-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SgMcYoEz//iBplm2GWnjmTG7cnGyaO4vLH6Qc76TBIKVMT9o5p2SXK2k3HbzE5ww ALqc5m/QxgJDa4RPLGtq5w== 0000925600-97-000010.txt : 19970814 0000925600-97-000010.hdr.sgml : 19970814 ACCESSION NUMBER: 0000925600-97-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GORAN CAPITAL INC CENTRAL INDEX KEY: 0000925600 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24366 FILM NUMBER: 97657849 BUSINESS ADDRESS: STREET 1: 181 UNIVERSITY AVE - STE 1101 STREET 2: BOX 11 CITY: TORONTO ONTARIO CANA STATE: A6 BUSINESS PHONE: 4165941155 MAIL ADDRESS: STREET 1: 4720 KINGSWAY DRIVE CITY: INDIANAPOLIS STATE: IN ZIP: 46205 10-Q 1 2ND QUARTER 10-Q OF GORAN CAPITAL INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended June 30, 1997 Commission File Number: 000-24366 GORAN CAPITAL INC. (Exact name of registrant as specified in its charter) CANADA Not Applicable (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 181 University Avenue Box 11, Suite 1101 Toronto, Ontario M5H 3M7 4720 Kingsway Drive Indianapolis, Indiana 46205 (Address of Principal Executive Offices) Registrant's telephone number, including area code: (416) 594-1155 (Canada) (317) 259-6400 (U.S.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of June 30, 1997, there were 5,570,277 shares of Registrant's common stock issued and outstanding exclusive of shares held by Registrant. Form 10-Q Index June 30, 1997 Page Number PART 1 FINANCIAL INFORMATION Item 1 Financial Statements..................................... 3 Consolidated Financial Statements: Consolidated Balance Sheets at June 30, 1997 and December 31, 1996........................................ 4 Consolidated Statements of Earnings for the Three and Six Months Ended June 30, 1997 and 1996.............. 5 Consolidated Statements of Changes in Cash Resources for the Six Months Ended June 30, 1997 and 1996.......... 7 Consolidated Statements of Shareholders' Equity.......... 8 Notes to Consolidated Financial Statements............... 9 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 13 PART 2 OTHER INFORMATION........................................ 22 SIGNATURES....................................................... 22 GORAN CAPITAL INC. PART 1 FINANCIAL INFORMATION Item 1 Financial Statements In the opinion of management, the financial information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The results for the three and six months ended June 30, 1997 and 1996 are not necessarily indicative of the results to be expected for the entire year. These quarterly interim financial statements are unaudited and are stated in U.S. dollars. -3- GORAN CAPITAL INC. CONSOLIDATED BALANCE SHEETS (Canadian GAAP, stated in U.S. Dollars) June 30, December 31, 1997 1996 ASSETS Cash and Investments .................. $ 229,616,714 $ 206,670,797 Accounts Receivable Premiums Receivable ................. 177,407,073 63,873,697 Due From Insurance Companies ........ 20,617,795 33,905,128 Due From Associated Companies ....... 107,718 140,423 Accrued and Other Receivables ....... 4,533,731 3,329,893 ------------- ------------- 202,666,317 101,249,141 Reinsurance recoverable on outstanding claims ................................ 71,642,210 33,112,946 Prepaid reinsurance premiums .......... 74,139,403 14,983,097 Capital Assets ........................ 6,258,199 4,801,086 Other Assets .......................... 3,493,023 5,335,477 Deferred Policy Acquisition Costs ..... 14,223,788 13,859,492 Goodwill .............................. 1,455,077 1,329,736 ------------- ------------- Total Assets .......................... $ 603,494,731 $ 381,341,772 ============= ============= LIABILITIES Accounts Payable Due to Insurance Companies .......... $ 104,033,136 $ 5,754,831 Accrued and Other Payables .......... 24,107,297 21,050,919 ------------- ------------- 128,140,433 26,805,751 Outstanding Claims .................... 163,102,998 127,044,804 Unearned Premiums ..................... 164,972,765 91,206,974 Bank Loans ............................ 44,872,000 48,000,000 Minority Interest in Subsidiary ....... 47,683,878 41,026,354 ------------- ------------- Total Liabilities ..................... 548,772,074 334,083,883 ============= ============= SHAREHOLDERS' EQUITY Capital Stock ......................... 17,469,388 17,416,431 Contributed Surplus ................... 2,774,606 2,774,606 Retained Earnings ..................... 34,743,748 27,401,236 Cumulative Translation Adjustment ..... (265,084) (334,384) ------------- ------------- Total Shareholders' Equity ............ $ 54,722,658 $ 47,257,890 ------------- ------------- Total Liabilities and Shareholders' ... $ 603,494,731 $ 381,341,772 Equity ============= ============= See Notes to Consolidated Financial Statements -4- GORAN CAPITAL INC. CONSOLIDATED STATEMENTS OF EARNINGS (Canadian GAAP, stated in U.S. Dollars) For the Three Months Ending June 30, June 30, 1997 1996 Gross Premiums Written $149,834,571 $109,859,879 ============ ============ Net Premiums Earned $77,126,355 $51,072,513 Net Investment and Other Income 10,108,734 5,599,771 ---------- --------- Total Revenues 87,235,089 56,672,285 ---------- ---------- Net Claims Incurred 60,858,371 39,951,261 General and Administrative Expenses 19,435,633 10,763,139 Interest Expense 1,080,411 1,401,585 --------- --------- Total Expenses 81,374,415 52,115,985 ---------- ---------- Income Before Undernoted Items 5,860,674 4,556,300 Provision for Income Taxes 2,114,072 978,351 Minority Interest 1,010,984 398,376 --------- ------- Net Earnings $2,735,618 $3,179,573 ========== ========= Earnings Per Share - Basic $ 0.49 $ 0.61 ====== ====== Earning Per Share - Fully Diluted $ 0.44 $ 0.56 ====== ====== See Notes to Consolidated Financial Statements -5- GORAN CAPITAL INC. CONSOLIDATED STATEMENTS OF EARNINGS (Canadian GAAP, stated in U.S. Dollars) For the Six Months Ending June 30, June 30, 1997 1996 Gross Premiums Written $280,138,810 $151,281,496 ============ ============ Net Premiums Earned $142,765,330 $75,590,824 Net Investment and Other Income 19,382,580 7,063,020 ---------- --------- Total Revenues 162,147,910 82,653,844 ----------- ---------- Net Claims Incurred 107,544,390 56,548,363 General and Administrative Expenses 33,864,132 16,755,942 Interest Expense 2,451,411 1,738,644 --------- --------- Total Expenses 143,859,933 