UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 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.)
2 Eva Road
Suite 200
Toronto, Ontario M9C 2A8
4720 Kingsway Drive
Indianapolis, Indiana 46205
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (416) 662-0660 (Canada)
(317) 259-6400 (U.S.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of November 1, 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 Index
For The Quarter Ended September 30, 1999
Page
Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Unaudited Consolidated Financial Statements:
Unaudited Consolidated Balance Sheets at
September 30, 1999 and December 31, 1998...................... 3
Unaudited Consolidated Statements of Earnings for the
Three and Nine Months Ended September 30, 1999 and 1998....... 4-5
Unaudited Consolidated Statements of Shareholders'
Equity........................................................ 6
Unaudited Consolidated Statements of Changes in
Cash Resources for the Three and Nine Months Ended
September 30, 1999 and 1998................................... 7
Condensed Notes to Unaudited Consolidated Financial
Statements.................................................... 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 19
PART II OTHER INFORMATION............................................. 34
SIGNATURES............................................................. 36
INDEX TO EXHIBITS
Exhibit 11 - Computation of Per Share Earnings................ 37
Note: All items are in thousands of dollars except share and per share data or
unless otherwise noted.
<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>
September 30, December 31,
ASSETS 1999 1998
<S> <C> <C>
Cash and investments $238,067 $253,718
------- -------
Accounts receivable:
Premiums receivable 145,025 121,328
Income taxes recoverable 11,708 12,711
Due from related parties 1,013 3,495
Accrued and other receivables 4,858 2,362
------- -------
TOTAL ACCOUNTS RECEIVABLE 162,604 139,896
Reinsurance recoverable on paid and outstanding claims 225,843 67,885
Prepaid reinsurance premiums 28,477 17,486
Capital assets, net of accumulated depreciation 22,062 19,350
Deferred policy acquisition costs 12,509 16,332
Deferred income taxes 10,428 5,825
Intangibles 44,413 46,300
Other assets 5,674 4,197
------- -------
TOTAL ASSETS $750,077 $570,989
======= =======
LIABILITIES
Accounts Payable:
Due to insurance companies $83,160 $12,353
Accrued and other payables 32,215 22,283
------- -------
115,375 34,636
Outstanding claims 335,045 207,432
Unearned premiums 117,320 110,665
Notes Payable 7,589 13,744
------- -------
575,329 366,477
------- -------
Minority interest:
Equity in net assets of subsidiaries 10,047 19,787
Preferred securities 135,000 135,000
------- -------
145,047 154,787
------- -------
Shareholders' equity 29,701 49,725
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $750,077 $570,989
======= =======
</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
September 30,
1999 1998
<S> <C> <C>
Gross premiums written $67,685 $95,887
Less ceded premiums (12,457) (23,418)
------- -------
Net premiums written 55,228 72,469
Change in net unearned premiums 12,936 21,699
------ ------
Net premiums earned 68,164 94,168
Fee income 3,161 3,813
Net investment income 3,197 3,281
Net realized capital gain (loss) (250) 1,145
------- -------
Total Revenues 74,272 102,407
------- -------
Net claims incurred 75,693 92,490
General and administrative expenses 24,395 27,468
Interest expense 631 129
Amortization of intangibles 197 698
------- -------
Total expenses 100,916 120,785
------- -------
Earnings (loss) before undernoted items (26,644) (18,378)
Provision for income taxes (8,614) (5,902)
Distribution of preferred securities, net of tax 2,101 2,101
Minority interest (6,224) (4,344)
------- -------
Earnings (loss) from continuing operations (13,907) (10,233)
Loss from discontinued operations -- --
------- -------
Net Earnings (loss) $(13,907) $(10,233)
======= =======
Earnings (loss) per share - basic $(2.37) $(1.76)
==== ====
Earnings (loss) per share - fully diluted $(2.37) $(1.76)
==== ====
Earnings (loss) per share - operating $(2.33) $(1.18)
==== ====
</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>
Nine Months Ended
September 30,
1999 1998
<S> <C> <C>
Gross premiums written $393,577 $443,588
Less ceded premiums 191,928 (163,029)
------- -------
Net premiums written 201,649 280,559
Change in net unearned premiums 10,166 (14,888)
------- -------
Net premiums earned 211,815 265,671
Fee income 10,778 15,203
Net investment income 10,212 10,177
Net realized capital gain (loss) (1,206) 3,959
------- -------
Total Revenues 231,599 295,010
------- -------
Net claims incurred 206,981 218,979
General and administrative expenses 57,040 67,734
Interest expense 376 361
Amortization of intangibles 1,887 1,719
------- -------
Total expenses 266,284 288,793
------- -------
Earnings (loss) before undernoted items (34,685) 6,217
Provision for income taxes (11,574) 2,536
Distribution of preferred securities, net of tax 6,252 6,327
Minority interest (9,740) (890)
------- -------
Earnings (loss) from continuing operations (19,623) (1,756)
Loss from discontinued operations -- (185)
------- -----
Net Earnings (loss) $(19,623) $ (1,941)
======= =======
Earnings (loss) per share - basic $(3.34) $(0.33)
==== ====
Earnings (loss) per share - fully diluted $(3.34) $(0.33)
==== ====
Earnings (loss) per share - operating $(3.21) $(0.77)
==== ====
</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, 1997 $18,010 $2,775 $(292) $39,839 $60,332
Issuance of common shares 366 --- -- --- 366
Change in cumulative 59 --- 59
translation adjustment --- --- ---
Net earnings --- --- -- 8,292 8,292
------ ----- --- ------ ------
Balance at September 30, 1998 $18,376 $2,775 $(233) $48,131 $69,049
====== ===== === ====== ======
Balance at December 31, 1998 $19,317 $2,775 $252 $27,381 $49,725
Issuance of common shares --- --- -- --- ---
Change in cumulative
translation adjustment --- --- (401) --- (401)
Net earnings (loss) --- --- -- (19,623) (19,623)
------ ----- --- ------ ------
Balance at September 30, 1999 $19,317 $2,775 $(149) $7,758 $29,701
====== ===== === ====== ======
</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>
Nine Months Ended
September 30,
1999 1998
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES
Net earnings (loss) for the period $(19,623) $(1,941)
Items not affecting cash resources:
Amortization and depreciation 1,887 3,210
Loss (gain) on disposal of investments 1,206 (3,959)
Minority interest in net income (loss) of consolidated subsidiary (9,740) (890)
Decrease (increase) in other assets (1,477) (156,251)
Decrease (increase) in deferred policy acquisition costs 3,823 (3,383)
Decrease (increase) in deferred income taxes recoverable (4,603) (3,087)
Increase (decrease) in unearned premiums 6,655 27,393
Increase (decrease) in outstanding losses 127,613 148,232
Decrease (increase) in accounts receivable (193,493) (122,650)
Increase (decrease) in accounts payable 80,739 120,974
------- -------
(7,013) 7,648
------- -------
FINANCING ACTIVITIES:
Increase (reduction) of borrowed funds (6,155) 9,418
Issue of share capital - 366
------- -------
(6,155) 9,784
------- -------
INVESTING ACTIVITIES:
Net (purchase) sale of marketable securities 4,292 (15,543)
Acquisition of subsidiary - (3,000)
Net purchase of minority interest shares - (1,208)
Net purchase of capital assets (970) (7,690)
------- -------
3,322 (27,441)
------- -------
Change in cash resources during the period (9,846) (10,009)
Cash resources, beginning of period 42,759 36,557
------- -------
Cash resources, end of period $32,913 $26,548
======= =======
</TABLE>
See notes to consolidated financial statements
-7-
<PAGE>
GORAN CAPITAL INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For The Three and Nine Months Ended September 30, 1999
(,000 Omitted)
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated 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 ("GAAP") 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 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 for
the year ended December 31, 1998.
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 13. All material
intercompany amounts have been eliminated.
2. Subsequent Events
On October 27, 1999 the Company announced that it had ceased its
previously announced efforts to locate a buyer for all or part of its
non-standard automobile and its crop insurance operations.
3. Certain Accounting Policies for Multi-Peril Crop Insurance ("MPCI")
A significant portion of the Company's gross premiums written and
earnings before income taxes within the crop insurance segment relate to
the MPCI program. MPCI is a government-sponsored program with accounting
treatment which differs in certain respects from the more traditional
property and casualty insurance lines. For statement of earnings
purposes under GAAP, gross premiums written consist of the aggregate
amount of MPCI premiums paid by farmers for buy-up coverage (MPCI
coverage in excess of catastrophic ("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
statement of earnings 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 has risks throughout the year with
crops planted in the fall, the winter and spring.
-8-
<PAGE>
Beginning in 1996, the Company instituted a policy of recognizing (i)
35% of its estimated annual 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 and (iii) Buy-Up Expense Reimbursement at the
applicable rate of MPCI gross premiums written along with normal
operating expenses incurred in connection with premium writings. In the
third quarter, if a sufficient volume, approximately 90%, 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 of premium
which takes into account actual gross premiums processed. If an
insufficient volume of policies have 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 an assessment of
current year crop conditions and other relevant factors. 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.
