Exhibit 13
1997 Goran Capital, Inc. Annual Report
GORAN LOGO
1997 Annual Report
[Large Goran logo with three photos]
[small Goran logo]
Corporate Profile
Goran Capital Inc. owns subsidiaries engaged in a number of business activities.
The most important of these is the property and casualty insurance business
conducted in 38 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 67% of Symons International Group, Inc. ("SIG")
which began trading on the NASDAQ on November 5, 1996 under the symbol SIGC. SIG
owns IGF Insurance Company of Des Moines, Iowa which is the fourth largest crop
insurer in the United States. SIG also owns Superior Insurance Company of Tampa,
Florida and Pafco General Insurance Company of Indianapolis, Indiana. These
insurers provide nonstandard automobile insurance and combined are the tenth
largest writers of such insurance in the United States. The other subsidiaries,
Granite Reinsurance Company Ltd. and Symons International Group, Inc. - Florida
underwrite finite (limited risk) reinsurance in Bermuda, the United States and
Canada and offer commercial insurance coverage, respectively. The operations of
Symons International Group, Inc. Florida were discontinued in 1997 with a sale
of this operation expected in early 1998.
The investment portfolios of the insurance subsidiaries include primarily debt
and government instruments. The majority of holdings of the portfolios are
publicly traded and most of the holdings of the debt portfolio have investment
grade ratings. Goran is a public company listed on The Toronto Stock Exchange
under the symbol GNC and NASDAQ under the symbol GNCNF.
All dollar amounts shown in this report are in U.S. currency unless otherwise
indicated. The conversion rates for 1997 and as of December 31, 1997 were
$1.3846 and $1.4295, respectively.
Table of Contents
Financial Highlights 1
Chairman's Report 2
Management's Discussion and Analysis 5
Consolidated Financial Statements 15
Notes to Consolidated Financial Statements 19
Auditors' Report 34
Corporate Directory 36
Subsidiaries and Branch Offices IBC
Shareholder Information IBC
GRAPH 1993 1994 1995 1996 1997
$88,936 $103,134 $124,634 $305,499 $460,600
Gross Premiums Written By Year
[small Goran logo]
Financial Highlights
(dollars in thousands, except per share amounts)
For The Years Ended December 31,
1997 1996 1995 1994 1993
Gross premium revenue $448,982 $299,376 $146,303 $126,978 $114,135
Earnings from continuing
operations $15,983 $14,127 $7,157 $3,940 $1,397
Earnings per share from
continuing operations $2.86 $2.67 $1.43 $0.81 $0.29
Shareholders' Equity $60,332 $47,258 $12,622 $5,067 $1,088
Book Value per share $10.53 $8.74 $2.49 $1.03 $0.22
Market Value per share $29.41 $20.08 $8.57 $5.20 $3.55
CORPORATE STRUCTURE
Goran Capital, Inc.
Toronto, Ontario
("Goran" or the "Company")
|
- ----------------------------------------------------------------------
| | | |
67% 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.
("SIG") ("Granite Re") ("Granite") Florida
|------------------------------------------|
IGF Holdings, Inc. GGS Management, Inc.
("IGFH") ("GGS Management")
| |
IGF Insurance
Company
("IGF") -----------------------------------
| |
Pafco General Superior Insurance
Insurance Company Company
("Pafco") ("Superior")
|
-------------------------
| |
Superior Guaranty Superior American
Insurance Company Insurance Company
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[small Goran logo]
Chairman's Report to Shareholders: GORAN MILESTONES
Greetings:
As has been my practice in the past, I have used "milestones" to provide a
comparison of our development. I have taken a broader approach this year and
carried the results into an appraisal of our efforts as I see it.
I am much encouraged with the future and I feel certain you will be too when you
digest the information assembled below.
YEAR: No. of Employees Gross Revenue Pre-Tax Earnings Net Earnings
1994 253 $133,596 $4,614 $3,941
1995 325 $152,443 $9,654 $7,157
1996 672 $317,770 $24,984 $14,127
1997 786 $491,461 $37,904 $15,983
(1) 1998 800 $730,000 N/A N/A
(1) 1998 information is an estimate based on stated corporate goals.
Amounts are for continuing operations.
Revenue is gross premiums, interest and fee income.
All dollar amounts are in thousands of U.S. dollars.
While I don't always agree with analysts, generally they do a good job. But as a
person who has been in the business of insurance for more than fifty years, I
have an advantage in assessing the true value of an insurance enterprise over
those that do not have my experience. I have a better tuned antenna and feel
many analysts miss some important aspects of the true worth of an insurance
company.
Over the years I have been the instigator and closer in the sale and purchase of
many insurance entities. The true value of those businesses was somewhat more
than a mere multiplication of the Earnings Per Share, (EPS).
We believe that our companies are grossly undervalued in the market place in
that it does not appreciate the cost and value added for growth in gross
revenue. To help you understand what I mean, let's look at values paid by
knowing buyers for recent acquisitions in fields of insurance similar to our
companies.
Note that the price paid for these entities doesn't follow a straight
multiplication of EPS, in fact the most constant number that parallels the price
is the Gross Written Premium.
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[small Goran logo]
Chairman's Report
Premium
Mean Purchase Trailing to Purchase
Premiums Price EPS Multiple Price Ratio
Omni Insurance $140M $185M 30 132%
(sold to Hartford)
10/16/97
Guaranty National $510M $469M 16 91%
(sold to Orion Capital)
9/18/97
Titan $172M $240M 17 140%
(sold to U.S.F.&G.)
8/8/97
Integon $783M $519M N/A 62%
(sold to G.M.A.C.) ----- ----- --- ---
6/3/97
Average 21 88%
== ===
In today's world, the value of an insurer is more closely linked to its gross
written premiums. Depending on the class of business, this value multiple should
be between 75% and 100% of the insurers premium volume. We have outperformed all
the above companies in every worthwhile category. Yet, I ponder why no value has
been attributed to our $150M of premium growth in 1997.
In the past several years we have acquired businesses in the industry sectors
that we felt had the most potential for growth: Crop insurance (the fastest
growing segment of the Commercial insurance industry) and Non-Standard
automobile insurance (the growth leader in the Personal line component). You
will note that our growth parallels this pattern and that we have consistently
demonstrated our ability to grow faster than our industry peer group.
Let me recall for you our two most recent acquisitions, Superior Insurance
Group, and CNA Crop Book. When we bought Superior Insurance Group on May 1,
1996, it was coming off a year in which it had produced $95M of Gross Written
Premiums and earned about $5M of pre-tax income. For 1997, Superior wrote $250M
of premiums and earned a pre-tax profit of $20M. This growth came through the
repositioning of Superior in its markets and changing the way it did business.
This rate of growth is continuing in 1998.
On March 2, 1998 we took over CNA's book of MPCI and Crop Hail insurance. In
return, CNA gets a share of our crop reinsurance business that would otherwise
be placed with other reinsurers. We feel we can use our marketing expertise and
varied products to grow this approximately $110M of business in the same way we
have grown our previous acquisitions in the past, outpacing other crop insurers
in the process.
Over the last 5 years, we have seen our performance as follows:
annual gross revenue average compound growth: 45%
annual net income average compound growth: 92%
annual ROE average compound growth: 64%
This growth and performance is the result of attracting a competent work force,
excelling in niche markets and making acquisitions that others look at and say
are insightful purchases (oddly, only after we have turned these acquisitions
into great producers). We are continuing to look at growth and acquisitions with
enthusiasm.
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[small Goran logo]
Chairman's Report
During the second half of 1997, we retained Donaldson, Lufkin & Jenrette ("DLJ")
to lead a $135M, thirty-year issue of Trust Preferred Securities. As part of
this successful issue, we did a road show to tell the story of our company. DLJ
prepared the presentations for that road show and commented, among other
positive statements, that we have "a proven management team." This team has the
ability, experience and the tools to continue our growth and performance into
the future.
The commendations on the quality of our personnel by the firm of Donaldson,
Lufkin & Jenrette is self evident and anything I might add on the professional
standing of our managers and employees would be redundant. I would be remiss
however if I didn't thank them all for their efforts and professional interest
in the company's welfare and success.
It has been said that a business is, at its inception, "Desperate," then
"Honest" and finally "Respectable." We have worked hard to reach
"respectability" and it is this that motivates us. We have made profits for our
shareholders and have greatly enhanced the company's corporate governance
function. Our growth in the business of insurance, measured by premium income,
profits and professionalism has been outstanding. This has come about primarily
through the efforts and dedication of our personnel and I extend to all of them
the thanks of the Board of Directors.
We have two public companies, Goran Capital Inc. and Symons International Group
Inc., and as a public organization we must maintain larger and more diverse
Boards. As Chairman, I rely on these gentlemen for their help and advice. Our
meetings are often lengthy and diverse and we wrestle with many additional
factors because the company is growth oriented. I wish to thank each of these
gentlemen for their contribution over the past year and assure them that their
efforts are greatly appreciated.
Thanks Board, thanks employees.
[large Goran logo]
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[small Goran logo]
MANAGEMENT'S DISCUSSION AND ANALYSIS
[photographs of wheat down left margin]
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Goran Capital Inc. (the "Company" or "Goran") underwrites and markets
nonstandard private passenger automobile insurance and crop insurance. The
Company also writes third party property and casualty coverage and also provides
finite risk, stop loss and quota share reinsurance.
Acquisitions and Public Offerings
On April 30 ,1996 the Company purchased the operations of Superior
Insurance Company for $66.6 million in cash (the "Acquisition"). Funds for the
Acquisition were provided from funds affiliated with Goldman Sachs and a bank
term loan of $48 million. Both Goldman Sachs and the bank term loan were taken
out in November 1997.
On November 5, 1996, SIG issued 3,450,000 shares in an initial public
offering of 33% of its stock at $12.50 per share.
On November 12, 1997, SIG issued $135 million of Trust Preferred
Securities at 9.50%. The proceeds of this offering were used to buyout Goldman
Sachs' minority interest share of the nonstandard automobile operations, repay
the term loan used to acquire Superior and provide capital to the nonstandard
automobile division for future growth. The Preferred Securities carry a 30 year
term with a noncallable period of 10 years. Distributions are payable
semi-annually at a rate of 9.5% per annum with all principal paid at maturity.
SIG also has the ability to forego distributions for periods of up to five
years, although it has no intention to do so, and the Preferred Securities have
limited covenants. SIG believed the time was proper to obtain the benefit of
100% of the nonstandard automobile operations, provide longer term financing at
favorable terms and provide additional capital for future growth.
Nonstandard Automobile Insurance Operations
The Company, through Pafco and Superior, is engaged in the writing of
automobile insurance for "nonstandard risks". Nonstandard insureds are those
individuals who are unable to obtain insurance through standard market carriers
due to factors such as poor premium payment history, driving experience, record
of prior accidents or driving violations, particular occupation or type of
vehicle. Premium rates for nonstandard risks are higher than for standard risks.
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. The nonstandard automobile market is
the fastest growing sector of the personal lines market.
Crop Insurance Operations
General
Crop insurance consists of three main products. Hail insurance, which is
controlled by the private insurance industry, receives no subsidy from the
government. Multi-Peril Crop Insurance ("MPCI"), is a government sponsored
product, administered through the Federal Crop Insurance Corporation ("FCIC").
Named perils insurance covers farmers for risks specific to specific crops.
Farmers who purchase insurance receive subsidies to reduce their cost and
provide protection for major catastrophic loss. When a farmer wants to borrow
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[small Goran logo]
MANAGEMENT'S DISCUSSION AND ANALYSIS
money to buy his seed, the bank wants insurance on the harvest so the bank knows
the loan can be repaid either through normal harvest or through an insurance
policy covering the yield on the crop. There are many types of coverages and
percentages that farmers can purchase. The Company works with independent agents
to meet the insurable needs of the farmer which includes the best coverage and
premium for the farm. The government supports this effort through commissions it
pays the Company to do this work and through premium subsidy for the farmer's
insurance costs. The government also provides back-up risk protection to the 18
or so crop insurance providers in the event of major loss. Based on the results
for any given year, the Company and the government share in the results of
profit and loss. In order to protect IGF from the loss part of this equation,
IGF buys third party reinsurance to reduce the downside from a loss year which
includes participation by Granite Re.
Certain Accounting Policies for Crop Insurance Operations
The majority of the Company's crop insurance business consists of MPCI.
MPCI is a government-sponsored program with accounting treatment which differs
in certain respects from more traditional property and casualty insurance lines.
