UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 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 March 31, 1998, there were 5,808,466 shares of Registrant's common stock
issued and outstanding exclusive of shares held by Registrant.
<PAGE>
Form 10-Q Index
For The Quarter Ended March 31, 1998
Page
Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Unaudited Consolidated Financial Statements:
Unaudited Consolidated Balance Sheets at
March 31, 1998 and December 31, 1997 ..........................3
Unaudited Consolidated Statements of Earnings
for the Three Months Ended March 31, 1998 and 1997 ............4
Unaudited Consolidated Statements of Shareholders'
Equity ........................................................5
Unaudited Consolidated Statements of Changes in
Cash Resources for the Three Months Ended
March 31, 1998 and 1997 .......................................6
Condensed Notes to Unaudited Consolidated Financial
Statements ....................................................7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ...........................9
PART II OTHER INFORMATION ............................................15
SIGNATURES ............................................................16
INDEX TO EXHIBITS
Exhibit 11 - Computation of Per Share Earnings ...............17
<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>
March 31, December 31,
ASSETS 1998 1997
<S> <C> <C>
Cash and investments $275,522 $247,124
Accounts receivable
Premiums receivable 162,569 89,762
Due from insurance companies 13,169 13,782
Due from associated companies 4,495 1,442
Accrued and other receivables 2,805 2,658
------- -------
TOTAL ACCOUNTS RECEIVABLE 183,038 107,644
Reinsurance recoverable on outstanding claims 67,980 94,424
Prepaid reinsurance premiums 96,882 36,607
Capital assets, net of accumulated depreciation 14,586 12,230
Deferred policy acquisition costs 18,376 11,849
Deferred income taxes 2,528 2,098
Intangibles 42,636 42,562
Other assets 6,826 6,310
------- -------
TOTAL ASSETS $708,374 $560,848
======= =======
LIABILITIES
Accounts Payable:
Due to insurance companies $98,384 $37,350
Accrued and other payables 30,388 27,266
------- -------
128,772 64,616
Outstanding claims 141,418 152,871
Unearned premiums 209,967 118,616
Bank loans 2,569 4,182
------- -------
482,726 340,285
------- -------
Minority interest:
Equity in net assets of subsidiaries 26,591 25,231
Preferred securities 135,000 135,000
------- -------
161,591 160,231
------- -------
SHAREHOLDERS' EQUITY
Capital stock 18,321 18,010
Contributed surplus 2,775 2,775
Retained earnings 43,356 39,839
Cumulative translation adjustment (395) (292)
--- ---
TOTAL SHAREHOLDERS' EQUITY 64,057 60,332
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $708,374 $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
March 31,
1998 1997
<S> <C> <C>
Gross premiums written $177,196 $127,914
Less ceded premiums 78,835 58,512
------ ------
Net premiums written 98,361 69,402
Change in net unearned premiums 26,476 5,511
------ ------
Net premiums earned 71,885 63,891
Fee income 6,489 5,038
Net investment income 3,176 3,283
Net realized capital gain 1,968 942
------ ------
Total Revenues 83,518 73,154
------ ------
Net claims incurred 55,302 45,171
General and administrative expenses 16,022 13,760
Interest expense 183 1,371
Amortization of intangibles 511 129
------ ------
Total expenses 72,018 60,431
------ ------
Earnings before undernoted items 11,500 12,723
Provision for income taxes 4,023 4,117
Distribution of preferred securities, net of tax 2,130 --
Minority interest 1,645 3,712
------ ------
Earnings from continuing operations 3,702 4,894
Loss from discontinued operations (185) (287)
--- ---
Net Earnings $ 3,517 $ 4,607
====== ======
Earnings per share from continuing operations - basic $0.64 $0.88
==== ====
Earnings per share from continuing operations - fully diluted $0.62 $0.87
==== ====
Net earnings per share - basic $0.61 $0.83
==== ====
Net earnings per share - fully diluted $0.59 $0.82
==== ====
See notes to consolidated financial statements
</TABLE>
-4-
<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 12 --- --- --- 12
Change in cumulative
translation adjustment --- --- 87 --- 87
Net earnings --- --- --- 4,607 4,607
--- --- --- ------ ------
Balance at March 31, 1997 $17,428 $2,775 $(247) $32,008 $51,964
