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 September 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 November 3, 1997 there were 15,062,933 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 September 30, 1997
Page
Number
PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at
September 30, 1997 and December 31, 1996 3
Consolidated Statements of Earnings
for the nine months and three months
ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows
for the nine months ended
September 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 16
SIGNATURES 17
PART I - FINANCIAL INFORMATION
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
Investments:
Fixed maturities held to maturity, at cost $ 74,262 $ 80,271
Fixed maturities available for sale,
at market 426,259 390,290
---------- --------
500,521 470,561
Common stocks, at market 77,178 59,415
Non-redeemable preferred stocks, at market 46,372 28,687
Other long-term investments 16,894 13,585
Short-term investments 103,097 94,993
---------- --------
Total investments 744,062 667,241
Cash 2,849 3,988
Accrued investment income 7,658 7,971
Accounts receivable,
(less allowance of $171 - 1997 and 1996) 58,384 45,557
Reinsurance recoverables and prepaids,
(less allowance of $200 - 1997 and 1996) 92,565 90,781
Property and equipment, (less accumulated
depreciation of $16,209 - 1997; $13,508 - 1996) 28,753 29,833
Deferred policy acquisition costs 48,538 44,456
Goodwill, (less accumulated amortization of
$7,262 - 1997; $6,423 - 1996) 33,800 34,639
Other assets 2,806 4,626
---------- --------
Total assets $1,019,415 $929,092
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses $ 300,043 $303,266
Unpaid loss adjustment expenses 76,169 65,142
Unearned premiums 172,771 154,242
Notes payable 101,125 101,688
Reinsurance payables and deposits 11,506 7,268
Deferred income taxes 10,986 803
Other liabilities 68,165 58,644
---------- --------
Total liabilities 740,765 691,053
---------- --------
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 15,054,433 shares - 1997
and 14,975,497 shares - 1996 15,054 14,975
Capital in excess of par 122,632 121,272
Retained earnings 109,075 84,685
Net unrealized investment gains 31,889 17,107
---------- --------
Total shareholders' equity 278,650 238,039
---------- --------
Total liabilities and shareholders' equity $1,019,415 $929,092
========== ========
See notes to consolidated financial statements.
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
Nine Months Ended Three Months Ended
September 30, September 30,
1997 1996 1997 1996
-------- -------- -------- --------
(Unaudited) (Unaudited)
Revenue:
Premiums earned $403,354 $356,740 $140,082 $122,321
Net investment income 31,698 28,418 10,090 9,899
Realized investment gains 8,376 5,494 3,421 1,905
-------- -------- -------- --------
443,428 390,652 153,593 134,125
-------- -------- -------- --------
Expenses:
Losses and loss adjustment
expenses incurred 280,916 253,370 97,790 84,863
Policy acquisition costs 105,871 96,765 36,535 36,205
General and administrative 9,230 7,477 2,703 552
Interest 4,960 5,123 1,653 1,720
Other 1,046 1,166 357 383
Nonrecurring tender offer charge 2,163
-------- -------- -------- --------
402,023 366,064 139,038 123,723
-------- -------- -------- --------
Earnings before income taxes 41,405 24,588 14,555 10,402
Income taxes 11,385 6,055 3,995 2,881
-------- -------- -------- --------
Net earnings $ 30,020 $ 18,533 $ 10,560 $ 7,521
======== ======== ======== ========
Earnings per common share $ 1.98 $ 1.24 $ 0.69 $ 0.50
======== ======== ======== ========
Dividends per common share $ 0.375 $ 0.375 $ 0.125 $ 0.125
======== ======== ======== ========
See notes to consolidated financial statements.
