-----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, UkoDQn40qGMKNNsyvYhwsUoyOKgf0N2uhxfqp1CbO6rJfXf5b9cSn1+FY0WieBA3 PkqfChRY3nx0lqARw5ZMhw== 0000925600-98-000016.txt : 19980814 0000925600-98-000016.hdr.sgml : 19980814 ACCESSION NUMBER: 0000925600-98-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 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: SEC FILE NUMBER: 000-24366 FILM NUMBER: 98684668 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 SECOND QUARTER 10-Q 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, 1998 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, 1998, there were 5,839,466 shares of Registrant's common stock issued and outstanding exclusive of shares held by Registrant. Form 10-Q Index For The Quarter Ended June 30, 1998 Page Number PART I FINANCIAL INFORMATION Item 1 Financial Statements Unaudited Consolidated Financial Statements: Unaudited Consolidated Balance Sheets at June 30, 1998 and December 31, 1997 ..............................3 Unaudited Consolidated Statements of Earnings for the Three and Six Months Ended June 30, 1998 and 1997 ..............4-5 Unaudited Consolidated Statements of Shareholders' Equity ...........................................................6 Unaudited Consolidated Statements of Changes in Cash Resources for the Three and Six Months Ended June 30, 1998 and 1997 ...........................................7 Condensed Notes to Unaudited Consolidated Financial Statements .......................................................8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ..............................9 PART II OTHER INFORMATION ...............................................19 SIGNATURES ...............................................................20 INDEX TO EXHIBITS Exhibit 11 - Computation of Per Share Earnings ............ .....21 PART I - FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS GORAN CAPITAL INC. UNAUDITED CONSOLIDATED BALANCE SHEETS (Canadian GAAP, stated in thousands of U.S. dollars)
June 30, December 31, ASSETS 1998 1997 Cash and investments $271,079 $247,124 Accounts receivable: Premiums receivable 239,482 89,762 Due from insurance companies 14,230 13,782 Due from associated companies -- 1,442 Accrued and other receivables 708 2,658 ------- ------- TOTAL ACCOUNTS RECEIVABLE 254,420 107,644 Reinsurance recoverable on outstanding claims 106,809 94,424 Prepaid reinsurance premiums 111,526 36,607 Capital assets, net of accumulated depreciation 17,570 12,230 Deferred policy acquisition costs 18,727 11,849 Deferred income taxes 1,342 2,098 Intangibles 42,126 42,562 Other assets 7,506 6,310 ------- ------- TOTAL ASSETS $831,105 $560,848 ======= ======= LIABILITIES Accounts Payable: Due to insurance companies $156,054 $37,350 Accrued and other payables 26,356 27,266 ------- ------- 182,410 64,616 Outstanding claims 185,961 152,871 Unearned premiums 230,348 118,616 Bank loans 35 4,182 ------- ------- 598,754 340,285 ------- ------- Minority interest: Equity in net assets of subsidiaries 28,302 25,231 Preferred securities 135,000 135,000 ------- ------- 163,302 160,231 ------- ------- SHAREHOLDERS' EQUITY Capital stock 18,376 18,010 Contributed surplus 2,775 2,775 Retained earnings 48,131 39,839 Cumulative translation adjustment (233) (292) ------- ------- TOTAL SHAREHOLDERS' EQUITY 69,049 60,332 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $831,105 $560,848 ======= =======
See notes to consolidated financial statements -3- GORAN CAPITAL INC. UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS (Canadian GAAP, stated in thousands of U.S. dollars, except per share data)
