GORAN CAPITAL INC.
2000 Annual Report
Corporate Profile
Goran Capital Inc. ("Goran") owns subsidiaries engaged in a number of business
activities. The most important of these is the property and casualty insurance
business conducted in 20 U.S. states, Canada and Barbados, on both a direct and
reinsurance basis through a number of subsidiaries collectively referred to in
this report as Goran. Goran owns 73.0% of Symons International Group, Inc.
("SIG") which trades on the OTC Bulletin Board under the symbol "SIGC.OB". SIG
owns insurance companies principally in the nonstandard automobile insurance
market. Superior Insurance Company of Tampa, Florida; Pafco General Insurance
Company of Indianapolis, Indiana, and IGF Insurance Company of Indianapolis,
Indiana underwrite nonstandard automobile insurance in the United States.
Nonstandard automobile insurance is marketed and sold through independent agents
to drivers who are unable to obtain coverage from insurers at standard or
preferred rates.
As previously announced, the Company is currently pursuing the sale of its crop
insurance operations. Management expects to complete the sale during the second
quarter of 2001. The financial statements included in this report reflect the
results of the crop insurance segment as "discontinued operations".
Granite Reinsurance Company Ltd. underwrites finite (limited risk) reinsurance
in Bermuda, the United States and Canada.
The common stock of Goran trades on The Toronto Stock Exchange under the symbol
"GNC" and the OTC Bulletin Board under the symbol "GNCNF.OB".
All dollar amounts shown in this report are in U.S. currency unless otherwise
indicated. The conversion rates between U.S. and Canadian dollars for
transactions occurring during the year 2000 was 1.4853 and for balances as of
December 31, 2000 the rate is 1.4988.
Table of Contents Page
Financial Highlights 2
President's Report 4
Selected Financial Data 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Consolidated Financial Statements 17
Notes to Cosnolidated Financial Statements 21
Report of Independent Accountants 45
Stockholder Information 46
Board of Directors and Executive Officers 47
Subsidiaries and Brach Offices 49
Financial Highlights (1) (in thousands, except per share data) For the years
ended December 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Gross premiums written $182,099 $236,401 $303,745 $322,581 $189,317
Net operating earnings (loss) from continuing
operations (2) $(12,417) $(49,883) $471 $11,680 $12,756
Net earnings (loss) from discontinued operations $(17,041) $(15,373) $(9,421) $10,015 $10,495
Net earnings (loss) $(80,265) $(62,373) $(11,936) $12,438 $31,296
Basic operating earnings (loss) per share from
continuing operations (2) $(2.13) $(8.49) $0.08 $2.09 $2.41
Basic earnings (loss) per share from
discontinued operations $(2.93) $(2.61) $(1.61) $1.79 $1.99
Basic earnings (loss) per share $(13.79) $(10.61) $(2.04) $2.22 $5.92
Stockholders' equity (deficit) $(72,668) $(12,887) $49,725 $60,332 $47,258
Return on average equity (3) N/A N/A (21.7%) 23.1% 104.3%
Book value (deficit) per share $(12.48) $(2.19) $8.51 $10.79 $8.94
Market Value per share $0.34 $2.00 $10.38 $29.41 $20.08
Weighted average outstanding shares - basic 5,822 5,876 5,841 5,591 5,286
1) The financial statements of the Company have been prepared in accordance with
Canadian GAAP presented in U.S. dollars.
2) Operating earnings and per share amounts exclude amortization, interest,
taxes, realized capital gains and losses, minority interest, and any
extraordinary items.
3) Return on average equity cannot be calculated due to the accumulated deficit
in stockholders' equity in 2000 and 1999.
CORPORATE STRUCTURE
Goran Capital Inc.
Toronto, Ontario
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73% Owned 100% Owned 100% Owned 100% Owned
Symons International Granite Reinsurance Granite Symons
Group, Inc., Company, Ltd. Insurance International
Indianapolis, Indiana Barbados Company Group, Inc.,
Florida
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IGF Holdings, Inc. Superior Insurance Group Management, Inc.
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IGF Insurance ------------------------------------------------
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Pafco General Superior Insurance
Insurance Company Company
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Superior Guaranty Superior American
Insurance Company Insurance Company
President's Report to our Shareholders
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Dear Fellow Shareholder:
The year 2000 has finally come to a close, from the financial statements that
follow; it is hard to see the major changes that have taken place within our
group. I hope that this letter and the following report will give you some
insight to the going forward operations.
The loss for 2000 included a write down of goodwill of $33.5 million. This
combined with operating losses in the non-standard auto insurance of $29.8
million and crop of $17 million represents the loss of $80.3 million for 2000.
We feel that we have cleaned out the cupboard and it's time to present better
news to our shareholders.
During the last year we replaced the entire senior and middle management of our
non-standard operation, Superior Insurance Group. The new management have
reduced our premium volume by shedding under priced business and poorer
performing agents. The premiums we wrote reduced from $236,401,000 at Dec 31,
1999 to $182,099,000 at Dec. 31, 2000. With reducing volume we needed to cut the
cost of doing business. We closed Tampa's two large offices with staff exceeding
125, consolidated these operations into Atlanta and Indianapolis. Local claim
service helps reduce loss costs, for this reason, we opened claims service
centers with limited staff in Alexandria, VA, Glendale, CA, and are opening one
in Pennsylvania soon. These are in addition to Atlanta and Indianapolis claims
service centers. We reduced full and part time employees from over 541 to about
390. We increased premium rates for our whole book of business by about 14%. The
higher priced business we are writing today will allow us to increase our
premium base and start to re grow the business.
We now operate through independent agents in twenty (20) states, with better
operating systems that have helped to reduce overhead costs. We offer agents
direct access on-line to our policy system and will provide them with point of
sale quoting and binding with on-line real time underwriting in the near future.
The market for non standard and regular auto insurance has improved. Over the
last year the number of suppliers has reduced with those remaining increasing
prices. All automobile insurance companies reported much higher loss costs for
2000. The market is responding finally by tightening up what they will insure.
This moves drivers to our market. Most of the insurance companies have or are
raising rates in response to higher losses. The demand is growing for
non-standard automobile insurance, the higher priced area of automobile
insurance. Growth comes from more jobless people forced into our market as a
result of poor payment habits, standard companies pulling back what they will
insure, but the biggest demand is coming from the children of the baby-boomers.
It will be the biggest source of drivers to the non-standard market in its
history.
In order to be ready to write this profitable business, we needed to look for
capital to deploy into our nonstandard unit. The capital markets are shut to us
for now, so is the debt market. We have reinsurers, which helps us to write over
$100 million of our business, but at a cost. We need to increase the capital of
Superior, and become less dependent on reinsurance. The company has been exposed
to earning volatility from its crop operations, and with limited capital as a
result of past years losses we must reduce this exposure.
For all of these reasons we have chosen to look for a buyer of the assets of our
crop segment. We have recorded the crop insurance business as discontinuing
operations in the following pages and are working with potential buyers to sell
the assets. We will keep IGF Insurance Company for our auto business. We expect
to finalize a transaction in the next few months.
Following a successful sale of IGF assets we will be out of the direct crop
business. Our companies will be a major player in the fast growing, non-standard
automobile insurance market.
Our staff has gone through 2 1/2 years of tough sledding, as have our
shareholders. Our Board of Directors have worked to help management and
shareholders to turn our fortune around. Our heartfelt thanks to all of you!
Yours truly,
Alan G. Symons
President and Chief Executive Officer
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
Years Ended December 31,
OF GORAN CAPITAL INC.
The selected consolidated financial data presented below is derived from the
consolidated financial statements of the Company and its Subsidiaries for the
year ended December 31. This information should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto, included
elsewhere in this Report.
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Consolidated Statement of Operations Data:
(in thousands, except per share amounts and
ratios) (4)
Gross Premiums Written $182,099 $236,401 $303,745 $322,581 $189,317
Net Premiums Earned 145,532 261,800 281,276 255,746 185,870
Fee Income 14,239 15,335 16,431 15,545 7,614
Net Investment Income 12,171 13,125 13,126 12,586 7,564
Income (loss) from Continuing Operations $(63,224) $(47,000) $(2,515) $2,423 $2,632
Income (loss) from Discontinued Operations $(17,041) $(15,373) $(9,421) $10,015 $10,495
NET INCOME (LOSS) $(80,265) $(62,373) $(11,936) $12,438 $31,296
========= ========= ========= ======= =======
Per Common Share Data:
Basic Income (Loss) from Continuing
Operations $(10.86) $(8.00) $(0.43) $0.43 $0.50
Basic Income (loss) from Discontinued
Operations $(2.93) $(2.61) $(1.61) $1.79 $1.99
BASIC NET INCOME (LOSS) $(13.79) $(10.61) $(2.04) $2.22 $5.92
Basic Weighted Average Shares Outstanding 5,822 5,876 5,841 5,591 5,286
GAAP Ratios:
Loss and LAE Ratio (1) 78.2% 92.6% 81.2% 76.0% 71.9%
Expense Ratio (2) 38.7% 31.5% 23.3% 24.3% 25.4%
COMBINED RATIO (3) 116.9% 124.1% 104.5% 100.3% 97.3%
Consolidated Balance Sheet Data:
Investments $148,890 $225,168 $236,144 $231,130 $199,208
Total Assets 440,032 519,922 570,989 560,848 381,342
Losses and LAE 113,149 157,425 140,484 135,087 109,449
Total Long-Term Debt or Preferred Securities 112,000 135,000 135,000 135,000 48,000
Total Shareholders' Equity (Deficit) (72,668) (12,887) 49,725 60,332 47,258
Book Value (Deficit) Per Share $(12.48) $(2.19) $8.51 $10.79 $8.94
(1) Loss and LAE ratio: The ratio of loss and loss adjustment expenses incurred
during the period, as a percentage of premiums earned.
(2) Expense ratio: The ratio of policy acquisition, general and administrative
expenses less billing fees, as a percentage of premiums earned.
(3) Combined ratio: The sum of the loss and LAE ratio plus the expense ratio as
a percentage of premiums earned.
(4) Loss from continuing operations for the year 2000 includes a write-down of
$33.5 million for goodwill. See Note 6 to the consolidated financial statements
for additional information.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
All statements, trend analyses, and other information herein contained relative
to markets for the Company's products and/or trends in the Company's operations
or financial results, as well as other statements including words such as
"anticipate," "could," "feel(s)," "believe," "believes," "plan," "estimate,"
"expect," "should," "intend," "will," and other similar expressions, constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to known and unknown risks,
uncertainties and other factors which may cause actual results to be materially
different from those contemplated by the forward-looking statements. Such
factors include, among other things: (i) general economic conditions, including
prevailing interest rate levels and stock market performance; (ii) factors
affecting the Company's nonstandard automobile operations such as rate increase
approval, policy renewals, new business written, and premium volume; and (iii)
the factors described in this section and elsewhere in this report.
Overview
Goran Capital, Inc. (the "Company" or "Goran") owns insurance companies which
underwrite and market nonstandard private passenger automobile insurance. The
Company's principal insurance company subsidiaries are Pafco General Insurance
Company ("Pafco"), Superior Insurance Company ("Superior") and IGF Insurance
Company ("IGF").
Strategic Alignment
In December 2000, management initiated a strategic review of the Company's
operations. This review resulted in a plan to divest of the Company's crop
insurance segment, allowing management to focus on nonstandard automobile
insurance. (See Note 23 of the financial statements which discusses results of
the discontinued crop segment.) The plan includes a sale of certain revenue
producing assets of the Company's crop segment along with plans to wind-down
remaining crop segment obligations.
Accordingly, financial results of the crop insurance segment are presented as
discontinued operations in the Company's financial statements. Continuing
operations of the Company consists of the single nonstandard automobile
insurance segment. Management believes a transaction to complete the sale of the
crop book of business will be completed in the second quarter of 2001.
Nonstandard Automobile Insurance Operations
Pafco, Superior, Superior Guaranty Insurance Company ("Superior Guaranty"),
Superior American Insurance Company ("Superior American") and IGF Insurance
Company ("IGF"), are engaged in the writing of insurance coverage for automobile
physical damage and liability policies for nonstandard risks. Nonstandard risk
insureds are those individuals who are unable to obtain insurance coverage
through standard market carriers due to factors such as poor premium payment
history, driving experience or violations, particular occupation or type of
vehicle. The Company offers several different policies which are directed
towards different classes of risk within the nonstandard market. Premium rates
for nonstandard risks are higher than for standard risks. Since it can be viewed
as a residual market, the size of the nonstandard private passenger automobile
insurance market changes with the insurance environment and grows when the
standard coverage becomes more restrictive. Nonstandard policies have relatively
short policy periods and low limits of liability. Due to the low limits of
coverage, the period of time that elapses between the occurrence and settlement
of losses under nonstandard policies is shorter than many other types of
insurance. Also, since the nonstandard automobile insurance business typically
experiences lower rates of retention than standard automobile insurance, the
number of new policyholders underwritten by nonstandard automobile insurance
carriers each year is substantially greater than the number of new policyholders
underwritten by standard carriers.
Results of Operations
Overview
2000 Compared to 1999
For the year 2000, the Company reported a loss on continuing operations of
$(63,224,000) or $(10.86) per share (basic and diluted) which includes a
one-time write down of goodwill in the amount of $33,464,000. Loss on continuing
operations for the year 1999 was $(47,000,000) or $(8.00) per share. Loss before
income taxes and distribution on minority interest was $(53,347,000) and
$(52,033,000) for 2000 and 1999, respectively. Operating earnings (loss) from
continuing operations, measured as income/(loss) before amortization, interest,
taxes, realized capital gains and losses, minority interest, and any
extraordinary items, was $(12,417,000) or $(2.13) per share (basic and diluted)
in 2000 and $(49,883,000) or $(8.49) per share in 1999 (basic and diluted).
Premium rate increases and reductions in loss ratios are the primary factors
contributing to the reduction in losses of 2000.
Discontinued operations reported losses of $(17,041,000) and $(15,373,000) for
2000 and 1999, respectively. Underwriting losses and operation costs in excess
of administrative expense reimbursements contributed to posted losses.