Farmers may purchase "CAT Coverage" (the minimum available level of MPCI
coverage) upon payment of a fixed administrative fee of $50 per policy (the "CAT
Coverage Fee") instead of a premium. This fee is included in other income.
Commissions paid to agents to write CAT policies are partially offset by the CAT
Coverage Fee. For purposes of the profit-sharing formula under the MPCI program
referred to below, the Company is credited with an imputed premium (its "MPCI
Imputed Premium") for all CAT Coverage policies it sells, determined in
accordance with the profit-sharing formula established by the FCIC. For income
statement purposes under GAAP, Gross Premiums Written consist of the aggregate
amount of premiums paid by farmers for "Buy-up Coverage" (MPCI coverage in
excess of CAT Coverage), and any related federal premium subsidies, but do not
include any MPCI Imputed Premium credited on CAT Coverage. By contrast, Net
Premiums Written and Net Premiums Earned do not include any MPCI Premiums or
premium subsidies, all of which are deemed to be ceded to the United States
Government as reinsurer. The Company's profit or loss from its MPCI business is
determined after the crop season ends on the basis of a profit-sharing formula
established by federal regulation and the FCIC. For GAAP income statement
purposes, any such profit or loss sharing earned or payable by the Company is
treated as an adjustment to commission expense and is included in policy
acquisition and general and administrative expenses. Amounts receivable from the
FCIC are reflected on the Company's consolidated balance sheet as reinsurance
recoverables.
The Company also receives from the FCIC (i) an expense reimbursement
payment equal to a percentage of Gross Premiums Written for each Buy-up Coverage
policy it writes (the "Buy-up Expense Reimbursement Payment"), (ii) an LAE
reimbursement payment equal to 13.0% of MPCI Imputed Premiums for each CAT
Coverage policy it writes (the "CAT LAE Reimbursement Payment") and (iii) a
small excess LAE Reimbursement Payment of two hundredths of one percent (0.02%)
of MPCI Retention to the extent the Company's MPCI Loss Ratios on a per state
basis exceed certain levels (the "MPCI Excess LAE Reimbursement Payment"). For
GAAP income statement purposes, the Buy-up Expense Reimbursement Payment is
treated as a contribution to income and reflected as an offset against policy
acquisition and general and administrative expenses. The CAT LAE Reimbursement
Payment and the MPCI Excess LAE Reimbursement Payment are, for income statement
purposes, recorded as an offset against LAE, up to the actual amount of LAE
incurred by the Company in respect of such policies, and the remainder of the
payment, if any, is recorded as other income.
In 1996, the Company instituted a policy of recognizing (i) 35% of its
estimated MPCI Gross Premiums Written for each of the first and second quarters,
(ii) commission expense on MPCI Gross Premiums Written at contractual rates and
(iii) Buy-up Expense Reimbursement at the contractual rate of MPCI Gross
Premiums Written along with normal operating expenses incurred in connection
with premium writings. In the third quarter, if a sufficient volume of
policyholder acreage reports have been received and processed by the Company,
the Company's policy is to recognize MPCI Gross Premiums Written for the first
nine months based on a re-estimate. If an insufficient volume of policies have
been processed, the Company's policy is to recognize 20% of its full year
estimate of MPCI Gross Premiums Written in the third quarter. The remaining
amount of MPCI Gross Premiums Written is recognized in the fourth quarter, when
all amounts are reconciled. In prior years, recognition of MPCI Gross Premiums
Written was 30%, 30%, 30% and 10%, for the first, second, third and fourth
quarters, respectively. Commencing with its June 30, 1995 financial statements,
the Company also began recognizing MPCI underwriting gain or loss during the
first, second and third quarters, reflecting the Company's best estimate of the
amount of such gain or loss to be recognized for the full year, based on, among
other things, historical results, plus a provision for adverse developments. In
the fourth quarter, a reconciliation amount is recognized for the underwriting
gain or loss based on final premium and loss information.
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[small Goran logo]
Selected Segment Data of the Company
The following table presents historical segment data for the Company's
nonstandard automobile and crop insurance operations. This data does not reflect
results of operations attributable to corporate overhead, interest costs and
amortization of intangibles or commercial or reinsurance insurance operations,
nor does it include the results of operations of Superior prior to May 1, 1996.
Year Ended December 31,
Nonstandard - Automobile Insurance Operations 1997 1996 1995
Gross premiums written $323,915 $187,176 $49,005
======= ======= ======
Net premiums written $256,745 $186,579 $37,302
======= ======= ======
Net premiums earned $251,020 $168,746 $34,460
Fee income 15,515 7,578 1,787
Net investment income 10,969 6,489 624
Net realized capital gain (loss) 9,462 (1,014) (508)
------- ------ ------
Total Revenues 286,966 181,799 36,363
------- ------- ------
Losses and loss adjustment expenses 195,900 124,385 25,423
Policy acquisition and general and administrative expenses 72,463 46,796 12,929
------- ------ ------
Total Expenses 268,363 171,181 38,352
------- ------- ------
Earnings (loss) before income taxes $18,603 $10,618 $(1,989)
======= ====== ======
GAAP RATIOS (Nonstandard Automobile Only)
Loss ratio 70.2% 65.1% 65.8%
LAE ratio 7.8% 8.6% 8.0%
Expense ratio, net of billing fees 22.7% 23.2% 32.3%
---- ---- ----
Combined ratio 100.7% 96.9% 106.1%
===== ==== =====
Crop Insurance Operations:
Gross premiums written $126,401 $110,059 $70,374
======= ======= ======
Net premiums written $20,796 $23,013 $11,608
====== ====== ======
Net premiums earned $20,794 $23,013 $11,608
Fee income 4,764 1,672 384
Net investment income 191 181 674
Net realized capital gain (loss) (18) (1) 164
----- -- ---
Total Revenues 25,731 24,865 12,830
------ ------ ------
Losses and loss adjustment expenses 16,185 12,724 8,629
Policy acquisition and general and administrative expenses(1) (11,551) (6,095) (7,466)
Interest and amortization of intangibles 235 551 627
----- ----- -----
Total Expenses 4,869 7,180 1,790
----- ----- ------
Earnings before income taxes $20,862 $17,685 $11,040
====== ====== ======
Statutory Capital and Surplus:
Pafco $19,924 $18,112 $11,875
IGF 42,809 29,412 9,219
Superior 65,146 57,121 49,277
(1) Negative crop expenses are caused by inclusion of MPCI expense
reimbursements and underwriting gain.
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[small Goran logo]
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Overview
1997 Compared To 1996
The Company recorded earnings from continuing operations of $15,983,000 or $2.86
per share, respectively in 1997. This is approximately a 13.1% and 7.1% increase
from 1996 comparable amounts of $14,127,000 or $2.67 per share. In the fourth
quarter of 1997, the Company discontinued the operations of SIGFL and expects to
sell these operations in 1998. The intended sale results from the Company's
decision to focus on nonstandard automobile, crop and reinsurance operations.
The Company recorded a loss from discontinued operations of $3,545,000 in 1997
compared to a loss of $1,000,000 in 1996. Such increase was due to a
deterioration in the loss ratio. The Company also recorded a gain of $18,169,000
in 1996 from the sale of SIG stock in its IPO. That gain is not included as part
of earnings from continuing operations. The nonstandard automobile insurance
segment demonstrated improved earnings due to continued premium growth, improved
expense ratios and higher realized gains from investment sales. Premium growth
in nonstandard automobile was generated from increased pressure on uninsured
motorists to obtain insurance, expansion into new states and increased market
share penetration. During 1997, the Company increased reserves at Pafco for both
prior and current accident years. The total increase for prior accident years at
Pafco was approximately $7.5 million. The improvement in crop insurance earnings
relates to growth in market share and favorable underwriting results. Growth in
market share occurred in all product lines for crop and is the result of
improved marketing and agent service efforts. Record underwriting results are
due to favorable crop conditions and continued improvement in risk selection.
1996 Compared To 1995
Earnings and earnings per share from continuing operations increased 97.4% to
$14,127,000 and 86.7% to $2.67 in 1996 from $7,157,000 and $1.43 in 1995.
Improved earnings in 1996 were attributable to both the nonstandard automobile
and crop segments. The nonstandard automobile segment benefitted from
significant premium growth from the acquisition of Superior, elimination of
quota share reinsurance and internal growth. The nonstandard automobile segment
also benefitted from lower loss and expense ratios due to improved claims
management, introduction of multi-tiered products and operating efficiencies
through reengineering, management changes and gains from technological
advancements. The crop insurance segment also benefitted from significant
premium growth in both crop hail and MPCI premiums. The crop insurance segment's
profitability was enhanced by a lower crop hail loss ratio and improved MPCI
underwriting gains.
Years Ended December 31, 1997 and 1996
Gross Premiums Written
Consolidated Gross Premiums Written increased 50.0% in 1997 due to
growth in both the nonstandard automobile and crop segments. Gross Premiums
Written for the nonstandard automobile segment increased 73.1% in 1997. While a
portion of this increase relates to four additional months of premium in 1997 of
Superior, additional premium growth relates to internal growth due to improved
service, certain product improvements, tougher uninsured motorist laws in states
such as California and Florida and entrance into new states such as Nevada and
Oregon. Such increase was primarily due to volume rather than rate increases,
although the Company adjusts rates on an ongoing basis. Gross Premiums Written
for the crop segment increased 14.5% in 1997. Such increase was due to continued
industry privatization and aggressive marketing efforts, resulting in continued
increase in market share. Remaining gross written premiums represent reinsurance
business.
Net Premiums Written
Net Premiums Written increased in 1997 as compared to 1996 due to the
growth in Gross Premiums Written offset by quota share reinsurance.
In 1997, the Company ceded $62,412,000 of nonstandard automobile
premiums as part of a quota share treaty instituted January 1, 1997. For the
first three quarters of 1997 the Company ceded 20% of nonstandard automobile
premiums and ceded 25% of such premiums in the fourth quarter. In 1998 the
Company plans to cede 10% of nonstandard automobile premiums with adjustments as
needed for surplus leverage. No such treaty was in effect during 1996. In 1997,
the Company ceded $15,640,000 of crop hail premiums as part of a 40% quota share
treaty instituted January 1, 1997. In 1996, crop hail premiums were ceded at a
rate of 10%. Granite Re participated in 10% of the nonstandard automobile quota
share treaties but did not participate in the crop hail quota share treaties.
Net Premiums Earned
Net Premiums Earned increased in 1997 as compared to the prior year,
reflecting the strong growth in Gross Written Premiums offset by the effects of
the nonstandard automobile and crop hail quota share treaties. Net premiums
earned to net premiums written for the nonstandard automobile segment was 97.8%
in 1997 as compared to 90.4% in 1996. The increase in the earned ratio is due to
higher premium growth earlier in 1997.
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[small Goran logo]
Fee Income
Fee income increased $11,023,000 in 1997 compared to 1996. Such
increase was due to billing fee income on nonstandard automobile business from
an increase in in-force policy count. There was also an increase in the receipt
of CAT Coverage Fees and CAT LAE Reimbursement Payments due to higher premium
volume.
Net Investment Income
Net investment income increased $5,032,000 in 1997 compared to 1996.
Such increase was due primarily from additional months of investment income from
Superior but also due to greater invested assets resulting from premium growth
and higher profitability.
Net Realized Capital Gains (Loss)
Realized gains of $9,393,000 in 1997 were due to the significant
strength of the equity markets in 1997 and the Company's position to realize
gains as securities had reached targeted pricing levels.
Losses and LAE
The Loss and LAE Ratio for the nonstandard automobile segment was 78.0%
for 1997 as compared to 73.7% for 1996. The Crop Hail Loss Ratio in 1997 was
77.8% compared to 55.3% in 1996. The increase in the Loss and LAE Ratio for the
nonstandard automobile segment reflects the recent growth in premium volume in
an effort to increase market share and improve economies of scale, increased
physical damage severity costs and certain pending rate increases. The Company
increased 1996 and prior nonstandard automobile reserves at Pafco by $6.0
million in the first two quarters and $1.5 million in the fourth quarter which
increased the Loss and LAE Ratio by 3.0% in 1997. Deficient reserve development
at superior was approximately $2.5 million in 1997. The increase in the crop
hail loss ratio is the result of storm damage in the third quarter in certain
eastern states on new business obtained in 1997. The Company continues to
aggressively address ways to decrease the nonstandard automobile loss ratios
including elimination of unprofitable agents, rate increases and improved claims
management and closure rates. The Company is also reviewing the pricing of the
crop hail business to improve future loss experience.