Three Months Ended June 30, 1998 1997 Gross premiums written $170,505 $147,445 Less ceded premiums (60,776) (63,711) ------- ------ Net premiums written 109,729 83,734 Change in net unearned premiums (10,111) (8,356) ------ ------ Net premiums earned 99,618 75,378 Fee income 4,901 5,753 Net investment income 3,720 3,603 Net realized capital gain 846 742 ------- ------ Total Revenues 109,085 85,476 ------- ------ Net claims incurred 71,187 59,343 General and administrative expenses 24,244 18,732 Interest expense 49 1,080 Amortization of intangibles 510 164 ------- ------ Total expenses 95,990 79,319 ------- ------ Earnings before undernoted items 13,095 6,157 Provision for income taxes 4,415 2,124 Distribution of preferred securities, net of tax 2,096 -- Minority interest 1,809 1,011 ------- ------ Earnings from continuing operations 4,775 3,022 Loss from discontinued operations -- (286) ------- ------ Net Earnings $ 4,775 $ 2,736 ======= ====== Earnings per share from continuing operations - basic $0.82 $0.54 ==== ==== Earnings per share from continuing operations - fully diluted $0.78 $0.49 ==== ==== Net earnings per share - basic $0.82 $0.49 ==== ==== Net earnings per share - fully diluted $0.78 $0.44 ==== ====
See notes to consolidated financial statements -4- GORAN CAPITAL INC. UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS (Canadian GAAP, stated in thousands of U.S. dollars, except per share data)
Six Months Ended June 30, 1998 1997 Gross premiums written $347,701 $275,359 Less ceded premiums (139,611) (124,835) ------- ------- Net premiums written 208,090 150,524 Change in net unearned premiums (36,587) (11,255) ------- ------- Net premiums earned 171,503 139,269 Fee income 11,390 10,791 Net investment income 6,896 6,885 Net realized capital gain 2,814 1,684 ------- ------- Total Revenues 192,603 158,629 ------- ------- Net claims incurred 126,489 104,514 General and administrative expenses 40,266 32,492 Interest expense 232 2,451 Amortization of intangibles 1,021 293 ------- ------- Total expenses 168,008 139,750 ------- ------- Earnings before undernoted items 24,595 18,879 Provision for income taxes 8,438 6,240 Distribution of preferred securities, net of tax 4,226 -- Minority interest 3,454 4,723 ------- ------- Earnings from continuing operations 8,477 7,916 Loss from discontinued operations (185) (573) ------- ------- Net Earnings $ 8,292 $ 7,343 ======= ======= Earnings per share from continuing operations - basic $1.46 $1.42 ==== ==== Earnings per share from continuing operations - fully diluted $1.40 $1.36 ==== ==== Net earnings per share - basic $1.42 $1.32 ==== ==== Net earnings per share - fully diluted $1.37 $1.26 ==== ====
See notes to consolidated financial statements -5- GORAN CAPITAL INC. UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Canadian GAAP, stated in thousands of U.S. dollars)
Cumulative Retained Total Common Contributed Translation Earnings Shareholders' Stock Surplus Adjustment (Deficit) Equity Balance at December 31, 1996 $17,416 $2,775 $(334) $27,401 $47,258 Issuance of common shares 53 --- --- --- 53 Change in cumulative translation adjustment --- --- 69 --- 69 Net earnings --- --- --- 7,343 7,343 ------ ----- --- ------ ------ Balance at June 30, 1997 $17,469 $2,775 $(265) $34,744 $54,723 ====== ===== === ====== ====== Balance at December 31, 1997 $18,010 $2,775 $(292) $39,839 $60,332 Issuance of common shares 366 --- --- --- 366 Change in cumulative translation adjustment --- --- 59 --- 59 Net earnings --- --- --- 8,292 8,292 ------ ----- --- ------ ------ Balance at June 30, 1998 $18,376 $2,775 $(233) $48,131 $69,049 ====== ===== === ====== ======
See notes to consolidated financial statements -6- GORAN CAPITAL INC. UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN CASH RESOURCES (Canadian GAAP, stated in thousands of U.S. dollars)
Six Months Ended June 30, 1998 1997 CASH PROVIDED BY OPERATING ACTIVITIES Net earnings for the period $8,292 $7,343 Items not affecting cash resources: Amortization and depreciation 2,434 1,353 Loss (gain) on disposal of investments (2,862) (1,783) Minority interest in net income of consolidated subsidiary 3,454 4,723 Decrease (increase) in reinsurance recoverable on outstanding claims (12,385) (38,805) Decrease (increase) in prepaid reinsurance premiums (74,919) (59,281) Decrease (increase) in other assets 2,405 1,797 Decrease (increase) in deferred policy acquisition costs (6,878) (480) Increase (decrease) in deferred income taxes 756 -- Increase (decrease) in unearned premiums 111,732 74,525 Increase (decrease) in outstanding losses 33,090 37,116 Decrease (increase) in accounts receivable (150,168) (102,260) Increase (decrease) in accounts