75,042,949 ----------- ---------- Income Before Undernoted Items 18,287,977 7,610,895 Provision for Income Taxes 6,222,481 1,829,421 Minority Interest 4,722,984 398,376 --------- ------- Net Earnings $7,342,512 $5,383,098 ========== ========== Earnings Per Share - Basic $1.32 $1.04 ===== ===== Earnings Per Share - Fully Diluted $1.26 $0.97 ===== ===== Weighted Average Shares Outstanding: Primary 5,552,097 5,172,105 ========= ========= Fully Diluted 6,096,789 5,674,307 ========= ========= See Notes to Consolidated Financial Statements -6- GORAN CAPITAL INC. CONSOLIDATED STATEMENTS OF CHANGES IN CASH RESOURCES FOR THE SIX MONTHS ENDING (Canadian GAAP, stated in U.S. Dollars) June 30, 1997 June 30, 1996 CASH PROVIDED BY OPERATING ACTIVITIES Net Earnings For The Period 7,342,512 5,383,098 Items Not Affecting Cash Resources: Amortization 1,352,741 155,152 Loss (Gain) on Disposal of Investments (1,783,346) (2,208,002) Minority Interest in Net Income of 4,722,984 398,376 Consolidated Subsidiary Net changes in operating assets & liabilities: Decrease (Increase) in Reinsurance (38,804,985) 17,918,189 Recoverable on Outstanding Claims Decrease (Increase) in Prepaid Reinsurance (59,281,065) (36,161,069) Premiums Decrease (Increase) in Other Assets 1,798,027 (2,038,449) Decrease (Increase) in Deferred Policy (479,700) 353,369 Acquisition Costs Decrease (Increase) in Deferred Income Taxes -- 36,520 Increase (Decrease) in Unearned Premiums 74,525,244 44,036,257 Increase (Decrease) in Outstanding Losses 37,116,057 (12,615,119) Decrease (Increase) in Accounts Receivable (102,260,248) (8,875,820) Increase (Decrease) in Accounts Payable 101,557,886 (640,589) ----------- --------- Net Cash provided by Operations 25,806,106 5,741,915 ---------- --------- INVESTING ACTIVITIES: Net Purchase of Marketable Securities (12,533,845) (12,895,528) Acquisition of Subsidiary -- (66,389,000) Net Purchase of Capital Assets (2,658,641) (536,098) Other (13,536) (51,897) -------- -------- Net Cash Used by Investing Activities (15,206,022) (79,872,523) ------------ ------------ FINANCING ACTIVITIES: Increase (Reduction) of Borrowed Funds (2,728,319) 49,955,554 Increase (Decrease) in Minority Interest 2,304,000 21,200,670 Increase (Decrease) in Contributed Surplus 23,103 -- Issue of Share Capital 197,978 400,384 ------- ------- Net Cash Provided by Financing Activities (203,273) 71,556,608 ---------- Change in Cash Resources During the Period 10,396,846 (2,574,000) Cash Resources, Beginning of Period 33,730,582 10,613,027 ---------- ---------- Cash Resources, End of Period $44,127,428 $8,039,027 =========== ========== Cash Resources are Comprised of: Cash $18,868,870 $77,070 Short-Term Investments 25,258,558 7,961,957 ---------- --------- Sub-total $44,127,428 $8,039,027 =========== ========== See Notes to Consolidated Financial Statements -7- GORAN CAPITAL, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Canadian GAAP, stated in U.S. Dollars)
Common Contributed Cumulative Retained Total Stock Surplus Translation Earnings Stockholders' Adjustment (Deficit) Equity Balance at 16,874,923 -- (357,777) (3,895,014) 12,622,132 December 31, 1995 Issuance of common shares 352,315 -- -- -- 352,315 Change in cumulative translation adjustment -- -- 22,800 -- 22,800 Net Earnings -- -- -- 5,383,098 5,383,098 -- -- -- --------- --------- Balance at June 17,227,238 -- (334,977) 1,488,084 18,380,345 30, 1996 Issuance of common shares 189,193 -- -- -- 189,193 Change in contributed surplus -- 2,774,606 -- -- 2,774,606 Change in cumulative transaction adjustment -- -- 594 594 Net earnings -- -- -- 25,913,152 25,913,152 -- -- -- ---------- ---------- Balance at 17,416,431 2,774,606 (334,383) 27,401,236 47,257,890 December 31, 1996 Issuance of common shares 52,957 -- -- -- 52,957 Change in contributed surplus -- -- -- -- -- -- -- -- Change in cumulative translation adjustment -- -- 69,299 -- 69,299 Net earnings -- -- -- 7,342,512 7,342,512 -- -- -- --------- --------- Balance at June $17,469,388 $2,774,606 $(265,084) $34,743,748 $54,722,658 30, 1997 =========== ========== ========== =========== ===========
See Notes to Consolidated Financial Statements -8- GORAN CAPITAL INC. CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For The Three and Six Months Ended June 30, 1997 NOTE 1 - BASIS OF PRESENTATION The foregoing consolidated condensed financial statements are unaudited. However, in the opinion of management, all adjustments necessary for a fair presentation of the results of the interim period presented have been included. All adjustments are of a normal and recurring nature. Results for any interim period are not necessarily indicative of results to be expected for the year. The consolidated financial statements include the accounts of Goran Capital Inc. ("Goran" and the "Company") and its 67% owned subsidiary, Symons International Group, Inc. ("SIG") (and its wholly-owned subsidiary, IGF Insurance Company ("IGF"), as well as its 52% owned subsidiaries, Pafco General Insurance Company ("Pafco") and Superior Insurance Company ("Superior")), and its wholly-owned subsidiaries, Granite Reinsurance Company Ltd., Granite Insurance Company and Symons International Group - Florida. The consolidated condensed interim financial statements have been prepared in accordance with form 10-Q specifications and, therefore, do not include all information and footnotes normally shown in full annual financial statements. These unaudited consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in Canada ("CDN GAAP"). These principles also conform in all material respects with accounting principles generally accepted in the United States ("US GAAP") except as disclosed in Note 5. All material intercompany amounts have been eliminated. NOTE 2 - REINSURANCE In order to reduce risk and increase its underwriting capacity, the Company purchases reinsurance. Reinsurance does not relieve the Company of its ultimate liability to its insureds for the risks ceded to reinsurers. As such, the Company is subject to credit risk with respect to risks ceded to reinsurers should a reinsurer fail. Effective January 1, 1996 reinsurance was placed as follows: For the nonstandard automobile segment, the Company only purchases excess of loss and catastrophic protections which result in minimum ceded premium in proportion to gross written