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 June 30, 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 August 4, 1997, there were 15,038,433 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 June 30, 1997
Page
Number
PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Earnings
for the six months and three months
ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows
for the six months ended June 30, 1997
and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART 2. OTHER INFORMATION 15
SIGNATURES 17
PART I - FINANCIAL INFORMATION
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
June 30, December 31,
1997 1996
-------- ------------
(Unaudited)
Investments:
Fixed maturities held to maturity, at cost $ 74,378 $ 80,271
Fixed maturities available for sale, at market 402,481 390,290
-------- --------
476,859 470,561
Common stocks, at market 70,169 59,415
Non-redeemable preferred stocks, at market 33,692 28,687
Other long-term investments 16,379 13,585
Short-term investments 98,430 94,993
-------- --------
Total investments 695,529 667,241
Cash 8,104 3,988
Accrued investment income 7,824 7,971
Accounts receivable, (less allowance of
$171 - 1997 and 1996) 60,174 45,557
Reinsurance recoverables and prepaids,
(less allowance of $200 - 1997 and 1996) 87,850 90,781
Property and equipment, (less accumulated
depreciation of $15,188 - 1997; $13,508 - 1996) 28,988 29,833
Deferred policy acquisition costs 46,751 44,456
Goodwill, (less accumulated amortization of
$6,982 - 1997; $6,423 - 1996) 34,080 34,639
Other assets 1,774 4,626
-------- --------
Total assets $971,074 $929,092
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses $299,219 $303,266
Unpaid loss adjustment expenses 72,143 65,142
Unearned premiums 167,152 154,242
Notes payable 101,313 101,688
Reinsurance payables and deposits 10,673 7,268
Deferred income taxes 4,660 803
Other liabilities 56,152 58,644
-------- --------
Total liabilities 711,312 691,053
-------- --------
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 15,038,433 shares - 1997
and 14,975,497 shares - 1996 15,038 14,975
Capital in excess of par 122,354 121,272
Retained earnings 100,395 84,685
Net unrealized investment gains 21,975 17,107
-------- --------
Total shareholders' equity 259,762 238,039
-------- --------
Total liabilities and shareholders' equity $971,074 $929,092
======== ========
See notes to consolidated financial statements
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
Six Months Ended Three Months Ended
June 30, June 30,
1997 1996 1997 1996
-------- -------- -------- ---------
(Unaudited) (Unaudited)
Revenue:
Premiums earned $263,272 $234,419 $134,597 $118,949
Net investment income 21,608 18,519 10,863 9,266
Realized investment gains 4,955 3,589 3,543 1,608
-------- -------- -------- --------
289,835 256,527 149,003 129,823
-------- -------- -------- --------
Expenses:
Losses and loss adjustment
expenses incurred 183,126 168,507 94,264 83,662
Policy acquisition costs 69,336 60,560 33,366 31,478
General and administrative 6,527 6,925 3,947 3,397
Interest 3,307 3,403 1,654 1,683
Other 689 783 342 495
Nonrecurring tender offer charge 2,163 2,163
-------- -------- -------- --------
262,985 242,341 133,573 122,878
-------- -------- -------- --------
Earnings before income taxes 26,850 14,186 15,430 6,945
Income taxes 7,390 3,174 4,388 1,720
-------- -------- -------- --------
Net earnings $ 19,460 $ 11,012 $ 11,042 $ 5,225
======== ======== ======== ========
Earnings per common share $ 1.29 $ 0.74 $ 0.73 $ 0.35
======== ======== ======== ========
Dividends per common share $ 0.25 $ 0.25 $ 0.125 $ 0.125
======== ======== ======== ========
See notes to consolidated financial statements.
