UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _________ to ____________
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 May 1, 2000, 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 MARCH 31, 2000
Page
Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Unaudited Consolidated Financial Statements:
Unaudited Consolidated Balance Sheets at March 31, 2000
and December 31, 1999.............................................. 3
Unaudited Consolidated Statements of Earnings (Loss)
for the Three Months Ended March 31, 2000 and 1999 .............. 4
Unaudited Consolidated Statements of Shareholders' Equity (Deficit)
for the Three Months ended March 31, 2000 and 1999 ................ 5
Unaudited Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 2000 and 1999 .................... 6
Condensed Notes to Unaudited Consolidated Financial
Statements......................................................... 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations................................13
Item 3 Quantitative and Qualitative Disclosures About Market Risks........23
PART II OTHER INFORMATION..................................................23
SIGNATURES ..............................................................25
INDEX TO EXHBITS
Exhibit 11 - Computation of Per Share Earnings (Loss) .............26
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
GORAN CAPITAL INC.
UNAUDITED CONSOLIDAED BALANCE SHEETS
(CANADIAN GAAP, stated in thousands of U.S. dollars)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
ASSETS
<S> <C> <C>
Cash and investments $219,005 $231,424
Accounts receivable:
Receivables, net of allowance 128,933 92,446
Income taxes recoverable -- 6,820
Investments in and advances to related parties 1,853 1,646
Total Accounts Receivable 130,786 100,912
Reinsurance recoverable on paid and unpaid losses 44,540 88,293
Prepaid reinsurance premiums 94,026 10,259
Capital assets, net of accumulated depreciation 21,277 21,967
Deferred policy acquisition costs 12,490 13,920
Intangible assets 44,399 43,812
Other assets 7,723 9,335
TOTAL ASSETS $574,246 $519,922
LIABILITIES
Accounts Payable:
Reinsurance payables $84,851 $37,603
Accrued and other payables 19,196 28,543
104,047 66,146
Distributions payable on preferred securities 8,073 4,809
Loss and loss adjustment expenses 174,136 219,918
Unearned premiums 165,802 90,007
Notes Payable 3,736 16,929
455,794 397,809
Minority interest:
Company obligated manditorily redeemable preferred stock of trust
subsidiary holding solely parent debentures 135,000 135,000
135,000 135,000
Shareholders' equity (Deficit) (16,548) (12,887)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $574,246 $519,922
See condensed notes to consolidated financial statements
</TABLE>
<PAGE>
GORAN CAPITAL INC.
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(CANADIAN GAAP, stated in thousands of U.S. dollars, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
<S> <C> <C>
Gross premiums written $144,219 $152,022
Less ceded premiums 104,790 84,751
Net premiums written 39,429 67,271
Change in net unearned premiums (7,971) 147
Net premiums earned 47,400 67,124
Fee income 3,791 4,464
Net investment income 3,248 3,508
Net realized gain (loss) 365 (1,322)
Total Revenues 54,804 73,774
Losses and loss adjustment expenses 38,793 58,995
Policy acquisition and general and administrative expenses 14,938 11,630
Interest expense 203 74
Amortization of intangibles 531 605
Total Expenses 54,465 71,304
Earnings (loss) before undernoted items 339 2,470
Provision (benefit) for income taxes 487 (491)
Accrued distribution on preferred securities 3,264 3,162
Minority interest: -- (324)
Earnings (loss) from continuing operations (3,412) 123
Loss from discontinued operations -- --
Net earnings (loss) $(3,412) $123
Earnings (loss) per share - basic $(0.58) $0.02
Earnings (loss) per share - fully diluted $(0.58) $0.02
Earnings (loss) per share - operating $(0.64) $0.17
See condensed notes to consolidated financial statements
<PAGE>
</TABLE>
GORAN CAPITAL INC.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(Canadian GAAP, stated in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Cumulative Retained Total
Common Contributed Translation Earnings Shareholders'
Stock Surplus Adjustment (Deficit) Equity (Deficit)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $19,317 $2,775 $252 $27,381 $49,725
Issuance of common shares --- --- --- --- ---
Change in cumulative
translation adjustment --- --- (107) --- (107)
Net earnings --- --- --- 123 123
Balance at March 31, 1999 $19,317 $2,775 $145 $27,504 $49,741
Balance at December 31, 1999 $19,317 $2,775 $13 $(34,992) $(12,887)
Issuance of common shares --- --- --- --- ---
Change in cumulative
translation adjustment --- --- (249) --- (249)
(3,412) (3,412)
Net earnings (loss) --- --- ---
Balance at March 31, 2000 $19,317 $2,775 $(236) $(38,404) $(16,548)
See notes to consolidated financial statements
</TABLE>
<PAGE>
GORAN CAPITAL INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CANADIAN GAAP, stated in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
<S> <C> <C>
Net earnings (loss) for the period $(3,412) $123
Adjustments
Amortization and depreciation 2,073 1,426
Loss (gain) on disposal of investments (365) 1,322
Minority interest in net income (loss) of consolidated subsidiary -- (324)
Decrease (increase) in other assets 7 (9,833)
Decrease (increase) in deferred policy acquisition costs 1,430 980
Increase (decrease) in unearned premiums 75,795 65,357
Increase (decrease) in loss and loss adjustment expenses (45,782) (22,966)
Decrease (increase) in accounts receivable (29,874) (67,780)
Increase (decrease) in accounts payable 37,901 92,529
Decrease (increase) in recoverable on paid and unpaid 43,753 7,426
losses
Decrease (increase) in prepaid reinsurance premiums (83,767) (60,892)
Increase (decrease) in future income taxes payable -- 3,281
(2,241) 10,649
NET CASH (USED IN) FINANCING ACTIVITIES:
Increase (reduction) of borrowed funds (13,193) (9,224)
Increases in distributions payable on preferred securities 3,264 --
(9,929) (9,224)
NET CASH (USED IN) INVESTING ACTIVITIES:
Net (purchase) sale of marketable securities 12,862 (10,340)
Net purchase of capital assets (716) (970)
12,146 (11,310)
Change in cash and cash equivalents during the period (24) (9,885)
Cash and cash equivalents, beginning of period 32,874 42,759
Cash and cash equivalents, end of period $32,850 $32,874
See condensed notes to consolidated financial statements
</TABLE>
<PAGE>
GORAN CAPITAL INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As at March 31, 2000
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The financial statements included in this report are the consolidated
financial statements of Goran Capital Inc. and its subsidiaries (the
"Company"). The consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). In management's opinion, these financial statements
include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results of
operations for the interim periods presented. Pursuant to SEC rules and
regulations, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted from
these statements unless significant changes have taken place since the
end of the most recent fiscal year. For this reason, the accompanying
consolidated financial statements and notes thereto should be read in
conjunction with the financial statements and notes for the year ended
December 31, 1999 included in the Company's 1999 Annual Report on Form
10-K. Results for any interim period are not necessarily indicative of
results to be expected for the year.
