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 September 30, 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.)
4720 Kingsway Drive
Indianapolis, Indiana 46205
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (317) 259-6400
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, 2000, there were 5,776,398 shares of Registrant's common stock
issued and outstanding.
<PAGE>
FORM 10-Q INDEX
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
Page
Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Financial Statements:
Consolidated Balance Sheets at September 30, 2000
(unaudited) and December 31, 1999............................ 3
Unaudited Consolidated Statements of Earnings (Loss)
for the Three and Nine Months Ended
September 30, 2000 and 1999.................................. 4
Unaudited Consolidated Statements of Shareholders' Equity (Deficit)
For the Nine Months Ended September 30, 2000 and 1999 ....... 6
Unaudited Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999 ............... 7
Condensed Notes to Unaudited Consolidated Financial
Statements................................................... 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 15
Item 3 Qualitative and Quantitative Disclosures About Market Risk.. 25
PART II OTHER INFORMATION............................................ 26
SIGNATURES ........................................................ 27
INDEX TO EXHIBITS
Exhibit 11 - Computation of Per Share Earnings (Loss) ....... 28
<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,
2000 1999
ASSETS
<S> <C> <C>
Cash and investments $192,702 $231,424
Accounts receivable:
Receivables, net of allowance 171,088 92,446
Income taxes recoverable -- 6,820
Investments in and advances to related parties 1,864 1,646
----- -----
Total accounts receivable 172,952 100,912
Reinsurance recoverable on paid and unpaid losses 159,148 88,293
Prepaid reinsurance premiums 49,520 10,259
Capital assets, net of accumulated depreciation 18,945 21,967
Deferred policy acquisition costs 8,291 13,920
Intangible assets 43,196 43,812
Other assets 9,809 9,335
----- -----
TOTAL ASSETS $654,563 $519,922
======== ========
LIABILITIES
Accounts Payable:
Reinsurance payables $178,540 $37,603
Accrued and other payables 26,579 28,543
------ ------
Total accounts payable 205,119 66,146
Distributions payable on preferred securities 12,348 4,809
Loss and loss adjustment expenses 248,277 219,918
Unearned premiums 99,433 90,007
Notes Payable 3,676 16,929
----- ------
TOTAL LIABILITIES 568,853 397,809
Minority interest:
Company obligated manditorily redeemable preferred stock of trust
subsidiary holding solely parent debentures 112,000 135,000
Shareholders' deficit (26,290) (12,887)
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $654,563 $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
September 30,
2000 1999
---- ----
<S> <C> <C>
Gross premiums written $80,299 $67,685
Less ceded premiums (39,177) (14,236)
-------- --------
Net premiums written 41,122 53,449
Change in net unearned premiums 7,209 14,715
----- ------
Net premiums earned 48,331 68,164
Fee income 3,667 3,161
Net investment income 2,685 3,197
Net realized loss on sale of investments (2,632) (250)
------- -----
Total Revenues 52,051 74,272
------ ------
Losses and loss adjustment expenses 49,838 68,560
Policy acquisition and general and administrative expenses 24,507 31,528
Interest expense 97 197
Amortization of intangibles 655 631
--- ---
Total expenses 75,097 100,916
------ -------
Loss before undernoted items (23,046) (26,644)
Benefit for income taxes -- 9,745
Accrued distribution on preferred securities (2,865) (3,232)
Minority interest -- 6,224
-- -----
Net loss $(25,911) $(13,907)
========= =========
Loss per share - basic $(4.49) $(2.37)
Loss per share - fully diluted $(4.49) $(2.37)
Loss per share - operating $(4.03) $(2.33)
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>
Nine Months Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
Gross premiums written $355,658 $393,577
Less ceded premiums (244,565) (193,707)
--------- ---------
Net premiums written 111,093 199,870
Change in net unearned premiums 29,622 11,945
------ ------
Net premiums earned 140,715 211,815
Fee income 11,313 10,778
Net investment income 8,583 10,212
Net realized loss on sale of investments (3,948) (1,206)
------- -------
Total Revenues 156,663 231,599
------- -------
Losses and loss adjustment expenses 124,332 197,380
Policy acquisition and general and administrative expenses 55,137 66,641
Interest expense 323 376
Amortization of intangibles 1,921 1,887
----- -----
Total expenses 181,713 266,284
------- -------
Loss before undernoted items (25,050) (34,685)
Benefit (provision) for income taxes (487) 14,940
Accrued distribution on preferred securities (9,112) (9,618)
Minority interest -- 9,740
-- -----
Net loss $(34,649) $(19,623)
========= =========
Loss per share - basic $(5.94) $(3.34)
Loss per share - fully diluted $(5.94) $(3.34)
Loss per share - operating $(5.26) $(3.21)
See condensed notes to consolidated financial statements
</TABLE>
<PAGE>
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 Stock Contributed Translation Earnings Shareholders'
Surplus Adjustment (Deficit) Equity (Deficit)
<S> <C> <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 --- --- (401) --- (401)
Net loss --- --- --- (19,623) (19,623)
--- --- --- -------- --------
Balance at September 30, 1999 $19,317 $2,775 $(149) $7,758 $29,701
======= ====== ====== ====== =======
Balance at December 31, 1999 $19,317 $2,775 $13 $(34,992) $(12,887)
Repurchase of common shares (185) --- --- --- (185)
Preferred Securities --- 21,763 --- --- 21,763
Change in cumulative translation
adjustment --- --- (332) --- (332)
Net loss --- --- ---- (34,649) (34,649)
Balance at September 30, 2000 $19,132 $24,538 $(319) $(69,641) $(26,290)
======= ======= ====== ========= =========
</TABLE>
See condensed notes to consolidated financial statements
<PAGE>
GORAN CAPITAL INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CANADIAN GAAP, stated in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings loss for the period $(34,649) $(19,623)
Adjustments
Amortization and depreciation 6,846 1,887
Loss on disposal of investments 3,942 1,206
Minority interest in net loss of consolidated subsidiary -- (9,740)
Increase in other assets (474) (1,477)
Decrease in deferred policy acquisition costs 5,629 3,823
Increase in unearned premiums 9,426 6,655
Increase in loss and loss adjustment expenses 28,359 127,613
Increase in accounts receivable (72,040) (24,544)
Increase in accounts payable 138,973 80,739
Increase in recoverable on paid and unpaid losses (70,855) (157,958)
Increase in prepaid reinsurance premiums (39,261) (10,991)
Increase in distributions payable on preferred securities 7,539 --
Decrease deferred income taxes recoverable -- (4,603)
-- -------
(16,565) (7,013)
-------- -------
NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES:
Reduction of borrowed funds (13,253) (6,155)
-------- -------
NET CASH PROVIDED FROM (USED IN) INVESTING ACTIVITIES:
Net sale of marketable securities 44,575 4,292
Net purchase of capital assets (1,457) (970)
Redemption of share capital & minority interest (3,000) --
------- --
40,118 3,322
------ -----
Change in cash and cash equivalents during the period 10,300 (9,846)
Cash and cash equivalents, beginning of period 35,807 42,759
------ ------
Cash and cash equivalents, end of period $46,107 $32,913
======= =======
See condensed notes to consolidated financial statements
</TABLE>
<PAGE>
GORAN CAPITAL INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For The Three and Nine Months Ended September 30, 2000
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Organization
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.