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
1997 1996
-------- --------
(Unaudited)
Operating Activities:
Premiums collected $263,750 $243,895
Net investment income collected 19,060 17,381
Losses and loss adjustment expenses paid (178,933) (166,909)
Policy acquisition costs and general and
administrative expenses paid (77,663) (72,644)
Interest paid (3,281) (3,372)
Federal income taxes paid (5,047) (6)
Nonrecurring tender offer charge (102)
Other receipts (payments) 948 (57)
-------- --------
Net cash provided by operating activities 18,834 18,186
-------- --------
Investing Activities:
Maturities of fixed maturities
held to maturity 4,131 2,000
Maturities of fixed maturities
available for sale 30,672 32,309
Sales of fixed maturities
available for sale 35,955 31,389
Sales of equity securities 21,308 17,811
Sales of property and equipment 241 264
Redemption of mortgage loans 681
Net change in short-term investments (3,407) (11,925)
Purchases of fixed maturities
held to maturity (12,858)
Purchases of fixed maturities
available for sale (74,094) (43,944)
Purchases of equity securities (24,109) (17,397)
Net change in other long-term investments (924) (356)
Purchases of property and equipment (1,361) (2,238)
-------- --------
Net cash used in investing activities (11,588) (4,264)
-------- --------
Financing Activities:
Repayment of notes payable (375) (938)
Dividends paid (3,750) (3,741)
Proceeds from exercise of stock options 995 54
-------- --------
Net cash used in financing activities (3,130) (4,625)
-------- --------
Net Increase in Cash 4,116 9,297
Cash, Beginning of Period 3,988 6,794
-------- --------
Cash, End of Period $ 8,104 $ 16,091
======== ========
See notes to consolidated financial statements.
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Six and Three Months Ended June 30, 1997
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 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 six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for
the year ending December 31, 1997.
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
15,053,857 and 14,967,244 for the six months ended June 30, 1997
and 1996, and 15,115,009 and 14,972,525 for the three months
ended June 30, 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
June 30, 1997 and 1996.
NOTE 3 - INVESTMENTS
At June 30, 1997 and December 31, 1996, the estimated aggregate
fair value of fixed maturities held to maturity was $75,240,000
and $81,430,000, respectively, the cost of fixed maturities
available for sale was $393,793,000 and $382,415,000,
respectively, and the cost of equity securities was $78,741,000
and $69,658,000, respectively. At June 30, 1997 and December 31,
1996, the Company had investments in non-investment grade
securities with a cost of $57,393,000 and $55,205,000 which are
carried at fair values of $58,665,000 and $56,477,000,
respectively.
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Six and Three Months Ended June 30, 1997
Realized investment gains (losses), which include gains
(losses) on calls and maturities of fixed maturities, for the six
and three months ended June 30, 1997 and 1996, and write downs
for other-than-temporary investment impairments of approximately
$160,000 for the six months ended June 30, 1997, and
approximately $434,000 and $300,000 for the six and three months
ended June 30, 1996 are as follows (in thousands):
Six Months Ended Three Months Ended
June 30, 1997 June 30, 1997
---------------- ------------------
Fixed maturities
available for sale:
Gains $1,054 $ 578
Losses (612) (233)
------ ------
442 345
------ ------
Equity securities:
Gains 5,694 3,369
Losses (1,181) (171)
------ ------
4,513 3,198
------ ------
Total $4,955 $3,543
====== ======
Six Months Ended Three Months Ended
June 30, 1996 June 30, 1996
---------------- ------------------
Fixed maturities
available for sale:
Gains $ 948 $ 288
Losses (203) (183)
------ ------
745 105
------ ------
Equity securities:
Gains 4,048 2,242
Losses (1,204) (739)
------ -----
2,844 1,503
------ -----
Total $3,589 $1,608
====== ======
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 individual
risks to $400,000, $300,000 on property losses and $600,000 for
catastrophe losses. Reinsurance does not discharge the primary
liability 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.
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Six and Three Months Ended June 30, 1997
Premiums, losses, and loss adjustment expenses, including the
effect of reinsurance, are comprised of (in thousands):
Six Months Ended June 30, Three Months Ended June 30,
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
Written Earned Written Earned Written Earned Written Earned
------- -------- ------- -------- ------- -------- --------- --------
Premiums:
Direct $276,113 $265,445 $247,392 $240,242 $140,625 $135,675 $122,190 $121,686
Assumed 21,817 19,327 22,990 19,276 9,630 9,465 11,153 9,717
Ceded (19,728) (21,500) (26,027) (25,099) (10,350) (10,543) (12,601) (12,454)
-------- -------- -------- -------- -------- -------- --------- --------
Net $278,202 $263,272 $244,355 $234,419 $139,905 $134,597 $120,742 $118,949
======== ======== ======== ======== ======== ======== ========= ========
% Assumed
to Net 7.84% 9.41% 6.88% 9.24%
==== ==== ==== ====
Incurred Incurred Incurred Incurred
-------- -------- -------- --------
Losses and loss
adjustment
expenses:
Direct $178,214 $163,275 $ 93,163 $ 76,918
Assumed 19,368 20,096 10,282 15,934
Ceded (14,456) (14,864) ( 9,181) (9,190)
-------- -------- -------- --------
Net $183,126 $168,507 $ 94,264 $ 83,662
======== ========= ======== ========
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 is 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, 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 resulting in the settlement and dismissal
of the three cases in June 1997, 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 did not have a materially
adverse effect on the results of the Company's operations. The
settlement costs have been accrued in the Company's
consolidated financial statements as of June 30, 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 results of
operations, taking into account the reserves established
therefore and giving effect to insurance.
