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 Quarter ended March 31, 1997
Commission file number 1-10861
GUARANTY NATIONAL CORPORATION
.............................
(Exact name of registrant as specified in its charter)
Colorado 84-0445021
........ ..........
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
9800 South Meridian Boulevard
Englewood, Colorado 80112
..................................................
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code(303) 754-8400
..............
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days. Yes X No
As of May 9, 1997, there were 14,985,497 shares of
Registrant's $1.00 par value common stock issued and
outstanding exclusive of shares held by registrant.
GUARANTY NATIONAL CORPORATION
Form 10-Q Index
For the Quarter Ended March 31, 1997
Page
Number
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountants' Review Report 3
Consolidated Financial Statements:
Consolidated Balance Sheets at March 31, 1997 and
December 31, 1996 4
Consolidated Statements of Earnings for the three
months ended March 31, 1997 and 1996 5
Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2.Management's Discussion and Analysis
of Financial Condition and Results of Operations 10
PART 2.OTHER INFORMATION 14
SIGNATURES 15
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Shareholders
Guaranty National Corporation
We have reviewed the accompanying consolidated balance
sheet of Guaranty National Corporation and subsidiaries (the
"Company") as of March 31, 1997, and the related
consolidated statements of earnings and cash flows for the
three-month periods ended March 31, 1997 and 1996. These
financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information
consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially
less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to such consolidated
financial statements for them to be in conformity with
generally accepted accounting principles.
We have previously audited, in accordance with generally
accepted auditing standards, the consolidated balance sheet
of the Company as of December 31, 1996, and the related
consolidated statements of earnings, changes in
shareholders' equity and cash flows for the year then ended
(not presented herein); and in our report dated February 14,
1997, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated
balance sheet as of December 31, 1996 is fairly stated, in
all material respects, in relation to the consolidated
balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Denver, Colorado
April 29, 1997
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
March 31, December 31,
1997 1996
--------- ------------
(Unaudited)
Investments:
Fixed maturities held to maturity, at cost $73,029 $80,271
Fixed maturities available for sale,
at market 417,287 390,290
-------- --------
490,316 470,561
Equity securities, at market 94,950 88,102
Other long-term investments 15,176 13,585
Short-term investments 69,453 94,993
-------- --------
Total investments 669,895 667,241
Cash 3,068 3,988
Accrued investment income 7,602 7,971
Accounts receivable, (less allowance of
$171 - 1997 and 1996) 49,057 45,557
Reinsurance recoverables and prepaids,
(less allowance of$200 - 1997 and 1996) 87,444 90,781
Property and equipment (less accumulated
depreciation of $14,461 - 1997 and
$13,508 - 1996) 29,283 29,833
Deferred policy acquisition costs 45,558 44,456
Goodwill (less accumulated amortization of
$6,703 - 1997 and $6,423 - 1996) 34,359 34,639
Other assets 1,920 4,626
-------- --------
Total assets $928,186 $929,092
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses $295,605 $303,266
Unpaid loss adjustment expenses 65,928 65,142
Unearned premiums 162,037 154,242
Notes payable 101,500 101,688
Reinsurance payables and deposits 7,346 7,268
Other liabilities 56,655 59,447
-------- --------
Total liabilities 689,071 691,053
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.10 par value;
authorized, 6,000,000 shares;
none issued and outstanding
Common stock, $1 par value;
authorized, 30,000,000 shares;
issued 14,975,497 shares - 1997
and 1996 14,975 14,975
Capital in excess of par 121,272 121,272
Retained earnings 91,231 84,685
Net unrealized investment gains 11,637 17,107
-------- --------
Total shareholders' equity 239,115 238,039
-------- --------
Total liabilities and shareholders' equity $928,186 $929,092
======== ========
See notes to consolidated financial statements.
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
Three Months Ended
March 31,
1997 1996
-------- --------
(Unaudited)
Revenue:
Premiums earned $128,675 $115,470
Net investment income 10,745 9,253
Realized investment gains 1,412 1,981
-------- --------
140,832 126,704
-------- --------
Expenses:
Losses and loss adjustment
expenses incurred 88,862 84,845
Policy acquisition costs 35,970 29,082
General and administrative 2,580 3,528
Interest 1,653 1,720
Other 347 288
-------- --------
129,412 119,463
-------- --------
Earnings before income taxes 11,420 7,241
Income taxes 3,002 1,454
-------- --------
Net earnings $8,418 $5,787
======== ========
Earnings per common share $0.56 $0.39
======== ========
Dividends per common share $0.125 $0.125
======== ========
See notes to consolidated financial statements.