During the three months ended September 30, 2000, Goran acquired from
third parties 80,800 common shares of Symons International Group, Inc.
("SIG") at then prevailing varying market prices. This brings the
cumulative total of SIG common shares purchased for the year to
196,300. The third quarter purchases increased Goran's ownership of SIG
to 70% from 69.2% in the second quarter.
2. Supplemental Cash Flow Information
Net cash payments of interest were $737,000 and $13,566,000 for the
nine months ended September 30, 2000 and 1999, respectively. Net cash
received related to refunded income taxes was $6,739,000 and
$12,810,000 for the first nine months of 2000 and 1999, respectively.
3. Notes Payable
One of the Company's insurance subsidiaries, IGF Insurance Company
("IGF"), had a revolving bank line of credit (the "IGF Revolver").
During the third quarter 2000 the maximum amount available under the
IGF Revolver was $8,000,000. As of September 30, 2000, the outstanding
balance was $0, and the credit facility was cancelled. The weighted
average interest rate on the IGF Revolver was 8.61% for the nine months
ended September 30, 2000 and 6.83% for the nine months ended September
30, 1999.
Notes payable also includes a $1,000,000 note due July 1, 2001 on the
purchase of North American Crop Underwriters, Inc. ("NACU") at no
interest. The balance of notes payable at September 30, 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 of SIG 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. Under the terms of the indenture, SIG is permitted to defer
semi-annual interest payments for up to five years. SIG deferred
interest payments that were due in February and August 2000.
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"). If SIG's EBITDA falls below
2.5 times consolidated interest expense (including Preferred Security
interest) 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. SIG is in compliance with the
restrictions and is not in default in its obligations with the regard
to the Preferred Securities.
As previously reported Granite Reinsurance Company, Ltd. ("Granite Re")
and Granite Insurance Company ("Granite"), the Company's subsidiaries,
acquired from third parties, $23,000,000 principal value of SIG's
Preferred Securities at a cost of $2,810,000 including the cost of
accrued interest. Upon consolidation of the Company's accounts as of
September 30, 2000, the acquisition of these Preferred Securities
resulted in an increase in consolidated shareholders' equity of
$21,763,000.
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.
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.
On October 10, 2000, Pafco informed the Iowa Department of Insurance
("IADOI") of its decision to stop writing new business in Iowa while it
reviews and revises its current program in this state. Pafco will
continue to service existing policyholders and renew policies in Iowa
and provide policy count information on a monthly basis in conformance
with IADOI requirements.
The financial review of Superior Insurance Company ("Superior") for the
year ended December 31, 1999 by the Florida Department of Insurance
("FDOI") is ongoing. As previously reported, the FDOI issued a notice
of its intent to issue an order (the "Notice") which principally
addresses certain policy and finance fee payments by Superior to
Superior Insurance Group, Inc. ("Superior Group"), another subsidiary
of the Company, and financial reporting issues, including disclosure of
intercompany transactions. Superior filed a petition with the FDOI
which requests a formal hearing to review the Notice and a
determination that the order contemplated by the Notice not be issued.
The hearing is scheduled for December 8, 2000. The order, if issued,
may restrict Superior from paying certain billing and policy fees to
Superior Group and include a requirement that Superior Group repay to
its subsidiary, Superior, billing and policy fees from prior years in
an amount of approximately $35.2 million. In such event, there would be
no financial impact on the Company's consolidated financial statements.
A restriction on the ability of Superior to pay future billing and
policy fees to Superior Group may necessitate that the Company take
certain actions, which may be subject to regulatory approvals, to
reallocate operating revenues and expenses between its subsidiaries.
The Company intends to vigorously contest the issuance of any such
order. Pafco, IGF and Superior also provide monthly financial
information to the departments of insurance in certain states in which
they write business, and Pafco and IGF have agreed to obtain prior
approval of any new affiliated party transactions.
<PAGE>
The Company's insurance 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"). 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 may 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 is vigorously defending the claims brought
against it. No material developments have occurred since last reported.
As previously reported the FDOI advised Superior that it intends to
issue an order. See Note 5. 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, several brokers and a third party carrier
are parties to a number of pending legal proceedings relating to
agricultural business interruption policies sold during 1998 ("AgPI")
which have since been discontinued. Since last reported, all claims by
the policyholders in the AgPI lawsuits have been settled by the third
party carrier of the policies. Over the objections of IGF, the third
party carrier settled some of the AgPI cases for amounts in excess of
policy limits. Cross claims remain pending in California state court
(King and Fresno counties) between IGF and other defendants in the AgPI
cases, and discovery is proceeding. As of September 30, 2000, IGF had
paid an aggregate of approximately $28,626,000 to AgPI policyholders.