1999 Compared To 1998
The Company reported a loss on continuing operations of $(47,000,000) or $(8.00)
per share (basic and diluted) compared to a loss on continuing operations of
$(2,515,000) or $(0.43) per share in (basic and diluted) in 1998. Results for
1999 were negatively impacted by lower premium volume and a higher loss ratio.
These were the results of competitive pricing in the nonstandard automobile
market, untimely rate filings and problems encountered in implementation of the
Company's consolidated systems. The Company also increased loss reserves for
prior accident years by approximately $16.4 million in 1999 due to adverse loss
development.
Years Ended December 31, 2000 and 1999
Gross Premiums Written
Gross premiums written have decreased 23.0% or $54,302,000 in 2000 from 1999
levels. Premium rate increases of approximately 14% were implemented throughout
2000 which were offset by a reduction in policies in force of 29%. The reduction
in written premiums was further affected by a shift during the second quarter of
2000 to writing a higher mix of six-month policies while management evaluated
rate adequacy.
Net Premiums Written
Net premiums written represent the portion of premiums that are being retained
by the Company after consideration for risk sharing through reinsurance
contracts. As a result of losses in the Company's insurance subsidiaries and to
manage overall risk retention, a reinsurance agreement was negotiated to cede a
portion of the gross written premiums to a third party. The Company ceded
approximately 45% of its gross written premiums under such a quota share
reinsurance contract that was effective January 1, 2000.
Net Premiums Earned
Premiums are earned ratably over the term of the underlying insurance contracts.
The reduction in net premiums earned is reflective of the overall reduction in
gross premiums written and the increase in ceded premiums.
Fee Income
Fee income is derived from installment billings and other services provided to
policyholders. The reduction in fee income of 7.1% in the year 2000 is
attributed to the reduction of insurance policies in force of 29%, offset by
earned fee rate increases from 1999.
Net Investment Income
Net investment income decreased 7.3% in 2000 as compared to 1999. This is
reflective of the decline in invested assets during a period of declining
premiums and the payout of the prior year losses when settled in 2000.
Net Realized Capital Losses
Net realized capital losses were $5,970,000 in 2000 as compared to a gain of
$44,000 in 1999. Capital losses were realized in 2000 due to a liquidation and
reinvestment of a portion of the equity portfolio during the year as well as
continued liquidation of investments to fund operations during a period of
declining premiums.
Losses and LAE
The loss and LAE ratio (the ratio of claims and loss adjusting expenses as a
percentage of earned premium) was 78.2% for 2000 as compared to 92.6% for 1999.
The Company estimates accident year 2000 gross loss and LAE ratio to be 85.6% as
compared to its current estimate of 84.8% for accident year 1999. Accident year
1999 reserves developed favorably during 2000, as a result, the current estimate
for accident year 1999 is 4.5% points lower than projected as of year-end 1999.
The Company also experienced favorable development on accident years 1998 and
prior.
The Company attributes the favorable development on prior years to actions taken
at the beginning of 2000 to strengthen its claims function. At that time the
Company replaced its existing claims management team with new claims management
that improved the performance of the claims staff. The new claims management
also evaluated the Company's claims practices and procedures and eliminated
those that interfered with timely and effective claims settlement.
Policy Acquisition and General and Administrative Expense
The Company reduced policy acquisition and general and administrative expenses
for the year 2000 to $70,591,000 or 27.8% from 1999 amounts. This reduction is
reflective of a 24.8% decline in gross written premiums, an increase in ceding
commissions associated with the quota share reinsurance contract, and overall
operating expense reductions. As a percentage of net premiums earned, the
Company experienced an increase in its gross expense ratio from 37.3% to 48.5%.
This increase was the result of the Company ceding approximately 45% of its
gross written premium under a quota share reinsurance contract.
Amortization of Intangibles
Amortization expense increased in 2000 due to an impairment charge on the
carrying value of goodwill resulting from the Superior Insurance Group
Management, Inc. ("Superior Group Management") acquisition in 1997. The
impairment charge and amortization expense recognized in 2000 on goodwill was
$34,806,000. Amortization of debt acquisition costs of $154,000 comprise the
balance of the year 2000 expense.
Income Tax Expense (Benefit)
The variance in the rate from the federal statutory rate of 35%, before the
effect of a valuation allowance on deferred tax assets, is primarily due to
nondeductible goodwill amortization and alternative minimum taxes.
At December 31, 2000 the Company's net deferred tax assets are fully offset by a
valuation allowance. Therefore, the Company has not recognized the benefit of
tax losses carried forward. Earnings in future periods will result in no income
tax expense until the current operating loss carryforwards are utilized.
Years Ended December 31, 1999 and 1998
Gross Premiums Written
Gross premiums written decreased 22.2% or $67,344,000 in 1999 as compared to
1998. This reduction is primarily a result of system implementation problems
encountered in the Company's consolidated operating systems, along with
increased competition in the nonstandard insurance sector.
Net Premiums Written
Net premiums written decreased 18.6% in 1999 as compared to 1998. This reduction
was the result of the reduction of gross premiums written, offset by the
recapturing of gross premium ceded in 1998.
Net Premiums Earned
Premiums are earned ratably over the term of the underlying insurance contracts.
The reduction in net premiums earned is reflective of the overall reduction in
premiums written.
Fee Income
Fee income is derived from installment billings and other services provided to
policyholders. Fee income declined 6.7% in 1999 as a result of the overall
reduction in policies in force of 16%, offset by billing and service fee rate
increases put into effect during 1999.
Net Realized Capital Gains (Loss)
In 1999, the investment portfolio realized a gain of $44,000 compared to
realized gains in 1998 of $3,887,000 which emanated from a high level of
activity in the equity portfolio in 1998.
Losses and LAE
The loss and LAE ratio was 92.6% for 1999 as compared to 81.2% for 1998. The
increase reflects adverse development on accident years 1998 and prior of
approximately 6.6%. The Company's current estimate of loss and LAE ratio for
accident year 1999 is 84.8% as compared to its current estimate of 80.3% for
accident year 1998. The increase in the accident year loss ratio results from
product and pricing decisions and increases in claim frequency.
Policy Acquisition and General and Administrative Expenses
Policy acquisition and general and administrative expenses have increased
primarily as a result of problems encountered with the Company's policy
administration systems which resulted in higher expenses being incurred in 1999.
As a percentage of net premiums earned, the Company experienced an increase in
its expense ratio from 29.2% in 1998 to 37.3% in 1999. This increase is
attributed to higher expenses as well as a 24.1% reduction in written premiums
for 1999.
Amortization of Intangibles
Amortization of intangibles includes goodwill from the acquisition of Superior,
additional goodwill from the acquisition of the minority interest portion of
Superior Group Management formerly, GGS Management Holdings, Inc. ("GGSH"), and
debt or preferred security issuance costs. Amortization expense in 1999 of
$2,194,000 is an increase of 7.5% over 1998.
Income Tax Expense (Benefit)
The variance in the rate from the federal statutory rate of 35% is primarily due
to nondeductible goodwill amortization, alternative minimum taxes, tax versus
book basis in capital assets and securities disposed.
At December 31, 1999 the Company's net deferred tax assets are fully offset by a
valuation allowance. The Company will continue to assess the valuation allowance
and to the extent it is determined that such allowance is no longer required,
the tax benefit of the remaining net deferred tax assets will be recognized in
the future.
Distributions on Preferred Securities
Distributions on the Preferred Securities are calculated at 9.5% net of federal
income tax from the offering date of August 12, 1997.
Symons International Group, Inc. - Florida
Goran's wholly-owned subsidiary, Symons International Group, Inc. - Florida
("SIGF") is a specialized surplus lines underwriting unit. SIGF's operations no
longer fit the Company's strategic operating plan of concentrating on the
business segments of nonstandard automobile and reinsurance. Accordingly, the
majority of the book of business was sold effective January 1, 1999. A small
amount of premium remained after the sale. The premium volume from this
operation was $1,218,000, $1,619,000 and $6,427,000 as of December 31, 2000,
1999 and 1998, respectively. The net loss was $48,000, $861,000 and $2,937,000
as of December 31, 2000, 1999 and 1998, respectively.
Non-U.S. Operations
Granite Insurance Company
Granite Insurance Company ("Granite") is a Canadian federally licensed insurance
company which is presently servicing its investment portfolio and a few
outstanding claims. Granite stopped writing business on December 31, 1989 and
sold its book of Canadian business in June 1990. The outstanding claims continue
to be settled in accordance with actuarial estimates with moderate redundancies
appearing in the most recent year. Granite's invested assets decreased to $2.8
million from $3.0 million in 1999. This is the result of realized losses and
assumed claims paid for the year. Total net outstanding claims decreased to
$243,000 in 2000 from $368,000 in 1999. It is expected that the run-off of
outstanding claims will continue through 2002. Granite recorded a net loss of
$117,000 in 2000, compared to a $179,000 net profit in 1999 and $403,000 net
loss in 1998.
Granite Reinsurance Company Ltd.
Granite Reinsurance Company Ltd. ("Granite Re") is managed by Atlantic Security
Ltd. of Bermuda and a corporate services management company in Barbados. Granite
Re underwrites finite risk, stop loss and quota share reinsurance, through
various programs in Bermuda, the United States and Canada. During 2000, 1999 and
1998, Granite Re participated in certain quota share and stop loss programs for
the now discontinued crop operations. These programs were in accordance with
third party placements.
Net premiums earned were $7.8 million, $12.7 million and $21.8 million for 2000,
1999 and 1998, respectively. Net earnings (loss) were $7.5 million, ($.2)
million and $1.1 million in 2000, 1999 and 1998, respectively. The net earnings
for 2000 is primarily related to favorable development in the losses incurred on
its quota share reinsurance, which is assumed from a related insurer and
interest income on a book of business assumed from a non affiliate.
In 1998, Granite Re participated in Goran's nonstandard automobile insurance
through a quota share treaty. On January 1, 1999, the nonstandard automobile
treaty was commuted resulting in a return premium of $11.2 million. There was no
other assumed automobile reinsurance in 1999.
Granite Re's capital and surplus was $14.7 million and $6.6 million as of
December 31, 2000 and 1999, respectively.
Granite Re's capital and surplus reduced by approximately $10 million from $16.2
million as reported in 1998 to $6.6 million as of December 31, 1999, primarily
as a result of a deemed dividend to Goran relating to prior years activities.
Liquidity and Capital Resources
The primary source of funds for Goran is through dividend and other funding from
Granite Re, its Barbados based subsidiary.
The primary source of funds available to SIG are fees from policy holders,
management fees and dividends from its subsidiaries.
The Company collects billing fees charged to policyholders who elect to make
their premium payments in installments. Superior Insurance Group, Inc.
("Superior Group") also receives management fees under its management agreement
with its insurance subsidiaries. When the Florida Department of Insurance
("FDOI") approved the acquisition of Superior by Superior Group Management, it
prohibited Superior from paying any dividends (whether extraordinary or not) for
four years from the date of acquisition (May 1, 1996) without the prior written
approval of the FDOI, which restriction expired in April 2000. As a result of
regulatory actions taken by the Indiana Department of Insurance ("IDOI") with
respect to Pafco and IGF, those subsidiaries may not pay dividends without prior
approval by the IDOI. Extraordinary dividends, within the meaning of the Indiana
Insurance Code, cannot be paid by Pafco without the prior approval of the
Indiana Insurance Commissioner. The management fees charged to Pafco, IGF and
Superior are subject to review by the IDOI and FDOI.
The nonstandard automobile insurance subsidiaries' primary source of funds are
premiums, investment income and proceeds from the maturity or sale of invested
assets. Such funds are used principally for the payment of claims, payment of
claims settlement costs, operating expenses (primarily management fees),
commissions to independent agents, premium taxes, dividends and the purchase of
investments. There is variability to cash outflows because of uncertainties
regarding settlement dates for liabilities for unpaid losses. Accordingly, the
Company maintains investment programs intended to provide adequate funds to pay
claims. During 2000 and 1999, due to reduced premium volume, the Company has
liquidated investments to pay claims. The Company historically has tried to
maintain duration averages of 3.5 years. However, the reduction in new funds due
to lower premium has and will cause the Company to shorten duration. The Company
may incur cost of selling longer bonds to pay claims. Claim payments tend to lag
premium receipts. Due to the decline in premium volume, the Company has
experienced a reduction in its investment portfolio, but to date has not
experienced any problems meeting its obligations for claims payments.
On August 12, 1997, SIG's trust subsidiary issued $135 million in trust
originated preferred securities ("Preferred Securities") at a rate of 9.5% paid
semi-annually. The Preferred Securities are secured by senior subordinated notes
sold to the trust by SIG.
The Preferred Securities have a term of 30 years with semi-annual interest
payments of $6.5 million which commenced February 15, 1998. The Preferred
Securities may be redeemed in whole or in part after 10 years.
Beginning in February 2000, SIG has deferred interest payments in accordance
with the terms of the trust indenture. SIG may defer payment of any or all
interest payments for up to five years. The unpaid interest installment amounts
accrue interest at 9.5%. SIG presently expects to defer the interest payments
due in August 2001.
The trust indenture contains certain restrictive covenants. These covenants are
based upon SIG's consolidated coverage ratio of earnings before interest, taxes,
depreciation and amortization (EBITDA) whereby if SIG's EBITDA falls below 2.5
times consolidated interest expense (including Preferred Security distributions)
for the most recent four quarters, the following restrictions become effective:
o SIG may not incur additional indebtedness or guarantee additional
indebtedness.
o SIG may not make certain restricted payments including loans or advances to
affiliates, stock repurchases and a limitation on the amount of dividends
is in force.
o SIG may not increase its level of non-investment grade securities defined
as equities, mortgage loans, real estate, real estate loans and
non-investment grade fixed income securities.
These restrictions currently apply as SIG's consolidated coverage ratio was
(1.52) in 2000, and will continue to apply until SIG's consolidated coverage
ratio is in compliance with the terms of the trust indenture. SIG is in
compliance with these additional restrictions.
During 2000, subsidiaries of Goran (Granite Re and Granite) purchased $23
million of Preferred Securities. As of December 31, 2000, the Company had a net
outstanding balance of $112 million related to the Preferred Securities. The
purchase of Preferred Securities during 2000 by subsidiaries of Goran results in
a $20,973,000 increase to the Company's consolidated stockholders' equity.