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,
1997 1996
-------- --------
(Unaudited)
Operating Activities:
Premiums collected $132,528 $120,610
Net investment income collected 9,649 9,459
Losses and loss adjustment expenses paid (89,801) (84,425)
Policy acquisition costs and general and
administrative expenses paid (42,982) (39,789)
Interest paid (1,636) (1,712)
Other receipts (payments) (550) 3,715
-------- --------
Net cash provided by operating activities 7,208 7,858
-------- --------
Investing Activities:
Maturities of fixed maturities
held to maturity 4,131
Maturities of fixed maturities
available for sale 12,115 15,508
Sales of fixed maturities
available for sale 18,057 22,323
Sales of equity securities 9,079 9,204
Sales of property and equipment 264
Redemption of mortage loans 3
Net change in short-term investments 25,551 1,927
Purchases of fixed maturities
held to maturity (8,506)
Purchases of fixed maturities
available for sale (60,443) (24,011)
Purchases of equity securities (13,631) (8,761)
Net change in other long-term investments (483) (321)
Purchases of property and equipment (708) (1,436)
-------- --------
Net cash (used in) provided by
investing activities (6,068) 5,930
-------- --------
Financing Activities:
Repayment of notes payable (188) (750)
Dividends paid (1,872) (1,870)
-------- --------
Net cash used in financing activities (2,060) (2,620)
-------- --------
Net Increase (Decrease) in Cash (920) 11,168
Cash, Beginning of Period 3,988 6,794
-------- --------
Cash, End of Period $3,068 $17,962
======== ========
See notes to consolidated financial statements.
NOTE 1 - GENERAL
The accompanying unaudited consolidated financial
statements of Guaranty National Corporation and subsidiaries
(the "Company") have been prepared in accordance with
generally accepted accounting principles applicable to
interim reporting and do not include all of the information
and footnotes required for complete financial statements.
In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the
three months ended March 31, 1997, are not necessarily
indicative of the results that may be expected for the year
ending December 31, 1997.
Although these financial statements are unaudited, they
have been reviewed by the Company's independent accountants,
Deloitte & Touche LLP, for conformity with accounting
requirements for interim financial reporting. Their report
on such review is included herein. These financial
statements should be read in conjunction with the financial
statements and related notes included in the Company's
Annual Report to Shareholders and Form 10-K for the year
ended December 31, 1996, for the more complete explanations
therein.
Certain reclassifications have been made to the 1996
financial statements to conform with presentations used in
1997.
NOTE 2 - EARNINGS PER SHARE
Earnings per common share has been computed using the
weighted average number of shares and equivalent shares
outstanding of 14,987,533 and 14,963,367 for the three
months ended March 31, 1997, and 1996, respectively. The
common stock equivalents are stock options which result in a
dilutive effect from assumed exercise of the options.
During the first quarter of 1997, Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share"
was issued. This SFAS is effective for financial statements
issued for periods ending after December 15, 1997, including
interim periods; earlier application is not permitted. The
SFAS replaces primary earnings per share with basic earnings
per share (computed by dividing income available to common
stockholders (the numerator) by the weighted-average number
of common shares outstanding (the denominator during the
period). Adoption of SFAS No. 128 would have had no effect
on earnings per share for March 31, 1997 and 1996.
NOTE 3 - INVESTMENTS
At March 31, 1997, and December 31, 1996, the estimated
aggregate fair value of fixed maturities held to maturity
was $73,015,000 and $81,430,000, respectively, the cost of
fixed maturities available for sale was $416,607,000 and
$382,415,000, respectively, and the cost of equity
securities was $77,727,000 and $69,658,000, respectively.
At March 31, 1997, and December 31, 1996, the Company had
investments in noninvestment grade securities with a cost of
$62,751,000 and $55,205,000 respectively, which are carried
at fair values of $63,052,000 and $56,477,000, respectively.