The Company increased its reserves during the third quarter by
$3,800,000. The unpaid reserves for AgPI as of September 30, 2000 are
$11,074,000. Certain of the settlements made by the third party carrier
exceeded established reserves for the particular cases involved. The
Company does not believe it will ultimately be responsible for the full
amount of the settlement amounts paid by the third party carrier;
however, the Company adjusted its reserves during the third quarter of
2000 for a portion of the settlement amounts paid by the third party
carrier. Management believes that the reserve is sufficient to meet all
future obligations. There can be no assurance that the Company's
ultimate liability with respect to the settlements and pending legal
proceedings involving the policies will not have a material adverse
effect on the Company's results of operations or financial position.
As previously reported, there are two class action claims pending in
Florida which allege that Superior Guaranty Insurance Company
("Superior Guaranty") improperly charged service or finance fees in
violation of Florida law. The plaintiff in one of these actions has
obtained certification as a class. The Company believes that it has
substantially complied with the premium financing statute and intends
to vigorously defend any potential loss.
On February 4, 2000 a complaint for class action was filed against
Superior in the Circuit Court for Dade County, Florida. The plaintiff
alleges that Superior improperly reduced medical benefits payable and
improperly calculated interest in violation of Florida law. The Company
believes the allegations are without merit and intends to vigorously
defend the charges.
On September 15, 2000 a complaint for class action was filed against
Superior in the Circuit Court for Lee County, Florida. The complaint
alleges that Superior inappropriately reduced or denied medical claims
in violation of Florida law. The Company believes the case is without
merit and intends to vigorously defend the charges brought against it.
<PAGE>
The Company and its subsidiaries are named as defendants in various
other 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.
7. Loss Development on Prior Accident Periods
During the first three quarters of 2000 the Company experienced
favorable development on its year end 1999 loss and loss adjustment
expense ("LAE") reserves for other than crop in the amount of
$7,312,000. The favorable development primarily related to nonstandard
auto, $4,526,000, and commercial business runoff, $2,786,000.
During the same period the Company experienced an unfavorable
development on its year end crop insurance loss and LAE reserves in the
amount of $5,752,000. This includes $5,200,000 of additional loss and
LAE reserves booked through the third quarter of 2000 on the
discontinued AgPI line of business.
8. Segment Disclosures
The Company has two reportable segments based on products: nonstandard
automobile insurance and crop insurance. The accounting policies of the
segments are the same as those described in the December 31, 1999
Annual Report on Form 10-K in "Nature of Operating 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 property and equipment.
<PAGE>
<TABLE>
<CAPTION>
The following tables show financial data by segment (in thousands):
Three Months Ended
September 30,
2000 1999
NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS
<S> <C> <C>
Gross premiums written $45,450 $57,416
======= =======
Net premiums written $28,086 $56,079
======= =======
Net premiums earned $30,857 $59,238
Fee income 3,356 2,994
Net investment income 2,393 2,961
Net realized loss on sale of investments (2,632) (407)
------- -----
TOTAL REVENUES 33,974 64,786
------ ------
Losses and loss adjustment expense 25,629 54,899
Policy acquisition and general and administrative expenses 16,251 26,725
------ ------
TOTAL EXPENSES 41,880 81,624
------ ------
Loss before income taxes $(7,906) $(16,838)
======== =========
GAAP RATIOS (Nonstandard Automobile Only):
Loss and LAE Ratio (1) 83.10% 92.68%
Expense ratio, net of billing fees (2) 41.80% 40.06%
------ ------
Combined ratio (3) 124.90% 132.74%
======= =======
CROP INSURANCE OPERATIONS:
Gross premiums written $34,447 $10,201
======= =======
Net premiums written $8,942 $(824)
====== ======
Net premiums earned $14,155 $7,316
Fee income 281 110
Net investment income 91 22
-- --
TOTAL REVENUES 14,527 7,448
------ -----
Losses and loss adjustment expenses 20,803 11,889
Policy acquisition and general and administrative expenses 5,813 3,244
Interest and amortization of intangibles 299 318
--- ---
TOTAL EXPENSES 26,915 15,451
------ ------
Loss before income taxes $(12,388) $(8,003)
========= ========
(1) Loss and LAE ratio: ratio of loss and LAE incurred during the period, as a percentage of net premium
earned.
(2) 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.
(3) Combined ratio: sum of the loss and LAE ratio plus the expense ratio net of billing fees.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS
<S> <C> <C>
Gross premiums written $134,887 $184,659
======== ========
Net premiums written $77,901 $193,918
======= ========
Net premiums earned $111,275 $191,472
Fee income 10,921 10,412
Net investment income 7,706 9,421
Net realized loss on sale of investments (3,949) (1,423)
------- -------
TOTAL REVENUES 125,953 209,882
------- -------
Losses and loss adjustment expense 92,032 167,843
Policy acquisition and general and administrative expenses 51,864 69,929
------ ------
TOTAL EXPENSES 143,896 237,772
------- -------
Loss before income taxes $(17,943) $(27,890)
========= =========
GAAP RATIOS (Nonstandard Automobile Only):
Loss and LAE Ratio (1) 82.70% 87.66%
Expense ratio, net of billing fees (2) 36.80% 31.08%
------ ------
Combined ratio (3) 119.50% 118.74%
======= =======
CROP INSURANCE OPERATIONS:
Gross premiums written $219,915 $208,448
======== ========
Net premiums written $26,891 $12,422
======= =======
Net premiums earned $23,589 $12,330
Fee income 316 247
Net investment income 177 61
Net realized capital gain 1 --
- --
TOTAL REVENUES 24,083 12,638
------ ------
Losses and loss adjustment expenses 31,137 23,489
Policy acquisition and general and administrative expenses(4) (2,634) (6,950)
Interest and amortization of intangibles 811 735
--- ---
TOTAL EXPENSES 29,314 17,274
------ ------
Loss before income taxes $(5,231) $(4,636)
======== ========
(1) Loss and LAE ratio: ratio of loss and LAE incurred during the period, as a percentage of net
premium earned.