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) Loss Adjustment Expense ("LAE") reimbursement payment equal to a
percentage of MPCI Imputed Premiums for each CAT Coverage policy it
writes (the "CAT LAE Reimbursement Payment"). For 1999 and 1998, the
Buy-Up Expense Reimbursement Payment has been set at 24.5% and 27.0%,
respectively, of MPCI Premium. For 1999 and 1998, the LAE Reimbursement
Payment has been set at 11.0% and 13.0%, respectively, of MPCI Imputed
Premiums for each CAT Coverage policy the Company writes. The reduction
in expense and LAE reimbursement percentage in 1999 was due to the
passing of legislation by the United States Congress in June, 1998.
Although the expense reimbursement percentages were reduced, this
legislation also provided permanent funding for the crop insurance
industry. In addition, this legislation discontinued the Company's
retention of a $60 fee for every CAT policy written in the 1999 crop
year and thereafter. The Company was allowed to retain a portion of this
policy fee in 1998.
For statement of earnings 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 statement of
earnings 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 Fee Income.
-9-
<PAGE>
4. Intangible Assets
Intangible assets include goodwill from the acquisition of Superior
Insurance Company ("Superior"), additional goodwill from the acquisition
of the minority interest in GGS Management Holdings, Inc. ("GGSH") and
North American Crop Underwriters ("NACU"), debt and preferred security
issuance costs and organizational costs.
5. Notes Payable
At September 30, 1999, the Company's IGF Insurance Company subsidiary
("IGF") maintained a revolving bank line of credit in the amount of
$12,000 (the "IGF Revolver"). This line of credit has been extended
through December 15, 2000. At December 31, 1998, March 31, 1999, June
30, 1999 and September 30, 1999 the outstanding balance was $12,000,
$1,989, $11,767 and $5,966, respectively. This line is collateralized by
the crop-related uncollected premiums, reinsurance recoverable on paid
losses, FCIC annual settlement, and a first lien on the real estate
owned by IGF. The IGF Revolver contains certain covenants which (i)
restrict IGF's ability to accumulate common stock; (ii) set minimum
standards for investments and policyholder surplus; and (iii) limit
ratio of net written premiums to statutory surplus. At September 30,
1999, IGF was not in compliance with a minimum statutory surplus
covenant. However, IGF has received a waiver from the bank for September
30, 1999. IGF does expect to meet the minimum statutory surplus covenant
at year-end.
The average interest rate on the IGF Revolver was 7.81% for the nine
months ended September 30, 1998 and 6.83% for the nine months ended
September 30, 1999.
Notes payable also includes a $1,000 note due 2001 on the purchase of
NACU which bears no interest. The balance of notes payable at December
31, 1998 includes three smaller notes (less than $300 each) assumed in
the acquisition of NACU which have various due dates from 2002 to 2006
with periodic payments at interest rates ranging from 7% to 9.09%.
6. Preferred Securities
On August 12, 1997, the Company's Symons International Group, Inc.
("SIG") issued $135 million in Trust Originated Preferred Securities
("Preferred Securities") at a cumulative annual distribution rate of
9.5% paid semi-annually. These Preferred Securities were offered through
a trust subsidiary of SIG. The Preferred Securities have a Liquidation
amount of $1,000 per share and mature on August 15, 2027. The principal
asset of the trust subsidiary is a subordinated debenture of the Company
in the principal amount of $135 million with an interest rate and
maturity date substantially identical to those of the Preferred
Securities.
The Preferred Securities represent Company-obligated mandatorily
redeemable securities of subsidiary holding solely parent debentures and
have a term of 30 years with semi-annual interest payments which
commenced February 15, 1998. The Preferred Securities may be redeemed in
whole or in part after 10 years. The Preferred Security obligations of
approximately $13 million per year are funded from the Company's
nonstandard automobile management company and dividend capacity from the
crop operations. The nonstandard auto funds are the result of management
and billing fees in excess of operating costs.
-10-
<PAGE>
The Trust Indenture for the Preferred Securities contains certain
preventative covenants. These covenants are based upon the SIG's
Consolidated Coverage Ratio of earnings before interest, taxes,
depreciation and amortization (EBITDA) whereby if SIG's EBITDA falls
below 2.5 times Consolidated Interest Expense (including Preferred
Security distributions) for the most recent four quarters the following
restrictions become effective:
- SIG may not incur additional Indebtedness or guarantee additional
Indebtedness.
- SIG may not make certain Restricted Payments including loans or
advances to affiliates, stock repurchases and a limitation on
the amount of dividends is inforce.
- SIG may not increase its level of Non-Investment Grade Securities
defined as equities, mortgage loans, real estate, real estate
loans and non-investment grade fixed income securities.
These restrictions currently apply as SIG's Consolidated Coverage Ratio
was (2.9x) through September 30, 1999 and will continue to apply until
the SIG's Consolidated Coverage Ratio is in compliance with the terms of
the Trust Indenture. This does not represent a Default by the Company on
the Preferred Securities. SIG was in compliance with these preventative
covenants as of September 30, 1999.
7. Regulatory Affairs
The Indiana Department of Insurance ("IDOI") is conducting examinations
of Pafco General Insurance Company. The scope of the examinations
encompass loss reserves, pricing and reinsurance. Although there has
been no report issued as a result of these examinations, the IDOI has
required Pafco to provide monthly financial information, obtain prior
approval of reinsurance arrangements and related party transactions,
submit business plans that address levels of surplus and net premiums
written, and consult with the IDOI on a monthly basis.
As a result of the losses experienced by IGF in the crop insurance
operations, IGF has agreed with the IDOI to provide monthly financial
statements and consult monthly with the IDOI, and to obtain prior
approval for related party transactions.
The Florida Department of Insurance ("FDOI") has initiated reviews of
Superior. The Company expects the scope of the reviews to encompass
market conduct, data processing systems, Year 2000 readiness and
financial examinations as of June 30, 1999 and December 31, 1999.
Although there have been no reports issued or other actions taken, the
Company expects to meet shortly with the FDOI to discuss these and other
issues, including reserve levels.
8. Commitments and Contingencies
The Company and its subsidiaries are, at various times, named as
defendants in lawsuits relating to its business. Legal actions arise
from claims made pursuant to insurance policies, employment-related
matters, commercial disputes, and other matters. Unless specifically
stated otherwise, the Company believes that the ultimate disposition of
these lawsuits will not materially affect the Company's operations or
financial position. In 1998, IGF issued agricultural business
-11-
<PAGE>
interruption insurance policies ("AgPI(R)"). Several suits and
arbitrations have been filed regarding these policies. See Note 9 to the
consolidated financial statements.
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. The CDOI also 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 believes its practices are consistent with
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. 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 a material adverse development is not deemed
probable, the Company has not accrued any amount in its consolidated
financial statements for this liability.
9. Losses on AgPI(R) Product
In 1998, IGF sold a total of 157 policies for agricultural business
interruption insurance called AgPI(R) that were intended to protect
businesses that depend upon a steady flow of crop (or crops) to stay in
business. This product was sold to a variety of businesses involved in
agribusiness, including farmers, as well as grain elevator operators,
produce shippers, custom harvesters, cotton gins, agriculture chemical
dealers and other processing businesses whose income is heavily
dependent on a stable supply of raw product (i.e., cotton), or whose
product sales are negatively affected if crop yields fall (i.e.,
chemical dealers). Most of the policies were sold to California
policyholders.
The policy form required that the county in which crops
reside must suffer a minimum level of crop loss before a loss recovery
by a policyholder is possible. After the county loss test was met, then
the policyholder must demonstrate an insurable economic loss on an
individual basis under the policy.
The Company recognized approximately $7.6 million in written premium
in 1998, of which $6 million was earned in 1998 and $1.6 million
earned in the first quarter of 1999. Adverse weather conditions and
resultant crop damage in parts of the country where the policies were
sold, led the Company to begin establishing reserves for its possible
exposure. However, the lack of National Agricultural Statistical
Service ("NASS") and policyholder loss data adversely affected the
Company's ability to establish the amount of their exposure. At
December 31, 1998, the Company set its reserves at an amount equal to
100% of the earned premium. County loss data, as well as policyholder
loss data, gradually became known starting in late April 1999. As of
May 28, 1999, the Company recognized that it was experiencing
unexpected adverse loss development on these policies and increased
its incurred losses related to 1998 policies to $15 million. When the
Company published second quarter results, NASS data was complete, and
the Company had received policyholder data on nearly all policies to
determine its exposure. The Company's estimated gross ultimate
incurred loss settlement and loss adjustment expense ("LAE") related
to these policies was $25 million (gross loss before reinsurance
recoveries). Although, as discussed below, a number of legal
-12-
<PAGE>
proceedings have been commenced with respect to the AgPI(R) policies,
the Company has not found reason to alter that estimate at this time.