payable 117,794 101,558 ------- ------- 32,745 25,806 ------- ------- FINANCING ACTIVITIES: Increase (reduction) of borrowed funds (4,147) (2,728) Net purchase (increase) of minority interest (1,111) 2,304 Increase (decrease) in contributed surplus -- 23 Issue of share capital 366 198 ------- ------ (4,892) (203) ------- ------ INVESTING ACTIVITIES: Net purchase of marketable securities (21,567) (12,534) Net purchase of capital assets (6,545) (2,659) Other -- (13) ------- ------- (28,112) (15,206) ------- ------- Change in cash resources during the period (259) 10,397 Cash resources, beginning of period 36,557 33,731 ------ ------ Cash resources, end of period $36,298 $44,128 ====== ======
See notes to consolidated financial statements -7- GORAN CAPITAL INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For The Three and Six Months Ended June 30, 1998 NOTES TO THE CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (1) The accompanying unaudited condensed financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. Interim financial statements should be read in conjunction with the Company's annual audited 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 3. All material intercompany amounts have been eliminated. (2) On March 2, 1998, the Company announced that it had signed an agreement with CNA to assume its multi-peril and crop hail operations. CNA wrote approximately $110 million of multi-peril and crop hail insurance business in 1997. The Company will reinsure 100% of all multi-peril and crop hail premiums written by CNA during 1998 and cede a small portion of the Company's total crop book of business (approximately 22% MPCI and 15% crop hail) back to CNA. Starting in the year 2000, assuming no event of change of control as defined in the agreement, the Company can purchase the insurance premiums reinsured to CNA through a call provision or CNA can require the Company to buy the insurance premiums reinsured to CNA. Regardless of the method of takeout of CNA, CNA must not compete in MPCI or crop hail for a period of time. There was no purchase price. The formula for the buyout in the year 2000 is based on a multiple of average pre-tax earnings that CNA received from reinsuring the Company's book of business. (3) On July 8, 1998, the Company acquired North American Crop Underwriters (NACU) a Henning, Minnesota based managing general agency which focuses exclusively on crop insurance. The acquisition price was $4 million with $3 million paid at closing and $1 million due July 1, 2000 without interest. This acquisition captures 100% of the MPCI underwriting gain and fees on approximately $27 million of premiums. Prior to this transaction, NACU received all fees and 50% of the underwriting gain with the balance going to the Company through the CNA transaction. -8- (4) 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:
June 30, June 30, 1998 1997 Reported net earnings $8,292 $7,343 US/Canada GAAP differences: Discounting on outstanding claims -- 37 ----- ----- Revised net earnings $8,292 $7,380 ===== ===== Earnings per share - basic $1.42 $1.33 ==== ==== Earnings per share - fully diluted $1.37 $1.24 ==== ====
June 30, December 31, 1998 1997 Shareholders' equity in accordance with Canadian GAAP $69,049 $60,332 Add (deduct) effect of difference in accounting for: Deferred income taxes 1,911 1,975 Outstanding claims (1,696) (1,765) Minority interest portion (71) (70) Receivables from sale of capital stock (321) (346) Unrealized gain on investments* 2,700 1,336 ------ ------ Shareholders' equity in accordance with US GAAP $71,572 $61,462 ====== ======