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
September 30,
1997 1996
-------- --------
(Unaudited)
Operating Activities:
Premiums collected $413,082 $372,512
Net investment income collected 28,596 28,000
Losses and loss adjustment expenses paid (274,068) (252,435)
Policy acquisition costs and general and
administrative expenses paid (112,512) (109,456)
Interest paid (4,908) (5,036)
Federal income taxes paid (10,547) ( 7)
Nonrecurring tender offer charge (1,199)
Other receipts 412 3,681
-------- --------
Net cash provided by operating activities 40,055 36,060
-------- --------
Investing Activities:
Maturities of fixed maturities
held to maturity 4,131 7,635
Maturities of fixed maturities
available for sale 52,776 36,403
Sales of fixed maturities
available for sale 55,148 40,284
Sales of equity securities 33,419 29,758
Sales of property and equipment 256 290
Redemption of mortgage loans 681
Net change in short-term investments (8,048) (35,336)
Purchases of fixed maturities
held to maturity ( 20,780)
Purchases of fixed maturities
available for sale (126,724) (58,826)
Purchases of equity securities (43,575) (23,852)
Net change in other long-term investments (1,127) (668)
Purchases of property and equipment (2,557) (2,926)
-------- --------
Net cash used in investing activities (36,301) (27,337)
-------- --------
Financing Activities:
Repayment of notes payable (563) (1,125)
Dividends paid (5,630) (5,613)
Proceeds from exercise of stock options 1,300 54
-------- --------
Net cash used in financing activities (4,893) (6,684)
-------- --------
Net (Decrease) Increase in Cash (1,139) 2,039
Cash, Beginning of Period 3,988 6,794
-------- --------
Cash, End of Period $ 2,849 $ 8,833
======== ========
See notes to consolidated financial statements.
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Nine and Three Months Ended September 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 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 nine months ended September 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
15,129,510 and 14,970,580 for the nine months ended September 30,
1997 and 1996, and 15,248,913 and 14,977,140 for the three months
ended September 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 material effect on earnings per
share for September 30, 1997 and 1996.
NOTE 3 - INVESTMENTS
At September 30, 1997 and December 31, 1996, the estimated
aggregate fair value of fixed maturities held to maturity was
$75,814,000 and $81,430,000, respectively, the cost of fixed
maturities available for sale was $410,308,000 and $382,415,000,
respectively, and the cost of equity securities was $90,441,000
and $69,658,000, respectively. At September 30, 1997 and
December 31, 1996, the Company had investments in non-investment
grade securities with a cost of $58,714,000 and $55,205,000,
which are carried at fair values of $61,483,000 and $56,477,000,
respectively.
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Nine and Three Months Ended September 30, 1997
Realized investment gains (losses), which include gains
(losses) on calls and maturities of fixed maturities, for the
nine and three months ended September 30, 1997 and 1996, and
write downs for other-than-temporary investment impairments of
approximately $160,000 for the nine months ended September 30,
1997, and approximately $434,000 for the nine months ended
September 30, 1996, are as follows (in thousands):
Nine Months Ended Three Months Ended
September 30, 1997 September 30, 1997
------------------ ------------------
Fixed maturities
available for sale:
Gains $1,675 $ 621
Losses (740) (128)
------ ------
935 493
------ ------
Equity securities:
Gains 9,044 3,350
Losses (1,603) (422)
------ ------
7,441 2,928
------ ------
Total $8,376 $3,421
====== ======
Nine Months Ended Three Months Ended
September 30, 1996 September 30, 1996
------------------ ------------------
Fixed maturities
available for sale:
Gains $1,485 $ 537
Losses (788) (585)
------ ------
697 (48)
------ ------
Equity securities:
Gains 6,415 2,367
Losses (1,618) (414)
------ ------
4,797 1,953
------ ------
Total $5,494 $1,905
====== ======
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. The primary reinsurance contract for 1997
is with General Reinsurance Corporation ("GRC"), and 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. 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.
The GRC contract will terminate December 31, 1997. The Company
has made a decision to replace GRC with American Re-Insurance
Company. The new agreement, which is subject to annual
renegotiation of terms, will give the Company more coverage at a
lower cost than the current treaty, though the Company will be
increasing certain retentions on both the individual and catastrophe
losses.