The Company has tendered settlement payments to virtually all
policyholders with a demonstrable loss under the policy. The Company
believes that the claim payments tendered are consistent with policy
language and applicable state law. The AgPI(R) policy form requires
binding arbitration. As of the date of this Form 10-Q, 138
policyholders have incurred an indemnifiable loss according to Company
calculations. Of these, 38 policyholders have accepted settlements and
released the Company from liability. IGF is a party to 8 legal
proceedings involving AgPI(R) policyholders and arbitration
proceedings involving an additional 7 policyholders. The Company is
vigorously defending these matters. These lawsuits and arbitrations
remain in an early stage of development. Arbitration hearings and any
court appearances will likely not begin until the year 2000. See Part
II, Item 1 of this report.
Less than $0.1 million of 1999 gross written AgPI(R)
premiums have been written and assumed by the Company
through September 30, 1999. Based on the information presently
available, the Company believes that it has recognized, through loss
and LAE payments and reserves, its ultimate loss exposure related to
the AgPI(R) product. The Company feels its financial reserves for the
lawsuits and arbitrations are sufficient to cover the resulting
liability, if any, that may arise from these matters. However, there
can be no assurance that the Company's ultimate liability for AgPI(R)
related claims will not be materially greater than the $25 million in
gross losses already recorded ($19,100 in 1999, $5,900 in 1998) in the
consolidated financial statements related to this product and will not
have a material adverse effect on the Company's results of operations
or financial condition. Of the $25 million AgPI(R) losses reserved
approximately $21 million has been paid to date.
During the first quarter of 1999, the Company entered into reinsurance
arrangements covering a portion of the AgPI(R) business. Under those
arrangements, during the first quarter the Company recorded $4.7
million of ceded gross premium and a $9.4 million reinsurance
recovery, deferring the resulting net gain of $4.7 million. The $4.7
million deferred gain was recognized as income in the second quarter.
The Company is not entitled to any further recoveries under these
reinsurance arrangements.
10. Adverse Development on Prior Accident Year
During the second quarter of 1999 the Company incurred $4.1 million
of loss and LAE on its nonstandard auto operation for losses occurring
in 1998. During the third quarter, the Company incurred an additional
$2.5 million for losses occurring in 1998. At the end of 1998, the
Company projected its unpaid loss and LAE liabilities for nonstandard
auto, net of reinsurance, to be $114.8 million. During 1999 a greater
than expected number of 1998 incurred claims were reported to the
Company by policyholders. The preponderance of those unanticipated
claims involved bodily injury liability and personal injury
protection.
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<PAGE>
11. Segment Disclosures
The Company has two reportable segments based on products: Nonstandard
automobile insurance and Crop insurance. The Nonstandard automobile
segment offers personal nonstandard automobile insurance coverages
through a network of independent general agencies. The Crop segment
writes MPCI and crop hail insurance through independent agencies with
its primary concentration in the Midwest. The accounting policies of the
segments are the same as those described in the December 31, 1998 annual
report in "Nature of Operating and Significant Accounting Policies" and
in footnote 3 of the September 30, 1999 10-Q. There are no significant
intersegment transactions. The Company evaluates performance and
allocates resources to the segments based on profit or loss from
operations before income taxes.
The following is a summary of the Company's segment data and a
reconciliation of the segment data to the Consolidated Financial
Statements. The "Corporate and Other" includes operations not directly
related to the reportable business segments and unallocated corporate
items (i.e., corporate investment income, interest expense on corporate
debt and unallocated overhead expenses). Segment assets are those assets
in the Company's operations in each segment.
The following tables show financial data by segment:
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<PAGE>
<TABLE>
<CAPTION>
For the three months
ended September 30,
1999 1998
<S> <C> <C>
NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS:
Gross premiums written $57,416 $61,536
======= ======
Net premiums written $56,079 $55,381
======= ======
Net premiums earned $59,238 $64,742
Fee income 2,994 3,827
Net investment income 2,961 2,960
Net realized gain (loss) (407) 1,121
------ ------
TOTAL REVENUES 64,786 72,650
------ ------
Losses and loss adjustment expenses 54,899 57,589
Policy acquisition and general and administrative expenses 26,725 19,563
------ ------
TOTAL EXPENSES 81,624 77,152
------ ------
Earnings (loss) before income taxes $(16,838) $(4,502)
======= ======
GAAP RATIOS (Nonstandard Automobile Only):
Loss and LAE Ratio 92.68% 88.95%
Expense ratio, net of billing fees 40.06% 24.31%
----- -----
Combined ratio 132.74% 113.26%
====== ======
CROP INSURANCE OPERATIONS:
Gross premiums written(2) $10,201 $32,423
====== ======
Net premiums written $(824) $15,313
===== ======
Net premiums earned $7,316 $29,170
Fee income 110 (12)
Net investment income 22 55
Net realized capital gain (loss) - 47
------ ------
TOTAL REVENUES 7,448 29,260
------ ------
Losses and loss adjustment expenses 19,022 34,312
Policy acquisition and general and administrative expenses(1) (3,889) 6,572
Interest and amortization of intangibles 318 287
------ ------
TOTAL EXPENSES 15,451 41,171
------ ------
Earnings (loss) before income taxes $(8,003) $(11,911)
====== ======
</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.
Loss and LAE ratio: ratio of loss and loss adjustment expense incurred during
the period, as a percentage of net premium earned.
Expense ratio, net of billing fees: ratio of policy acquisition and general and
administrative expense less fee income, as a percentage of net premium earned.
Combined ratio: sum of the loss and LAE ratio plus the expense ratio net of
billing fees.
-15-
<PAGE>
<TABLE>
<CAPTION>
For the nine months ended
September 30,
1999 1998
<S> <C> <C>
NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS:
Gross premiums written $184,659 $231,042
======= =======
Net premiums written $193,918 $206,802
======= =======
Net premiums earned $191,472 $203,563
Fee income 10,412 12,535
Net investment income 9,421 8,894
Net realized gain (loss) (1,423) 3,762
------- -------
TOTAL REVENUES 209,882 228,754
------- -------
Losses and loss adjustment expenses 167,843 164,237
Policy acquisition and general and administrative expenses 69,929 56,367
------- -------
TOTAL EXPENSES 237,772 220,604
------- -------
Earnings (loss) before income taxes $(27,890) $ 8,150
======= =======
GAAP RATIOS (Nonstandard Automobile Only):
Loss and LAE Ratio 87.66% 80.68%
Expense ratio, net of billing fees 31.08% 21.53%
------ ------
Combined ratio 118.74% 102.21%
====== ======
CROP INSURANCE OPERATIONS:
Gross premiums written(2) $208,448 $210,618
======= =======
Net premiums written $12,422 $68,167
======= =======
Net premiums earned $12,330 $57,791
Fee income 247 2,670
Net investment income 61 220
Net realized capital gain - 217
------ ------
TOTAL REVENUES 12,638 60,898
------ ------
Losses and loss adjustment expenses 33,090 53,050
Policy acquisition and general and administrative expenses(1) (16,551) 6,822
Interest and amortization of intangibles 735 520
------ ------
TOTAL EXPENSES 17,274 60,392
------ ------
Earnings (loss) before income taxes $(4,636) $ 506
======= =======
</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.
Loss and LAE ratio: ratio of loss and loss adjustment expense incurred during
the period, as a percentage of net premium earned.
Expense ratio, net of billing fees: ratio of policy acquisition and general and
administrative expense less fee income, as a percentage of net premium earned.
Combined ratio: sum of the loss and LAE ratio plus the expense ratio net of
billing fees.
-16-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Earnings (loss) before income taxes and
minority interest:
Nonstandard automobile $(16,838) $(4,502) $(27,890) $8,150
Crop (8,003) (11,911) (4,636) 506
------ ------ ------ -----
Segment totals (24,841) (16,413) (32,526) 8,656
Corporate and other (1,803) (1,965) (2,159) (2,439)
------ -------- ------ -----
Consolidated totals $(26,644) $(18,378) $(34,685) $6,217
====== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
<S> <C> <C>
Segment assets:
Nonstandard automobile $317,908 $376,831
Crop 367,666 143,434
</TABLE>
Total assets of the crop business are subject to normal cyclical
fluctuations and are normally high at September 30 of each year.
12. Earnings Per Share
Basic and diluted net earning (loss) per share are computed by dividing net
earnings (loss) as reported by the average number of shares outstanding as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Basic:
Weighted-average common shares
outstanding 5,876,398 5,825,930 5,876,398 5,825,930
========= ========= ========= =========
Diluted:
Weighted-average common shares
outstanding 5,876,398 5,825,930 5,876,398 5,825,930
Dilutive effect of stock options 0 0 0 0
---------- ---------- ---------- ----------
Average common shares outstanding
assuming dilution 5,876,398 5,825,930 5,876,398 5,825,930
========= ========= ========= =========
</TABLE>
The Company has 682,572 million stock options outstanding as of September
30, 1999. Of these, 682,572 million are antidilutive because the exercise
price is below the average market price during the period. Additionally due
to the net loss in 1998 and 1999, stock options are antidilutive and
therefore are excluded from the calculation of average common shares
outstanding assuming dilution and fully diluted earnings per share is the
same a basic earnings per share.
