $17,416 $2,775 $(334) $27,401 $47,258
Issuance of common shares 53 --- --- --- 53
Change in cumulative
translation adjustment --- --- 69 --- 69
Net earnings --- --- --- 7,343 7,343
------ ----- --- ------ ------
Balance at June 30, 1997 $17,469 $2,775 $(265) $34,744 $54,723
====== ===== === ====== ======
Balance at December 31, 1997 $18,010 $2,775 $(292) $39,839 $60,332
Issuance of common shares 366 --- --- --- 366
Change in cumulative
translation adjustment --- --- 59 --- 59
Net earnings --- --- --- 8,292 8,292
------ ----- --- ------ ------
Balance at June 30, 1998 $18,376 $2,775 $(233) $48,131 $69,049
====== ===== === ====== ======
</TABLE>
See notes to consolidated financial statements
-6-
<PAGE>
GORAN CAPITAL INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN CASH RESOURCES
(Canadian GAAP, stated in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES
Net earnings for the period $8,292 $7,343
Items not affecting cash resources:
Amortization and depreciation 2,434 1,353
Loss (gain) on disposal of investments (2,862) (1,783)
Minority interest in net income of consolidated subsidiary 3,454 4,723
Decrease (increase) in reinsurance recoverable on outstanding claims (12,385) (38,805)
Decrease (increase) in prepaid reinsurance premiums (74,919) (59,281)
Decrease (increase) in other assets 2,405 1,797
Decrease (increase) in deferred policy acquisition costs (6,878) (480)
Increase (decrease) in deferred income taxes 756 --
Increase (decrease) in unearned premiums 111,732 74,525
Increase (decrease) in outstanding losses 33,090 37,116
Decrease (increase) in accounts receivable (150,168) (102,260)
Increase (decrease) in accounts payable 117,794 101,558
------- -------
32,745 25,806
------- -------
FINANCING ACTIVITIES:
Increase (reduction) of borrowed funds (4,147) (2,728)
Net purchase (increase) of minority interest (1,111) 2,304
Increase (decrease) in contributed surplus -- 23
Issue of share capital 366 198
------- ------
(4,892) (203)
------- ------
INVESTING ACTIVITIES:
Net purchase of marketable securities (21,567) (12,534)
Net purchase of capital assets (6,545) (2,659)
Other -- (13)
------- -------
(28,112) (15,206)
------- -------
Change in cash resources during the period (259) 10,397
Cash resources, beginning of period 36,557 33,731
------ ------
Cash resources, end of period $36,298 $44,128
====== ======
</TABLE>
See notes to consolidated financial statements
-7-
<PAGE>
GORAN CAPITAL INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For The Three and Six Months Ended June 30, 1998
NOTES TO THE CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for fair presentation have
been included. Operating results for the interim periods are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1998. Interim financial statements should be read in
conjunction with the Company's annual audited 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 3. All material
intercompany amounts have been eliminated.
(2) On March 2, 1998, the Company announced that it had signed an agreement
with CNA to assume its multi-peril and crop hail operations. CNA wrote
approximately $110 million of multi-peril and crop hail insurance
business in 1997. The Company will reinsure 100% of all multi-peril and
crop hail premiums written by CNA during 1998 and cede a small portion
of the Company's total crop book of business (approximately 22% MPCI
and 15% crop hail) back to CNA. Starting in the year 2000, assuming no
event of change of control as defined in the agreement, the Company can
purchase the insurance premiums reinsured to CNA through a call
provision or CNA can require the Company to buy the insurance premiums
reinsured to CNA. Regardless of the method of takeout of CNA, CNA must
not compete in MPCI or crop hail for a period of time. There was no
purchase price. The formula for the buyout in the year 2000 is based on
a multiple of average pre-tax earnings that CNA received from
reinsuring the Company's book of business.
(3) On July 8, 1998, the Company acquired North American Crop Underwriters
(NACU) a Henning, Minnesota based managing general agency which focuses
exclusively on crop insurance. The acquisition price was $4 million
with $3 million paid at closing and $1 million due July 1, 2000 without
interest. This acquisition captures 100% of the MPCI underwriting gain
and fees on approximately $27 million of premiums. Prior to this
transaction, NACU received all fees and 50% of the underwriting gain
with the balance going to the Company through the CNA transaction.
