1
EXHIBIT (g)(1)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
The management of Guaranty National Corporation is responsible for the
consolidated financial statements and the information included therein. The
consolidated financial statements are fairly presented and have been prepared
in accordance with generally accepted accounting principles and are appropriate
in the circumstances, and, where necessary, include amounts based on
management's informed estimates and judgments.
The Company has an internal control structure which it believes provides
reasonable assurance that assets are safeguarded from loss or unauthorized use,
transactions are recorded in accordance with management's policies and that the
financial records are reliable for preparing consolidated financial statements.
The internal control structure includes written policies and procedures which
are communicated to all appropriate personnel and updated as necessary.
Compliance with the internal control structure is continuously maintained and
monitored by management. The internal audit staff of the Company evaluates and
reports on the adequacy of and adherence to these controls, policies and
procedures. In addition, as part of its audit of the consolidated financial
statements, Deloitte & Touche LLP, the independent auditors for the Company,
evaluate the Company's internal control structure to the extent they consider
necessary to express an opinion on the consolidated financial statements.
Recommendations concerning the internal control structure are provided by both
the internal auditors and Deloitte & Touche LLP, and management takes actions
which are believed to be appropriate responses to these recommendations.
The Audit Committee of the Board of Directors is comprised of independent
directors, and has general responsibility for oversight of financial controls
and audit activities of the Company and its subsidiaries. The Audit Committee,
which reports to the Board, annually reviews the qualifications of the
independent auditors and meets periodically with them, the internal auditors
and management to review the plans for and results of the audits. Both internal
and independent auditors have free access to the Audit Committee, without
members of management present, to discuss the adequacy of the internal control
structure and any other matters which they believe should be brought to the
attention of the Audit Committee.
s/ James R. Pouliot s/ Michael L. Pautler
James R. Pouliot Michael L. Pautler
President and Chief Executive Officer Senior Vice President
Finance and Treasurer
34
2
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Guaranty National Corporation
We have audited the accompanying consolidated balance sheets of Guaranty
National Corporation and subsidiaries (the "Company") as of December 31, 1996
and 1995, and the related consolidated statements of earnings, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. 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 the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
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.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Guaranty National Corporation
and subsidiaries at December 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
February 14, 1997
35
3
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
---------------------
1996 1995
-------- --------
ASSETS
Investments:
Fixed maturities held to maturity, at cost........................... $ 80,271 $ 75,017
Fixed maturities available for sale, at market....................... 390,290 395,198
-------- --------
470,561 470,215
Equity securities, at market......................................... 88,102 85,085
Other long-term investments.......................................... 13,585 11,521
Short-term investments available for sale, at market................. 94,993 52,257
-------- --------
Total investments............................................ 667,241 619,078
Cash................................................................... 3,988 6,794
Accrued investment income.............................................. 7,971 7,603
Accounts receivable (less allowance of $171 -- 1996; $374 -- 1995)..... 45,557 51,638
Reinsurance recoverables and prepaids (less allowance of $200 -- 1996;
$200 -- 1995)........................................................ 90,781 81,825
Property and equipment (less accumulated depreciation of
$13,508 -- 1996; $9,326 -- 1995)..................................... 29,833 31,573
Deferred policy acquisition costs...................................... 44,456 37,637
Goodwill (less accumulated amortization of $6,423 -- 1996;
$5,263 -- 1995)...................................................... 34,639 33,133
Other assets........................................................... 4,626 5,892
-------- --------
Total assets................................................. $929,092 $875,173
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses........................................................ $303,266 $290,156
Unpaid loss adjustment expenses...................................... 65,142 64,478
Unearned premiums.................................................... 154,242 146,205
Notes payable........................................................ 101,688 103,000
Reinsurance payables and deposits.................................... 7,268 8,290
Other liabilities.................................................... 59,447 47,493
-------- --------
Total liabilities................................................. 691,053 659,622
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.10 par value; authorized, 6,000,000 shares; none
issued and outstanding............................................
Common stock, $1 par value; authorized, 30,000,000 shares; issued
14,975,497 shares -- 1996; 14,961,354 shares -- 1995.............. 14,975 14,961
Capital in excess of par............................................. 121,272 121,050
Retained earnings.................................................... 84,685 64,664
Deferred compensation on restricted stock............................ (644)
Net unrealized investment gains...................................... 17,107 15,520
-------- --------
Total shareholders' equity........................................ 238,039 215,551
-------- --------
Total liabilities and shareholders' equity................... $929,092 $875,173
======== ========
See notes to consolidated financial statements.
36
4
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
Revenue:
Premiums earned.......................................... $481,648 $390,017 $321,638
Net investment income.................................... 39,439 30,976 23,576
Realized investment gains................................ 8,455 3,291 3,007
Other income............................................. 2
-------- -------- --------
529,542 424,284 348,223
Expenses:
Losses incurred.......................................... 279,108 248,771 180,865
Loss adjustment expenses................................. 58,676 44,742 32,640
Policy acquisition costs................................. 133,931 110,341 93,103
General and administrative............................... 10,422 6,458 7,206
Interest................................................. 6,851 5,708 3,218
Nonrecurring charges..................................... 2,163 838
Other.................................................... 1,510 932 766
-------- -------- --------
492,661 416,952 318,636
-------- -------- --------
Earnings before income taxes (benefit)..................... 36,881 7,332 29,587
Income taxes (benefit)..................................... 9,375 (1,597) 7,036
-------- -------- --------
Net earnings............................................... $ 27,506 $ 8,929 $ 22,551
======== ======== ========
Earnings per common share.................................. $ 1.84 $ 0.67 $ 1.86
======== ======== ========
See notes to consolidated financial statements.
37
5
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
DEFERRED UNREALIZED
CAPITAL COMPENSATION INVESTMENT
COMMON IN EXCESS RETAINED ON RESTRICTED GAINS TREASURY
STOCK OF PAR EARNINGS STOCK (LOSSES) STOCK
------- --------- -------- ------------- ---------- --------
Balance, January 1, 1994............ $12,480 $ 83,991 $ 45,888 $(663) $ 10,793 $
Net earnings........................ 22,551
Change in unrealized investment
(losses), less applicable deferred
taxes............................. (17,854)
Purchase of treasury stock.......... (6,636)
Exercise of stock options and
issuance of restricted stock, net
of cancellation................... 74 (368) 294
Amortization of deferred
compensation on restricted
stock............................. 8 250
Cash dividends declared and paid.... (6,049)
------- ------- ------- ---- -------- -------
Balance December 31, 1994........... 12,480 84,073 62,390 (781) (7,061) (6,342)
Net earnings........................ 8,929
Change in unrealized investment
gains, less applicable deferred
taxes............................. 22,581
Exercise of stock options and
issuance of restricted stock, net
of cancellations.................. 20 329 (126) 327
Amortization of deferred
compensation on restricted
stock............................. 8 263
Sale of common stock................ 1,550 22,670
Conversion of affiliate debt........ 911 13,970 6,015
Cash dividends declared and paid.... (6,655)
------- ------- ------- ---- -------- -------
Balance, December 31, 1995.......... 14,961 121,050 64,664 (644) 15,520
Net earnings........................ 27,506
Change in unrealized investment
gains, less applicable deferred
taxes............................. 1,587
Exercise of stock options, net of
cancellation...................... 14 222
Amortization of deferred
compensation on restricted
stock............................. 644
Cash dividends declared and paid.... (7,485)
------- ------- ------- ---- -------- -------
Balance, December 31, 1996.......... $14,975 $ 121,272 $ 84,685 $ $ 17,107 $
======= ======= ======= ==== ======== =======
See notes to consolidated financial statements.