-17-
<PAGE>
13. 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>
September 30, September 30,
1999 1998
<S> <C> <C>
Reported net earnings (loss) $(19,623) $(1,941)
US/Canada GAAP differences:
No differences -- --
------ -----
Revised net earnings (loss) $(19,623) $(1,941)
====== =====
Earnings (loss) per share - basic $(3.34) $(0.33)
===== ====
Earnings (loss) per share - fully diluted $(3.34) $(0.33)
===== ====
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
<S> <C> <C>
Shareholders' equity in accordance with Canadian GAAP $29,701 $49,725
Add (deduct) effect of difference in accounting for:
Deferred income taxes -- --
Outstanding claims -- --
Minority interest portion -- --
Receivables from sale of capital stock (242) (1,377)
Unrealized gain (loss) on investments* (2,921) 1,176
------ ------
Shareholders' equity in accordance with US GAAP $26,538 $49,524
====== ======
</TABLE>
*Note: The increase (decrease) in shareholders' equity attributable to the
unrealized gain (loss) of $(2,921) and $1,176 at September 30, 1999 and December
31, 1998, respectively, are net of deferred tax expenses (recovery) of $(1,573)
and $679 and related minority interest of $(964) and $416.
-18-
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF THE COMPANY
FORWARD LOOKING STATEMENTS AND CERTAIN RISKS
All statements, trend analyses, and other information herein contained relative
to markets for the Company's products and/or trends in the Company's operations
or financial results, as well as other statements including words such as
"anticipate," "could," "feel(s)," "believe," "believes," "plan," "estimate,"
"expect," "should," "intend," "will," and other similar expressions, constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to known and unknown risks,
uncertainties and other factors which may cause actual results to be materially
different from those contemplated by the forward-looking statements, Such
factors include, among other things: (i) general economic conditions, including
prevailing interest rate levels and stock market performance; (ii) factors
affecting the Company's crop insurance operations such as weather-related
events, final harvest results, commodity price levels, governmental program
changes, new product acceptance and commission levels paid to agents; (iii)
factors affecting the Company's nonstandard automobile operations such as
premium volume and levels of operating expenses as compared to premium volume;
and (iv) the factors described in this section and elsewhere in this report.
Problems with Policy Administration Systems
Three out of the five policy administration systems utilized by the nonstandard
auto segment during 1999 were implemented in the 1998 and 1999 time frames and
do not have fully automated financial reporting functionality. The other two
policy administration systems being used are systems with mature financial
reporting capabilities.
Implementation of the three new systems without mature financial reporting
capabilities, has resulted in the usage of an accounts receivable estimation
methodology. Currently, appropriate financial reporting capabilities are in the
development stage, but the reports have not been adequately tested for accuracy.
The Company's other two systems generate accounts receivable reports which show
the total of all premium receivable balances and which balance to the total of
all premium receivable balances of all policies within the system. As a result,
the Company estimates accounts receivable on policies administered by the three
new systems. Approximately 80% or $56.5 million of accounts receivable as of
September 30, 1999, relate to policies administered by new systems. The Company
expects that it will be able to generate accounts receivable balances directly
from its policy administration systems at Pafco and Superior early next year.
Two of the three new policy administration systems were implemented in December
1998 and August 1999. After the systems were implemented, system problems were
identified which resulted in additional bad debt expense being recorded. The
additional bad debt expense was due to problems in billing policies contained
within the two systems. Of the $4.5 million of estimated premium receivables
administered by the two systems, the Company has estimated $2.9 million of that
amount to be un-collectable primarily as a result of policy billing and
cancellation problems. Accordingly, that amount has been written off in the
third quarter of 1999. The Company is converting policies from the two systems
back to a mature policy administration system which the Company has used before.
The Company expects the conversion to be completed during the fourth quarter.
-19-
<PAGE>
The third new policy administration system has also experienced reporting
problems. Approximately 75% of all of nonstandard automobile policies are on
this policy administration system. The reporting problems appear to be due to
programming changes in how data was extracted from the policy administration
system for reporting purposes.
The effect of the identified problems has been recorded in the third quarter
1999. Additional research needs to be completed to measure the full financial
impact of these problems.
Operating Losses in Nonstandard Automobile Segment
The Company's nonstandard automobile segment accounted for approximately 65% of
the net loss reported for the third quarter of 1999. The loss ratios for this
segment remain higher than industry ratios. The Company has developed a
state-by-state action plan for improving its loss ratio. The plan includes more
restrictive underwriting of new and renewal business, withdrawal from selected
states, rate increases, and product redesign. More restrictive underwriting
including extensive use of motor vehicle reports (MVR's) was implemented during
the second and third quarters of 1999. The Company has notified agents in
selected states of its decision to withdraw from those states. Rate increases
are being implemented in major states during the fourth quarter of 1999 and the
first quarter of 2000. The introduction of redesigned products started in the
third quarter of 1999 and will continue through the first half of 2000. Because
a majority of the Company's policyholders purchase annual policies, the impact
of corrective actions will be relatively modest during the fourth quarter of
1999. Profitable underwriting results are expected to occur in the latter half
of 2000.
The Company's operating expenses are currently high relative to its premium
volume. To a large extent this is a result of extraordinary expenses incurred
during 1999 to address system issues. Those systems issues have also negatively
impacted the Company's ability to service its policyholders and agents and,
thereby, have negatively impacted the Company's premium volume. During 2000, the
Company expects significantly reduced expenses associated with systems issues.
In addition, during the first half of 2000, the Company will reduce operating
expenses so that those expenses are in line with projected premium volume.
Weaknesses in Internal Control Systems
The Company's systems of internal control present within key processes and
information technology systems are being evaluated through an ongoing review.
The Company's systems of internal control are intended to insure reliable
financial reporting as well as provide for the safeguarding of the Company's
assets. Specific weaknesses have been identified in the following areas: Year
2000 compliance of certain operating systems in the nonstandard operations,
general ledger systems integration, financial reporting controls, the
relationship of actuarial analysis with claims processing, and specific
technical documentation. Many of the identified weaknesses in these areas should
be ameliorated when the Company's automated operating and financial systems are
properly integrated. Technological inadequacies arising during the migration of
systems are being addressed on an ongoing basis. An action plan has been created
to insure that attention is given to identified areas. The four part action plan
includes: 1) specific human resource initiatives designed to increase financial
accounting staffing and core competency and the hiring of experienced financial
management, 2) imposition of task force direction headed by senior management
-20-
<PAGE>
designed to integrate and automate the information technology and financial
reporting applications, 3) increased emphasis on internal audit functional
responsibilities including the development of comprehensive internal audit
programs designed to monitor and report on compliance with established control
systems, and 4) ongoing use of external consulting resources in the oversight of
system documentation, development of financial reporting procedures,
re-engineering of interdepartmental integration processes and the implementation
and enhancement of existing policies and procedures.
Timeliness of Financial Information
The Company's problems with its policy administration systems and the weaknesses
in internal controls discussed in this report have resulted in the Company being
unable to prepare certain otherwise routine monthly and quarterly financial
statements and information on a timely basis. Such statements and information
are necessary for the Company's internal use, for filings with regulators and
for compliance with the Company's periodic reporting obligations. The Company
expects to be able to generate and prepare these financial statements and
information on a timely basis in the year 2000.
Regulatory Uncertainties
The losses, adverse trends and uncertainties discussed in this report are
matters of concern to the domiciliary insurance regulators of the Company's
operating subsidiaries, the IDOI and FDOI. As previously disclosed, the IDOI has
commenced target examinations of Pafco covering loss reserves, pricing and
reinsurance. Although no report has been issued, the IDOI has required Pafco to
provide monthly financial statements, obtain prior approval of reinsurance
arrangements and of affiliated party transactions, submit business plans that
address levels of surplus and net premiums written, and consult with the IDOI on
a monthly basis. In addition, as a result of the losses experienced by IGF in
the crop insurance operations, IGF has agreed with the IDOI to provide monthly
financial statements and consult monthly with the IDOI and obtain prior approval
for affiliated party transactions. The FDOI has initiated examinations covering
Superior. The scope of these examinations has covered or will cover market
conduct, data processing systems, Year 2000 readiness and financial examinations
as of June 30, 1999 and December 31, 1999. Although no report has been issued or
other action taken, the Company expects to meet shortly with the FDOI to discuss
these and other issues, including reserve levels. The Company's operating
subsidiaries and their transactions with affiliates, including the Company, are
subject to the regulation by these insurance departments. Although the Company
expects to resolve all issues with these insurance departments in a satisfactory
manner, failure to resolve issues could result in regulatory actions that
materially and adversely affect the Company.