-8-
<PAGE>
(4) UNITED STATES ACCOUNTING PRINCIPLES
These unaudited consolidated financial statements have been prepared in
accordance with CDN GAAP. The differences between CDN GAAP and US GAAP are as
follows:
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
<S> <C> <C>
Reported net earnings $8,292 $7,343
US/Canada GAAP differences:
Discounting on outstanding claims -- 37
----- -----
Revised net earnings $8,292 $7,380
===== =====
Earnings per share - basic $1.42 $1.33
==== ====
Earnings per share - fully diluted $1.37 $1.24
==== ====
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
Shareholders' equity in accordance with Canadian GAAP $69,049 $60,332
Add (deduct) effect of difference in accounting for:
Deferred income taxes 1,911 1,975
Outstanding claims (1,696) (1,765)
Minority interest portion (71) (70)
Receivables from sale of capital stock (321) (346)
Unrealized gain on investments* 2,700 1,336
------ ------
Shareholders' equity in accordance with US GAAP $71,572 $61,462
====== ======
</TABLE>
*Note: The increase in shareholders' equity attributable to the unrealized
gain of $2,700 and $1,336 at June 30, 1998 and December 31, 1997,
respectively, are net of deferred taxes of $2,147 and $1,005 and
related minority interest of $1,291 and $658.
-9-
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY
The Company underwrites and markets nonstandard private passenger automobile
insurance and crop insurance.
Nonstandard Automobile Insurance Operations
The Company 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.
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. 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.
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 925 independent agencies in 42 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
-10-
<PAGE>
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
1998 and 1997, the Buy-Up Expense Reimbursement Payment has been set at 27% and
29%, respectively, of the MPCI Premium. For generally accepted account
principles income statement purposes, the Buy-Up Expense Reimbursement Payment
is treated as a contribution to income and reflected as an offset against policy
acquisition and general and administrative expenses. The CAT LAE Reimbursement
Payment and the MPCI Excess LAE Reimbursement Payment are, for income statement
purposes, recorded as an offset against LAE, up to the actual amount of LAE
incurred by the Company in respect of such policies, and the remainder of the
payment, if any, is recorded as Other Income.
In June 1998, the United States Congress passed legislation which provided
permanent funding for the crop insurance industry. However, beginning with the
1999 crop year, the Buy-Up Expense Reimbursement Payment was reduced to 24.5%,
the CAT LAE Reimbursement Payment was reduced to 11% and the $50 CAT coverage
fee will no longer go to the insurance companies.
The Company expects to more than offset these reductions through growth in fee
income from non-federally subsidized programs such as AgPI(R) and GEO Ag Plus(R)
initiated in 1998. The Company has also been working to reduce its internal
costs including agent's commissions. While the Company fully believes it can
more than offset these reductions, there is no assurance the Company will be
successful in its efforts or that further reductions in federal reimbursements
will not continue to occur.
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.
-11-
<PAGE>
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.
AgPI(R) protects businesses that depend upon a steady flow of a crop (or crops)
to stay in business. This protection is available to those involved in
agribusiness who are a step beyond the farm gate, such as elevator operators,
custom harvesters, cotton gins and businesses that are dependent upon a single
supplier of products, (i.e., popping corn).
These businesses have been able to buy normal business interruption insurance to
protect against on-site calamities such as a fire, wind storm or tornado. But
until now, they have been totally unprotected by the insurance industry if they
incorporate a production shortfall in their trade area which limited their
ability to bring raw materials to their operation. AgPI(R) allows the
agricultural business to protect against a disruption in the flow of the raw
materials it depends on. AgPI(R) was formally introduced at the beginning of the
1998 crop year.
Geo AgPLUS(TM) provides to the farmer the soil sampling results combined with
fertility maps and the software that is necessary to run their precision farming
program. Grid soil sampling, when combined with precision farming, allows the
farmer to apply just the right amount of fertilization, thus balancing the soil
for a maximum crop yield. Precision farming increases the yield to the farmer,
reduces the cost of unnecessary fertilization and enhances the environment by
reducing overflows of fertilization into the ecosystem. Geo AgPLUS(TM) is an IGF
Insurance Company trademarked precision farming division that is now marketing
its fee based products to the farmer.
