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GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
PART 1- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Shareholders
Guaranty National Corporation
We have reviewed the accompanying consolidated balance sheet of Guaranty
National Corporation and subsidiaries (the "Company") as of March 31, 1996, and
the related consolidated statements of earnings and cash flows for the three-
month periods ended March 31, 1996 and 1995. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company as of December 31,
1995, and the related consolidated statements of earnings, changes in
shareholders' equity and cash flows for the year then ended (not presented
herein); and in our report dated February 20, 1996, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 1995 is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Denver, Colorado
April 29, 1996
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GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
March 31, December 31,
1996 1995
----------- -----------
(Unaudited)
Investments (Note 3):
Fixed maturities held to maturity, at cost $83,317 $75,017
Fixed maturities available for sale, at market 375,410 395,198
-------- --------
458,727 470,215
Equity securities, at market 86,933 85,085
Other long-term investments 12,377 11,521
Short-term investments 50,386 52,257
-------- --------
Total investments 608,423 619,078
Cash 17,962 6,794
Accrued investment income 6,953 7,603
Accounts receivable, (less allowance of $400 - 1996 and 1995) 53,390 51,638
Reinsurance recoverables and prepaids, (less allowance of
$200 - 1996 and 1995) (Note 4) 80,790 81,825
Property and equipment (less accumulated depreciation of
$10,421 - 1996 and $9,326 - 1995) 31,912 31,573
Deferred policy acquisition costs 40,616 37,637
Goodwill (less accumulated amortization of $5,542- 1996
and $5,263 - 1995) 33,071 33,133
Deferred income taxes 5,851 4,216
Other assets 340 1,676
-------- --------
Total assets $879,308 $875,173
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses $291,950 $290,156
Unpaid loss adjustment expenses 64,008 64,478
Unearned premiums 155,193 146,205
Notes payable 102,250 103,000
Reinsurance payables and deposits 5,629 8,290
Other liabilities 45,119 47,493
-------- --------
Total liabilities 664,149 659,622
-------- --------
Commitments and contingencies (Note 5)
Shareholders' equity:
Preferred stock, $.10 par value; authorized, 6,000,000 shares;
none issued and outstanding
Common stock, $1 par value; authorized, 30,000,000 shares;
issued 14,961,354 shares - 1996 and 1995 14,961 14,961
Capital in excess of par 121,050 121,050
Retained earnings 68,581 64,664
Deferred compensation on restricted stock (610) (644)
Net unrealized investment gains 11,177 15,520
-------- --------
Total shareholders' equity 215,159 215,551
-------- --------
Total liabilities and shareholders' equity $879,308 $875,173
======== ========
See notes to consolidated financial statements.
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GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
Three Months Ended
March 31,
1996 1995
-------- --------
(Unaudited)
Revenue:
Premiums earned (Note 4) $115,470 $79,468
Net investment income 9,253 6,465
Realized investment gains (Note 3) 1,981 569
-------- -------
126,704 86,502
Expenses: -------- -------
Losses and loss adjustment expenses incurred (Note 4) 84,845 52,726
Policy acquisition costs 29,082 23,076
General and administrative 3,528 1,912
Interest 1,720 1,056
Other 288 197
-------- -------
119,463 78,967
-------- -------
Earnings before income taxes 7,241 7,535
Income taxes 1,454 1,767
-------- -------
Net earnings 5,787 $5,768
-------- -------
Earnings per common share $0.39 $0.48
-------- -------
Dividends per common share $0.125 $0.125
======== =======
See notes to consolidated financial statements.
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GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,
1996 1995
-------- --------
(Unaudited)
Operating Activities:
Premiums collected $120,610 $ 78,523
Net investment income collected 9,997 7,198
Losses and loss adjustment expenses paid (84,425) (50,943)
Policy acquisition costs and general and
administrative expenses paid (39,789) (31,720)
Interest paid (1,712) (481)
Other receipts (payments) 3,715 (1,150)
-------- --------
Net cash provided by operating activities 8,396 1,427
-------- --------
Investing Activities:
Maturities of fixed maturities held to maturity 2,104
Maturities of fixed maturities available for sale 15,508 162
Sales of fixed maturities available for sale 22,323 1,262
Sales of equity securities 9,204 2,974
Net change in short-term investments 1,927 1,409
Purchases of fixed maturities held to maturity (8,506) (2,537)
Purchases of fixed maturities available for sale (24,011) (5,871)
Purchases of equity securities (8,761) (5,439)
Net change in other long-term investments (856) 270
Purchases of property and equipment (1,436) (949)
-------- --------
Net cash provided by (used in) investing activities 5,392 (6,615)
-------- --------
Financing Activities:
Repayment of notes payable (750)
Dividends paid (1,870) (1,505)
-------- --------
Net cash used in financing activities (2,620) (1,505)
-------- --------
Net Increase (Decrease) in Cash 11,168 (6,693)
Cash, Beginning of Period 6,794 9,609
-------- --------
Cash, End of Period $17,962 $2,916
======== ========
See notes to consolidated financial statements.
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GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTE 1- GENERAL
The accompanying unaudited consolidated financial statements of Guaranty
National Corporation and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles applicable to interim
reporting and do not include all of die information and footnotes required for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 1996, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996.