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Nine and Three Months Ended September 30, 1997
Premiums, losses, and loss adjustment expenses, including the
effect of reinsurance, are comprised of (in thousands):
Nine Months Ended September 30, Three Months Ended September 30,
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
Written Earned Written Earned Written Earned Written Earned
------- ------ ------- ------ ------- ------ ------- ------
Premiums:
Direct $421,690 $405,765 $373,079 $365,259 $145,577 $140,320 $125,687 $125,017
Assumed 31,981 29,129 32,905 27,546 10,164 9,802 9,915 8,270
Ceded (29,938) (31,540) (37,325) (36,065) (10,210) (10,040) (11,298) (10,966)
-------- -------- -------- -------- -------- -------- -------- --------
Net $423,733 $403,354 $368,659 $356,740 $145,531 $140,082 $124,304 $122,321
======== ======== ======== ======== ======== ======== ======== ========
% Assumed
to Net 7.55% 8.93% 6.98% 7.98%
======== ======== ======= ========
Incurred Incurred Incurred Incurred
-------- -------- -------- --------
Losses and loss
adjustment
expenses:
Direct $288,374 $257,403 $110,160 $ 94,128
Assumed 19,282 19,466 (86) (630)
Ceded (26,740) (23,499) (12,284) (8,635)
-------- -------- -------- --------
Net $280,916 $253,370 $ 97,790 $ 84,863
======== ======== ======== ========
NOTE 5 - COMMITMENTS AND CONTINGENCIES
On September 18, 1997, Orion Capital Corporation ("Orion")
commenced a tender offer (the "Offer") to purchase the approximately
2,900,000 outstanding shares of the Company's common stock not now
owned by Orion and its affiliates. The Offer contemplated a price
of $34.00 per share, consisting of $27.20 in cash and the balance
in Orion common stock. At the time the Offer was made, Orion owned
80.6 percent of the Company's outstanding common stock. On
October 31, 1997, Orion Capital Corporation and the
Company's Boards of Directors approved an agreement providing for
the merger of the Company into a wholly-owned subsidiary of
Orion. Under the agreement, the merger will take place following
the completion of the Offer for $36 per share in cash. The
Company's Board approved this transaction following a
recommendation by a committee consisting of its independent
directors. It is currently expected that the Offer will
expire during the first week of December 1997, unless extended.
The registration statement Orion filed with the U. S. Securities
and Exchange Commission on September 22, 1997, with
respect to an exchange offer to acquire the Company's outstanding
shares for $34 per share in cash and Orion common stock will be
withdrawn as a result of this agreement.
Additionally, on September 18, 1997, a complaint naming Orion,
the Company and the Company's Directors, as defendants, was
filed on behalf of the Company's shareholders in connection with
the Offer. The Company expects to respond to this
complaint promptly after the Offer commences.
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.
GUARANTY NATIONAL CORPORATION AND SUBSIDIAIRES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Nine and Three Months Ended September 30, 1997
In addition to the complaint 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.
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.
NOTE 7 - SUBSEQUENT EVENTS
On October 20, 1997, the Company announced plans to purchase
Unisun Insurance Company ("Unisun") from Michigan Mutual Insurance
Company for $26 million. Unisun, which is primarily a personal
lines company, is headquartered in Charleston, South Carolina.
Unisun also writes commercial multi-lines, home owners protection
and flood insurance under the U. S. Government insured Write Your
Own program. The Company expects the transaction to be
completed by year-end following appropriate approvals by
regulatory authorities.
On October 31, 1997, the Company sold its office building in
Madison, Wisconsin for approximately $4,400,000 and will
temporarily lease back about 35,000 square feet. This leaseback
will expire on April 30, 1998, with three 30-day extensions
available, if needed. During 1998, management intends to relocate
to leased space in a building currently under construction for
five years at a rental of approximately $500,000 annually.
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results for the First Nine Months of 1997 Compared to the First
Nine 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 nine months ended September 30,
1997 and 1996 are summarized below:
Nine Months Ended
September 30,
1997 1996
-------- --------
(Dollars in thousands)
Personal Lines:
Gross premiums written $250,377 $192,629
GAAP combined ratio 95.1% 98.5%
Commercial Lines:
Gross premiums written $134,917 $156,254
GAAP combined ratio 105.0% 104.2%
Collateral Protection:
Gross premiums written $ 68,377 $ 57,101
GAAP combined ratio 98.0% 97.0%
Total:
Gross premiums written $453,671 $405,984
GAAP combined ratio 98.2% 100.2%
The personal lines gross premiums written increased 30% for the
first nine months of 1997 compared to the first nine 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 nine months gross premiums written in the
state of California were $116.0 million compared to $63.0 million
for the same period in 1996, representing 46% of total personal
lines premiums for the nine months ended September 30, 1997. In
addition, 17 of the 27 other states in which personal lines
markets had growth in premium production for the first nine
months of 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, but instead is
encountering above average retention rates on the new business.
In addition, any new business generally has a higher loss ratio
than seasoned business due to higher frequency of claims.