Net cash used by operating activities in 2000 aggregated $49,412,000 compared to
$15,968,000 in 1999 due to reduced cash provided by operations as a result of
lower premium volumes and continued losses.
The Company believes cash flows in the nonstandard automobile operations from
premiums, investment income and billing fees are sufficient to meet obligations
to policyholders and operating expenses for the foreseeable future. This is due
primarily to the lag time between receipt of premiums and claims payments.
Accordingly, while there can be no assurance as to the sufficiency of the
Company's cash flow in future periods, the Company believes that its cash flow
will be sufficient to meet all of the Company's operating expenses and operating
debt service (not including the Preferred Securities) for the foreseeable
future.
GAAP stockholders' equity reflected a deficit of $72.7 million at December 31,
2000, which does not reflect the statutory equity upon which the Company
conducts its various insurance operations. The Company's insurance subsidiaries,
after the effects of codification, had statutory surplus of approximately $28
million at December 31, 2000. (See Note 14 for discussion regarding the effects
of codification on statutory surplus.)
Effects of Inflation
Due to the short term that claims are outstanding in the product lines the
Company underwrites, inflation does not pose a significant risk to the Company.
Primary Differences Between GAAP and SAP
The financial statements contained herein have been prepared in conformity with
GAAP which differ from Statutory Accounting Practices ("SAP") prescribed or
permitted for insurance companies by regulatory authorities in the following
respects: (i) certain assets are excluded as "Nonadmitted Assets" under
statutory accounting; (ii) costs incurred by the Company relating to the
acquisition of new business are expensed for statutory purposes; (iii) the
investment in wholly-owned subsidiaries is consolidated for GAAP rather than
valued on the statutory equity method. The net income or loss and changes in
unassigned surplus of the subsidiaries is reflected in net income for the period
rather than recorded directly to unassigned surplus; (iv) fixed maturity
investments are reported at amortized cost or market value based on their
National Association of Insurance Commissioners ("NAIC") rating; (v) the
liability for losses and loss adjustment expenses and unearned premium reserves
are recorded net of their reinsured amounts for statutory accounting purposes;
(vi) deferred income taxes are not recognized on a statutory basis; and (vii)
credits for reinsurance are recorded only to the extent considered realizable.
New Accounting Standards
The NAIC adopted the Codification of Statutory Accounting Principles guidance
("Codification"), which replaces the Accounting Practices and Procedures manual
as the NAIC's primary guidance on statutory accounting effective January 1,
2001. The IDOI and the FDOI have adopted the Codification.
The changes in statutory accounting principles resulting from codification which
impacts the Company's insurance subsidiaries will, among other things, limit the
statutory carrying value of electronic data processing equipment and deferred
tax assets in determining statutory surplus. The consolidated statutory surplus
of insurance subsidiaries as of December 31, 2000 is $39.4 million. Effective
January 1, 2001, the consolidated statutory surplus was reduced by $11.4 million
to $28.0 million, giving recognition to the new accounting principles.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
issued in June 1998, requires companies to recognize all derivative contracts as
either assets or liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of gain or
loss recognition on the hedging derivative with the recognition of (1) the
changes in the fair value of the hedge asset or liability that are attributable
to the hedged risk or (2) the earnings effect of the hedged forecasted
transaction. For a derivative not designated as a hedging instrument, the gain
or loss is recognized in income in the period of change. SFAS No. 133, as
amended by SFAS No. 137 and 138, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The impact of SFAS No. 133 does not have a
material effect on the Company's financial position or results of operations.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 ("FIN 44"), Accounting, for Certain Transactions Involving Stock
Compensation, an interpretation APB Opinion No. 25. FIN 44 clarifies the
application of Opinion No. 25 for (a) the definition of employee for purposes of
applying Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequences of various
modifications to the previously fixed stock option or award, and (d) the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 2, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
The impact of FIN 44 did not have a material effect on the Company's financial
position or results of operations.
Quantitative And Qualitative Disclosures About Market Risk
Insurance company investments must comply with applicable laws and regulations
which prescribe the kind, quality and concentration of investments. In general,
these laws and regulations permit investments, within specified limits and
subject to certain qualifications, in federal, state and municipal obligations,
corporate bonds, preferred and common securities, real estate mortgages and real
estate. The Company's investments in real estate and mortgage loans represent
1.5% of the Company's aggregate investments. The investment portfolios of the
Company at December 31, 2000, consisted of the following (in thousands):
Cost or
Type of Investment Amortized Cost Market Value
Fixed maturities:
United States Treasury securities and obligations of United
States government corporation and agencies $59,389 $59,742
Obligations of states and political subdivisions 241 242
Corporate securities 48,197 45,933
------ ------
Total Fixed Maturities 107,827 105,917
Equity Securities:
Common Stocks 20,268 18,690
Short-Term investments 17,594 17,480
Mortgage loans 1,870 1,870
Other invested assets 1,331 1,331
----- -----
Total Investments $148,890 $145,288
======== ========
The following table sets forth composition of the fixed maturity securities
portfolio of the Company by time to maturity as of December 31 (in thousands):
2000 1999
---- ----
Percent Total Percent Total
Time to Maturity Market Value Market Value Market Value Market Value
- ---------------- ------------ ------------ ------------ ------------
1 year or less $11,792 11.1% $3,599 2.1%
More than 1 year through 5 years 42,966 40.6 87,820 52.1
More than 5 years through 10 years 14,825 14.0 38,266 22.7
More than 10 years 22,724 21.5 35,641 21.2
------ ---- ------ ----
92,307 87.2 165,326 98.1
Mortgage-backed securities 13,610 12.8 3,239 1.9
------ ---- ----- ---
Total $105,917 100.0% $168,565 100.0%
======== ====== ======== ======
The following table sets forth the ratings assigned to the fixed maturity
securities of the Company as of December 31 (in thousands):
2000 1999
---- ----
Percent Total Percent Total
- --------------------------------------- Market Value Market Value Market Value Market Value
------------ ------------ ------------ ------------
Rating (1)
Aaa or AAA $68,717 64.9% $104,275 61.9%
Aa or AA 3,861 3.6 3,381 2.0
A 12,515 11.8 24,957 14.8
Baa or BBB 14,861 14.0 21,576 12.8
Ba or BB 5,148 4.9 13,674 8.1
Other below investment grade 815 .8 702 .4
--- -- --- --
Total $105,917 100.0% $168,565 100.0%
======== ====== ======== ======
(1) Ratings are assigned by Standard & Poor's Corporation, and when not
available, are based on ratings assigned by Moody's Investors Service, Inc..
The investment results of the Company for the periods indicated are set forth
below (in thousands):
Years Ended December 31,
2000 1999 1998
Net investment income (1) $12,171 $13,125 $13,126
Average investment portfolio (2) $187,243 $232,947 $231,417
Pre-tax return on average investment portfolio 6.5% 5.6% 5.7%
Net realized gains (losses) $(5,970) $44 $3,887
(1) Includes dividend income received in respect of holdings of common stock.
(2) Average investment portfolio represents the average (based on amortized
cost) of the beginning and ending investment portfolio.
If interest rates were to increase 10% from the December 31, 2000 levels, the
decline in fair value of the fixed maturity securities would not significantly
affect the Company's ability to meet its obligations to policyholders and
debtors.
Market-Sensitive Instruments and Risk Management
The Company's investment strategy is to invest available funds in a manner that
will maximize the after-tax yield of the portfolio while emphasizing the
stability and preservation of the capital base. The Company seeks to maximize
the total return on investment through active investment management utilizing
third-party professional administrators, in accordance with pre-established
investment policy guidelines established and reviewed regularly by the Board of
Directors of the Company. Accordingly, the entire portfolio of fixed maturity
securities is available to be sold in response to changes in market interest
rate; changes in relative values of individual securities and asset sectors;
changes in prepayment risks; changes in credit quality; and liquidity needs, as
well as other factors.
The portfolio is invested in types of securities and in an aggregate duration
which reflect the nature of the Company's liabilities and expected liquidity
needs diversified among industries, issuers and geographic locations. The
Company's fixed maturity and common equity investments are substantially all in
public companies.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For investment
securities and debt obligations, the table presents principal cash flows and
related weighted-average interest rates by expected maturity date. Additionally,
the Company has assumed its available for sale securities are similar enough to
aggregate those securities for presentation purposes.
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate
(U.S. dollars in thousands)
Fair Value
There-after 12/31/00
----------- --------
2001 2002 2003 2004 2005 Total
---- ---- ---- ---- ---- -----
Assets
Available for sale $13,637 $7,380 $9,655 $15,891 $10,004 $51,260 $107,827 $105,917
Average interest rate 7.5% 7.9% 6.7% 6.9% 7.0% 7.0% 7.1% 7.2%
Liabilities
Preferred securities -- -- -- -- $112,000 $112,000 $16,800
Average interest rate -- -- -- -- 9.5% 9.5% 9.5%
CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 2000 and 1999
(U.S. dollars in thousands, except share data)
CONSOLIDATED BALANCE SHEETS
2000 1999
ASSETS:
Investments:
Fixed maturities $107,827 $174,097
Equity securities 20,268 15,511
Short-term investments, at amortized cost, which approximates market 17,594 32,634
Mortgage loans, at cost 1,870 1,990
Other invested assets 1,331 936
----- ---
TOTAL INVESTMENTS 148,890 225,168
Investments in and advances to related parties 4,254 1,646
Cash and cash equivalents 3,230 2,215
Receivables, net of allowances of $1,940 and $1,479 54,370 68,523
Reinsurance recoverable on paid and unpaid losses, net 44,843 4,790
Prepaid reinsurance premiums 24,774 878
Deferred policy acquisition costs 6,454 13,908
Property and equipment, net of accumulated depreciation 12,400 15,655
Intangible assets 4,983 40,116
Other assets 3,784 2,415
Assets of discontinued operations 132,050 144,608
------- -------
TOTAL ASSETS $440,032 $519,922
======== ========
LIABILITIES AND STOCKHOLDER'S DEFICIT
LIABILITIES:
Losses and loss adjustment expenses $113,149 $157,425
Unearned premiums 62,386 80,561
Reinsurance payables 63,632 5,490
Distributions payable on preferred securities 15,263 4,809
Other 14,904 23,525
Liabilities of discontinued operations 131,366 125,999
------- -------
TOTAL LIABILITIES 400,700 397,809
------- -------
Commitments and Contingencies
Minority Interest:
Company-obligated mandatorily redeemable preferred stock of trust subsidiary
holding solely parent 112,000 135,000
STOCKHOLDERS' EQUITY (DEFICIT):
Common Stock 19,132 19,317
Contributed surplus 23,748 2,775
Cumulative translation adjustment (291) 13
Retained deficit (115,257) (34,992)
--------- --------
TOTAL STOCKHOLDERS' DEFICIT (72,668) (12,887)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $440,032 $519,922
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2000, 1999,
and 1998 (U.S. dollars in thousands, except per share data) CONSOLIDATED
STATEMENTS OF EARNINGS (LOSS)
2000 1999 1998
---- ---- ----
Gross premiums written $182,099 $236,401 $303,745
Less ceded premiums (78,637) 7,361 (4,106)
-------- ----- -------
NET PREMIUMS WRITTEN $103,462 $243,762 $299,639
======== ======== ========
NET PREMIUMS EARNED $145,532 $261,800 $281,276
Fee income 14,239 15,335 16,431
Net investment income 12,171 13,125 13,126
Net realized capital gain (loss) (5,970) 44 3,887
------- -- -----
TOTAL REVENUES 165,972 290,304 314,720
------- ------- -------
Expenses:
Losses and loss adjustment expenses 113,768 242,408 228,342
Policy acquisition and general and administrative expenses 70,591 97,735 82,020
Amortization of intangibles 34,960 2,194 2,040
------ ----- -----
TOTAL EXPENSES 219,319 342,337 312,402
------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY (53,347) (52,033) 2,318
-------- -------- -----
INTEREST
Income taxes:
Current income tax expense (benefit) 487 (765) 6,167
Deferred income tax expense (benefit) (2,636) 7,183 (4,896)
------- ----- -------
TOTAL INCOME TAXES (2,149) 6,418 1,271
------- ----- -----
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST (51,198) (58,451) 1,047
Minority Interest:
Earnings in consolidated subsidiary -- 19,787 4,849
Distributions on preferred securities, net of tax of $0 in 2000, $4,489
in 1999 and $4,529 in 1998 (12,026) (8,336) (8,411)
-------- ------- -------
LOSS FROM CONTINUING OPERATIONS (63,224) (47,000) (2,515)
Discontinued Operations:
Loss from operations of discontinued segment, less applicable income (16,141) (15,373) (9,421)
taxes of $0 in 2000 and 1999 and $(3,277) in 1998
Loss on disposal of discontinued segment less applicable taxes of nil (900) -- --
LOSS FROM DISCONTINUED OPERATIONS (17,041) (15,373) (9,421)
-------- -------- -------
NET LOSS $(80,265) $(62,373) $(11,936)
========= ========= =========
Weighted average shares outstanding - basic and fully diluted 5,822 5,876 5,841
===== ===== =====
Net loss from continuing operations per share - basic and fully diluted $(10.86) $(8.00) $(0.43)
======== ======= =======
Net loss of discontinued operations per share - basic and fully diluted $(2.93) $(2.61) $(1.61)
======= ======= =======
Net loss per share - basic and fully diluted $(13.79) $(10.61) $(2.04)
======== ======== =======
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 2000, 1999 and 1998 (U.S. dollars in thousands, except number of shares)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
Retained Cumulative Total
Contributed (Deficit) Transulation Stockholders'
Shares Amount Surplus Earnings Adjustment Equity
BALANCE AT JANUARY 1, 1998 5,730,276 $18,010 $2,775 $39,839 $(292) $60,332
Comprehensive Income:
Net Loss -- -- -- (11,936) -- (11,936)
Change in Cumulative Translation
Adjustment -- -- -- -- 544 544
Issuance of common shares 215,922 1,533 -- -- -- 1,533
Purchase of common shares (69,800) (226) -- (522) -- (748)
--
BALANCE AT DECEMBER 31, 1998 5,876,398 $19,317 $2,775 $27,381 $252 $49,725
========= ======= ====== ======= ==== =======
Comprehensive Income:
Net Loss -- -- -- (62,373) -- (62,373)
Change in Cumulative Translation
Adjustment -- -- -- -- (239) (239)
BALANCE AT DECEMBER 31, 1999 5,876,398 $19,317 $2,775 $(34,992) $13 $(12,887)
========= ======= ====== ========= === =========
Comprehensive Income:
Net Loss -- -- -- (80,265) -- (80,265)
Preferred Securities purchase -- -- 20,973 -- -- 20,973
Change in Cumulative Translation
Adjustment -- -- -- -- (304) (304)
Purchase of common shares (100,000) (185) -- -- -- (185)
BALANCE AT DECEMBER 31, 2000 5,776,398 $19,132 $23,748 $(115,257) $(291) $(72,668)
========= ======= ======= ========== ====== =========
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 2000, 1999 and 1998 (U.S. dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
2000 1999 1998
---- ---- ----
Cash flows from operating activities
Net loss $(80,265) $(62,373) $(11,936)
Adjustments to reconcile net earnings (loss) to net cash provided
from operations:
Minority interest -- (19,787) (4,849)
Depreciation, amortization, impairment and other 38,983 5,858 4,209
Deferred income tax expense (2,635) 4,177 138
Net realized capital (gain) loss 5,970 (22) (3,887)
Gain on sale of capital assets -- -- (267)
Net changes in operating assets and liabilities (net of assets
acquired):
Receivables 14,153 (6,114) (3,653)
Reinsurance recoverable on losses, net (40,053) 20,922 30,048
Prepaid reinsurance premiums (23,896) 5,443 21,475
Federal income taxes recoverable (payable) -- 11,379 (8,618)
Deferred policy acquisition costs 7,454 2,424 (4,483)
Other assets and liabilities (9,816) 7,256 (2,447)
Losses and loss adjustment expenses (44,276) 16,941 5,397
Unearned premiums (18,175) (17,368) (11,873)
Reinsurance payables 58,142 15,329 (24,638)
Distribution payable on preferred securities 10,454 -- --
Net assets from discontinued operations 34,548 (33) 32,004
------ ---- ------
NET CASH PROVIDED/(USED) BY OPERATIONS (49,412) (15,968) 16,620
-------- -------- ------
Cash flow from investing activities net of assets acquired:
Net sales (purchases) of short-term investments 15,040 (13,211) (8,807)
Proceeds from sales, calls and maturities of fixed maturities 77,641 206,742 123,508
Purchases of fixed maturities (10,181) (182,453) (142,114)
Proceeds from sales of equity securities 16,736 11,215 69,379
Purchase of equity securities (25,408) (9,850) (42,909)
Proceeds from repayment of mortgage loans 120 75 123
Purchase of property and equipment (1,663) (6,414) (4,870)
Purchase of minority interest and subsidiaries -- -- (1,208)
Net investing activities from discontinued operations (150) (1,385) (7,060)
Net proceeds from sales (purchases) of other investments (415) (2,161) (791)
----- ------- -----
NET CASH PROVIDED/(USED) BY INVESTING ACTIVITIES 71,720 2,558 (14,749)
------ ----- --------
Cash flow from financing activities net of assets acquired:
Purchase of affiliate preferred securities (2,027 -- --
Proceeds from issue of share capital -- -- 356
Redemption of share capital (185) -- (748)
Net financing activities from discontinued operations (16,473) 4,954 164
Loans from and (repayments to) related parties (2,608) 80 (1,601)
------- -- -------
NET CASH PROVIDED/(USED) BY FINANCING ACTIVITIES:
(21,293) 5,034 (1,829)
-------- ----- -------
Increase (decrease) in cash and cash equivalents 1,015 (8,376) 42
Cash and cash equivalents, beginning of year 2,215 10,591 10,549
----- ------ ------
Cash and cash equivalents, end of year $3,230 $2,215 $10,591
====== ====== =======
The accompanying notes are an integral part of the consolidated financial
statements.