(2) 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.
(3) Combined ratio: sum of the loss and LAE ratio plus the expense ratio net of billing fees.
(4) Negative crop expenses are caused by inclusion of Multiple Peril Crop Insurance ("MPCI") expense
reimbursement and underwriting gain.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
September 30,
2000 1999
Loss before income taxes and minority interest:
<S> <C> <C>
Nonstandard automobile $(7,906) $(16,838)
Crop (12,388) (8,003)
-------- -------
Segment totals (20,294) (24,841)
Corporate and other (2,752) (1,803)
------- -------
Consolidated totals $(23,046) $(26,644)
========= =========
Nine Months Ended
September 30,
2000 1999
Loss before income taxes and minority interest:
Nonstandard automobile $(17,943) $(27,890)
Crop (5,231) (4,636)
------- -------
Segment totals (23,174) (32,526)
Corporate and other (1,876) (2,159)
------- -------
Consolidated totals $(25,050) $(34,685)
========= =========
September 30, December 31,
2000 1999
Segment assets:
Nonstandard automobile $229,358 $229,640
Crop 316,725 145,622
Corporate and other 108,480 144,660
------- -------
Consolidated Totals $654,563 $519,922
======== ========
</TABLE>
9. Reclassifications
Certain prior period amounts have been reclassified to conform with
current year presentation.
10. Earnings Per Share
Basic and diluted net loss per share are computed by dividing net loss
as reported by the average number of shares outstanding as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2000 1999 2000 1999
Basic:
<S> <C> <C> <C> <C>
Weighted-average common shares outstanding 5,776 5,876 5,838 5,876
Diluted:
Weighted-average common shares outstanding 5,776 5,876 5,838 5,876
Dilutive effect of stock options -- -- -- --
Average common shares outstanding assuming dilution 5,776 5,876 5,838 5,876
</TABLE>
The Company had 743,708 stock options outstanding as of September 30,
2000. The weighted average common shares outstanding on a basic and a
fully diluted basis are the same because of the net losses in 2000 and
1999.
11. Shareholders' Equity
During the nine months ended September 30, 2000, Goran acquired from
third parties, 100,000 of its own common shares, all at market value,
resulting in 5,776,398 outstanding common shares at September 30, 2000.
<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>
September 30, September 30,
2000 1999
<S> <C> <C>
Reported net loss $(34,649) $(19,623)
US/Canada GAAP Differences:
No Differences -- --
--
Revised net loss $(34,649) $(19,623)
Loss per share - basic $(5.94) $(3.34)
Loss per share - fully diluted $(5.94) $(3.34)
September 30, December 31, 1999
2000
Shareholders' deficit in accordance with Canadian GAAP $(26,290) $(12,887)
Receivable from sale of capital stock (300) (300)
Unrealized loss on investments (1,910) (4,874)
------- -------
Shareholders' deficit in accordance with US GAAP $(28,500) $(18,061)
========= =========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW OF THE COMPANY
Goran Capital Inc. (the "Company") owns approximately 70% of Symons
International Group, Inc. ("SIG"). SIG in turn owns 100% of Pafco General
Insurance Company ("Pafco"), Superior Insurance Company ("Superior") and IGF
Insurance Company ("IGF"). Additionally, the Company owns 100% of Granite
Reinsurance Company, Ltd. ("Granite Re"), Granite Insurance Company ("Granite")
and Symons International Group, Inc. Florida ("SIGF").
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.
<PAGE>
Crop Insurance Operations
The two principal components of the Company's crop insurance business are
multiple peril crop insurance ("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 annually 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 2,800 independent agencies in 46 states. Of the 2,800
licensed agents approximately 1,600 are actively writing business.
The Company's underwriting risk is affected by the following factors: (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 or in certain circumstances other pre-set dates determined by crop and
location.
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 crop hail product since the combined product
generally insures a greater number of acres, thereby spreading the risk of
damage over a larger insured area. Approximately 33% 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.
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 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 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.
<PAGE>
CORPORATE AND 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 were
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 been reporting losses on a quarterly basis since the third
quarter of 1998. Pre-tax losses for the nine months ended September 30, 2000 and
September 30, 1999 were $(25,050,000) and $(34,685,000) respectively. Most of
these losses are attributed to the auto segment. Although losses have continued,
losses from the auto segment have decreased from 1999 largely due to favorable
developments in loss ratios. The Company is continuing to seek and implement
rate increases and other underwriting actions to further improve profitability.
Additionally, the Company's volume of nonstandard auto business appears to be
increasing. As the Company increases premium volume, the expense ratio should
reduce. Auto segment losses in the third quarter were further impacted by
$2,632,000 realized losses due to the repositioning of the investment portfolio.
The crop segment reported a pre-tax loss of approximately $(12,388,000) for the
third quarter. This loss was a result of unfavorable development of hail and
named peril losses, an increase of AgPI reserves, and additional reinsurance
costs. Although the Company has taken a number of actions to address the factors
that have contributed to these past 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 subsidiaries, their business operations, and their
transactions with affiliates, including the Company, are subject to 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 subsidiaries write business and, in the case of IGF, the
Federal Crop Insurance Corporation ("FCIC"). Moreover, the insurance
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 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.
<PAGE>
As previously reported, the FDOI issued a notice of its intent to issue an order
(the "Notice") which principally addresses certain policy and finance fee
payments by Superior to Superior Insurance Group, Inc. ("Superior Group"),
another subsidiary of the Company, and financial reporting issues, including
disclosure of intercompany transactions. Superior has filed a petition with the
FDOI which requests a formal hearing to review the Notice and a determination
that the order contemplated by the Notice not be issued. The hearing is
scheduled for December 8, 2000. The Company intends to vigorously contest the
issuance of any such order; however, there can be no assurance that an order, if
issued, will not have a material adverse effect on the Company's results of
operations or financial position.