38
6
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
--------- --------- ---------
Operating Activities:
Premiums collected.................................... $ 496,686 $ 396,621 $ 321,000
Net investment income collected....................... 35,102 29,938 22,969
Losses and loss adjustment expenses paid.............. (339,442) (267,641) (199,530)
Policy acquisition costs and general and
administrative expenses paid....................... (145,711) (119,821) (93,495)
Interest paid......................................... (6,817) (6,005) (3,043)
Nonrecurring charges paid............................. (1,302) (978)
Federal income taxes paid............................. (2,470) (5,359) (6,108)
Other receipts (payments)............................. 8,390 1,368 (1,337)
--------- --------- ---------
Net cash provided by operating activities..... 44,436 29,101 39,478
--------- --------- ---------
Investing Activities:
Maturities of fixed maturities held to maturity....... 9,795 12,096 10,231
Maturities of fixed maturities available for sale..... 56,553 20,219 8,281
Sales of fixed maturities available for sale.......... 49,931 40,158 37,147
Sales of equity securities............................ 40,373 28,367 19,185
Net change in short-term investments.................. (42,584) (20,039) 7,535
Sales of property and equipment....................... 303 590 274
Purchases of fixed maturities held to maturity........ (20,780) (10,138) (16,570)
Purchases of fixed maturities available for sale...... (100,536) (74,652) (57,989)
Purchases of equity securities........................ (29,512) (21,480) (21,883)
Net change in other long-term investments............. 1,433 1,825 (1,376)
Purchases of property and equipment................... (3,482) (2,950) (13,643)
Acquisition of subsidiaries, net of cash acquired..... (94,681) (6,363)
--------- --------- ---------
Net cash used in investing activities......... (38,506) (120,685) (35,171)
--------- --------- ---------
Financing Activities:
Proceeds from issuance of notes payable............... 130,654 14,000
Repayment of notes payable............................ (1,313) (60,000)
Dividends paid to shareholders........................ (7,485) (6,655) (6,049)
Purchase of treasury stock............................ (6,636)
Proceeds from issuance of common stock................ 24,220
Proceeds from exercise of stock options............... 62 550
--------- --------- ---------
Net cash (used in) provided by financing
activities.................................. (8,736) 88,769 1,315
--------- --------- ---------
Net (Decrease) Increase in Cash......................... (2,806) (2,815) 5,622
Cash, Beginning of Year................................. 6,794 9,609 3,987
--------- --------- ---------
Cash, End of Year....................................... $ 3,988 $ 6,794 $ 9,609
========= ========= =========
Non-Cash Financing Transactions:
Conversion of affiliate debt.......................... $ $ (20,896) $
Issuance of common stock in conversion of affiliate
debt............................................... 14,881
Conversion of affiliate debt from treasury stock...... 6,015
Restricted stock forfeitures.......................... (126)
39
7
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
Reconciliation of Net Earnings to Net Cash Provided by
Operating Activities:
Net earnings................................................ $27,506 $ 8,929 $22,551
Adjustments:
Depreciation............................................. 4,392 3,490 2,692
Non-cash investment income............................... (3,969) (275) (401)
Realized investment gains................................ (8,455) (3,291) (3,007)
Amortization of goodwill................................. 1,160 883 766
Deferred tax provision (benefit)......................... 4,164 (3,543) 24
Other.................................................... 1,061 979 774
Changes in assets and liabilities:
Accrued investment income................................ (368) (763) (206)
Accounts receivable...................................... 6,081 (2,782) (2,248)
Reinsurance recoverables and prepaids.................... (8,956) (6,679) (8,070)
Deferred policy acquisition costs........................ (6,819) (3,775) 187
Other assets............................................. (44) 250 (25)
Unpaid losses............................................ 13,110 26,620 15,778
Unpaid loss adjustment expenses.......................... 664 5,829 4,478
Unearned premiums........................................ 8,037 12,375 3,506
Reinsurance payables and deposits........................ (1,022) (821) (4,261)
Other liabilities........................................ 7,894 (8,325) 6,940
------- ------- -------
Total adjustments and changes....................... 16,930 20,172 16,927
------- ------- -------
Net Cash Provided by Operating Activities..................... $44,436 $29,101 $39,478
======= ======= =======
See notes to consolidated financial statements.
40
8
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations -- Guaranty National Corporation and its subsidiaries
(the "Company") is a corporation based in Englewood, Colorado which principally
underwrites and sells specialty property and casualty insurance coverages that
are generally not available in traditional insurance markets. The Company
manages its business under three operational areas based on function: commercial
lines, personal lines and collateral protection.
The Company's insurance subsidiaries are authorized as multiple-line
insurance carriers and may insure all types of property and liability risks. The
insurance coverages provided by these insurance carriers are generally known as
nonstandard risks due to the potential for poor claims experience because of
increased risk exposure. The insurance subsidiaries market insurance coverage
throughout the United States, and one or more of these subsidiaries are admitted
in all states.
Basis of presentation -- The consolidated financial statements and notes
thereto are presented in accordance with generally accepted accounting
principles ("GAAP") for property and casualty insurance companies. The
preparation of the Company's consolidated financial statements in conformity
with generally accepted accounting principles requires Company management to
make estimates and assumptions that affect the amounts reported in these
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
From November 1, 1988, through November 19, 1991, Orion Capital Corporation
and its affiliates ("Orion") owned 100% of Guaranty National Corporation and
subsidiaries outstanding common stock. The assets and liabilities of the Company
were revalued at the time of the 1988 Orion purchase. The accompanying
consolidated financial statements reflect the recording of these acquisition
adjustments by Orion. Orion's current ownership is approximately 81%.
In 1995, the Company acquired control of, but not ownership of, Viking
County Mutual Company ("VCM"). VCM is a Texas mutual organization which performs
100% reinsurance services in the state of Texas for its affiliated companies.
VCM is not included in the consolidated financial statements.
As discussed in Notes 9 and 14, there are various transactions with Orion
and VCM which include certain expenses paid to Orion and VCM and other
transactions with Orion affiliates and VCM. In the opinion of management, the
transaction amounts with Orion are reasonable and representative of expenses
that would have been incurred in transactions with unrelated parties.
Certain reclassifications have been made to the 1995 and 1994 consolidated
financial statements to conform with the presentation used in 1996.
Principles of consolidation -- The consolidated financial statements
include the accounts of Guaranty National Corporation ("Guaranty") and its
wholly owned subsidiaries, Intercon General Agency, Inc. ("Intercon"), Auto
Insurance Centers, Inc. ("AIC"), Guaranty National Warranty Services ("GNWS"),
Guaranty National Insurance Company ("GNIC") and Viking. GNIC includes its
wholly owned subsidiaries, Landmark American Insurance Company ("LAIC"),
Colorado Casualty Insurance Company ("CCIC"), Peak Property and Casualty
Insurance Corporation ("PEAK"), and Guaranty National Insurance Company of
California ("GNICOC"). All significant intercompany accounts and transactions
have been eliminated in consolidation.
Significant accounting policies -- This summary of significant accounting
policies is presented to assist in understanding the Company's consolidated
financial statements:
a. Investments -- Investments in bonds and redeemable preferred stocks are
carried in the accompanying consolidated balance sheets as fixed maturities.
Fixed maturities for which the Company has the positive intent and ability to
hold until maturity are carried at amortized cost. Fixed maturities classified
as available for sale are carried at estimated fair value with any unrealized
gains or losses reflected in shareholders' equity, net of applicable deferred
taxes. Losses considered other than temporary are recorded in earnings as a
realized loss. The Company's criteria used to identify fixed maturities held to
maturity as of December 31, 1996 and 1995, generally includes investment grade
bonds
41
9
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with stated maturities less than 10 years. All other fixed securities are
classified as available for sale and may be sold in response to changes in
interest rates, anticipated prepayments, liquidity needs or other economic
factors. Select issues with maturities beyond 10 years may be classified as held
to maturity due to certain factors, including expected early call provisions.
Investments in common stocks and nonredeemable preferred stocks are
classified as available for sale and are carried at estimated fair value, with
any unrealized gains or losses of securities reflected in shareholders' equity,
net of applicable deferred taxes. Losses considered other than temporary are
recorded in earnings as a realized loss.
Estimated fair value for securities is generally based on last sales
prices, listed bid prices, bid quotations received from security dealers or,
when estimated fair values are not readily available through market sources,
fair value estimates are based on quoted market prices of similar instruments.
Mortgage loans are carried at their unpaid balance and are classified as other
long-term investments. Estimated fair value for mortgage loans is calculated by
discounting scheduled cash flows through maturity using estimated market
discount rates. Other long-term investments, which are principally comprised of
interests in several investment limited partnerships, are generally carried at
equity value which approximates estimated fair value. Short-term investments,
which include certificates of deposit, money market accounts, and commercial
paper maturing within one year of the balance sheet date, are carried at cost
which approximates estimated fair value.
