UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 1999
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, 1999, there were 5,876,398 shares of Registrant's common stock
issued and outstanding exclusive of shares held by Registrant.
<PAGE>
Form 10-Q/A Index
For The Quarter Ended March 31, 1999
Page
Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Unaudited Consolidated Financial Statements:
Unaudited Consolidated Balance Sheets at
March 31, 1999 and December 31, 1998......................... 3
Unaudited Consolidated Statements of Earnings
for the Three Months Ended March 31, 1999 and 1998........... 4
Unaudited Consolidated Statements of Shareholders'
Equity....................................................... 5
Unaudited Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1999 and 1998........... 6
Condensed Notes to Unaudited Consolidated Financial
Statements................................................... 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 8
PART II OTHER INFORMATION............................................ 17
SIGNATURES............................................................ 19
INDEX TO EXHIBITS
Exhibit 11 - Computation of Per Share Earnings............... 20
<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,
1999 1998
ASSETS Restated
<S> <C> <C>
Cash and investments $252,662 $253,718
------- -------
Accounts receivable
Premiums receivable 189,108 121,328
Income taxes recoverable 18,868 12,711
Due from related parties 3,136 3,495
Accrued and other receivables 2,706 2,362
------- -------
TOTAL ACCOUNTS RECEIVABLE 213,818 139,896
Reinsurance recoverable on paid and unpaid claims 60,459 67,885
Prepaid reinsurance premiums 78,378 17,486
Capital assets, net of accumulated depreciation 19,688 19,350
Deferred policy acquisition costs 15,352 16,332
Deferred income taxes 2,544 5,825
Intangibles 45,695 46,300
Other assets 7,781 4,197
------- -------
TOTAL ASSETS $696,377 $570,989
======= =======
LIABILITIES
Accounts Payable:
Due to insurance companies $100,873 $12,353
Accrued and other payables 26,292 22,283
------- -------
127,165 34,636
Outstanding claims 184,466 207,432
Unearned premiums 176,022 110,665
Notes payable 4,520 13,744
------- -------
492,173 366,477
------- -------
Minority interest:
Equity in net assets of subsidiaries 19,463 19,787
Preferred securities 135,000 135,000
------- -------
154,463 154,787
------- -------
SHAREHOLDERS' EQUITY 49,741 49,725
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $696,377 $570,989
======= =======
See notes to consolidated financial statements
</TABLE>
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<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,
1999 1998
Restated
<S> <C> <C>
Gross premiums written $152,022 $177,196
Less ceded premiums 84,751 78,835
------- -------
Net premiums written 67,271 98,361
Change in net unearned premiums 147 26,476
------- -------
Net premiums earned 67,124 71,885
Fee income 4,464 5,120
Net investment income 3,508 3,176
Net realized capital gain (loss) (1,322) 1,968
------- -------
Total revenues 73,774 82,149
------- -------
Net claims incurred 58,995 55,302
General and administrative expenses 11,630 14,653
Interest expense 74 183
Amortization of intangibles 605 511
------- -------
Total expenses 71,304 70,649
------- -------
Earnings before undernoted items 2,470 11,500
Provision for income taxes 616 4,023
Distribution of preferred securities, net of tax 2,055 2,130
Minority interest (324) 1,645
------- -------
Earnings from continuing operations 123 3,702
Loss from discontinued operations -- (185)
------- -------
Net earnings $ 123 $ 3,517
======= =======
Net earnings per share - basic $0.02 $0.61
==== ====
Net earnings per share - fully diluted $0.02 $0.59
==== ====
See notes to consolidated financial statements
</TABLE>
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<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, 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
====== ===== === ====== ======
Balance at December 31, 1998 $19,317 $2,775 $252 $27,381 $49,725
Issuance of common shares --- --- --- --- ---
Change in cumulative
translation adjustment --- --- (107) --- (107)