Policy Acquisition and General and Administrative Expenses
Policy acquisition and general and administrative expenses have
increased as a result of the increased volume of business produced by the
Company. Policy acquisition and general and administrative expenses rose to
$66,197,000 or 23.9% of Net Premiums Earned for 1997 compared to $48,647,000 or
23.3% of Net Premiums Earned in 1996. The Expense Ratio, net of billing fees,
for the nonstandard automobile segment improved to 22.7% for 1997 as compared to
23.2% for 1996.
Due to the accounting for the crop insurance segment, operating
expenses for 1997 includes a contribution to earnings of $11,551,000 as compared
to $6,095,000 for 1996. Such increase was due to greater Buy-up Expense
Reimbursement Payments and MPCI underwriting gain due to increased premium
volumes and more favorable underwriting results.
Amortization of intangibles includes goodwill from the acquisition of
Superior, additional goodwill from the acquisition of the minority interest
position in GGSH, debt or preferred security issuance costs and organizational
costs. The increase in 1997 reflects the effects of the Preferred Securities
Offering.
Interest Expense
Interest expense primarily represents interest incurred since April 30,
1996 on the GGS Senior Credit Facility. The GGS Senior Credit Facility was
repaid with the proceeds from the Preferred Securities Offering.
Income Tax Expense
Income tax expense was 30.6% of pre-tax income from continuing
operations for 1997 as compared to 32.2% in 1996.
Distributions on Preferred Securities
Distributions on Preferred Securities are calculated at a rate of 9.5%
net of federal income taxes from the offering date of August 12, 1997.
Years Ended December 31, 1996 and 1995
Gross Premiums Written
Gross Premiums Written in 1996 increased to $299,376,000 from
$146,603,000 in 1995 reflecting a 282% increase in nonstandard automobile
insurance and an increase of 56.4% in crop insurance. Other Gross Premiums
Written consist of finite reinsurance premiums. The increase in nonstandard
automobile Gross Premiums Written was due to the Acquisition, which generated
Gross Premiums Written of $118,661,000 subsequent to the Acquisition, as well as
a 21% increase in policies in-force issued by Pafco. The increase in Pafco
policies in-force primarily resulted from improved service and product
improvements. The increase in crop insurance Gross Premiums Written was
primarily due to (i) farmers electing higher percentage of crop price levels to
be insured under MPCI Buy-up Coverages, (ii) an increase in MPCI policies
in-force, and (iii) increase in the number of acres insured, together with an
increase of $10,990,000, or 64.8%, in crop hail premiums in 1996 compared to
1995.
Net Premiums Written
The Company's Net Premiums Written in 1996 increased 161.3% to
$213,778,000 from $81,822,000 in 1995 due to the Acquisition, which generated
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[small Goran logo]
MANAGEMENT'S DISCSUSSION AND ANALYSIS
Net Premiums Written for Superior of $118,298,000 subsequent to the Acquisition,
and the increase in Gross Premiums Written in Pafco's nonstandard automobile
insurance business. In addition, the increase in Net Premiums Written resulted
from the Company's election not to renew, as of January 1, 1996, its 25% quota
share reinsurance on its nonstandard automobile business. As a result of
increases over time in its statutory capital, the Company determined that it no
longer required the additional capacity provided by this coverage in order to
maintain acceptable premium to surplus ratios. Since all MPCI premiums are
reported as 100% ceded, MPCI Gross Premiums Written have no effect on Net
Premiums Written.
Net Premiums Earned
The Company's Net Premiums Earned in 1996 increased 188.1% reflecting
the increase in Net Premiums Written. The ratio of Net Premiums Earned to Net
Premiums Written in 1996 increased to 97.7% from 88.7% in 1995 due to growth in
Net Premiums Written in 1996 exceeding growth in Net Premiums Written in 1995.
Fee Income
The Company's fee income in 1996 increased 327.9% due principally to
(i) billing fee revenue of $4,655,000 at Superior subsequent to the Acquisition,
(ii) increased billing fee revenue at Pafco of $998,000 from nonstandard
automobile insurance policies, resulting from the increase in the in-force
policy count described above, and an increase in fees charged per installment in
late 1995, and (iii) increased CAT Coverage Fees and CAT LAE Reimbursement
Payments resulting from the introduction of CAT Coverages in the Federal Crop
Insurance Reform Act of 1994 (the "1994 Reform Act").
Net Investment Income
The Company's net investment income in 1996 increased 100.2%. This
increase was due primarily to the investment earnings of $4,996,000 at Superior
subsequent to the Acquisition. Also contributing to the increase in net
investment income is an increase in average invested assets in the nonstandard
automobile division (not including Superior) to $30,911,000 in 1996 from
$22,653,000 in 1995.
Net Realized Capital Gain (Loss)
The Company recorded a net realized capital loss from the sale of
investments of $637,000 in 1996 compared to a net realized capital loss from the
sale of investments of $198,000 in 1995. The net realized capital loss in 1996
was the result of sales of securities to shorten the portfolio's overall
maturity to provide a better duration match with claims payments.
Losses and LAE
The Loss and LAE Ratio for the nonstandard automobile segment in 1996
was 73.7% as compared to 73.8% in 1995. The reduction in the Loss and LAE Ratio
for 1996 was a function of rate increases and improved claim closure ratios.
Crop hail loss ratios decreased in 1996 to 55.3% from 74.3% in 1995 due to more
favorable weather conditions and a broader geographic expansion of premiums
which serves to reduce exposure.
Policy Acquisition and General and Administrative Expenses
The Expense Ratio for the nonstandard automobile segment, net of
billing fees decreased to 23.2% in 1996 from 32.3% in 1995. This decrease was
due to several factors including: (i) lower commission expense at Superior
through utilization of multi-tier products, (ii) lower staff expenses as a
result of higher utilization and work flow re-engineering, and (iii)
technological advancements in the underwriting, premium processing and claims
areas. As a result of the accounting for the crop insurance segment, such
segment experienced a contribution to income reflected in the policy acquisition
and general and administrative expense line item of $6,095,000 in 1996 compared
to a contribution to income of $7,466,000 in 1995. This decrease in contribution
resulted from a combination of several factors. The primary difference is the
decrease in ceding commission income of $2,036,000 which is due to only a 10%
quota share agreement for crop hail in 1996 versus a 25% quota share in 1995.
Other items include a commission expense increase of $6,217,000 due to higher
premium writings and an increase in other operating expenses of $4,153,000. This
net increase in expense of $10,370,000 was reduced by an increase of $8,490,000
in Buy-up Expense Reimbursement and an increase in the MPCI underwriting gain of
$2,624,000.
Interest Expense
The Company's interest expense in 1996 increased to $4,961,000 from
$1,761,000 in 1995 due primarily to interest of $2,774,000 on the $48 million
indebtedness incurred by a subsidiary of GGSH to partially fund the Acquisition
(the "GGS Senior Credit Facility").
Income Tax Expense
The effective tax rate in 1996 reflects a 32.2% provision compared to a
25.8% provision in 1995. The increase in the effective tax rate is due to lower
tax-exempt interest income.
-10-
[small Goran logo]
Symons International Group, Inc. - Florida ("SIGF")
Goran's wholly-owned subsidiary, Symons International Group, Inc. -
Florida is a specialized surplus lines underwriting unit. The Company decided to
discontinue the operations of this unit in 1997 and expects a sale of this
operation to occur in 1998. Such operations no longer fit the Company's
strategic operating plan of concentrating on the business segments of
nonstandard automobile, crop and reinsurance. Goran wrote third party property
and casualty coverage using Pafco, IGF and other insurance companies under
contract with SIGF. The volume of business grew by 15.7% to $9,560,000 in 1997
compared to $8,258,000 in 1996 and $5,414,000 in 1995, however, the underwriting
profits continued to deteriorate in 1997. SIGF produced an overall loss to the
Company of $3,545,000 in 1997 compared to $1,000,000 in 1996 and compared to a
profit of $14,000 for 1995.
Non-U.S. Operations
Granite Insurance Company ("Granite")
Granite is a Canadian federally licensed insurance company which is
presently servicing its investment portfolio and a very 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 some deficiencies showing in the most
recent year. Granite's invested assets reduced to $3.4 million from $4.5 million
in 1996. This is the result of the administration and settlement of claims.
Total outstanding claims decreased to $1.3 million in 1997 from $1.9 million in
1996. It is expected that the run-off of outstanding claims will continue at
least until 1998. Granite recorded a net loss of $261,000 in 1997, compared to
$50,000 earnings in 1996 and $200,000 earnings in 1995. This is reflective of
the reduction in investment income.
Granite Reinsurance Company Limited ("Granite Re")
Granite Re is managed by Atlantic Security Ltd. of Bermuda and
Colybrand in Barbados. Granite Re underwrites finite risk reinsurance, stop loss
reinsurance and quota share reinsurance. This reinsurance involves a defined
maximum risk at the time of entering into a contract. Granite Re participates in
various programs in Bermuda, the United States and Canada. On December 31, 1995,
its Canadian quota share terminated and is now in run -off which is expected to
yield investment revenue and underwriting gains for the next five to six years.
The loss portfolio transfer program implemented on June 30, 1990, is now winding
down in accordance with management's forecast and is producing profits as
anticipated. During 1997, 1996 and 1995, Granite Re participated in certain stop
loss programs for Goran's crop insurance subsidiary, IGF. These covers were in
accordance with third party placements where Granite Re took a portion after
terms having been established by substantial third party reinsurers. In 1997,
Granite Re participated in Goran's nonstandard automobile subsidiaries quota
share treaty. On January 1, 1996, it assumed all of the outstanding losses and
the book of business of Pafco's premium writings from the surplus lines
operation in Florida, which is expected to be sold in 1998. Gross premiums
written during the 12 months ended November 30, 1997 (Granite Re has a year-end
different from Goran) were $10.5 million compared to $12.3 million for the
corresponding period in 1996 and $34.8 million in 1995. Earnings were $2.3
million, $2.6 million and $4.0 million in 1997, 1996 and 1995, respectively.
Total capital and surplus of Granite Re increased to $18.0 million in
1997 from $15.8 million in 1996. Granite Re initially started July 1, 1990 with
a capital base of $825,000. Granite Re intends to continue to broaden its base
to include captive reinsurance, finite reinsurance, and its existing programs as
outlined above.
The programs currently underwritten by Granite Re generate a loss
portfolio that is matched with cash and investments. Such portfolios take about
eight to nine years to run-off, thus generating investment returns and
underwriting gains and losses during the life of the run-off. New business
underwritten is added to the portfolio of outstanding losses and invested
assets, thus perpetuating the growth of Granite Re through fees, investment
income and underwriting profits.
Liquidity and Capital Resources
The primary sources of funds available to Goran are from the management
fee arrangements with Granite. At this time SIG pays no dividends to Goran or
any of its shareholders. The primary source of funds available to SIG as a
holding company are dividends from its primary subsidiaries, IGF, IGF Holdings
and GGS Management. SIG also receives $150,000 quarterly pursuant to an
administration agreement with IGF to cover the costs of executive management,
accounting, investing, marketing, data processing and reinsurance.
GGS Management collects billing fees charged to policyholders of Pafco
and Superior who elect to make their premium payments in installments. GGS
Management also receives management fees under its management agreement with
Pafco and Superior. When the Florida Department of Insurance ("Florida
-11-
[small Goran logo]
MANAGEMENT'S DISCUSSION AND ANALYSIS
Department") approved the acquisition of Superior by GGS Holdings, it prohibited
Superior from paying any dividends (whether extraordinary or not) for four years
from the date of Acquisition without the prior written approval of the Florida
Department. 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 and Superior by GGS
Management are subject to review by the Indiana and Florida Departments of
Insurance.
The nonstandard automobile insurance subsidiaries' primary sources 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,
operating expenses (primarily management fees), commissions, 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 without forced sales of investments. As claim
payments tend to lag premium receipts and due to the growth in premium volume
the Company has experienced an increase in its investment portfolio and has not
experienced any problems with meeting its obligations for claims payments or
management fees.
As of December 31, 1997, IGF has the ability to pay $13,404,000 in
dividends without prior regulatory approval.