GORAN CAPITAL INC AND SUBSIDIARIES
1. Nature of Operations and Significant Accounting Policies:
Goran Capital Inc. ("Goran" or the "Company") is the parent company of the Goran
group of companies. The consolidated financial statements include the accounts
of all subsidiary companies of Goran as follows:
Symons International Group, Inc. ("SIG") is a 73% owned subsidiary of Goran. The
Company operates in one segment which is the sale of nonstandard automobile
insurance. The Company's crop insurance operations were discontinued as of
December 31, 2000. The Company's products are marketed through independent
agents and brokers. Its insurance subsidiaries are licensed in 35 states.
The following is a description of the significant accounting policies and
practices employed:
a. Basis of Presentation: The consolidated financial statements include
the accounts, after intercompany eliminations, of the Company and its
wholly-owned subsidiaries as follows:
Superior Insurance Group Management, Inc ("Superior Group Management") a
holding company for the nonstandard automobile operations which includes:
Superior Insurance Group, Inc. ("Superior Group") a management
company for the nonstandard automobile operations;
Superior Insurance Company ("Superior") an insurance company
domiciled in Florida;
Superior American Insurance Company ("Superior American") an
insurance company domiciled in Florida;
Superior Guaranty Insurance Company ("Superior Guaranty") an
insurance company domiciled in Florida;
Pafco General Insurance Company ("Pafco") an insurance company
domiciled in Indiana;
IGF Holdings, Inc. ("IGFH") a holding company
IGF Insurance Company ("IGF") an insurance company domiciled
in Indiana (See Note 23);
Granite Reinsurance Company Ltd. ("Granite Re") a finite risk
reinsurance company based in Barbados.
Granite Insurance Company ("Granite") a Canadian federally licensed
insurance company which ceased writing new insurance policies on January 1,
1990.
Symons International Group, Inc. of Ft. Lauderdale, Florida ("SIGF")
a Florida based surplus lines insurance agency. These
operations have been discontinued effective January 1, 1999.
b. Use of Estimates: The preparation of financial statements requires
management to make estimates and assumptions that affect amounts reported
in the financial statements and accompanying notes. Such estimates and
assumptions could change in the future as more information becomes known
which could impact the amounts reported and disclosed herein.
c. Significant Estimates: The most significant estimates in the Company's
balance sheet are the determination of prepaid policy acquisition costs,
the reserve for insurance losses and loss adjustment expenses, and the
reserve estimated for discontinued operations. Management's estimate of
prepaid policy acquisition costs is based on historical studies and
assumptions made regarding costs incurred. Management's estimate of
insurance losses and loss adjustment expenses is based on past loss
experience and consideration of current claim trends as well as prevailing
social, economic and legal conditions. Although management's estimates
currently are not expected to change in the foreseeable future, the costs
the Company will ultimately incur could differ from the amounts that are
assumed to be incurred based on the assumptions made.
d. Premiums: Premiums are recognized as income ratably over the life
of the related policies and are stated net of ceded premiums.
Unearned premiums are computed on the daily pro rata basis.
e. Investments: Investments are presented on the following basis:
Fixed maturities and equity securities are carried at amortized cost for
fixed maturities and cost for equity securities.
Real estate at cost, less allowances for depreciation.
Mortgage loans at outstanding principal balance.
Realized gains and losses on sales of investments are recorded on the trade
date and are recognized in net income on the specific identification basis.
Interest and dividend income are recognized as earned.
f. Cash and Cash Equivalents: For purposes of the statement of cash flows,
the Company includes in cash and cash equivalents all cash on hand and
demand deposits with original maturities of three months or less.
g. Deferred Policy Acquisition Costs: Deferred policy acquisition costs are
comprised of agents' commissions, premium taxes, certain other costs and
investment income (starting in 1999) which are related directly to the
acquisition of new and renewal business, net of expense allowances received
in connection with reinsurance ceded, which have been accounted for as a
reduction of the related policy acquisition costs. These costs are deferred
and amortized over the terms of the policies to which they relate.
Acquisition costs that exceed estimated losses and loss adjustment expenses
and maintenance costs are charged to expense in the period in which those
excess costs are determined.
h. Property and Equipment: Property and equipment are recorded at cost.
Depreciation for buildings is based on the straight-line method over 31.5
years and the straight-line method for other property and equipment over
their estimated useful lives ranging from five to seven years. Asset and
accumulated depreciation accounts are relieved for dispositions, with
resulting gains or losses reflected in net income.
i. Intangible Assets: Intangible assets consist primarily of goodwill, and
debt acquisition costs. Prior to 2000, goodwill was amortized over a
25-year period on a straight-line basis based upon management's estimate of
the expected benefit period. See Note 6 regarding the goodwill impairment
charge recorded in 2000. Deferred debt acquisition costs are amortized over
the term of the debt.
j. Asset Impairment Policy: The Company reviews the carrying values of its
long-lived and identifiable intangible assets for possible impairment
whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable. See Note 6 regarding the
goodwill impairment charge recorded in 2000. Any long-lived assets held for
disposal are reported at the lower of their carrying amounts or fair value
less cost to sell.
k. Losses and Loss Adjustment Expenses: Reserves for losses and loss
adjustment expenses include estimates for reported unpaid
losses and loss adjustment expenses and for estimated losses and loss
adjustment expenses that have been incurred but not
reported. These reserves have not been discounted. Reserves are
established using individual case-basis evaluations and
statistical analysis as claims are reported. Those estimates are
subject to the effects of trends in loss severity and
frequency. While management believes the reserves make reasonable
provisions for its unpaid loss and loss adjustment expense
obligations, those provisions are necessarily based on estimates
and are subject to variability. Changes in the estimated
reserves are charged or credited to operations as additional information
of the estimated amount of a claim becomes known during
the course of its settlement. The gross reserves for losses and loss
adjustment expenses are reported net of anticipated
receivables for salvage and subrogation of approximately $6,983,000 and
$8,506,000 at December 31, 2000 and 1999, respectively.
l. Preferred Securities: Preferred Securities represent company-obligated
mandatorily redeemable securities of a trust subsidiary of SIG
holding solely parent debentures and are reported at their
liquidation value under minority interest. Distributions on these
securities are charged against consolidated earnings.
m. Income Taxes: The Company utilizes the liability method of accounting for
deferred income taxes. Under the liability method, companies will establish
a deferred tax liability or asset for the future tax effects of temporary
differences between book and taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities.
n. Reinsurance: Reinsurance premiums, commissions, and reserves related
to reinsured business are accounted for on a basis
consistent with those used in accounting for the original policies and
the terms of the reinsurance contracts. Premiums ceded to
other companies have been reported as a reduction of premium income.
o. Accounting Changes: In June 1998 SFAS No. 133, as amended,
"Accounting for Derivative Instruments and Hedging
Activities" was issued, to be effective for fiscal quarters and
fiscal years beginning after June 15, 2000. The Company does not
have any derivative instruments or hedging activities, therefore
there has been no material impact on the Company's financial
statements or notes thereto.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("Fin 44"), Accounting, for Certain Transactions
Involving Stock Compensation, an interpretation APB Opinion No. 25. FIN 44
clarifies the application of Opinion No. 25 for (a) the definition of
employee for purposes of applying Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a non-compensatory plan, (c) the
accounting consequences of various modifications to the previously fixed
stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 2,
2000, but certain conclusions cover specific events that occur after either
December 15, 1998, or January 12, 2000. The impact of FIN 44 did not have a
material effect on the Company's financial position or results of
operations.
p. Earnings Per Share: The Company's basic earnings per share calculations
are based upon the weighted average number of
shares of common stock outstanding during each period.
Common stock equivalents are anti-dilutive, therefore, fully diluted
earnings per share is the same as basic earnings per share.
q. Reclassifications: Amounts from prior periods have been reclassified for
comparability to the 2000 presentation.
2. Corporate Reorganization and Acquisitions:
On August 12, 1997, the Company purchased the remaining minority interest in
Superior Group Management for $61 million in cash. The excess of the acquisition
price over the minority interest liability was assigned to goodwill as the fair
market value of assets and liabilities approximated their carrying value. See
Note 6 regarding the goodwill impairment charge recorded in 2000.
3. Investments:
Investments are summarized as follows:
Cost or Estimated
- -------------------------------------------------- Amortized Unrealized Market
Cost Gain Loss Value
December 31, 2000 (in thousands)
Fixed Maturities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
$59,389 $541 $(188) $59,742
Obligations of states and political subdivisions 241 1 -- 242
Corporate securities 48,197 177 (2,441) 45,933
------ --- ------- ------
TOTAL FIXED MATURITIES 107,827 719 (2,629) 105,917
Equity securities 20,268 1,754 (3,332) 18,690
Short-term investments 17,594 -- (114) 17,480
Mortgage loans 1,870 -- -- 1,870
Other invested assets 1,331 -- -- 1,331
----- -- -- -----
TOTAL INVESTMENTS $148,890 $2,473 $(6,075) $145,288
======== ====== ======== ========
Cost or Estimated
Amortized Unrealized Market
December 31, 1999 (in thousands) Cost Gain Loss Value
Fixed Maturities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $61,554 $103 $(2,741) $58,916
Obligations of states and political subdivisions 42 -- (4) 38
Corporate securities 112,501 14 (2,904) 109,611
------- -- ------- -------
TOTAL FIXED MATURITIES 174,097 117 (5,649) 168,565
------- --- ------- -------
Equity securities 15,511 884 (2,840) 13,555
Short-term investments 32,634 -- -- 32,634
Mortgage loans 1,990 -- -- 1,990
Other invested assets 936 -- -- 936
--- -- -- ---
TOTAL INVESTMENTS $225,168 $1,001 $(8,489) $217,680
======== ====== ======== ========
At December 31, 2000, 94.4% of the Company's fixed maturities were considered
investment grade by Standard & Poors Corporation or Moody's Investor Services,
Inc. Securities with quality ratings Baa and above are considered investment
grade securities. In addition, the Company's investments in fixed maturities did
not contain any significant geographic or industry concentration of credit risk.
