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 June 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 August 1, 2000, there were 5,776,398 shares of Registrant's par value
common stock issued and outstanding exclusive of shares held by registrant.
<PAGE>
FORM 10-Q INDEX
FOR THE QUARTER ENDED JUNE 30, 2000
Page
Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Financial Statements:
Consolidated Balance Sheets at June 30, 2000
(unaudited) and December 31, 1999........................... 3
Unaudited Consolidated Statements of Earnings (Loss)
for the Three and Six Months Ended
June 30, 2000 and 1999...................................... 4
Unaudited Consolidated Statements of Shareholders' Equity (Deficit)
For the Six Months Ended June 30, 2000 and 1999 ............ 6
Unaudited Consolidated Statements of Cash Flows for the
Six Months Ended June 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........................ 14
Item 3 Qualitative and Quantitative Disclosures About Market Risk 23
PART II OTHER INFORMATION.......................................... 23
SIGNATURES ...................................................... 26
INDEX TO EXHIBITS
Exhibit 11 - Computation of Per Share Earnings (Loss) ..... 27
<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>
June 30, December 31,
2000 1999
ASSETS
<S> <C> <C>
Cash and investments $190,031 $231,424
Accounts receivable:
Receivables, net of allowance 178,179 92,446
Income taxes recoverable -- 6,820
Investments in and advances to related parties 1,661 1,646
----- -----
Total Accounts Receivable 179,840 100,912
Reinsurance recoverable on paid and unpaid losses 71,418 88,293
Prepaid reinsurance premiums 133,967 10,259
Capital assets, net of accumulated depreciation 20,479 21,967
Deferred policy acquisition costs 10,151 13,920
Intangible assets 43,850 43,812
Other assets 12,575 9,335
------ -----
TOTAL ASSETS $662,311 $519,922
======== ========
LIABILITIES
Accounts Payable:
Reinsurance payables $150,862 $37,603
Accrued and other payables 24,963 28,543
------ ------
175,825 66,146
Distributions payable on preferred securities 9,484 4,809
Loss and loss adjustment expenses 168,577 219,918
Unearned premiums 192,150 90,007
Notes Payable 4,582 16,929
----- ------
550,618 397,809
Minority interest:
Company obligated manditorily redeemable preferred stock of trust
subsidiary holding solely parent debentures 112,000 135,000
Shareholders' deficit (307) (12,887)
----- --------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $662,311 $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
June 30,
2000 1999
---- ----
<S> <C> <C>
Gross premiums written $131,140 $173,870
Less ceded premiums (100,598) (94,720)
--------- --------
Net premiums written 30,542 79,150
Change in net unearned premiums 14,442 (2,623)
------ -------
Net premiums earned 44,984 76,527
Fee income 3,855 3,153
Net investment income 2,650 3,507
Net realized gain (loss) (1,681) 366
------- ---
Total Revenues 49,808 83,553
------ ------
Losses and loss adjustment expenses 35,701 72,293
Policy acquisition and general and administrative expenses 15,692 21,015
Interest expense 23 105
Amortization of intangibles 735 651
--- ---
Total Expenses 52,151 94,064
------ ------
Loss before undernoted items (2,343) (10,511)
Benefit for income taxes -- (4,705)
Accrued distribution on preferred securities 2,983 3,225
Minority interest: -- (3,149)
-- -------
Loss from continuing operations (5,326) (5,882)
------- -------
Net loss $(5,326) $(5,882)
======== ========
Loss per share - basic $(0.91) $(1.00)
Loss per share - fully diluted $(0.91) $(1.00)
Loss per share - operating $(0.62) $(1.04)
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>
Six Months Ended
June 30,
2000 1999
---- ----
<S> <C> <C>
Gross premiums written $275,359 $325,892
Less ceded premiums (205,388) (179,471)
--------- ---------
Net premiums written 69,971 146,421
Change in net unearned premiums 22,413 (2,770)
------ -------
Net premiums earned 92,384 143,651
Fee income 7,646 7,617
Net investment income 5,898 7,015
Net realized loss (1,316) (956)
------- -----
Total Revenues 104,612 157,327
------- -------
Losses and loss adjustment expenses 74,494 131,288
Policy acquisition and general and administrative expenses 30,630 32,645
Interest expense 226 179
Amortization of intangibles 1,266 1,256
----- -----
Total Expenses 106,616 165,368
------- -------
Loss before undernoted items (2,004) (8,041)
Provision (benefit) for income taxes 487 (5,195)
Accrued distribution on preferred securities 6,247 6,386
Minority interest: -- (3,516)
-- -------
Loss from continuing operations (8,738) (5,716)
------- -------
Net loss $(8,738) $(5,716)
======== ========
Loss per share - basic $(1.49) $(0.97)
Loss per share - fully diluted $(1.49) $(0.97)
Loss per share - operating $(1.26) $(0.87)
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 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 --- --- (389) --- (389)
--- --- --- (5,716) (5,716)