Cash flows in the Company's MPCI business differ from cash flows from
certain more traditional lines. The Company pays insured losses to farmers as
they are incurred during the growing season, with the full amount of such
payments being reimbursed to the Company by the federal government within three
business days. MPCI premiums are not received from farmers until covered crops
are harvested. Such premiums are required to be paid in full to the FCIC by the
Company, with interest, if not paid by a specified date in each crop year.
During 1997, IGF continued the practice of borrowing funds under a
revolving line of credit to finance premiums payable to the FCIC on amounts not
yet received from farmers (the "IGF Revolver"). The maximum borrowing amount
under the IGF Revolver was $6,000,000 until July 1, 1996, at which time the
maximum borrowing amount increased to $7,000,000. The IGF Revolver carried a
weighted average interest rate of 9.7%, 8.6%, and 8.75% in 1995, 1996 and 1997,
respectively. These payables to the FCIC accrue interest at a rate of 15%, as do
the receivables from farmers. By utilizing the IGF Revolver, which bears
interest at a floating rate equal to the prime rate plus .25%, IGF avoids
incurring interest expense at the rate of 15% on interest payable to the FCIC
while continuing to earn 15% interest on the receivables due from the farmer.
Subsequent to December 31, 1997, IGF had reduced its contractual borrowing rate
to prime minus .75%. The IGF Revolver contains certain covenants which restrict
IGF's ability to (i) incur indebtedness and (ii) make loans to others, including
affiliates. The IGF Revolver also contains other customary covenants which,
among other things, restricts IGF's ability to participate in mergers, acquire
another enterprise or participate in the organization or creation of any other
business entity. At December 31, 1997, $2,918,000 remains available under the
IGF Revolver.
On August 12, 1997, SIG issued $135 million in Trust Originated
Preferred Securities (the "Preferred Securities Offering"). These Preferred
Securities were offered through a wholly-owned trust subsidiary of SIG and are
backed by Senior Subordinated Notes to the Trust from SIG. These Preferred
Securities were offered under Rule 144A of the SEC and, pursuant to the
Registration Rights Agreement executed at closing, SIG filed a Form S- 4
Registration Statement with the SEC on September 16, 1997 to effect the Exchange
Offer. The S-4 Registration Statement was declared effective on September 30,
1997 and the Exchange Offer successfully closed on October 31, 1997. The
proceeds of the Preferred Securities Offering were used to repurchase the
remaining minority interest in GGSH for $61 million, repay the balance of the
GGS Senior Credit Facility of $44.9 million and SIG expects to contribute the
balance, after expenses, of approximately $24 million to the nonstandard
automobile insurers of which $10.5 million was contributed in 1997. Expenses of
the issue aggregated $5.1 million and will be amortized over the term of the
Preferred Securities (30 years). In the third quarter SIG wrote off the
remaining unamortized costs of the GGS Senior Credit Facility of approximately
$1.1 million pre-tax or approximately $0.09 per share after income taxes and
minority interest.
The Preferred Securities have a term of 30 years with semi-annual
distribution payments at 9.5% per annum commencing February 15, 1998. The
Preferred Securities may be redeemed in whole or in part after 10 years.
SIG shall not, and shall not permit any subsidiary, to incur directly
or indirectly, any indebtedness unless, on the date of such incurrence ( and
after giving effect thereto), the consolidated coverage ratio exceeds 2.5 to 1.
The coverage ratio is the aggregate of net earnings, plus interest expense,
income taxes, depreciation and amortization divided by interest expense for the
same period.
The Company plans to fund the distributions on the Preferred Securities
from the excess management and billing fees which are paid by the nonstandard
automobile insurers to their management company. The Company believes such funds
are adequate to pay the distributions on the Preferred Securities for the
forseeable future. Additionally, the Company has available dividend capacity
from IGF to also meet this funding.
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[small Goran logo]
[photograph of cars on freeway down right margin]
Net cash provided by operating activities in 1997 aggregated
$14,027,000 compared to $12,728,000 in 1996, excluding the sale of subsidiary
stock in 1996 of $18,169,000. This increase in funds provided was caused by
additional cash of $15,508,000 from net earnings adjusted for non-cash expenses
and realized gains or losses and continued premium growth which results in
increased cash flows as loss payments lag receipt of premiums. Net cash used in
investing activities increased from $80,482,000 in 1996 to $100,208,000 in 1997
reflecting investment of remaining proceeds from the Preferred Securities
Offering and cash flow from operations. In 1997, financing activities provided
cash of $89,007,000 compared to cash provided of $72,703,000 in 1996, with funds
in 1997 primarily from the Preferred Securities Offering while funds provided in
1996 were primarily from the financing of the acquisition of Superior.
Net cash provided by operating activities in 1996 was $30,897,000
compared to $9,637,000 in 1995 for an increase of $21,260,000. This increase was
due to the $18,169,000 gain from the SIG IPO as well as improved profitability
and growth in written premiums. Loss payments in the nonstandard automobile
insurance business tend to lag behind receipt of premiums thus providing cash
for operations. Net cash used in investing activities increased from $5,673,000
in 1995 to $80,482,000 in 1996. Included in 1996 was a $66,590,000 use of cash
for the Acquisition. The remaining increase in cash used in investing activities
in 1996 related to the growth in investments due to increased cash provided by
operating activities. The primary items comprising the $72,703,000 of cash
provided by financing activities in 1996 were the $48,000,000 of proceeds from
the GGS Senior Credit Facility, $21,200,000 minority interest investment
received as part of the formation of GGS Holdings and the funding of the
Acquisition and $37,969,000 of proceeds from the Initial Public Offering.
The Company believes cash flows in the nonstandard automobile segment
from premiums, investment income and billing fees are sufficient to meet that
segment's obligations to policyholders, operating expenses and debt service for
the foreseeable future. This is due primarily to the lag time between receipt of
premiums and claims payments. Therefore, the Company does not anticipate
additional borrowings for this segment other than in the event of an
acquisition. The Company also believes cash flows in the crop segment from
premiums and expense reimbursements are sufficient to meet the segment's
obligations for the foreseeable future. Due to the more seasonal nature of the
crop segment's operations, it may be necessary to obtain short term funding at
times during a calendar year by drawing on an existing line of credit. Except
for this short term funding and normal increases therein resulting from an
increase in the business in force, the Company does not anticipate any
significant short or long term additional borrowing needs for this segment.
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 debt
service for the foreseeable future and, therefore, does not anticipate
additional borrowings except as may be necessary to finance acquisitions.
While GAAP shareholders' equity was $60,332,000 at December 31, 1997,
it does not reflect the statutory equity upon which the Company conducts its
various insurance operations. Pafco, Superior and IGF individually had statutory
surplus at December 31, 1997 of $19,924,000, $65,146,000 and $42,809,000,
respectively.
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[small Goran logo]
MANAGEMENT'S DISCUSSION AND ANALYSIS
Effects of Inflation
Due to the short term that claims are outstanding in the two 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 Generally Accepted Accounting Principles ("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 is considering the adoption of a recommended statutory
accounting standard for crop insurers, the impact of which is uncertain since
several methodologies are currently being examined. Although the Indiana
Department has permitted the Company to continue, for its statutory financial
statements through March 31, 1998, its practice of recording its MPCI business
as 100% ceded to the FCIC with net underwriting results recognized in ceding
commissions, the Indiana Department has indicated that in the future it will
require the Company to adopt the MPCI accounting practices recommended by the
NAIC or any similar practice adopted by the Indiana Department. Since such a
standard would be adopted industry wide for crop insurers, the Company would
also be required to conform its future GAAP financial statements to reflect the
new MPCI statutory accounting methodology and to restate all historical GAAP
financial statements consistent with this methodology for comparability. The
Company cannot predict what accounting methodology will eventually be
implemented or when the Company will be required to adopt such methodology. The
Company anticipates that any such new crop accounting methodology will not
affect GAAP net earnings.
The NAIC currently has a project under way to codify SAP, as existing
SAP does not address all accounting issues and may differ from state to state.
Upon completion, the codification is expected to replace prescribed or permitted
SAP in each state as the new comprehensive statutory basis of accounting for
insurance companies. The final format of the codification is uncertain at this
time, yet implementation could be required as early as January 1, 1999. Due to
the project's uncertainty, the Company has not yet quantified the impact any
such changes would have on the statutory capital and surplus or results of
operations of the Company's insurance subsidiaries. The impact of adopting this
new comprehensive statutory basis of accounting may, however, materially impact
statutory capital and surplus.
Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable year. This
could result in recognizing data using "00" as 1900 rather than 2000 which could
result in system failures or miscalculations. This could create a disruption in
business activities.
The Company's nonstandard automobile operations have been in the
process of developing a completely new array of information technology services.
During 1998 the Company will be testing and implementing these new systems and
expects to be fully operational with these new systems in 1998. The new systems
will be completely Year 2000 compliant. However, the intention of the new
systems was to improve transaction processing and the Company's expense ratio
rather than any Year 2000 issue. The Company has expended most of the funds
necessary for implementation of these new systems prior to January 1, 1998 and
does not expect expenditures in 1998 to be material.
The Company's crop operations have been implementing changes to
incorporate Year 2000 concerns for the past two years and expect completion of
such efforts in 1998. Expenditures for these changes have not been material and
are not expected to be material in the future.
While implementation of these new systems or changes to existing
systems carries risks that modifications will need to be made in order for them
to be completely effective, the Company believes at this time that such
modifications will not require material funds and will not be extensive
subsequent to December 31, 1998. There is no assurance that such systems will be
implemented without a disruption to the Company's operations.