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 12. All material
intercompany amounts have been eliminated.
2. Supplemental Cash Flow Information
Cash payments of interest were $581,000 and $311,000 for the three
months ended March 31, 2000 and 1999, respectively. Cash received
related to Federal Income taxes was $(6,586,000) and $(6,548,000) for
the first three months of 2000 and 1999, respectively.
3. Notes Payable
IGF Insurance Company, the Company's subsidiary ("IGF"), has a
revolving bank line of credit (the "IGF Revolver"). During the first
quarter 2000, the maximum amount that could be borrowed under the IGF
Revolver was reduced from $15,000,000 to $8,000,000 and it was extended
through December 15, 2000. As of April 1, 2000, the entire line of
credit was available to IGF. This line is collateralized by receivables
and real property. 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 the
ratio of net written premiums to statutory surplus. At March 31, 2000,
IGF was not in compliance with a minimum statutory surplus covenant;
however, IGF has received a waiver from the bank for the period ending
March 31, 2000. Although the Company believes it will be able to obtain
waivers from the bank as necessary in the future there and can be no
assurance thereof.
The average interest rate on the IGF Revolver was 6.75% for the three
months ended March 31, 1999 and 7.91% for the three months ended March
31, 2000.
Notes payable also includes a $1,000,000 note due 2001 on the purchase
of North American Crop Underwriters, Inc. ("NACU") at no interest. The
balance of notes payable at March 31, 2000 includes three smaller notes
(less than $300,000 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%.
<PAGE>
4. Preferred Securities
The preferred securities represent company-obligated mandatorily
redeemable preferred securities of a trust subsidiary (the "Preferred
Securities") holding solely parent debentures which have a term of 30
years with semi-annual interest payments commencing February 15, 1998.
The Preferred Securities may be redeemed in whole or in part after 10
years. Symons International Group, Inc. ("SIG"), a 68% owned subsidiary
of Goran, deferred the semi-annual interest payment that was
due February 2000. Under the terms of the indenture for the preferred
Securities, the Company is permitted to defer such payment for up to
five years.
The indenture for the Preferred Securities contains certain restrictive
covenants. Some of these covenants are based upon the SIG's
consolidated coverage ratio of earnings before interest, taxes,
depreciation and amortization ("EBITDA") whereby if the 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:
o SIG may not incur additional indebtedness or guarantee
additional indebtedness.
o 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.
o 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 (5.00) as of March 31, 2000, and will continue to
apply until the Company's consolidated coverage ratio exceeds the
amount set forth in the indenture. The Company is in compliance with
the additional restrictions and is not in default in its obligations
with the regard to the Preferred Securities.
5. Regulatory Affairs
As previously reported, Pafco General Insurance Company ("Pafco") has
agreed to an order under which the Indiana Department of Insurance
("IDOI") may monitor more closely the ongoing operations of Pafco due
to the risk-based capital ratio being below the Company action level
using the National Association of Insurance Commissioners ("NAIC")
guidelines and applicable law. This order remains in effect. Pafco's
inability or failure to comply with this order could result in the IDOI
requiring further reductions in Pafco's permitted premium writings or
in the IDOI instituting future proceedings against Pafco. The final
report has yet been issued by the IDOI on its previously disclosed
target examination of Pafco, covering loss reserves, pricing and
reinsurance and no action was taken thereon.
Pafco has also agreed with the Iowa Department of Insurance ("IADOI")
to (i) limit its policy counts on automobile business in Iowa and (ii)
provide the IADOI with policy count information on a monthly basis
until June 30, 2000 and thereafter on a quarterly basis.
In addition Pafco has agreed to provide monthly financial information
to other departments of insurance in states in which it writes
business.
As previously disclosed, with regard to IGF and 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 to the
IDOI, consult monthly with the IDOI, and to obtain prior approval for
affiliated party transactions. IGF is currently in compliance with its
agreement to provide monthly financial statements to the IDOI.
IGF has agreed with the IADOI that it will not write any nonstandard
business, other than that which it is currently writing until such time
as IGF has: (i) increased surplus; (ii) a net written premium to
surplus ratio of less than three to one; and (iii) surplus reasonable
to its risk.
The Florida Department of Insurance ("FDOI") has concluded its
examinations of Superior Insurance Company ("Superior") with regard to
review of systems and year 2000 compliance. No significant action was
taken by the FDOI as a result of these examinations. The FDOI's
financial review of Superior for the year ended December 31, 1999 is
ongoing, and Superior is maintaining ongoing discussions with the FDOI
regarding reserve levels, financial review and reporting, and other
issues. Superior has also agreed with the Arizona Department of
Insurance to provide it with monthly financial statements.
<PAGE>
The Company's operating subsidiaries, their business operations, and
their transactions with affiliates, including the Company, are subject
to regulation and oversight by the IDOI, the FDOI, the insurance
regulators of other states in which the subsidiaries write business,
and in the case of IGF, the Federal Crop Insurance Corporation
("FCIC"). The Company is a holding company and all of its operations
are conducted by its subsidiaries. Regulation and oversight of
insurance companies and their transactions with affiliates is conducted
by state insurance regulators and, in the case of IGF, the FCIC,
primarily for the protection of policyholders and not for the
protection of other creditors or of shareholders. Failure to resolve
outstanding issues with the IDOI, the FDOI and other regulators in a
manner satisfactory to the Company could result in future regulatory
actions or proceedings that materially and adversely affect the
Company.