Realized investment gains and losses are recognized on the specific
identification method, and amortization of premiums and discounts is determined
using the interest method.
b. Losses and loss adjustment expenses -- Losses and loss adjustment
expenses ("LAE") are charged to operations as incurred. Losses and LAE
liabilities are determined on the basis of claims adjusters' evaluations and
estimates based on historical experience including estimates of incurred but not
reported losses and salvage and subrogation recoveries. Such liabilities are
recorded gross of applicable reinsurance. The Company does not discount the
liability for unpaid losses and LAE. Management believes that the recorded
liabilities are a reasonable provision for all losses and loss adjustment
expenses incurred. Notwithstanding the foregoing, no assurances can be given
that further reserve development may not occur in the future as the process of
establishing loss and LAE reserves is, by nature, imprecise. The estimates are
continually reviewed and as adjustments to these estimates become necessary,
such adjustments are reflected in current operations.
c. Revenue recognition -- Unearned premiums are generally computed on a
daily pro-rata method over the term of the policies in-force and are carried
gross of related reinsurance. Historically, the Company has not experienced
significant losses related to receivables because of short payment terms and the
lack of concentrations of credit risk. Thus, the carrying amount approximates
estimated fair value.
d. Deferred policy acquisition costs -- Policy acquisition costs are
deferred and charged to operations over the periods in which the related
premiums are earned. The determination of recoverability of such deferred costs
includes anticipated investment income.
e. Property, equipment and depreciation -- Property and equipment are
recorded at cost. Depreciation is computed using the straight-line method over
the estimated useful lives.
f. Income taxes -- Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
g. Goodwill -- The excess of Viking's cost over fair value of net assets
acquired is being amortized by the straight-line method over 40 years. The
excess of Orion's cost over fair value of net assets acquired and other goodwill
recorded in the consolidated balance sheet is being amortized by the
straight-line method over 31 to 36 years. Reflected in other expenses is
amortization of goodwill of $1,160,000, $883,000, and $766,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
h. Statement of cash flows -- For purposes of the consolidated statements
of cash flows, the Company considers only demand deposit accounts to be cash.
42
10
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
i. Earnings per share -- Earnings per share for 1996, 1995 and 1994 has
been computed by dividing net earnings by the number of weighted average shares
and equivalent shares outstanding of 14,973,332, 13,324,200 and 12,135,505,
respectively. The common stock equivalents are stock options which result in a
dilutive effect from assumed exercise of the options.
j. Employee stock compensation plans -- The Company follows Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees." The exercise price of stock options issued to employees equals the
market price of the stock on the measurement date, and therefore, the Company
does not record compensation expense on stock options granted to employees.
Restricted stock issued to employees is considered issued and outstanding when
awarded, and is recorded as deferred compensation.
2. STATUTORY ACCOUNTING PRACTICES
The accompanying consolidated financial statements are prepared under GAAP
which differs materially from practices prescribed by statutory accounting rules
and regulations. Under such practices, GNIC consolidated policyholders' surplus
reported to the state regulatory authorities as of December 31, 1996 and 1995
was $164,473,000 and $133,749,000, respectively, and Viking Insurance Company of
Wisconsin ("VICW") consolidated policyholders' surplus as of December 31, 1996
and 1995 was $89,342,000 and $86,872,000, respectively. Statutory net income, as
reported to state insurance departments, is as follows (in thousands):
GNIC VICW
------- -------
Year ended December 31, 1996............................... $20,450 $ 9,366
Year ended December 31, 1995............................... 7,875 15,866
Year ended December 31, 1994............................... 26,324
3. ACQUISITIONS
On July 18, 1995, the Company acquired Viking in a business combination
accounted for as a purchase. Viking is a property and casualty insurance company
writing nonstandard personal automobile insurance, primarily in the state of
California. The results of operations of Viking are included in the accompanying
consolidated financial statements since the date of acquisition.
The total cost of the acquisition was $97,225,000, with total cash paid of
approximately $94,681,000, including acquisition expenses and net of $878,000
cash acquired. The total consideration exceeded the fair value of the net assets
of Viking by approximately $10,612,000. The total acquisition cost differs from
the announced total consideration paid of $103,000,000 due to transaction
expenses, the contingent purchase price adjustments, discussed below, and a
$12,000,000 extraordinary dividend taken by Talegen Holdings, Inc. ("Seller")
from Viking just prior to the sale.
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 LAE reserves. The
Company has agreed to 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. 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 (as 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 this estimated
amount of approximately $4,333,000, as well as the corresponding
43
11
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest payable, in the accompanying consolidated financial statements. Loss
and LAE reserves of Viking were recorded at the date of acquisition at amounts
consistent with the Company's estimates of additional purchase price that will
be paid.
The following summarized pro forma information (unaudited) assumes the
Viking acquisition had occurred on January 1, 1995 and 1994 (in thousands,
except per share amounts):
TWELVE MONTHS ENDED
DECEMBER 31,
---------------------
1995 1994
-------- --------
Total Revenue.......................................... $512,718 $509,657
======== ========
Net Income............................................. 7,765 30,014
======== ========
Earnings Per Share..................................... $ 0.53 $ 2.05
======== ========
The above amounts reflect adjustments used in recording the purchase, such
as adjustments for interest on notes payable issued as part of the purchase
price, amortization of goodwill, and fees eliminated as a result of the
acquisition.
4. INVESTMENTS
The amortized cost and estimated fair values of investments in fixed
maturity and equity securities are as follows (in thousands):
DECEMBER 31,
-----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
1996
Fixed maturity securities held to
maturity:
U.S. Treasury and U.S. Government
agencies........................... $ 30,674 $ 170 $ 106 $ 30,738
State and municipal................... 47,605 1,202 146 48,661
Corporate............................. 1,992 39 2,031
-------- ------- ------ --------
80,271 1,411 252 81,430
Fixed maturity securities available for
sale:
U.S. Treasury and U.S. Government
agencies........................... 112,115 1,222 548 112,789
State and municipal................... 156,439 6,150 165 162,424
Corporate............................. 113,861 3,290 2,074 115,077
-------- ------- ------ --------
382,415 10,662 2,787 390,290
-------- ------- ------ --------
Total fixed maturity securities......... $ 462,686 $ 12,073 $3,039 $ 471,720
======== ======= ====== ========
Equity securities:
Common stocks......................... $ 42,689 $ 17,966 $1,240 $ 59,415
Nonredeemable preferred stocks........ 26,969 3,096 1,378 28,687
-------- ------- ------ --------
Total equity securities................. $ 69,658 $ 21,062 $2,618 $ 88,102
======== ======= ====== ========
44
12
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31,
-----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
1995
Fixed maturity securities held to
maturity:
U.S. Treasury and U.S. Government
agencies........................... $ 17,943 $ 896 $ $ 18,839
State and municipal................... 53,907 1,564 400 55,071
Corporate............................. 3,167 66 3,233
-------- ------- ------ --------
75,017 2,526 400 77,143
Fixed maturity securities available for
sale:
U.S. Treasury and U.S. Government
agencies........................... 123,209 3,000 126,209
State and municipal................... 176,461 8,298 161 184,598
Corporate............................. 83,465 2,884 1,958 84,391
-------- ------- ------ --------
383,135 14,182 2,119 395,198
======== ======= ====== ========
Total fixed maturity securities......... $ 458,152 $ 16,708 $2,519 $ 472,341
======== ======= ====== ========
Equity securities:
Common stocks......................... $ 41,994 $ 12,767 $2,622 $ 52,139
Nonredeemable preferred stocks........ 31,277 3,654 1,985 32,946
-------- ------- ------ --------
Total equity securities................. $ 73,271 $ 16,421 $4,607 $ 85,085
======== ======= ====== ========
For a summary of the amortized costs and estimated fair value of fixed
investment maturities at December 31, 1996 and 1995, by contractual maturity,
see Note 7.