Realized investment gains (losses), which includes gains
(losses) on calls of fixed maturities, for the three months
ended March 31, 1997 and 1996, as well as a write down for
other-than-temporary investment impairments of approximatley
$160,000 and $134,000 for the three months ended March 31,
1997 and 1996, respectively, are as follows (in thousands):
March 31, March 31,
Three Months Ended 1997 1996
- ------------------ -------- --------
Fixed maturities
available for sale:
Gains $476 $660
Losses (379) (20)
------ ------
97 640
------ ------
Equity securities:
Gains 2,325 1,806
Losses (1,010) (465)
----- ------
1,315 1,341
------ ------
Total $1,412 $1,981
====== ======
NOTE 4 - REINSURANCE
In the ordinary course of business, the Company reinsures
certain risks, generally on an excess of loss basis with
other insurance companies. Such reinsurance arrangements
serve to limit the Company's maximum loss per occurrence on
casualty losses to $400,000, $300,000 on property losses and
$600,000 for catastrophe losses. Reinsurance does not
discharge the primary liabilitiy of the original insurer.
Amounts recoverable from reinsurers are recognized and
estimated in a manner consistent with the claim liabilities
arising from the reinsured policies and incurred but not
reported losses.
Premiums, losses, and loss adjustment expenses, including
the effect of reinsurance, are comprised of (in thousands):
Three Months Ended March 31,
1997 1996
---------------------- ----------------------
Written Earned Written Earned
-------- -------- -------- --------
Premiums:
Direct $135,488 $129,770 $125,202 $118,556
Assumed 12,187 9,862 11,837 9,559
Ceded (9,378) (10,957) (13,426) (12,645)
-------- -------- -------- --------
Net $138,297 $128,675 $123,613 $115,470
======== ======== ======== ========
% Assumed
to Net 8.81% 9.58%
==== ====
Losses and loss
adjustment expenses: Incurred Incurred
-------- --------
Direct $85,051 $86,357
Assumed 9,086 4,162
Ceded (5,275) (5,674)
------- -------
Net $88,862 $84,845
======= =======
NOTE 5 - COMMITMENTS AND CONTINGENCIES
During 1995, the Company acquired Viking Insurance Company
of Wisconsin ("Viking") in a business combination accounted
for as a purchase. As part of the 1995 Viking acquisition,
and based upon Viking's favorable loss development since the
acquisition date, the Company estimates that it will pay
Talegen Holdings, Inc. ("Seller") an additional purchase
price in the maximum amount agreed to in the purchase
agreement. This amount, which is
approximately $4,333,000 plus interest at 6.28%, will be
payable to the Seller as of December 31, 1998. The Company
has accrued this amount and the related interest payable in
the accompanying consolidated balance sheet.
As discussed in the Company's report on Schedule 14D-9,
filed with the Securities and Exchange Commission on May 22,
1996, as amended on June 1, 1996 and June 7, 1996 and June
19, 1996, three separate complaints naming the Company and
one or more of its directors, and Orion Capital Corporation
("Orion"), as defendants were filed on behalf of the
Company's shareholders, alleging that the Orion tender offer
was unfair and inadequate. On July 2, 1996, counsel for
Orion and the Company signed a Memorandum of Understanding
providing for the settlement and dismissal of the three
cases, based on the revisions which the Purchasers had made
in the terms of the Offer to Purchase. In the judgment of
the Company's management, the costs incurred to defend and
settle these complaints will not have a materially adverse
effect on the results of the Company's operations. The
estimated settlement costs have been accrued in the
Company's consolidated financial statements as of March 31,
1997.
In addition to the three complaints described above, the
Company is subject to litigation in the normal course of
operating its insurance business. The Company is not
engaged in any such litigation which it believes would have
a material adverse impact on its financial condition or
result of operations, taking into account the reserves
established therefore and giving effect to insurance.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results for the Quarters Ended March 31, 1997 and March 31, 1996
Guaranty National Corporation and its subsidiaries (the
"Company") manage their property and casualty business in
three operating units: commercial lines, personal lines and
collateral protection insurance. Gross premiums written and
GAAP combined ratios by operating unit for the quarters
ended March 31, 1997 and 1996, are summarized below:
Three Months Ended
March 31,
1997 1996
------- --------
(Dollars in thousands)
Personal Lines:
Gross premiums written $82,721 $65,282
GAAP combined ratio 96.7% 101.0%
Commercial Lines:
Gross premiums written $42,298 $51,964
GAAP combined ratio 104.8% 104.4%
Collateral Protection:
Gross premiums written $22,656 $19,793
GAAP combined ratio 97.1% 97.5%
Total:
Gross premiums written $147,675 $137,039
GAAP combined ratio 99.1% 101.6%
Personal lines gross premiums written increased 27% for the
first quarter of 1997 compared to the first quarter of 1996.