--- --- --- - ------- -------
Net earnings
Balance at June 30, 1999 $19,317 $2,775 $137 $21,665 $43,620
====== ===== === ======= =======
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 --- --- (260) --- (260)
Net loss --- --- --- (8,738) (8,738)
--- --- --- ------- -------
Balance at June 30, 2000 $19,132 $24,538 $(247) $(43,730) $(307)
====== ====== ==== ========= ======
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>
Six Months Ended
June 30,
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings loss for the period $(8,738) $(5,716)
Adjustments
Amortization and depreciation 4,266 3,801
Loss (gain) on disposal of investments 1,316 956
Minority interest in net income (loss) of consolidated subsidiary - (3,516)
Decrease (increase) in other assets (3,240) 3,841
Decrease (increase) in deferred policy acquisition costs 3,769 (1,122)
Increase (decrease) in unearned premiums 102,143 115,818
Increase (decrease) in loss and loss adjustment expenses (51,341) 11,004
Decrease (increase) in accounts receivable (78,928) (137,098)
Increase (decrease) in accounts payable 109,679 162,198
Decrease (increase) in recoverable on paid and unpaid 16,875 (29,090)
losses
Decrease (increase) in prepaid reinsurance premiums (123,708) (107,226)
Increase (decrease) in distributions payable on preferred 4,675 -
securities
Increase (decrease) in future income taxes payable - (101)
- -----
(23,232) 13,749
-------- ------
NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES:
Increase (reduction) of borrowed funds (12,347) (309)
-------- -----
(12,347) 309
-------- ---
NET CASH PROVIDED FROM (USED IN) INVESTING ACTIVITIES:
Net (purchase) sale of marketable securities 25,833 (8,660)
Net purchase of capital assets (1,197) (3,685)
Redemption of share capital & minority interest (2,916) -
-
Other -- (126)
-- -----
21,720 (12,471)
------ --------
Change in cash and cash equivalents during the period (13,859) 969
Cash and cash equivalents, beginning of period 35,807 42,759
------ ------
Cash and cash equivalents, end of period 21,948 43,728
====== ======
</TABLE>
See condensed notes to consolidated financial statements
<PAGE>
GORAN CAPITAL INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For The Three and Six Months Ended June 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 June 30, 2000, Goran acquired from third
parties 115,500 common shares of SIG at varying prices, all at fair
market value. Goran did not purchase any SIG common shares in the first
quarter, 2000. These purchases increased Goran's ownership of SIG to
69.2% from 68.1%.
2. Supplemental Cash Flow Information
Cash payments of interest were $246,000 and $150,000 for the six months
ended June 30, 2000 and 1999, respectively. Cash received related to
refunded federal income taxes was $6,586,000 and $10,585,790 for the
first six 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") that expires May 10,
2001. During the second quarter 2000 the maximum amount that could be
borrowed under the IGF Revolver was $8,000,000. As of June 30, 2000,
$3,000,000 had been borrowed. 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) restrict the ability to pay or declare dividends. The average
interest rate on the IGF Revolver was 6.83% for the six months ended
June 30, 1999 and 8.08% for the six months ended June 30, 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 June 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 Symons International Group, Inc. ("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. SIG
deferred the semi-annual interest payment that was due February 2000.
SIG also plans to defer the interest payment due August 2000. Under the
terms of the indenture, SIG is permitted to defer such payments for up
to five years.
The indenture for the Preferred Securities contains certain restrictive
covenants. Some of these covenants are based upon the Company's
consolidated coverage ratio of earnings before interest, taxes,
depreciation and amortization ("EBITDA"). If the Company'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 The Company may not incur additional indebtedness or guarantee
additional indebtedness.
o The Company 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 The Company 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. The Company is in compliance with
the restrictions and is not in default in its obligations with the
regard to the Preferred Securities.
In the three months ended June 30, 2000, Granite Re and Granite
Insurance Company ("Granite") 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 distributions. Upon consolidation of the
Company's accounts as at June 30, 2000, the acquisition of these
preferred securities has 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 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. 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 IDOI has concluded its previously
disclosed target examination of Pafco and no action was taken thereon.