Net earnings (restated) --- --- --- 123 123
------ ----- --- ------ ------
Balance at March 31, 1999 $19,317 $2,775 $145 $27,504 $49,741
====== ===== === ====== ======
See notes to consolidated financial statements
</TABLE>
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<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,
1999 1998
Restated
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES
Net earnings for the period $ 123 $3,517
Items not affecting cash resources:
Amortization 1,426 1,167
Loss (gain) on disposal of investments 1,322 (1,968)
Minority interest in net income of consolidated subsidiary (324) 1,645
Decrease (increase) in reinsurance recoverable on paid and
unpaid claims 7,426 26,444
Decrease (increase) in prepaid reinsurance premiums (60,892) (60,275)
Decrease (increase) in other assets (9,833) (516)
Decrease (increase) in deferred policy acquisition costs 980 (6,527)
Decrease (increase) in goodwill -- (74)
Increase (decrease) in deferred income taxes 3,281 (430)
Increase (decrease) in unearned premiums 65,357 91,351
Increase (decrease) in outstanding losses (22,966) (11,453)
Decrease (increase) in accounts receivable (67,780) (75,394)
Increase (decrease) in accounts payable 92,529 64,156
------ ------
10,649 31,643
------ ------
FINANCING ACTIVITIES:
Increase (reduction) of borrowed funds (9,224) (1,613)
Increase (decrease) in minority interest -- 1,360
Issue of share capital -- 311
------ ------
(9,224) 58
------ ------
INVESTING ACTIVITIES:
Net purchase of marketable securities (10,340) (10,329)
Net purchase of capital assets (970) (2,869)
Other -- (350)
------ ------
(11,310) (13,548)
------ ------
Change in cash resources during the period (9,885) 18,153
Cash resources, beginning of period 42,759 36,557
------ ------
Cash resources, end of period $32,874 $54,710
====== ======
Cash resources are comprised of:
Cash $ 4,615 $28,273
Short-term investments 28,259 26,437
------ ------
$32,874 $54,710
====== ======
See notes to consolidated financial statements
</TABLE>
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<PAGE>
GORAN CAPITAL INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For The Three Months Ended March 31, 1999
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, 1999. 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) 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, December 31,
1999 1998
Restated
<S> <C> <C>
Shareholders' equity in accordance with Canadian GAAP $49,741 $49,725
Add (deduct) effect of difference in accounting for:
Receivables from sale of capital stock (1,377) (1,377)
Unrealized gain (loss) on investments* 251 1,176
------ ------
Shareholders' equity in accordance with US GAAP $48,615 $49,524
====== ======
</TABLE>
*Note: The increase in shareholders' equity attributable to the
unrealized gain of $251 and $1,176 at March 31, 1999 and
December 31, 1998, respectively, are net of deferred tax
expense (recovery) of $(64) and $679, and related minority
interest (recovery) of $(39) and $416.
(3) The Company writes nonstandard insurance business through agents in
California where some of the agents charge administration fees on top
of the premium to these customers. The California Department of
Insurance (CDOI) in early 1998 indicated that such broker fees are
part of premium and has requested reimbursement to the policyholders
by Superior Insurance Company. The CDOI has indicated it may assess
the Company to repay fees the agents received from the insured. The
Company did not receive any of these broker fees and has carried on
the insurance practice that is normal for many of the insurance
companies writing automobile insurance in California. The total
amount, if CDOI proceeds and requires all fees returned with no
recovery from agents, is $3 million. As the ultimate outcome of this
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<PAGE>
potential assessment is not deemed probable, the Company has not
accrued any amount in its consolidated financial statements. Although
the assessment has not been formally made by the CDOI at this time,
the Company believes it will prevail and will vigorously defend any
potential assessment.