OVERVIEW 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 General Insurance
Company ("Pafco") and Superior Insurance Company ("Superior"), is engaged in the
writing of insurance coverage on automobile physical damage and liability
policies for "nonstandard risks". Beginning in September the Company began to
market its non-standard auto policies from both Pafco and Superior under the
same name: Superior Insurance Group. Nonstandard insureds are those individuals
-21-
<PAGE>
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 four principal components of the Company's crop insurance business are (1)
Multi-Peril Crop Insurance ("MPCI"),(2) crop hail insurance, (3) private named
peril, and (4)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 1,625 independent agencies in 42 states.
The Company's risk in the first two quarters of the year is due to the following
facts: (1) the Company has a large exposure of crops planted in the fall and
winter (citrus and nursery in Florida, nursery in Texas, wheat in Kansas), (2)
the Company's CRC risk which is tied to commodity prices is quantified in July,
November and December but is incurred throughout the various growing seasons,
(3) the preventative planting risk that the Company incurs on its traditional
spring crops, and (4) the planting of its spring crops (corn and soybeans in the
Midwest)the majority of which occurs prior to the end of May of any given crop
year. Also, MPCI policies are continuous and automatically renew each year
unless the insured notifies the Company prior to March 15 of each year. The
Company allocates a percentage of risk incurred in the first quarter equal to
35% of the overall risk for the year, 35% for the second quarter and 20% for the
third quarter. The risk of drought is highest on traditional spring crops in the
months of July, August, and early September. The remaining portion of the risk
(10%) is recognized in the fourth quarter and relates to the late fall and
winter crops and CRC adjustments.
-22-
<PAGE>
Therefore, the Company's revenue and profit for the MPCI and CRC programs are
recognized in a 35%, 35%, 20%,10% manner throughout the year.
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.
REVIEW OF CONSOLIDATED OPERATIONS
Net Earnings (Loss)
For the three and nine months ended September 30, 1999, the Company recorded a
net loss of $(13,907) and $(19,623), or $(2.37) and $(3.34) per share (basic and
diluted). This is an increase in net loss for the three and nine months ended
September 30, 1998 of $(10,233) and $(1,941) or $(1.76) and $(0.33) per share
(basic and diluted).
Income before taxes and distributions on preferred securities for the
nonstandard automobile segment showed a loss of $(16,838) and $(27,890) for the
three and nine months ended September 30, 1999 compared to a loss of $(4,502)
and earnings of $8,150 for the three and nine months ended September 30, 1998.
These losses were driven primarily by an increase in loss and loss adjustment
expense ("LAE") reserves and as a result of extraordinary expenses incurred
during 1999 to address system issues.
Income before taxes and distributions on preferred securities for the three and
nine months ended September 30, 1999 in the crop segment showed a loss of
$(8,003) and $(4,636) which compares to a loss of $(11,911) and earnings of $506
for the same periods in 1998. The primary reason for the decrease in 1999 as
compared to 1998 was an adverse loss development on AgPI(R) policies written in
1998 in the Crop Segment (See Note 9).
-23-
<PAGE>
Losses before tax and distributions on preferred securities for the corporate
segment are comparable to prior year, at $(1,803) and $(2,159) for the three and
nine months ended September 30, 1999 and $(1,965) and $(2,439) for the same
period in 1998. These losses consist primarily of amortization of intangibles
and general and administrative expenses.
Gross Premiums Written
Gross premiums
written for the nonstandard automobile segment decreased 6.7% and 20.1% for the
three and nine months ended September 30, 1999 compared to the three and nine
months ended September 30, 1998. The primary reasons for this decline in volume
had been the downsizing by the Company of its nonstandard automobile business in
certain competitive markets, and the slowing of new business due to poor service
during the conversion by the Company to a new operating computer system.
However, management believes that service has subsequently improved and this
quarter's decreased premium volume percent of 6.7% is less than that reported
last quarter of 16.9%. Management believes this improvement in the declines is
indicative of the improved service.
Gross premiums written for the crop segment
decreased 68.5% and 1.0% for the three and nine months ended September 30, 1999
compared to comparable periods in 1998. Such decrease in the nine months ended
September 30, 1999 was due to lower crop values and reduced sales of named peril
products including AgPI(R). Crop premiums (expressed in thousands) for the three
and nine months ended September 30 are as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
CAT imputed $(3,275) $1,502 $27,507 $34,140
MPCI (4,254) 18,071 136,774 125,368
Crop hail and named perils 14,455 14,356 71,578 77,721
AgPI(R) 0 (4) 96 7,529
------ ------ -------- -------
6,926 33,925 235,955 244,758
Less: CAT imputed 3,275 (1,502) (27,507) (34,140)
------ ------ ------- -------
$10,201 $32,423 $208,448 $210,618
====== ====== ======= =======
</TABLE>
Remaining other gross written premiums not reflected in nonstandard automobile
or crop segments represent assumed intercorporate reinsurance of Granite
Reinsurance Company Ltd. Other gross written premiums were $68 and $470 for the
three and nine months ended September 30, 1999 compared to $1,928 and $1,928 for
the same periods in 1998. Gross written decreased in 1999 as a result of the
sale of the commercial business effective January 1999.
Net Premiums Written
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 nine months ended September 30 are as follows:
-24-
<PAGE>
1999 1998
---- ----
Nonstandard automobile 0% 10%
Crop hail 69% 25%
Named peril 50% 50%
With respect to automobile reinsurance, the Company determined that, as a result
of an evaluation of the financial viability of the primary reinsurer, it was no
longer in the Company's interest to continue such reinsurance in 1999. The
increase in crop hail reinsurance resulted from increased coverage emanating
from the acquisition of the CNA book during 1998 combined with additional quota
share reinsurance purchased to better protect the Company from the effects of
normal crop insurance fluctuations from season to season.
Fee Income
Fee income decreased 17.1% and 29.1% for the three and nine months ended
September 30, 1999 as compared to the corresponding periods of the prior year.
The decrease was primarily due to the federal government retaining the CAT
policy fee in 1999, versus Company retention of this fee in 1998. Fee income has
also decrease in the nonstandard auto segment due to decreases in gross written
premium volume.
Net Investment Income
Net investment income decreased 2.6% for the three months ended and increased
5.9% for the nine months ended September 30, 1999 as compared to the
corresponding periods of the prior year. Such increase was due primarily to
higher yields on invested assets caused by a shift out of equity securities and
into fixed income investments.
Net Claims Incurred
The loss ratio for the nonstandard automobile segment for the three and nine
months ended September 30, 1999 was 92.7% and 87.7% of net premiums earned as
compared to 89.0% and 80.7% in 1998. Nonstandard automobile results in 1999 are
worse than in 1998 because of adverse development on loss and loss adjustment
expense reserves for accidents occurring in 1998 and because of continuing
deterioration in results for accident year 1999. During the second quarter of
1999 the Company incurred $4.1 million of loss and loss adjustment expense on
its nonstandard auto operation for losses occurring in 1998.
During the third quarter, the Company incurred an additional $2.5 million of
loss and loss adjustment expenses for losses occurring in 1998. At the end of
1998 the Company projected its unpaid loss and loss adjustment expense
liabilities for nonstandard auto, net of reinsurance, to be $114.8 million.
During 1999 a greater number of claims that occurred prior to year end 1998 were
reported than anticipated by the Company. The preponderance of those
unanticipated claims involved bodily injury liability and personal injury
protection.
In the second quarter, the Company, reexamined its nonstandard automobile
projections for 1999 and strengthened reserves for the current accident year by
$5.0 million, $2.5 million of which was for accidents occurring in the first
quarter of 1999. In the third quarter, the Company again reviewed its
projections for the nonstandard automobile segment and strengthened reserves an
additional $2.8 million, $1.5 million of which was for accidents occurring in
the first half of 1999.
-25-
<PAGE>
As noted in Note 9 to the unaudited consolidated financial statements for the
nine months ended September 30, 1999, in 1998 the Company sustained significant
losses on its AgPI(R) product, the quantification of which became known in 1999.
Based on the Company's latest analysis, the estimated gross ultimate incurred
loss settlement and loss adjustment expense ("LAE") related to these policies
totals $25 million. The Company recorded $6 million, $9 million, and $10 million
of loss and LAE in 1998, the first quarter and second quarter of 1999,
respectively. Losses for second quarter were partially offset by the recording
of a net gain of $4.67 million on a reinsurance treaty.
The Company believes
that it has recognized, through loss and LAE payments and reserves, its ultimate
loss exposure related to the AgPI(R) product. However, there can be no assurance
that the Company's ultimate liability for AgPI(R) related losses will not be
materially greater than the $25 million in gross losses already recorded related
to this product.
General and Administrative Expenses
Policy acquisition and general and administrative expenses decreased to $24,395
and $57,040 or 35.8% and 26.9% of net premium earned for the three and nine
months ended September 30, 1999 compared to $24,468 and $67,734 or 29.2% and
25.5% of net premium earned in the corresponding periods of 1998. Overall
expenses in the first nine months of 1999 versus the first nine months of 1998
decreased by $10,694. Within this decrease crop expenses decreased by $23,373
while nonstandard auto expenses increased by $13,562.