-14-
[small Goran logo]
CONSOLIDATED FINANCIAL STATEMENTS
As at December 31
(in thousands of U.S. dollars, except per share data)
CONSOLIDATED BALANCE SHEETS
ASSETS 1997 1996
Cash and investments (note 5) $247,124 $202,666
------- -------
Accounts Receivable
Premiums receivable 89,762 63,874
Due from insurance companies 13,782 33,905
Due from associated companies 1,442 140
Accrued and other receivables 2,658 3,330
------- -------
107,644 101,249
Reinsurance recoverable on outstanding claims 94,424 33,113
Prepaid reinsurance premiums 36,607 14,983
Capital assets (note 6) 12,230 8,181
Deferred policy acquisition costs 11,849 13,860
Deferred income taxes 2,098 974
Intangibles (note 7) 42,562 4,089
Other assets 6,310 2,227
------- -------
$560,848 $381,342
======= =======
LIABILITIES
Accounts Payable
Due to insurance companies $37,350 $5,755
Accrued and other payables 27,266 21,051
------- -------
64,616 26,806
Outstanding claims (notes 2(e) and 4) 152,871 127,045
Unearned premiums (note 4) 118,616 91,207
Bank loans (note 8) 4,182 48,000
------- -------
340,285 293,058
------- -------
Minority interest:
Equity in net assets of subsidiaries 25,231 41,026
Preferred Securities (note 3) 135,000 ---
------- -------
160,231 41,026
------- -------
Contingent liabilities and commitments (note 12)
SHAREHOLDERS EQUITY 60,332 47,258
------- -------
$560,848 $381,342
======= =======
See accompanying notes to Consolidated Financial Statements
Approved on behalf of the board
/s/ /s/
Director Director
-15-
[small Goran logo]
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31
(in thousands of U.S. Dollars, except per share data)
CONSOLIDATED STATEMENTS OF EARNINGS
REVENUE 1997 1996 1995
Gross premiums written $448,982 $299,376 $146,603
======= ======= =======
Net premiums written $281,896 $213,778 $81,822
======= ======= ======
Net premiums earned $276,540 $208,883 $72,530
Fee income 20,309 9,286 2,170
Net investment income 12,777 7,745 3,868
Net realized capital gains (losses) 9,393 (637) (198)
------- ------- ------
Total Revenue 319,019 225,277 78,370
------- ------- ------
EXPENSES
Net claims incurred 210,634 146,274 51,453
Commissions and operating expenses (note 14) 66,197 48,647 15,502
Amortization of intangibles 1,197 411 ---
Interest expense 3,087 4,961 1,761
------- ------- ------
Total Expenses 281,115 200,293 68,716
------- ------- ------
Earnings before undernoted items 37,904 24,984 9,654
Provision for income taxes (note 10) 11,596 8,056 2,497
Preferred security distributions, net of tax 3,120 --- ---
Minority interest 7,205 2,801 ---
------ ------ -----
Earnings from continuing operations 15,983 14,127 7,157
Net earnings (loss) from discontinued operations
(note 3) (3,545) (1,000) 14
Gain on sale of subsidiary stock (note 3) --- 18,169 ---
------- ------ -----
Net earnings $12,438 $31,296 $7,171
====== ====== =====
Earnings per share from continuing operations $2.86 $2.67 $1.43
Earnings per share from continuing operations -
fully diluted $2.70 $2.48 $1.24
Net earnings per share $2.22 $5.92 $1.43
Net earnings per share - fully diluted $2.12 $5.28 $1.24
==== ==== ====
See accompanying Notes to Consolidated Financial Statements
-16-
[small Goran logo]
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31
(in thousands of U.S. Dollars, except per share data)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Capital Cumulative Retained Total
Stock Contributed Translation Earnings Shareholders'
(Note 9) Surplus Adjustment (Deficit) Equity
Balance at December 31,
1995 $16,817,000 $ --- $(300,000) $(3,895,000) $12,622,000
Issuance of common shares 599,000 --- --- --- 599,000
Increase in contributed
surplus --- 2,775,000 --- --- 2,775,000
Change in cumulative
translation adjustment --- --- (34,000) --- (34,000)
Net earnings --- --- --- 31,296,000 31,296,000
---------- --------- ------- ---------- ----------
Balance at December 31,
1996 17,416,000 2,775,000 (334,000) 27,401,000 47,258,000
Issuance of common shares 594,000 --- --- --- 594,000
Change in cumulative
translation adjustment --- --- 42,000 --- 42,000
Net earnings --- --- --- 12,438,000 12,438,000
----------- --------- ------- ---------- ----------
Balance at December 31,
1997 $18,010,000 $2,775,000 $(292,000) $39,839,000 $60,332,000
========== ========= ======= ========== ==========
See accompanying Notes to Consolidated Financial Statements
-17-
[small Goran logo]
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31
(in thousands of U.S. Dollars, except per share data)
CONSOLIDATED STATEMENTS OF CHANGES IN CASH RESOURCES
1997 1996 1995
Cash provided by (used in):
Operating activities
Net earnings $12,438 $31,296 $ 7,171
Items not involving cash:
Amortization 5,258 2,438 693
Minority interest share in net earnings 7,205 2,801 (16)
Loss (gain) on sale of investments (9,393) 637 198
Gain on sale of capital assets --- (4) (7)
------- ------ ------
Working capital provided by operating activities 15,508 37,168 8,039
Changes in working capital relating to operations
(note 15) (1,481) (6,271) 1,598
------- ------ ------
14,027 30,897 9,637
------- ------ ------
Financing activities
Proceeds from issuance of preferred securities 129,877 --- ---
Repayment of debentures --- (11,085) (1,462)
Proceeds from (repayment of) bank loans (43,818) 42,189 220
Proceeds from consolidated subsidiary minority
interest owners 2,354 41,000 ---
Issue of share capital 594 599 303
------- ------ ------
89,007 72,703 (939)
------- ------ ------
Investing activities
Purchase of minority interest (61,000) --- ---
Acquisition of Superior --- (66,590) ---
Net purchase of marketable securities (34,535) (11,996) (4,147)
Net purchase of capital assets (5,803) (2,459) (1,681)
Other, net 1,130 563 155
------- ------ ------
(100,208) (80,482) (5,673)
------- ------ ------
Increase in cash resources during the year 2,826 23,118 3,025
Cash resources, beginning of year 33,731 10,613 7,588
------- ------ ------
Cash resources, end of year $36,557 $33,731 $10,613
======= ====== ======
Cash resources are comprised of:
Cash $13,324 $ 4,679 $ 4,171
Short-term investments $23,233 29,052 6,442
------- ------ ------
$36,557 $33,731 $10,613
======= ====== ======
See accompanying Notes to Consolidated Financial Statements
-18-
[small Goran logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
(in thousands of U.S. dollars, except share and per share data)
1. ORGANIZATION
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:
1. Symons International Group, Inc. ("SIG") is a 67% owned subsidiary of Goran.
SIG is primarily involved in the sale of nonstandard automobile insurance and
crop insurance. Its products are marketed through independent agents and
brokers, in 38 states, primarily in the Midwest and Southern United States.
SIG's wholly-owned subsidiaries are as follows:
GGS Management Holdings, Inc. ("GGSH") - a holding company for the nonstandard
automobile operations which includes GGS Management, Inc., Pafco General
Insurance Company and the Superior Insurance Company entities;
GGS Management, Inc. ("GGS") - a management company for the nonstandard
automobile operations domiciled in Delaware;
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; and
IGF Holdings, Inc. ("IGFH") - a holding company for the crop operations which
includes IGF Insurance Company ("IGF") - an insurance company domiciled in
Indiana.
2. Granite Reinsurance Company Ltd. ("Granite Re") - a finite risk reinsurance
company based in Barbados.
3. Granite Insurance Company ("Granite") - a Canadian federally licensed
insurance company which ceased writing new insurance policies on January 1,
1990.
4. Symons International Group, Inc. of Ft. Lauderdale, Florida ("SIGF") - a
Florida based surplus lines insurance agency. (See Note 3.)
On January 31, 1996, Goran and SIG entered into an agreement with GS Capital
Partners II, L.P. ("Goldman Sachs") to create a company, GGSH, to be owned 52%
by SIG and 48% by Goldman Sachs. GGSH created GGS, a management company for the
nonstandard automobile operations which includes Pafco and the Superior
entities. (See Note 3.)
On April 30, 1996, GGSH acquired the Superior entities through a purchase
business combination. The Company's consolidated results of operations for the
year ended December 31, 1996 include the results of operations of the Superior
entities subsequent to April 30, 1996, the date of the acquisition. (See Note
3.)
On August 12, 1997, SIG acquired the 48% minority interest in GGSH from Goldman
Funds through a purchase business combination. (See Note 3.)
-19-
[small Goran logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
(in thousands of U.S. dollars, except share and per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in Canada ("Canadian GAAP").
(a) Basis of Consolidation
The consolidated financial statements include the accounts of Goran and
its subsidiary companies.
All significant intercompany transactions and balances have been
eliminated.
(b) Premiums
Premiums are taken into income evenly over the lives of the related
policies.
(c) Commissions
Commission expenses and related reinsurance commission recoveries are
recorded at the effective date of the respective insurance policy.
(d) Deferred Policy Acquisition Costs
Deferred policy acquisition costs comprise of agents' commissions,
premium taxes and certain general expenses which are related directly
to the acquisition of premiums. These costs, to the extent that they
are considered recoverable, are deferred and amortized over the same
period that the related premiums are taken into income.
(e) Outstanding Claims
The reserve for outstanding claims includes estimates for reported
unpaid losses and losses incurred but not reported. Reserves are
established using case-basis valuations 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 are adequate, the provision for losses are necessarily based
on estimates and are subject to considerable variability. Changes in
the estimated reserves are charged and credited to operations as
additional information on the estimated amount of a claim becomes known
during the course of its settlement. The reserve for outstanding claims
has been reported on by independent actuaries. The Company's policy
regarding the recognition of the time value of money on outstanding
claims is as follows:
(i) DIRECT CLAIMS
The reserve includes the recognition of the time value of
money on direct claims liabilities. Using an interest rate of
6.0% (1996 - 7.5%) net claims incurred have been reduced by
$504 (1996 increased by $66) and outstanding claims at
December 31, 1997 reduced by $1,765 (1996 - $1,261).
(ii) ASSUMED CLAIMS
The Company has not recognized the time value of money with
respect to assumed claims liabilities over which it does not
have direct control over the timing of settlement of the
liabilities. If the Company had discounted these claims using
an interest rate of 6.0% (1996 - 7.5%) net claims incurred
would have been increased by $64 (1996 - increased by $730 )
and outstanding claims at December 31, 1997 would have been
reduced by $1,554 (1996 - $1,618).
-20-
[small Goran logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
(in thousands of U.S. dollars, except share and per share data)
(f) Investments
Investments in bonds, mortgages and debentures are carried at amortized
cost providing for the amortization of the discount or premium to
maturity date. Investments in short-term investments, real estate, and
equities are carried at cost. Gains and losses on disposal of
investments are taken into income when realized. When there has been a
loss in value of an investment that is other than a temporary decline,
the investment is written down to recognize the loss.
(g) Capital Assets
Capital assets are recorded at cost, net of accumulated amortization.
Amortization is provided at rates sufficient to amortize the costs over
the estimated useful lives of the assets.
(h) Foreign Currency Translation
Foreign currency transaction gains and losses are included in the
statement of earnings. Goran and each of its subsidiaries have been
determined to be self-sustaining foreign operations and are translated
using the current rate method whereby all assets and liabilities are
translated into U.S. dollars at the year end rate of exchange and
revenue and expense items are translated at the average rate of
exchange for the year. The resulting unrealized translation gain or
loss is deferred and shown separately in shareholders' equity. These
adjustments are not included in operations until realized through a
reduction in the Company's net investment in such operations.
(i) Use of Estimates
The preparation of financial statements of insurance companies 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 future as more information
becomes known which could impact the amounts reported and disclosed
herein.
(j) Comparative Figures
Certain comparative figures have been reclassified to conform to the
basis of presentation adopted in 1997.
(k) Preferred Securities
Preferred securities represent SIG-obligated mandatorily redeemable
securities of subsidiary holding solely parent debentures and are
reported at their liquidation value under minority interest.
Distributions on these securities are charged against consolidated
earnings.
3. CORPORATE REORGANIZATION, ACQUISITIONS AND PUBLIC OFFERINGS
In April 1996, Pafco contributed all of the outstanding shares of capital stock
of IGF to IGFH, a wholly-owned and newly formed subsidiary of Pafco, and the
Board of Directors of IGFH declared an $11,000 distribution to Pafco in the form
of cash or $7,500 and a note payable of $3,500 ("Pafco Note"). IGFH borrowed the
$7,500 portion of the distribution from a bank ("IGFH Note"). The notes were
paid in full from the proceeds of the Offering. Immediately following the
distribution, Pafco distributed all of the outstanding common stock of IGFH to
SIG. Although SIG believes the plan of reorganization or spin off did not result
in gain or loss, no assurance can be given that the Internal Revenue Service
will not challenge the transaction.
-21-
[small Goran logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
(in thousands of U.S. dollars, except share and per share data)
On January 31, 1996, the Company and SIG entered into an agreement ("Agreement")
with GS Capital Partners II, L.P. (the "Goldman Funds") to create GGSH, to be
owned 52% by the Company and 48% by the Goldman Funds. In accordance with the
Agreement, on April 30, 1996, the Company contributed certain fixed assets and
Pafco with a combined book value, determined in accordance with generally
accepted accounting principles, of $17,186, to GGSH. Goldman Funds contributed
$21,200 to GGSH, in accordance with the Agreement. In return for the cash
contribution of $21,200, Goldman Funds received a minority interest share in
GGSH at the date of contribution of $18,425, resulting in a $2,775 increase to
additional paid-in capital. At December 31, 1996, Goldman Funds' minority
interest share consisted of the following:
Contribution April 30, 1996 $18,425
GGSH earnings 2,801
------
$21,226
======
In connection with the above transactions, GGSH acquired (the "Acquisition") all
of the outstanding shares of common stock of Superior and its wholly-owned
subsidiaries, domiciled in Florida, (collectively referred to as "Superior") for
cash of $66,590. In conjunction with the Acquisition, the Company's funding was
through a senior bank facility of $48,000 and a cash contribution from Goldman
Funds of $21,200.
The acquisition of Superior was accounted for as a purchase and recorded as
follows:
Assets acquired $165,826
Liabilities assume 100,566
Net assets acquire 65,260
Purchase price 66,590
------
Goodwill $1,330
======
The Company's results from operations for the year ended December 31, 1996
include the results of Superior subsequent to April 30, 1996.
On August 12, 1997, the Company purchased the remaining minority interest in
GGSH for $61 million in cash. The excess of the acquisition price over the
minority interest liability of $25,355 aggregated approximately $35,645 and was
assigned to goodwill as the fair market value of acquired assets approximated
their carrying value.
Goodwill is amortized over a 25-year period on a straight-line basis based upon
management's estimate of the expected benefit period.
On November 5, 1996, SIG sold 3,000,000 shares at $12.50 per share in an initial
public offering ("IPO") of common stock. An additional 450,000 shares were sold
in December 1996 representing the exercise of the overallotment option. SIG
generated net proceeds after underwriter's discount and expenses, of $37,969
from the offering, the proceeds of which were used to repay the IGFH and Pafco
Notes, repay indebtedness to Goran and Granite Re of approximately $7,500 and
pay Goran a dividend of $3,500. The Company used its proceeds to pay off the
balance of its debentures.