As part of an agreement by the Company to assume the multi-peril and
crop operations of CNA during 1998, the Company agreed to reimburse
CNA for certain direct overhead costs incurred by CNA during the first
quarter of 1998 before the Company assumed this book of business. CNA
has requested reimbursement of $2.0 million in expenses which the
Company believes should only be $1.1 million. Negotiations are in
process to settle this dispute. The Company fully expects the ultimate
settlement will approximate $1.1 million and has therefore, accrued
this amount in its consolidated financial statements at March 31,
1999.
(4) On April 19, 1999, the Company guaranteed loans in the amount of
$2,505,000, granted by a third party lender to certain shareholders,
the proceeds of which were used to repay the Company for loans
previously made to the shareholders. The guarantees were secured by
the pledge of 715,800 shares of Symons International Group, Inc., a
67% owned subsidiary of the Company.
(5) These restated financials contain a correction of an accounting
error. The error related to the recording of the retroactive
reinsurance recoverable pertaining to AgPI(R) in the incorrect
accounting period. The correction of the error defers the recognition
of a gain on a reinsurance recovery from first quarter 1999 to second
quarter 1999. The amount of the deferred gain is $4,668,000. The
Company recorded an increase in loss and loss adjustment expense of
$4,668,000 due to the deferral of the gain which reduced net income by
$2,045,000 or $0.35 per share (basic), net of income taxes and
minority interest.
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
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<PAGE>
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
General
The three principal components of the Company's crop insurance business are
Multi-Peril Crop Insurance ("MPCI") and private named peril, crop hail insurance
and fee based services to farmers. 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 2,007 independent agencies in 43 states.
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
60% 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 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.
The fee income business is primarily services to farmers for global positioning
grid mapping of their farm and soil sampling to enhance the growing conditions
of the crops.
AgPI(R) is business interruption insurance that protects businesses that depend
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<PAGE>
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 other processing
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
encounter 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 these
businesses depends on. AgPI(R) was formally introduced at the beginning of the
1998 crop year.
GeoAgPLUS(TM) provides to the farmer measuring, gridding and soil sampling
services combined with fertility maps and the software that is necessary to run
precision farming programs. Grid soil sampling, when combined with precision
farming technology, allows the farmer to apply just the right amount of
fertilization, thus balancing soil nutrients for a maximum crop yield. Precision
farming technology 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
services to the farmer.
Certain Accounting Policies for Crop Insurance Operations
MPCI is a government-sponsored program with accounting treatment which differs
in certain respects from the more traditional property and casualty insurance
lines. For income statement purposes under generally accepted accounting
principles, 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 - the minimum available level of MPCI Coverage), and any related
federal premium subsidies, but do not include MPCI premium on CAT Coverage. By
contrast, net premiums written do not include any MPCI premiums or subsidies,
all of which are deemed to be ceded to the Federal Crop Insurance Corporation
(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") and (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"). 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 accounting 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 is, 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.
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<PAGE>
In June 1998, the United States Congress passed legislation which provided
permanent funding for the crop insurance industry. However, beginning with the
1999 MPCI crop year, the Buy-Up Expense Reimbursement Payment was reduced to
24.5%, the CAT LAE Reimbursement Payment was reduced to 11% and the $60 CAT
coverage fee will no longer go to the insurance companies.
The Company expects to more than offset these reductions through growth in
non-federally subsidized programs such as AgPI(R) and Geo AgPLUS(TM) initiated
in 1998. The Company has also been working to reduce its costs. 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 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 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 latest
available loss information.