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Six and Three Months Ended June 30, 1997
NOTE 6 - ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1997 the Financial Accounting Standards Board ("FASB")
issued SFAS No. 130, "Reporting Comprehensive Income", which
requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as
other financial statements. This statement is effective for
periods beginning after December 15, 1997. Management is
currently evaluating the effects of this change on the Company's
financial statements.
Additionally, in June 1997 the FASB issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related
Information", which changes the way public companies report
information about segments. This statement is effective for
periods beginning after December 15, 1997. Management is
currently evaluating the effects of this change on the Company's
financial statements.
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results for the First Six Months of 1997 Compared to the First Six
Months of 1996
Guaranty National Corporation and its subsidiaries (the
"Company") manage their property and casualty business in three
operating units: personal lines, commercial lines and collateral
protection insurance. Gross premiums written and GAAP combined
ratios by operating unit for the six months ended June 30, 1997
and 1996, are summarized below:
Six Months Ended
June 30,
1997 1996
-------- --------
(Dollars in thousands)
Personal Lines:
Gross premiums written $165,684 $127,244
GAAP combined ratio 95.6% 99.8%
Commercial Lines:
Gross premiums written $ 88,112 $105,143
GAAP combined ratio 104.7% 103.4%
Collateral Protection:
Gross premiums written $ 44,134 $ 37,995
GAAP combined ratio 97.5% 96.9%
Total:
Gross premiums written $297,930 $270,382
GAAP combined ratio 98.4% 100.7%
Personal lines gross premiums written increased 30% for the
first six months of 1997, compared to the first six months 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. The first six months gross premiums written in the
state of California were $75.7 million compared to $39.4 million
for the same period in 1996, representing 46% of total personal
lines premiums for the six months ended June 30, 1997. In
addition, 16 of the 27 other states in which personal lines
markets had growth in premium production for the first six months
of June 30, 1997. 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. Usually with a legislative change
similar to California there is a rapid escalation followed by a
corresponding falloff in policies-in-force. However, the Company
is not experiencing this trend in California. Presently, the
Company is encountering above average retention rates on the new
business written in California. In addition, any new business
generally has a higher loss ratio than seasoned business due to
higher frequency. Personal lines reserve estimates currently
anticipate an increase in frequency from the new California
business, but so far the higher frequency has not manifested
itself.
The personal lines loss ratio (incurred losses and loss
adjustment expense) for the first six months of 1997 was 71.3%,
compared to 74.4% for the first six months of 1996. The decrease
in the loss ratio resulted from a 5.0 point decrease in the
incurred loss component, partially offset by an increase in the
loss adjustment expense component of 1.9 points. The lower
incurred loss component is primarily due to lower claim
frequency. The loss adjustment expense ratio increase was due
mainly to this unit's continued emphasis on improving claim
handling and on reducing insurance fraud, which resulted in
higher legal expenses. During the second quarter of 1997, the
Company opened a second claims office in California as a result
of the growth in that state.
The personal lines expense ratio was 24.3% for the first six
months of 1997, compared to 25.4% for the first six months of
1996. The lower expense ratio is primarily due to the benefits
of integrating the Viking and Guaranty National personal lines
operations, spreading fixed costs over our increased premium
volume, and a greater
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
concentration of one-month product business in the state of
California, which has a lower overall agent commission rate.
During the first six months of 1997, commercial lines gross
premiums written decreased 16% when compared to the same period
in the prior year. The decrease was primarily the a result of
a 23% decrease in premiums in the commercial nonstandard
division, partially offset by a 12% increase in the commercial
standard division. The majority of the decrease is due to
the Company's position in the commercial nonstandard division to
maintain important underwriting standards in an increasingly soft
market, which has resulted from increased competition from large
standard carriers entering the nonstandard marketplace. The
remaining decrease is from agent and program cancellations
initiated in 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 an overall increase in premium production
for the first six months of 1997 in existing offices compared to
the same period in 1996.