6. Commitments and Contingencies
As previously reported, a complaint for a class action alleging
violations of Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934 was filed against the Company and certain of its officers and
directors in the United States District Court for the Southern District
of Indiana. The Company intends to vigorously defend the claims brought
against it. No material developments have occurred since last reported.
As previously reported, the California Department of Insurance ("CDOI")
has advised the Company that it is reviewing a possible assessment
which could total $3,000,000. As the ultimate outcome of this potential
assessment is not deemed probable, the Company has not accrued any
amount in its consolidated financial statements. Although the
assessment has not been formally made by the CDOI at this time, the
Company will vigorously defend any potential assessment and believes it
will prevail. No material developments have occurred since last
reported.
As previously reported, IGF is a party to a number of pending legal
proceedings relating to a product sold in 1998 (AgPI) which has since
been discontinued. Approximately $22,400,000 was paid through March 31,
2000. A reserve of approximately $12,100,000 remains. No material
developments have occurred since last reported.
As previously reported, two assertions have been made in Florida
alleging that service charges or finance charges are in violation of
Florida law. The plaintiffs are attempting to obtain class
certification in these actions. The Company believes that it has
substantially complied with the premium financing statute and intends
to vigorously defend any potential loss. No material developments have
occurred since last reported.
The Company and its subsidiaries are named as defendants in various
lawsuits relating to their business. Legal actions arise from claims
made under insurance policies issued by the Company's subsidiaries.
These actions were considered by the Company in establishing its loss
reserves. The Company believes that the ultimate disposition of these
lawsuits will not materially affect the Company's operations or
financial position.
SIG is a joint and several guarantor in a $7,250,000 debt
collateralized by operating assets held in an entity in which SIG
is a 50% owner. The estimated fair market value of the assets
approximates the debt.
7. Loss Development on Prior Accident Years
During the first quarter of 2000 the Company experienced favorable
development on its year end 1999 loss and loss adjustment expense
("LAE") reserves for the nonstandard auto operation in the amount of
$300,000. As the result of favorable settlement of outstanding
claims on surplus line policies, the Company experienced favorable
development of $100,000 and this amount is included in the results of
the Company's nonstandard auto segment. In total, the Company's results
for nonstandard auto include favorable development on prior accident
years of $400,000.
During the same time period the Company experienced favorable
development on its year end crop insurance reserves in the amount of
$600,000. Although the aggregate reserve development was favorable, the
Company experienced an adverse loss reserve development of $700,000 on
crop hail and named peril claims caused by claims reported late. This
was offset by a catastrophic coverage ("CAT") and multiple-peril crop
insurance ("MPCI") LAE reimbursement of $1,300,000 for the Company's
handling of 1999 MPCI and CAT claims.
8. 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, 1999
annual report in "Nature of Operations and Significant Accounting
Policies." 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. "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. "Corporate and
Other" assets are principally cash, short-term investments, related
party assets, intangible assets, and capital assets.
<PAGE>
The following tables show financial data by segment (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS
<S> <C> <C>
Gross premiums written $59,569 $61,171
Net premiums written 30,469 62,526
Net premiums earned 43,040 65,396
Fee income 3,934 4,521
Net investment income 2,860 3,164
Net realized gain (loss) 365 (1,382)
TOTAL REVENUES 50,199 71,699
Losses and loss adjustment expense 37,220 51,313
Policy acquisition and general and administrative expenses 17,560 19,595
TOTAL EXPENSES 54,779 70,908
Earnings (loss) before income taxes $(4,579) $791
GAAP RATIOS (Nonstandard Automobile Only):
Loss and LAE Ratio (2) 86.5% 78.5%
Expense ratio, net of billing fees (3) 31.7% 23.0%
Combined ratio (4) 118.2% 101.5%
CROP INSURANCE OPERATIONS:
Gross premiums written $84,360 $90,723
Net premiums written 7,570 $1,613
Net premiums earned 2,935 $(1,060)
Fee income (159) (59)
Net investment income 125 57
Net realized capital gain (loss) -- --
TOTAL REVENUES 2,903 (1,062)
Losses and loss adjustment expenses 2,440 5,174
Policy acquisition and general and administrative expenses(1) (3,792) (8,008)
Interest and amortization of intangibles 243 169
TOTAL EXPENSES (1,109) (2,665)
Earnings (loss) before income taxes $4,010 $1,603
(1) Negative crop expenses are caused by inclusion of MPCI expense reimbursement and underwriting gain.
(2) Loss and LAE ratio: ratio of loss and LAE incurred during the period, as a percentage of net premium
earned.
(3) 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.
(4) Combined ratio: sum of the loss and LAE ratio plus the expense ratio net of billing fees.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
Earnings (loss) before income taxes, preferred securities and minority
interest:
<S> <C> <C>
Nonstandard automobile $(4,581) $791
Crop 4,011 1,603
Segment totals (570) $2,394
Corporate and other 909 76
Consolidated totals $339 $2,470
March 31, December 31,
2000 1999
Segment assets:
Nonstandard automobile $258,323 $229,640
Crop 189,681 145,622
Corporate and other 126,242 144,660
Total assets of the crop business are subject to normal cyclical
fluctuations.
</TABLE>
9. Reclassifications
Certain prior period amounts have been reclassified to conform with
current period presentation.
10. 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
March 31,
2000 1999
Basic:
<S> <C> <C>
Weighted-average common shares outstanding 5,876,398 5,876,398
Diluted:
Weighted-average common shares outstanding 5,876,398 5,876,398
Dilutive effect of stock options (1) -- 43,946
Shares Repurchased -- (21,251)
Average common shares outstanding assuming dilution 5,876,398 5,899,093
</TABLE>
(1) Only those options with a dilutive effect were included above for
the three months ended. Total options outstanding amounts to 660,708
(1999 - 682,572) of which 660,708 (1999 - 638,626) 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.