premiums. For the crop segment, the Company reinsures to the federal government Federal Crop Insurance Corporation ("FCIC") program all of its Multi-Peril Crop Insurance ("MPCI") business which has a back-end underwriting gain or loss feature. The Company reinsures stop-loss protection to third party reinsurers on its MPCI business. Regarding the crop hail line of business, the Company also carries an excess of loss (stop-loss) protection, with third party reinsurers. Effective January 1, 1997, the Company ceded 20% of its new and renewal nonstandard automobile business and 40% of its crop hail business and 50% of its crop hail business under certain quota share arrangements. Granite Reinsurance Company Ltd. is a participant in the 20% quota Share treaty, receiving 10% of the ceded nonstandard automobile business. The effects of reinsurance are as follows: -9- NOTE 3 GORAN CAPITAL INC. Analysis of Effects of Reinsurance (Canadian GAAP, stated in U.S. Dollars) For The Three Months Ended June 30, June 30, 1997 1996 Premiums Written Gross $149,834,571 $109,859,879 Ceded (63,704,812) (52,095,108) ------------ ------------ Net $ 86,129,759 $ 57,764,771 ============ ============ Premiums Earned Gross $ 85,025,315 $ 95,350,334 Ceded (7,898,960) (44,277,821) ----------- ------------ Net $ 77,126,355 $ 51,072,513 ============ ============ Claims Incurred Gross $ 97,040,081 $ 49,368,258 Ceded (36,181,709) (9,416,997) ------------ ----------- Net $ 60,858,371 $ 39,951,261 ============ ============ For the Six Months Ended June 30, June 30, 1997 1996 Premiums Written Gross $280,138,810 $151,281,496 Ceded (122,756,815) (68,177,443) ------------- ------------- Net $157,381,995 $ 83,104,053 ============= ============= Premiums Earned Gross $212,362,290 $143,302,477 Ceded ( 69,596,960) ( 67,711,653) ------------- ------------- Net $142,765,330 $ 75,590,824 ============ ============= Claims Incurred Gross $158,797,710 $ 78,437,241 Ceded ( 51,253,320) (21,888,877) ------------- ------------- Net $107,544,390 $ 56,548,363 ============ ============= June 30, December 31, 1997 1996 Unearned Premiums Gross $164,972,765 $ 91,206,974 Ceded ( 74,139,403) ( 14,983,097) ------------ ------------ Net $ 90,883,362 $ 76,223,877 ============ ============ Outstanding Claims Gross $163,102,998 $127,044,804 Ceded ( 71,642,210) ( 33,112,946) ------------ ------------ Net $ 91,460,788 $ 93,931,858 ============ ============ -10- NOTE 4 - CAPITAL STOCK For the three and six months ended June 30, 1997, 625 and 164,457 common shares were issued by the Company pursuant to warrants previously issued to debenture holders and pursuant to an established Company Employee Stock Option Plan. NOTE 5 - UNITED STATES ACCOUNTING PRINCIPLES These unaudited consolidated financial statements have been prepared in accordance with CDN GAAP. The difference between CDN GAAP and US GAAP are as follows: For The Three Months Ended June 30, June 30, 1997 1996 Reported Net Earnings $ 2,735,618 $ 3,179,573 US/Canada GAAP Differences Discounting on Outstanding Claims (385) -- Deferred Income Taxes -- (657,967) -- --------- Revised Net Earnings 2,734,233 2,521,606 ========= ========= Earnings Per Share $0.46 $0.46 EPS - Before Extraordinary Items $0.46 $0.46 EPS - Fully Diluted $0.46 $0.46 Dividends Per Share $0.00 $0.00 Reported Total Assets 603,494,731 369,048,502 US/Canada GAAP Differences Loans to Purchase Shares 808 (2,003) Deferred Income Taxes 737,544 676,486 Outstanding Claims ceded -- -- Unearned Premiums ceded -- -- Unrealized gain (loss)on investments 2,439,548 (257,978) --------- --------- Revised Total Assets 606,672,631 369,465,006 =========== =========== Reported Shareholders' Equity 54,722,658 18,376,016 US/Canada GAAP Differences Deferred Income Taxes 737,544 676,486 Discounting on Claims (2,804) (4,720) Loans to Purchase Shares 808 (2,003) Unrealized Gain (Loss) on Investments 2,439,548 (257,978) --------- --------- Revised Shareholders' Equity 57,897,755 18,787,801 ========== ========== For The Six Months Ended June 30, June 30, 1997 1996 Reported Net Earnings 7,342,512 5,383,098 US/Canada GAAP Differences Discounting on Outstanding Claims 37,893 -- Deferred Income Taxes 0 (637,226) - --------- Revised Net Earnings 7,380,405 4,745,872 ========= ========= Earnings Per Share $1.24 $0.85 EPS - Before Extraordinary Items $1.24 $0.85 EPS - Fully Diluted $1.24 $0.85 Dividends Per Share $0.00 $0.00 Reported Total Assets 603,494,731 369,048,502 US/Canada GAAP Differences Loans to Purchase Shares (587,937) (561,683) Deferred Income Taxes 2,898,544 2,176,047 Unrealized Gain (Loss) on Investments 2,316,548 (339,046) --------- --------- Revised Total Assets 608,121,886 370,323,820 =========== =========== Reported Shareholders' Equity 54,722,658 18,376,016 US/Canada GAAP Differences Deferred Income Taxes 2,898,544 2,176,047 Discounting on Claims (1,212,801) (1,323,497) Loans to Purchase Shares (587,937) (561,683) Unrealized Gain (Loss) on Investments 2,316,548 (339,046) --------- --------- Revised Shareholders' Equity 58,137,012 18,327,837 ========== ========== -11- NOTE 6 - CONTINGENT LIABILITY 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 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. One of the Company's subsidiaries, IGF, is the administrator of a run-off book of business. The FCIC has requested that IGF take responsibility for the claims liabilities of these policies under its administration. IGF has requested reimbursement of certain expenses from the FCIC with respect to this run-off activity. IGF instituted litigation against the FCIC on March 23, 1995 in the United States District Court for the Southern District of Iowa seeking $4.3 Million as reimbursement for these expenses. The FCIC has counterclaimed for approximately $1.2 Million in claims payments for which the FCIC contends IGF is responsible for as successor to the run-off book of business. While the final result of this lawsuit cannot be predicted with certainty, the Company believes that the final resolution of this lawsuit will not have a material adverse effect on the financial condition of the Company. NOTE 7 - Subsequent Events On August 12, 1997, SIG issued $ 135,000,000 in Trust Originated Preferred Securities ("Preferred Securities"). These Preferred Securities were offered through a wholly-owned trust subsidiary of SIG and are