The amortized cost and estimated market value of fixed maturities at December
31, 2000, by contractual maturity, are shown in the table which follows.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without penalty (in
thousands):
Estimated Market
Amortized Cost Value
Maturity:
Due in one year or less $11,801 $11,792
Due after one year through five years 44,101 42,966
Due after five years through ten years 15,162 14,825
Due after ten years 23,283 22,724
Mortgage-backed securities 13,480 13,610
------ ------
TOTAL $107,827 $105,917
======== ========
Gains and losses realized on sales of investments are as follows (in thousands):
2000 1999 1998
---- ---- ----
Proceeds from sales $94,497 $218,032 $193,010
Gross gains realized $1,361 $3,351 $10,684
Gross losses realized $(7,331) $(3,307) $(6,797)
Net investment income for the years ended December 31 are as follows (in
thousands):
2000 1999 1998
---- ---- ----
Fixed maturities $9,342 $12,150 $11,699
Equity securities 344 401 596
Cash and short-term investments 1,269 1,232 1,286
Mortgage loans -- 152 173
Other 1,318 (173) 32
----- ----- --
Total investment income 12,273 13,762 13,786
Investment expenses (102) (637) (660)
----- ----- -----
Net investment income $12,171 $13,125 $13,126
======= ======= =======
Investments with a market value of $16,042,000 and $20,639,000 (amortized cost
of $15,993,000 and $20,652,000) as of December 31, 2000 and 1999,
respectively, were on deposit in the United States and Canada. The deposits
are required by various insurance departments and others to support licensing
requirements and certain reinsurance contracts, respectively.
4. Deferred Policy Acquisition Costs:
Policy acquisition costs are capitalized and amortized over the life of the
policies. Policy acquisition costs are those costs directly related to the
issuance of insurance policies including commissions, premium taxes, and
underwriting expenses net of reinsurance commission income on such policies.
During 1999 the Company changed its method of calculating deferred policy
acquisition costs by including investment income in the computation. Prior
period calculations did not consider investment income. The effect of the change
was to increase policy acquisition costs by approximately $4,071,000 in 1999.
Policy acquisition costs both acquired and deferred, and the related
amortization charged to income were as follows (in thousands):
2000 1999 1998
---- ---- ----
Balance, beginning of year $13,908 $16,332 $11,849
Costs deferred during year 29,999 40,241 56,041
Amortization during year (37,453) (42,665) (51,558)
-------- -------- --------
Balance, end of year $6,454 $13,908 $16,332
====== ======= =======
5. Property and Equipment:
Property and equipment at December 31 are summarized as follows (in thousands):
Accumulated
2000 Cost Depreciation 2000 Net 1999 Net
--------- ------------ -------- --------
Land $100 $ -- $100 $100
Buildings 4,361 1,397 2,964 2,749
Office furniture and equipment 3,899 2,960 939 1,669
Automobiles 110 46 64 103
Computer equipment 14,112 5,779 8,333 11,034
------ ----- ----- ------
Total $22,582 $10,182 $12,400 $15,655
======= ======= ======= =======
Accumulated depreciation at December 31, 1999 was $9,720,000. Depreciation
expense related to property and equipment for the years ended December 31, 2000,
1999 and 1998 were $3,507,000 $3,414,000 and $1,668,000, respectively.
6. Intangible Assets:
In accordance with generally accepted accounting principles, the Company has
determined the carrying value of goodwill that resulted from the acquisition of
Superior Group Management exceeds its fair value and an impairment charge equal
to the carrying value should be recorded as of December 31, 2000. This
determination was made considering the series of continued losses which the
company has experienced, the reduction in the volume of premiums written, as
well as an evaluation of future cash flows. Based on the assessment, a charge of
$33,464,000 was recorded in the fourth quarter of 2000 to write-off the
remaining carrying value of the related goodwill. Such charge is included as
amortization of intangibles expense in the accompanying financial statements.
Intangible assets at December 31 are as follows (in thousands):
Accumulated
2000 Cost Depreciation 2000 Net 1999 Net
--------- ------------ -------- --------
Goodwill $39,471 $38,262 $1,209 $35,044
Deferred debt costs 4,342 568 3,774 4,718
Other 1,293 1,293 -- 354
----- ----- -- ---
$45,106 $40,123 $4,983 $40,116
======= ======= ====== =======
Accumulated amortization at December 31, 1999 was $5,163,000. Amortization and
impairment expense related to intangible assets for the years ended December 31,
2000, 1999 and 1998 was $34,960,000, $2,194,000 and $2,040,000 respectively.
7. Unpaid Losses and Loss Adjustment Expenses (in thousands):
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows (in thousands):
2000 1999 1998
---- ---- ----
Balance at January 1 $157,425 $140,484 $135,087
Less reinsurance recoverables 3,411 1,301 8,631
----- ----- -----
NET BALANCE AT JANUARY 1 154,014 139,183 126,456
------- ------- -------
Incurred related to:
Current year 132,781 217,686 214,743
Prior years (19,013) 24,722 13,599
-------- ------ ------
TOTAL INCURRED 113,768 242,408 228,342
------- ------- -------
Paid related to:
Current year 89,612 126,526 129,947
Prior years 84,800 101,051 85,668
------ ------- ------
TOTAL PAID 174,412 227,577 215,615
------- ------- -------
NET BALANCE AT DECEMBER 31 93,370 154,014 139,183
Plus reinsurance recoverables 19,779 3,411 1,301
------ ----- -----
BALANCE AT DECEMBER 31 $113,149 $157,425 $140,484
======== ======== ========
Reserve estimates are regularly adjusted in subsequent reporting periods, as new
facts and circumstances emerge which indicate that a modification of the prior
estimate is necessary. The adjustment, referred to as "reserve development," is
inevitable given the complexities of the reserving process and is recorded in
the statements of earnings in the period when the need for the adjustment
becomes apparent. The foregoing reconciliation indicates favorable reserve
development of $19,013,000 on the December 31, 1999, reserves and deficient
reserve developments of $24,722,000 and $13,599,000 on the reserves as of
December 31, 1998 and December 31, 1997, respectively. The 1998 deficient
reserve development occurred primarily due to volatility in the historical
trends for nonstandard automobile business as the result of significant growth
during 1996 and 1997. The 1999 deficient reserve development resulted primarily
from a higher than expected frequency and severity on nonstandard automobile
claims. The favorable reserve development during 2000 resulted from a major
restructuring and strengthening of the claims function effective at the
beginning of 2000. At that time the Company replaced its existing claims
management team with new claims management that improved the performance of the
claims staff. The new claims management implemented practices and procedures to
improve the effectiveness and timeliness of claims settlement.
The anticipated effect of inflation is implicitly considered when estimating
losses and loss adjustment expenses liabilities. While anticipated price
increases due to inflation are considered in estimating the ultimate claims
costs, increases in average claim severities is caused by a number of factors.
Future severities are projected based on historical trends adjusted for
implemented changes in underwriting standards, policy provisions, claims
management practices and procedures, and general economic trends. Anticipated
severity trends are monitored relative to actual development and are modified if
necessary.
Liabilities for loss and loss adjustment expenses have been established when
sufficient information has been developed to indicated the involvement of a
specific insurance policy. In addition, reserves have been established to cover
additional exposure on both known and unasserted claims.
8. Company-Obligated Mandatorily Redeemable Preferred Stock of Trust Subsidiary
Holding Soley Parent Debentures:
On August 12, 1997, SIG's wholly owned trust subsidiary issued $135 million in
preferred securities ("Preferred Securities") at a rate of 9.5% paid
semi-annually. The principal assets of the trust subsidiary are senior
subordinated notes of SIG in the principal amount of $135 million with an
interest rate and maturity date substantially identical to those of the
Preferred Securities. Expenses of the issue aggregated $5.1 million and are
amortized over the term of the Preferred Securities (30 years).
The Preferred Securities represent company-obligated mandatorily redeemable
securities of subsidiary holding solely parent debentures and have a term of 30
years with semi-annual interest payments commencing February 15, 1998. The
Preferred Securities may be redeemed in whole or in part by the holders after 10
years. The annual Preferred Security obligations of approximately $13 million
per year is funded from SIG's nonstandard automobile management company. The
nonstandard auto funds are the result of management and billing fees in excess
of operating costs. Under the terms of the indenture, SIG is permitted to defer
semi-annual interest payments for up to five years. SIG has elected to defer
interest payments beginning in February 2000. SIG presently intends to defer
interest payment due in August 2001.
The trust indenture for the Preferred Securities contains certain restrictive
covenants. These covenants are based upon SIG's consolidated coverage ratio of
earnings before interest, taxes, depreciation and amortization (EBITDA) whereby
if SIG's EBITDA falls below 2.5 times consolidated interest expense (including
Preferred Security distributions) for the most recent four quarters the
following restrictions become effective:
o SIG may not incur additional indebtedness or guarantee additional
indebtedness.
o SIG may not make certain restricted payments including loans or
advances to affiliates, stock repurchases and a limitation on the
amount of dividends is inforce.
o SIG may not increase its level of non-investment grade securities
defined as equities, mortgage loans, real estate, real estate loans and
non-investment grade fixed income securities.
These restrictions currently apply as SIG's consolidated coverage ratio was
(1.52) in 2000, and will continue to apply until SIG's consolidated coverage
ratio is in compliance with the terms of the trust indenture. SIG is in
compliance with these additional restrictions.
During 2000, subsidiaries of Goran (Granite Reinsurance Company Ltd. and Granite
Insurance Company) purchased $23 million of Preferred Securities. As of December
31, 2000, the Company had a net outstanding balance of $112 million related to
the Preferred Securities. The purchase of the Preferred Securities during 2000
by subsidiaries of Goran results in a $20,973,000 increase to the Company's
consolidated stockholders' equity.
9. Capital Stock
The Company's authorized share capital consists of:
(a) First Preferred shares
An unlimited number of first preferred shares of which none are outstanding at
December 31, 2000 and 1999.
(b) Common Shares
An unlimited number of common shares of which 5,776,398 are outstanding as at
December 31, 2000 (1999 - 5,876,398). During 1999 and 2000 the Company did not
issue any common shares. During 2000, the Company purchased 100,000 of its
common shares for an aggregate consideration of $185,000.
10. Income Taxes:
The Company and its subsidiaries have net operating loss carryovers of
$87,653,000. Of that amount, $66,250,000 is attributable to SIG, $14,879,000 is
attributable to Goran and its non U.S. subsidiaries, and $6,524,000 is
attributable to SIGF a U.S. subsidiary which does not qualify for filing
consolidated tax returns with SIG. These losses are usable only against future
income in these respective operating units.
As of December 31, 2000, the Company has unused net operating loss carryovers
available as follows (in thousands):
Goran & Non
U.S.
Years ending not later than December 31: SIG Subsidiaries SIGF Total
--- ------------ ---- -----
2001 $1,537 $1,537
2002 $126 865 991
2003 1,120 1,120
2004 511 511
2005 1,659 1,659
2006 1,113 1,113
2007 602 602
2017 $4,368 4,368
2018 1,295 1,295
2019 31,859 -- 861 32,720
2020 34,265 -- -- 34,265
Capital Losses -- 7,472 -- 7,472
-- ----- -- -----
TOTAL $66,250 $14,879 $6,524 $87,653
======= ======= ====== =======
SIG files a consolidated U.S. federal income tax return with its wholly-owned
subsidiaries. Intercompany tax sharing agreements between SIG and its
wholly-owned subsidiaries provide that income taxes will be allocated based upon
separate return calculations in accordance with the Internal Revenue Code of
1986, as amended.
A reconciliation of the differences between federal tax computed by applying the
federal statutory rate to income before income taxes and the income tax
provision is as follows (in thousands):
2000 1999 1998
---- ---- ----
Computed income taxes (benefit) at statutory rate $(17,981) $(15,682) $474
Goodwill and acquisition costs 12,176 779 503
Other (4,154) (619) (1,318)
Tax Exempt (Income) Loss (3,443) 88 689
------- -- ---
(13,402) (15,434) 348
Valuation allowance change 11,253 21,852 923
------ ------ ---
Income Tax Expense (Benefit) $(2,149) $6,418 $1,271
======== ====== ======
The net deferred tax asset at December 31, 2000 and 1999 is comprised of the
following (in thousands):
2000 1999
Deferred tax assets:
Unpaid losses and loss adjustment expenses $2,899 $3,443
Unearned premiums and prepaid insurance 2,633 5,563
Allowance for doubtful accounts 1,302 1,022
Unrealized losses on investments 1,378 2,637
Net operating loss carryforwards 25,764 22,605
Other 8,758 303
----- ---
DEFERRED TAX ASSETS $42,734 $35,573
------- -------
Deferred tax liabilities:
Deferred policy acquisition costs $(2,259) $(4,872)
Other (892) (799)
----- -----
DEFERRED TAX LIABILITIES $(3,151) $(5,671)
-------- --------
$39,583 $29,902
VALUATION ALLOWANCE 39,583 (29,902)
------ --------
NET DEFERRED TAX ASSETS $-- $--
=== ===
At December 31, 2000 and 1999 the Company's net deferred tax assets are fully
offset by a valuation allowance. The Company will continue to assess the
valuation allowance and to the extent it is determined that such allowance is no
longer required, the tax benefit of the remaining net deferred tax assets will
be recognized in the future.
11. Leases:
The Company leases buildings, furniture, cars and equipment under operating
leases. Operating leases generally include renewal options for periods ranging
from two to seven years and require the Company to pay utilities, taxes,
insurance and maintenance expenses.
The following is a schedule of future minimum lease payments under cancelable
and non-cancelable operating leases for each of the five years succeeding
December 31, 2000 and thereafter, excluding renewal options (in thousands):
Year Ending December 31:
2001 $1,680
2002 1,677
2003 809
2004 38
2005 and Thereafter 0
Rental expense charged to operations in 2000, 1999 and 1998 amounted to
$1,848,000, $2,370,000 and $1,742,000 respectively, including amounts paid under
short-term cancelable leases.
12. Reinsurance:
The Company limits the maximum net loss that can arise from a large risk, or
risks in concentrated areas of exposure, by reinsuring (ceding) certain levels
of risks with other insurers or reinsurers, either on an automatic basis under
general reinsurance contracts known as "treaties" or by negotiation on
substantial individual risks. Such reinsurance includes quota share, excess of
loss, stop-loss and other forms of reinsurance on essentially all property and
casualty lines of insurance. In addition, the Company assumes reinsurance on
certain risks. The Company remains contingently liable with respect to
reinsurance, which would become an ultimate liability of the Company in the
event that such reinsuring companies might be unable, at some later date, to
meet their obligations under the reinsurance agreements.