====== ===== === ====== ======
Balance at December 31, 1997 $18,010 $2,775 $(292) $39,839 $60,332
Issuance of common shares 311 --- --- --- 311
Change in cumulative
translation adjustment --- --- (103) --- (103)
Net earnings --- --- --- 3,517 3,517
--- --- --- ------ ------
Balance at March 31, 1998 $18,321 $2,775 $(395) $43,356 $64,057
====== ===== === ====== ======
</TABLE>
See notes to consolidated financial statements
-5-
<PAGE>
GORAN CAPITAL INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN CASH RESOURCES
(Canadian GAAP, stated in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES
Net earnings for the period $3,517 $4,607
Items not affecting cash resources:
Amortization 1,167 518
Loss (gain) on disposal of investments (1,968) (958)
Minority interest in net income of consolidated subsidiary 1,645 3,712
Decrease (Increase) in reinsurance recoverable on outstanding claims 26,444 4,877
Decrease (increase) in prepaid reinsurance premiums (60,275) (35,659)
Decrease (increase) in other assets (516) 2,401
Decrease (increase) in deferred policy acquisition costs (6,527) (72)
Decrease (increase) in goodwill (74) (265)
Increase (decrease) in deferred income taxes (430) --
Increase (decrease) in unearned premiums 91,351 41,273
Increase (decrease) in outstanding losses (11,453) (16,629)
Decrease (increase) in accounts receivable (75,394) (36,113)
Increase (decrease) in accounts payable 64,156 51,347
------ ------
31,643 19,039
------ ------
FINANCING ACTIVITIES:
Increase (reduction) of borrowed funds (1,613) --
Increase (decrease) in minority interest 1,360 2,304
Issue of share capital 311 11
----- -----
58 2,315
----- -----
INVESTING ACTIVITIES:
Net purchase of marketable securities (10,329) (16,257)
Net purchase of capital assets (2,869) (1,025)
Other (350) 88
------- ------
(13,548) (17,194)
Effect of exchange rate changes on cash resources:
Change in cash resources during the period 18,153 4,160
Cash resources, beginning of period 36,557 33,730
------ ------
Cash resources, end of period $54,710 $37,890
====== ======
Cash resources are comprised of:
Cash $28,273 $20,630
Short-term investments 26,437 17,260
------ ------
$54,710 $37,890
====== ======
</TABLE>
See notes to consolidated financial statements
-6-
<PAGE>
GORAN CAPITAL INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For The Three Months Ended March 31, 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
2. 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.
-7-
<PAGE>
NOTE 2 - 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>
March 31, March 31,
1998 1997
<S> <C> <C>
Reported net earnings $3,517 $4,607
US/Canada GAAP differences:
Discounting on outstanding claims -- 38
----- -----
Revised net earnings $3,517 $4,645
===== =====
Earnings per share - basic $.61 $.84
Earnings per share - fully diluted $.58 $.78
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
<S> <C> <C>
Shareholders' equity in accordance with Canadian GAAP $64,057 $60,332
Add (deduct) effect of difference in accounting for:
Deferred income taxes 1,915 1,975
Outstanding claims (1,708) (1,765)
Minority interest portion (68) (70)
Receivables from sale of capital stock (334) (346)
Unrealized gain on investments* 2,836 1,336
------ ------
Shareholders' equity in accordance with US GAAP $66,698 $61,462
====== ======
</TABLE>
*Note: The increase in shareholders' equity attributable to the unrealized
gain of $2,836 and $1,336 at March 31, 1998 and December 31, 1997,
respectively, are net of deferred taxes of $1,480 and $1,005 and
related minority interest of $1,363 and $658.
-8-
<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
-9-
<PAGE>
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
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 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
-10-
<PAGE>
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 effect comparisons
of the Company's results and operating ratios with that of other insurers,
including: (i) the seasonal nature of the business whereby profits are generally
recognized predominantly in the second half of the year, (ii) the short-term
nature of crop business whereby losses are known within a short time period, and
(iii) the limited amount of investment income associated with crop business. In
addition, cash flows from the crop business differ from cash flows from certain
more traditional lines.