backed by Senior Subordinated Notes to the Trust from SIG. These Preferred Securities were offered under Rule 144A of the SEC ("Offering") and SIG will ultimately file a Form S-1 Registration Statement. The proceeds of the Offering were used to repurchase the remaining minority interest in GGSH for $61 million, repay the balance of the GGS Senior Credit Facility of $44.9 million and SIG expects to contribute the balance, after expenses, of approximately $24 million to the nonstandard automobile insurers. Expenses of the issue will aggregate 4.9 million and will be amortized over the term of the Preferred Securities (30 years). In the third quarter, the Company will write-off the remaining unamortized costs of the GGS Senior Credit Facility of approximately $1.4 million pre-tax or approximately $0.11 per share. The excess of the acquisition price over the minority interest liability aggregated approximately $34,000,000 and was assigned to goodwill as the fair market value of acquired assets approximating their carrying value. Goodwill will be amortized over 25 years to match management's expectations of the expected benefit period. The Preferred Securities have a term of 30 years with semi-annual interest payments due at 9.50%. The Preferred Securities may be redeemed in whole or in part after 10 years. Assuming this offering took place at January 1, 1997, the proforma effect of this offering on the Company's consolidated statement of earnings for the six months ended is as follows: June 30, 1997 Unaudited Revenues $ 163,147,910 Net earnings $ 6,339,522 Net earnings per common share $ 1.14 -12- The aforementioned proforma results do not include the effects of the write-off of the debt issuance cost to be recorded in the third quarter. The aforementioned proforma amounts are dilutive because of the additional reserve adjustment to the non-standard auto operations in the second quarter and the non- inclusion of investment income on the additional proceeds from the offering. The Company expects based on projected premium volumes and results of operations for the non-standard division that this transaction will be accretive to earnings in future years. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY The Company underwrites and markets nonstandard private passenger automobile insurance and crop insurance. Nonstandard Automobile Insurance Operations GGS Management Holdings, Inc. ("GGSH") through its wholly owned subsidiaries, Pafco and Superior, is engaged in the writing of insurance coverage on automobile physical damage and liability policies for "nonstandard risks". Nonstandard insureds are those individuals who are unable to obtain insurance coverage through standard market carriers due to factors such as poor premium payment history, driving experience, record of prior accidents or driving violations, particular occupation or type of vehicle. The Company offers several different policies which are directed towards different classes of risk within the nonstandard market. Premium rates for nonstandard risks are higher than for standard risks. Since it can be viewed as a residual market, the size of the nonstandard private passenger automobile insurance market changes with the insurance environment and grows when the standard coverage becomes more restrictive. Nonstandard policies have relatively short policy periods and low limits of liability. Due to the low limits of coverage, the period of time that elapses between the occurrence and settlement of losses under nonstandard policies is shorter than many other types of insurance. Also, since the nonstandard automobile insurance business typically experiences lower rates of retention than standard automobile 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. The Company follows the customary industry practice of reinsuring a portion of its risks and paying for that protection based upon premiums received on all policies subject to such reinsurance. As part of its internal procedures, the Company evaluates the financial condition of each prospective reinsurer before it cedes business to that carrier. Based on the Company's review of its reinsurers' financial health and reputation in the insurance marketplace, the Company believes its reinsurers are financially sound and that they therefore can meet their obligations to the Company under the terms of the reinsurance treaties. Crop Insurance Operations The two principal components of the Company's crop insurance business are Multi- Peril Crop Insurance ("MPCI") and private named peril, primarily crop hail insurance. The majority of the Company's crop insurance business consists of MPCI. Crop insurance is purchased by farmers to reduce the risk of crop loss from adverse weather and other uncontrollable events. Farms are subject to drought, floods and other natural disasters that can cause widespread crop losses and, in severe cases, force farmers out of business. Historically, one out of every twelve acres planted by farmers has not been harvested because of adverse weather or other natural disasters. Because many farmers rely on credit to -13- finance their purchases of such agricultural inputs as seed, fertilizer, machinery and fuel, the loss of a crop to a natural disaster can reduce their ability to repay these loans and to find sources of funding for the following year's operating expenses. The Company, like other private insurers participating in the MPCI program, generates revenues from the MPCI program in two ways. First, it markets, issues and administers policies, for which it receives administrative fees; and second, it participates in a profit-sharing arrangement in which it receives from the government a portion of the aggregate profit, or pays a portion of the aggregate loss, in respect of the business it writes. The Company writes MPCI and crop hail insurance through approximately 1,300 independent agencies in 39 states. MPCI is a government-sponsored program with accounting treatment which differs in certain respects from the more traditional property and casualty insurance lines. For income statement purposes under US generally accepted accounting principles, gross premiums written consist of the aggregate amount of MPCI premiums paid by farmers for buy-up coverage (MPCI coverage in excess of CAT Coverage), and any related federal premium