The premium volume growth in the private passenger line of
business was due mainly to newly-enacted legislation in the
state of California which requires all drivers to maintain
liability insurance. This change in California law resulted
in a significant increase in the personal lines one-month
product business. First quarter 1997 gross premiums written
in the state of California were $37.4 million compared to
$18.8 million for the same period in 1996, representing 45%
of total personal lines premiums for the quarter. Personal
lines policies in-force at March 31, 1997 increased 23% from
December 31, 1996. Although the extent and duration of the
increase in California premium can not be predicted, the
Company believes it will continue to record significant
premium increases through the remainder of 1997.
The personal lines loss ratio (incurred losses and loss
adjustment expense) for the first quarter of 1997 was 71.5%
compared to 75.5% for the first quarter of 1996. The
decrease in the loss ratio resulted from a 6.3 point
decrease in the incurred loss component, partially offset by
an increase in the loss adjustment expense component of 2.3
points. The lower incurred loss component was primarily due
to lower claim frequency. The loss adjustment expense ratio
increased 2.3 points due mainly to this unit's emphasis on
improving claim handling and on reducing insurance fraud,
which resulted in higher legal expenses. During the second
quarter of 1997, the Company will open a second claims
office in California in anticipation of increased claim
activity as a result of the growth in California.
The personal lines expense ratio was 25.2% for the first
quarter of 1997, compared to 25.5% for the first quarter of
1996. The lower expense ratio is primarily due to spreading
fixed costs over our increased premium volume and a greater
concentration of one-month product business in the state of
California, which has a lower overall agent commission rate.
The personal lines overall GAAP combined ratio of 96.7%
improved 4.3 points over the first quarter of 1996
principally from the decrease in the loss ratio discussed
above.
Commercial lines gross premiums written decreased 19% for
the first quarter of 1997 compared to the first quarter of
1996, primarily as a result of a 26% decrease in premiums
from the commercial nonstandard division, partially offset
by a 16% increase in the commercial standard division. The
majority of the decrease is due to lower production in
commercial auto, umbrella and other programs;
increased competition from large standard carriers entering
the nonstandard marketplace; and agent and program
cancellations during 1996. The commercial nonstandard
division plans to replace a portion of this premium loss by
appointing new agents, identifying new business
opportunities and more closely monitoring the production of
existing agents. The increase in gross premiums written for
the commercial standard division is primarily the result of
two new contract branch offices opened subsequent to the
first quarter of 1996, one in the state of Florida and the
other in the state of Missouri, and an overall increase in
premium production for 1997 in existing offices compared to
the first quarter of 1996.
The commercial lines loss ratio for the first quarter of
1997 was 70.1% compared to 71.3% for the same period last
year. The loss incurred component decreased by 1.3 points
and the loss adjustment expenses component increased by 0.1
point. The improvement in the loss incurred component was
principally caused by lower claim frequency and severity
within the commercial lines unit.
The commercial lines expense ratio increased 1.6 points to
34.7% for the first quarter of 1997 from 33.1% for 1996's
first quarter, due mainly to a decrease in net premiums
written, the effects of which were partially offset by lower
salary and benefit expenses resulting from the Company not
replacing vacancies created by normal attrition. The
commercial lines overall GAAP combined ratio of 104.8%
increased slightly by 0.4 points for the first quarter of
1997 compared to the first quarter of 1996.
The collateral protection unit's gross premiums written
increased 14% for the first quarter of 1997 compared to the
first quarter of 1996. The premium volume growth is
primarily due to continued increased writing in the
automobile financing GAP and mortgage fire programs as well
as the addition of a new warranty program. Gross premiums
written from the automobile financing GAP and mortgage fire
products for the first quarter of 1997 were $6,778,000, a
45% increase compared to gross premiums in the first quarter
of 1996 of $4,664,000. First quarter 1997 gross premiums
written from the warranty program were $1,194,000.
The GAAP combined ratio for the collateral protection unit
decreased to 97.1% for the first quarter of 1997 compared to
97.5% for the first quarter of 1996. The loss incurred
component decreased 11.0 points in the first quarter of 1997
compared to the first quarter of 1996. The loss incurred
component for the first quarter of 1996 was abnormally high
due to the Northeast blanket vendor single interest and
Puerto Rico business which experienced unfavorable results
in early 1996. During 1996, the unit implemented
underwriting and pricing adjustments and canceled
problematic accounts. The unit's expense ratio increased
11.8 points for the first quarter of 1997 compared to the
first quarter of 1996, primarily due to higher agency
contingent commissions, which were proportionately increased
as a result of the improved loss ratio.