Assuming that these transactions took place (including the IPO) at January 1,
1995 or at January 1, 1996, the pro-forma effect of these transactions would
result in summarized company consolidated statements of earnings as follows:
1996 1995
(unaudited)
Revenues $269,362 $185,629
Earnings from continuing operations $16,318 $9,421
Earnings per share from continuing operations $3.08 $1.88
-22-
[small Goran logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
(in thousands of U.S. dollars, except share and per share data)
As a result of the IPO, the Company effectively disposed of a 33% interest in
SIG. The change in the Company's share of SIG's net identifiable assets at the
time of the IPO, represented by the Company's 67% proportionate interest in the
net IPO proceeds over the 33% proportionate share of the book value of SIG
disposed, amounts to a gain of $18,169 and is reported as unusual income in
1996.
On August 12, 1997, SIG issued $135 million in Trust Originated Preferred
Securities ("Preferred Securities"). These Preferred Securities were offered
through a wholly-owned trust subsidiary of SIG and are backed by Senior
Subordinated Notes to the Trust from SIG. These Preferred Securities were
offered under Rule 144A of the SEC ("Preferred Securities Offering") and,
pursuant to the Registration Rights Agreement executed at closing, SIG filed a
Form S-4 Registration Statement with the SEC on September 16, 1997 to effect the
Exchange Offer. The S-4 Registration Statement was declared effective on
September 30, 1997 and the Exchange Offer successfully closed on October 31,
1997. The proceeds of the Preferred Securities Offering were used to repurchase
the remaining minority interest in GGSH for $61 million, repay the balance of
the term debt of $44.9 million and SIG expects to contribute the balance, after
expenses, of approximately $24 million to the nonstandard automobile insurers of
which $10.5 million was contributed in 1997. Expenses of the issue aggregated
$5.1 million and will be amortized over the term of the Preferred Securities (30
years). In the third quarter the Company wrote off the remaining unamortized
costs of the term debt of approximately $1.1 million pre-tax or approximately
$0.09 per share after income taxes and minority interest.
The Preferred Securities have a term of 30 years with semi-annual distribution
payments at 9.5% per annum commencing February 15, 1998. The Preferred
Securities may be redeemed in whole or in part after 10 years.
SIG shall not, and shall not permit any subsidiary, to incur directly or
indirectly, any indebtedness unless, on the date of such incurrence (and after
giving effect thereto), the Consolidated Coverage Ratio exceeds 2.5 to 1. The
Coverage Ratio is the aggregate of net earnings, plus interest expense, income
taxes, depreciation, and amortization divided by interest expense for the same
period.
Assuming the Preferred Securities Offering took place at January 1, 1997, the
proforma effect of this offering on the Company's consolidated statement of
earnings for the year ended December 31, 1997 is as follows:
Unaudited
(In thousands)
Revenues $319,019
Net earnings $11,163
Net earnings per common share $1.99
Proforma results for the Preferred Securities Offerings for 1996 and 1995 would
not be meaningful due to the Acquisition and IPO in 1996.
The pro-forma results are not necessarily indicative of what actually would have
occurred if these transactions had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results.
In December 1997, the Company discontinued the operations of SIGF. Accordingly,
the results of these operations have been accounted for separately from the
results of ongoing operations. The net loss from discontinued operations was
$3,545 and $1,000 and net earnings of $14 for the years ended December 31, 1997,
1996 and 1995, respectively.
-23-
[small Goran logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
(in thousands of U.S. dollars, except share and per share data)
4. REINSURANCE
The Company's insurance subsidiaries follow a policy of underwriting and
reinsuring contracts of insurance which limits their liability to a maximum
amount on any one claim for nonstandard automobile of $250 (1996 - $250) with
the result that claims incurred are stated net of reinsurance. The crop division
reinsures losses through stop loss in excess of 80% loss ratio for crop hail and
100% loss ratio for MPCI. As the primary insurers, the Company's insurance
subsidiaries maintain the principal liability to the policyholder.
The effect of reinsurance on the activities of the Group can be summarized as
follows:
1997 Gross Ceded Net
Premiums written $448,982 $(167,086) $281,896
Premiums earned 422,200 (145,660) 276,540
Incurred losses and loss adjustment expenses 312,079 (101,445) 210,634
Commission expense (note 14) 65,529 (74,426) 8,898
Outstanding claims 152,871 (94,424) 58,447
Unearned premiums 118,616 (36,607) 82,009
1996 Gross Ceded Net
Premiums written $299,376 $(85,598) $213,778
Premiums earned 303,187 (94,304) 208,883
Incurred losses and loss adjustment expenses 237,882 (91,608) 146,274
Commission expense (note 14) 48,601 (44,096) 4,505
Outstanding claims 127,045 (33,113) 93,932
Unearned premiums 91,207 (14,983) 76,224
1995 Gross Ceded Net
Premiums written $146,603 $(64,781) $ 81,822
Premiums earned 141,824 (69,294) 72,530
Incurred losses and loss adjustment expenses 145,261 (93,808) 51,453
Commission expense (note 14) 25,069 (25,950) (881)
Outstanding claims 87,655 (41,667) 45,988
Unearned premiums 33,159 (6,263) 26,896
5. CASH AND INVESTMENTS
1997 1996
Book Market Book Market
Value Value Value Value
Cash $13,324 $13,324 $4,679 $4,679
Short-term investments 23,233 23,233 29,052 29,052
Equities 35,446 36,631 28,443 29,431
Bonds and debentures 172,401 174,215 137,521 138,383
Mortgages 2,220 2,220 2,430 2,430
Real Estate 450 450 466 466
Other loan receivable 50 50 75 75
------- ------- ------- -------
Total Cash & Investments $247,124 $250,123 $202,666 $204,516
======= ======= ======= =======
-24-
[small Goran logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
(in thousands of U.S. dollars, except share and per share data)
At December 31, 1997, cash and investments of approximately $42,367 (1996 -
$41,659) are on deposit or held in trust by cedents, and to a limited amount
regulatory authorities, to secure certain of the outstanding claims of the
Company.
6. CAPITAL ASSETS
1997
Accumulated 1996
Cost Depreciation Net Net
Land $226 $--- $226 $226
Buildings 5,421 1,323 4,098 3,154
Furniture, fixture and equipment 12,119 4,242 7,877 4,788
Automobiles 46 17 29 13
------ ----- ----- -----
Total $17,812 $5,582 $12,230 $8,181
====== ===== ====== =====
Depreciation expense related to capital assets for the years ended December 31,
1997, 1996 and 1995, was $1,754, $1,811 and $483, respectively.
7. INTANGIBLES
Intangible assets at December 31 are as follows:
1997
Accumulated 1996
Cost Depreciation Net Net
Goodwill $36,975 $654 $36,321 $1,330
Deferred preferred security debt costs 5,123 70 5,053 ---
Deferred debt costs --- --- --- 1,232
Organization costs 1,527 339 1,188 1,527
------ ----- ------ -----
Total $43,625 $1,063 $42,562 $4,089
====== ===== ====== =====
Amortization expense related to intangible assets for the years ended December
31, 1997, 1996, and 1995 was $1,197, $411 and $0, respectively.
8. BANK LOANS
IGF maintained a secured revolving line of credit, bearing interest at prime
plus 25 basis points, in the amount of $7,000,000 at December 31, 1997.
Interest on this line of credit was at the New York prime rate (8.50% at
December 31, 1997) plus 0.25% adjusted daily. Subsequent to December 31, 1997
this rate was adjusted to prime minus .75%. This line is collateralized by the
crop-related uncollected premiums, reinsurance recoverable on paid losses,
Federal Crop Insurance Corporation (FCIC) annual settlement and FCIC premium tax
recoverables, and a first lien on the real estate owned by IGF. The line
requires IGF to maintain its primary banking relationship with the issuing bank,
limits capital purchases and requires the maintenance of certain financial
ratios. At December 31, 1997, IGF was in compliance with all covenants
associated with the line or had received proper waivers. The weighted average
interest rate on the line of credit was 8.75%, 8.6% and 9.7% during 1997, 1996
and 1995, respectively.
At December 31, 1997, IGF had outstanding borrowings in the amount of $4,182
(1996 - $NIL).
-25-
[small Goran logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
(in thousands of U.S. dollars, except share and per share data)
The term debt at GGS, was repaid in full on August 12, 1997. Interest on the
term debt was payable quarterly at LIBOR plus 2.75%. In 1996, SIG entered into
an interest rate swap agreement to protect SIG against interest rate volatility.
As a result, SIG fixed its interest rate on the term debt at 8.31% through
November 1996, 8.85% through January 1997, 9.08% through April 1997, 9.24%
through July 1997 and 8.80% through repayment.
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, 1997 (1996 NIL).
(b) Common Shares
An unlimited number of common shares of which 5,730,276 are outstanding
as at December 31, 1997 (1996 - 5,405,820).
During the year, pursuant to the exercise of warrants and options, the Company
issued 324,456 (1996 - 341,591) common shares for aggregate consideration in the
amount of $594 (1996 - $599).
The Company has reserved for issue 546,856 (1996 - 709,149) common shares
consisting of:
i) 0 (1996 - 182,250) shares issuable on the exercise of warrants for the
purchase of common shares at $2.19 per share, issued to former
debenture holders; and
ii) 546,856 (1996 - 526,899) shares pursuant to the employee incentive
share option plan as follows:
Number of Shares Exercise Price ($ Cdn) Expiry Date
---------------- ---------------------- ------------
2,000 7.25 April 25, 2000
8,000 11.00 December 7, 2000
47,049 2.48 March 8, 2001
45,000 5.25 July 14, 2002
47,364 7.25 April 25, 2003
1,000 5.25 July 14, 2004
1,000 7.25 April 25, 2005
7,861 39.00 August 11, 2005
207,088 16.50 May 13, 2006
180,494 29.00 January 29, 2007
-------
546,856
=======
The warrants expired on December 31, 1997, leaving 24,625
warrants unexercised.
iii) On November 1, 1996 SIG adopted the SIG 1996 Stock Option Plan. The
SIG 1996 Stock Option Plan provides 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. The options granted to the
Company's Chairman (436,567 shares)
-26-
[small Goran logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
(in thousands of U.S. dollars, except share and per share data)
vest and become exercisable in full on the first anniversary of the
grant date. All of the remaining outstanding stock options vest and
become exercisable in three equal installments on the first, second
and third anniversaries of the date of grant. All options were granted
at an exercise price equal to the fair market value of the Company's
common stock at time of grant.
Information regarding the SIG Stock Option Plan is summarized below:
1997 1996
Weighted Weighted
average average
exercise exercise
Shares price Shares price
- ------------------------------------------------------------------------------------------------------
Outstanding at the beginning of the year 830,000 $12.50 --- $ ---
- ------------------------------------------------------------------------------------------------------
Granted 185,267 15.35 830,000 12.50
- ------------------------------------------------------------------------------------------------------
Exercised (1,667) 12.50 --- ---
- ------------------------------------------------------------------------------------------------------
Forfeited (13,600) 12.50 --- ---
------- ---
- ------------------------------------------------------------------------------------------------------
Outstanding at the end of the year 1,000,000 $13.03 830,000 $12.50
========= =======
- ------------------------------------------------------------------------------------------------------
Options exercisable at year end 521,578 ---
- ------------------------------------------------------------------------------------------------------
Available for future grant --- 170,000
- ------------------------------------------------------------------------------------------------------
Options Options
Weighted outstanding exercisable
average weighted weighted
remaining average average
Number life (in exercise Number exercise
Range of exercise prices outstanding years) price exercisable price
- ------------------------------------------------------------------------------------------------------
$12.50-$13.75 933,733 8.9 $12.66 521,578 $12.50
- ------------------------------------------------------------------------------------------------------
$17.75-$19.25 66,267 9.7 18.23 --- ---
------ ---
- ------------------------------------------------------------------------------------------------------
1,000,000 521,578
========= =======
- ------------------------------------------------------------------------------------------------------
The Board of Directors of GGSH adopted the GGS Management Holdings, Inc. Stock
Option Plan (the "GGS Stock Option Plan"), effective April 30, 1996. The GGS
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 GGSH. Options granted under the GGS 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 GGS
Stock Option Plan shall be subject to the following formula: 50% of each grant
of options having an exercise price determined by the Board of Directors of GGSH
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.