subsidies, but do not include MPCI premium on CAT Coverage (the minimum available level of MPCI Coverage). By contrast, net premiums written do not include any MPCI premiums or subsidies, all of which are deemed to be ceded to the FCIC as a reinsurer. The Company's profit or loss from its MPCI business is determined after the crop season ends on the basis of a complex profit sharing formula established by law and the FCIC. For generally accepted accounting principles income statement purposes, any such profit or loss sharing earned or payable by the Company is treated as an adjustment to commission expense and is included in policy acquisition and general and administrative expenses. The Company also receives from the FCIC (i) an expense reimbursement payment equal to a percentage of gross premiums written for each Buy-Up Coverage policy it writes ("Buy-Up Expense Reimbursement Payment"), (ii) an LAE reimbursement payment equal to 13.0% of MPCI Imputed Premiums for each CAT Coverage policy it writes (the "CAT LAE Reimbursement Payment"), and (iii) a small excess LAE reimbursement payment of two hundredths of one percent (.02%) of MPCI Retention (as defined herein) to the extent the Company's MPCI loss ratios on a per state basis exceed certain levels (the "MPCI Excess LAE Reimbursement Payment"). For 1997 and 1996, the Buy-Up Expense Reimbursement Payment has been set at 29% and 31%, respectively, of the MPCI Premium. For generally accepted account principles income statement purposes, the Buy-Up Expense Reimbursement Payment is treated as a contribution to income and reflected as an offset against policy acquisition and general and administrative expenses. The CAT LAE Reimbursement Payment and the MPCI Excess LAE Reimbursement Payment are, for income statement purposes, recorded as an offset against LAE, up to the actual amount of LAE incurred by the Company in respect of such policies, and the remainder of the payment, if any, is recorded as Other Income. The Company is currently negotiating the 1998 Standard Reinsurance Agreement with the FCIC. The current government proposal is to reduce the Buy-Up Expense Reimbursement Payment to 27 to 28% and reduce the profit sharing arrangement. The negotiations are on-going and the ultimate results cannot be determined at this time. There can be no assurance that the Company will negotiate terms which are favorable to the Company. On June 9, 1997, the Secretary of Agriculture announced that the USDA would no longer provide CAT coverage through USDA offices in any state for the 1998 crop year. This is to be implemented by a transferring of CAT policies to the various members of the crop insurance industry. At this time, the Company has been preliminarily informed that it will receive approximately 17,000 policies that were formerly written by USDA offices, although there can be no assurance that -14- the Company will receive this number of policies. Based on historical, per- policy averages, the Company has preliminarily estimated that it will receive approximately an additional $6 to $7 million in premiums from such transferred policies, however, there can be no assurance that this number will be realized. This estimate assumes that IGF will retain 100% of such premiums. In addition to MPCI, the Company offers stand alone crop hail insurance, which insures growing crops against damage resulting from hail storms and which involves no federal participation, as well as its proprietary product which combines the application and underwriting process for MPCI and hail coverages. This product tends to produce less volatile loss ratios than the stand alone product since the combined product generally insures a greater number of acres, thereby spreading the risk of damage over a larger insured area. Approximately half of the Company's hail policies are written in combination with MPCI. Although both crop hail and MPCI provide coverage against hail damage, under crop hail coverages farmers can receive payments for hail damage which would not be severe enough to require a payment under an MPCI policy. The Company believes that offering crop hail insurance enables it to sell more policies than it otherwise would. In addition to crop hail insurance, the Company also sells a small volume of insurance against crop damage from other specific named perils. These products cover specific crops and are generally written on terms that are specific to the kind of crop and farming practice involved and the amount of actuarial data available. The Company plans to seek potential growth opportunities in this niche market by developing basic policies on a diverse number of named crops grown in a variety of geographic areas and to offer these policies primarily to large producers through certain select agents. In order to reduce the Company's potential loss exposure under the MPCI program, in addition to reinsurance obtained from the FCIC, the Company purchases stop-loss reinsurance from other private insurers. Such private reinsurance would not eliminate the Company's potential liability in the event a reinsurer was unable to pay or losses exceeded the limits of the stop-loss coverage. For crop hail insurance, the Company has in effect quota share reinsurance and various layers of stop-loss reinsurance. Based on a review of the reinsurers' financial health and reputation in the insurance marketplace, the Company believes that the reinsurers for its crop insurance business are financially sound and that they therefore can meet their obligations to the Company under the terms of the reinsurance treaties. Certain other conditions of the Company's crop business may effect comparisons of the Company's results and operating ratios with that of other insurers, including: (i) the seasonal nature of the business whereby profits are generally recognized predominantly in the second half of the year, (ii) the short-term nature of crop business whereby losses are known within a short time period, and (iii) the limited amount of investment income associated with crop business. In addition, cash flows from the crop business differ from cash flows from certain more traditional lines. In 1996, the Company instituted a policy of recognizing (i) 35% of its estimated MPCI gross premiums written for each of the first and second quarters, 20% for the third quarter