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 reinsurers. 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 various layers of stop-loss
reinsurance.
Certain other conditions of the Company's crop business may affect comparisons
of the Company's results and operating ratios with those 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 the
applicable rate 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
-12-
<PAGE>
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.
Results of Operations
For the three and six months ended June 30, 1998, the Company recorded net
earnings of $4,775,000 and $8,292,000 or $0.82 and $1.42 per share (basic). This
is approximately a 74.5% and 12.9% increase from 1997 comparable amounts of
$2,736,000 and $7,343,000 or $0.49 and $1.32 per share (basic).
Increased earnings reflect improved results from the nonstandard automobile
division due to improvements in both the loss and expense ratios. Prior year
results in the second quarter also included a one-time charge to earnings of
$5,300,000 for loss reserves. Crop results for the second quarter of 1998 were
up slightly over 1997 while year-to-date results for this division are virtually
flat with the prior year. This is due to volume gains offset by higher
commission expense, lower reimbursements and integration costs of the CNA
transaction.
-13-
<PAGE>
<TABLE>
<CAPTION>
For the three months
ended June 30,
1998 1997
<S> <C> <C>
NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS:
Gross premiums written $79,530 $90,481
====== ======
Net premiums written $69,154 $74,255
====== ======
Net premiums earned $70,498 $65,139
Fee income 4,553 4,305
Net investment income 3,133 2,756
Net realized gain 673 742
------ ------
TOTAL REVENUES 78,857 72,942
------ ------
Losses and loss adjustment expenses 53,502 53,756
Policy acquisition and general and administrative expenses 18,681 18,368
Interest and amortization of intangibles -- --
------ ------
TOTAL EXPENSES 72,183 72,124
------ ------
Earnings before income taxes $ 6,674 $ 818
====== ======
GAAP RATIOS (Nonstandard Automobile Only):
Loss and LAE Ratio 75.9% 82.5%
Expense ratio, net of billing fees 20.0 21.6
---- ----
Combined ratio 95.9% 104.1%
==== =====
CROP INSURANCE OPERATIONS:
Gross premiums written(2) $92,020 $56,647
====== ======
Net premiums written $35,560 $9,479
====== =====
Net premiums earned $28,460 $7,758
Fee income 350 1,448
Net investment income 112 43
Net realized capital gain 170 --
------ -----
TOTAL REVENUES 29,092 9,249
------ -----
Losses and loss adjustment expenses 18,679 4,269
Policy acquisition and general and administrative expenses(1) 3,897 (1,260)
Interest expense 50 13
------ -----
TOTAL EXPENSES 22,626 3,022
------ -----
Earnings before income taxes $ 6,466 $6,227
====== =====
</TABLE>
(1) Negative crop expenses are caused by inclusion of MPCI expense reimbursement
and underwriting gain. (2) Includes premiums assumed from CNA in accordance with
the Strategic Alliance Agreement.
-14-
<PAGE>
<TABLE>
<CAPTION>
For the six months
ended June 30,
1998 1997
<S> <C> <C>
NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS:
Gross premiums written $169,506 $165,547
======= =======
Net premiums written $151,421 $133,843
======= =======
Net premiums earned $138,821 $128,244
Fee income 8,708 7,204
Net investment income 5,934 5,094
Net realized gain 2,641 1,684
------- -------
TOTAL REVENUES 156,104 142,226
------- -------
Losses and loss adjustment expenses 106,648 99,024
Policy acquisition and general and administrative expenses 36,804 35,492
Interest and amortization of intangibles -- --
------- -------
TOTAL EXPENSES 143,452 134,516
------- -------
Earnings before income taxes $ 12,652 $ 7,710
======= =======
GAAP RATIOS (Nonstandard Automobile Only):
Loss and LAE Ratio 76.8% 77.2%
Expense ratio, net of billing fees 20.2 22.1
---- ----
Combined ratio 97.0% 99.3%
==== ====
CROP INSURANCE OPERATIONS:
Gross premiums written(2) $178,195 $108,356
======= =======
Net premiums written $ 52,854 $ 16,680
======= =======
Net premiums earned $ 28,621 $ 7,768
Fee income 2,682 3,587
Net investment income 165 92
Net realized gain 170 --
------- ------
TOTAL REVENUES 31,638 11,447
------- ------
Losses and loss adjustment expenses 18,738 4,269
Policy acquisition and general and administrative expenses(1) 250 (6,026)
Interest expense 233 24
------- ------
TOTAL EXPENSES 19,221 (1,733)
------- ------
Earnings before income taxes $ 12,417 $13,180
======= ======
</TABLE>
(1) Negative crop expenses are caused by inclusion of MPCI expense reimbursement
and underwriting gain. (2) Includes premiums assumed from CNA in accordance with
the Strategic Alliance Agreement.
