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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _________ to ____________
Commission File Number: 000-24366
GORAN CAPITAL INC.
(Exact name of registrant as specified in its charter)
CANADA NOT APPLICABLE
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Eva Road
Suite 200
Toronto, Ontario M9C 2A8
4720 Kingsway Drive
Indianapolis, Indiana 46205
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (416) 622-0660 (Canada)
(317) 259-6300 (U.S.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No
As of November 4, 2002, there were 5,393,698 shares of Registrant's no par value
common stock issued and outstanding.
FORM 10-Q INDEX
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
Page
PART I FINANCIAL INFORMATION Number
Item 1 Financial Statements
Consolidated Balance Sheets at September 30, 2002
(unaudited) and December 31, 2001 3
Unaudited Consolidated Statements of Operations for
the Three Months Ended September 30, 2002 and 2001 4
Unaudited Consolidated Statements of Operations for
the Nine Months Ended September 30, 2002 and 2001 5
Unaudited Consolidated Statement of Stockholder's Equity
(Deficit) for the Nine Months ended September 30, 2002
and 2001 6
Unaudited Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 2002 and 2001 7
Condensed Notes to Unaudited Consolidated Financial
Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3 Qualitative and Quantitative Disclosures about
Market Risk 22
Item 4 Controls and Procedures 22
PART II OTHER INFORMATION 22
Item 1 Legal Proceedings 22
Item 2 Changes in Securities and Use of Proceeds 24
Item 3 Defaults Upon Senior Securities 24
Item 4 Submission of Matters to a Vote of Security Holders 24
Item 5 Other Information 24
Item 6 Exhibits and Reports on Form 8-K 24
GORAN CAPITAL INC., Analysis of Loss Per Share 25
SIGNATURES 26
CERTIFICATIONS 27
EXHIBIT INDEX 29
EXHIBITS 30
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GORAN CAPITAL INC.
CONSOLIDATED BALANCE SHEETS
(CANADIAN GAAP, stated in thousands of U.S. dollars)
September 30,
2002 December 31,
(Unaudited) 2001
------------------------
ASSETS:
Investments:
Fixed maturities. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 64,757 $ 77,325
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . 14,589 21,610
Short-term investments, at amortized cost, which approximates market. 7,419 13,266
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . 788 1,594
---------- ----------
Total Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,553 113,795
Investments in and advances to related parties. . . . . . . . . . . . . . 204 1,130
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . 3,264 11,263
Receivables, net of allowances of $315 and $1,526 . . . . . . . . . . . . 28,765 47,441
Reinsurance recoverable on paid and unpaid losses, net. . . . . . . . . . 26,753 29,284
Prepaid reinsurance premiums. . . . . . . . . . . . . . . . . . . . . . . 26,675 40,039
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . - 763
Property and equipment, net of accumulated depreciation . . . . . . . . . 7,674 9,907
Preferred securities issuance costs, net of amortization. . . . . . . . . 2,171 4,376
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,245 2,421
Assets of discontinued operations . . . . . . . . . . . . . . . . . . . . 10,361 115,900
---------- ----------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 198,665 $ 376,319
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT:
LIABILITIES:
Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . $ 71,024 $ 84,876
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . 37,992 59,216
Reinsurance payables. . . . . . . . . . . . . . . . . . . . . . . . . 42,284 58,868
Distributions payable on preferred securities . . . . . . . . . . . . 22,994 23,252
Deferred Income . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 7,250
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,428 21,563
Liabilities of discontinued operations. . . . . . . . . . . . . . . . 10,361 115,900
---------- ----------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209,083 370,925
---------- ----------
MINORITY INTEREST:
Company-obligated mandatorily redeemable preferred stock of trust
Subsidiary holding solely parent debentures . . . . . . . . . . . . . . . 67,994 94,540
---------- ----------
STOCKHOLDERS' DEFICIT:
Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,502 18,502
Contributed surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,864 42,465
Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . (753) (763)
Retained (deficit). . . . . . . . . . . . . . . . . . . . . . . . . . . . (167,025) (149,350)
---------- ----------
TOTAL STOCKHOLDERS' (DEFICIT) . . . . . . . . . . . . . . . . . . . . . . (78,412) (89,146)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) . . . . . . . . . . . . . . $ 198,665 $ 376,319
========== ==========
See condensed notes to consolidated financial statements.