Reinsurance activity for 2000, 1999 and 1998, which includes reinsurance with
related parties, is summarized as follows (in thousands):
2000 Gross Ceded Net
---- ----- ----- ---
Premiums written $182,099 $(78,637) $103,462
Premiums earned 200,278 (54,746) 145,532
Incurred losses and loss adjustment expenses 154,929 (41,161) 113,768
Commission expenses (income) 22,275 (14,043) 8,232
1999
Premiums written 236,401 7,361 243,762
Premiums earned 254,445 7,355 261,800
Incurred losses and loss adjustment expenses 239,035 3,373 242,408
Commission expenses (income) 27,985 435 28,420
1998
Premiums written 303,745 (4,106) 299,639
Premiums earned 317,787 (36,511) 281,276
Incurred losses and loss adjustment expenses 242,033 (13,691) 228,342
Commission expenses (income) 50,658 (11,875) 38,783
Amounts recoverable from reinsurers relating to unpaid losses and loss
adjustment expenses were $19,779,000 and $3,411,000 as of December 31, 2000 and
1999, respectively. These amounts are reported as assets and are not netted
against the liability for loss and loss adjustment expenses in the accompanying
Consolidated Balance Sheets.
13. Related Party Transactions
The Company and its subsidiaries have entered into transactions with various
related parties including transactions with Symons International Group Ltd
("SIGL"), Goran's majority shareholder.
The following balances were outstanding at December 31 (in thousands):
2000 1999
Advances to related parties:
Due from directors and officers $2,054 $999
Other receivables from related parties 2,200 647
----- ---
Total Receivables $4,254 $1,646
------ ------
The following transactions occurred with related parties in the years ended
December 31 (in thousands):
2000 1999 1998
---- ---- ----
Other related party transactions:
Consulting fees charged by various related parties $1,895 $3,652 $3,134
Management fees charged by SIGL 900 201 203
Approximately, half of the amounts due from officers and directors are interest
bearing loans. The Company paid $1,846,000, $3,112,000 and $2,832,000 in 2000,
1999, and 1998, respectively, for consulting and other services relative to the
conversion to the Company's nonstandard automobile operating system. The Company
has capitalized these costs as part of its nonstandard automobile operating
system. Approximately 90% of these payments are for services provided by
consultants and vendors unrelated to the Company. During 1998, 1999 and a
portion of 2000 Stargate Solutions ("Stargate") managed the work of the
unrelated consultants and vendors and, as compensation for such work, retained
approximately 10% of the payments referred to above in return for management
services provided. During 1998, Stargate was owned beneficially by certain
directors of the Company and a relative of those directors. Also included in
consulting fees to related parties is nil and $520,000 and $270,000 in 2000,
1999 and 1998, respectively, for payments to Onex, Inc., an officer of whom was
on the Company's Board of Directors, with regard to employment matters.
In 1989, the Company wrote off a loan owed by a subsidiary of SIGL. SIGL, the
majority shareholder of Goran, guaranteed the loan and pledged shares of Goran
("escrowed shares") as security for the loan. The outstanding loan balance is
$3,340,000 (Canadian dollars) for the periods ending December 31, 2000 and 1999.
This loan balance continues to be guaranteed by SIGL and is secured with 100,000
shares of Goran owned by SIGL.
The Company leases office space in Canada from a related party, a relative of
certain directors. The rent paid was $40,000 and $10,000 as of December 31, 2000
and 1999, respectively.
In 1999, Granite Re issued a performance bond in favor of Tritech Financial
Systems Inc. ("Tritech") in the amount of $328,000. In August 2000 the creditor
called the bond. Tritech is owned by a relative of certain directors of the
Company. The bond is secured by a guarantee from Tritech, a personal guarantee
from its president and 50,000 shares of Goran's common stock. Tritech is paying
interest on the outstanding balance at a rate of 7.5%. Interest received in 2000
was $6,150.
14. Regulatory Matters:
Pafco and IGF, domiciled in Indiana, prepare their statutory financial
statements in accordance with accounting practices prescribed or permitted by
the Indiana Department of Insurance ("IDOI"). Statutory requirements place
limitations on the amount of funds which can be remitted to the Company from
Pafco and IGF. The Indiana statute allows 10% of surplus as regard to
policyholders or 100% of net income, whichever is greater, to be paid as
dividends only from earned surplus. The Superior Insurance Company entities,
domiciled in Florida, prepare their statutory financial statements in accordance
with accounting practices prescribed or permitted by the Florida Department of
Insurance ("FDOI"). In the consent order approving the acquisition of Superior,
the FDOI prohibited Superior from paying any dividends for four years without
the prior written approval of the FDOI. The dividend restriction expired in
April 2000. Florida statute also contains limitations with regard to payment of
dividends. Superior may pay dividends of up to 10% of surplus or 100% of net
income, whichever is greater, from earned surplus. Prescribed statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners ("NAIC"), as well as state laws,
regulations, and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed.
The NAIC has promulgated risk-based capital (RBC) requirements for
property/casualty insurance companies to evaluate the adequacy of statutory
capital and surplus in relation to investment and insurance risks, such as asset
quality, asset and liability matching, loss reserve adequacy and other business
factors. Regulatory compliance is determined by a ratio (Ratio) of the
enterprise's regulatory total adjusted capital, as defined by the NAIC, to its
authorized control level RBC, as defined by NAIC. Generally, a Ratio in excess
of 200% of authorized control level RBC requires no corrective actions by the
company or regulators.
Based upon the foregoing formula, as of December 31, 2000, RBC calculations for
IGF, Superior and Pafco were in excess of 200%.
To address IDOI concerns relating to Pafco, on February 17, 2000, Pafco agreed
to an order under which the IDOI may monitor more closely the ongoing operations
of Pafco. Among other matters, Pafco must:
o Refrain from doing any of the following without the IDOI's prior written
consent: selling assets or business in force or transferring property,
except in the ordinary course of business; disbursing funds, other than for
specified purposes or for normal operating expenses and in the ordinary
course of business (which does not include payments to affiliates, other
than under written contracts previously approved by the IDOI, and does not
include payments in excess of $10,000); lending funds; making investments,
except in specified types of investments; incurring debt, except in the
ordinary course of business and to unaffiliated parties; merging or
consolidating with another company; or entering into new, or modifying
existing, reinsurance contracts.
o Reduce its monthly auto premium writings, or obtain additional statutory
capital or surplus, such that the ratio of gross written premium to surplus
and net written premium to surplus does not exceed 4.0 and 2.4,
respectively; and provide the IDOI with regular reports demonstrating
compliance with these monthly writings limitations. Restrictions on premium
writings result in lower premium volume. Management fees payable to
Superior Group are based on gross written premium; therefore lower premium
volume results in reduced management fees paid by Pafco.
o Continue to comply with prior IDOI agreements and orders to correct
business practices, under which (as previously disclosed) Pafco must
provide monthly financial statements to the IDOI, obtain prior IDOI
approval of reinsurance arrangements and of affiliated party transactions,
submit business plans to the IDOI that address levels of surplus and net
premiums written, and consult with the IDOI on a monthly basis.
Pafco's inability or failure to comply with any of the above could result in the
IDOI requiring further reductions in Pafco's permitted premium writings or in
the IDOI instituting future proceedings against Pafco. As reported on April 24,
2000 the IDOI concluded its target examination of Pafco, covering loss reserves,
pricing and reinsurance and no action was taken thereon.
Pafco informed the Iowa Department of Insurance (IADOI) of its decision to stop
writing new automobile business in Iowa while Pafco reviews and revises it
program in the state. Pafco has agreed with the IADOI that it will not write any
new nonstandard business, until such time as Pafco has reduced its overall
nonstandard automobile policy counts in the state or has: (i) increased surplus
or; (ii) a net written premium to surplus ratios less than three to one; and
(iii) surplus reasonable to its risk. Pafco has continued to service existing
policyholders and renew policies in Iowa and provide policy count information on
a monthly basis in conformance with IADOI requirements.
With regard to IGF and as a result of the losses experienced by IGF in the
discontinued crop insurance operations, IGF has agreed with the IDOI to provide
monthly financial statements and consult monthly with the IDOI, and obtain prior
approval for affiliated party transactions. On January 24, 2000 the IDOI
concluded its target examination of IGF regarding 1998 loss reserves principally
related to AgPI and no further action by IGF was required as a result of the
examination.
The FDOI has concluded its market conduct, data processing, year 2000 readiness
and financial examinations as of June 30, 1999 and no significant action was
taken as a result. The financial review of Superior for the year ended December
31, 1999 by the FDOI has been completed and no report has yet been issued
thereon.
The FDOI issued a notice of its intent to issue an order (the "Notice") which
principally addressed certain policy and finance fee payments by Superior to
Superior Insurance Group, Inc. ("Superior Group"), another subsidiary of the
Company. A formal hearing to review the Notice and a determination that the
order contemplated by the Notice not be issued was held February, 2001. A
recommended order has not yet been rendered by the administrative law judge. The
FDOI could reject findings in a recommended order and issue an order which could
restrict Superior from paying certain billing and policy fees to Superior Group
and include a requirement that Superior Group repay to its subsidiary, Superior,
billing and policy fees from prior years in an amount of approximately $35.2
million. A restriction on the ability of Superior to pay future billing and
policy fees to Superior Group may necessitate that the Company take certain
actions, which may be subject to regulatory approvals, to reallocate operating
revenues and expenses between its subsidiaries. The Company would vigorously
contest the issuance of any such order.
Pafco, IGF and Superior also provide monthly financial information to the
departments of insurance in certain states in which they write business, and
Pafco and IGF have agreed to obtain IDOI prior approval of any new affiliated
party transactions.
The Company's operating subsidiaries, their business operations, and their
transactions with affiliates, including the Company, are subject to regulation
and oversight by the IDOI, the FDOI, and the insurance regulators of other
states in which the subsidiaries write business. The Company is a holding
company and all of its operations are conducted by its subsidiaries. Regulation
and oversight of insurance companies and their transactions with affiliates is
conducted by state insurance regulators primarily for the protection of
policyholders and not for the protection of other creditors or of shareholders.
Failure to resolve issues with the IDOI and the FDOI in a manner satisfactory to
the Company could result in future regulatory actions or proceedings that
materially and adversely affect the Company.
IGF recorded certain reinsurance transactions related to the now discontinued
crop insurance business transacted with the federal government in a manner which
differs from prescribed statutory accounting practices. This is a permitted
practice by IDOI which has no effect on statutory surplus or net income.
Net loss of the insurance subsidiaries, as determined in accordance with
statutory accounting practices ("SAP"), was $17.1 million, $32.3 million, and
$21.5 million, for 2000, 1999, and 1998, respectively. Consolidated statutory
capital and surplus was approximately $39.4 million and $57.1 million at
December 31, 2000 and 1999, respectively.
The NAIC adopted the Codification of Statutory Accounting Principles guidance
("Codification"), which replaces the Accounting Practices and Procedures manual
as the NAIC's primary guidance on statutory accounting effective January 1,
2001. The IDOI and FDOI have adopted Codification.
The changes in statutory accounting principles resulting from codification which
impacts the Company's insurance subsidiaries will, among other things, limit the
statutory carrying value of electronic data processing equipment and deferred
tax assets in determining statutory surplus. The consolidated statutory surplus
of insurance subsidiaries as of December 31, 2000 is $39.4 million. Effective
January 1, 2001, the consolidated statutory surplus was reduced by $11.4 million
to $28.0 million, giving recognition to the new accounting principles.
15. Commitments and Contingencies:
SIG, IGFH and IGF are parties to a Strategic Alliance Agreement ("SAA") dated
February 28, 1998 with Continental Casualty Company (referred to in the SAA as
"CNA"). By letter dated January 3, 2001, CNA gave notice pursuant to the SAA of
its exercise of the "Put Mechanism" under the SAA effective February 19, 2001.
According to the SAA, upon exercise of the Put Mechanism, IGFH is obligated to
pay CNA an amount equal to 5.85 times an amount equal to "Average Pre Tax
Income" as defined by the SAA. The SAA further provides that within 30 days
after exercise of the put, IGF will execute a promissory note payable six months
after the exercise of the Put Mechanism in the principal amount equal to the
amount owed, as specified by the SAA. In a letter dated March 20, 2001, CNA
advised SIG, IGFH and IGF that it calculated the principal amount due CNA to be
$26,265,403. IGF does not agree with this amount. CNA also has asserted a claim
for amounts allegedly due under certain reinsurance agreements with the Company
for the 2000 crop year. SIG, IGFH and IGF believe they have claims against CNA
and defenses to CNA's exercise of the Put Mechanism that may offset or reduce
amounts owed by the Company to CNA. Moreover, SIG, IGFH and IGF believe that the
impending sale of IGF's crop insurance business may provide an opportunity for
the parties to resolve their claims. However, there can be no assurance that the
ultimate resolution of the claims asserted by CNA will not have material adverse
effects on SIG's, IGFH's and IGF's financial condition or results of operations.
On February 23, 2000, a complaint for class action was filed against the
Company, SIG, three individuals who were or are officers or directors of the
Company or of SIG, PricewaterhouseCoopers LLP and Schwartz Levitsky Feldman,
LLP. The case purports to be brought on behalf of a class consisting of
purchasers of the Company's stock or SIG's stock during the period February 27,
1998, through and including November 18, 1999. Plaintiffs allege, among other
things, that defendants misrepresented the reliability of the Company's reported
financial statements, data processing and financial reporting systems, internal
controls and loss reserves in violation of Section 10(b) of the Securities
Exchange Act of 1934 ("1934 Act") and SEC Rule 10b-5 promulgated thereunder. The
individual defendants are also alleged to be liable as "controlling persons"
under ss.20(a) of the 1934 Act. The Company and the individual defendants filed
a motion to dismiss the amended, consolidated complaint for failure to state a
claim and for failure to plead with particularity as required by Fed. R. Civ.