Accordingly, 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 unit loss ratio (incurred losses and loss
adjustment expense) for the first nine months of 1997 was 70.9%
compared to 72.8% for the first nine months of 1996. The
incurred loss component decreased 3.2 points and the loss
adjustment expense component increased 1.3 points from the prior
year. The lower incurred loss component resulted primarily from
lower claim frequency, as well as incurred but not reported
losses being lower than expected. The increase in the loss
adjustment expense component is due to this unit's continued
emphasis on improving claim handling and on reducing insurance
fraud, which resulted in higher legal expenses.
The personal lines expense ratio was 24.2% for the first nine
months of 1997 compared to 25.7% for the first nine 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 concentration of one-month product business
in the state of California, which has a lower overall agent
commission rate.
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
For the first nine months of 1997, commercial lines gross
premiums written decreased 14%, compared to the first nine months
of 1996. The decrease was primarily the result of a 20%
decrease in premiums in the commercial nonstandard division,
partially offset by an 11% increase in the commercial standard
division. The majority of the decrease is due to the commercial
nonstandard division's maintenance of 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 nine months
of 1997 in existing offices compared to the same period in 1996.
The commercial lines loss ratio for the first nine months of
1997 was 70.0% compared to 71.4% for the same period last year.
The incurred loss component decreased by 2.2 points, while the
loss adjustment expense component increased by 0.8 points. The
improvement in the incurred loss component was principally caused
by lower claim frequency and the underwriting actions mentioned
above. The increase in the loss adjustment expenses component is
due to higher estimates of loss adjustment expenses on
general liability claims, which are needed to cover high
litigation costs on this line of business.
The commercial lines expense ratio increased to 35.0% for the
first nine months of 1997, compared to 32.8% for the first nine
months of 1996, due mainly to a decrease in net premiums
written occurring faster than direct underwriting expenses, such
as salaries and related benefits, were reduced. This also reflects
the Company's investment in agency interface and product management.
The collateral protection unit's gross premiums written
increased 20% for the first nine months of 1997 compared to the
first nine 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 nine months of 1997 were $9,995,000 as compared to
gross premiums in the first nine months of 1996 of $4,251,000.
The mechanical breakdown program's gross premiums written for the
first nine months of 1997 were $6,219,000.
The collateral protection unit's loss ratio increased 1.4
points to 63.8% for the first nine months of 1997 compared to the
first nine months of 1996. The incurred loss component increased
by 1.6 points, while the loss adjustment expense component
decreased by 0.2 points. This is primarily due to adverse
development related to the Northeast blanket vendor single
interest business written during 1996, offset by the mortgage
fire program having a lower loss ratio compared to other business
the unit writes.
The unit's expense ratio decreased to 34.2% for the first nine
months of 1997 compared to 34.6% for the first nine months of
1996. The improved expense ratio primarily relates to lower
agency contingent commissions, which have been proportionately
reduced by the increased loss ratio, discussed above. In
addition, during the third quarter mechanical breakdown had a one-
time charge for settlement of a lawsuit and related legal fees.
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 for 1997 is with General Reinsurance
Corporation ("GRC"), and 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 GRC contract will terminate December 31, 1997. The Company
has made a decision to replace GRC with American Re-Insurance
Company. The new agreement, which is subject to annual renegotiation
of terms, will give the Company more coverage at a lower cost than
the current treaty, though the Company will be increasing certain
retentions on both the individual and catastrophe losses. On a
comparable basis, the Company estimates that the savings will be
approximately 25%, or 30 cents per share, net of tax, from the
reinsurance treaty charge incurred in 1997.
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
The Company's insurance operating units in total showed
$2,810,000 of adverse development on 1996 and prior loss
reserves, net of reinsurance, in the first nine months of 1997.
This compares to $789,000 of adverse development in the first
nine months of 1996 on 1995 and prior loss reserves, net of
reinsurance. The development equates to 1.0% and 0.3% of net
loss reserves at December 31, 1996 and 1995, respectively. The
commercial lines unit had adverse development of $2,597,000 due
primarily to allocated loss adjustment expense costs emerging
higher than expected and more significantly a strengthening of
reserves intended to reduce future adverse development. The
collateral protection unit had adverse development of $2,525,000
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
$2,312,000, which is mainly attributable to lower estimates of
future claim payments on prior accident year losses.