GORAN CAPITAL INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(CANADIAN GAAP, stated in thousands of U.S. dollars, except per share data)
Three Months Ended
September 30,
-------------------
2002 2001
-------- --------
Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . $17,618 $27,348
Less ceded premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,281 12,664
-------- --------
Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,337 $14,684
======== ========
Net premiums earned. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,757 $22,943
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,357 4,220
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,150 1,715
Other Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750 -
Net realized capital gain (loss) . . . . . . . . . . . . . . . . . . . . . 543 793
-------- --------
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,557 29,671
-------- --------
Expenses:
Losses and loss adjustment expenses. . . . . . . . . . . . . . . . . . . 8,458 19,859
Policy acquisition and general and administrative expenses . . . . . . . 5,300 15,696
Amortization of intangibles. . . . . . . . . . . . . . . . . . . . . . . 42 674
-------- --------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,800 36,229
-------- --------
Loss from continuing operations before income taxes and minority interest. (1,243) (6,558)
-------- --------
Total income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
-------- --------
Loss from continuing operations before minority interest . . . . . . . . . (1,243) (6,558)
Minority interest:
Distributions on preferred securities, net of tax of $0 in both
2002 and 2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,079 2,483
-------- --------
Loss from continuing operations. . . . . . . . . . . . . . . . . . . . . . (3,322) (9,041)
-------- --------
Discontinued operations:
Income (loss) from operations of discontinued segment, less applicable
income taxes of $0 in both 2002 and 2001 . . . . . . . . . . . . . . . . - -
-------- --------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,322) $(9,041)
======== ========
Weighted average shares outstanding - basic and fully diluted. . . . . . . 5,394 5,772
======== ========
Net loss from continuing operations per share - basic and fully diluted. . $ (0.62) $ (1.57)
======== ========
Net loss of discontinued operations per share - basic and fully diluted. . $ 0.00 $ (0.00)
======== ========
Net loss per share - basic and fully diluted . . . . . . . . . . . . . . . $ (0.62) $ (1.57)
======== ========
See condensed notes to consolidated financial statements.
GORAN CAPITAL INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(CANADIAN GAAP, stated in thousands of U.S. dollars, except per share data)
Nine Months Ended
September 30,
------------------
2002 2001
--------- --------
Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . $ 86,326 $125,636
Less ceded premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,224 66,305
--------- ---------
Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,102 $ 59,331
========= =========
Net premiums earned. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,742 $ 68,198
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,347 10,876
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,889 5,236
Other Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,250 -
Net realized capital gain (loss) . . . . . . . . . . . . . . . . . . . . . (804) (283)
--------- ---------
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,424 84,027
--------- ---------
Expenses:
Losses and loss adjustment expenses. . . . . . . . . . . . . . . . . . . 35,762 59,494
Policy acquisition and general and administrative expenses . . . . . . . 21,142 38,634
Amortization of intangibles. . . . . . . . . . . . . . . . . . . . . . . 128 733
--------- ---------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,032 98,861
--------- ---------
Loss from continuing operations before income taxes and minority interest. (11,608) (14,834)
--------- ---------
Total income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
--------- ---------
Loss from continuing operations before minority interest . . . . . . . . . (11,608) (14,834)
Minority interest:
Distributions on preferred securities, net of tax of $0 in both
2002 and 2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,067 7,694
--------- ---------
Loss from continuing operations. . . . . . . . . . . . . . . . . . . . . . (17,675) (22,528)
--------- ---------
Discontinued operations:
Income (loss) from operations of discontinued segment, less applicable
Income taxes of $0 in both 2002 and 2001 . . . . . . . . . . . . . . . . - (2,156)
--------- ---------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(17,675) $(24,684)
========= =========
Weighted average shares outstanding - basic and fully diluted. . . . . . . 5,394 5,775
========= =========
Net loss from continuing operations per share - basic and fully diluted. . $ (3.28) $ (3.90)
========= =========
Net loss of discontinued operations per share - basic and fully diluted. . $ 0.00 $ (0.37)
========= =========
Net loss per share - basic and fully diluted . . . . . . . . . . . . . . . $ (3.28) $ (4.28)
========= =========
See condensed notes to consolidated financial statements.