Pafco has maintained its policy volumes in conformity with the Iowa
Department of Insurance requirements. In addition the Company's
insurance subsidiaries provide monthly financial information to the
departments of insurance in certain states in which they write business
and have agreed to obtain prior approval of any new affiliated party
transactions.
The financial review of Superior Insurance Company ("Superior") for the
year ended December 31, 1999 by the Florida Department of Insurance
("FDOI") is ongoing. 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 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.
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 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.
On July 11, 2000 the FDOI advised Superior that it intends to issue an
order. See Note 5.
As previously reported, the California Department of Insurance ("CDOI")
has advised Superior 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 has since been discontinued. IGF remains a defendant in five
lawsuits pending in California state court (King and Fresno counties).
Discovery in the pending cases is proceeding. As of June 30, 2000, IGF
had paid an aggregate of approximately $28,517,000 to AgPI
policyholders. The Company increased its reserves during the second
quarter by $1,400,000. The unpaid reserves for AgPI as of June 30, 2000
was $7,383,000. Four lawsuits have been settled since the end of the
second quarter of 2000. The third party carrier of the policies has,
over the objections of IGF, settled some of the AgPI cases for amounts
in excess of policy limits. Certain of the settlements made by the
third party carrier have exceeded established reserves for the
particular cases involved. The Company does not believe it will
ultimately be responsible for the settlement amounts paid by the third
party carrier and, therefore, the Company has not adjusted its
reserves.
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.
In June, 2000, the Company became a joint and several guarantor in a
debt approximating $5,000,000, 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 two 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 $6,016,000. The
favorable development primarily related to nonstandard auto,
$3,159,000 and commercial business runoff, $2,857,000.
During the same period the Company experienced an unfavorable
development on its year end crop insurance loss and LAE reserves in the
amount of $1,731,000. This includes $1,400,000 of additional loss and
LAE reserves booked second quarter 2000 on the AgPI line of business
written by the Company in 1998.
<PAGE>
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 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.
The following tables show financial data by segment (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
June 30,
2000 1999
NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS
<S> <C> <C>
Gross premiums written $29,868 $66,072
Net premiums written 19,346 64,154
Net premiums earned 37,377 66,836
Fee income 3,631 2,895
Net investment income 2,453 3,296
Net realized gain (loss) (1,682) 366
TOTAL REVENUES 41,779 73,393
Losses and loss adjustment expense 29,184 61,631
Policy acquisition and general and administrative expenses 18,053 23,609
TOTAL EXPENSES 47,237 85,240
Loss before income taxes $(5,458) $(11,847)
GAAP RATIOS (Nonstandard Automobile Only):
Loss and LAE Ratio (2) 78.1% 92.2%
Expense ratio, net of billing fees (3) 38.6% 31.0%
Combined ratio (4) 116.7% 123.2%
CROP INSURANCE OPERATIONS:
Gross premiums written $101,108 $107,524
Net premiums written 10,379 11,633
Net premiums earned 6,501 6,074
Fee income 194 197
Net investment income (40) (18)
TOTAL REVENUES 6,655 6,253
Losses and loss adjustment expenses 7,894 8,894
Policy acquisition and general and administrative expenses(1) (4,655) (4,654)
Interest and amortization of intangibles 269 246
TOTAL EXPENSES 3,508 4,486
Earnings before income taxes $3,147 $1,767
(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>
Six Months Ended
June 30,
2000 1999
NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS
<S> <C> <C>
Gross premiums written $89,437 $127,243
======= ========
Net premiums written 49,815 137,840
====== =======
Net premiums earned 80,418 132,233
Fee income 7,565 7,417
Net investment income 5,313 6,460
Net realized loss (1,317) (1,016)
------- -------
TOTAL REVENUES 91,979 145,094
------ -------
Losses and loss adjustment expense 66,403 112,944
Policy acquisition and general and administrative expenses 35,613 43,204
------ ------
TOTAL EXPENSES 102,016 156,148
------- -------
Earnings (loss) before income taxes $(10,037) $(11,054)
========= =========
GAAP RATIOS (Nonstandard Automobile Only):
Loss and LAE Ratio (2) 82.6% 85.4%
Expense ratio, net of billing fees (3) 34.9% 27.1%
----- -----
Combined ratio (4) 117.5% 112.5%