11. Subsequent Events
Effective April 1, 2000, the new and renewal nonstandard auto premium
written by IGF will no longer be reinsured by Pafco. On April 6, 2000
Granite Reinsurance Company Ltd, a subsidiary of Goran, acquired
$10,000, 000 principal value of the Preferred Securities at a cost of
$1,250,000.
<PAGE>
12. 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 (in thousands):
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
Shareholders' equity (deficit) in
<S> <C> <C>
accordance with Canadian GAAP $(16,548) $(12,887)
Add (deduct) effect of difference in accounting for:
Receivable from sale of capital stock (300) (300)
Unrealized gain (loss) on investments* (4,928) (4,874)
Shareholders' equity (deficit) in
accordance with US GAAP $(21,776) $18,061
</TABLE>
*Note: The increase (decrease) in shareholders' equity attributable
to the unrealized gain (loss) of $(4,928) and $(4,874) at
March 31, 2000 and December 31, 1999, respectively, are net of
deferred tax recovery of $2,637 which was fixed at December
31, 1999 when the Company's net deferred tax assets were fully
offset by a valuation allowance.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW OF THE COMPANY
The Company owns approximately 68% of Symons International Group, Inc. ("SIG").
SIG in turn owns 100% of Pafco, Superior and IGF. Additionally, the Company owns
100% of Granite Reinsurance Company Ltd. ("Granite Re"), Granite Insurance
Company ("Granite") and Symons International Group, Inc. Florida ("SIGF").
<PAGE>
Nonstandard Automobile Insurance Operations
Pafco, Superior, Superior Guaranty Insurance Company ("Superior Guaranty") and
Superior American Insurance Company ("Superior American") are engaged in the
writing of insurance coverage for automobile physical damage and liability
policies. Nonstandard insureds are those individuals who are unable to obtain
insurance coverage through standard market carriers due to factors such as poor
premium payment history, driving experience or 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 risk. Since it
can be viewed as a residual market, the size of the nonstandard private
passenger automobile insurance market changes with the insurance environment and
grows when the standard coverage becomes more restrictive. Nonstandard policies
have relatively short policy periods and low limits of liability. Due to the low
limits of coverage, the period of time that elapses between the occurrence and
settlement of losses under nonstandard policies is shorter than many other types
of insurance. Also, since the nonstandard automobile insurance business
typically experiences lower rates of retention than standard automobile
insurance, the number of new policyholders underwritten by nonstandard
automobile insurance carriers each year is substantially greater than the number
of new policyholders underwritten by standard carriers.
Crop Insurance Operations
The two principal components of the Company's crop insurance business are MPCI
and private named peril crop insurance, primarily crop hail insurance. Crop
insurance is purchased by farmers to reduce the risk of crop loss from adverse
weather and other uncontrollable events. Farms are subject to drought, floods
and other natural disasters that can cause widespread crop losses and, in severe
cases, force farmers out of business. Historically, one out of every twelve
acres planted by farmers has not been harvested because of adverse weather or
other natural disasters. Because many farmers rely on credit to finance their
purchases of such agricultural inputs as seed, fertilizer, machinery and fuel,
the loss of a crop to a natural disaster can reduce their ability to repay these
loans and to find sources of funding for the following year's operating
expenses.
The Company generates revenue like other private insurers participating in 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 with the federal government. The Company may also pay
a portion of the aggregate loss, in respect of the business it writes, if the
losses exceed certain levels. The Company writes MPCI and crop hail insurance
through approximately 2,850 independent agencies in 46 states.
The Company's risk in the first two quarters of the year is affected 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 crop revenue coverage ("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.
In addition to MPCI, the Company offers stand alone crop hail insurance, which
insures growing crops against damage resulting from hailstorms and involves no
federal participation. The Company also offers a proprietary product which
combines the application and underwriting process for MPCI and hail coverages -
HAILPLUS(TM) ("HAILPLUS"). 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 37% of the Company's hail policies are written in
combination with MPCI. Although both crop hail and MPCI provide coverage against
hail damage, the private crop hail coverages allow farmers to 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.
The Company has started three new business initiatives related to agriculture
risk management: agronomy services, price risk management, and carbon emission
reduction credits. Each will provide the opportunity to increase fee revenue.
Fee revenue provides the Company with limited risk and high profit margins from
its same base of operations and thus contributes to capital and surplus growth.
Fee revenue in total is not projected to be more than $2.0 million for 2000.
The crop insurance business is seasonal by geographic region; spring crops in
northern and midwestern states, fall crops in southern states such as fruit and
nuts, winter crops in coastal states such as California and summer cash crops
grown in all states. The Company also insures long term crops such as timber and
nurseries. While this seasonality is time specific for each crop, the associated
tasks of sales and marketing primarily occur before each respective crop-growing
season. The customer support, applications and claims processing tasks are time
and event driven within the mid to later part of the growing season; many times
being finished after the growing season and harvest is completed. The bulk of
the loss adjustment activities for the spring and fall crops occur between May
and November. These same activities occur for winter crops, such as fruits, in
January and February, and for cash crops throughout the year.
Throughout the year the Company provides to its customers services such as
education, agronomy training, soil sampling, grid mapping for precision farming,
insurance advice and loss adjusting.
OTHER OPERATIONS
Granite Re is a finite risk reinsurance company based in Barbados.
Granite is a Canadian federally licensed insurance company which ceased writing
new insurance policies on January 1, 1990.
SIGF is a Florida based surplus lines insurance agency. These operations have
been discontinued effective January 1, 1999.
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(s)," "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.
Losses Have Been Reported and May Continue
The Company has mostly reported net losses on a quarterly basis since the third
quarter of 1998. Net losses for the quarter ended in March 31, 2000 totaled
$(3,412,000). Losses for the first quarter of 2000 were due primarily to reduced
earnings in the nonstandard auto segment. Despite the losses, loss ratios
started to improve in the first quarter of the current year for nonstandard auto
over the prior quarter. Also, during the first quarter of 2000, the Company
experienced favorable development on its loss and loss adjustment expense
reserves for accidents occurring in 1999 and prior years. Losses in the current
quarter for the nonstandard auto segment were primarily due to decreases in
premiums and fee income that exceeded operating expenses. The Company is
actively seeking rate increases and implementing other underwriting initiatives
and expense reductions which are likely to result in reduced premium volume this
year.