In 1996, the Company instituted a policy of recognizing (i) 35% of its estimated
MPCI gross premiums written for each of the first and second quarters, 20% for
the third quarter and 10% for the fourth quarter, (ii) commission expense at a
rate of 16% of MPCI gross premiums written recognized and (iii) Buy-Up Expense
Reimbursement at the applicable rate of MPCI gross premiums written recognized
along with normal operating expenses incurred in connection with premium
writings. In the third quarter, if a sufficient volume of policyholder acreage
reports have been received and processed by the Company, the Company's policy is
to recognize MPCI gross premiums written for the first nine months based on a
re-estimate which takes into account actual gross premiums processed. If an
insufficient volume of policies has been processed, the Company's policy is to
recognize in the third quarter 20% of its full year estimate of MPCI gross
premiums written, unless other circumstances require a different approach. The
remaining amount of gross premiums written is recognized in the fourth quarter,
when all amounts are reconciled. The Company also recognizes the MPCI
underwriting gain or loss during each quarter, reflecting the Company's best
estimate of the amount of such gain or loss to be recognized for the full year,
based on, among other things, historical results, plus a provision for adverse
developments. In the third and fourth quarters, a reconciliation amount is
recognized for the underwriting gain or loss based on final premium and loss
information.
Results of Operations
For the three months ended March 31, 1998, the Company recorded net earnings of
$3,517,000 or $0.61 per share (basic). This is approximately a 24% decrease from
1997 comparable amounts of $4,607,000 or $0.83 per share (basic). This resulted
from lower earnings in both the nonstandard automobile and crop segments.
However, earnings in the first quarter of 1998 were at consensus expectations.
Increases in gross premiums written and a lower nonstandard automobile expense
ratio were offset by a higher loss ratio. However, the first quarter 1998 loss
ratio improved from the fourth quarter of 1997 due to the effects of certain
rate increases. Lower crop results reflect increased commission rates due to
competition and a lower expense reimbursement from the federal government offset
by significant volume growth created internally and through the transaction with
CNA.
-11-
<PAGE>
<TABLE>
<CAPTION>
For the three months
ended March 31,
1998 1997
<S> <C> <C>
NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS:
Gross premiums written $89,976 $75,066
====== ======
Net premiums written $82,267 $59,588
====== ======
Net premiums earned $68,323 $63,105
Fee income 4,155 2,899
Net investment income 2,801 2,338
Net realized gain 1,968 942
------ ------
TOTAL REVENUES 77,247 69,284
------ ------
Losses and loss adjustment expenses 53,146 45,268
Policy acquisition and general and administrative expenses 18,123 17,124
------ ------
TOTAL EXPENSES 71,269 62,392
------ ------
Earnings before income taxes $5,978 $6,892
===== =====
GAAP RATIOS (Nonstandard Automobile Only):
Loss and LAE Ratio 77.8% 71.7%
Expense ratio, net of billing fees 20.4 22.5
---- ----
Combined ratio 98.2% 94.2%
==== ====
CROP INSURANCE OPERATIONS:
Gross premiums written $86,175 $51,709
====== ======
Net premiums written $17,294 $7,201
====== =====
Net premiums earned $161 $10
Fee income 2,332 2,139
Net investment income 53 49
----- -----
TOTAL REVENUES 2,546 2,198
----- -----
Losses and loss adjustment expenses 59 --
Policy acquisition and general and administrative expenses(1) (3,647) (4,766)
Interest expense 183 11
----- ------
TOTAL EXPENSES (3,405) (4,755)
----- -----
Earnings before income taxes $5,951 $6,953
===== =====
</TABLE>
(1) Negative crop expenses are caused by inclusion of MPCI expense reimbursement
and underwriting gain.
-12-
<PAGE>
Consolidated gross premiums written increased 39% due to growth in both the
nonstandard auto and crop segments.
Gross premiums written for the nonstandard auto segment increased 20%. Such
increase was due primarily to continued introduction of multi-tiered products,
introduction of two new states and increased market share penetration.