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<PAGE>
Results of Operations
<TABLE>
<CAPTION>
For the three months
ended March 31,
1999 1998
Restated
<S> <C> <C>
NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS:
Gross premiums written $61,171 $89,976
====== ======
Net premiums written $62,526 $82,267
====== ======
Net premiums earned $65,396 $68,323
Fee income 4,521 4,155
Net investment income 3,164 2,801
Net realized gain (loss) (1,382) 1,968
------ ------
TOTAL REVENUES 71,699 77,247
------ ------
Losses and loss adjustment expenses 51,313 53,146
Policy acquisition and general and administrative expenses 19,595 18,123
------ ------
TOTAL EXPENSES 70,908 71,269
------ ------
Earnings before income taxes $ 791 $5,978
====== =====
GAAP RATIOS (Nonstandard Automobile Only):
Loss and LAE Ratio 78.5% 77.8%
Expense ratio, net of billing fees 23.0 20.4
---- ----
Combined ratio 101.5% 98.2%
===== ====
CROP INSURANCE OPERATIONS:
Gross premiums written $90,723 $86,175
====== ======
Net premiums written $ 1,613 $17,294
====== ======
Net premiums earned $(1,060) $161
Fee income (59) 963
Net investment income 57 53
------ ------
TOTAL REVENUES (1,062) 1,177
------ ------
Losses and loss adjustment expenses 5,174 59
Policy acquisition and general and administrative expenses(1) (8,008) (5,016)
Amortization of intangibles 95 --
Interest expense 74 183
------ -----
TOTAL EXPENSES (2,665) (4,774)
------ -----
Earnings before income taxes $ 1,603 $5,951
====== =====
</TABLE>
(1) Negative crop expenses are caused by inclusion of MPCI expense
reimbursement and underwriting gain.
Net Earnings
For the three months ended March 31, 1999 as restated, the Company recorded net
earnings of $123,000 or $0.02 per share (basic). This is approximately a
decrease from 1998 comparable amounts of $3,517,000 or $0.61 per share (basic).
These restated financials contain a correction of an accounting error. The error
related to the recording of the retroactive reinsurance recoverable pertaining
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<PAGE>
to AgPI(R) in the incorrect accounting period. The correction of the error
defers the recognition of a gain on a reinsurance recovery from first quarter
1999 to second quarter 1999. The amount of the deferred gain is $4,668,000. The
Company recorded an increase in loss and loss adjustment expense of $4,668,000
due to the deferral of the gain which reduced net income by $2,045,000 or $0.35
per share (basic), net of income taxes and minority interest.
Consolidated Gross Premiums Written
Gross premiums written for the nonstandard automobile segment decreased 32.0%
for the three months ended March 31, 1999 compared to the three months ended
March 31, 1998. This represents an 8.8% decrease in premiums from the average
premium volume in the last half of 1998. The primary reasons for this decline in
volume has been the downsizing by the Company of its nonstandard automobile
business in certain competitive markets, the loss of some business prior to the
hiring of a new product development team and the slowing of new business during
the conversion by the Company to a new operating computer system.
Gross premiums written for the crop segment were comparable to those of a year
ago. Crop premiums for the three months ended March 31 are as follows:
1999 1998
---- ----
CAT imputed $16,312 $16,319
MPCI 62,280 60,743
Crop hail and named perils 28,443 25,431
------- -------
107,035 102,493
Less: CAT imputed (16,312) (16,319)
------- -------
$90,723 $86,174
======= =======
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:
1999 1998
---- ----
Nonstandard automobile 0% 10%
Crop hail 62% 25%
Named peril 50% 50%
AgPI 62% 0%
Fee income decreased 12.8% for the three months ended March 31, 1999 as compared
to the corresponding period of the prior year. Such decrease was primarily due
to the discontinuance by the government of the CAT policy fee partially offset
by increased penetration of policy issuance fees on the automobile book.
Net investment income increased 10.5% for the three months ended March 31, 1999
as compared to the corresponding period of the prior year due to the transfer of
invested assets to interest bearing fixed maturities from equity based
investments since the first quarter of 1998. The realized loss was primarily due
to tax loss related selling of certain securities as well as some selling to
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<PAGE>
reduce the average duration of the fixed income portfolio.
The loss ratio for the nonstandard automobile segment for the three months ended
March 31, 1999 was 78.5% comparable to 77.8% for the three months ended March
31, 1998 . Crop hail loss ratios in the first quarter do not have significant
impact on consolidated earnings.