-27-
[small Goran logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
(in thousands of U.S. dollars, except share and per share data)
Information regarding the GGS Stock Option Plan is summarized below:
1997 1996
Weighted Weighted
average average
exercise exercise
Shares price Shares price
- ---------------------------------------------------------------------------------------------------------------
Outstanding at the beginning of the year 55,972 $51.75 --- $ ---
- ---------------------------------------------------------------------------------------------------------------
Granted --- --- 55,972 51.75
- ---------------------------------------------------------------------------------------------------------------
Forfeited (1,950) 51.75 --- ---
------ ---
- ---------------------------------------------------------------------------------------------------------------
Outstanding at the end of the year 54,022 $51.75 55,972 $51.75
====== ======
- ---------------------------------------------------------------------------------------------------------------
Options exercisable at year end 10,804 ---
- ---------------------------------------------------------------------------------------------------------------
Available for future grant 57,089 55,139
- ---------------------------------------------------------------------------------------------------------------
Options Options
Weighted outstanding exercisable
average weighted weighted
remaining average average
Number life (in exercise Number exercise
Range of exercise prices outstanding years) price exercisable price
- -----------------------------------------------------------------------------------------------------------------
$44.17-$53.45 37,815 8.3 $46.13 10,804 $46.38
- -----------------------------------------------------------------------------------------------------------------
$58.79-$71.14 16,207 8.3 64.87 --- ---
------ ---
- -----------------------------------------------------------------------------------------------------------------
54,022 10,804
====== ======
- -----------------------------------------------------------------------------------------------------------------
10. INCOME TAXES
The provision for (recovery of) income taxes is analyzed as follows:
1997 1996 1995
---- ----- ----
Consolidated net earnings before income taxes and
discontinued operations $37,904 $43,153 $9,654
====== ====== =====
Incomes taxes at Canadian statutory rates $16,867 $19,203 $4,287
Effect on taxes resulting from:
Tax exempt income (1,714) (1,495) (1,571)
U.S. statutory rate differential (3,262) (2,566) (750)
Application of losses carried forward and reserves (292) --- (399)
Nontaxable gain on IPO --- (8,085) ---
Operating loss for which no current income tax
benefit is recognized 116 1,027 785
Timing differences 1,124 (73) (145)
Other, net (119) (28) 145
------- ------- ------
Current tax provision 12,720 7,983 2,352
Deferred tax provision (recovery) (1,124) 73 145
------- ------- ------
$11,596 $ 8,056 $2,497
====== ======= ======
At December 31, 1997, the Company's Canadian subsidiary had reserves, unclaimed
for income tax purposes, of $677 (1996 - $1,027). In addition, the Company and
its consolidated subsidiaries have operating loss carry forwards of
approximately $8,444 (1996 - $12,591) for tax purposes which expire primarily
after 1997. The Company also has net capital losses carried forward of
approximately $7,875 (1996 - $8,097) which can be applied to reduce income taxes
on any future taxable capital gains. The potential tax benefit of the reserves
and losses carried forward have not been recorded in these financial statements.
-28-
[small Goran logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
(in thousands of U.S. dollars, except share and per share data)
11. RELATED PARTY TRANSACTIONS
In 1989, the Company wrote off a loan of $5,135 owed by a subsidiary of Symons
International Group Ltd. ("SIGL"). SIGL, the majority shareholder of Goran,
guaranteed this loan and pledged 1.2 million escrowed common shares of Goran
(the "escrowed shares") as security for the loan. During 1994, SIGL entered into
agreements with Goran whereby as consideration for the release of 766,600 of the
escrowed shares, SIGL repaid $1,465 of the loan. During 1997, SIGL entered into
an agreement with Goran whereby as consideration for release of 333,400 of the
escrowed shares, SIGL repaid $1,444 of the loan. The balance due to Goran of
$2,226 continues to be guaranteed by SIGL and is secured by the 100,000
remaining escrowed shares.
Included in other receivables are $346 (1996 - $595) due from certain
shareholders and directors which relate to the purchase of common shares of the
Company. Approximately half of the amounts due bear interest and are subject to
principal repayment schedules.
12. CONTINGENT LIABILITIES AND COMMITMENTS
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 position.
On October 27, 1997, IGF reached an agreement with the FCIC to settle a lawsuit
started March 23, 1995, with both parties dismissing all claims against one
another which were subject to the litigation. The FCIC has agreed to pay IGF a
lump sum payment of $60,000.
The Company bought an office building in Des Moines, Iowa, as its crop insurance
division home office. The purchase price was $2.6 million. The sale of the old
building is expected to close on April 1, 1998 for $1,350,000.
13. SEGMENTED INFORMATION
United States
United States Nonstandard
1997 Crop Auto Other Consolidated
Gross premiums written $126,401 $323,915 $(1,334) $448,982
======= ======= ===== =======
Net premiums written $20,796 $256,745 $4,355 $281,896
====== ======= ===== =======
Net premiums earned $20,794 $251,020 $4,726 $276,540
Fee income 4,764 15,515 30 20,309
Net investment income 191 10,969 1,617 12,777
Net realized capital gains (losses) (18) 9,462 (51) 9,393
--- ----- ------ ---------
Total revenue 25,731 286,966 6,322 319,019
------ ------- ----- -------
Net claims incurred 16,185 195,900 (1,451) 210,634
Commission and operating expenses (11,551) 72,463 5,285 66,197
Interest and amortization of intangibles 235 --- 4,049 4,284
--- --- ----- -----
Total expenses 4,869 268,363 7,883 281,115
----- ------- ----- -------
Earnings (loss) before income taxes, minority interest
and discontinued operations $20,862 $18,603 $(1,561) $37,904
====== ====== ===== ======
Identifiable assets $108,650 $302,795 $149,403 $560,848
======= ======= ======= =======
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
(in thousands of U.S. dollars, except share and per share data)
United States
United States Nonstandard
1996 Crop Auto Other Consolidated
Gross premiums written $110,059 $187,176 $2,141 $299,376
======= ======= ===== =======
Net premiums written $23,013 $186,569 $4,196 $213,778
====== ======= ===== =======
Net premiums earned $23,013 $168,746 $17,124 $208,883
Fee income 1,672 7,578 36 9,286
Net investment income 181 6,489 1,075 7,745
Net realized capital gains (losses) (1) (1,014) 378 (637)
-- ----- --- ----
Total revenue 24,865 181,799 18,613 225,277
------ ------- ------ -------
Net claims incurred 12,724 124,385 9,165 146,274
Commission and operating expenses (6,095) 46,796 7,946 48,647
Interest and amortization of intangibles 551 --- 4,821 5,372
--- --- ----- -----
Total expenses 7,180 171,181 21,932 200,293
----- ------- ------ -------
Earnings (loss) before income taxes, minority interest
and discontinued operations $17,685 $10,618 $(3,319) $24,984
====== ====== ===== ======
Identifiable assets $72,916 $260,332 $48,094 $381,342
====== ======= ====== =======
United States
United States Nonstandard
1995 Crop Auto Other Consolidated
Gross premiums written $70,374 $49,005 $27,224 $146,603
====== ====== ====== =======
Net premiums written $11,608 $37,302 $32,912 $81,822
====== ====== ====== ======
Net premiums earned $11,608 $34,460 $26,462 $72,530
Fee income 384 1,787 (1) 2,170
Net investment income 674 624 2,570 3,868
Net realized capital gains (losses) 164 (508) 146 (198)
--- --- --- ---
Total revenue 12,830 36,363 29,177 78,370
------ ------ ------ ------
Net claims incurred 8,629 25,423 17,401 51,453
Commission and operating expenses (7,466) 12,929 10,039 15,502
Interest and amortization of intangibles 627 --- 1,134 1,761
--- --- ----- -----
Total expenses 1,790 38,352 28,574 68,716
----- ------ ------ ------
Earnings (loss) before income taxes, minority interest
and discontinued operations $11,040 $(1,989) $603 $9,654
====== ====== === =====
Identifiable assets $59,733 $47,372 $53,711 $160,816
====== ====== ====== ======
Other results are comprised of the operations of Granite, Granite Re
and corporate operations of Goran and SIG.
The negative premiums for other in 1997 result from return premiums on
prior periods for reinsurance transactions which has no significant impact on
net earnings.
See also Note 1.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
(in thousands of U.S. dollars, except share and per share data)
14. REGULATORY MATTERS
Goran's insurance subsidiaries are subject to certain requirements and
restrictions in accordance with the regulations of their respective
jurisdictions. Statutory regulations require that the subsidiaries maintain a
minimum amount of capital to support outstanding insurance in force and new
premium writing. This requirement and other regulations in the respective
jurisdictions, restricts the amount of dividends payable in any year by the
subsidiaries to the parent. The statutory surplus of the Company's active
insurance subsidiaries at December 31, 1997 amounted to $145,859 (1996 -
$120,229).
Superior, Pafco and IGF, domiciled in Florida and Indiana, prepare their
statutory financial statements in accordance with accounting practices
prescribed or permitted by the Indiana Department of Insurance ("IDOI") or the
Florida Department of Insurance ("FDOI"). Prescribed statutory accounting
practices include a variety of publications of the National Association of
Insurance Commissioner ("NAIC"), as well as state laws, regulations, and general
administrative rules. Permitted statutory accounting practices encompass all
accounting practices not so prescribed.
IGF received written approval from IDOI to reflect its business transacted with
the FCIC as a 100% cession with any net underwriting results recognized in
ceding commissions for statutory accounting purposes, which differs from
prescribed statutory accounting practices. As of December 31, 1997, that
permitted practice had no effect on statutory surplus or net earnings.
The net underwriting results, included in commissions and operating expenses,
for the years ended December 31, 1997, 1996 and 1995 were gains of $26,589,
$12,277 and $9,653, respectively.
15. CHANGES IN WORKING CAPITAL RELATING TO OPERATIONS
1997 1996 1995
Increase in accounts receivable $(6,395) $(19,448) $(5,252)
Decrease (increase) in reinsurance recoverable on
outstanding claims (61,311) 8,464 (25,930)
Decrease (increase) in prepaid reinsurance premiums (21,624) (8,785) 916
Decrease (increase) in deferred policy acquisition costs 2,011 1,649 (3,058)
Decrease (increase) in deferred income taxes (1,124) 73 147
Increase in other assets (4,083) (2,433) (470)
Increase (decrease) in accounts payable 37,810 5,576 (2,291)
Increase (decrease) in outstanding claims 25,826 (4,545) 28,289
Increase in unearned premiums 27,409 13,178 9,247
------ ------ ------
$(1,481) $(6,271) $1,598
====== ======= ======
16. RECONCILIATION OF CANADIAN GAAP AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("U.S. 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:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
(in thousands of U.S. dollars, except share and per share data)
(a) Earnings and retained earnings
1997 1996 1995
Net earnings in accordance with Canadian GAAP $12,438 $31,296 $7,171
Add effect of difference in accounting for:
Deferred income taxes (see note (d)) 177 (64) (344)
Minority interest 107 (177) ---
Outstanding claims (see note (e)) (504) 62 (161)
------ ------- -----
Net earnings in accordance with U.S. GAAP $12,218 $31,117 $6,666
====== ====== ======
Applying U.S. GAAP, deferred income tax assets would be increased by $1,975 and
$1,798, outstanding claims would be increased by $1,765 and $1,261, and
cumulative translation adjustment would be increased by $0 and $41 as at
December 31, 1997 and 1996, respectively. As a result of these adjustments,
retained earnings would be increased by $140 and increased by $360, which is net
of related minority interest of $70 and $177, as at December 31, 1997 and 1996,
respectively. The effect of the above noted differences on other individual
balance sheet items and on working capital is not significant.
(b) Earnings per share
Earnings per share, as determined in accordance with U.S. GAAP are set out
below. Basic earnings per share are computed based on the weighted average
number of common shares outstanding during the year. Fully diluted earnings per
share are calculated using the Treasury Stock method and assume conversion of
securities when the result is dilutive.