The nonstandard auto business strategy is to retain only profitable business and
reduce expenses proportionately. For first quarter 2000 and 1999 respectively,
the crop segment reported pre-tax earnings of approximately $4,000,000 and
$1,600,000. The crop segment business strategy is to continue focusing on MPCI
and named peril insurance, which is primarily crop/hail insurance. Although the
Company has taken a number of actions to address the factors that have
contributed to these past operating losses, there can be no assurance that
operating losses will not continue.
Recent and Further Regulatory Actions May Affect the Company's Future Operations
The Company's insurance company subsidiaries, their business operations, and
their transactions with affiliates, including the Company, are subject to
extensive regulation and oversight by the Indiana Department of Insurance
("IDOI"), the Florida Department of Insurance ("FDOI"), the insurance regulators
of other states in which the insurance company subsidiaries write business and,
in the case of IGF, the Federal Crop Insurance Corporation ("FCIC"). Moreover,
the insurance company subsidiaries' losses, adverse trends and uncertainties
discussed in this report have been and continue to be matters of concern to the
domiciliary and other insurance regulators of the Company's insurance company
subsidiaries and have resulted in enhanced scrutiny and regulatory actions by
several regulators. The Company relies on payment of management fees from the
regulated insurance subsidiaries to support its cash flow needs, and continued
payment of those fees is subject to regulatory oversight. The primary purpose of
insurance regulation is the protection of policyholders rather than
stockholders. Failure to resolve issues with the IDOI, the FDOI, the FCIC, and
with other regulators (including the risk based capital levels of Pafco and
IGF), in a manner satisfactory to the Company could impair the Company's ability
to execute its business strategies or result in future regulatory actions or
proceedings that otherwise materially and adversely affect the Company's
operations.
A.M. Best Rating May Adversely Affect the Company's Ability to Retain and Expand
its Business
A.M. Best Company rates insurance companies based on factors of concerns to
policyholders. No changes in the ratings of the Company subsidiaries have
occurred since those reported previously. It is not likely that the ratings will
be improved unless the Company improves its future operating performance. One
factor in an insurer's ability to compete effectively is its A.M. Best rating.
There can be no assurance that the current or future ratings will not adversely
affect the Company's competitive position.
The Company is Subject to a Number of Pending Legal Proceedings
As previously reported and discussed elsewhere in this report, the Company is
involved in a number of pending legal proceedings. Most of these proceedings
remain in the early stages. Although the Company believes that many of the
allegations of wrongdoing are without merit and intends to vigorously defend the
claims brought against it, there can be no assurance that such proceedings will
not have a materially adverse effect on the Company's operations.
The Terms of the Trust Preferred Securities May Restrict The Company's Ability
to Act
SIG has issued through a wholly owned trust subsidiary $135,000,000 aggregate
principal amount in trust originated preferred securities . The Preferred
Securities have a term of 30 years with annual interest payments of 9.5% paid
semi-annually. The obligations of the Preferred Securities are funded from the
Company's nonstandard automobile management company and dividend capacity from
the crop insurance business. The Company deferred the semi-annual interest
payment that was due February 2000 and may continue to defer such payments for
up to five years as permitted by the indenture for the Preferred Securities.
Although there is no present default under the indenture which would accelerate
the payment of the Preferred Securities, the indenture contains a number of
convenants which may restrict the Company's ability to act in the future. These
covenants include restrictions on the SIG's ability to: incur or guarantee
debt; make payment to affiliates; repurchase its common stock; pay dividends on
common stock; and make certain investments other than investment grade fixed
income securities. There can be no assurance that compliance with these
restrictions and other provisions of the indenture for the Preferred Securities
will not adversely affect the Company's ability to improve its operating
results.
REVIEW OF CONSOLIDATED OPERATIONS
Net (Loss)
For the three months ended March 31, 2000, the Company recorded a net loss of
$(3,412,000) or $(0.58) per share (basic and diluted). The net loss increased
over the same quarter in 1999 by $(3,535,000) or $(0.60) per share (basic and
diluted).
Income before taxes and distributions on preferred securities for the
nonstandard automobile segment showed a loss of $(4,581,000) for the three
months ended March 31, 2000 compared to earnings of $791,000 for the three
months ended March 31, 1999. These losses were driven primarily by a decrease in
net premiums earned.
Income before taxes and distributions on preferred securities for the three
months ended March 31, 2000 in the crop segment showed earnings of $4,011,000
which compares to earnings of $1,603,000 for the same period in 1999. The
increase in earnings was primarily due to a decrease in the net loss to net
premium retained ratios for crop hail and named peril in the first quarter of
2000 as compared to the same period in the prior year.
Income before tax and distributions on preferred securities for the corporate
segment were $909,000 for the three months ended March 31, 2000 and $76,000 for
the same period in 1999..
Gross Premiums Written
Gross premiums written for the nonstandard automobile segment decreased 2.6% for
the three months ended March 31, 2000 compared to the three months ended March
31, 1999. The primary reasons for this decline in volume are the downsizing by
the Company of its nonstandard automobile business in certain competitive
markets, rate increases and other underwriting initiatives intended to increase
profitability.
Gross premiums written for the crop segment decreased 7.0% for the three months
ended March 31, 2000 compared to the comparable period in 1999. Such decrease
was due to lower than expected first quarter 2000 crop hail business. Crop
premiums (expressed in thousands) for the three months ended March 31 are as
follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
<S> <C> <C>
CAT imputed $12,250 $16,312
MPCI 69,934 62,280
Crop Hail and named perils 14,426 28,443
AgPI (1) -- --
96,611 107,035
Less: CAT imputed (12,250) (16,312)
$84,360 $90,723
(1) Represents discontinued product sold in 1998.
</TABLE>
Other gross written premiums were $290,000 for the three months ended March 31,
2000 compared to $128,000 for the same periods in 1999 due to the effect of
endorsements and cancellations on a run off book of business that was put in run
off in 1999.