During the first nine 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 it does not have a material exposure to
environmental losses. For the nine month period ended
September 30, 1997, the Company's catastrophe losses
amounted to approximately $851,000, or six cents per share, net
of tax and reinsurance recoveries. This compares to catastrophe
losses of $1,286,000, or nine cents per share, net of tax and
reinsurance recoveries, during the nine month period ended
September 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.
On September 18, 1997, Orion Capital Corporation ("Orion")
commenced a tender offer (the "Offer") to purchase the
approximately 2,900,000 outstanding shares of the Company's
common stock not now owned by Orion and its affiliates. The
Offer contemplated a price of $34.00 per share, consisting $27.20
in cash and the balance in Orion common stock. On October 31,
1997, Orion Capital Corporation and the Company's Boards of
Directors approved an agreement providing for the merger of the
Company into a wholly-owned subsidiary of Orion, following the
completion of the Offer, which has been increased to $36 per share
in cash. The Company's Board approved this transaction following
a recommendation by a committee consisting of its independent
directors. It is currently expected that the Offer will
expire during the first week of December 1997, unless extended.
The registration statement Orion filed with the U. S. Securities
and Exchange Commission on September 22, 1997, with
respect to an exchange offer to acquire the Company's outstanding
shares for $34 per share in cash and Orion common stock will be
withdrawn as a result of this agreement.
On September 18, 1997, a complaint naming Orion, the Company
and the Company's Directors, as defendants, was filed on behalf
of the Company's shareholders in connection with the Offer. See
Note 5 to the Consolidated Financial Statements for
more discussion related to this complaint.
Overall, the Company's net earnings increased $11,487,000, to
$30,020,000 during the first nine months of 1997 when compared to
the first nine months of 1996. Net earnings per common share
were $1.98 as of September 30, 1997, versus $1.24 per common
share as of September 30, 1996. Net earnings increased 62%
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 $3,280,000 in the first
nine months of 1997 compared to 1996, while after-tax net
investment income increased to $23,950,000 from $22,006,000 for
the same periods. 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 nine
months of 1997 remained constant at approximately five percent.
After-tax realized investment gains in the first nine months of
1997 and 1996 were $5,444,000 and $3,571,000, respectively. The
after-tax realized investment gains for the first nine 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 nine 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 81% and 85% of the portfolio as of September 30, 1997
and December 31, 1996, respectively.
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
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 September 30,
1997, were $15,951,000 and $33,109,000, respectively. The
unrealized investment gains on fixed maturities available for
sale and on equity securities as of December 31, 1996 were
$7,875,000 and $18,444,000, respectively. The increase in
unrealized gains on the fixed portfolio was due mostly to the
rise in value of our investment grade securities. Stable
interest rates have increased the value of our investment grade
fixed 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 $60,442,000 as of
September 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
September 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 44% at September 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.
Results for the Quarters Ended September 30, 1997 and September 30, 1996
Gross premiums written and GAAP combined ratios by operating
unit, for the quarters ended September 30, 1997 and 1996, are
summarized below:
Three Months Ended
September 30,
1997 1996
-------- --------
(Dollars in thousands)
Personal Lines:
Gross premiums written $ 84,693 $ 65,385
GAAP combined ratio 94.1% 96.0%
Commercial Lines:
Gross premiums written $ 46,805 $ 51,111
GAAP combined ratio 105.6% 105.8%
Collateral Protection:
Gross premiums written $ 24,243 $ 19,106
GAAP combined ratio 99.1% 97.1%
Total:
Gross premiums written $155,741 $135,602
GAAP combined ratio 97.9% 99.4%
The personal lines unit gross premiums written increased 30%
for the third quarter of 1997, compared to the third quarter of
1996. The increase in gross premiums written was due principally
to premium generated from the state of California, an increase of
71%, as discussed above, as well as from the states of Colorado
and Oregon, an increase of 15% and 26%, respectively. The 1.9
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 unit gross premiums written decreased by
eight percent during the third quarter of 1997, compared to the
third quarter of 1996. The decrease was primarily as a result of
a 13% decrease in premiums in the commercial nonstandard
division, partially offset by a 10% increase in the commercial
standard division. The commercial lines GAAP combined ratio
improved slightly for the third quarter of 1997, compared to the
third quarter of 1996, which is the result of a lower loss ratio
partially offset by a higher expense ratio.