GORAN CAPITAL INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CANADIAN GAAP, stated in thousands of U.S. dollars)
Cumulative Retained Total
Common Contributed Translation Earnings Stockholders'
Stock Surplus Adjustment (Deficit) Equity (Deficit)
----- ------- ---------- --------- -----------------
Balance at December 31, 2000
$19,132 $23,748 $(291) $(115,257) $(72,668)
Purchase of Common Shares
(109) - - - (109)
Purchase of Preferred Securities
- 19,344 - - 19,344
Change in cumulative translation
Adjustment
- - (215) - (215)
Net loss
- - - (24,684) (24,684)
-------- ------- ------ ---------- ---------
Balance at September 30, 2001 . . . $19,023 $43,092 $(506) $(139,941) $(78,332)
======== ======= ====== ========== =========
Balance at December 31, 2001
$18,502 $42,465 $(763) $(149,350) $(89,146)
Purchase of Preferred Securities
28,399 28,399
Change in cumulative translation
Adjustment
10 10
Net loss
- - - (17,675) (17,675)
-------- ------- ------ ---------- ---------
Balance at September 30, 2002
$18,502 $70,864 $(753) $(167,025) $(78,412)
======== ======= ====== ========== =========
See condensed notes to consolidated financial statements.
GORAN CAPITAL INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CANADIAN GAAP, stated in thousands of U.S. dollars)
Nine Months Ended
September 30,
2002 2001
--------- --------
Cash flows from operating activities:
Net loss for the period . . . . . . . . . . . . . . . . . . . . . . . . . . . $(17,675) $(24,684)
Adjustments to reconcile net loss to net cash provided by (used in) operations:
Depreciation, amortization, impairment and other. . . . . . . . . . . . . . . 2,767 2,595
Net realized capital loss . . . . . . . . . . . . . . . . . . . . . . . . . . 1,415 281
Net changes in operating assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,676 4,486
Reinsurance recoverable on paid and unpaid losses . . . . . . . . . . . . . . 2,531 21325
Prepaid reinsurance premiums. . . . . . . . . . . . . . . . . . . . . . . . . 13,364 (4,013)
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . 763 2,918
Other assets and liabilities. . . . . . . . . . . . . . . . . . . . . . . . . (4,959) 7,869
Loss and loss adjustment expense reserves . . . . . . . . . . . . . . . . . . (13,852) (22,373)
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21,224) (1,884)
Reinsurance payables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,584) (19,373)
Distribution payable on preferred securities. . . . . . . . . . . . . . . . . 3,672 4,686
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,250) 8,000
Net assets from discontinued operations . . . . . . . . . . . . . . . . . . . (3,483) 1,577
--------- ---------
Net cash (used in) operations . . . . . . . . . . . . . . . . . . . . . . . . . (36,839) (18,590)
--------- ---------
Cash flows from investing activities, net of assets acquired:
Net sale of short-term investments. . . . . . . . . . . . . . . . . . . . . . 5,847 4,995
Proceeds from sales, calls and maturities of fixed maturities . . . . . . . . 29,790 60,658
Purchase of fixed maturities. . . . . . . . . . . . . . . . . . . . . . . . . (15,014) (12,443)
Proceeds from sale of equity securities . . . . . . . . . . . . . . . . . . . 9,343 17,336
Purchase of equity securities . . . . . . . . . . . . . . . . . . . . . . . . (3,625) (14,486)
Proceeds from repayment of mortgage loans . . . . . . . . . . . . . . . . . . - 1,870
Purchase of property and equipment. . . . . . . . . . . . . . . . . . . . . . (294) (1,216)
Net investing activities from discontinued operations . . . . . . . . . . . . 3,912 (1,322)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 779 (104)
--------- ---------
Net cash provided by investing activities . . . . . . . . . . . . . . . . . . . 30,738 55,288
--------- ---------
Cash flows from financing activities, net of assets acquired:
Redemption of share capital . . . . . . . . . . . . . . . . . . . . . . . . . - (109)
Purchase of subsidiary's preferred securities . . . . . . . . . . . . . . . . (2,395) (1,870)
Repayment of related party loans. . . . . . . . . . . . . . . . . . . . . . . 926 1,304
Net financing activities from discontinued operations . . . . . . . . . . . . (429) 429
--------- ---------
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . (1,898) (246)
--------- ---------
Increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . (7,999) 36,452
Cash and cash equivalents, beginning of period. . . . . . . . . . . . . . . . . 11,263 3,230
--------- ---------
Cash and cash equivalents, end of period. . . . . . . . . . . . . . . . . . . . $ 3,264 $ 39,682
========= =========
See condensed notes to consolidated financial statements.