<PAGE>
Net Premiums Written
MPCI premiums are considered to be 100% ceded to the federal government for
accounting purposes and therefore no net written premiums result from MPCI
business. Quota share cession rates for other lines of insurance for the three
months ended March 31 are as follows:
2000 1999
Nonstandard automobile 22% 0%
Crop Hail 45% 62%
Named peril 50% 50%
To address writing ratio and other statutory surplus concerns, the Company ceded
a portion of its automobile business effective January 1, 2000. The reinsurer
has an A.M. Best rating of A++. Based on 1999 results, IGF has decided to retain
more risk on the crop hail line of business resulting in a decrease in the quota
share cession rate.
Fee Income
Fee income declined 15.1% for the three months ended March 31, 2000 as compared
to the first quarter of 1999 due to the overall decrease in gross written
premium volume.
Net Investment Income
Net investment income decreased 7.4% for the three months ended March 31, 2000
as compared to the corresponding period of the prior year. This decrease was due
to a decrease in the size of the investment portfolio and lower yields on the
remaining investments.
Loss and Loss Adjustment Expense
The loss and LAE ratio for the Company's nonstandard auto segment for the three
months ended March 31, 2000 was 86.5% of net premiums earned. The loss and LAE
ratio for 1999 is not meaningful due to unusual one time AgPI losses and related
reinsurance costs. During the first quarter of 2000 the Company experienced
favorable development on its loss and LAE reserves for accidents occurring in
1999 and prior. This reduced the nonstandard auto loss and LAE ratio for the
quarter by 1.0%.
The loss and LAE ratio for the Company's crop insurance segment for the three
months ended March 31, 2000, was 83.2% of net premiums earned as compared to
14.0% for first quarter 1999 and to 240.3% for the entire year of 1999. During
the first quarter of 2000 the Company experienced $0.6 million favorable
development on its loss and LAE reserves for losses occurring in 1999 and prior.
This reduced the crop insurance loss and LAE ratio for the quarter by 20.9%.
Policy Acquisition and General and Administrative Expenses
Policy acquisition and general and administrative expenses were $14,938,000 and
$11,630,000 or 31.5% and 17.3% of net premium earned for the three months ended
March 31, 2000 and March 31, 1999, respectively. Overall expenses in the first
three months of 2000 versus the first three months of 1999 increased by
$3,308,000. Within this increase crop expenses increased by $4,216,000 while
nonstandard auto expenses decreased by $2,036,000.
The expense ratio for the nonstandard auto segment was 40.8% for the first
quarter of 2000 as compared to 30% in 1999. The expense ratio increased
primarily due to a 34.2% decrease in net premiums earned comparing March 31,
2000 to March 31, 1999. Nonstandard auto expenses were $17,559,000 and
$19,595,000 or a $2,036,000 decrease (10.4%) for the three month ended March 31,
2000 and March 31, 1999, respectively. The decrease in expenses is primarily
attributable to the ceding commission received from the quota share agreement
effective January 1, 2000.
<PAGE>
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 2000, as well as for 1999, was 13.6% on gross premium. The underwriting
gain increased in 2000 due to the fact that the crops covered by MPCI policies
are estimated to have average to above average yields this year. The 13.6%
estimate is in line with actual annual results over the past four years.
Provision (Benefit) for Income Taxes
The current provision primarily consists of a write off of a refund being denied
by the IRS offset by a refund received in the first quarter of 2000 relating to
a 1998 net operating loss. At March 31, 2000 the companies net tax assets are
fully offset by a 100% valuation allowance which resulted in no tax benefit
being reflected for the three months ended March 31, 2000.
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
Investments
Total investments as of March 31, 2000 and December 31, 1999 were $219,005,000
and $231,424,000, respectively. Composition of investments is comparable between
these periods. The Company's market risk exposure has not materially changed
since prior year end.
Cash and Cash Equivalents
Total cash and cash equivalent balances as of March 31, 2000 and December 31,
1999 were $32,850,000 and $32,874,000, respectively.
Investments in and Advances to Related Parties
Investments in and advances to related parties increased from $1,646,000 at
December 31, 1999, to $1,853,000 at March 31, 2000.
Accounts Receivable Net of Allowance For Doubtful Accounts
Receivables net of allowances for doubtful accounts as of March 31, 2000 and
December 31, 1999 were $125,547,000 and $92,446,000, respectively. The crop
portion of the net receivable balances as of March 31, 2000 and December 31,
1999 were $56,574,000 and $23,924,000, respectively. However, the crop portion
of the receivable balance is more comparable to the balance of $106,812,000 for
the period ended March 31, 1999. This decrease is due to a portion of the
reinsurance balances being applied to the reinsurance payables liability balance
in 1999.
Nonstandard auto receivable balances net of allowance for doubtful accounts as
of March 31, 2000 and December 31, 1999 were $64,216,000 and $62,299,000,
respectively.
Reinsurance Recoverables and Prepaid Reinsurance Premiums
Reinsurance recoverables were $44,540,000 and $88,293,000 as of March 31, 2000
and December 31, 1999, respectively. However the reinsurance recoverable balance
is more effectively compared to the March 31, 1999 balance of $60,459,000. This
is primarily due to the cyclical nature of the crop business. Of the total
reinsurance recoverable balance, as of March 31, 2000 and 1999, $25,756,000 and
$28,245,000, respectively pertain to crop business. The nonstandard auto
recoverables were $10,558,000 and ($1,353,000) for the periods ending March 31,
2000 and 1999, respectively. The nonstandard auto increase is attributable to a
quota share agreement that was effective January 1, 2000.
Prepaid reinsurance premiums were $94,026,000 and $10,259,000 as of March 31,
2000 and December 31, 1999, respectively. This prepaid balance is more
effectively compared to the March 31, 1999 balance of $78,378,000. The prepaid
reinsurance balance is affected by the cyclical nature of the crop business
reinsured. Crop prepaid reinsurance premiums totaled $75,431,000 and $73,124,000
as of March 31, 2000 and 1999, respectively. Prepaid reinsurance premiums on
nonstandard auto totaled $17,826,000 and $463,000 as of March 31, 2000 and 1999,
respectively. The increase in nonstandard auto is attributable to a quota share
that was effective January 1, 2000.