Consolidated gross premiums written increased 15.6% and 26.3% for the three and
six months ended June 30, 1998 compared to comparable periods in 1997 due to
growth in both the nonstandard auto and crop segments.
-15-
<PAGE>
Gross premiums written for the nonstandard auto segment decreased 12.1% for the
three months ended June 30, 1998 and increased 2.4% for the six months ended
June 30, 1998 compared to comparable periods in 1997. The decrease in the second
quarter primarily reflects certain program changes and rate increases taken in
Florida to improve loss experience.
Gross premiums written for the crop segment increased 62.4% and 64.5% for the
three and six months ended June 30, 1998 compared to comparable periods in 1997.
Such increase was due to the transaction with CNA, internal growth and new
products such as AgPI. Premium increases were noted in all lines of crop
insurance. Crop premiums for the three and six months ended June 30 are as
follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
CAT imputed $16,319 $13,031 $32,638 $26,063
MPCI 46,654 39,239 107,297 79,016
Crop hail and named perils 37,873 17,408 63,365 29,340
AgPI 7,493 -- 7,533 --
------- ------ ------- -------
108,339 69,678 210,833 134,419
Less: CAT imputed (16,319) (13,031) (32,638) (26,063)
------- ------ ------- -------
$92,020 $56,647 $178,195 $108,356
====== ====== ======= =======
</TABLE>
MPCI premiums are considered to be 100% ceded to the federal government for
accounting purposes. Quota share cession rates for other lines of insurance for
the three and six months ended June 30 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Nonstandard automobile 10% 20%
Crop hail 25% 40%
Named peril 50% 50%
</TABLE>
Fee income decreased 14.8% for the three months ended June 30, 1998 and
increased 5.6% for the six months ended June 30, 1998 as compared to the
corresponding periods of the prior year. The decrease in the second quarter of
1998 results from the Company's practice of offsetting CAT fees with crop LAE
costs. Such offset was greater in 1998. However, overall fees continue to
increase. Such increase was due to greater installment billings on nonstandard
automobile policies, which averaged 5.14% and 4.35% of gross written premiums in
1998 and 1997, respectively, and additional CAT fees on crop business due to
growth in volume.
The loss ratio for the nonstandard automobile segment for the three and six
months ended June 30, 1998 was 75.9% and 76.8% as compared to 82.5% and 77.2% in
1997. The loss ratio for the nonstandard automobile segment for the three and
six months ended June 30, 1997, excluding the $5.3 million reserve adjustment in
the second quarter of 1997 was 74.4% and 73.1%, respectively. The increase in
the loss ratio in 1998 from 1997, excluding the effects of the reserve
adjustment in 1997, reflects increased severity costs and the effects of certain
pending rate increases. However, this loss ratio has improved from the first
quarter of 1998 which was 77.8%, due to the effects of recent rate increases.
The crop hail loss ratio in 1998 was 53.5% compared to 54.2% in 1997.