and 10% for the fourth quarter, (ii) commission expense at a rate of 16% of MPCI gross premiums written recognized and (iii) Buy-Up Expense Reimbursement at the applicable rate of MPCI gross premiums written recognized along with normal operating expenses incurred in connection with premium writings. In the third quarter, if a sufficient volume of policyholder acreage reports have been received and processed by the Company, the Company's policy is to recognize MPCI gross premiums written for the first nine months based on a re-estimate which takes into account actual gross -15- premiums processed. If an insufficient volume of policies has been processed, the Company's policy is to recognize in the third quarter 20% of its full year estimate of MPCI gross premiums written, unless other circumstances require a different approach. The remaining amount of gross premiums written is recognized in the fourth quarter, when all amounts are reconciled. The Company also recognizes the MPCI underwriting gain or loss during each quarter, reflecting the Company's best estimate of the amount of such gain or loss to be recognized for the full year, based on, among other things, historical results, plus a provision for adverse developments. In the third and fourth quarters, a reconciliation amount is recognized for the underwriting gain or loss based on final premium and loss information. Regulation The Company's admitted insurance businesses are subject to comprehensive, detailed regulation throughout the United States, under statutes which delegate regulatory, supervisory and administrative powers to state insurance commissioners. The primary purpose of such regulations and supervision is the protection of policyholders and claimants. Depending on whether the insurance company is domiciled in the state and whether it is an admitted or non-admitted insurer, such authority may extend to such things as (i) periodic reporting of the insurer's financial condition, (ii) periodic financial examination, (iii) approval of rates and policy forms, (iv) loss reserve adequacy, (v) insurer insolvency, (vi) the licensing of insurers and their agents, (vii) restrictions on the payment of dividends and other distributions, (viii) approval of changes in control, and (ix) the type and amount of permitted investments. The Company's MPCI program is federally regulated and supported by the federal government by means of premium subsidies to farmers, expense reimbursement and federal reinsurance pools for private insurers. Consequently, the MPCI program is subject to oversight by the legislative and executive branches of the federal government, including the FCIC. The MPCI program regulations generally require compliance with federal guidelines with respect to underwriting, rating and claims administration. The Company is required to perform continuous internal audit procedures and is subject to audit by several federal government agencies. Results of Operations For the three and six months ended June 30, 1997, the Company recorded net earnings of $2,735,618 and $7,342,512 or $0.49 and $1.32 per share, respectively. This is approximately a 13.9% decrease and a 36.3% increase from 1996 comparable amounts of $3,179,573 and $5,383,098 or $0.61 and $1.04 per share, respectively. The improved year-to-date earnings were attributable to continued premium growth of the nonstandard automobile segment and continued growth and profit in the crop segment. The improvement for the three months ended relates to the growth and profitability of the crop segment. The crop segment demonstrated enhanced profitability due to higher volume as well as normal crop underwriting expectations. Reinsurance operations at Granite Re and commercial insurance results from SIG-FL continue to meet expectations. -16- For The Three Months Ended June 30, 1997 1996 Nonstandard-Automobile Insurance Operations: Gross premiums written $90,481,000 $44,368,000 =========== ========== Net premiums written $74,255,000 $41,922,000 =========== ========== Net premiums earned 65,139,000 $39,218,000 Net investment income 2,756,000 1,039,000 Other income, principally billing fees 4,305,000 1,742,000 Net realized capital loss 742,000 264,000 ------- ------- TOTAL REVENUES 72,942,000 42,263,000 ---------- ---------- Losses and loss adjustment expenses 53,756,000 30,266,000 Policy acquisition and general and 18,368,000 10,600,000 ---------- administrative expenses Interest and amortization of intangibles 1,227,000 696,000 --------- ------- TOTAL EXPENSES 73,351,000 41,562,000 ---------- ---------- Earnings (loss) before income taxes $ (409,000) $701,000 ========== ======== GAAP Ratios(Nonstandard Automobile Only): Loss and LAE Ratio 82.5% 77.2% Expense ratio, net of billing fees 21.6% 22.6% ----- ----- Combined ratio 104.1% 99.8% ====== ===== Without the reserve increase of $5.3 million, the ratios would have been as follows: Loss and LAE Ratio 74.4% 77.2% Expense ratio, net of billing fees 21.6% 22.6% ----- ----- Combined ratio 96.0% 99.8% ===== ===== Crop Insurance Operations: Gross premiums written $56,647,000 $59,133,000 =========== =========== Net premiums written $9,479,000 $14,690,000 ========== =========== Net premiums earned $7,758,000 $6,063,000 Net investment income 43,000 (66,000) Other income 1,448,000 775,000 Net realized capital gain (loss) -- -- -- -- TOTAL REVENUES 9,294,000 6,772,000 --------- --------- Losses and loss adjustment expenses 4,269,000 6,047,000 Policy acquisition and general and (1,260,000) (2,433,000) administrative expenses Interest expense 13,000 25,000 TOTAL EXPENSES 3,022,000 3,639,000 --------- --------- Earnings before income taxes $6,227,000 $3,133,000 ========== ========== -17- For The Six Months Ended June 30, 1997 1996 Nonstandard-Automobile Insurance Operations: Gross premiums written $165,547,000 $62,290,000 ============ =========== Net premiums written $133,843,000 $62,089,000 ============ =========== Net premiums earned $128,244,000 $52,844,000 Net investment income 5,094,000 1,435,000 Other income, principally billing fees 7,204,000 2,333,000 Net realized capital gain (loss) 1,684,000 212,000 --------- ------- TOTAL REVENUES 142,226,000 56,824,000 ----------- ---------- Losses and loss adjustment expenses 99,024,000 38,831,000 Policy acquisition and general and 35,492,000 15,774,000 administrative