====== ======
CROP INSURANCE OPERATIONS:
Gross premiums written $185,468 $198,247
======== ========
Net premiums written 17,949 13,246
====== ======
Net premiums earned 9,434 5,014
Fee income 35 138
Net investment income 86 39
Net realized capital gain 1 --
--
TOTAL REVENUES 9,556 5,191
----- -----
Losses and loss adjustment expenses 10,334 14,068
Policy acquisition and general and administrative expenses(1) (8,447) (12,662)
Interest and amortization of intangibles 512 416
--- ---
TOTAL EXPENSES 2,399 1,822
----- -----
Earnings before income taxes $7,157 $3,369
====== ======
(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
June 30,
2000 1999
Loss before income taxes and minority interest:
<S> <C> <C>
Nonstandard automobile $(5,458) $(11,847)
Crop 3,147 1,767
----- -----
Segment totals (2,311) (10,080)
Corporate and other (32) (431)
---- -----
Consolidated totals $(2,343) $(10,511)
======== =========
Six Months Ended
June 30,
2000 1999
Loss before income taxes and minority interest:
Nonstandard automobile $(10,037) $(11,054)
Crop 7,157 3,369
----- -----
Segment totals (2,880) (7,685)
Corporate and other 876 (356)
--- -----
Consolidated totals $(2,004) $(8,041)
======== ========
June 30, December 31,
2000 1999
Segment assets:
Nonstandard automobile $228,978 $229,640
Crop 314,496 145,622
Corporate and other 118,837 144,660
</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 Six Months Ended
June 30, June 30,
(in thousands) 2000 1999 2000 1999
Basic:
<S> <C> <C> <C> <C>
Weighted-average common shares outstanding 5,859 5,876 5,868 5,876
Diluted:
Weighted-average common shares outstanding 5,859 5,876 5,868 5,876
Dilutive effect of stock options -- -- -- --
Average common shares outstanding assuming dilution 5,859 5,876 5,868 5,876
</TABLE>
The Company has 743,708 stock options outstanding as of June 30, 2000.
The Company issued 100,000 stock options in second quarter 2000. The
weighted average common shares outstanding on a basic and a fully
diluted basis are the same because of the anti dilutive effect of the
options outstanding.
<PAGE>
11. Shareholders' Equity
During the three months ended June 30, 2000, Goran acquired from third
parties, 100,000 of its own common shares, all at fair market value,
resulting in 5,776,398 outstanding common shares as at June 30, 2000.
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>
June 30, June 30,
2000 1999
<S> <C> <C>
Reported net loss $(8,738) $(5,716)
US/Canada GAAP Differences:
No Differences -- --
Revised net loss $(8,738) $(5,716)
Loss per share - basic $(1.49) $(0.97)
Loss per share - fully diluted $(1.49) $(0.97)
June 30, December 31,
2000 1999
Shareholders' deficit in accordance with Canadian GAAP $(307) $(12,887)
Receivable from sale of capital stock (300) (300)
Unrealized loss on investments (5,118) (4,874)
------- -------
Shareholders' deficit in accordance with US GAAP $(5,725) $(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 69% 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").
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
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 risk in the first two quarters of the year is affected by 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 renewed 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 hail storms 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 27% 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 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.
CORPORATE AND OTHER OPERATIONS
Granite Reinsurance Company, Ltd. ("Granite Re') is a finite risk reinsurance
company based in Barbados.
Granite Insurance Company ("Granite") is a Canadian federally licensed insurance
company which ceased writing new insurance policies on January 1, 1990.
Symons International Group, Inc.-Florida ("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 while reporting losses on a quarterly basis since the third quarter
of 1998 is achieving profits currently in its crop operation. The net losses for
the quarter ended June 30, 2000 totaled $5,326,000. Losses for the second
quarter of 2000 were primarily due to the nonstandard auto operating division.
The volume has been reduced to get out of poorly priced business. The expenses
of running the business have been reduced substantially, but not proportional to
the premium reduction. The reduction in deferred acquisition costs and loss on
realized investments also contributed to the loss. Rate increases or other
underwriting actions averaging 12% have been implemented or are being filed to
further improve the loss ratio over the year 2000. If the Company regains market
share, the expense ratio should reduce. The Company also repositioned its
investment portfolios in the second quarter, and is continuing to do so in the
third quarter. The repositioning caused a realized loss in the current period.