The commercial lines loss ratio for the first six months of 1997
was 69.9%, compared to 70.9% for the same period last year. The
loss incurred component decreased by 2.6 points and the loss
adjustment expense component increased by 1.6 points. The
improvement in the loss incurred component was principally caused
by lower claim frequency and the result of underwriting actions
mentioned above. The increase in the loss adjustment expense
component is due to higher estimates of loss adjustment
expenses on general liability claims, which is needed to cover
high litigation costs on this line of business.
The commercial lines expense ratio increased 2.3 points to 34.8%
for the first six months of 1997 from 32.5% for the same period
last year, due mainly to the decrease in net premiums written
occurring faster than direct underwriting expenses, such as
salaries and related benefits, were reduced.
The collateral protection unit's gross premiums written
increased 16% for the first six months of 1997, compared to the
first six months of 1996. The premium volume growth is primarily
due to continued increased writing in the mortgage fire program
as well as the addition of a new mechanical breakdown program.
Gross premiums written from the mortgage fire product for the
first six months of 1997 were $6,114,000 as compared to gross
premiums in the first six months of 1996 of $3,075,000. The
mechanical breakdown program's gross premiums written for the
first six months of 1997 were $3,708,000.
The collateral protection unit's loss ratio was 61.9% and 63.5%
for the first six months of 1997 and 1996, respectively. The
loss incurred component decreased by 1.3 points and the loss
adjustment expense component decreased by 0.3 points. This is
primarily due to the mortgage fire program having a lower loss
ratio compared to other business the unit writes. In addition,
the loss incurred component for the first six months
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 2.2
points for the first six months of 1997 compared to the first six
months of 1996, primarily due to higher agency contingent
commissions, which increased proportionately 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
$2,074,000 of adverse development on 1996 and prior loss
reserves, net of reinsurance, in the first six months of 1997,
compared to $251,000 of favorable development in the first six
months of 1996 on 1995 and prior loss reserves, net of
reinsurance. This development equates to 0.7% and (0.2%) of net
loss reserves at the end of the previous years 1996 and 1995,
respectively. The commercial lines unit had adverse development of
$1,206,000 due primarily to allocated loss adjustment expense costs emerging
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
higher than expected and more significantly an increase in
reserves intended to reduce the possibility of adverse
development in future years. The collateral protection unit had
adverse development of $2,260,000 principally related to
unexpectedly high paid losses on the Northeast blanket vendor
single interest business written during 1996. The personal lines
unit had favorable development of $1,392,000, which is mainly
attributable to lower estimates of future claim payments
on prior accident year losses.
During the first six months of 1997, the Company's known
exposure to environmental losses remained consistent with the
activity reported as of December 31, 1996. Considering the
minimal claim activity to date and the nature of the business
written, primarily automobile coverage, the Company continues
to believe that a material exposure to environmental losses
does not exist. For the six month period ended June 30, 1997,
the Company's catastrophe losses amounted to approximately
$425,000, or three cents per share, net of tax and reinsurance
recoveries. This compares to catastrophe losses of $1,040,000,
or seven cents per share, net of tax and reinsurance recoveries,
during the six month period ended June 30, 1996. Company
management believes that its exposure to such catastrophic losses
is limited due to the spread of geographic coverage and the
prudent level of reinsurance retention in the event of a single loss.
Overall, the Company reported net earnings for the first six
months of 1997 of $19,460,000, or $1.29 per share, compared to
net earnings for the first six months of 1996 of $11,012,000, or
$0.74 per share. Net earnings increased 77% primarily as a
result of the lower loss ratio and the growth of the personal
lines unit, as discussed above.
Pretax net investment income increased $3,089,000 in the first
six months of 1997, compared to 1996, while after-tax net
investment income increased to $16,254,000 from $14,405,000 for
the same period. 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, for the first six
months of 1997 remained constant at approximately five percent.