P.9(b) and the Private Securities Litigation Reform Act of 1995. The accounting
firms also filed motions to dismiss. Briefing on the motions was completed on
December 18, 2000, and the motions presently are pending before the court.
IGF, several brokers and a third party carrier are parties to a number of
pending legal proceedings relating to agricultural business interrruption
policies ("AgPI") sold during 1998 by the now discontinued crop insurance
segment. During 2000 all claims by the policyholders in the AgPI lawsuits were
settled by the third party carrier of the policies. In January 2001, one new
case was filed by four policyholders who had previously fully settled their AgPI
claims through binding settlement agreements. Discovery is proceeding. IGF
remains a defendant/cross-claimant relating to cross claims in six lawsuits
pending in California state court (King and Fresno counties) and discovery is
proceeding. Over the objections of IGF, the third party carrier settled some of
the AgPI cases for amounts in excess of policy limits. IGF and Mutual Service
Casualty Insurance Company, the third party carrier of the AgPI policies, have
submitted their claims against each other related to the AgPI settlements to
binding arbitration. As of December 31, 2000, IGF had paid an aggregate of
approximately $28,900,000 to AgPI policyholders of which approximately
$5,200,000 was incurred during 2000. The unpaid reserves for AgPI as of December
31, 2000 were $10,912,000. Certain of the settlements made by the third party
carrier exceeded established reserves for the particular cases involved. The
Company does not believe it will ultimately be responsible for the full amount
of the settlement amounts paid by the third party carrier. Based on the
information presently available, the Company believes that it has recognized,
through loss and LAE payments and reserves, its ultimate loss exposure related
to AgPI. The Company believes its financial reserves for the lawsuits are
sufficient to cover the resulting liability, if any, that may arise from these
matters. However, there can be no assurance that the Company's ultimate
liability for AgPI related claims will not be materially greater than the
aggregate $39.8 million in gross losses already recorded in the consolidated
financial statements related to this product and will not have a material
adverse effect on the Company's results of operations or financial condition.
SIG is a joint and several guarantor in a $7.25 million debt collateralized by
operating assets held in an entity in which SIG is a 50% owner. The estimated
fair market value of the assets approximates the debt.
Two assertions have been made in Florida against Superior Guaranty purported to
be brought on behalf of a class of persons alleging to be charged service
charges or finance charges in violation of Florida law. The Company has agreed
to class certification of one of the actions. The class is limited to
individuals allegedly aggrieved from four years prior to the filing of the
complaint, which would exclude the plaintiff in the other action. The Company
believes that it has substantially complied with the premium financing statute
and intends to vigorously defend any potential loss under both of these actions.
An assertion has been made in Florida against Superior purported to be brought
on behalf of a class consisting of healthcare providers that rendered treatment
to and obtained a valid assignment of benefits from Superior. The court granted
Superior's motion to dismiss the amended complaint and indicated that the
allegations of the plaintiff's amended complaint were inappropriate for class
certification. The plaintiff alleges that Superior reduced or denied claims for
medical expenses payable to the plaintiff without first obtaining a written
report in violation of Florida law. The plaintiff also alleges that Superior
inappropriately reduced the amount of benefits payable to the plaintiff in
breach of Superior's contractual obligations to the plaintiff. Superior believes
the allegations of wrongdoing in violation of law are without merit and intends
to vigorously defend the claims brought against it.
The California Department of Insurance ("CDOI") advised the Company in 1998 that
it is reviewing a possible assessment which could total $3 million. This
possible assessment relates to the charging of brokers fees charged to
policyholders by independent agents who placed business with Superior. The CDOI
indicated that such broker fees charged by the independent agent to the
policyholder were improper and requested reimbursement to the policyholders by
Superior. The Company did not receive any of these broker fees. There was no
action by the CDOI during 2000 regarding the broker fees. As the ultimate
outcome of this potential assessment is not deemed probable, the Company has not
accrued any amount in its consolidated financial statements. Although an
assessment has not been formally made by the CDOI, the Company will vigorously
defend any potential assessment and believes it will prevail.
In 2000 a product of the discontinued crop operation was underwritten insuring
the revenue received by potato producers from their 2000 harvest. The policy was
designed to augment the multiperil crop insurance program for potatoes. The
ultimate liability from those policies will not be known until the entire
harvest has been sold in August. Because the price of potatoes at year-end had
dropped below the expected price, the Company established a $4,500,000 gross
loss reserve for its unpaid loss obligations on this product. The ultimate
liability may vary from this estimate.
The Company and its subsidiaries, are named as defendants in various lawsuits
relating to their business. Legal actions arise from claims made under insurance
policies issued by the subsidiaries. These actions were considered by the
Company in establishing its loss reserves. The Company believes that the
ultimate disposition of these lawsuits will not materially affect the Company's
operations or financial positions.
16. Supplemental Cash Flow Information:
Cash paid/(received) for income taxes and interest are summarized as follows (in
thousands):
2000 1999 1998
---- ---- ----
Cash paid/(received) for federal income taxes, net of refunds
refunds $(6,134) $(17,952) $1,752
Cash paid for interest on trust preferred $ -- $12,825 $12,825
17. Disclosures About Fair Values of Financial Instruments:
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair value of the Company's financial instruments.
Considerable judgment is required to develop these fair values and, accordingly,
the estimates shown are not necessarily indicative of the amounts that would be
realized in a one-time, current market exchange of all of the Company's
financial instruments.
a) Fixed Maturity, Equity Securities, and Other Investments:
Fair values for fixed maturity and equity securities are
based on quoted market prices.
b) Short-term Investments, and Cash and Cash Equivalents: The
carrying value for assets classified as short-term
investments, and cash and cash equivalents in the
accompanying Consolidated Balance Sheets approximates their
fair value.
c) Short-term Debt: The carrying value for short-term debt
approximates fair value.
d) Preferred Securities: There is not an active market for the
Preferred Securities; however, the estimated market value as
of December 31, 2000 was $16,800,000.
18. Stock Option Plans:
In June 1986, Goran adopted the Goran Capital Inc. 1986 Stock Option Plan (the
"Goran Stock Option Plan"). The Goran Stock Option Plan provides Goran the
authority to grant nonqualified stock options and incentive stock options to
officers and key employees of Goran and its subsidiaries and nonqualified stock
options to non-employee directors of Goran. Options have been granted at an
exercise price equal to the fair market value of the Goran stock at date of
grant. The outstanding stock options vest and become exercisable at varying
terms ranging from immediate vesting to equal installments over terms up to 5
years. On June 15, 1999, all Goran options granted at an exercise price in
excess of CDN$14.70, were repriced to CDN$14.70 per share. In 2000, certain
officers and non-employee directors of Goran surrendered a total of 515,771
stock options.
Information regarding the Goran Stock Option Plan is summarized below (in
Canadian dollars):
2000 1999 1998
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at the beginning of the 660,708 $14.17 695,572 $29.92 546,856 $17.86
year
Granted 100,000 $2.35 -- -- 363,970 $36.57
Exercised -- -- -- -- (215,254) $10.53
Forfeited/Surrendered (564,771) $14.15 (34,864) $14.69 -- --
--------- ------ -------- ------ -- --
Outstanding at the end of the year 195,937 $8.36 660,708 $14.17 695,572 $29.92
======= ===== ======= ====== ======= ======
Options exercisable at year end 88,605 $14.62 619,035 $14.18 569,126 $29.82
Available for future grant 675,063 -- 210,292 -- 175,428 --
On November 1, 1996, SIG adopted the Symons International Group, Inc. 1996 Stock
Option Plan (the "SIG Stock Option Plan"). The SIG Stock Option Plan provides
SIG the authority to grant nonqualified stock options and incentive stock
options to officers and key employees of SIG and its subsidiaries and
nonqualified stock options to nonemployee directors of SIG and Goran. Options
have been granted at an exercise price equal to the fair market value of the
SIG's stock at date of grant. All of the outstanding stock options vest and
become exercisable in three equal installments on the first, second and third
anniversaries of the date of grant. On October 14, 1998, all SIG options were
repriced to $6.3125 per share. In November 1999, certain officers and non
employee directors of SIG surrendered a total of 1,153,600 stock options.
Information regarding the SIG Stock Option Plan is summarized below:
2000 1999 1998
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------- ----- ------ -----
Outstanding at the beginning of the
year 213,033 $6.3125 1,457,833 $6.3125 1,000,000 $6.3125
Granted 1,287,000 0.5436 -- 6.3125 478,000 6.3125
Exercised (1,667) 6.3125 (4,332) 6.3125
Forfeited/Surrendered (155,200) 5.0391 (1,243,133) 6.3125 (15,835) 6.3125
--------- ------ ----------- ------ -------- ------
Outstanding at the end of the year 1,344,833 0.9400 213,033 6.3125 1,457,833 6.3125
========= ====== ======= ====== ========= ======
Options exercisable at year end 73,500 $6.3125 120,366 $6.3125 760,289 $6.3125
Available for future grant 155,167 1,286,967 42,167
Options Options
Outstanding Exercisable
Weighted weighted Weighted
Average Average Average
Number Remaining Life Exercise Price Number Exercise Price
----- ----- -----
Range of Exercise Prices Outstanding (in years) Exercisable
- ------------------------ ----------- ---------- -----------
$0.50 - $0.8750 1,253,000 9.4 $.5448 -- --
$6.3125 91,833 6.9 $6.3125 73,500 $6.3125
------ --- ------
1,344,833 9.2 73,500
========= === ======
The Board of Directors of Superior Group Management adopted the GGS Management
Holdings, Inc. Stock Option Plan (the "Superior Group Management Stock Option
Plan"), effective April 30, 1996. The Superior Group Management Stock Option
Plan authorizes the granting of nonqualified and incentive stock options to such
officers and other key employees as may be designated by the Board of Directors
of Superior Group Management. Options granted under the Superior Group
Management Stock Option Plan have a term of ten years and vest at a rate of 20%
per year for the five years after the date of the grant. The exercise price of
any options granted under the Superior Group Management Stock Option Plan is
subject to the following formula: 50% of each grant of options having an
exercise price determined by the Board of Directors of Superior Group Management
at its discretion, with the remaining 50% of each grant of options subject to a
compound annual increase in the exercise price of 10%, with a limitation on the
exercise price escalation as such options vest.
Information regarding the Superior Group Management Stock Option Plan is
summarized below:
2000 1999 1998
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at the beginning of the
year 92,232 $51.75 94,732 $51.75 95,282 $51.75
Granted -- -- -- -- -- --
Forfeited (8,800) $51.48 (2,500) $51.75 (550) 51.75
------- ------ ------- ------ ----- -----
Outstanding at the end of the year 83,432 $54.42 92,232 $51.75 94,732 $51.75
====== ====== ====== ====== ====== ======
Options exercisable at year end 66,726 42,448 24,601
Available for future grant 27,679 18,879 16,379
Options Options
Outstanding Exercisable
Weighted weighted Weighted
Average Average Average
Number Remaining Life Exercise Price Number Exercise Price
----- ----- -----
Range of Exercise Prices Outstanding (in years) Exercisable
- ------------------------ ----------- ---------- -----------
$44.17 41,717 5.3 yrs $44.17 33,364 $44.17
$58.79 - $64.67 41,715 5.3 yrs $64.66 33,362 $64.66
The Company applies U.S. Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretation in accounting for its
stock option plans. Accordingly, no compensation cost has been recognized for
such plans. Had compensation cost been determined, based on fair value at the
grant dates for options granted under the Company stock option plan as well
under both the SIG Stock Option Plan and the GGS Stock Option Plan during 2000,
1999 and 1998 consistent with the method of U.S. SFAS No. 123, "Accounting for
Stock-Based Compensation", the Company's pro-forma net earnings and pro-forma
earnings per share for the years ended December 31, 2000, 1999 and 1998 would
have been as follows:
2000 2000 1999 1999 1998 1998
As Pro- As Pro- As Pro-
Reported Forma Reported Forma Reported Forma
Earnings (loss) from continuing
operations $(63,224) $(63,676) $(47,000) $(50,596) $(2,515) $(5,485)
Basic and fully diluted EPS from
continuing operations $(10.86) $(10.94) $(8.00) $(8.61) $(0.43) $(0.94)
Net earnings (loss) $(80,265) $(80,717) $(62,373) $(65,969) $(11,936) $(14,906)
Basic and fully diluted EPS $(13.79) $(13.86) $(10.61) $(11.23) $(2.04) $(2.55)
The fair value of each option grant used for purposes of estimating the
pro-forma amounts summarized above is estimated on the grant date using the
Black-Scholes option-pricing model with the weighted average assumptions for
2000 and 1998 shown on the following table:
SIG Goran SIG Goran
2000 2000 1998 1998
Grants Grants Grants Grants
Risk-free interest rates 5.00% 5.00% 5.53% 5.40%
Dividend yields --- --- --- ---
Volatility factors 106% 106% 41% 41%
Weighted average expected life 4.0 years 5.0 years 2.5 years 3.2 years
Weighted average fair value per share $0.40 $1.31 $7.20 $5.73
The Goran stock options are granted and denominated in Canadian dollars. The
pro-forma stock based compensation for these options are translated at the
average rate for the year. The weighted average fair value per share is
translated at the year end rate.
19. Quarterly Financial Information (unaudited):
Quarterly financial information is as follows:
(in thousands) First Second Third Fourth Total
----- ------ ----- ------ -----
2000
Gross written premiums $59,859 $30,032 $45,852 $46,356 $182,099
Net premiums written 31,859 20,163 32,180 19,260 103,462
Net premiums earned 44,467 38,483 34,176 28,406 145,532
Total revenues 51,903 43,153 37,524 33,392 165,972
Net operating earnings (loss) from continuing operations
(1) (3,544) (3,320) (7,573) 2,020 (12,417)
Net loss from continuing operations (7,422) (8,473) (13,523) (33,806) (63,224)
Basic operating earnings (loss) per share from continuing
operations (1) (0.60) (0.56) (1.31) 0.34 (2.13)
Net loss from continuing operations per share - basic and
diluted (1.26) (1.45) (2.35) (5.80) (10.86)
1999
Gross written premiums $61,299 $66,346 $57,484 $51,272 $236,401
Net premiums written 65,658 67,517 56,052 54,535 243,762
Net premiums earned 68,184 70,453 60,848 62,315 261,800
Total revenues 74,836 77,300 66,824 71,344 290,304
Net operating earnings (loss) from continuing operations
(1) 2,699 (12,134) (17,881) (22,567) (49,883)
Net loss from continuing operations (1,957) (6,910) (6,020) (32,113) (47,000)
Basic operating earnings (loss) per share from continuing
operations (1) 0.46 (2.06) (3.04) (3.85) (8.49)
Net loss from continuing operations per share - basic and
diluted (0.33) (1.17) (1.03) (5.47) (8.00)
(1) Operating earnings (loss) and per share amounts exclude
amortization, interest, taxes, realized capital gains and losses,
minority interest and any extraordinary items.