Net investment income is summarized as follows (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
Type of investment:
Fixed maturities held to maturity................... $ 4,090 $ 7,531 $ 7,653
Fixed maturities available for sale................. 24,369 15,886 10,999
Common stocks....................................... 1,686 1,420 1,147
Nonredeemable preferred stocks...................... 2,393 2,432 2,557
Short-term investments.............................. 4,570 2,439 1,145
Other............................................... 3,702 2,397 1,166
------- ------- -------
Total investment income............................. 40,810 32,105 24,667
Less investment expenses............................ 1,371 1,129 1,091
------- ------- -------
Net investment income............................ $39,439 $30,976 $23,576
======= ======= =======
45
13
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Realized investment gains and losses, which include a writedowns for
other-than-temporary investment impairments of $2,135,000 as of December 31,
1995, are as follows (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
Fixed maturities held to maturity:
Gains............................................... $ $ 360 $ 174
Losses.............................................. (269) (21)
------- ------- -------
91 153
Fixed maturities available for sale:
Gains............................................... 1,815 1,566 2,374
Losses.............................................. (1,322) (2,869) (2,657)
------- ------- -------
493 (1,303) (283)
Equity securities:
Gains............................................... 9,950 6,227 3,192
Losses.............................................. (1,988) (1,724) (55)
------- ------- -------
7,962 4,503 3,137
------- ------- -------
Total............................................... $ 8,455 $ 3,291 $ 3,007
======= ======= =======
Net change in unrealized gains (losses) in the estimated fair value of
investments is as follows (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
------- ------- --------
Fixed maturities held to maturity.................... $ (967) $ 4,999 $ (7,819)
Fixed maturities available for sale.................. (4,188) 24,044 (20,675)
Equity securities.................................... 6,630 10,697 (6,672)
------- -------- --------
Total................................................ $ 1,475 $39,740 $(35,166)
======= ======== ========
To augment the average yield on its investment portfolio, the Company
invests a portion of its fixed maturity assets in "high yield" bonds and
preferred stocks, which are investments of a quality considered to be
noninvestment grade (rated "BB" or below). Such securities are generally
considered to have a higher potential of loss due to default because they are
unsecured, subordinated to other debt and/or issued by highly leveraged
companies. At December 31, 1996 and 1995, the Company had investments in "high
yield" securities of $55,205,000 and $36,641,000 with estimated fair values of
$56,477,000 and $36,356,000, respectively.
The Company closely monitors the financial condition of issuers of
securities that it owns, and if conditions are deemed appropriate, the Company
ceases to accrete, discount, accrue interest or record "pay in-kind" interest or
dividends. The Company had $315,000 and $230,000 of fixed maturities at
estimated fair value at December 31, 1996 and 1995, respectively, which had been
non-income producing for a portion of the previous twelve months. All fixed
maturities at December 31, 1994 had been income producing during the year. At
December 31, 1996 and 1995, total other-than-temporary investment impairments
amounted to $1,700,000 and $2,135,000, respectively. There were no
other-than-temporary investment impairments at December 31, 1994. In 1995, and
as a result of the Statement of Financial Accounting Standards (SFAS) No. 115
"Implementation Guide" the Company transferred certain fixed maturities from the
held to maturity portfolio to the available for sale portfolio. The amortized
cost of this transfer was $41,643,000 and the unrealized gain was $916,000.
During 1994, the Company transferred fixed maturity securities from the held to
maturity portfolio to the available for sale portfolio due to the decrease in
credit ratings of three issuers. The amortized cost of this transfer was
$4,219,000 and the unrealized loss was $450,000.
Concentrations of credit risk exist for groups of issuers when they have
similar economic characteristics that would cause their ability to meet their
obligations to be similarly affected by changes in economic or other conditions.
At December 31, 1996, the Company holds $35,543,000 of fixed maturity and equity
securities of public utilities and $210,029,000 of fixed maturities of state and
local governments; these holdings are not collateralized. The Company does not
have a concentration of credit risk with any one issuer of fixed income or
equity securities.
46
14
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
In May 1996, Viking moved its Freeport, Illinois operations from a leased
facility to an office building which was acquired by Viking. Viking purchased
the building in February 1996, for approximately $1,300,000.
In conjunction with the Viking acquisition, in July 1995, the Company
acquired two Viking owned properties, as well as various Viking owned equipment.
The Viking owned properties consist of Viking's corporate office building
located in Madison, Wisconsin, and a regional claims office located in Salem,
Oregon. The estimated fair value of these two facilities, as well as the
equipment, totaled approximately $7,028,000 at July 18, 1995, the acquisition
closing date.
During 1994, the Company relocated its Colorado operations to a new home
office facility. See Note 17 for further discussion of this relocation.
6. NOTES PAYABLE
On June 2, 1995, the Company entered into a $110,000,000 credit agreement
("Credit Agreement") with several participating banks. The Agreement provides
for an unsecured reducing revolving credit facility, used in part to fund the
Viking acquisition (See Note 3), to retire the outstanding balance of
$29,000,000 under the Company's previous revolving line of credit, and for
working capital and general corporate purposes.
The Credit Agreement was amended and restated as of December 16, 1996, in
order to obtain a more favorable commitment fee and London Interbank Offered
Rate (LIBOR) margin, to adjust the repayment schedule and terms, and to modify
certain of the debt covenants. Under the amended and restated Credit Agreement,
principal payments are required beginning April 15, 1998, until the loan is
retired in 2002. The Company made an early principal payment during 1995 in the
amount of $2,000,000, and therefore, the next principal payment is due on April
15, 1999. Interest is payable quarterly, and interest rates are based on the
floating LIBOR rate. As of December 31, 1996, the outstanding loan amount under
this Agreement was $100,000,000, with an interest rate of 6.24% (see Note 11).
Loan fees are being amortized over the seven year life of the loan.
The Credit Agreement contains covenants with respect to minimum net worth
and statutory surplus, the maximum ratio of net written premiums to surplus, the
minimum fixed charge coverage ratio, the minimum level of total adjusted capital
(within the meaning of the Risk-Based Capital for Insurers Model Act as
promulgated by the National Association of Insurance Commissioners), and
limitations on other items, such as permitted investments and disposition of
material assets. The Company is currently in compliance with the affirmative,
negative and financial covenants of the Agreement.
On June 14, 1995, the Company amended the $20,896,000 subordinated notes
("Orion Notes") held by Orion, to include a common stock conversion feature. On
June 22, 1995, the Company converted $8,667,000 of the Orion Notes into 550,000
shares of common stock. On October 30, 1995, the Shareholders of the Company
approved the conversion of the remaining balance of the Orion Notes into 776,128
shares of common stock.
As of December 31, 1996, the Company had a remaining principal balance of
$1,688,000 under its 6.5% term loan, which was entered into during 1994 in order
to purchase furniture and fixtures for the new home office facility. This term
loan is secured by the furniture and fixtures purchased. Quarterly principal and
interest payments are due on this loan until April 1, 1999.
Maturities of notes payable are as follows: 1997-$562,500; 1998-$750,000;
1999-$22,375,000; 2000-$24,000,000; 2001-$26,000,000; 2002 and
thereafter-$28,000,000.
47
15
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The amortized cost and estimated fair value of fixed investment maturities
at December 31, 1996 and 1995, by contractual maturity, are shown below (in
thousands). Expected maturities will differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without call or
prepayment penalties.
DECEMBER 31,
-----------------------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY
------------------------ ------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ---------- --------- ----------
1996
-----
Due in one year or less................. $ 46,601 $ 46,700 $ 2,000 $ 2,000
Due after one year through five years... 95,761 96,236 39,321 40,333
Due after five years through ten
years................................. 63,395 66,057 33,330 33,615
After ten years......................... 128,284 132,981 5,620 5,482
Federal agency and other mortgage
pools................................. 48,374 48,316
-------- -------- -------- --------
$ 382,415 $ 390,290 $80,271 $ 81,430
======== ======== ======== ========
1995
-----
Due in one year or less................. $ 33,100 $ 33,342 $ 9,816 $ 9,861
Due after one year through five years... 98,425 99,124 26,346 27,411
Due after five years through ten
years................................. 66,832 68,829 28,489 29,905
After ten years......................... 132,220 139,818 10,366 9,966
Federal agency and other mortgage
pools................................. 52,558 54,085
-------- -------- -------- --------
$ 383,135 $ 395,198 $75,017 $ 77,143
======== ======== ======== ========
The carrying value and estimated fair value of other financial instruments
at December 31, 1996 and 1995 are as follows (in thousands):
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------- ----------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- --------- -------- ---------
Assets:
Equities.............................. $ 88,102 $ 88,102 $ 85,085 $ 85,085
Other long-term investments........... 13,585 13,600 11,521 11,572
Short-term investments................ 94,993 94,993 52,257 52,257
Liabilities:
Notes payable......................... 101,688 101,696 103,000 103,009
Estimated fair value of the term loan, included in notes payable above, was
calculated by discounting contractual cash flows through maturity using quoted
market rates for similar issues with similar maturities. Estimated fair value of
the Credit Agreement, also included in notes payable above, approximates face
value due to the credit terms during the revolving period. See Note 6 for
further discussion of both the term loan and Credit Agreement.