The expense ratio for the nonstandard auto segment was 40.1% and 31.1% for the
third quarter and year-to-date in 1999 as compared to 24.3% and 21.5% in 1998.
The expense ratio increased primarily due to a reduction in ceding commission
income and increased salary expense. The reduction in ceding commission income
was due to the elimination of this income due to a commutation of a quota share
treaty. This ceding commission income was netted against auto expenses in the
prior year which reduced auto expenses in 1998. Salary and benefit expenses were
higher in 1999 in part due to increased use of temporary help and contract
labor.
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 underwriting gain is an estimate until later in the year
when crops are harvested and losses are known. The estimated year to date gain
ratio in 1999 was 13.8% on gross premium; compared to 11.7% in 1998. The
underwriting gain increased in 1999 due to the fact that the crops covered by
MPCI policies are estimated to have average to above average yields this year.
The 13.8% estimate is in line with actual annual results over the past four
years. The 11.7% gain ratio for crop in the prior year was lower due to lower
estimated crop yields.
Interest Expense
Interest expense primarily represents interest incurred by the IGF Revolver and
three smaller notes assumed in the acquisition of NACU. See Note 5 to the
consolidated financial statements.
Amortization of Intangibles
Amortization of intangibles includes goodwill from the acquisition of Superior,
additional goodwill from the acquisition of the minority interest position in
GGS Management Holdings Inc. ("GGSH") and NACU, debt or preferred security
issuance costs and organizational costs. The increase in 1999 reflects the
effects of the goodwill associated with the July 1998 acquisition of NACU.
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<PAGE>
Provision (Benefit) for Income Taxes
Income tax expense was 32.3% and 33.4% of pre-tax income for the three and nine
months ended September 30, 1999 compared to 32.1% and 40.8% for the same period
in 1998. The decreased effective tax rate at September 30, 1999 is due to a
combination of estimated permanent differences, of $2,030, between book and
taxable income, coupled with a year to date pre-tax loss rather than a pre-tax
gain.
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
Cash and Investments
Total cash and investments as of September 30, 1999 and December 31, 1998 were
$238,067 and $253,718, respectively. Composition of investments is comparable
between these periods. The Company's market risk exposure has not materially
changed since prior year end.
Due From Related Parties
Investments in and advances to related parties decreased from $3,495 at December
31, 1998, to $1,013 at September 30, 1999. The decrease was caused by repayment
of certain loans by company officers.
Premium Receivables
Receivables net of allowances for doubtful accounts as of September 30, 1999 and
December 31, 1998 were $145,025 and $121,328, respectively. The crop portion of
receivable balances as of September 30, 1999 and December 31, 1998 were $86,824
and $55,484, respectively. Crop receivables are seasonally higher in second and
third quarter as compared to at year end.
Nonstandard auto receivable balances net of allowance for doubtful accounts were
$62,053 and $65,076, respectively as of September 30, 1999 and December 31,
1998. Receivables are down due to a decline in premium volume.
Reinsurance Recoverables and Prepaid Reinsurance Premiums
Reinsurance recoverables were $225,843 and $67,885 as of September 30, 1999 and
December 31, 1998, respectively. However the reinsurance recoverable balance is
more effectively compared to the September 30, 1998 balance of $236,390. This is
primarily due to the cyclical nature of the crop business. Of the total
reinsurance recoverable balance, $217,532 and $155,460 pertain to crop business
as of September 30, 1999 and 1998, respectively. Reinsurance recoverables are up
in 1999 due to an increased percentage of ceded business in 1999 with regard to
a quota share treaty. Reinsurance recoverables on nonstandard auto decreased
from $47,920 to $1,910 for the period from September 30, 1998 to the current
year to date due to the commutation of a quota share treaty.
Prepaid reinsurance premiums were $28,477 and $17,486 as of September 30, 1999
and December 31, 1998, respectively. This prepaid balance is more effectively
compared to the September 30, 1998 prepaid reinsurance balance of $42,693. The
prepaid reinsurance balance is affected also by the cyclical nature of the crop
business reinsured. Crop prepaid reinsurance premiums totaled $29,169 and
$24,681 as of September 30, 1999 and 1998, respectively. Prepaid reinsurance
premiums on nonstandard auto decreased from $8,368 at September 30, 1998 to $-0-
at September 30, 1999 due to the commutation of a quota share treaty arrangement
in the second half of 1998.
Deferred Policy Acquisition Costs
Deferred policy acquisition costs were $12,509 and $16,332 as of September 30,
1999 and December 31, 1998, respectively. Although these costs are comparable,
the Company feels the ratio of DAC to net unearned premium would be more
comparable using prior year to date comparisons. Deferred acquisition costs as
of September 30, 1998 were $15,232. Deferred acquisition costs were primarily
composed of deferred acquisition costs on nonstandard auto of $12,068 and
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<PAGE>
$12,192, respectively at September 30, 1999 and September 30, 1998,
respectively. Deferred policy acquisition costs for nonstandard auto as compared
with nonstandard net unearned premiums of $86,192 and $81,263 were 14.0% and
15.0% as of the above dates, respectively. Deferred acquisition costs for crop
were $331 and $474, respectively at September 30, 1999 and 1998, which are
comparable from one year to another. The ceded deferred costs are no longer
applicable in 1999 due to commutation of a quota share treaty.
Federal Income Taxes
Federal income taxes recoverable of $11,708 and $12,711 at September 30, 1999
and December 31, 1998 are based on amounts recoverable from the 1996 and 1997
tax year due to tax losses generated in 1998 and through September 30, 1999.
The deferred income tax asset balance of $10,428 as of September 30, 1999 has
increased from $5,185 at September 30, 1998 and $5,825 at December 31, 1998
because of higher unearned premiums, changes in the unrealized gain or loss in
investments and an increase in loss reserve.
Capital Assets
Property and Equipment, net of accumulated depreciation has increased $2,712
over year end 1998. This increase is primarily due to the capitalization of
various systems implementation and hardware costs, primarily in the nonstandard
auto segment.
Intangible Assets
The balance in the Intangible Assets has decreased from year end 1998 due to
amortization expense. Intangible assets include goodwill from the acquisition of
Superior, additional goodwill from the acquisition of the minority interest in
GGSH and NACU, debt or preferred security issuance costs and organizational
costs.
Outstanding Claims
Total loss and loss adjustment expense reserves increased from $207,432 as of
December 31, 1998, to $335,045 as of September 30, 1999. The total increase in
loss and loss adjustment expense reserves is approximately $127,613.
Nonstandard auto reserves declined $2.1 million during 1999 resulting from the
Company's premium decrease. Reserves for crop insurance increased $131.7 million
from December 31, 1998, due to the seasonal nature of the business. Crop
insurance reserves will decline to comparable December 1998 levels as claims are
settled during fourth quarter.
Unearned Premium
The unearned premium reserve increased by $6,655 from December 31,1998 to
September 30,1999. Gross unearned premium was $117,320 and $110,665 as of
September 30, 1999 and December 31, 1998. However, this unearned premium balance
is more effectively compared to the September 30, 1998 balance of $146,009 due
to the cyclical nature of the crop business. Unearned for the crop business is
impacted by the cyclical nature of the business. Crop unearned as of September
30, 1999 and September 30, 1998 was $30,830 and $35,062, respectively. Crop
unearned decreased by $4,232 or 12.1% from September 30, 1998 to September 30,
1999. This was primarily due to a decrease in crop hail written premium of 7.9%
for the same period. Unearned on nonstandard auto decreased $10,263 or 10.6% for
the same period. This was primarily due to a decrease in nonstandard premiums
written of 9.3% for the respective quarters ended September 30. Unearned for
nonstandard auto was $86,192 and $96,455 as of September 30, 1999 and September
30, 1998.
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<PAGE>
Due to Insurance Companies
Reinsurance payables increased by $70,807 from December 31, 1998 to September
30, 1999 due to the cyclical nature of the crop business. Crop receivables
increased from year end by $73,544 through September 30, 1999. Nonstandard auto
decreased by $13,565 to $130 from December 1998 due a commutation of a quota
share reinsurance treaty.
Notes Payable
IGF depends upon the IGF Revolver to meet its seasonal needs for liquidity. This
line of credit has been extended through December 15, 2000. At December 31,
1998, March 31, 1999, June 30, 1999 and September 30, 1999 the outstanding
balance was $12,000, $1,989, $11,767 and $5,966, respectively. This line is
collateralized by the crop-related uncollected premiums, reinsurance recoverable
on paid losses, FCIC annual settlement, and a first lien on the real estate
owned by IGF. The IGF Revolver contains certain covenants which (i) restrict
IGF's ability to accumulate common stock; (ii) set minimum standards for
investments and policyholder surplus; and (iii) limit ratio of net written
premiums to statutory surplus. At September 30, 1999, IGF was not in compliance
with a minimum statutory surplus covenant. However, IGF has received a waiver
from the bank for September 30, 1999. IGF does expect to meet the minimum
statutory surplus covenant at year-end.