After-tax realized investment gains in the first six months of
1997 and 1996 were $3,221,000 and $2,333,000, respectively. The
after-tax realized investment gain for the first six months of
1997 and 1996 include the effects of a $104,000 and $282,000,
respectively, after-tax, permanent investment impairment recorded
by the Company. The increase in after-tax realized investment
gains was attributable primarily to sales from the Company's
equity portfolio. During the first six months of 1997, 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 83% and 85% of the portfolio as of June 30, 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 ten
years. The unrealized investment gains on fixed maturities
available for sale and on equity securities as of June 30, 1997,
were $8,688,000 and $25,120,000, 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. The increase in
unrealized gains on the fixed portfolio was due mostly to the
rise in our high yield securities which we have strategically,
but conservatively positioned in our fixed portfolio to take
advantage of higher yields. 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
$47,555,000 as of June 30, 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 as of June
30, 1997 and December 31, 1996 were approximately eight percent
of total invested assets. Total investments held by the Company
include highly rated fixed maturities (rated AAA or AA) of 46% at
June 30, 1997, and 50% at December 31, 1996. The Company
continues to maintain a low level of real estate related
investments, consisting primarily of federal agency mortgage
pools.
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
Results for the Quarters Ended June 30, 1997 and June 30, 1996
Gross premiums written and GAAP combined ratios by operating
unit, for the quarters ended June 30, 1997 and 1996, are
summarized below:
Three Months Ended
June 30,
1997 1996
-------- --------
(Dollars in thousands)
Personal Lines:
Gross premiums written $ 82,963 $ 61,962
GAAP combined ratio 94.7% 98.8%
Commercial Lines:
Gross premiums written $ 45,814 $ 53,179
GAAP combined ratio 104.6% 102.4%
Collateral Protection:
Gross premiums written $ 21,478 $ 18,202
GAAP combined ratio 97.7% 96.3%
Total:
Gross premiums written $150,255 $133,343
GAAP combined ratio 97.8% 99.6%
Personal lines gross premiums written increased 34% for the
second quarter of 1997, compared to the second quarter of 1996.
The increase in gross premiums written was due principally to
premium generated from the state of California, an increase of
86%, as discussed above, as well as from the states of Colorado
and Oregon, an increase of 45% and 30%, respectively. The 4.1
point decrease in the GAAP combined ratio was caused by the
improved loss and expense ratios, which were impacted by the
growth in premium production, and the operating efficiencies of
the recently combined personal lines operations, as discussed
above.
The commercial lines gross premiums written decreased 14% for
the second quarter of 1997, compared to the second quarter of
1996. The decrease was primarily as a result of a 20% decrease in
premiums in the commercial nonstandard division, partially offset
by a nine percent increase in the commercial standard division.
The commercial lines GAAP combined ratio increased 2.2 points for
the second quarter of 1997, compared to the second quarter of
1996, and was primarily caused by an increase in the expense
ratio resulting from the lower level of premium production.
The collateral protection unit's gross premiums written
increased 18% for the second quarter of 1997, compared to the
second quarter of 1996, due to its mortgage fire and new
mechanical breakdown programs. The mortgage fire program's gross
written premiums increased 185% for the second quarter of 1997,
compared to the same period in 1996, while the mechanical
breakdown program's gross premiums written for the second quarter
of 1997 were $2,514,000. The unit's GAAP combined ratio
increased 1.4 points for the three month period ended June 30,
1997, compared to the same period in the prior year. The
increase in the GAAP combined ratio resulted from a 8.3 points
increase in the loss ratio, which was offset proportionately by a
6.9 points decrease in the expense ratio. The higher loss ratio
and lower expense ratio for the second quarter of 1997 is
primarily due to adverse development related to the Northeast
blanket vendor single interest program, which is partially offset
by lower agency contingent commissions.
Liquidity and Capital Resources
Positive cash flow from operations of $18,834,000 was generated
for the first six months of 1997 compared to $18,186,000 for the
first six months of 1996. The operating cash flow remained
relatively constant and was primarily the result of a combination
of higher premiums, mainly from the personal lines unit, and net
investment income collected. This was offset mainly by the
commercial lines loss and loss adjustment expense payments not
declining in proportion to the decline in commercial premium
and higher acquisition expenses related to premium production.
In addition, 1997 cash flow from operations was adversely
impacted by the higher level of
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
federal incomes taxes paid in the first six months of 1997 as
compared to the same period in 1996. An overpayment in 1995
reduced taxes paid in 1996 to nearly zero.
Net cash used in investing activities was $11,588,000 for the
first six months of 1997, compared to $4,264,000 for the first
six months of 1996. The increase in funds used in investing
activities in 1997 was related primarily to increases in fixed
maturities, equity securities and long term investments. These
increased investment acquisitions were partially offset by cash
proceeds received from maturities of short term investments, as
well as sales of equity and fixed maturity securities.