The Company operates under a reinsurance contract that
provides both excess of loss and property catastrophe
coverage up to $6,000,000 per occurrence for all major lines
of business. This primary reinsurance contract serves to
limit the Company's maximum loss per occurrence on casualty
losses to $400,000, $300,000 on property losses and
$600,000 for catastrophe losses. The Company also has an
additional layer of catastrophe coverage up to 95% of
$14,000,000 per loss occurrence, for total catastrophe
protection of $20,000,000. The Company continues to utilize
facultative reinsurance for certain risks, primarily
umbrella and property coverages.
The Company's insurance operating units in total showed
$473,000 of adverse development in 1997 on 1996 and prior
loss reserves, net of reinsurance compared to $463,000 of
redundant development in the first quarter of 1996 on 1995
and prior loss reserves, net of reinsurance. This
development equates to 0.2% and (0.2%) of net loss reserves
carried at the end of the previous years 1996 and 1995,
respectively. The adverse development in the first quarter
of 1997 was caused primarily by incurred but not reported
losses being greater than expected for the collateral
protection unit.
For the first three months of 1997 and 1996, the Company's
catastrophe losses were minimal. In addition, during the
first quarter of 1997, the Company's known exposure to
environmental losses, such as asbestos and pollution
contamination, did not materially change from year end 1996.
Overall, the Company reported net earnings for the first
quarter of 1997 of $8,418,000, or $0.56 per share, compared
to net earnings of $5,787,000, or $0.39 per share, for the
first quarter of 1996. Net earnings increased 45% primarily
as a result of the lower loss ratio and the growth of the
personal lines unit as discussed above.
The Company's interest expense decreased slightly for the
first quarter of 1997 compared to the first quarter of 1996,
due to a lower debt level.
Pretax net investment income increased $1,492,000 to
$10,745,000 in the first quarter of 1997 from $9,253,000 for
the first quarter of 1996, while after-tax net investment
income increased to $8,098,000 for the quarter ended March
31, 1997, from $7,201,000 for the same period in 1996.
These increases are due mainly to continuing positive cash
flow and increased earnings from limited partnership equity
interests.
The investment yield, on an after-tax basis, remained
constant at approximately five percent for the first
quarters of 1997 and 1996. After-tax realized investment
gains in the first quarters of 1997 and 1996 were $918,000
and $1,288,000, respectively, including other-than-
temporary investment impairments of $104,000 and $87,000,
after-tax, for the three-month periods ending March 31, 1997
and 1996, respectively. The realized investment gains were
primarily attributable to sales from the Company's equities
portfolio. The strong equity market has enabled the Company
to take the realized gains without reducing its total
investments in equities. The Company's overall investment
portfolio continues to be invested primarily in fixed
maturities and short-term investments which represented 84%
and 85% of the portfolio as of March 31, 1997 and
December 31, 1996, respectively.
Securities are classified as available for sale and
recorded at fair value, unless they meet the Company's
criteria for classification as held to maturity. Such
criteria include investment grade bonds with stated
maturities of less than 10 years. The unrealized investment
gains on fixed maturities available for sale and on equity
securities as of March 31, 1997, were $680,000 and
$17,223,000, respectively. This compares to unrealized
investment gains on fixed maturities available for sale and
on equity securities as of December 31, 1996, of $7,875,000
and $18,444,000, respectively. Higher interest rates in the
first quarter of 1997 had a negative impact on the market
value of the fixed investment portfolio. The market value
of the Company's fixed maturity investments generally varies
inversely with changes in the general level of interest
rates. The market value of Federal agency and other
mortgage pool securities of $46,988,000, as of March 31,
1997, is subject to additional market value volatility due
to the impact of changes in prepayment rates on the
mortgages which underlie such securities.
The Company's holdings in noninvestment grade bonds for
the first quarter of 1997 were approximately nine percent of
total invested assets, compared to approximately eight
percent of total invested assets at December 31, 1996.
Total investments held by the Company include highly rated
fixed maturities (rated AAA or AA) of 50% at both March 31,
1997, and December 31, 1996. The Company continues to
maintain a low level of real estate related investments,
consisting primarily of federal agency mortgage pools.