The average interest rate on the IGF Revolver was 7.81% for the nine months
ended September 30, 1998 and 6.83% for the nine months ended September 30, 1999.
Notes payable also includes a $1,000 note due 2001 on the purchase of NACU which
bears no interest. The balance of notes payable at December 31, 1998 includes
three smaller notes (less than $300 each) assumed in the acquisition of NACU
which have various due dates from 2002 to 2006 with periodic payments at
interest rates ranging from 7% to 9.09%.
Accrued and Other Payables
Other liabilities increased by $9,932 from December 31, 1998 to September 30,
1999. However, payables as of September 30, 1998 of $20,817 are comparable to
payables of $30,611 as of September 30, 1999. The payables tend to be higher at
September 30 due to cyclical nature of the crop business and the related overall
effect on cash flow in the consolidated business.
Equity in Net Assets of Subsidiary
The Company's minority interest equity in net assets of its subsidiary reduced
from $19,787 to $10,047 as of December 31, 1998 and September 30, 1999 as a
result of operating losses in SIG, the Company's 67% owned subsidiary.
Shareholders' Equity
Stockholders' equity has decreased $20,024 from December 31, 1998. This decrease
is the result of a net loss of $19,623 for the nine months ended September 30,
1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated total assets of $750,077 at September 30, 1999
increased $179,088 from $570,989 as of December 31, 1998. The primary reason for
this increase was an increase in receivable balances which are impacted by the
cyclical nature of the crop/hail business. Typically crop/hail receivables are
high as of September 30.
As of September 30, 1999, the Company had $32,913 of cash, cash equivalents and
short-term investments available to meet short-term operating cash needs. This
was a decrease of $9,846 and $6,365 over the December 31, 1998 and September 30,
1998 balances.
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<PAGE>
The Portfolio of fixed maturities of the Company's 67% owned subsidiary Symons
International Group, Inc. ("SIG") reduced to $172,502 at September 30, 1999 from
$191,002 and $181,310 at December 31, 1998 and September 30, 1998, as a result
of the sale of fixed maturities to fund operating losses.
Net cash used in operating activities to September 30, 1999 aggregated $7,013
compared to cash provided from operations of $7,648 in 1998 due to the effect of
operating losses offset by net cash from changes in operating assets and
liabilities.
Net cash provided in investing activities of $3,322 for the nine months ended
September 30, 1999 compares to $26,233 for the comparable period in 1998.
Overall, operating cash flow combined with the availability of short term
investments and the liquidation of certain fixed maturity investments continues
to be adequate to meet policyholders needs for claims.
The crop segment also has the ability to retain MPCI premium funds collected
October through December of 1999 til March of 2000 at a 15% interest rate if
needed.
The IGF Revolver has been extended through December 15, 2000. At December 31,
1998, March 31, 1999, June 30, 1999 and September 30, 1999 the outstanding
balance was $12,000, $1,989, $11,767 and $5,966, respectively.
The nonstandard automobile insurance subsidiaries' primary sources of funds are
premiums, investment income and proceeds from the maturity or sale of invested
assets. Such funds are used principally for the payment of claims, operating
expenses (primarily management fees), commissions, dividends and the purchase of
investments. There is variability to cash outflows because of uncertainties
regarding settlement dates for liabilities for unpaid losses. Accordingly, the
Company maintains investment programs intended to provide adequate funds to pay
claims without forced sales of investments.
Cash flows in the Company's MPCI business differ from cash flows from certain
more traditional lines. The Company pays insured losses to farmers as they are
incurred during the growing season, with the full amount of such payments being
reimbursed to the Company by the federal government within three business days.
MPCI premiums are not received from farmers until covered crops are harvested.
Such premiums are required to be paid in full to the FCIC by the Company, with
interest, if not paid by a specified date in each crop year.
The Trust Indenture for the Preferred Securities contains certain preventative
covenants. These covenants are based upon the SIG's Consolidated Coverage Ratio
of earnings before interest, taxes, depreciation and amortization (EBITDA)
whereby if SIG's EBITDA falls below 2.5 times Consolidated Interest Expense
(including Preferred Security distributions) for the most recent four quarters
the following restrictions become effective:
- - SIG may not incur additional Indebtedness or guarantee additional
Indebtedness.
- - SIG may not make certain Restricted Payments including loans or advances to
affiliates, stock repurchases and a limitation on the amount of
dividends is inforce.
- - SIG may not increase its level of Non-Investment Grade Securities defined as
equities, mortgage loans, real estate, real estate loans and
non-investment grade fixed income securities.
These restrictions currently apply as SIG's Consolidated Coverage Ratio was
(2.9x) through September 30, 1999 and will continue to apply until SIG's
Consolidated Coverage Ratio is in compliance with the terms of the Trust
Indenture. This does not represent a Default by SIG on the Preferred Securities.
SIG is in compliance with these preventative covenants as of September 30, 1999.
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<PAGE>
YEAR 2000 COMPLIANCE
General
In the next year, many companies will face potentially serious risks associated
with the inability of existing data processing hardware and software to
appropriately recognize calendar dates beginning in the year 2000. Many computer
programs that can only distinguish the final two digits of the year entered may
read entries for the year 2000 as the year 1900 and compute payments, interest,
premiums, commissions, delinquencies and other matters based on the wrong date.
If a company's critical internal systems do not correctly recognize and process
data information beyond the year 1999, there could be a material adverse impact
on a company's business and operation.
The Company has four primary locations where Y2K issues have the potential to
significantly impact the Company's operations. These locations are Indianapolis,
Indiana; Atlanta, Georgia; Tampa, Florida and Des Moines, Iowa. Give the nature
of the Company structure, the issues relating to Tampa will be grouped together
with those of the Company's Atlanta operations and will be referred to as
"Atlanta" issues.
The Company's location in Des Moines, Iowa primarily administers the Company's
crop insurance business, which on a premium volume basis, represents roughly 50%
of the Company's total business. The Company's corporate headquarters is located
in Indianapolis and the Company's Indianapolis location also houses nonstandard
automobile business operations which, on a premium volume basis, account for
roughly 25% of the Company's nonstandard automobile business. The Company's
Atlanta location (including Tampa), administers the remainder of the Company's
nonstandard automobile business.
The Year 2000 Project ("Project") addresses the inability of various computer
software and hardware (both internal and external to the Company) to distinguish
between the year 1900 and the year 2000. In 1996, the Company initiated an
effort to replace its hardware and software systems to reap the operational
efficiencies of state of the art processing systems. This effort came as a
result of the Company's decision to replace the mainframe system in Indianapolis
and wean the Company from a third party contractor processing arrangement in
Atlanta. As the Company began to prepare for Y2K issues during the time it was
in the midst of its operating systems conversion and upgrade, the Company set
forth on a course to identify Y2K items and issues, assign a priority for those
items identified, test solutions, and design contingency plans.
Readiness
Corporate Wide Infrastructure
The Company relies on third party vendors for many things, such as electric
utility supply, water, telephone service, banking services, investment
management and reinsurance, among other things. The Company began inquiring of
such third party infrastructure vendors regarding their Y2K readiness in July
1998. These inquiries took the form of written requests for responses from such
third party vendors, which would detail their Y2K preparedness. The Company has
received written assurance from each of its material third party infrastructure
vendors that their respective Y2K preparations are complete and that the Company
should not anticipate a material disruption in service from such infrastructure
vendors.
Further, the Company has examined its internal infrastructure systems (e.g.
telephone system, HVAC, security systems) and has successfully completed the
necessary remediation of such internal infrastructure system.
The Company has also prepared and implemented documented standards with respect
to all new equipment purchases and the Company now receives a letter of
certification from the manufacturers of such equipment that their products are
Y2K compliant.
-31-
<PAGE>
Des Moines
The Company's Des Moines location has completed its Y2K Project and its
preparation is now complete.
Atlanta
The Company has replaced its policy administration and claims systems by
converting to Y2K compliant systems. These new policy administration and claims
systems are currently operational for all new business written by the Company's
Atlanta facility. There are, however, approximately 8,000 insurance policies
which are currently maintained on a non-Y2K compliant policy administration
system provided by an unrelated third party. The policies maintained on this
non-Y2K compliant system represent less than ten percent of the policies
currently administered by the Company's Atlanta operations. Given the nature of
the policy term of these 8,000 insurance policies, the Company expects the
policies to be beyond their term as of December 31, 1999, and it is the
Company's intention that if such policies are quoted for renewals, if any, that
such renewals will be processed on Atlanta's Y2K compliant policy administration
system. The Company has arranged for an unrelated third party to store inactive
policy data while providing the Company access to such data on a fee basis.
Ongoing operations of the Company will not be affected by the warehousing of
such inactive policy data. All open claims are currently being administered on
Atlanta's Y2K compliant claims system.