The following average number of shares were used for the compilation of basic
and fully diluted earnings per share:
1997 1996 1995
Basic 5,590,576 5,286,270 5,012,005
Fully Diluted 5,886,211 5,724,476 5,567,644
Earnings per share, as determined in accordance with U.S. GAAP, are as follows:
1997 1996 1995
Basic earnings per share from continuing
operations $2.82 $2.67 $1.33
Fully diluted earnings per share from
continuing operations $2.68 $2.47 $1.20
Basic earnings per share $2.19 $5.89 $1.33
Fully diluted earnings per share $2.08 $5.44 $1.20
(c) Supplemental cash flow information
Cash paid for interest and income taxes is summarized as follows:
1997 1996 1995
Cash paid for interest $ 3,467 $4,005 $1,548
Cash paid for income taxes, net of refunds $10,979 $9,825 $1,953
(d) Income taxes
The difference in accounting for deferred income taxes reflects the adoption for
U.S. GAAP, effective January 1, 1993, of Statement of Financial Accounting
Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes." This standard
requires an asset and liability approach that takes into account changes in tax
rates when valuing the deferred tax amounts to be reported in the balance sheet.
(See note (a))
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
(in thousands of U.S. dollars, except share and per share data)
(e) Outstanding claims
The difference in accounting for outstanding claims reflects the application for
U.S. GAAP of SEC Staff Accounting Bulletin No. 62, "Discounting by
Property/Casualty Insurance Companies". This standard does not allow discounting
of unpaid claim liabilities by public companies, except in specific
circumstances that are not applicable to the Company.
(f) 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 shareholders' equity and not as assets. Accordingly, in order to
comply with U.S. GAAP, shareholders' equity would be reduced by $346 and $595 as
at December 31, 1997 and 1996, respectively, to reflect the loans due from
certain shareholders which relate to the purchase of common shares of the
Company.
(g) Unrealized gain (loss) on investments
U.S. GAAP require that unrealized gains and losses on investment portfolios be
included as a component in determining shareholders' equity. In addition, SFAS
No. 115 permits prospective recognition of unrealized gains on investment
portfolios for year-ends commencing after December 15, 1993. As a result,
shareholders' equity would be increased by $1,336 and by $820, which is net of
deferred tax of $1,005 and $625 and related minority interest of $658 and $405,
as at December 31, 1997 and 1996, respectively, before consideration for
deferred taxes. As the Company classifies its debt and equity securities as
available for sale, the adoption of SFAS No. 115 in 1994 has no effect on net
earnings.
(h) Changes in shareholders' equity
A reconciliation of shareholders' equity from Canadian GAAP to U.S. GAAP is as
follows:
1997 1996
Shareholders' equity in accordance with Canadian GAAP $60,332 $47,258
Add (deduct) effect of difference in accounting for:
Deferred income taxes (see note (a)) 1,975 1,798
Outstanding claims (see note (a)) (1,765) (1,261)
Minority interest portion (70) (177)
Receivables from sale of capital stock (see note (f)) (346) (595)
Unrealized gain on investments (see note (g)) 1,336 820
------ ------
Shareholders' equity in accordance with U.S. GAAP $61,462 $47,843
====== ======
17. SUBSEQUENT EVENT
On March 2, 1998, the Company announced that its subsidiary, IGF, signed a
definitive agreement with CNA to purchase its multi-peril and crop hail
operations. IGF will reinsure back to CNA a small portion of the Company's total
crop book of business. CNA wrote approximately $110 million of multi-peril and
crop hail insurance business in 1997. Starting in the year 2000, assuming no
event of change of control as defined in the agreement, IGF can purchase the
insurance premiums reinsured to CNA through a call provision or CNA can require
IGF to buy the insurance premiums reinsured to CNA. Regardless of the method of
takeout of CNA, CNA must not compete in MPCI or crop hail for a period of time
after the buyout. The formula for the buyout is based on a multiple of average
pre-tax earnings that CNA receives from reinsuring IGF's book of business.
-33-
FORWARD-LOOKING STATEMENTS
The statements contained in this Annual Report which are not historical facts,
including but not limited to, statements concerning (i) the impact of federal
and state laws and regulations on the Company's business and results of
operations, (ii) the competitive advantage afforded to the Company's crop
insurance operations by approaches adopted by management in the areas of
information, technology, claims handling and underwriting, (iii) the sufficiency
of the Company's cash flow to meet the operating expenses, debt service
obligations and capital needs of the Company and its subsidiaries, and (iv) the
impact of declining MPCI Buy-up Expense Reimbursements on the Company's results
of operations, are forward-looking statements. The Company desires to take
advantage of the "safe harbor" afforded such statements under the Private
Securities Litigation Reform Act of 1995 when they are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those in the forward-looking statements. Such
cautionary statements which discuss certain risks associated with the Company's
business including the variability of the results of operations of the Company's
crop insurance business as a result of weather and natural perils, the highly
competitive nature of both the Company's crop insurance and nonstandard
automobile insurance business and the effects of state and federal regulation,
the capital intensive nature of the property and casualty business and potential
limitations on the ability of the Company to raise additional capital are set
forth under the heading "Forward-Looking Statements -- Safe Harbor Provisions"
in Item 1 - Business in the Company's Annual Report on Form 10-K for the Year
Ended December 31, 1997.
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 generally accepted accounting principles 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 Schwartz Levitsky Feldman,
Chartered Accountants has audited and reported on the Company's financial
statements. Their opinion is based upon audits conducted by them in accordance
with generally accepted auditing standards to obtain reasonable 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
Alan G. Symons
Chief Executive Officer
/s/ Gary P. Hutchcraft
Gary P. Hutchcraft
Vice President and Chief Financial Officer
February 27, 1998
AUDITORS' REPORT
To the Shareholders of Goran Capital Inc.
We have audited the consolidated balance sheets of Goran Capital Inc. as at
December 31, 1997 and 1996 and the consolidated statements of earnings,
shareholders' equity and changes in cash resources for each of the three years
in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
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[small Goran logo]
MARKET INFORMATION
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1997
and 1996 and the results of its operations and the changes in its cash resources
for each of the three years in the period ended December 31, 1997 in accordance
with generally accepted accounting principles.
Chartered Accountants
Toronto, Ontario
February 27, 1998
MARKET INFORMATION
The Company's common shares began trading on the Toronto Stock Exchange under
the symbol "GNC" in 1986. The Company's common shares began trading on the
NASDAQ National Market under the symbol "GNCNF" on November 8, 1994.
As of December 31, 1997 there were approximately 100 Common shareholders of
record, including many brokers holding shares for the individual clients. The
number of individual shareholders on the same date is estimated at 1,000.
The number of common shares outstanding on December 31, 1997 totaled 5,730,276.
Information relating to the common shares is available through the NASDAQ
National Market system 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 1997, 1996 and 1995.
TORONTO STOCK EXCHANGE
1997 1996 1995
Quarter Ended High Low High Low High Low
March 31 29.15 18.98 14.02 8.76 6.19 4.92
June 30 26.05 19.31 14.05 10.59 6.10 5.37
September 30 39.35 24.27 19.35 11.32 7.10 6.10
December 31 39.32 27.75 20.26 16.79 8.74 7.47
NASDAQ
1997 1996 1995
Quarter Ended High Low High Low High Low
March 31 29.25 18.75 13.125 8.625 6.25 3.80
June 30 26.25 19.75 13.125 10.75 6.125 5.125
September 30 40.00 24.50 19.375 11.125 7.125 5.25
December 31 39.50 27.75 22.00 17.00 8.75 6.625
DIVIDEND POLICY
Since 1988, the Company has not paid a dividend on its stock. The Company has no
present intention to pay dividends on its common stock.
-35-
[small Goran logo]
CORPORATE DIRECTORY
Directors
G. Gordon Symons
Hamilton, Bermuda
Chairman of the Board
Goran Capital Inc.
J. Ross Schofield
Toronto, Ontario
President
Schofield Insurance Brokers
David B. Shapira
Toronto, Ontario
President
Medbers Limited
Douglas H. Symons
Indianapolis, Indiana
Vice President and Chief Operating Officer
*James G. Torrance, Q.C.
Toronto, Ontario
Partner Emeritus
Smith, Lyons, Barristers & Solicitors
*John K. McKeating
Montreal, Quebec
Partner
Vision 2120, Inc.
*Alan G. Symons
Indianapolis, Indiana
President and Chief Executive Officer
Goran Capital Inc.
*Members of Audit Committee
Officers
G. Gordon Symons
Chairman of the Board
Alan G. Symons
President and Chief Executive Officer
Douglas H. Symons
Vice-President and Chief Operating Officer
Gary P. Hutchcraft, C.P.A.
Vice President and Chief Financial Officer
David L. Bates, J.D., C.P.A.
Vice President, General Counsel and Secretary
Actuaries
Tillinghast
Philadelphia, Pennsylvania
J.S. Cheng & Partners Inc.
Toronto, Ontario
Trustee and Registrar
Montreal Trust Company of Canada
Toronto, Ontario
Auditors
Schwartz Levitsky Feldman
Chartered Accountants
Toronto, Ontario
Coopers and Lybrand, L.L.P.
Indianapolis, Indiana
Managers - Granite Reinsurance Company Ltd.
Atlantic Security Ltd.
Hamilton, Bermuda
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[small Goran logo]
SUBSIDIARIES AND BRANCH OFFICES
HEAD OFFICE CANADA
Goran Capital Inc.
181 University Avenue
Box 11, Ste 1101
Toronto, Ontario
Canada M5H 3M7
Tel: 416-594-1155
Fax: 416-594-0711
HEAD OFFICE U.S.
Goran Capital Inc.
4720 Kingsway Drive
Indianapolis, IN 46205
Tel: 317-259-6400
Fax: 317-259-6395
SHAREHOLDER INFORMATION
Stock Exchange Listings
The common shares are listed on The Toronto Stock
Exchange (GNC) and on NASDAQ (GNCNF)
Annual Meeting
The Annual Meeting of Shareholders
will be held on May 19, 1998
at 10:00 a.m.
181 University Avenue, Suite 1101,
Toronto, Ontario Canada
Shareholder Inquiries
Inquiries should be directed to:
Alan G. Symons
President and Chief Executive Officer
Goran Capital Inc.
Tel: 416-594-1155 (Canada)
317-259-6302 (U.S.)
SUBSIDIARIES AND BRANCHES
Granite Insurance Company
181 University Avenue,
Box 11, Ste 1101
Toronto, Ontario Canada M5H 3M7
Tel: 416-594-1155
Fax: 416-594-0711
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, IN 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
Symons International Group, Inc.
(Florida)
5900 North Andrews Drive
Suite 800
Fort Lauderdale, Florida 33309
Tel: 954-772-5061
Fax: 954-772-9873
Superior Insurance Company
280 Interstate North Circle N.W.
Atlanta, Georgia 30339
Tel: 770-952-4885
Fax: 770-9567504
Superior Insurance Company
3030 N. Rocky Point Drive, Ste 770
Tampa, Florida 33607
Tel: 813-281-2444
Fax: 813-281-8036
Superior Insurance Company
1745 W. Orangewood Road
Orange, CA 92868
Tel: 714-978-6811
Fax: 714-978-0353
IGF Insurance Company
Corporate Office
6000 Grand Avenue
Des Moines, Iowa 50312
Tel: 515-633-1000
Fax: 515-633-1010
IGF Mid West
6000 Grand Avenue
Des Moines, Iowa 50312
Tel: 515-633-1000
Fax: 515-633-1012
IGF Mid East
3900 Wood Duck Drive, Suite B
Springfield, Illinois 62707
Tel: 217-726-2450
Fax: 217-726-2451
IGF Southwest
7914 Abbeville Avenue
Lubbock, Texas 79424
Tel: 806-783-3010
Fax: 806-783-3017
IGF South
101 Business Park Drive, Suite C
Jackson, Mississippi 39213
Tel: 601-957-9780
Fax: 601-957-9793
IGF East
8000 Regency Park, Suite 280
Cary, North Carolina 27511
Tel: 919-462-7850
Fax: 919-462-7863
IGF West
1750 Bullard Avenue, Suite 106
Fresno, California 93710
Tel: 209-432-0196
Fax: 209-432-0294
IGF North
116 South Main, Box 1090
Stanley, North Dakota 58784
Tel: 701-628-3536
Fax: 701-628-3537
Granite Reinsurance Company Ltd.
Bishop's Court Hill
St. Michael, Barbados, W.I.
(Managers: Atlantic Security Ltd.)
Tel: 441-295-5425
Fax: 441-295-5444
BACK PAGE
[Goran logo]
GORAN CAPITAL INC.
181 University Avenue 4720 Kingsway Drive
Box 11, Suite 1101 Indianapolis, Indiana
Toronto, Ontario 46205
Canada M5H 3M7
Tel: 416-594-1155 Tel: 317-259-6400
Fax: 416-594-0711 Fax: 317-259-6395