The collateral protection unit's gross premiums written
increased 27% for the third quarter of 1997, compared to the
third quarter of 1996 due to its mortgage fire, physical damage
and new mechanical breakdown programs. The
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
mortgage fire program's gross premiums written increased 230% for
the third quarter of 1997, compared to the same period in 1996,
while the mechanical breakdown program's gross premiums written
for the third quarter of 1997 were $2,511,000. In addition, the
unit's physical damage program's gross premiums written increased
125% for the third quarter of 1997, compared to the same period
in 1996. The unit's GAAP combined ratio increased 2.0 points for
the three month period ended September 30, 1997, compared to the
same period in the prior year. The increase in the GAAP combined
ratio resulted from a 7.0 point increase in the loss ratio, which
was offset proportionately by a 5.0 point decrease in the expense
ratio. The higher loss ratio and lower expense ratio for the
third 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,
and a one-time charge for settlement of a lawsuit and related
legal fees for mechanical breakdown.
Liquidity and Capital Resources
Positive cash flow from operations of $40,055,000 was generated
for the first nine months of 1997 compared to $36,060,000 for the
first nine months of 1996. The $3,995,000 increase in operating
cash flow was primarily the result of higher premiums written,
mainly from the personal lines, and net investment income
collected. This was offset mainly by commercial lines
loss and loss adjustment expenses payments which did not decline
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 federal incomes taxes paid in the
first nine 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 $36,301,000 and
$27,337,000 for the first nine months of 1997 and 1996,
respectively. The increase in funds used in investing activities
in 1997 was related primarily to increases in fixed maturities
and equity securities. These increased investment acquisitions
were partially offset by cash proceeds received from maturities
of short term investments and fixed maturity securities, as well
as sales of equity and fixed maturity securities.
Net cash used in financing was $4,893,000 for the first nine
months of 1997, compared to $6,684,000 for the first nine months
of 1996. During the first nine months of 1997, the Company made
$563,000 in principal payments on its 6.5% term loan compared to
$1,125,000 in the same period last year. As of September 30,
1997, the Company had $10,000,000 of funds available under its
reducing, revolving credit facility. For the first
nine months of 1997 the Company received proceeds of $1,300,000
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 three quarters
of 1997 and 1996.
The Company's level of short-term investments at September 30,
1997 and December 31, 1996 was 13.9% and 14.2% of total invested
assets, respectively. Overall, the Company maintains sufficient
liquidity in its investment portfolio through its short-term
investment holdings to meet operating cash 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 retirement at the end of 1997.
During the third quarter, the Company announced that John W.
Mahoney will join the Company in the fourth quarter as senior
vice president/president-elect of nonstandard commercial lines to
replace Mr. Roberts. Mr. Mahoney comes to the Company from ERC
Specialty/Coregis Insurance Group, a subsidiary of GE Capital,
where he was a director of programs. Mr. Mahoney will be
responsible for all nonstandard commercial business, while Jim
Morey, President of Colorado Casualty Insurance Company will
continue to be responsible for all standard commercial business.
On October 20, 1997, the Company announced plans to purchase
Unisun Insurance Company ("Unisun") from Michigan Mutual Insurance
Company for $26 million. Unisun, which is primarily a personal
lines company, is headquartered in Charleston, South Carolina.
Unisun also writes commercial multi-lines, home owners protection
and flood insurance under the U. S. Government insured Write Your
Own program. The Company expects the transaction to be
completed by year-end following appropriate approvals by
regulatory authorities.
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
The Company continues to actively seek other acquisition
candidates and is currently having discussions with several
companies concerning their nonstandard automobile insurance
operations. The Company can not predict whether any of these
discussions will result in a transaction.
On October 31, 1997, the Company sold its office building in
Madison, Wisconsin for approximately $4,400,000 and will
temporarily lease back about 35,000 square feet. During 1998,
management intends to relocate to leased space in a building
currently under construction for five years at a rental of
approximately $500,000 annually.
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, and
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; (x) whether the Company will
be successful in receiving approval of its purchase of Unisun
Insurance Company and if approved whether the transaction will be
accretive to earnings; (xi) whether future acquisitions will be
made and their effect on the Company's financial results; and
(xii) 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. At September 30, 1997, there was one lawsuit
outstanding, which was related to the 1997 Orion Offer. In the
judgment of the Company's management, at September 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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.4 Stock Purchase Agreement by and between Guaranty
National Insurance Company, Guaranty National Corporation
and Michigan Mutual Insurance Company, signed
October 20, 1997.
(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 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: November 3, 1997