The estimated fair value of financial hedge instruments, both of which are
held for other than trading purposes, is the estimated amount the Company would
pay to terminate the interest rate swap agreements, taking into consideration
current interest rates and other relevant factors. The estimated amount at
December 31, 1996 and 1995 was $214,000 and $678,000, respectively.
8. INCOME TAXES
Effective July 2, 1996, the Company will be included in Orion's
consolidated federal income tax return and is covered by income tax sharing
agreements under which the Company computes its current federal income tax
liability on a separate return basis and pays Orion any taxes due on this basis.
Deferred income taxes result from temporary differences in the basis of
various assets and liabilities for financial statement purposes and for tax
purposes, and alternative minimum tax ("AMT") credit carryforwards. The tax
effects of
48
16
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the temporary differences and AMT carryforwards comprising the net deferred
tax liability at December 31, 1996 and the net deferred tax asset at December 31
1995, which are included in other liabilities and other assets in the
consolidated balance sheet, are as follows (in thousands):
YEAR ENDED DECEMBER
31,
-------------------
1996 1995
------- -------
Discounted loss reserves......................................... $10,406 $11,325
Unearned premiums................................................ 9,642 8,971
Deferred compensation arrangements............................... 1,658 1,030
Realized investment losses....................................... 595 747
AMT credit carryforward.......................................... 1,141 1,819
Accrued post retirement benefits other than pensions............. 643 504
Accrued exit activity costs...................................... 574 1,464
Other............................................................ 891 1,039
------- -------
Gross deferred tax assets...................................... 25,550 26,899
------- -------
Deferred policy acquisition costs................................ 15,560 13,173
Net unrealized investment gain................................... 9,212 8,357
Amortization of fixed maturities................................. 461 489
Other............................................................ 1,120 664
------- -------
Gross deferred tax liabilities................................. 26,353 22,683
------- -------
Net deferred tax (liability) asset............................... $ (803) $ 4,216
======= =======
Included in gross deferred tax assets at December 31, 1996 and 1995, is
$1,141,000 and $1,819,000 of AMT credit carryforward, respectively. The credit
is allowed for the amount of adjusted net minimum tax for all years reduced by
the minimum tax credit for all prior tax years. This credit has no expiration
date as a credit against the Company's future regular tax liability. Included in
other deferred tax assets at December 31, 1996 and 1995, is the tax effect of a
$573,000 and $639,000, respectively, net operating loss carryforward arising
from the acquisition of CCIC, available to offset future taxable income of CCIC.
This carryforward substantially expires in 1997, with final expiration in 2003.
Also included in other deferred tax assets at December 31, 1995, is the tax
effect of a $609,000 net operating loss carryforward, which was utilized to
reduce the Company's 1996 regular tax liability. This carryforward expires in
2010. As of December 31, 1996, no valuation allowance on deferred tax assets was
necessary.
Total income taxes (benefits) are allocated as follows (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
Income from continuing operations..................... $ 9,375 $(1,597) $ 7,036
Shareholders' equity, for unrealized investment gains
(losses)............................................ 855 12,160 (9,493)
Shareholders' equity, other........................... -- 8 8
------- ------- -------
$10,230 $10,571 $(2,449)
======= ======= =======
The components of the provision (benefit) for income taxes on continuing
operations are as follows (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------ ------- ------
Current................................................. $5,211 $ 1,946 $7,012
Deferred................................................ 4,164 (3,543) 24
------ ------- ------
$9,375 $(1,597) $7,036
====== ======= ======
49
17
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table reconciles the effective tax rate to the federal
statutory rate of 35 percent for pretax earnings from continuing operations (in
thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
Earnings before taxes................................. $36,881 $ 7,332 $29,587
======= ======= =======
Expected income tax expense........................... $12,908 $ 2,566 $10,355
Adjustments resulting from:
Dividends received deduction........................ (1,234) (1,875) (1,528)
Nontaxable interest income.......................... (3,848) (3,451) (2,754)
Proration........................................... 762 799 642
Nonrecurring tender offer charge (Note 17).......... 409
Other, net.......................................... 378 364 321
------- ------- -------
$ 9,375 $(1,597) $ 7,036
======= ======= =======
9. REINSURANCE
In the ordinary course of business, the Company reinsures certain risks,
generally on an excess of loss basis with other insurance companies. Effective
July 1, 1996, such reinsurance arrangements limit the Company's maximum loss per
occurrence on casualty losses to $400,000, on property losses to $300,000 and
for catastrophe losses to $600,000. For the first half of 1996, such reinsurance
arrangements limited the Company's maximum loss per occurrence on individual
risks to $400,000 and for catastrophes to $500,000. 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.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. To the extent that any reinsuring company is unable to meet its
obligations, the Company would be liable for such defaulted amounts;
consequently, allowances are established for amounts deemed uncollectible. The
allowances established for uncollectible amounts were $200,000 at both December
31, 1996 and 1995. The Company generally does not require collateral to support
reinsurance recoverables, but continually evaluates the financial condition of
its reinsurers and monitors concentrations of credit risk to minimize exposure
to significant losses from reinsurer insolvencies. At December 31, 1996 and
1995, reinsurance recoverables of $80,249,000 and $68,938,000, respectively,
were associated with two reinsurers (both companies are rated A+ or above by
A.M. Best) under the Company's excess of loss property and casualty treaties and
certain facultative reinsurance contracts. The Company's reinsurance treaties
generally provide that premiums are ceded on a written basis but are paid to the
reinsurers on an earned basis; consequently, prepaid reinsurance premiums are
primarily deposits required by contract terms and amounts paid related to
facultative reinsurance contracts. Prepaid reinsurance premiums are amortized
over the contract period in proportion to the amount of reinsurance protection
provided.
The approximate prepaid and recoverable amounts of reinsurance ceded to
other companies, including subsidiaries of Orion under 100% reinsurance
arrangements, are as follows (in thousands):
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------------- -----------------------------
NON-AFFILIATES AFFILIATES NON-AFFILIATES AFFILIATES
-------------- ---------- -------------- ----------
Premiums prepaid...................... $ 2,244 $ 30 $ 4,435 $ 79
Paid losses recoverable............... 4,780 9,016
Unpaid losses recoverable............. 66,633 2,197 51,491 3,438
Unpaid LAE recoverable................ 12,238 2,659 10,048 3,318
------- ------ ------- ------
$ 85,895 $4,886 $ 74,990 $6,835
======= ====== ======= ======
50
18
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Premiums, losses and LAE, including the effect of reinsurance, are
comprised of (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ---------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
-------- -------- -------- -------- -------- --------
Premiums:
Direct................. $493,660 $492,077 $414,694 $393,886 $295,714 $284,918
Assumed................ 44,376 37,921 36,819 47,916 69,277 76,720
Ceded.................. (46,804) (48,350) (53,614) (51,785) (42,066) (40,000)
-------- -------- -------- -------- -------- --------
Net.................... $491,232 $481,648 $397,899 $390,017 $322,925 $321,638
======== ======== ======== ======== ======== ========
% Assumed to Net......... 9.03% 9.25% 21.45%
==== ==== =====
INCURRED INCURRED INCURRED
-------- -------- --------
Losses and LAE:
Direct................................................... $361,837 $309,298 $192,183
Assumed.................................................. 20,268 32,281 54,892
Ceded.................................................... (44,321) (48,066) (33,570)
-------- -------- --------
Net...................................................... $337,784 $293,513 $213,505
======== ======== ========
Included in direct premiums earned above, for the years ended December 31,
1996, 1995 and 1994, were $97,000, $309,000 and $1,152,000, respectively, of
premiums earned under 100% reinsurance agreements with subsidiaries of Orion.
Also, included in direct losses incurred above, for the years ended December 31,
1996, 1995 and 1994, were $67,000, $218,000 and $854,000, respectively, of
losses incurred under these same 100% reinsurance agreements with subsidiaries
of Orion.