Although these financial statements are unaudited, they have been reviewed
by the Company's independent accountants, Deloitte & Touche LLP, for conformity
with accounting requirements for interim financial reporting. Their report on
such review is included herein. These financial statements should be read in
conjunction with the financial statements and related notes included in the
Company's Annual Report to Shareholders and Form 10-K for the year ended
December 31, 1995, for the more complete explanations therein.
Certain reclassifications have been made to the 1995 financial statements
to conform with presentations used in 1996.
NOTE 2- EARNINGS PER SHARE
Earnings per common share has been computed using the weighted average
number of shares and equivalent shares outstanding of 14,963,367 and 12,064,834
for the three months ended March 31, 1996, and 1995, respectively. The common
stock equivalents are stock options which result in a dilutive effect from
assumed exercise of the options.
NOTE 3- INVESTMENTS
At March 31, 1996, and December 31, 1995, the estimated aggregate fair
value of fixed maturities held to maturity was $84,044,000 and $77,143,000,
respectively, the cost of fixed maturities available for sale was $371,282,000
and $383,135,000 respectively, and the cost of equity securities was
$73,866,000 and $73,271,000 respectively. At March 31, 1996, and December 31,
1995, the Company had investments in noninvestment grade securities with a cost
of $40,085,000 and $36,641,000 respectively, which are carried at fair values
of $39,634,000 and $36,356,000 respectively.
Realized investment gains (losses), which includes gains (losses) on calls
of fixed maturities, for the three months ended March 31,1996 and 1995, as well
as a write down for other-than-temporary investment impairments of
approximately $134,000, for the three months ended March 31, 1996, are an
follows (in thousands):
March 31, March 31,
Three Months Ended 1996 1995
- ------------------ -------- --------
Fixed maturities held to maturity:
Gains $ $
Losses (8)
-------- --------
(8)
-------- --------
Fixed maturities available for sale:
Gains 660 28
Losses (20)
-------- --------
640 28
-------- --------
Equity securities:
Gains 1,806 1,059
Losses (465) (510)
-------- --------
1,341 549
-------- --------
Total $1,981 $569
======== ========
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GUARANTY NATIONAL CORPORATiON AND SUBSIDIARIES
NOTE 4- REINSURANCE
In the ordinary course of business, the Company reinsures certain risks,
generally on an excess of loss basis with other insurance companies. Such
reinsurance arrangements serve to limit the Company's maximum loss per
occurrence on individual risks to $400,000, and for catastrophes to $500,000.
Reinsurance does not discharge the primary liability of the original insurer.
Amounts recoverable from reinsurers are recognized and estimated in a manner
consistent with the claim liabilities arising from the reinsured policies and
incurred but not reported losses.
Premiums, losses, and loss adjustment expenses, including the effect of
reinsurance, are comprised of (in thousands):
Three Months Ended March 31,
1996 1995
---------------------- -------------------
Written Earned Written Earned
------- ------ ------- ------
Premiums:
Direct $125,202 $118,556 $ 86,617 $ 76,946
Assumed 11,837 9,559 7,961 14,125
Ceded (13,426) (12,645) (12,756) (11,603)
-------- -------- -------- --------
Net $123,613 $115,470 $ 81,822 $ 79,468
-------- -------- -------- --------
% Assumed to Net 9.58% 9.73%
-------- --------
Losses and loss adjustment expenses: Incurred Incurred
Direct $ 86,357 $ 51,067
Assumed 4,162 8,113
Ceded (5,674) (6,454)
-------- --------
Net $ 84,845 $ 52,726
-------- --------
NOTE 5- COMMITMENTS AND CONTINGENCIES
As part of the 1995 Viking acquisition, the Company will pay the Seller,
as additional purchase price, two- thirds of any favorable loss development up
to $15,000,000, and one-third of any favorable development between $15,000,000
and $20,000,000. The amounts payable will be reduced by 35% to compensate for
the applicable tax rate. Included in the cost of the acquisition, was
$3,250,000 paid to the Seller as additional purchase price, in anticipation of
favorable development of Viking's recorded 1994 and prior accident year loss
and loss adjustment expense reserves. The Company and the Seller will initially
settle any additional purchase price as of December 31, 1998, and will finalize
the settlement as of December 31, 2001. If adverse development results, the
Seller will repay to the Company an offsetting amount, after allowance for the
tax adjustment, not to exceed the initial $3,250,000 paid to the Seller at the
time of acquisition.
Any payments to or receivables from the Seller, as a result of the
positive or negative loss development, will include accrued interest from the
acquisition closing date at an annual rate equal to 6,28%, for the initial loss
development settlement payment as of December 31, 1998. For the final loss
development settlement payment, as of December 31, 2001, the interest rate will
equal the mid-term Applicable Federal Rate (an defined in the Internal Revenue
Service Code) in effect as of January 1, 1999.
Management estimates that a payment in excess of the $3,250,000 already
paid will ultimately be made to the Seller, and has included an estimated
amount of approximately $2,000,000, as well as the corresponding interest
payable, in the accompanying balance sheet. Loss and loss adjustment expense
reserves of Viking were recorded at the date of acquisition at amounts
consistent with the Company's estimates of the additional purchase price that
will be paid.
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GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
The Company is subject to litigation in the normal course of operating its
insurance business. The Company is not engaged in any litigation which it
believes would have a material impact on its financial condition or future
results of operations.
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