Liquidity and Capital Resources
Positive cash flow from operations of $7,208,000 was
generated for the first quarter of 1997 compared to
$7,858,000 for the first quarter of 1996. The operating
cash flow for the first quarter of 1997 was reduced by the
payout of the Company's bonus program. Payments made in
1996 under this program were substantially less due to
unsatisfactory 1995 operating results. In addition, there
are higher levels of loss and loss adjustment expense
payments and acquisition expenses related to premium
production. These higher payments were partially offset by
higher premiums collected and increased net investment
income in 1997 compared to 1996.
Net cash used in investing activities was $6,068,000 for
the first quarter of 1997. This compares to net cash from
investing activities for the first quarter of 1996 of
$5,930,000. The decrease in funds from investing activities
during the first three months of 1997, relates to increased
investments made in and decreased sales of both fixed
maturities and equity securities.
Cash used in financing activities was $2,060,000 and
$2,620,000 for the first quarters of 1997 and 1996,
respectively. During the first quarter of 1997, the Company
made a quarterly principal payment of $187,500 on its 6.5%
term loan compared to the first quarter of 1996, when
the Company made its first principal payment of $750,000 on
this loan. As of March 31, 1997, the Company had funds
available of $10,000,000 under the Company's reducing,
revolving credit facility. The Company declared and paid a
regular quarterly dividend of $0.125 per share in both the
first quarters of 1997 and 1996.
The Company's level of short-term investments at March 31,
1997, and December 31, 1996, was 10.3% and 14.2%,
respectively, of total invested assets. The decrease
resulted from management's decision to reduce its cash
position and to shift its investment mix to securities of a
longer average duration to achieve a better yield on our
investment portfolio. Overall, the Company maintains
sufficient liquidity in its investment portfolio through its
short-term investment holdings to meet anticipated claim
payments and other insurance payment requirements.
Forward Looking Statements
Some of the statements made in this Form 10-Q Report, as
well as statements made by the Company in periodic press
releases, oral statements made by the Company's officials to
analysts and shareholders in the course of presentations
about the Company and conference calls following earnings
releases, constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of
1995 (the "Reform Act"). Such forward-looking statements
involve known and unknown risks, uncertainties and other
factors that may cause the actual results, performance or
achievements of the Company to be materially different from
any future results, performance or achievements expressed or
implied by the forward-looking statements. Such factors
include, among other things, (i) general economic and
business conditions; (ii) interest rate changes; (iii)
competition and regulatory environment in which the Company
operates; (iv) claims frequency; (v) claims severity; (vi)
severe adverse weather conditions; (vii) the cost of
automobile repair; (viii) the number of new and renewal
policy applications submitted by the Company's agents; (ix)
changes in the renewal rate on policies written in the state
of California; and (x) other factors over which the Company
has little or no control.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is routinely engaged in litigation incidental
to its business. At March 31, 1997, there were three
lawsuits outstanding , which were related to the Orion
Tender Offer. During the third quarter of 1996 the Company
signed a Memorandum of Understanding with respect to the
settlement and dismissal of the three complaints. In the
judgment of the Company's management, the costs incurred to
defend and settle these complaints will not have a
materially adverse effect on the results of the Company's
operations. The estimated settlement costs have been
accrued in the Company's consolidated financial statements.
See Note 17 to the Consolidated Financial Statements in the
Company's Annual Report to Shareholders and Form 10-K for
the year ended December 31, 1996, for further discussion of
these costs. In the judgment of the Company's management,
at March 31, 1997, the Company is not engaged in any such
litigation which it believes would have a material adverse
impact on its financial condition or results of operation,
taking into account the reserves established therefore and
giving effect to insurance.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On April 18, 1997, the Company announced that W.
Marston Becker, Chief Executive Officer and Chairman of the
Board of Orion Capital Corporation and a member of the
Company's Board of Directors, would assume the position of
Chairman of the Board of the Company upon the death of Alan
R. Gruber. Mr. Becker was scheduled to succeed Mr. Gruber
as Chairman of the Board on May 13, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Guaranty National Corporation Equity Incentive
Plan, approved by the Company's Board of
Directors on October 29, 1996 and subject to shareholder
approval on May 13, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the
Registrant during the quarter.
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.
Guaranty National Corporation
By: s/James R. Pouliot
James R. Pouliot, President
and Chief Executive Officer
(Principal Executive Officer)
By: s/Michael L. Pautler
Michael L. Pautler, Senior Vice
President-Finance and Treasurer
(Principal Financial Officer)
By: s/Shelly J. Hengsteler
Shelly J. Hengsteler
Controller and Assistant Treasurer
(Principal Accounting Officer)
DATE: May 9, 1997