These restated financials contain a reclassification of reinsurance ceded
premium related to AgPI(R) from policy acquisition and general and
administrative expense to ceded premiums. The amount of the reclass is
$4,668,000 with no impact on net income. Policy acquisition and general and
administrative expenses have decreased to $11,630,000 or 17.3% of net premium
earned for the three months ended March 31, 1999 compared to $14,653,000 or
20.4% of net premium earned in the corresponding period of 1998. The reduction
in expense related to the reclassification was partially offset by nonstandard
auto general and administrative expenses which rose due to increased use of
temporary help to resolve processing backlogs and lower expense recoveries from
reinsurers due to the elimination of quota share reinsurance in 1999.
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.
Amortization of intangibles includes goodwill from the acquisition of Superior,
additional goodwill from the acquisition of the minority interest portion of
GGSH and the acquisition of NACU, debt or preferred security issuance costs and
organizational costs.
Income tax expense was 24.9% and 35.0% of pre-tax income for the three months
ended March 31, 1999 and 1998. The decrease in the average rate resulted
primarily from the earning of income in nontaxable jurisdictions.
Distributions on Preferred Securities are calculated at a rate of 9.5% net of
federal income taxes.
Liquidity and Capital Resources
The Company's total assets of $696,377,000 at March 31, 1999 as restated,
increased $125,388,000 from $570,989,000 as of December 31, 1998. The primary
reasons for this increase were increased premium receivable and reinsurance
payable balances in the crop business due to the normal accumulation of these
balances during the year and settlement in the fall of each year, coincidental
with fall harvest.
Net cash provided by operating activities reduced to $10,649,000 in 1999 from
$31,643,000 in 1998 due to lower premium volume. 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>
Year 2000 Compliance
General
TheYear 2000 Project ("Project") addresses the inability of computer software
and hardware to distinguish between the year 1900 and the year 2000. In 1996,
the Company began a company-wide replacement of hardware and software systems to
address this and other issues. The Company is utilizing systems from Dell,
Hewlett Packard, Sun Systems, Compaq, Oracle and ZIM as well as certain software
conversions using Java. The new hardware is in place and operational at all
subsidiaries. The software systems are in place in our nonstandard auto
operations and are being implemented on a state-by-state basis. The Company
first began implementing the new nonstandard auto operating system in those
states in which the Company writes annual policies (annual states). 100% of
those annual states are currently in production. The remaining non-annual states
are scheduled to be completed by June 30, 1999. The Y2K issue does not have an
effect on the crop operations until October 1, 1999. The Company is converting
non-compliant crop operating systems, through programmatic means, into a Y2K
compliant environment. The crop operation has completed the conversion and the
testing phase of the Project. A number of the Company's other IT projects are
being delayed or completely eliminated due to the implementation of the Project.
Project
The Company has divided the Project into three sections - Infrastructure,
Applications/Business Systems and Third Party Suppliers. There are common
portions of each of these divisions which are: (1) identifying Y2K items; (2)
assigning a priority for those items identified; (3) repairing or replacing
those items; (4) testing the fixes; and (5) designing a contingency and business
continuation plan for each subsidiary.
In February 1998, all items had been identified and the plans for replacement or
repair were proposed to management. These plans were approved and the process
began.
The infrastructure section of the Project was quickly implemented and tested by
the Company's IT staff and has been completed since May of 1998. All desktop,
mini and midrange systems as well as phone switches, phones and building
security systems have been tested for Y2K compliance. Any new systems required
by the Company are being tested and certified prior to purchase with completion
by June 30, 1999. Two mainframes being used by the Company are not Y2K certified
or compliant. These machines have been replaced by Sun and HP compliant systems
and are being kept in production until new applications are put in place on the
new machines.
The applications systems section of the Project includes: (1) the replacement of
nonstandard auto companies Policy Administration and Claims systems; (2) the
conversion of crop operations systems in total; and (3) replacement of
non-compliant business systems company-wide (this includes wordprocessors,
network operating systems, spreadsheet programs, presentation systems, etc.).