-16-
<PAGE>
Policy acquisition and general and administrative expenses have increased as a
result of the increased volume of business produced by the Company. Policy
acquisition and general and administrative expenses rose to $24,244,000 and
$40,266,000 or 24.3% and 23.5% of net premium earned for the three and six
months ended June 30, 1998 compared to $18,732,000 and $32,492,000 or 24.9% and
23.3% of net premium earned in the corresponding periods of 1997. The expense
ratio, for the nonstandard segment improved to 20.0% and 20.2% for the second
quarter and year-to-date in 1998 as compared to 21.6% and 22.1% in 1997, due
primarily to reduced expenses from the Indianapolis operations (Pafco General
Insurance Company) resulting from lower commissions on multi-tiered products and
other efficiency implementations as well as higher billing fee rates.
Crop segment expenses include agent commissions, stop loss reinsurance costs and
operating expenses which are offset by MPCI Expense Reimbursements and MPCI
Underwriting Gain. The increase in expenses results primarily from a 2% lower
MPCI Expense Reimbursement for 1998 versus 1997, higher commissions due to
competition and integration costs of the CNA transaction offset by a higher MPCI
Underwriting Gain due to volume. This gain is an estimate until later in the
year when crops are harvested and losses are known. The estimated gain ratio in
1998 was consistent with 1997 at 10%.
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 1998 reflects the effects of the Preferred Securities Offering in
late 1997.
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 33.7% and 34.3% of pre-tax income for the three and six
months ended June 30, 1998 compared to 34.5% and 33.1% in 1997.
Distributions on Preferred Securities are calculated at a rate of 9.5% net of
federal income taxes.
Operations of Granite Re continue to show solid improvement with pre-tax
earnings of $1.8 million in 1998 compared to $1.1 million in 1997.
-17-
<PAGE>
Financial Condition
The Company's total assets of $831,105,000 at June 30, 1998 increased
$270,257,000 from $560,848,000 as of December 31, 1997. The primary reasons for
this increase was an increase in cash and invested assets due to continued
growth in premiums, normal receipt of crop funds from the FCIC, increases in
receivables from insureds and reinsurers due to continued growth in volume and
growth in prepaid reinsurance in crop operations due to the accounting for MPCI
with the FCIC.
Year-to-date net cash provided by operating activities improved to $32,745,000
in 1998 compared to $25,806,000 in 1997 due to continued premium growth and
normal receipt of crop funds from the FCIC. This additional cash flow was used
to increase invested assets. Financing activities included normal activities on
the Company's line of credit for crop operations.
-18-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's insurance subsidiaries are parties to litigation
arising in the ordinary course of business. The Company believes that the
ultimate resolution of these lawsuits will not have a material adverse effect on
its financial condition or results of operations. The Company, through its
claims reserves, reserves for both the amount of estimated damages attributable
to these lawsuits and the estimated costs of litigation.
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(a). EXHIBITS
(11) Statement Regarding Computation of Per Share Earnings
ITEM 6(b). REPORTS ON FORM 8-K
None
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: August 12, 1998 By:______________________
Alan G. Symons
President
Dated: August 12, 1998 By:______________________
Gary P. Hutchcraft
Vice President, Treasurer and
Chief Financial Officer
-20-
<PAGE>
GORAN CAPITAL INC. - Consolidated Exhibit 11.01
Analysis of Earnings Per Share
<TABLE>
<CAPTION>
Six Six
Months Ended Months Ended
June 30, 1998 June 30, 1997
<S> <C> <C> <C>
Average Price (US $) $27.88 (A) $24.07
Proceeds from Exercise of Warrants and Options
(US $) $15,360,402 (B) $3,562,823
========== =========
Shares Repurchased - Treasury Method 550,947 (B)/(A) 148,026
======= =======
Shares Outstanding - Weighted Average 5,819,049 5,552,097
Add: Options and Warrants Outstanding 802,304 544,692
Less: Treasury Method - Shares Repurchased (550,947) (148,026)
------- -------
Shares Outstanding for US GAAP Purposes 6,070,406 (C) 5,948,763
========= =========
Net Earnings in Accordance with US GAAP $8,292,000 (D) $7,380,000
========= =========
Earnings Per Share - US GAAP - Basic $1.42 $1.33
==== ====
Earnings Per Share - US GAAP - Fully Diluted $1.37 (D)/(C) $1.24
==== ====
</TABLE>
-21-
<PAGE>