<PAGE>
Deferred Policy Acquisition Costs
Deferred policy acquisition costs ("DAC") as of March 31, 2000 and December 31,
1999, were $12,490,000 and $13,920,000 respectively. Although these costs are
comparable, the Company believes the ratio of DAC to net unearned premium would
be more comparable using prior year to date comparisons. DAC as of March 31,
1999 was $15,352,000. DAC was primarily composed of DAC on nonstandard auto at
March 31, 2000 and 1999 of $11,550,000 and $14,372,000, respectively. The ceded
deferred costs on nonstandard auto at March 31, 2000 and 1999 were $3,124,000
and $0, respectively. DAC for nonstandard auto as compared with nonstandard net
unearned premiums of $66,792,000 and $90,531,000 were 17.3% and 15.9% as of the
above dates, respectively. DAC for crop insurance at March 31, 2000 and 1999 was
$940,000 and $535,000, respectively. In the last quarter of 1999 the Company
changed its method of calculating the auto deferred policy costs by including
investment income in the computation.
Federal Income Taxes
Federal income taxes recoverable were $0 and $6,820,000 at March 31, 2000 and
December 31, 1999. The 1999 balance consists of amounts recoverable from the
1997 tax year due to tax losses generated in 1999. All receivables were
collected during the first quarter of 2000. No further recoveries are expected
or available resulting in a $0 balance forward.
The deferred income tax asset balance of $0 as of March 31, 2000 has decreased
from $2,544,000 at March 31, 1999 because of a 100% valuation allowance of all
deferred tax assets effective December 31, 1999.
Capital Assets
Capital Assets, net of accumulated amortization, decreased $690,000 over year
end 1999. This change is primarily due to disposals and amortization.
Intangible Assets
The balance in the intangible assets increased from year end 1999 due to the
addition of intangibles in IGF, net of amortization expense. Intangible assets
include goodwill from the acquisition of Superior, additional goodwill from
the acquisition of the minority interest in Superior Insurance Group
Management, Inc. and NACU, debt or preferred security issuance costs and
organizational costs.
Loss and Loss Adjustment Expense Reserves
Total loss and loss adjustment expense reserves decreased from $219,918,000 as
of December 31, 1999 to $174,136,000 as of March 31, 2000. The total decrease in
loss and loss adjustment expense reserves is approximately $45,782,000.
Nonstandard auto reserves declined $7.8 million during the first quarter of
2000; this decrease is consistent with the declining volume in nonstandard auto
business. Reserves for crop insurance declined $34.8 million during the first
quarter of 2000 due to the seasonal nature of the business. The remaining
reserve decrease of $2.0 million resulted from favorable settlement of
outstanding claims on surplus line policies. Because most of the outstanding
liabilities from this business are reinsured, the favorable development has
minimal impact on the Company's net income.
Unearned Premium
The unearned premium reserve increased by $75,795,000 from December 31,1999 to
March 31, 2000. Gross unearned premium was $165,802,000 and $90,007,000 as of
March 31, 2000 and December 31, 1999, respectively. However, this unearned
premium balance is more effectively compared to the March 31, 1999 balance of
$176,022,000 due to the cyclical nature of the crop business. Crop unearned as
of March 31, 2000 and March 31, 1999 was $80,133,000 and $77,363,000,
respectively. Crop unearned increased by $2,770,000 or 3.6% from March 31, 1999.
This was primarily due to an increase in crop hail written premium for the same
period. Unearned on nonstandard auto decreased $6,262,000 or 6.9% for the same
period. This was primarily due to the decrease in nonstandard premiums written
for the respective quarter ended March 31, 2000. Unearned for nonstandard auto
was $84,733,000 and $90,955,000 as of March 31, 2000 and March 31, 1999.
Reinsurance Payables
Reinsurance payables increased by $47,248,000 from December 31, 1999 to March
31, 2000 due to the cyclical nature of the crop business. Crop payables
increased from year end by $19,551,000 through March 31, 2000. Nonstandard auto
increased by $24,854,000 from December 1999 due to a quota share agreement
effective January 1, 2000.
<PAGE>
Notes Payable
Notes payable include the IGF Revolver which on December 31, 1999 and March 31,
2000 had an outstanding balance of $15,000,000 and $0, respectively. This change
in the balance is due to the fact that IGF primarily depends upon the IGF
Revolver to meet its seasonal needs for liquidity. The average interest rate on
the IGF Revolver was 6.75% for the nine months ended March 31, 1999 and 7.91%
for the three months ended March 31, 2000.
Notes payable also include a $1,000,000 note due 2001 on the purchase of NACU
which bears no interest. The balance of notes payable at March 31, 2000 consists
of three smaller notes (less than $300,000 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%.
Other Liabilities
Other liabilities decreased by $9,347,000 from December 31, 1999 to March 31,
2000. However, payables as of March 31, 2000 of $19,196,000 are more comparable
to payables of $26,292,000 as of March 31, 1999. The payables tend to be lower
at March 31 due to the cyclical nature of the crop business and the related
overall effect on cash flow in the consolidated business.
Shareholders' (Deficit)
Shareholders' (deficit) has increased $3,661,000 from December 31, 1999. This
increase is primarily the result of the net loss of $(3,412,000) for the three
months ended March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's nonstandard automobile insurance subsidiaries' primary source 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,
payment of claims settlement costs, operating expenses (primarily management
fees), commissions to independent agents, 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. During 1999, the Company liquidated some investments to pay claims. The
Company historically has tried to maintain duration averages of 3.5 years.
However, the losses in 1999 and the first quarter of 2000 have caused the
Company to shorten the duration averages. The Company may incur a cost of
selling longer bonds to pay claims. Claim payments tend to lag premium receipts.
Due to losses, the Company has experienced a reduction in its investment
portfolio but to date has not experienced any problems meeting its obligations
for claims payments.
Cash flows in the Company's crop insurance subsidiary (which is primarily 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. Collected and
uncollected premiums are required to be paid in full
The Company itself relies primarily on the payment of management fees from its
insurance subsidiaries as a source of cash flow. The Company has deferred the
semi-annual trust preferred payment because its nonstandard auto operations have
not generated sufficient cash to both provide funding for these interest
payments and maintain sufficient cash liquidity for the nonstandard auto
operations.