The Company had already made the decision to transition off all of its
nonstandard auto legacy systems and this process had been in work since 1996.
These systems are Y2K compliant and are scheduled for completion by the end of
June 30, 1999. The conversion of crop systems began in August 1998 and is
complete. Business systems are being replaced as vendors certify their
compliance. The Company is at 90% compliance in this area.
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<PAGE>
The Company relies on third party vendors for investments, reinsurance treaties
and banking. The Company began inquiring about Y2K compliance with its third
party vendors beginning in July 1998. To date, all vendors have replied
regarding their compliance efforts. Those that are not in compliance have until
the end of second quarter 1999 to do so, or they will be replaced.
Costs
The Company considers the cost associated with the Project to be material. The
Company has estimated the total cost to be $5.7 million, the majority of which
has been capitalized as hardware or software costs. The Company has also
incurred substantial costs for carrying two systems including personnel costs
and outside service fees. The component of these costs specifically associated
with Y2K cannot be reasonably estimated. The total amount expended through March
31, 1999 on all infrastructure and software upgrades is approximately $5
million. The Company expects to spend another $800,000 in its efforts to
complete the Project. This does not include additional annual maintenance costs
that will be incurred as we move forward. Funding for these costs will continue
to be provided by funds from operations. The Company believes that the new
nonstandard auto system will significantly enhance service capability and reduce
future operating costs.
Risks
Failure to correct the Y2K problem through efficient and timely implementation
of the Company's new operating system could cause a failure or interruption of
normal business operations. These failures could materially affect the Company's
operational results, financial condition and liquidity through reduction of
premium volume and an increase in operating costs as a percentage of premium
volume or deterioration of loss experience. Due to the nature of the Y2K
problem, the Company is uncertain whether it will have a material affect or the
potential magnitude of any financial impact. The Company believes that the
possibility of significant business interruptions should be reduced by
successful implementation of the Project.
-16-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's insurance subsidiaries are parties to litigation
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
Of the 682,572 employee stock options outstanding at March 31,
1999, 639,626 have been repriced, subject to disinterested
shareholder approval, to an exercise price of Cdn $14.70, the
closing price of the Company's common shares on the Toronto Stock
Exchange on November 9, 1998. This repricing is subject to
approval by a majority of the disinterested shareholders at the
Company's next annual meeting on June 15, 1999.
ITEM 5. OTHER INFORMATION
Within this form 10-Q/A the Company has incorporated the
financial impact of events which had occurred as of March 31,
1999, but which came to management's attention and / or became
quantifiable after the release to the public of the first quarter
results of operations on May 12, 1999.
Through the Company's 67% owned insurance subsidiaries, the
Company writes a portion of its crop hail insurance based on
continuous policies which remain in-force unless and until
cancelled by the policyholder. The Company also writes a lesser
amount of crop hail insurance on an annual basis. In the first
quarter earnings release dated May 12, 1999, the Company recorded
approximately $11.3 million of crop hail gross written premium
related to processed crop hail policies. However, the Company
failed to record all of the continuous policies for which
liabilities had attached as of the March 31, 1999 balance sheet
date, thus understating crop hail gross written premium by
approximately $16.6 million, and net written premium by
approximately $4.0 million. The crop hail gross written premium
should have totalled $27.9 million for the first quarter, which
is comparable with the $24.5 million in crop hail gross written
premium recorded in the first quarter of 1998.
The increase in the crop hail premiums has an effect on income
through ceding commissions the Company receives on quota share
reinsurance treaties. It also improves earnings through profits
on the net retained portion of the crop hail business. The total
amount of pre-tax earnings related to the additional $16.6
million in gross written premiums recorded for the first quarter
of 1999 was approximately $2.0 million, or $.9 million after
income taxes of $.7 million and minority interest of $.4 million.