*Note: The increase in shareholders' equity attributable to the unrealized gain of $2,700 and $1,336 at June 30, 1998 and December 31, 1997, respectively, are net of deferred taxes of $2,147 and $1,005 and related minority interest of $1,291 and $658. -9- 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 The Company 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. 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. Crop insurance is purchased by farmers to reduce the risk of crop loss from adverse weather and other uncontrollable events. Farms are subject to drought, floods and other natural disasters that can cause widespread crop losses and, in severe cases, force farmers out of business. Historically, one out of every twelve acres planted by farmers has not been harvested because of adverse weather or other natural disasters. Because many farmers rely on credit to finance their purchases of such agricultural inputs as seed, fertilizer, machinery and fuel, the loss of a crop to a natural disaster can reduce their ability to repay these loans and to find sources of funding for the following year's operating expenses. The Company, like other private insurers participating in the MPCI program, generates revenues from the MPCI program in two ways. First, it markets, issues and administers policies, for which it receives administrative fees; and second, it participates in a profit-sharing arrangement in which it receives from the government a portion of the aggregate profit, or pays a portion of the aggregate loss, in respect of the business it writes. The Company writes MPCI and crop hail insurance through approximately 925 independent agencies in 42 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 -10- 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 1998 and 1997, the Buy-Up Expense Reimbursement Payment has been set at 27% and 29%, 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. In June 1998, the United States Congress passed legislation which provided permanent funding for the crop insurance industry. However, beginning with the 1999 crop year, the Buy-Up Expense Reimbursement Payment was reduced to 24.5%, the CAT LAE Reimbursement Payment was reduced to 11% and the $50 CAT coverage fee will no longer go to the insurance companies. The Company expects to more than offset these reductions through growth in fee income from non-federally subsidized programs such as AgPI(R) and GEO Ag Plus(R) initiated in 1998. The Company has also been working to reduce its internal costs including agent's commissions. While the Company fully believes it can more than offset these reductions, there is no assurance the Company will be successful in its efforts or that further reductions in federal reimbursements will not continue to occur. 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. -11- 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. AgPI(R) protects businesses that depend upon a steady flow of a crop (or crops) to stay in business. This protection is available to those involved in agribusiness who are a step beyond the farm gate, such as elevator operators, custom harvesters, cotton gins and businesses that are dependent upon a single supplier of products, (i.e., popping corn). These businesses have been able to buy normal business interruption insurance to protect against on-site calamities such as a fire, wind storm or tornado. But until now, they have been totally unprotected by the insurance industry if they incorporate a production shortfall in their trade area which limited their ability to bring raw materials to their operation. AgPI(R) allows the agricultural business to protect against a disruption in the flow of the raw materials it depends on. AgPI(R) was formally introduced at the beginning of the 1998 crop year. Geo AgPLUS(TM) provides to the farmer the soil sampling results combined with fertility maps and the software that is necessary to run their precision farming program. Grid soil sampling, when combined with precision farming, allows the farmer to apply just the right amount of fertilization, thus balancing the soil for a maximum crop yield. Precision farming increases the yield to the farmer, reduces the cost of unnecessary fertilization and enhances the environment by reducing overflows of fertilization into the ecosystem. Geo AgPLUS(TM) is an IGF Insurance Company trademarked precision farming division that is now marketing its fee based products to the farmer. 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 reinsurers. 