Loss ratios continue to improve in the nonstandard operations in the second
quarter over the prior quarter. Most companies in the nonstandard market are
increasing rates. During the second quarter of 2000, the Company experienced
favorable development in its nonstandard auto loss and loss adjustment expense
reserves. For the second quarter 2000, the crop segment reported pre-tax
earnings of approximately $3,147,000 mainly due to favorable crop conditions
year-to-date. Although the Company has taken a number of actions to address the
factors that have contributed to these past nonstandard auto 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
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.
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 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.
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 regulators 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.
Rating of the Company's Subsidiaries May Adversely Affect the Company's Ability
to Retain and Expand its Business
On July 12, 2000, Standard & Poors ("S&P") announced that their rating of IGF
was reduced from `BBB+' to `CCCpi'. An insurer rated `CCC' is regarded S&P as
having very weak financial security characteristics and is dependent on
favorable business conditions to meet financial commitments. S&P rates
companies' financial strength. The rating is not likely to improve unless IGF
improves its future operating performance and/or holds meetings with S&P.
Financial strength is a factor in an insurer's ability to compete effectively.
There can be no assurance that this rating or other ratings assigned to the
Company's Subsidiaries will not adversely affect the Company's competitive
position. No other changes in the ratings of the Company subsidiaries have
occurred since those reported previously.
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 The Company'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 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. SIG also plans to defer the interest payment due August
2000. 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
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 SIG.
<PAGE>
REVIEW OF CONSOLIDATED OPERATIONS
Net Loss
For the three and six months ended June 30, 2000, the Company recorded a net
loss of $(5,326,000) and $(8,738,000), or $(.91) and $(1.49) per share (basic
and diluted). This is a decrease from net loss for the three months ended June
30, 1999 of $556,000 or $.09 per share (basic and diluted). It also resulted in
an increase of net loss for the six months ended June 30, 1999 of $3,022,000 or
$.52 per share (basic and diluted).
The Company recorded a net loss before income taxes, distributions on Preferred
Securities and minority interest for the three and six months ended June 30,
2000 of $(2,343,000) and $(2,004,000) compared to $(10,511,000) and $(8,041,000)
for the three and six months ended June 30, 1999. The 1999 comparable results
include recoveries of deferred income taxes and losses attributable to the
minority interest ownership of SIG, whereas the 2000 results include neither of
these recoveries. As of June 30, 2000, net deferred tax assets are offset by a
100% valuation allowance and the SIG minority interest share of net losses are
no longer recognized in Goran's consolidated financial statements since SIG's
stockholders' equity is in a net deficit position.
Income before taxes and distributions on Preferred Securities for the
nonstandard automobile segment showed a loss of $(5,458,000) and $(10,037,000)
for the three and six months ended June 30, 2000 compared to losses of
$(11,847,000) and $(11,054,000) for the three and six months ended June 30,
1999. 2000 losses were driven primarily by a decrease in net premiums earned and
a realized loss on sale of investments of approximately $1,300,000. The realized
loss occurred second quarter 2000. New investment managers were appointed and
investment portfolios were restructured. The decrease in losses in 2000 is due
to an improvement in loss ratio which was partially offset by an increase in the
expense ratio. The expense ratio increased in 2000 due to a decrease in premium
earned.
Income before taxes and distributions on Preferred Securities for the three and
six months ended June 30, 2000 in the crop segment showed earnings of $3,147,000
and $7,157,000 which compares favorably to earnings of $1,767,000 and $3,369,000
for the same periods 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 second quarter of 2000 as compared to the same period in the prior
year and less impact from increase to AgPI reserves.
Income\(losses) before tax and distributions on Preferred Securities for the
corporate segment were $(32,000) and $876,000 for the three and six months ended
June 30, 2000 and $(431,000) and $(356,000) 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 a decrease in net
premiums earned coupled with an increase in policy acquisition and general and
administrative expenses.
Gross Premiums Written
Gross premiums written for the nonstandard automobile segment decreased 54.8%
and 29.7% for the three and six months ended June 30, 2000 compared to the three
and six months ended June 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 decreased 6.0% and 6.4% for the
three and six months ended June 30, 2000 compared to the same periods in 1999.
Such decrease was due to lower than expected second quarter 2000 crop hail
business. Crop premiums (expressed in thousands) for the three and six months
ended June 30, are as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Catastrophic imputed $12,250 $14,470 $24,500 $30,782
MPCI 73,805 78,748 143,739 141,028
Crop hail and named perils 27,303 28,776 41,729 57,123
AgPI (1) -- -- -- 96
-- -- -- --
113,358 121,994 209,968 229,028
Less: Catastrophic imputed (12,250) (14,470) (24,500) (30,782)
-------- -------- -------- --------
101,108 $107,524 185,468 $198,247
======= ======== ======= ========
(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 three
and six months ended June 30 are as follows:
2000 1999
Nonstandard automobile 25% 0%
Crop hail 54.9% 62%
Named peril 8.6% 50%
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 line of business resulting in a
decrease in the quota share cession rate.