The Company has entered into reinsurance agreements with subsidiaries of
Orion, whereby it assumes business written by the affiliates. Included in
premiums assumed above, for the years ended December 31, 1996, 1995 and 1994,
were $15,673,000, $9,495,000 and $30,921,000 of premiums written, respectively,
which were assumed under these agreements. Assumed premiums and incurred losses
have changed, compared to the prior years, as a result of the changes in the
Company's business written in different states. The Company paid fees and
expenses to affiliates for assumed business written as follows: 1996-$607,000;
1995-$338,000; 1994-$1,440,000.
Since the acquisition of Viking, the Company is party to 100% reinsurance
agreements with VCM, whereby the Company assumes business written, in the state
of Texas, by this affiliate. Included in 1996 and 1995 premiums assumed above
were $29,623,000 and $5,525,000, respectively, of premiums written under these
agreements. The policy issue fee charged by VCM is offset by the management fee
charged by the Company to VCM. Therefore, the net amount of policy issue fees
and management fees is immaterial.
51
19
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. RESERVES FOR LOSS AND LOSS ADJUSTMENT EXPENSES
The Company's loss and LAE reserves are summarized below (in thousands):
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
Balance at beginning of year....................... $354,634 $241,221 $220,965
Reserves acquired as a result of a business
combination...................................... 80,692
Less reinsurance recoverables...................... 68,295 61,446 55,165
-------- -------- --------
Net adjusted beginning balance..................... 286,339 260,467 165,800
Provision for incurred losses and LAE:
Current year..................................... 338,779 280,726 212,458
Prior years...................................... (995) 12,787 1,047
-------- -------- --------
337,784 293,513 213,505
-------- -------- --------
Payments for incurred losses and LAE:
Current year..................................... 194,667 159,208 111,418
Prior years...................................... 144,775 108,433 88,112
-------- -------- --------
339,442 267,641 199,530
-------- -------- --------
Net balance at end of year......................... 284,681 286,339 179,775
Plus reinsurance recoverables.................... 83,727 68,295 61,446
-------- -------- --------
Balance at end of year........................... $368,408 $354,634 $241,221
======== ======== ========
As a result of changes in estimates of insured events in prior years, the
provision for prior year losses and LAE decreased by $995,000 in 1996, a
significant improvement compared to 1995. The favorable development in 1996 was
the result of $4,038,000 redundant development in the personal lines business
unit. The redundancy in this unit was due to estimated incurred but not reported
losses at the beginning of the year developing lower than expected, as well as
the successful implementation of claims operational changes, which resulted in
better than expected development on 1995 personal lines acquired reserves. The
favorable development within the personal lines business unit during 1996 was
partially offset by adverse development within the commercial and collateral
protection units. The total commercial lines adverse development in 1996 was
$1,675,000, which represented a significant improvement over 1995, and resulted
primarily from general liability losses and loss adjustment expenses on reported
claims costing more to settle than expected. During 1996, the collateral
protection unit experienced $1,368,000 adverse development primarily due to an
under-estimation of unreported claims, as of December 31, 1995, for the Blanket
Vendor Single Interest and Puerto Rico business.
The 1995 adverse development in personal lines of $2,504,000 was a result
of adverse trends in claim frequency which caused higher than expected
development of outstanding claims and incurred but not reported losses.
Development on personal lines during 1994 was favorable. Total adverse
development in commercial lines during 1995 was $10,056,000, of which $7,266,000
was caused by commercial automobile liability higher claim severity primarily in
1994 through 1992. The remaining commercial lines 1995 adverse development was
from general liability and other lines. The adverse development in commercial
lines in 1994 was primarily due to loss development on professional, general and
commercial automobile liability claims occurring prior to 1985. These accident
years accounted for $920,000 of commercial lines' adverse development in 1995
and $1,300,000 in 1994. The remaining adverse development in 1995 of $227,000
was attributable to the collateral protection business unit.
The Company primarily writes automobile coverage, and therefore has limited
exposure for environmental claims. In establishing the liability for unpaid
losses and LAE related to environmental claims, the Company considers facts
currently known, current state of the law, and coverage litigation. Liabilities
are recognized for known claims when sufficient information has been developed
to indicate the involvement of a specific insurance policy, and its liability
can be reasonably estimated. In addition, liabilities have been established to
cover additional exposures on both known and unasserted claims. Estimates of the
liabilities are reviewed and updated continually. Developed case law and
adequate claim history do not exist for such claims,
52
20
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
especially because significant uncertainty exists about the outcome of
coverage litigation and whether past claim experience will be representative of
future claim experience.
Environmental claims reported to the Company to date, such as asbestos and
pollution contamination, have primarily related to policies written during the
period 1984 to 1978. In 1985, the Company added an absolute pollution exclusion
clause to general liability policies to significantly reduce exposure to such
claims. The Company's known exposure to environmental losses is not considered
to be material as they have amounted to approximately three percent of
cumulative payments on general liability claims for the accident years 1984 to
1978, and there are less than $600,000 in net outstanding claim reserves, and
approximately $2,000,000 in total loss and loss adjustment expense reserves, at
December 31, 1996. Based on the claim activity to date and the nature of the
business written during this period and subsequent periods, the Company does not
believe that a material exposure to such risks exists in the future.
11. INTEREST RATE SWAP AGREEMENTS
At December 31, 1996, the Company had two interest rate swap agreements
outstanding, with participating commercial banks, having a total notional
principal amount of $80,000,000, or $40,000,000 for each bank. These agreements
effectively change the Company's interest rate exposure on $80,000,000 of the
$100,000,000 million principal balance outstanding under the Credit Agreement,
which is discussed in Note 6, to a fixed rate. The fixed rate interest
percentage paid by the Company on the total notional amounts is approximately
6.3%. Net cash payments made or received under the swap agreements have been
included within interest expense.
The interest rate swap agreements terminate on March 16, 1998. The interest
rate swap floating rate, which is paid by the banks to the Company, resets every
three months, beginning December 20, 1995, which coincides with the LIBOR
determination dates available on the outstanding principal balance under the
Company's Credit Agreement. The floating interest rate under the swap agreements
is based upon the LIBOR rate at each determination date.
The Company is exposed to credit loss in the event of nonperformance by the
other parties to the interest rate swap agreements. However, the Company does
not anticipate nonperformance by the counterparties.
12. COMMITMENTS AND CONTINGENCIES
The Company rents various buildings for its branch office locations. Rent
expense for operating leases was as follows: 1996-$1,697,000; 1995-$1,262,000;
1994-$1,450,000. Future minimum lease payments on building and equipment
operating lease commitments are as follows: 1997-$1,520,000; 1998-$1,221,000;
1999-$451,000; 2000-$102,000; 2001-$16,000; 2002 and thereafter-$0.
In conjunction with the Viking acquisition there is additional purchase
price which may ultimately be paid to the seller depending on Viking's future
loss development. See Note 3 for further discussion of this contingency payment.
As discussed in the Company's report on Schedule 14D-9, filed with the
Securities and Exchange Commission on May 22, 1996, as amended on June 1, 1996,
June 7, 1996 and June 19, 1996, three separate complaints naming the Company and
one or more of its directors, and Orion, as defendants were filed on behalf of
the Company's shareholders, alleging that the Orion tender offer was unfair and
inadequate. On July 2, 1996, counsel for Orion and the Company signed a
Memorandum of Understanding providing for the settlement and dismissal of the
three cases, based on the revisions which the Purchasers had made in the terms
of the Offer to Purchase. In the judgment of the Company's management, the costs
incurred to defend and settle these complaints will not have a materially
adverse effect on the results of the Company's operations. The estimated
settlement costs have been accrued in the Company's consolidated financial
statements as of December 31, 1996, as part of the nonrecurring charge discussed
in Note 17.
In addition to the three complaints described above, the Company is subject
to litigation in the normal course of operating its insurance business. The
Company is not engaged in any such litigation which it believes would have a
material adverse impact on its financial condition or results of operations,
taking into account the reserves established therefore and giving effect to
insurance.
53
21
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. RESTRICTIONS ON SHAREHOLDERS' EQUITY
The amended and restated Credit Agreement, which is discussed in Note 6,
imposes no dividend restrictions on the Company, but requires the Company to
maintain consolidated net worth of $190,000,000, plus 30% of the aggregate
positive consolidated net income for each fiscal quarter ending after December
31, 1996, plus 100% of the aggregate amount of increases in the stated capital
and additional paid-in capital accounts resulting from the issuance of equity
securities or other capital investments after December 31, 1996. According to
the definition outlined in the Credit Agreement, consolidated net worth means
the net worth of Guaranty and its subsidiaries determined in accordance with
GAAP, and without regard to the requirements of Statement of Financial
Accounting Standards No. 115. As of December 31, 1996, the required net worth
under the bank loan agreement was $190,000,000 while the Company's actual net
worth, as defined in the Credit Agreement, was $232,920,000.