Gross premiums written for the crop segment increased 67%. Such increase was due
to the transactions with CNA and internal growth. Premium increases were noted
in all lines of crop insurance. Crop premiums for the three months ended March
31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CAT imputed $16,319 $13,032
MPCI 60,743 39,777
Crop hail and named perils 25,431 11,932
------ ------
102,493 64,741
Less: CAT imputed (16,319) (13,032)
------ ------
$86,174 $51,709
====== ======
</TABLE>
Remaining gross written premiums represent commercial business which is ceded
100% to another subsidiary, Granite Reinsurance Company Ltd.
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 months ended March 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Nonstandard automobile 10% 20%
Crop hail 30% 40%
Named peril 50% 50%
</TABLE>
Fee income increased 28.8% for the three months ended March 31, 1998 as compared
to the corresponding period of the prior year. Such increase was due to greater
installment billings on nonstandard automobile policies, which averaged 4.62%
and 3.86% of gross written premiums in 1998 and 1997, respectively, and
additional CAT fees on crop business due to growth in volume.
Net investment income decreased 3.3% for the three months ended March 31, 1998
as compared to the corresponding period of the prior year.
The loss ratio for the nonstandard automobile segment in 1998 was 77.8% as
compared to 71.7% in 1997. The increase in the loss ratio in 1998 from the first
quarter of 1997 reflects increased severity costs and the effects of certain
pending rate increases. However, this loss ratio has improved from the fourth
quarter of 1997 which was 79.4%, excluding the effects of certain fourth quarter
adjustments, due to the effects of recent rate increases. Crop hail loss ratios
in the first quarter do not have significant impact on consolidated earnings.
Policy acquisition and general and administrative expenses have increased as a
result of the increased volume of business produced by the Company. Policy
acquisition and general and administrative expenses rose to $16,022,000 or
-13-
<PAGE>
22.3% of net premium earned for the three months ended March 31, 1998 compared
to $13,760,000 or 21.5% of net premium earned in the corresponding period of
1997. The increase in the expense ratio in the first quarter of 1998 is due to
the effects of higher commissions and lower expense reimbursements in the crop
segment. However, the consolidated expense ratio has been reduced from the
fourth quarter 1997 rate of 26.6%. The expense ratio, for the nonstandard
segment improved to 20.4% in 1998 as compared to 22.5% in 1997, due primarily to
reduced expenses from the Indianapolis operations 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 negative expense results primarily from the inclusion of
the MPCI Underwriting Gain. The increase in expenses results primarily from a 2%
lower MPCI Expense Reimbursement for 1998 versus 1997 and higher commissions due
to competition 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 gain ratio in the first quarter of 1998 was consistent with the
first quarter of 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 the first quarter of 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 35.0% and 32.4% of pre-tax income for the three months
ended March 31, 1998 and 1997. The increase in the effective rate was due to
greater goodwill amortization in 1998.
Distributions on Preferred Securities are calculated at a rate of 9.5% net of
federal income taxes.
Financial Condition
The Company's total assets of $708,374,000 at March 31, 1998 increased
$147,526,000 from $560,848,000 as of December 31, 1997. The primary reasons for
this increase were an increase of $28,398,000 in cash and invested assets due to
continued growth in premiums and the normal receipt of crop funds from the FCIC.
The remaining increase is due to 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.
Net cash provided by operating activities improved to $33,835,000 in 1998 from
$19,039,000 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.
-14-
<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
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: May 8, 1998 By:______________________
Alan G. Symons
President
Dated: May 8, 1998 By:______________________
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
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1998 March 31, 1997
<S> <C> <C> <C>
Average Price (US $) $28.76 (A) $24.46
Proceeds from Exercise of Warrants and Options
(US $) $9,582,503 (B) $3,533,293
========= =========
Shares Repurchased - Treasury Method 333,189 (B)/(A) 144,444
======= =======
Shares Outstanding - Weighted Average 5,798,750 5,533,776
Add: Options and Warrants Outstanding 576,304 545,317
Less: Treasury Method - Shares Repurchased (333,189) (144,444)
------- -------
Shares Outstanding for US GAAP Purposes 6,041,865 (C) 5,934,649
========= =========
Net Earnings in Accordance with US GAAP $3,517,000 (D) $4,645,171
========= =========
Earnings Per Share - US GAAP - Basic $0.61 $0.84
==== ====
Earnings Per Share - US GAAP - Fully Diluted $0.58 (D)/(C) $0.78
==== ====
</TABLE>
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<PAGE>