expenses Interest and amortization of intangibles 2,711,000 696,000 --------- ------- TOTAL EXPENSES 137,227,000 55,301,000 ----------- ---------- Earnings before income taxes $4,999,000 $1,523,000 ========== ========== GAAP Ratios (Nonstandard Automobile Only): Loss and LAE Ratio 77.2% 73.5% Expense ratio, net of billing fees 22.1% 25.4% ----- ----- Combined ratio 99.3% 98.9% ===== ===== Without the reserve increase of $5.3 million, the ratios would have been as follows: Loss and LAE Ratio 73.1% 73.5% Expense ratio, net of billing fees 22.1% 25.4% ----- ----- Combined ratio 95.2% 98.9% ===== ===== Crop Insurance Operations: Gross premiums written $108,356,000 $80,537,000 ============ =========== Net premiums written $16,680,000 $14,953,000 =========== =========== Net premiums earned $ 7,768,000 $ 6,222,000 Net investment income 92,000 96,000 Other income 3,587,000 1,148,000 --------- Net realized capital gain (loss) -- 16,000 -- ------ TOTAL REVENUES 11,447,000 7,482,000 ---------- --------- Losses and loss adjustment expenses 4,269,000 6,444,000 Policy acquisition and general and (6,026,000) (4,266,000) administrative expenses Interest expense 24,000 120,000 ------ ------- TOTAL EXPENSES (1,733,000) 2,298,000 ----------- --------- Earnings before income taxes $13,180,000 $5,184,000 =========== ========== Statutory Capital and Surplus: Pafco $17,273,000 $14,872,000 =========== ========== IGF $36,760,000 $11,559,000 =========== ========== Superior $65,018,000 $48,036,000 =========== ========== -18- Consolidated gross premiums written increased 36.3% in the second quarter and 85.1% year-to-date in comparison to 1996 due to growth in both the nonstandard auto and crop segments. Gross premiums written for the nonstandard auto segment increased 104% in the second quarter and 166% year-to-date. Such increase was due primarily due to gross premiums written from Superior of $71,921,000 and $128,846,000 for the three and six months ended June 30, 1997, respectively, as compared to $25,202,000 in 1996 subsequent to its acquisition on April 30, 1996. While a portion of this increase relates to four additional months of premium in 1997 of Superior, additional premium growth relates to internal growth due to improved service, certain product improvements and tougher uninsured motorist laws in states such as California and Florida. The year-to-date increase was primarily due to volume rather than rate increases, although the Company adjusts rates on an ongoing basis. Gross premiums written for the crop segment decreased 4.2% in the second quarter and increased 34.5% year-to-date. The year-to-date increase was due to continued industry privatization and aggressive marketing efforts, while the decrease in the second quarter is a reflection of timing of processing of acreage reports. Remaining gross written premiums represent commercial business which was ceded 100% effective January 1, 1996 to an affiliate, Granite Reinsurance Company Ltd. Net premiums written increased in the second quarter and year-to-date for 1997 as compared to 1996 due to the growth in gross premiums written offset by quota share reinsurance. In 1997, the Company ceded $15,876,000 and $31,353,000 of nonstandard automobile premiums during the second quarter and year-to-date as part of a 20% quota share treaty instituted January 1, 1997. No such treaty was in effect during 1996. In 1997, the Company ceded $6,903,000 and $11,905,00 of crop hail premiums during the second quarter and year-to-date as part of a 40% quota share treaty instituted January 1, 1997. In 1996, crop hail premiums were ceded at a rate of 10%. The nonstandard automobile quota share reinsurance treaty is not expected to continue in effect subsequent to the Offering of the Preferred Securities. Net premiums earned increased for the three and six months ended June 30, 1997 as compared to the corresponding periods of the prior year, reflecting the strong growth in written premiums offset by the effects of the nonstandard automobile and crop hail quota share treaties. Net investment income increased $3,427,917 and $6,470,305 for the three and six months ended June 30, 1997 as compared to the corresponding periods of the prior year. Such increases were due primarily to investment income from Superior and greater invested assets. The second quarter of 1996 included a one-time gain from the sale of investments of $2,200,000. Other income increased $1,081,046 and $5,849,255 for the three and six months ended June 30, 1997 as compared to the corresponding periods of the prior year. Such increases were due to billing fee income on nonstandard automobile business at Superior and an increase in the in-force policy count. There was also an increase in the receipt of CAT Coverage fees and CAT LAE reimbursement payments due to higher premium volume. The loss ratio for the nonstandard automobile segment was 82.5% and 77.2% for the three and six months ended June 30, 1997 as compared to 77.2% and 73.5% for the corresponding periods in 1996. The Company, as part of management's actions to reduce costs and combine operations of the nonstandard automobile division, combined the claims management as well as the reserving philosophies of Superior Insurance Company with Pafco General Insurance Company, the two nonstandard automobile insurance companies in the Group. In order to align the different reserving philosophies of its two subsidiaries, the Company adopted the more -19- conservative methodology for the combined business which required an increase of reserves of $5.3 million. This adjustment increased the second quarter and year-to-date 1997 loss ratio by 8.1% and 4.1%. While the Company believes those actions were necessary, the establishment and monitoring of reserve levels are a highly subjective process involving numerous estimates and assumptions. Therefore, actual results may differ from current estimates. The crop hail loss ratio in 1997 is 54.2% compared to 61.0% in 1996. Policy acquisition and general and administrative expenses have increased as a result of the increased volume of business produced by the Company combined with a higher percentage of net premiums retained and offset by increases in reinsurance commission income. Policy acquisition and general and administrative expenses rose to $19,435,633 and $33,864,132 or 25.2% and 23.7% of