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 various layers of stop-loss reinsurance. Certain other conditions of the Company's crop business may affect comparisons of the Company's results and operating ratios with those 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 the applicable rate 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 -12- 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 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. Results of Operations For the three and six months ended June 30, 1998, the Company recorded net earnings of $4,775,000 and $8,292,000 or $0.82 and $1.42 per share (basic). This is approximately a 74.5% and 12.9% increase from 1997 comparable amounts of $2,736,000 and $7,343,000 or $0.49 and $1.32 per share (basic). Increased earnings reflect improved results from the nonstandard automobile division due to improvements in both the loss and expense ratios. Prior year results in the second quarter also included a one-time charge to earnings of $5,300,000 for loss reserves. Crop results for the second quarter of 1998 were up slightly over 1997 while year-to-date results for this division are virtually flat with the prior year. This is due to volume gains offset by higher commission expense, lower reimbursements and integration costs of the CNA transaction. -13-
For the three months ended June 30, 1998 1997 NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS: Gross premiums written $79,530 $90,481 ====== ====== Net premiums written $69,154 $74,255 ====== ====== Net premiums earned $70,498 $65,139 Fee income 4,553 4,305 Net investment income 3,133 2,756 Net realized gain 673 742 ------ ------ TOTAL REVENUES 78,857 72,942 ------ ------ Losses and loss adjustment expenses 53,502 53,756 Policy acquisition and general and administrative expenses 18,681 18,368 Interest and amortization of intangibles -- -- ------ ------ TOTAL EXPENSES 72,183 72,124 ------ ------ Earnings before income taxes $ 6,674 $ 818 ====== ====== GAAP RATIOS (Nonstandard Automobile Only): Loss and LAE Ratio 75.9% 82.5% Expense ratio, net of billing fees 20.0 21.6 ---- ---- Combined ratio 95.9% 104.1% ==== ===== CROP INSURANCE OPERATIONS: Gross premiums written(2) $92,020 $56,647 ====== ====== Net premiums written $35,560 $9,479 ====== ===== Net premiums earned $28,460 $7,758 Fee income 350 1,448 Net investment income 112 43 Net realized capital gain 170 -- ------ ----- TOTAL REVENUES 29,092 9,249 ------ ----- Losses and loss adjustment expenses 18,679 4,269 Policy acquisition and general and administrative expenses(1) 3,897 (1,260) Interest expense 50 13 ------ ----- TOTAL EXPENSES 22,626 3,022 ------ ----- Earnings before income taxes $ 6,466 $6,227 ====== =====
(1) Negative crop expenses are caused by inclusion of MPCI expense reimbursement and underwriting gain. (2) Includes premiums assumed from CNA in accordance with the Strategic Alliance Agreement. -14-
For the six months ended June 30, 1998 1997 NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS: Gross premiums written $169,506 $165,547 ======= ======= Net premiums written $151,421 $133,843 ======= ======= Net premiums earned $138,821 $128,244 Fee income 8,708 7,204 Net investment income 5,934 5,094 Net realized gain 2,641 1,684 ------- ------- TOTAL REVENUES 156,104 142,226 ------- ------- Losses and loss adjustment expenses 106,648 99,024 Policy acquisition and general and administrative expenses 36,804 35,492 Interest and amortization of intangibles -- -- ------- ------- TOTAL EXPENSES 143,452 134,516 ------- ------- Earnings before income taxes $ 12,652 $ 7,710 ======= ======= GAAP RATIOS (Nonstandard Automobile Only): Loss and LAE Ratio 76.8% 77.2% Expense ratio, net of billing fees 20.2 22.1 ---- ---- Combined ratio 97.0% 99.3% ==== ==== CROP INSURANCE OPERATIONS: Gross premiums written(2) $178,195 $108,356 ======= ======= Net premiums written $ 52,854 $ 16,680 ======= ======= Net premiums earned $ 28,621 $ 7,768 Fee income 2,682 3,587 Net investment income 165 92 Net realized gain 170 -- ------- ------ TOTAL REVENUES 31,638 11,447 ------- ------ Losses and loss adjustment expenses 18,738 4,269 Policy acquisition and general and administrative expenses(1) 250 (6,026) Interest expense 233 24 ------- ------ TOTAL EXPENSES 19,221 (1,733) ------- ------ Earnings before income taxes $ 12,417 $13,180 ======= ======