Fee Income
Fee income increased 22.2% and .4% for the three and six months ended June 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 forth quarter 1999 and first
quarter 2000 on which billing and other fees on this business are still being
collected.
Net Investment Income
Net investment income decreased 24.4% and 15.9% for the three and six months
ended June 30, 2000 as compared to the corresponding periods 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
and six months ended June 30, 2000 was 78.1% and 82.6% of net premiums earned as
compared to 92.2% and 85.4% for the corresponding periods in 1999 and 92.7% for
the entire year of 1999. During the second quarter of 2000 the Company
experienced favorable development on its loss and LAE reserves for losses other
than AgPI losses occurring in 1999 and prior. This reduced the nonstandard auto
loss and LAE ratio for the current quarter by 8.4%.
The loss and LAE ratio for the Company's crop insurance segment for the three
and six months ended June 30, 2000, was 121.4% and 109.5% of net premiums
earned. The loss and LAE ratio for 2000 includes unfavorable development on
prior year loss and LAE reserves of $1,731,000. This includes $1,400,000 of
additional loss and LAE reserves booked second quarter 2000 on the AgPI line of
business written by the company in 1998.
Policy Acquisition and General and Administrative Expenses
Policy acquisition and general and administrative expenses were $15,692,000 and
$30,630,000 or 34.9% and 33.2% of net premium earned for the three and six
months ended June 30, 2000 compared to $21,015,000 and $32,645,000 or 27.5% and
22.7% of net premium earned in the corresponding periods of 1999. Overall
expenses in the first six months of 2000 versus the first six months of 1999
decreased by $2,015,000. Within this decrease crop expenses increased by
$4,215,000 while nonstandard auto expenses decreased by $7,591,000. The rest of
the decrease is applicable to the corporate segment.
The expense ratio net of billing fees for the nonstandard auto segment was 38.6%
and 34.9% of net premium earned for the three and six months ended June 30, 2000
compared to 31% and 27.1% of net premium earned in the corresponding periods of
1999. The six months expense ratio for nonstandard auto increased primarily due
to a 39.2% decrease in net premiums earned comparing June 30, 2000 to June 30,
1999. Nonstandard auto expenses were $35,613,000 and $43,204,000 for the six
months ended June 30, 2000 and June 30, 1999, respectively. The decrease in
expenses of $7,591,000 is primarily attributable to the ceding commission
received from a quota share agreement effective January 1, 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 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 which is offset by a refund received in the first quarter of 2000
relating to a 1998 net operating loss. At June 30, 2000 the Company's net tax
assets are fully offset by a 100% valuation allowance of approximately
$26,907,000 which resulted in no tax benefit being reflected for the six months
ended June 30, 2000.
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
Investments
Total investments as of June 30, 2000 and December 31, 1999 were $168,083,000
and $195,617,000, 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 June 30, 2000 and December 31,
1999 were $21,948,000 and $35,807,000, respectively.
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 $1,661,000 at June 30, 2000.
Accounts Receivable
Receivables as of June 30, 2000 and December 31, 1999 were $178,179,000 and
$92,446,000, respectively. The crop portion of the receivable balances as of
June 30, 2000 and December 31, 1999 were $125,207,000 and $23,924,000,
respectively. The fluctuation in the balance is due to cyclicality of the crop
business.
Nonstandard auto receivable balances as of June 30, 2000 and December 31, 1999
were $49,421,000 and $62,299,000, respectively. The decrease in receivables is
due to a decline in written premium.