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, in a manner satisfactory to the regulators
could impair the Company's ability to execute its business strategies or result
in future regulatory actions or proceedings that otherwise may adversely affect
the Company's operations.
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 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 SIG's Ability to Act
SIG has issued company obligated mandatorily redeemable preferred securities
("Preferred Securities") of $135 million aggregate principal amount through a
wholly owned trust subsidiary. The Preferred Securities have a term of 30 years
with annual interest of 9.5% paid semi-annually. The obligations of the
Preferred Securities are funded from SIG's nonstandard automobile management
company and dividend capacity from the crop insurance business. SIG deferred
interest payments that were due February and August 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 SIG's ability to act in the
future. These covenants include restrictions on SIG's ability to: incur or
guarantee additional debt; make payments 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 cash flows of SIG.
The Terms of the Strategic Alliance Agreement May Adversely Impact the
Operations of IGF
As previously reported, on February 28, 1998 the Company, IGF and IGF Holdings,
Inc. entered into a Strategic Alliance Agreement ("SAA") with Continental
Casualty Company ("CNA") under which the Company assumed the multiple peril and
crop hail insurance operations of CNA. The SAA provides for continuous
reinsurance by CNA of a portion of the multiple peril and crop hail business
written by the Company. The SAA also includes a put mechanism whereby IGF may be
required to purchase all of such business from CNA and terminate the ongoing
reinsurance relationship at a purchase price based upon a multiple of historical
income from the reinsured business. The put mechanism becomes exercisable on
January 1, 2001. The Company is currently in discussions with CNA regarding
possible alternatives to the put mechanism. There can be no assurance that CNA
will not exercise the put mechanism and in the event CNA exercised the put
mechanism, IGF would not have sufficient funds to meet its obligation to CNA.
New Statutory Accounting Standards
As previously reported, the NAIC has recommended certain changes in statutory
accounting practices to become effective January 1, 2001. These recommendations
are intended to provide greater consistency for statutory reporting entities and
to expand current guidance in certain areas. The IDOI and FDOI are expected to
adopt substantially all of the proposed amendments.
<PAGE>
The Company has completed a preliminary analysis of the effect on the statutory
surplus of its insurance subsidiaries of such proposed changes. The consolidated
statutory surplus of insurance subsidiaries as of September 30, 2000 is
$43,503,000. Based on this analysis, management believes that there will be no
significant impact to the surplus of Superior as a result of implementing the
proposed changes in accounting standards. The impact to Pafco and IGF is
expected to be a material reduction in statutory surplus of approximately
$5,600,000 and $3,500,000, respectively. Management is currently evaluating the
ongoing surplus requirements of Pafco and IGF. The Company is exploring
alternatives for infusion of capital to these subsidiaries. Some of the
alternatives being considered may require prior regulatory approval, and there
can be no assurance that such regulatory approval would be obtained.
IGF May Experience Increased Interest Costs
As of September 30, 2000, IGF had a revolving bank line of credit ("the IGF
Revolver"), which had an outstanding balance of $0 and which is now cancelled.
The Company is in the process of obtaining a replacement line. Historically,
this credit facility was used to better enable IGF to meet the seasonal
liquidity needs of the crop business. The weighted average interest rate on the
IGF Revolver was 8.61% and 6.83% with interest expense totaling $239,000 and
$312,000 for the nine months ended September 30, 2000 and 1999 respectively.
IGF has reported a loss of $4,469,000 through the third quarter and as such, may
experience increased interest costs associated with negotiating a replacement
credit line. Management is working to replace the line and expects to have a
credit facility in place prior to the end of 2000. However, there can be no
assurance the Company will obtain a replacement credit line or that management
will not have to seek alternative financing at higher interest costs.
REVIEW OF CONSOLIDATED OPERATIONS
Net Loss
For the three and nine months ended September 30, 2000, the Company recorded a
net loss of $(25,911,000) and $(34,649,000), or $(4.49) and $(5.94) per share
(basic and diluted). This is an increase from the net loss for the three and
nine months ended September 30, 1999 of $(12,004,000) and $(15,026,000), or
$(2.12) and $(2.60) per share (basic and diluted).
Losses before taxes and interest on Preferred Securities for the nonstandard
automobile segment showed a loss of $(7,906,000) and $(17,943,000) for the three
and nine months ended September 30, 2000 compared to losses of $(16,838,000) and
$(27,890,000) for the three and nine months ended September 30, 1999. Reduced
losses in the auto segment for 2000 are primarily due to an improvement in the
loss ratio and a reduction in fixed expenses.
Losses before taxes and interest on Preferred Securities for the three and nine
months ended September 30, 2000 in the crop segment showed a loss of
$(12,388,000) and $(5,231,000) which compares to losses of $(8,003,000) and
$(4,636,000) for the same periods in 1999. The increase in losses were primarily
due to unfavorable development in AgPI reserves, higher hail and named peril
loss ratios, as well as an increase in reinsurance costs.
Losses before taxes and interest on Preferred Securities for the corporate
segment were $(2,752,000) and $(1,876,000) for the three and nine months ended
September 30, 2000 and $(1,803,000) and $(2,159,000) for the same period in
1999. These losses consist primarily of amortization of intangibles and general
and administrative expenses. The losses increased primarily due to an increase
in general and administrative expenses.