The trust indenture for the Preferred Securities contains certain restrictive
covenants. Certain of these covenants are based upon SIG's consolidated
coverage ratio of earnings before interest, taxes, depreciation and amortization
(EBITDA) whereby if the 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:
o SIG may not incur additional indebtedness or guarantee
additional indebtedness.
o SIG may not make certain restricted payments including
loans or advances to affiliates, stock repurchases and a limitation on
the amount of dividends is in force.
o 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 (5.00) in March 31, 2000, and will continue to apply until SIG's
consolidated coverage ratio exceeds the amount set forth in the indenture.
The Company's consolidated total assets of $574,246,000 at March 31, 2000
increased $54,324,000 from the balance at December 31, 1999. The primary reason
for this increase was an increase in receivable balances and prepaid reinsurance
premiums which are impacted by the cyclical nature of the crop/hail business.
As of March 31, 2000, the Company had $32,850,000of cash, cash equivalents and
short-term investments available to meet short-term operating cash needs. This
was a decrease of $24,000 from the December 31, 1999 balance.
The Company's portfolio of fixed maturities reduced to $158,303,000 at March 31,
2000 from $166,748,000 and $196,916,000 at December 31, 1999 and March 31, 1999,
as a result of the sale of fixed maturities to fund operating losses.
Net cash used in operating activities to March 31, 2000 aggregated $2,241,000
compared to cash provided from operations of $10,649,000 for the comparable
period in 1999 due to the effect of operating losses offset by net cash from
changes in operating assets and liabilities.
Net cash provided from investing activities of $12,146,000 for the three months
ended March 31, 2000 compared to cash used in investing activities of
$11,310,000 for the comparable period in 1999. Such increase was due primarily
to a reduction in the purchases of fixed maturities.
Overall, operating cash flow for the Company and its insurance subsidiaries
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 and other needs. The Company believes these cash
flows will continue to be adequate through year end.
The IGF Revolver has been extended through December 15, 2000. IGF relies upon
the IGF Revolver to meet seasonal needs for liquidity. The maximum amount that
may be borrowed on the IGF Revolver is $8,000,000.
<PAGE>
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, 1999 Form 10-K. No
material changes have occurred in market risk since this information was
disclosed in the December 31, 1999 Form 10-K.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in any of the pending
legal proceedings previously reported by the Company in
December 31, 1999 Form 10-K.
The Company's insurance subsidiaries are parties to other
litigation arising in the ordinary course of business. The
Company believes that the ultimate resolution of these
lawsuits will not have a material adverse effect on its
financial condition or results of operations. The Company,
through its claims reserves, reserves for both the amount of
estimated damages attributable to these lawsuits and the
estimated costs of litigation.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On March 22, 2000, SIG received notice from Nasdaq - Amex that
the Listing Qualifications Panel (the "Panel") has determined
that SIG was not in compliance with certain listing
qualifications. On or before June 30, 2000, SIG must
make a filing with the SEC and Nasdaq - Amex evidencing
complete compliance with the required qualifications including
net tangible assets excluding preferred securities, of at
least $15,000,000, market value of public float of at least
$5,000,000 for a period of ten consecutive days immediately
thereafter, and a minimum $1.00 per share bid price
requirement. In the event that SIG fails to comply with any of
the terms of these requirements, SIG's securities will be
delisted from The Nasdaq National Market. SIG has appealed the
decision of the Panel and expects to receive a decision on the
appeal in September, 2000. It is unlikely that SIG
will meet all of the listing requirements by June 30, 2000. In
the event that SIG's common stock is delisted, the Company
expects that its common stock may then be traded on the OTC
Bulletin Board.
On May 9, 2000, the Company received notice from from Nasdaq -
Amex that the Listing Qualifications Panel (the "Panel") has
determined that the Company was not in compliance with certain
listing qualifications. On or before June 30, 2000, the
Company must make a filing with the SEC and Nasdaq - Amex
evidencing complete compliance with the required
qualifications including net tangible assets excluding
preferred securities, of at least $15,000,000, market value of
public float of at least $5,000,000 for a period of ten
consecutive days immediately thereafter, and a minimum $1.00
per share bid price requirement. In the event that the company
fails to comply with any of the terms of these requirements,
the Company's securities will be delisted from the Nasdaq
National Market. It is unlikely that the Company will meet all
of the listing requirements by June 30, 2000. In the event
that the company's securities are delisted, it expects that
its common stock may then be traded on the OTC Bulletin Board.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 11.01 Analysis of Earnings Per Share US GAAP - Treasury Method
(b) 8-K Reports:
During the first quarter of 2000, the Company filed no reports
on Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: May 15, 2000 By:______________________
Alan G. Symons
Chief Executive Officer
Dated: May 15, 2000 By: ______________________
Bruce K. Dwyer
Vice President and
Chief Financial Officer
<PAGE>
Goran Capital, Inc. -
Consolidated
Exhibit 11.01
Analysis of Earnings (Loss) Per Share
US GAAP - Treasury Method
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 2000 March 31, 1999
<S> <C> <C> <C>
Average Price (US $) N/A (A) $9.64
Proceeds from Exercise of Warrants and Options (US $) Nil (B) $204,816
Shares Repurchased - Treasury Method Nil (B) / (A) 21,251
Shares Outstanding - Weighted Average 5,876,398 5,876,398
Add: Options and Warrants Outstanding (1) Nil 43,946
Less: Treasury Method - Shares Repurchased Nil (21,251)
Shares Outstanding for US GAAP Purposes 5,876,398 (C ) 5,899,093
Net Earnings in Accordance with US GAAP $(3,412,000) (D) $123,000
Earnings (loss) Per Share - US GAAP - Basic $(0.58) $0.02
Earnings (loss) Per Share - US GAAP - Fully Diluted $(0.58) (D) / (C ) $0.02
Note 1: Only those options with a dilutive effect were included above for the
three months ended March 31, 2000 and 1999.
</TABLE>