(1) Negative crop expenses are caused by inclusion of MPCI expense reimbursement and underwriting gain. (2) Includes premiums assumed from CNA in accordance with the Strategic Alliance Agreement. Consolidated gross premiums written increased 15.6% and 26.3% for the three and six months ended June 30, 1998 compared to comparable periods in 1997 due to growth in both the nonstandard auto and crop segments. -15- Gross premiums written for the nonstandard auto segment decreased 12.1% for the three months ended June 30, 1998 and increased 2.4% for the six months ended June 30, 1998 compared to comparable periods in 1997. The decrease in the second quarter primarily reflects certain program changes and rate increases taken in Florida to improve loss experience. Gross premiums written for the crop segment increased 62.4% and 64.5% for the three and six months ended June 30, 1998 compared to comparable periods in 1997. Such increase was due to the transaction with CNA, internal growth and new products such as AgPI. Premium increases were noted in all lines of crop insurance. Crop premiums for the three and six months ended June 30 are as follows:
Three Months Six Months Ended June 30, Ended June 30, 1998 1997 1998 1997 ---- ---- ---- ---- CAT imputed $16,319 $13,031 $32,638 $26,063 MPCI 46,654 39,239 107,297 79,016 Crop hail and named perils 37,873 17,408 63,365 29,340 AgPI 7,493 -- 7,533 -- ------- ------ ------- ------- 108,339 69,678 210,833 134,419 Less: CAT imputed (16,319) (13,031) (32,638) (26,063) ------- ------ ------- ------- $92,020 $56,647 $178,195 $108,356 ====== ====== ======= =======
MPCI premiums are considered to be 100% ceded to the federal government for accounting purposes. Quota share cession rates for other lines of insurance for the three and six months ended June 30 are as follows:
1998 1997 ---- ---- Nonstandard automobile 10% 20% Crop hail 25% 40% Named peril 50% 50%
Fee income decreased 14.8% for the three months ended June 30, 1998 and increased 5.6% for the six months ended June 30, 1998 as compared to the corresponding periods of the prior year. The decrease in the second quarter of 1998 results from the Company's practice of offsetting CAT fees with crop LAE costs. Such offset was greater in 1998. However, overall fees continue to increase. Such increase was due to greater installment billings on nonstandard automobile policies, which averaged 5.14% and 4.35% of gross written premiums in 1998 and 1997, respectively, and additional CAT fees on crop business due to growth in volume. The loss ratio for the nonstandard automobile segment for the three and six months ended June 30, 1998 was 75.9% and 76.8% as compared to 82.5% and 77.2% in 1997. The loss ratio for the nonstandard automobile segment for the three and six months ended June 30, 1997, excluding the $5.3 million reserve adjustment in the second quarter of 1997 was 74.4% and 73.1%, respectively. The increase in the loss ratio in 1998 from 1997, excluding the effects of the reserve adjustment in 1997, reflects increased severity costs and the effects of certain pending rate increases. However, this loss ratio has improved from the first quarter of 1998 which was 77.8%, due to the effects of recent rate increases. The crop hail loss ratio in 1998 was 53.5% compared to 54.2% in 1997. -16- Policy acquisition and general and administrative expenses have increased as a result of the increased volume of business produced by the Company. Policy acquisition and general and administrative expenses rose to $24,244,000 and $40,266,000 or 24.3% and 23.5% of net premium earned for the three and six months ended June 30, 1998 compared to $18,732,000 and $32,492,000 or 24.9% and 23.3% of net premium earned in the corresponding periods of 1997. The expense ratio, for the nonstandard segment improved to 20.0% and 20.2% for the second quarter and year-to-date in 1998 as compared to 21.6% and 22.1% in 1997, due primarily to reduced expenses from the Indianapolis operations (Pafco General Insurance Company) resulting from lower commissions on multi-tiered products and other efficiency implementations as well as higher