Gross Premiums Written
Gross premiums written for the nonstandard automobile segment decreased 20.8%
and 27.0% for the three and nine months ended September 30, 2000 compared to the
three and nine months ended September 30, 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 increased 237.7% and 5.5% for the
three and nine months ended September 30, 2000 compared to the same periods in
1999. Due to timing, prior year figures for the third quarter were based on
estimates. Due to the seasonality of the crop business, most of the crop hail
premiums are processed by the end of the third quarter. Third quarter 2000
premiums were booked on actual results and were higher than expected. Crop
premiums (expressed in thousands) for the three and nine months ended September
30 are as follows:
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Catastrophic imputed $2,500 $(3,275) $27,000 $27,507
MPCI 18,681 (4,254) 162,420 148,985
Crop hail and named perils 15,766 14,455 57,495 59,367
AgPI (1) 0 0 0 96
- - - --
36,947 6,926 $246,915 235,955
Less: Catastrophic imputed (2,500) 3,275 (27,000) (27,507)
------- ----- -------- --------
$34,447 $10,201 $219,915 $208,448
======= ======= ======== ========
(1) Discontinued product sold in 1998.
</TABLE>
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 nine
months ended September 30 are as follows:
2000 1999
Nonstandard automobile 27.6% 0%
Crop hail 52.4% 69.4%
Named peril 10.0% 50.0%
To address the 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 its 1999 results, IGF has
decided to retain more risk on the crop hail and named peril lines of business
resulting in a decrease in the quota share cession rates.
Fee Income
Fee income increased 16% and 5% for the three and nine months ended September
30, 2000 as compared to the same periods of 1999 due to the increases in policy
fees charged. Also higher premiums were written in the fourth quarter 1999 and
first quarter 2000 on which billing and other fees on this business are still
being realized.
Net Investment Income
Net investment income decreased 16% for the three and nine months ended
September 30, 2000 as compared to the corresponding periods of the prior year.
The current year decrease was due to a reduction 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
and nine months ended September 30, 2000 was 83.1% and 82.7% of net premiums
earned as compared to 92.7% and 87.7% for the corresponding periods in 1999.
This improvement is due to premium rate increases and favorable development on
prior reserve estimates.
The loss and LAE ratio for the Company's crop insurance segment for the three
and nine months ended September 30, 2000, was 147.0% and 132.0% of net premiums
earned. The loss and LAE ratio for 2000 includes unfavorable development on
prior year loss and LAE reserves of $5,752,000. This includes $5,200,000 of
additional loss and LAE reserves booked through the third quarter 2000 on the
AgPI line of business written by the Company in 1998.
<PAGE>
Policy Acquisition and General and Administrative Expenses
Policy acquisition and general and administrative expenses were $24,507,000 and
$55,137,000 or 30.5% and 15.5% of gross premiums written for the three and nine
months ended September 30, 2000 compared to $31,528,000 and $66,641,000 or 46.6%
and 16.9% of gross premiums written in the corresponding periods of 1999.
Overall expenses in the first nine months of 2000 versus the first nine months
of 1999 decreased by $11,504,000.
Nonstandard auto expenses were $51,864,000 and $69,929,000 for the nine months
ended September 30, 2000 and September 30, 1999, respectively. The decrease in
expenses of $18,065,000 is primarily attributable to the ceding commission
earned through a quota share agreement effective January 1, 2000, a decrease in
other expenses due to the decrease in written premiums, and a decrease in salary
expense.
Crop expenses increased $4,316,000 from September 30, 1999 to September 30,
2000. Crop segment expenses include agent commissions, stop loss reinsurance
costs and operating expenses which are offset by MPCI expense reimbursements and
MPCI underwriting gain. The increase in crop expenses are attributable to an
increase in reinsurance costs. Prior year figures also include higher MPCI gains
due to estimated above average yields through the third quarter of 1999. 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.
Provision (Benefit) for Income Taxes
At September 30, 2000 the Company's net tax assets are fully offset by a 100%
valuation allowance of approximately $32,009,000. The tax benefit accruing for
the first nine months of 2000 which has been offset by an increase in the
allowance is approximately $8,875,000. This resulted in no tax benefit being
reflected for the nine months ended September 30, 2000.
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
Investments
Total investments as of September 30, 2000 and December 31, 1999 were
$146,595,000 and $195,617,000, respectively. The decrease of $49,022,000 is a
result of the sale of fixed maturities to fund operating losses. 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 September 30, 2000 and December
31, 1999 were $46,107,000 and $35,807,000, respectively. This increase is
attributable to the seasonality of cash flow related to the crop segment.
Investments in and Advances to Related Parties
Investments in and advances to related parties minimally increased from
$1,646,000 at December 31, 1999, to $1,864,000 at September 30, 2000.
Accounts Receivable
Receivables as of September 30, 2000 and December 31, 1999 were $171,088,000 and
$92,446,000, respectively. However, the Company believes that the balance is
more comparable to the September 30, 1999 balance of $145,025,000. The crop
portion of the receivable balance as of September 30, 2000 and 1999 was
$112,711,000 and $86,824,000. This 29.8% increase is due to a portion of the
reinsurance balances being applied to the accounts receivable balance in 1999.
Nonstandard auto receivable balances as of September 30, 2000 and 1999 were
$55,901,000 and $62,053,000, respectively. The decrease in receivables is, in
part, due to a decline in written premium..
<PAGE>
Reinsurance Recoverables and Prepaid Reinsurance Premiums
Reinsurance recoverables were $159,148,000 and $88,293,000 as of September 30,
2000 and December 31, 1999, respectively. However the reinsurance recoverable
balance is more effectively compared to the September 30, 1999 balance of
$225,843,000. This is primarily due to the cyclical nature of the crop business.
Of the total reinsurance recoverable balance, as of September 30, 2000 and 1999,
$127,400,000 and $217,532,000, respectively pertain to crop business. The
decrease in crop is due to a decrease in the MPCI ceded loss reserves as well as
a decrease in the MPCI underwriting gain receivable. The nonstandard auto
recoverables were $26,984,000 and $1,910,000 for the periods ending September
30, 2000 and 1999, respectively. The nonstandard auto increase is attributable
to a quota share treaty agreement effective January 1, 2000.