In the fourth quarter of 2000, the Company recorded an impairment charge related
to goodwill of $33.5 million.
In the fourth quarter of 1999, the Company provided for a valuation allowance on
its net deferred tax assets of $23.1 million.
During the fourth quarter of 1999, the Company increased reserves on its
nonstandard automobile business by $6.9 million for both current and prior
accident years.
20. Reconciliation Of Canadian And United States Generally Accepted
Accounting Principles ("GAAP") And Additional Information
The consolidated financial statements are prepared in accordance with Canadian
GAAP. Material differences between Canadian and U.S. GAAP are described below.
There were no material difference in net earnings or earnings per share in 2000,
1999 and 1998.
(a) Receivables from sale of capital stock
The SEC Staff Accounting Bulletins require that accounts or notes receivable
arising from transactions involving capital stock should be presented as
deductions from stockholders' equity and not as assets. Accordingly, in order to
comply with U.S. GAAP stockholders' equity would be reduced by $1,258,000 and
$300,000 at December 31, 2000 and December 31, 1999, respectively to reflect the
loans due from certain stockholders which relate to the purchase of common
shares of the Company.
(b) Unrealized gain (loss) on investments
U.S. GAAP requires that unrealized gains and losses on investment portfolios be
included as a component in determining stockholders' equity. In addition, SFAS
No. 115 permits prospective recognition of unrealized gains (losses) on
investment portfolio for year-ends commencing after December 15, 1993. As a
result, stockholders' equity would be decreased by $3,602,000 and by $4,868,000
for the years ended December 31, 2000 and 1999, respectively.
(c) Discontinued operations
U.S. GAAP requires the netting of all assets and liabilities of discontinued
operations and the presentation of those net assets as a single line item in the
consolidated balance sheets for all periods presented. There is no impact on
stockholders' equity.
(d) Changes in stockholder's equity
A reconciliation of stockholders' equity (deficit) from Canadian GAAP to U.S.
GAAP is as follows (in thousands):
2000 1999
Stockholders' equity in accordance with Canadian GAAP $(72,668) $(12,887)
Add (deduct) effect of difference in account for:
Receivables from sale of capital stock (see note a) (1,258) (300)
Unrealized gain on investments (see note b) (3,602) (4,868)
------- -------
Stockholders' equity in accordance with U.S. GAAP $(77,528) $(18,055)
========= =========
21. Subsequent Events
On February 19, 2001, CNA exercised a Put Mechanism under the SAA with SIG, IGFH
and IGF. See Note 15 - Commitments and Contingencies for additional discussion
regarding the effect of the Put Mechanism.
22. Management's Plans
The Company reported, net losses of $80.3 million and $62.4 million for the
years 2000 and 1999 respectively. While the stockholders' equity at December 31,
2000 is a deficit of approximately $72.7 million, SIG has a thirty year
mandatorily redeemable preferred stock outstanding of $112 million at an
interest rate of 9.5%. The Preferred Securities are not due for redemption until
2027. The insurance subsidiaries have statutory surplus of approximately $39.4
million upon which the Company conducts its insurance operations ($28.0 million
of statutory surplus after codification). Management has initiated substantial
changes in operational procedures in an effort to return the Company to
profitable levels and to improve its financial condition. Early in the year
2000, the nonstandard auto insurance segment hired a new President, a new Chief
Information Officer, and pricing and claims management. The Company has and is
continuing to raise its rates in a market environment where increasing rates and
withdrawal from the market by other companies shows positive trends for
improving profitability of nonstandard automobile underwriters.
Management believes that despite the recent losses and the deterioration in
stockholders equity and statutory surplus, it has developed a business plan that
if successfully implemented, can substantially improve operating results and its
financial condition.
23. Discontinued Operations
In December 2000, the Company initiated the divestiture of its crop insurance
segment. This business was predominantly written through IGF. The transaction,
if completed, will transfer ownership of certain crop insurance accounts,
effective with the 2001 crop cycle. Management does not expect any remaining
crop business to be material to the consolidated financial statements and
accordingly has discontinued reporting crop insurance as a business segment. The
results of crop insurance segment have been reflected as "Discontinued
Operations" in the accompanying consolidated financial statements.
Summarized results of operations and financial position for discontinued
operations of the crop insurance segment were as follows:
Statements of Earnings (Losses)
(in thousands)
Year Ended December 31, 2000 1999 1998
Gross premiums written $241,748 $237,286 $243,026
======== ======== ========
Net premiums written $26,466 $12,737 $62,467
======= ======= =======
Net premiums earned $26,531 $14,240 $60,901
Net investment and fee income 1,229 749 4,047
Net realized capital gain 10 21 217
-- -- ---
Total revenues 27,770 15,010 65,165
Loss and loss adjustment expenses 40,690 34,225 52,550
Policy acquisition and general and administrative expenses 2,059 215 21,906
Interest and amortization expense 1,162 1,113 502
----- ----- ---
Total expenses 43,911 35,553 74,958
Loss before income taxes (16,141) (20,543) (9,793)
Income taxes:
Current income tax (benefit) -- (5,852) (7,873)
Deferred income tax expense -- 682 4,564
-- --- -----
Total income taxes -- (5,170) (3,309)
-- ------- -------
Loss from operations of discontinued segment (16,141) (15,373) (6,484)
Loss on disposal of discontinued segment (900) -- --
----- -- --
Net loss from discontinued operations $(17,041) $(15,373) $(6,484)
========= ========= ========
Net Assets of Discontinued Operations: (in thousands) 2000
====
Assets:
Cash and invested assets $2,822
Receivables, net of allowance for doubtful accounts 22,491
Reinsurance recoverable on paid and unpaid losses, net 84,242
Prepaid reinsurance premiums 10,361
Property and equipment, net of accumulated depreciation 5,730
Intangible assets 4,280
Other assets 2,124
-----
Assets of discontinued operations $132,050
========
Liabilities:
Losses and loss adjustment expenses 70,848
Unearned premiums 10,361
Reinsurance Payables 41,143
Notes payable 1,534
Other liabilities 7,480
-----
Liabilities of discontinued operations $131,366
========
In December 1997, the Company discontinued the operations of SIGF whose book of
business was subsequently sold on January 1, 1999. Accordingly, the results of
these operations have been accounted for separately from the results of ongoing
operations. The net loss from discontinued operations was $2,937 for the year
ended December 31, 1998.
MANAGEMENT RESPONSIBILITY
Management recognizes its responsibility for conducting the Company's affairs in
the best interests of all its shareholders. The consolidated financial
statements and related information in this Annual Report are the responsibility
of management. The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in Canada which involve
the use of judgement and estimates in applying the accounting principles
selected. Other financial information in this Annual Report is consistent with
that in the consolidated financial statements.
The Company maintains systems of internal controls which are designed to provide
reasonable assurance that accounting records are reliable and to safe-guard the
Company's assets. The independent accounting firm of BDO Seidman, LLP has
audited and reported on the Company's consolidated financial statements for
2000. Their opinion is based upon an audit conducted by them in accordance with
generally accepted auditing standards to obtain assurance that the consolidated
financial statements are free of material misstatements.
The Audit Committee of the Board of Directors, the members of which include
outside directors, meets with the independent external auditors and management
representatives to review the internal accounting controls, the consolidated
financial statements and other financial reporting matters. In addition to
having unrestricted access to the books and records of the Company, the
independent external auditors also have unrestricted access to the Audit
Committee. The Audit Committee reports its findings and makes recommendations to
the Board of Directors.
/s/ Alan G. Symons
Chief Executive Officer
March 13, 2001
Board of Directors And Stockholders of Goran Capital Inc.
Goran Capital Inc.
Toronto, Canada
We have audited the accompanying consolidated balance sheet of Goran Capital
Inc. and subsidiaries (the "Company") as of December 31, 2000, and the related
consolidated statements of earnings (loss), changes in stockholders' equity
(deficit) and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion of these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America and Canada. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation.
In our opinion, the 2000 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Goran Capital Inc. and subsidiaries at December 31, 2000, and the results of
their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in Canada.
The consolidated financial statements as at December 31, 1999 and for each of
the two years in the period ended December 31, 1999, prior to the
reclassifications made to reflect the Company's crop insurance segment as
discontinued operations, were audited by the other auditros who expressed an
opinion without reservation on those statements in their report dated March 14,
2000, except for Note 23, which is as of March 23, 2000. We have audited the
reclassifications to the 1999 and 1998 consolidated financial statements and in
our opinion, such reclassifications, in all material respects, are appropriate
and have been properly applied.
BDO SEIDMAN, LLP
Grand Rapids, Michigan
Mach 13, 2001
Stockholder Information
Registrar and Transfer Agent
CIBC Mellon Trust Company
Toronto, Ontario
Independent Public Accountants
BDO Seidman LLP
Grand Rapids, Michigan
Annual Meeting of Stockholders
2 Eva Road, Suite 200
Toronto, Ontario Canada M9C 2A8
May 31, 2001
10:00 A.M.
Annual Report on Form 10-K
A copy of the Annual Report on Form 10-K for Goran Capital Inc. for the year
ended December 31, 2000, filed with the Securities and Exchange Commission, may
be obtained, without charge, upon request to the individual and address noted
under Shareholder Inquiries.
Market and Dividend Information
As of July 1, 2000 Goran Capital Inc.'s common stock began trading on the OTC
Bulletin Board under the symbol GNCNF.OB. Prior to this date Goran Capital
Inc.'s stock was traded on the NASDAQ Stock Market's National Market. The shares
also trade on the Toronto Stock Exchange.
As of December 31, 2000 there were approximately 100 Common stockholders of
record, including many brokers holding shares for the individual clients. The
number of individual stockholders on the same date is estimated at 1,000.
The number of commons shares outstanding on December 31, 2000 totaled 5,776,398.
Information relating to the common shares is available through OTC Bulletin
Board and the Toronto Stock Exchange. The following table sets forth the high
and low closing sale prices for the common shares for each quarter of 2000, 1999
and 1998.
TORONTO STOCK EXCHANGE
2000 1999 1998
High Low High Low High Low
Quarter Ended
March 31 $4.15 $1.50 $12.37 $7.73 $31.93 $25.84
June 30 $3.50 $1.75 $9.75 $7.06 $29.61 $23.89
September 30 $2.84 $1.95 $12.78 $7.40 $28.10 $20.38
December 31 $2.25 $.50 $8.74 $1.95 $21.40 $8.04
STOCK TRADING PRICES
2000 1999 1998
High Low High Low High Low
Quarter Ended
March 31 $2.88 $1.05 $10.73 $8.38 $31.50 $25.25
June 30 $2.44 $1.16 $10.19 $7.31 $30.50 $23.50
September 30 $1.95 $1.25 $13.25 $7.75 $28.50 $19.75
December 31 $1.38 $.34 $8.38 $2.00 $21.06 $8.00
Goran Capital Inc. did not declare or pay cash dividends on its common stock
during the years ended December 31, 2000 and 1999. Goran Capital Inc. does not
plan to pay cash dividends on its common stock in the foreseeable future.
Shareholder Inquiries
Inquiries should be directed to:
Alan G. Symons
Chief Executive Officer
Goran Capital Inc.
Tel: (317) 259-6302
E-mail: asymons@sigins.com
Board of Directors
G. Gordon Symons
Chairman of the Board
Goran Capital Inc.
Symons International Group, Inc.
Alan G. Symons
President, Chief Executive Officer
Goran Capital Inc.
Douglas H. Symons
Vice President, Chief Operating Officer
Goran Capital Inc.
President, Chief Executive Officer and Secretary
Symons International Group, Inc.
J. Ross Schofield
President
Schofield Insurance Brokers
David B. Shapira
President Medbers Limited
John K. McKeating
Former Partner
Vision 2120, Inc.
Executive Officers
Alan G. Symons
President, Chief Executive Officer
Goran Capital Inc.
Douglas H. Symons
Vice President, Chief Operating Officer
Goran Capital Inc.
President, Chief Executive Officer and Secretary
Symons International Group, Inc.
Earl R. Fonville
Vice President, Chief Financial Officer and Treasurer
Goran Capital Inc.
Symons International Group, Inc.
Gene Yerant
Executive Vice President
Goran Capital Inc.
Symons International Group, Inc.
Chief Operating Officer and President
Superior Insurance Group, Inc.
Company, Subsidiaries and Branch Offices
HEAD OFFICE - CANADA
Goran Capital Inc.
2 Eva Road, Suite 200
Toronto, Ontario Canada M9C 2A8
Tel: 416-622-0660
Fax: 416-622-8809
HEAD OFFICE - US
Goran Capital Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6400
Fax: 317-259-6395
Website: www.sigins.com
SUBSIDIARIES AND BRANCHES
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6300
Fax: 317-259-6395
Superior Insurance Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6300
Fax: 317-259-6395
Pafco General Insurance Company
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6300
Fax: 317-259-6395
Superior Insurance Company
280 Interstate North Circle, N.W., Suite 500
Atlanta, Georgia 30339
Tel: 770-952-4885
Fax: 770-988-8583
Superior Insurance Company
1745 West Orangewood Road, Suite 210
Orange, California 92826
Tel: 714-978-6811
Fax: 714-978-0353
Superior Insurance Company
6303 Little River Turnpike
Suite 220
Alexandria, Virginia 22312
703-916-8001
Opens May 15th
Superior Insurance
150 Monument Road, Suite 610
Bala Cynwyd, Pennsylvania 19004-1701
No Phone Available At This Time
IGF Insurance Company
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6300
Fax: 317-259-6395