Shareholders' equity of the Company is primarily represented by the
surplus, including undistributed earnings, of GNIC and VICW. The Colorado
dividend restriction law limits the annual dividend a Colorado domiciled
insurance company may pay to its parent holding company during a twelve-month
period to the greater of 10% of GNIC's statutory surplus as reported at the end
of the preceding calendar year ($164,474,000 and $133,749,000 at December 31,
1996 and 1995, respectively), or GNIC's statutory net income, excluding realized
capital gains ($9,332,000 and ($442,490) for 1996 and 1995, respectively) as
reported at the end of the preceding calendar year. When a dividend is declared
by GNIC to Guaranty, the Colorado Insurance Department must be notified of such
declaration within five days thereafter, and at least ten business days before
the payment of the dividend. The Wisconsin dividend restriction law limits the
annual dividend that VICW may pay to Guaranty to the lesser of 10% of VICW's
statutory surplus as of the end of the preceding calendar year ($88,597,000 and
$86,872,000 at December 31, 1996 and 1995, respectively) or the greater of
either the statutory net income of VICW for the preceding calendar year, less
realized capital gains, ($7,524,000 and $14,591,000 at December 31, 1996 and
1995, respectively) or the aggregate of the net income of VICW for the three
calendar years preceding the date of the dividend, less realized capital gains
for those calendar years minus dividends paid or credited and distributions made
within the first two of the preceding three calendar years ($10,642,000 and
$17,521,000 at December 31, 1996 and 1995, respectively). When a dividend is
paid by VICW to Guaranty, the Wisconsin Insurance Department must have been
notified in writing at least 30 days prior to the payment of the dividend.
During 1996, GNIC paid no dividends to Guaranty, while VICW paid dividends in
the amount of $8,687,000 to Guaranty. In 1995, GNIC paid dividends of
$16,500,000 to Guaranty, while VICW paid no dividends to Guaranty. The Company
believes that GNIC and VICW will be in a position to pay dividends to Guaranty
in the future.
14. RELATED PARTY TRANSACTIONS
During 1996, Orion increased its ownership in the Company by approximately
31.5%, to 81%. See Notes 12 and 17 for further discussion of this transaction.
Orion manages a majority of the Company's investment portfolio. The Company
paid investment management fees to Orion as follows: 1996 -- $650,000;
1995 -- $595,000; 1994 -- $550,000.
The Company paid commissions to an Orion agency affiliate of $85,000,
$72,000 and $90,000 in 1996, 1995 and 1994, respectively, for premiums written
by the affiliate for the Company of $436,000, $411,000 and $516,000 in 1996,
1995 and 1994, respectively.
In 1990, GNIC entered into a loan participation agreement with a subsidiary
of Orion, whereby they loaned money to another affiliate. The loan was secured
by a leasehold deed of trust and matured in November 1995. GNIC's proportionate
share of this loan was $3,700,000, or 41.1%. GNIC received quarterly interest
payments at a rate of 11% of its proportionate share. Interest earned was
$355,000 in 1995 and $407,000 in 1994. In 1995, during the assembly of the
Viking acquisition financing, the Company received a commitment for a
$21,000,000 Bridge Loan from Orion, for which the Company paid a $210,000
commitment fee. During 1995, the Company converted the $20,896,000 Orion Notes
into 1,326,128 shares of common stock. See Note 6 for further discussion related
to this conversion. In 1995 and 1994, the interest expense paid to Orion was
$1,122,000 and $1,640,000, respectively.
Also, the Company has entered into certain reinsurance agreements with
subsidiaries of Orion (see Note 9).
In the opinion of management, the terms of the Company's transactions with
Orion are reasonable and representative of the terms that would have been
applicable in transactions with unrelated parties.
54
22
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The son of the Company's Chairman of the Board is a managing director of
Insurance Partners Advisors L.P., which manages Insurance Partners L.P., a
partnership formed to make equity investments in the insurance industry. The
Company has committed initial capital in an aggregate amount not to exceed
$1,500,000 of the total $550,000,000 committed by all partners.
A member of the Board of Directors of the Company is the owner of a general
agency. Gross commissions paid by the Company to the agency, under a standard
agency contract, for business produced were $731,000, $813,000 and $789,000 in
1996, 1995 and 1994, respectively.
As a result of the Viking acquisition and the subsequent change in control
of VCM, VCM was required to increase its surplus to a minimum of $2,000,000 as
required by the Texas Insurance Code. The increase was accomplished by the
issuance of a surplus debenture to Viking in the amount of $1,300,000 in
exchange for cash. The debenture pays interest annually at a rate of 8.5%.
Interest earned in 1996 and 1995 was $129,000 and $33,000, respectively. Also,
the Company provides management services to VCM. The fees paid by VCM are offset
by policy issue fees paid to VCM by the Company under 100% reinsurance
agreements (see Note 9).
15. EMPLOYEE BENEFIT PLANS
The Company provides incentive plans for key employees. These plans include
the Company's 1987 Performance Unit Plan (the "Unit Plan") and the Equity
Incentive Plan, which replaced the 1991 Long-Term Performance Incentive Plan
(the "Incentive Plan").
Under the Unit Plan, units granted increase in value in relationship to the
book value per share of the Company's common stock with certain adjustments. As
of December 31, 1996, 225,707 units are outstanding. No units were issued during
1996.
Under the Incentive Plan, shares of restricted stock as well as stock
options may be granted by the Company. The Incentive Plan, as adopted September
12, 1991, reserved 800,000 common shares for grant to key employees. During
1996, no restricted stock was issued. In 1995, 12,000 shares of restricted stock
was issued, a portion of which was from treasury stock. Restricted stock is
considered issued and outstanding when awarded, and is recorded as deferred
compensation. As a result of the Orion tender offer, which was completed in July
1996 and is discussed in Note 17, all restrictions on the restricted stock
lapsed in 1996. Therefore, the Company included $587,000 of compensation
expense, which related to the restricted stock that became fully vested as a
result of the Orion tender offer, in the nonrecurring tender offer charge, which
is also discussed in Note 17. Prior to the Orion tender offer, the Company had
recorded $57,000 as compensation expense on restricted stock during 1996. The
compensation expense recognized on restricted stock during 1995 and 1994 was
$263,000 and $250,000, respectively.
All stock options under the Incentive Plan are granted at fair market value
at date of grant, become exercisable proportionately from the first through the
fourth anniversaries of the grant dates, and expire ten years after the date of
grant. In October 1996, the Company's Board of Directors amended the Incentive
Plan to be consistent with the terms of the Equity Incentive Plan.
As a result of the Orion tender offer, all stock options granted prior to
the completion of the tender offer became fully vested and became exercisable.
At December 31, 1996, there were 400,500 options exercisable under the Incentive
Plan and 39,986 common shares available for grant under the Incentive Plan.
The Equity Incentive Plan was approved by the Board of Directors on October
29, 1996, and reserved 700,000 shares to grant to key employees. All stock
options under this plan must be granted at no less than fair market value at the
date of grant. The options granted under the Equity Incentive Plan are
exercisable proportionately from the first through fourth anniversaries of the
grant dates and expire ten years after the date of the grant. At December 31,
1996, there were no options exercisable under the Equity Incentive Plan. The
162,747 stock options granted under this plan in 1996 are pending shareholder
approval at the May 13, 1997 Annual Meeting of Shareholders. If approved, there
would be 537,253 common shares available for grant under the Equity Incentive
Plan at December 31, 1996. Additionally, the Equity Incentive Plan provides for
performance unit awards, which allow for cash and common stock payments to be
made, contingent on the future cumulative increases in book value of the
Company's common stock. The awards allow for annual payments to be earned up to
four years from the date of grant.
55
23
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As discussed in Note 1, the Company follows APB. No. 25 for stock options
issued to employees, rather than following Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." SFAS No.