Prepaid reinsurance premiums were $49,520,000 and $10,259,000 as of September
30, 2000 and December 31, 1999, respectively. This prepaid balance is more
effectively compared to the September 30, 1999 balance of $28,477,000. Prepaid
reinsurance premiums on nonstandard auto totaled $19,756,000 and $0 as of
September 30, 2000 and 1999, respectively. The increase in nonstandard auto is
attributable to a quota share agreement that was effective January 1, 2000.
Deferred Policy Acquisition Costs
Deferred policy acquisition costs ("DAC") as of September 30, 2000 and December
31, 1999, were $8,291,000 and $13,920,000 respectively. DAC is more comparable
to the prior year, September 30, 1999 balance of $12,509,000. The change in DAC
is largely attributed to the nonstandard auto segment. Balances at September 30,
2000 and 1999 were $7,617,000 and $12,068,000, respectively. The decrease
relates to decreases in premiums written and unearned premium reserves. The
decrease is also due, in part, to a quota share agreement effective January, 1,
2000. 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 September 30, 2000
and December 31, 1999, respectively. The Company has recorded an allowance
reserve of 100% on $32,009,000 of its federal income tax recoverables as of
September 30, 2000. The 1999 balance consists of amounts recoverable from the
1997 tax year due to tax losses generated in 1999.
Fixed Assets
Property and equipment, net of accumulated depreciation, decreased $3,022,000
over year end 1999. This change is primarily due to disposals and depreciation.
Intangible Assets
The balance in the intangible assets decreased from year end 1999 due to
amortization expense. Intangible assets include goodwill from the acquisition of
Superior, acquisition of the minority interest in Superior Insurance Group
Management, Inc., the acquisition of North American Crop Underwriters, Inc.
("NACU"), and Preferred Security issuance costs.
Loss and Loss Adjustment Expense Reserves
Total loss and LAE reserves increased from $219,918,000 as of December 31, 1999
to $248,277,000 as of September 30, 2000. The total increase in loss and LAE
reserves is approximately $28,359,000.
Nonstandard auto reserves declined $25,280,000 for the first nine months of 2000
and $6,045,000 during the third quarter. This decrease is consistent with the
declining volume in nonstandard auto business and favorable development of loss
ratios. Reserves for crop insurance increased $58,096,000 for the first nine
months of 2000 due to seasonality of the crop business and an increase in AgPI
reserves of $5,200,000. The remaining change in reserve is attributable to the
corporate segment.
<PAGE>
Unearned Premium
The unearned premium reserve increased by $9,426,000 from December 31,1999 to
September 30, 2000. Gross unearned premium was $99,433,000 and $90,007,000 as of
September 30, 2000 and December 31, 1999, respectively. However, this unearned
premium balance is more effectively compared to the September 30, 1999 balance
of $117,320,000. The unearned premium decreased by $17,887,000 from September
30, 1999 to September 30, 2000. Nonstandard auto unearned premium decreased
during this period by $20,544,000. This decrease is due to a nonstandard auto
quota share reinsurance agreement effective January 1, 2000, as well as a
decrease in written premium volume. In contrast, crop increased in unearned
premium by $2,070,000 for the same period. Crop unearned premium increased due
to the Company retaining more hail and named peril premium in 2000 than in 1999.
Reinsurance Payables
Reinsurance payables increased by $140,937,000 from December 31, 1999 to
September 30, 2000. Crop payables increased from year end by $98,712,000 through
September 30, 2000 due to the cyclical nature of the crop business. Nonstandard
auto increased by $44,724,000 from December 1999 due to a quota share agreement
effective January 1, 2000.
Notes Payable
Notes payable includes the IGF Revolver which on September 30, 2000 and December
31, 1999 had outstanding balances of $0 and $15,000,000, respectively, which is
now terminated. This change in the balance is due to the fact that IGF had
available cash on September 30, 2000 in excess of operating needs as a result of
increased collections. The weighted average interest rate on the IGF Revolver
was 8.61% for the nine months ended September 30, 2000 and 6.83% for the nine
months ended September 30, 1999.
Notes payable also include a $1,000,000 note due July 1, 2001 on the purchase of
NACU which bears no interest. The balance of notes payable at September 30, 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%.
Stockholders' Deficit
Stockholders' deficit has increased $13,403,000 from December 31, 1999. This
decrease reflects the impact of current year purchases on the open market by
Granite and Granite Re of the Preferred Securities valued at $21,763,000 offset
by a net loss of $34,649,000 for the nine months ended September 30, 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 2000, the Company has continued to liquidate some investments to
pay claims. The Company historically has tried to maintain duration averages of
3.5 years. However, the losses in 1999 and 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 premiums are
required to be paid in full to the FCIC by the Company. Uncollected premiums, if
not paid by a specified date during the crop year, accrue interest at 15%.
<PAGE>
As a result of the cash flow patterns of the crop insurance industry, IGF
historically has relied upon the IGF Revolver to meet seasonal needs for
liquidity. As this line is no longer in effect, management is seeking a
replacement credit facility and expects a new line to be in place by the end of
2000. If management is unable to obtain a replacement line of credit, then other
sources of financing would be pursued to meet operational cash requirements.
The Company itself relies primarily on the payment of management fees from its
insurance subsidiaries as a source of cash flow. As discussed elsewhere in this
filing, the ability of the insurance subsidiaries to pay fees may be limited by
regulatory action. SIG deferred the semi-annual Preferred Securities interest
payments in February and August 2000.
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). If SIG's EBITDA falls below 2.5 times consolidated interest expense
(including Preferred Security interest) 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
(4.06) as of September 30, 2000, and will continue to apply until the SIG's
consolidated coverage ratio exceeds the amount set forth in the indenture.
The Company's consolidated total assets of $654,563,000 at September 30, 2000
increased $134,641,000 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 September 30, 2000, the Company had $46,107,000 of cash, cash equivalents
and short-term investments available to meet short-term operating cash needs.
This was an increase of $10,300,000 from the December 31, 1999 balance.