billing fee rates. Crop segment expenses include agent commissions, stop loss reinsurance costs and operating expenses which are offset by MPCI Expense Reimbursements and MPCI Underwriting Gain. The increase in expenses results primarily from a 2% lower MPCI Expense Reimbursement for 1998 versus 1997, higher commissions due to competition and integration costs of the CNA transaction offset by a higher MPCI Underwriting Gain due to volume. This gain is an estimate until later in the year when crops are harvested and losses are known. The estimated gain ratio in 1998 was consistent with 1997 at 10%. Amortization of intangibles includes goodwill from the acquisition of Superior, additional goodwill from the acquisition of the minority interest position in GGSH, debt or preferred security issuance costs and organizational costs. The increase in 1998 reflects the effects of the Preferred Securities Offering in late 1997. Interest expense primarily represents interest incurred since April 30, 1996 on the GGS Senior Credit Facility. The GGS Senior Credit Facility was repaid with the proceeds from the Preferred Securities Offering. Income tax expense was 33.7% and 34.3% of pre-tax income for the three and six months ended June 30, 1998 compared to 34.5% and 33.1% in 1997. Distributions on Preferred Securities are calculated at a rate of 9.5% net of federal income taxes. Operations of Granite Re continue to show solid improvement with pre-tax earnings of $1.8 million in 1998 compared to $1.1 million in 1997. -17- Financial Condition The Company's total assets of $831,105,000 at June 30, 1998 increased $270,257,000 from $560,848,000 as of December 31, 1997. The primary reasons for this increase was an increase in cash and invested assets due to continued growth in premiums, normal receipt of crop funds from the FCIC, increases in receivables from insureds and reinsurers due to continued growth in volume and growth in prepaid reinsurance in crop operations due to the accounting for MPCI with the FCIC. Year-to-date net cash provided by operating activities improved to $32,745,000 in 1998 compared to $25,806,000 in 1997 due to continued premium growth and normal receipt of crop funds from the FCIC. This additional cash flow was used to increase invested assets. Financing activities included normal activities on the Company's line of credit for crop operations. -18- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company's insurance subsidiaries are parties to litigation arising in the ordinary course of business. The Company believes that the ultimate resolution of these lawsuits will not have a material adverse effect on its financial condition or results of operations. The Company, through its claims reserves, reserves for both the amount of estimated damages attributable to these lawsuits and the estimated costs of litigation. 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(a). EXHIBITS (11) Statement Regarding Computation of Per Share Earnings ITEM 6(b). REPORTS ON FORM 8-K None -19- 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 12, 1998 By:______________________ Alan G. Symons President Dated: August 12, 1998 By:______________________ Gary P. Hutchcraft Vice President, Treasurer and Chief Financial Officer -20- GORAN CAPITAL INC. - Consolidated Exhibit 11.01 Analysis of Earnings Per Share
Six Six Months Ended Months Ended June 30, 1998 June 30, 1997 Average Price (US $) $27.88 (A) $24.07 Proceeds from Exercise of Warrants and Options (US $) $15,360,402 (B) $3,562,823 ========== ========= Shares Repurchased - Treasury Method 550,947 (B)/(A) 148,026 ======= ======= Shares Outstanding - Weighted Average 5,819,049 5,552,097 Add: Options and Warrants Outstanding 802,304 544,692 Less: Treasury Method - Shares Repurchased (550,947) (148,026) ------- ------- Shares Outstanding for US GAAP Purposes 6,070,406 (C) 5,948,763 ========= ========= Net Earnings in Accordance with US GAAP $8,292,000 (D) $7,380,000 ========= ========= Earnings Per Share - US GAAP - Basic $1.42 $1.33 ==== ==== Earnings Per Share - US GAAP - Fully Diluted $1.37 (D)/(C) $1.24 ==== ====
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