-17-
<PAGE>
Also, through the Company's 67% owned insurance subsidiaries, the
Company reinsures 100% of a book of crop insurance business
written through a third party insurance company. As described in
the notes to the 1998 audited financial statements, this product,
called "AgPI(R)", insures against business interruption risk. At
year end 1998 the Company had recorded $7.5 million in gross
assumed loss reserves. Based on further recent analysis, coupled
with recently released national data related to the 1998 crop
year, the Company has increased its assumed gross loss reserves
from $7.5 million to $15.0 million as of March 31, 1999.
To date, there has not been a ceding of paid losses to the
Company from the third party reinsurance company related to the
potential AgPI(R) liability. The Company believes the ultimate
development on these gross reserves could range from $10 million
to $20 million, and, as such, believes that recorded gross loss
reserves of $15 million is sufficient. However, there can be no
assurance that the Company's ultimate liability for AgPI(R)
related losses will not be materially greater or less than the
Company's reserve for this liability.
The Company retrocedes the majority of this business to
reinsurers. The retrocession cover on this book of business is
62% quota share reinsurance. As such the Company has ceded
approximately $4,668,000 of premium, and $9,336,000 of loss
reserves, to its retro reinsurers of which $4,668,000 is
deferred to second quarter. The Company also incurred
approximately $996,000 in pretax fee expense related to this
treaty in the first quarter, or $437,000 after income
taxes of $349,000 and minority interest of $211,000.
Granite Reinsurance Company Ltd. has a 7.5% participation in this
reinsurance agreement, being part of the total 62% cession.
These restated financials contain a correction of an accounting
error. The error related to the recording of the retroactive
reinsurance recoverable pertaining to AgPI(R) in the incorrect
accounting period. The correction of the error defers the
recognition of a gain on a reinsurance recovery from first
quarter 1999 to second quarter 1999. The amount of the deferred
gain is $4,668,000. The Company recorded an increase in loss and
loss adjustment expense of $4,668,000 due to the deferral of the
gain which reduced net income by $2,045,000 or $0.35 per share
(basic), net of income taxes and minority interest.
ITEM 6(a). EXHIBITS
(10) Material Contracts - AgPI, Crop Hail and MPCI Multi-year
....Quota Share Reinsurance Agreement
(11) Statement Regarding Computation of Per Share Earnings
ITEM 6(b). REPORTS ON FORM 8-K
None
-18-
<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 27, 1999 By:/s/ Alan G. Symons
Alan G. Symons
President
Dated: August 27, 1999 By:/s/ Thomas R. Kaehr
Thomas R. Kaehr
Vice President, Treasurer and
Chief Financial Officer
-19-
<PAGE>
GORAN CAPITAL INC. - Consolidated Exhibit 11.01
Analysis of Earnings Per Share
US GAAP - Treasury Method
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1999 March 31, 1998
Restated
<S> <C> <C> <C>
Average Price (US $) $9.64 (A) $28.76
Proceeds from Exercise of Warrants and Options (US $) $204,816 (B) $9,582,503
======= =========
Shares Repurchased - Treasury Method 21,251 (B)/(A) 333,189
====== =======
Shares Outstanding - Weighted Average 5,876,398 5,798,750
Add: Options and Warrants Outstanding(1) 43,946 576,304
Less: Treasury Method - Shares Repurchased (21,251) (333,189)
------ ---------
Shares Outstanding for US GAAP Purposes 5,899,093 (C) 6,041,865
========= =========
Net Earnings in Accordance with US GAAP $ 123,000 (D) $3,517,000
========= =========
Earnings Per Share - US GAAP - Basic $0.02 $0.61
==== ====
Earnings Per Share - US GAAP - Fully Diluted $0.02 (D)/(C) $0.58
==== ====
</TABLE>
Note 1: Only those options with a dilutive effect were included above for the
three months ended March 31, 1999. Total options outstanding amounted to
682,572, of which 638,626 options had exercise prices which exceeded $9.64.
-20-