The Company's portfolio of fixed maturities reduced to $124,796,000 at September
30, 2000 from $177,171,000 at December 31, 1999 as a result of the sale of fixed
maturities to fund operating losses.
Net cash used in operating activities at September 30, 2000 aggregated
$16,565,000 compared to cash used in operations of $7,013,000 for the comparable
period in 1999. This decrease in net cash of $9,552,000 results from a negative
change in operating assets and liabilities.
Net cash provided from investing activities of $40,118,000 for the nine months
ended September 30, 2000 compares to cash used in investing activities of
$3,322,0000 for the comparable period in 1999. Such increase was due primarily
to the sale 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 the next year.
<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
Except as indicated in the following paragraphs there have
been no material developments in any of the pending legal
proceedings reported by the Company in its December 31, 1999
Form 10-K.
On October 4, 2000, the plaintiff in a case filed on November
26, 1996 in the Circuit Court for Lee County entitled Raed
Awad v. Superior Guaranty Insurance Company, et. al., Case No.
96-9151 CA LG obtained certification as a class. The
plaintiffs allege that the defendant charged premium finance
service charges in violation of Florida law. Discovery is
proceeding in the action. Superior Guaranty believes the
allegations of wrongdoing are without merit.
As previously reported, IGF, several brokers and a third party
carrier are parties to a number of pending legal proceedings
relating to agricultural business interruption policies sold
during 1998 ("AgPI") which have since been discontinued. See
Note 6 "Commitments and Contingencies" in the consolidated
financial statements. Since last reported, all claims by the
policyholders in the AgPI lawsuits have been settled by the
third party carrier of the policies. Over the objections of
IGF, the third party carrier settled some of the AgPI cases
for amounts in excess of policy limits. Cross claims remain
pending in California state court (King and Fresno counties)
between IGF and other defendants in the AgPI cases, and
discovery is proceeding. As of September 30, 2000, IGF had
paid an aggregate of approximately $28,626,000 to AgPI
policyholders. The Company increased its reserves during the
third quarter by $3,800,000. The unpaid reserves for AgPI as
of September 30, 2000 are $11,074,000. Certain of the
settlements made by the third party carrier exceeded
established reserves for the particular cases involved. The
Company does not believe it will ultimately be responsible for
the full amount of the settlement amounts paid by the third
party carrier; however, the Company adjusted its reserves
during the third quarter of 2000 for a portion of the
settlement amounts paid by the third party carrier. Management
believes that the reserve is sufficient to meet all future
obligations. There can be no assurance that the Company's
ultimate liability with respect to the settlements and pending
legal proceedings involving the policies will not have a
material adverse effect on the Company's results of operations
or financial position.
Superior is a defendant in a case filed February 4, 2000 in
the Circuit Court for Dade County, Florida entitled Medical
Re-Hab Center v. Superior Insurance Company. The case purports
to be brought on behalf of a class consisting of (i)
healthcare providers that rendered treatment to Superior
insureds and claimants of Superior insureds and (ii) such
insureds and claimants. The plaintiff alleges that Superior
reduced medical benefits payable and improperly calculated
interest in violation of Florida law. The Company believes the
claim is without merit and intends to vigorously defend the
charges brought against it.
<PAGE>
On July 7, 2000, the FDOI issued a notice of its intent to
issue an order (the "Notice") which principally addresses
certain policy and finance fee payments by Superior to
Superior Insurance Group, Inc. ("Superior Group"), another
subsidiary of the Company, and financial reporting issues,
including disclosure of intercompany transactions. Superior
has filed a petition with the FDOI which requests a formal
hearing to review the Notice and a determination that the
order contemplated by the Notice not be issued. The hearing is
scheduled for December 8, 2000. The order, if issued, may
restrict Superior from paying certain billing and policy fees
to Superior Group and include a requirement that Superior
Group repay to its subsidiary, Superior, billing and policy
fees from prior years in an amount of approximately $35.2
million. In such event, there would be no financial impact on
the Company's consolidated financial statements. A restriction
on the ability of Superior to pay future billing and policy
fees to Superior Group may necessitate that the Company take
certain actions, which may be subject to regulatory approvals,
to reallocate operating revenues and expenses between its
subsidiaries. The Company intends to vigorously contest the
issuance of any such order; however, there can be no assurance
that an order, if issued, will not have a material adverse
effect on the Company's results of operations or financial
position.
Superior is a defendant in a case filed September 15, 2000 in
the Circuit Court for Lee County, Florida entitled Charles L.
Fulton, D.C. v. Superior Insurance Company, Case No. 00-7546
CA LG. The case purports to be brought on behalf of a class
consisting of healthcare providers that rendered treatment to
and obtained a valid assignment of benefits from Superior. The
plaintiff alleges that Superior reduced or denied claims for
medical expenses payable to the plaintiff without first
obtaining a written report in violation of Florida law. The
plaintiff also alleges that Superior inappropriately reduced
the amount of benefits payable to the plaintiff in breach of
Superior's contractual obligations to the plaintiff. Superior
believes the allegations of wrongdoing in violation of law are
without merit and intends to vigorously defend the claims
brought against it.
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.
<PAGE>
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 October 25, 2000 the Nasdaq Listing and Hearing Review
Council affirmed the decision of the Nasdaq Listing
Qualifications Panel to delist SIG's securities from the
Nasdaq National Market. SIG's common stock is trading on the
OTC Bulletin Board as SIGC.OB.
The Company's common stock is trading on the OTC Bulletin
Board as GNCNF.OB and on the Toronto Stock Exchange as GNC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27 Financial Data Schedule.
Submitted in electronic format only.
(b) 8-K Reports:
The Company filed an 8-K on August 9, 2000 reporting under
Item 4 changes in registrants certifying accountants.
The Company filed an 8-K on July 11, 2000 reporting under
Item 5 that Nasdaq has determined to delist the Company's
securities.
<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: By:
Alan G. Symons
Chief Executive Officer
Dated: By:
Earl R. Fonville
Vice President and
Chief Financial Officer