The Company's Atlanta operation must migrate historical data from its non-Y2K
compliant legacy systems (policy administration and claims). The data
requirements of both the legacy system and the Company's new Y2K compliant
policy administration and claims system have been identified and the data
differences between such systems have also been identified. The Company has
developed the program logic to move historical claims information to its Y2K
compliant platform and is in the process of doing so.
Indianapolis
The Company anticipated that the conversion of its non-Y2K compliant policy
administration system would be completed by June 30, 1999. However, in early
June 1999 the Company determined that it would reap significant future
operational efficiencies by installing the Company's Y2K compliant policy
administration system from its Atlanta operations in Indianapolis. In addition
to significant operational efficiencies, the Company determined that it would
reap significant benefits from having all of its automobile insurance operations
on the same policy administration system. Therefore, the Company's prior effort
with respect to conversion of its Indianapolis policy administration system was
discontinued.
Given the fact that the Company's Indianapolis and Atlanta locations do not
service the same states, for the necessary policy administration conversions to
occur, variations which are unique to each state with which the Indianapolis
location deals must be separately programmed into the Y2K compliant policy
administration system being imported from the Company's Atlanta location.
Currently, programming is underway to add the various state-specific
requirements of those states with which the Indianapolis location deals. The
Company anticipates that, as soon as each state's programming is completed, it
will be brought on-line while programming continues on other Indianapolis
states. The Company believes that such state specific programming will be
completed (including testing) by December 27, 1999. The hardware necessary for
the Company's Indianapolis policy administration conversion has been acquired
and is Y2K compliant.
The Company has completed installation of its Y2K compliant Atlanta claims
system in its Indianapolis location and, as of August 1998 began administering
all new claims in its Indianapolis location on this new Y2K compliant system.
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<PAGE>
The Company recognizes the challenges it faces regarding the completion of the
installation of the Atlanta policy administration system in Indianapolis, the
conversion of the Indianapolis policy administration data to a Y2K compliant
platform and the conversion of those claims, which are currently maintained on a
non-Y2K compliant platform to the Company's new Y2K compliant claims system.
Recognizing those challenges, the Company developed an alternative plan with
respect to its legacy systems, whereby the Company has upgraded its hardware and
operating software and has completed the remediation of its current policy
administration software and is presently in the final testing phase. The Company
is currently proceeding with the development, both of its primary effort as well
as this alternative. The Company estimates that this alternative will be
complete and operational by November 30, 1999. There can, however, be no
assurance that the Company will have completed any of the steps outlined with
respect to the Indianapolis portion of the Project by the dates noted or that it
will have completed the necessary Indianapolis Project by December 31, 1999.
Year 2000 Costs
The Company considers the costs associated with the Project to be material. The
Company estimates that, to date, it has spent approximately $8.3 million towards
completion of the Project of which $7.0 million has been capitalized for
hardware and new software purchased and installed by outside vendors. In 1996,
the Company began several projects to replace hardware and software systems. The
intention of the new systems was to improve transaction processing and the
Company's expense ratio rather than any Year 2000 issue. The Company estimates
that it has expensed $1.3 million for costs to prepare systems for the Year
2000. Further, the Company estimates that approximately $1.0 million of
additional funds will be required to complete the Project. The Company
anticipates that it will pay for these costs from current funds.
Risks
Given its state of preparedness, the Company does not feel that there are
material Y2K related risks with respect to either its Des Moines facility or the
services to be provided by third party infrastructure vendors. Further, the
Company does not feel that there is a material risk to its business or
operations from Y2K issues associated with internal infrastructure.
Des Moines and Atlanta
With respect to the Company's Des Moines and Atlanta locations the most
reasonably likely worst case scenario would be a telephone or power failure. If
this were to occur, the Company would execute our contingency plan. See the
contingency plan below.
Indianapolis
The most reasonably likely worst case scenario involving the Company's
Indianapolis operations is that the Company is unable to complete the
installation of its Y2K compliant policy administration system and fails to
successfully convert policy administration from its non-Y2K complaint legacy
policy administration system, which the Company does not consider to be the
case. If this were to occur, the Company would be unable to process roughly 25%
of its nonstandard automobile insurance business and it would lose the ability
to administer existing policies in an automated environment.
General
In the event that the Company's efforts are unsuccessful and/or that one or more
of the Company's critical internal systems should not properly recognize January
1, 2000 and subsequent dates, the following could occur, any of which could have
a material adverse impact on the operations of the Company;
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<PAGE>
- - Service to the Company's customers in the Indianapolis operations could
deteriorate to the point that a substantial number of the Company's
customers move their business to another company;
- - The Company may be unable to process its new business in the Indianapolis
operations or pay certain older claims in a cost effective manner;
- - The Company may be unable to fulfill, on a timely basis, its obligations to
its customers, regulatory authorities, and/or contingencies;
- - The Company may be unable to fulfill, on a timely basis, various
contractual obligations; and
- - The Company may suffer unintended, indirect consequences in that efforts to
deal with issues caused by the failure to complete the Project may divert
resources from other area or phases of the Company's operations.
Contingency Plans
The Company has assessed the feasibility of other alternatives to its stated
plan and is developing a contingency plan for each of the Des Moines, Atlanta
and Indianapolis locations. The Company is currently in the process of
documenting the plans and expects that the contingency plans for each of its
locations will be in place by December 31, 1999. The Des Moines location can not
complete its contingency plan until FCIC issues its instructions for crop
insurers system contingency. It is expected that the FCIC will publish its
instructions no later than the first week of December 1999.
ITEM 3 QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Information related to
Qualitative and Quantitative Disclosures about Market Risk was included under
Item 1. Business in the December 31, 1998 Form 10-K. No material changes have
occurred in market risk since this information was disclosed in the December 31,
1998 Form 10-K.
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.
IGF is a party to a number of pending legal proceedings
relating to the AgPI(R) agricultural business interruption
policies sold by IGF during 1998. See Note 9 to the
consolidated financial statements. IGF is a defendant in six
lawsuits now pending in California state court (King and
Fresno counties) and is a defendant in counterclaims filed
in two declaratory judgment actions that were brought by IGF
in federal district court in California. In addition, IGF is
a party to arbitration proceedings involving seven AgPI(R)
policyholders. The first of these proceedings was commenced
in July 1999. All of these proceedings remain in an early
stage and hearings on the merits are not expected to occur
until next year.
The policyholders involved in these proceedings have
asserted that IGF is liable to them for the face amount of
their policies, an aggregate of approximately $41 million, plus
an unspecified amount of punitive damages and attorney's fees.
As of September 30, 1999, IGF had paid an aggregate of
approximately $10 million to the policyholders involved in
these legal proceedings. The Company believes that it has
meritorious defenses to any claims in excess of the amounts it
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<PAGE>
has already paid and that the loss payments made and LAE
reserves established with respect to the AgPI(R) claims as of
September 30, 1999, are adequate with regard to all of the
AgPI(R) policies sold. However, there can be no assurance that
the Company's ultimate liability with respect to these and any
future legal proceedings involving AgPI(R) policies will not
have a material adverse effect on the Company's results of
operations or financial position.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
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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: November 23, 1999 By: /s/ Alan G. Symons
Alan G. Symons
Chief Executive Officer
Dated: November 23, 1999 By: /s/ Bruce K. Dwyer
Bruce K. Dwyer
Vice President and
Chief Financial Officer
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<PAGE>
GORAN CAPITAL INC. - Consolidated Exhibit 11.01
Analysis of Earnings Per Share
<TABLE>
<CAPTION>
Nine Nine
Months Ended Months Ended
September 30, September 30,
1999 1998
<S> <C> <C> <C>
Average Price (US $) $6.53 (A) $27.88
Proceeds from Exercise of Warrants and Options (US $) $6,583,261 (B) $15,031,886
========= ==========
Shares Repurchased - Treasury Method 1,008,620 (B)/(A) 562,477
========= =======
Shares Outstanding - Weighted Average 5,876,398 5,825,930
Add: Options and Warrants Outstanding 682,572 802,304
Less: Treasury Method - Shares Repurchased (1,008,620) (562,477)
--------- ---------
Shares Outstanding for US GAAP Purposes 5,550,350 (C) 6,065,757
========= =========
Net Earnings (loss) in Accordance with US GAAP $(19,623,000) (D) $(1,941,000)
========== =========
Earnings (loss)Per Share - US GAAP - Basic $(3.34) $(.33)
==== ===
Earnings (loss) Per Share - US GAAP - Fully Diluted $(3.34) (D)/(C) $(.33)
==== ===
</TABLE>
The Company has 683,000 stock options outstanding as of September 30, 1999. All
of the stock options are antidilutive because the exercise price is below the
average market price during the period. Additionally due to the net loss in 1998
and 1999, stock options are antidilutive and therefore are excluded from the
calculation of average common shares outstanding assuming dilution and fully
diluted earnings per share is the same as basic earnings per share.
-37-
<PAGE>