net premium earned for the three and six months ended June 30, 1997 compared to $10,763,139 and $16,755,942 or 21.1% and 22.1% of net premium earned in the corresponding periods of 1996. Such increase was due to a higher mix of nonstandard automobile premiums in 1997 as compared to 1996. The expense ratio, net of billing fees, for the nonstandard automobile segment improved to 21.6% and 22.1% for the three and six months ended June 30, 1997 as compared to 22.6% and 25.4% for the corresponding periods in 1996, due to technological and operational efficiencies, economies of scale and tighter expense controls. Due to the accounting for the crop insurance segment, operating expenses for the three and six months ended June 30, 1997 includes a contribution to earnings of $1,260,000 and $6,026,000, as compared to comparable amounts of $2,433,000 and $4,266,000 for the corresponding periods in 1996. Such increase was due to greater Buy-up Expense Reimbursement Payments and MPCI underwriting gain due to increased premium volumes. The nonstandard automobile quota share treaty reduced premiums earned, losses and LAE incurred and policy acquisition and general administrative expenses by $12,442,000, $8,631,000 and $3,501,000, and $15,812,000, $10,912,000 and $4,505,000, respectively, for the three and six months ending June 30, 1997, for a net pre-tax earnings reduction of $310,000 and $395,000 in the three and six months ending June 30, 1997. Reduction in expenses reflects ceding commission income net of a deferred acquisition cost adjustment. Interest expense decreased $321,174 and increased $712,767 for the three and six months ended June 30, 1997 as compared to the corresponding periods in the prior year due primarily to interest incurred since April 30, 1996 on the GGS Senior Credit Facility. The GGS Senior Credit Facility will be repaid with the proceeds from SIG's Offering of the Preferred Securities. Income tax expense was 36.1% and 34.0% of pre-tax income for the three and six months ended June 30, 1997 as compared to 21.4% and 24.0% in 1996. The increase was due to a higher proportion of earnings in U.S. operations and sales of tax exempt securities in 1996 as part of the restructuring of the investment portfolio. Financial Condition and Capital Reserves and Liquidity The Company's total assets of $603,494,731 at June 30, 1997 increased $222,152,959 from $ 381,341,772 as of December 31, 1996. The primary reasons for this increase were an increase of $22,945,917 in cash and invested assets and increases in receivables and reinsurance assets due to growth in premium volume. The increase in cash and invested assets was due to the increase in cash flow from operations. The Company did not significantly change its investment mix or philosophy in 1997. -20- Net cash provided by operating activities in 1997 aggregated 25,806,106 compared to $5,741,915 in 1996. This increase in funds provided was caused by additional cash of 7,906,267 from net earnings adjusted for non-cash expenses and realized gains or losses, continued premium growth and the normal receipt of funds from the FCIC in the first quarter on the crop insurance operations. Net cash used in investing activities decreased from $79,872,523 in 1996 to $15,206,222 in the second quarter of 1997 reflecting the acquisition of Superior in 1996 offset in part by the application of funds received from operating activities. In 1997, financing activities utilized cash of $203,237 compared to cash provided of $71,556,608 in 1996. The Company paid principal of $3,128,000 on its term debt as scheduled. The contribution from the GS Funds of $2,304,000 represents a contribution to GGS Holdings that was ultimately contributed to the insurance subsidiaries for surplus. The Company also contributed cash to maintain its 52% share. The crop insurance segment had no need to borrow funds on its revolver in 1997 due to the proceeds it received from the initial public offering and continued growth and profitable operations. -21- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS One of the Company's subsidiaries, IGF Insurance Company ("IGF"), is the administrator of a run-off book of business. The Federal Crop Insurance Corporation ("FCIC") has requested that IGF take responsibility for the claims liabilities of these policies under its administration. IGF has requested reimbursement of certain expenses from the FCIC with respect to this run-off activity. IGF instituted litigation against the FCIC on March 23, 1995 in the United States District Court for the Southern District of Iowa seeking $4.3 million (US) as reimbursement for these expenses. The FCIC has counterclaimed for approximately $1.2 million (U.S.) in claims payments for which the FCIC contends IGF is responsible for as successor to the run-off book of business. While the final result of this litigation cannot be predicted with certainty, the Company believes that the final resolution of this lawsuit will not have a material adverse effect on the financial condition of the Company. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K None 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 12, 1997 By:__/s/ Alan G. Symons____ Alan G. Symons President Dated: August 12, 1997 By:__/s/ Gary P. Hutchcraft Gary P. Hutchcraft Vice President, Treasurer and Chief Financial Officer -22- EX-11 2 COMPUTATION OF PER SHARE EARNINGS GORAN CAPITAL INC. - Consolidated Exhibit 11.01 Analysis of Earnings Per Share As At: June 30, June 30, TSE Trading 1997 1996 Activity Volume Value Average Price Period Covered # (US $) (US $) (US $) January to 911,654 $21,942,539 $24.07 (A) $11.78 June, 1997 June 30, June 30, 1997 1996 Proceeds from Exercise of Warrants $3,562,823 (B) $957,948 and Options (US $) ---------- -------- Shares Repurchased - Treasury 148,026 (B)/(A) 81,304 ------- ------ Method Shares Outstanding - Weighted 5,552,097 5,172,105 Average Add: Options and Warrants 544,692 502,202 Outstanding Less: Treasury Method - Shares (148,026) (81,304) --------- -------- Repurchased Shares Outstanding for US GAAP 5,948,763 (C) 5,593,003 --------- --------- Purposes Net Earnings in Accordance with US $7,380,404 (D) $4,745,872 ========== ========== GAAP Earnings Per Share - US GAAP $1.24 (D)/(C) $0.85 ===== ===== (Primary and Fully Diluted) -23- -----END PRIVACY-ENHANCED MESSAGE-----