Reinsurance Recoverables and Prepaid Reinsurance Premiums
Reinsurance recoverables were $71,418,000 and $88,293,000 as of June 30, 2000
and December 31, 1999, respectively. However the reinsurance recoverable balance
is more effectively compared to the June 30, 1999 balance of $96,975,000. This
is primarily due to the cyclical nature of the crop business. Of the total
reinsurance recoverable balance, as of June 30, 2000 and 1999, $44,576,000 and
$74,968,000, respectively pertain to crop business. The nonstandard auto
recoverables were $21,349,000 and $4,150,000 for the periods ending June 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 $133,967,000 and $10,259,000 as of June 30,
2000 and December 31, 1999, respectively. This prepaid balance is more
effectively compared to the June 30, 1999 balance of $124,712,000. The prepaid
reinsurance balance is affected by the cyclical nature of the crop business
reinsured. Crop prepaid reinsurance premiums totaled $117,463,000 and
$116,112,000 as of June 30, 2000 and 1999, respectively. Prepaid reinsurance
premiums on nonstandard auto totaled $16,370,000 and $0 as of June 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 June 30, 2000 and December 31,
1999, were $10,151,000 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 June 30, 1999
was $17,454,000. DAC was primarily composed of DAC on nonstandard auto at June
30, 2000 and 1999 of $8,435,000 and $15,255,000, respectively. The ceded
deferred costs on nonstandard auto at June 30, 2000 and 1999 were $2,889,000 and
$0, respectively. DAC costs for nonstandard auto as compared with nonstandard
net unearned premiums of $48,875,000 and $89,354,000 were 17.3% and 17.1% as of
the above dates, respectively. DAC for crop insurance at June 30, 2000 and 1999
was $1,716,000 and $1,646,000, 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 June 30, 2000 and
December 31, 1999, respectively. 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 $1,488,000
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, additional goodwill from the acquisition of the minority interest in
Superior Insurance Group Management, Inc. and North American Crop Underwriters,
Inc. ("NACU"), debt or Preferred Security issuance costs and organizational
costs.
Loss and Loss Adjustment Expense Reserves
Total loss and LAE reserves decreased from $219,918,000 as of December 31, 1999
to $168,577,000 as of June 30, 2000. The total decrease in loss and LAE reserves
is approximately $51,341,000.
Nonstandard auto reserves declined $7,419,000 during the second quarter of 2000;
this decrease is consistent with the declining volume in nonstandard auto
business and also includes some positive development on prior accident reserves.
Reserves for crop insurance increased $2,623,000 during the second quarter of
2000 due to the seasonal nature of the business and due to an increase in AgPI
reserves of $1,400,000. The remaining reserve decrease of $2,039,000 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 $102,143,000 from December 31,1999 to
June 30, 2000. Gross unearned premium was $192,150,000 and $90,007,000 as of
June 30, 2000 and December 31, 1999, respectively. However, this unearned
premium balance is more effectively compared to the June 30, 1999 balance of
$226,483,000 due to the cyclical nature of the crop business. Crop unearned
balances typically are higher midyear and drop as premium is earned towards the
end of the year. Crop unearned as of June 30, 2000 and June 30, 1999 was
$126,043,000 and $125,911,000, respectively. Crop unearned increased by $132,000
or .1% from June 30, 1999. This was primarily due to an increase in crop hail
written premium for the same period. Unearned on nonstandard auto decreased
$24,109,000 or 27% for the same period. This was primarily due to the decrease
in nonstandard premiums written for the respective quarter ended June 30, 2000.
Unearned for nonstandard auto was $65,245,000 and $89,354,000 as of June 30,
2000 and June 30, 1999.
Reinsurance Payables
Reinsurance payables increased by $113,259,000 from December 31, 1999 to June
30, 2000 due to the cyclical nature of the crop business. Crop payables
increased from year end by $85,381,000 through June 30, 2000. Nonstandard auto
increased by $30,956,000 from December 1999 due to a quota share agreement
effective January 1, 2000.
Notes Payable
Notes payable includes the IGF Revolver which on December 31, 1999 and June 30,
2000 had an outstanding balance of $15,000,000 and $3,000,000, 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 6.83% for the six months ended June 30, 1999 and
8.08% for the six months ended June 30, 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 June 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%.
Other Liabilities
Other liabilities decreased by $3,580,000 from December 31, 1999 to June 30,
2000. However, payables as of June 30, 2000 of $24,963,000 are more comparable
to payables of $26,059,000 as of June 30, 1999.
Stockholders' Deficit
Stockholders' deficit has decreased $12,580,000 from December 31, 1999. This
decrease reflects the impact of current year purchases on the open market by
Granite and Granite Re of SIG's Preferred Securities valued at $21,763,000
offset by a net loss of $8,738,000 for the six months ended June 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 and
uncollected premiums are required to be paid in full to the FCIC by the Company,
with interest at 15%, if not paid by a specified date during the crop year.
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
report, the ability of the insurance subsidiaries to pay fees may be limited by
regulatory action. The Company deferred the semi-annual Preferred Securities
interest payments in February 2000, and intends to defer the payment due in
August 2000. The Company believes it is in its best interest to maintain this
cash for its operational needs.