123, among other things, requires estimating the fair value of stock options
using an option pricing model that considers factors specified by this SFAS, and
recording compensation cost based on the estimated fair value of the stock
options. Had compensation cost for the stock options granted under the Company's
Equity Incentive Plan and Incentive Plan been determined consistent with SFAS
No. 123, the Company's net earnings and earnings per common share would have
been reduced to the pro forma amounts indicated below:
1996 1995
------- ------
Net Income (In thousands)
As Reported........................................... $27,506 $8,929
Pro Forma............................................. 27,093(a) 8,727
Earnings Per Common Share:
As Reported........................................... $ 1.84 $ 0.67
Pro Forma............................................. 1.81(a) 0.65
- ---------------
(a) As a result of the Orion tender offer, approximately $361,000 of the
compensation cost estimated under SFAS No. 123 would have been included in
the 1996 nonrecurring charge.
The following is a summary of stock option transactions:
1996 1995
------------------------------- -------------------------------
WEIGHTED WEIGHTED
AVERAGE EXERCISE AVERAGE EXERCISE
SHARES PRICE SHARES PRICE
------------ ---------------- ------------ ----------------
Balance -- January 1........... 471,500 $16.70 458,000 $16.44
Granted........................ 302,749 16.50 90,000 17.25
Exercised...................... (98,500) 14.28 (36,750) 14.98
Terminated..................... (2,500) 17.50 (39,750) 16.64
-------- ----------- -------- -----------
Balance -- December 31......... 673,249 $16.96 471,500 $16.70
======== =========== ======== ===========
Options exercisable at year end
with the corresponding
weighted-average exercise
price........................ 400,500 $17.05 237,625 $15.97
======== =========== ======== ===========
Weighted-average fair value of
options granted during the
year......................... $4.16 $5.18
===== =====
Range of Exercise Prices for
Options Outstanding at
December 31.................. $13.50-23.25 $14.50-23.25
============ ============
The Company utilized the Black-Scholes option pricing model to estimate the
fair value, on the date of grant, of stock options granted. The following
weighted-average assumptions were used for 1996 stock options issued: 3.0%
dividend yield, expected volatility of 24%, risk free interest rate of 6.1% and
expected term of 6.0 years. The following weighted-average assumptions were used
for 1995 stock options issued: 2.9% dividend yield, expected volatility of 24%,
risk free interest rate of 6.4% and expected term of 8.7 years.
The Company had 272,749 and 233,875 nonexercisable options, including those
granted under the Equity Incentive Plan and the Incentive Plan, at December 31,
1996 and 1995, respectively. All of the December 31, 1996 and 1995
nonexercisable options were time-based-exercisable options, based on the four
year vesting period discussed above.
56
24
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted-average remaining contractual lives for options outstanding at
December 31, 1996 and 1995 were 7.5 and 7.4 years, respectively.
The Company has a defined contribution profit sharing plan, which qualifies
under Section 401(k) of the Internal Revenue Code, for which substantially all
employees are eligible after a specific waiting period. The plan is contributory
and the Company matches employee contributions unless changed by the Board of
Directors. Prior to 1996, Viking had its own separate Individual Retirement Plan
which was pending qualification under Section 401(k) of the Internal Revenue
Code. On April 1, 1996, the Company received a favorable determination letter
from the Internal Revenue Service and rolled the Viking plan into its plan.
The Company has a non-qualified Supplemental Executive Retirement Plan
("SERP") for employees whose compensation meets a minimum requirement. This plan
provides deferred benefits for those employees who received less than the full
employer contribution of the Company's defined contribution profit sharing plan
as a result of federal tax limitations on participation in the plan. Eligible
employees are entitled to receive payment of funds upon retirement or
termination unless terminated for good cause as defined in the SERP. Prior to
1996, Viking employees were not eligible to participate in this plan.
The Company, excluding Viking, has a defined benefit health care plan ("the
Plan") that provides postretirement medical benefits to full-time employees who
have worked for ten years and attained age 55 while in service with the Company.
Benefits generally are provided under the Plan for retirees and their dependents
until the retirees attain age 65. The Plan is contributory and contains other
cost sharing features which may be adjusted annually for the expected general
inflation rate. The Company's policy is to fund the cost of the Plan benefits in
amounts determined at the discretion of management. To date, no funding of the
Plan has been made.
As of December 31, 1995, Viking terminated its defined benefit health care
plan that provided for post-retirement medical benefits to individuals who
retired or became permanently disabled while in service with Viking. Employees
who were retired or disabled as of December 31, 1995 continue to be eligible for
post-retirement medical benefits. Benefits generally are provided under this
plan for retirees and their dependents until the death of the retiree. This plan
is contributory and contains other cost sharing features which may be adjusted
annually. Viking's policy is to fund the cost of plan benefits in amounts
determined at the discretion of management.
Total expense for the Company's employee benefit plans, discussed above, is
as follows: 1996 -- $2,692,000; 1995 -- $2,132,000; 1994 -- $1,602,000.
16. SHAREHOLDER RIGHTS AGREEMENT
On November 20, 1991, the Board of Directors approved the adoption of a
Shareholder Rights Agreement and in connection therewith declared a dividend
distribution of one Right for each outstanding share of Common Stock until such
time that separate Right certificates are distributed, or the Rights are
redeemed or expire. When exercisable, each Right will entitle a holder to
purchase from the Company a unit consisting of one one-hundredth of a share of a
new series of the Company's Preferred Stock at a purchase price of $60 per
share.
The Rights become exercisable ten days following a public announcement that
a person or group of acquires has acquired or obtained the rights to acquire
beneficial ownership of 20% or more of the Company's Common Stock or ten
business days following announcement of a tender offer or exchange offer that
could result in beneficial ownership of 20% or more of the Company's Common
Stock. Prior to consummation of such a transaction, each holder of a Right is
entitled to purchase shares of the Company's Common Stock having a value equal
to two times the exercise price of the Right. The Company has the right to
redeem the Rights at $.01 per Right prior to the time they become exercisable.
The Rights will expire on December 30, 2001.
17. NONRECURRING CHARGES
On May 8, 1996, Orion commenced a cash tender offer (the "Offer") to
purchase up to 4,600,000 shares of common stock of the Company at price of
$17.50 per share. At the time the tender offer was made, Orion owned
approximately 49.5 percent of the Company's outstanding common stock.
57
25
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of the Offer the Company incurred costs of approximately
$2,163,000, in the second quarter of 1996, for legal fees, investment advisor
fees, printing fees, director's fees, and compensation expense resulting from
the acceleration of unvested restricted stock grants.
On July 2, 1996, Orion successfully completed the Offer and purchased the
4,600,000 shares of the Company's common stock at an amended price of $18.50 per
share. According to the Depository for the Offer, 6,774,515 shares of the
Company's shares were tendered and not withdrawn pursuant to the Offer. The
proration factor used by Orion to purchase the tendered shares was .67901168.
For further information related to the Orion Offer refer to the Company's report
on Schedule 14D-9, filed with the Securities and Exchange Commission on May 22,
1996, and amendments thereto, filed on June 1, 1996, June 7, 1996 and June 19,
1996.
On July 17, 1996, Orion purchased an additional 120,000 shares of the
Company's common stock in the open market. The purchase of these additional
shares brought Orion's ownership level in the Company to 12,129,942 shares, or
81.0%.
The Company relocated its Colorado operations to a new home office facility
during the second quarter of 1994. New facility expenditures totaled
$16,208,000, which were primarily funded from operating cash flow. Total
nonrecurring relocation charges of $838,000 were incurred in 1994.
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED
-----------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996:
Total revenue....................................... $126,704 $129,823 $134,125 $138,890
Earnings before income taxes........................ 7,241 6,945 10,402 12,293
Net earnings........................................ 5,787 5,225 7,521 8,973
Earnings per share.................................. $ 0.39 $ 0.35 $ 0.50 $ 0.60
1995:
Total revenue....................................... $ 86,502 $ 88,306 $121,479 $127,997
Earnings (loss) before income taxes................. 7,535 6,575 (8,349) 1,571
Net earnings (loss)................................. 5,768 4,851 (4,113) 2,423
Earnings (loss) per share........................... $ 0.48 $ 0.40 $ (0.29) $ 0.16
During the third quarter of 1995, the Company completed the Viking
acquisition (see Note 3), which significantly increased revenues in the third
and fourth quarters of 1995. Also in the third quarter of 1995, the Company
strengthened its loss reserves (losses and loss adjustment expenses) by
$13,971,000, as a result of adverse development within the personal and
commercial lines units (see Note 10).
58