Cash used in financing activities was $3,130,000 and $4,625,000
for the first six months of 1997 and 1996, respectively. During
the first six months of 1997, the Company made $375,000 in
principal payments on its 6.5% term loan compared to $938,000 in
the same period last year. As of June 30, 1997, the Company had
$10,000,000 of funds available under its reducing, revolving
credit facility. For the first six months of 1997 the Company
received proceeds of $995,000 from the exercise of stock options
as compared to $54,000 for the same period in 1996. The Company
declared and paid a regular quarterly dividend of $.125 a share
in the first two quarters of 1997 and 1996.
The Company's level of short-term investments was 14.2% of
total invested assets at both June 30, 1997 and December 31,
1996. Overall, the Company maintains sufficient liquidity in its
investment portfolio through its short-term investment holdings
to meet operating cash payment requirements.
In the second quarter of 1997, Fred T. Roberts, Senior Vice
President and President of the Commercial Lines Unit since
November 1995, announced his pending retirement at the end of
1997.
Forward Looking Statements
Some of the statements made in the Form 10-Q Report, as well as
statements made by the Company in periodic press releases, total
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 of achievements expressed or
implied by the forward-looking statements. Such factors include,
among the 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 application 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.
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is routinely engaged in litigation incidental to
its business. In June 1997, the three outstanding lawsuits
related to the Orion Tender Offer were settled and dismissed.
In the judgment of the Company's management, the costs incurred
to defend and settle these complaints did not have a materially
adverse effect on the results of the Company's operations. The
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
June 30, 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
At the Annual Meeting of Shareholders held on May 13, 1997,
14,975,497 shares of Guaranty National Corporation's ("Guaranty")
Common Stock were outstanding and entitled to vote (the
"Outstanding Common Stock"), and a quorum of 13,345,703 shares of
the Outstanding Common Stock or 89.1% were represented at the
meeting in person or by proxy. At that meeting, the following
nominees were elected as the Board of Directors of Guaranty:
Number of Shares Number of Shares
Voted For Withheld
---------------- ----------------
W. Marston Becker 13,334,902 10,801
Alan R. Gruber (see below) 13,334,052 11,651
Vincent T. Papa 13,334,231 11,472
Robert B. Sanborn 13,334,902 10,801
William J. Shepherd 13,334,802 10,901
Roger B. Ware 13,334,902 10,801
Richard R. Thomas 13,334,902 10,801
Dennis J. Lacey 13,335,975 9,728
M. Ann Padilla 13,334,581 11,122
Tucker Hart Adams 13,333,731 11,972
James R. Pouliot 13,334,902 10,801
Consequently, all directors received the affirmative vote of at
least 13,333,731 shares, or 89.0%, of the Outstanding Common
Stock (99.9% of the shares voted at the meeting). The
appointment of Deloitte & Touche LLP as the auditors of Guaranty
for 1997 was ratified by the affirmative vote of 12,460,621
shares, or 83.2%, of the Outstanding Common Stock (93.4% of the
shares voted at the meeting), with 830,315 shares voting against
the proposal and 2,440 shares abstaining. The Guaranty National
Corporation Equity Incentive Plan was ratified by the affirmative
vote of 13,337,603 shares or 89.1%, of the Outstanding Common
Stock (99.9% of the shares voted at the meeting), with 8,100
shares voting against the proposal and no shares abstaining.
There were no "broker non-votes" on either of the three
proposals.
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
Alan R. Gruber passed away in April 1997, shortly before the
Annual Meeting of Stockholders. The Company has no present plans
to fill the resulting vacancy on the Board.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.2 Property First Catastrophe Excess of Loss
Contract, effective January 1, 1997, issued to
Guaranty National Insurance Company, Colorado Casualty
Insurance Company, Peak Property and Casualty
Insurance Corporation, Guaranty National Insurance
Company of California, Landmark American Insurance
Company, Viking Insurance Company of Wisconsin,
Viking County Mutual Insurance Company by
Towers Perrin Reinsurance.
10.3 Property Second Catastrophe Excess of Loss
Contract, effective January 1, 1997, issued to
Guaranty National Insurance Company, Colorado Casualty
Insurance Company, Peak Property and Casualty Insurance
Corporation, Guaranty National Insurance Company of
California, Landmark American Insurance Company, Viking
Insurance Company of Wisconsin, Viking County Mutual
Insurance Company by Towers Perrin Reinsurance.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Registrant
during the quarter.
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
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 NationalCorporation
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: August 4, 1997