The trust indenture for the Preferred Securities contains certain restrictive
covenants. Certain of these covenants are based upon the Company's consolidated
coverage ratio of earnings before interest, taxes, depreciation and amortization
(EBITDA). If the Company'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 The Company may not incur additional indebtedness or guarantee
additional indebtedness.
o The Company 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 The Company 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 the Company's consolidated coverage ratio
was (4.45) in June 30, 2000, and will continue to apply until the Company's
consolidated coverage ratio exceeds the amount set forth in the indenture.
The Company's consolidated total assets of $662,311,000 at June 30, 2000
increased $142,389,000 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 June 30, 2000, the Company had $21,948,000 of cash, cash equivalents and
short-term investments available to meet short-term operating cash needs. This
was a decrease of $13,859,000 from the December 31, 1999 balance.
The Company's portfolio of fixed maturities reduced to $144,644,000 at June 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 by operating activities to June 30, 2000 aggregated $23,232,000
compared to cash provided from operations of $13,749,000 for the comparable
period in 1999. This decrease in net cash of $36,981,000, results from a
negative change in operating assets and liabilities.
Net cash provided from investing activities of $21,720,000 for the six months
ended June 30, 2000 compares to cash used in investing activities of $12,471,000
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 the next year.
The IGF Revolver has been extended through May 10, 2001. IGF relies upon the IGF
Revolver to meet seasonal needs for liquidity. The maximum amount that may be
borrowed on the IGF Revolver was $8,000,000 as of August 3, 2000.
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.
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 has since been discontinued. See
Note 6 "Commitments and Contingencies" in the consolidated
financial statements. IGF remains a defendant in five lawsuits
pending in California state court (King and Fresno counties).
Discovery in the pending cases is proceeding. As of June 30,
2000, IGF had paid an aggregate of approximately $28,517,000
to AgPI policyholders. The Company increased its reserves
during the second quarter by $1,400,000 and as of June 30,
2000 has reserved a total of 35,900,000. The unpaid reserve
for AgPI as of June 30, 2000 was $7,383,000. Four lawsuits
have been settled since the end of the second quarter of 2000.
The third party carrier of the policies has, over the
objections of IGF, settled some of the AgPI cases for amounts
in excess of policy limits. Certain of the settlements made by
the third party carrier have exceeded established reserves for
the particular cases involved. The Company does not believe it
will ultimately be responsible for the settlement amounts paid
by the third party carrier and, therefore, the Company has not
adjusted its reserves. However, there can be no assurance that
the Company's ultimate liability with respect to the
settlements and future legal proceedings involving the
policies will not have a material adverse effect on the
Company's results of operations or financial position.
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 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.
<PAGE>
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.
There have been no material developments in any of the other
pending legal proceedings previously reported by the Company
in the 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
We held our annual meeting of shareholders on May 31, 2000. At
that meeting, our shareholders reelected the following persons
as Directors of the Company until the annual meeting of
shareholders in 2001 or until his successor is elected and has
qualified. Our shareholders also ratified, by vote, the
selection Schwartz Levitsky Feldman LLP as the Company's
independent auditor for 2000. The final results of the votes
taken at that meeting were as follows:
<TABLE>
<CAPTION>
Votes For Votes Against Non-Votes Abstentions
Election of Directors:
<S> <C> <C>
Schwartz Levitsky Feldman LLP 2,797,374 11,800
G. Gordon Symons 2,782,424 26,750
Alan G. Symons 2,782,424 26,750
Douglas H. Symons 2,782,424 26,750
J. Ross Schofield 2,782,424 26,750
David B. Shapira 2,782,424 26,750
John K. McKeating 2,782,424 26,750
</TABLE>
ITEM 5. OTHER INFORMATION
On July 11, 2000, SIG's common stock was delisted from the
Nasdaq National Market and began trading on the Nasdaq OTC
Bulletin Board as SIGC.OB.
On July 11, 2000, Goran's common stock was delisted from the
Nasdaq National Market and began trading on the Nasdaq OTC
Bulletin Board as GNCNF.OB.
<PAGE>
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 regarding
changes in registrants certifying accountants after the
Company filed its 1999 annual report on Form 10-K and 10-Q
for the quarterly period ended March 31, 2000.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: August 14, 2000 By: /Alan G. Symons/
Alan G. Symons
Chief Executive Officer
Dated: August 14, 2000 By: / Bruce K. Dwyer/
Bruce K. Dwyer
Vice President and
Chief Financial Officer