GORAN CAPITAL INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
1. BASIS OF PRESENTATION
Goran Capital Inc. ("the Company") is the parent company of the Goran group of
companies. The consolidated financial statements are prepared in accordance
with Canadian Generally Accepted Accounting Principles. In addition, the
consolidated financial statements are also used to satisfy the Company's
financial filing requirements in the U.S. Consequently, the consolidated
financial statements include disclosures that are not necessarily required under
Canadian GAAP and contain references to U.S. GAAP accounting pronouncements.
Note 8, presents a reconciliation of Canadian and U.S. GAAP. The consolidated
financial statements have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). In management's opinion, these
financial statements include all adjustments (consisting only of normal,
recurring adjustments) necessary for a fair presentation of the results of
operations for the interim periods presented. Pursuant to SEC rules and
regulations, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from these statements, unless
significant changes have taken place since the end of the most recent fiscal
year. For this reason, the accompanying consolidated financial statements and
notes thereto should be read in conjunction with the financial statements and
notes for the year ended December 31, 2001 included in the Company's 2001 Annual
Report on Form 10-K. Results for any interim period are not necessarily
indicative of results to be expected for the year.
The consolidated financial statements include the accounts, after intercompany
eliminations, of the Company and its wholly owned subsidiaries as follows:
- - Granite Reinsurance Company Ltd. ("Granite Re") a finite risk reinsurance
company domiciled in Barbados.
- - Granite Insurance Company ("Granite") a Canadian federally licensed
insurance company.
- - Symons International Group (Florida) Inc. ("SIGF") a Florida domestic
corporation.
Symons International Group, Inc. ("SIG") is a 73.1% owned subsidiary of Goran.
SIG's subsidiaries are as follows:
- - Superior Insurance Group Management, Inc ("Superior Group Management") a
holding company for the nonstandard automobile operations which includes:
- - Superior Insurance Group, Inc. ("Superior Group") a management company for
the nonstandard automobile operations;
- - Superior Insurance Company ("Superior") an insurance company domiciled in
Florida;
- - Superior American Insurance Company ("Superior American") an insurance
company domiciled in Florida;
- - Superior Guaranty Insurance Company ("Superior Guaranty") an insurance
company domiciled in Florida;
- - Pafco General Insurance Company ("Pafco") an insurance company domiciled
in Indiana;
- - IGF Holdings, Inc. ("IGFH") a holding company
- - IGF Insurance Company ("IGF") an insurance company domiciled in Indiana
(See Note 23);
As previously announced, SIG sold its crop insurance operations to Acceptance
Insurance Companies Inc. ("Acceptance") on June 6, 2001. The crop insurance
business was written through IGF, which is in runoff. Accordingly, the financial
statements included in this report reflect the results of the crop insurance
segment as "discontinued operations."
2. PREFERRED SECURITIES
On August 12, 1997, SIG's trust subsidiary issued $135 million in preferred
securities (the "Preferred Securities") bearing interest at an annual rate of
9.5%. The principal assets of the trust subsidiary are senior subordinated notes
of SIG in the principal amount of $135 million with an interest rate and
maturity date substantially identical to those of the Preferred Securities.
Expenses of the issue aggregated $5.1 million and are amortized over the term of
the Preferred Securities.
The Preferred Securities represent company-obligated mandatorily redeemable
securities of a trust subsidiary holding solely parent debentures and have a
term of 30 years with semi-annual interest payments that commenced February 15,
1998. SIG may redeem the Preferred Securities in whole or in part after 10
years. The annual Preferred Security obligations of approximately $13 million
must be funded from SIG's nonstandard automobile management company, which
receives management and billing fees from its insurance subsidiaries. In the
event SIG's insurance company subsidiaries continue to reduce premium volume,
reduced management and billing fees will be payable to Superior Group, which
would result in less funds from which to fund the obligations of the Preferred
Securities. Under the terms of the indenture, SIG is permitted to defer
semi-annual interest payments for up to five years. SIG elected to defer the
interest payments due in February and August 2000, 2001 and 2002 and may
continue this practice through January 2005. SIG plans to defer the interest
payments due in February 2003.
The trust indenture for the Preferred Securities contains certain restrictive
covenants including covenants based upon SIG's consolidated coverage ratio of
earnings before interest, taxes, depreciation and amortization ("EBITDA"). If
SIG's EBITDA falls below 2.5 times consolidated interest expense (including
Preferred Security distributions) for the most recent four quarters, the
following restrictions become effective:
- - SIG may not incur additional indebtedness or guarantee additional
indebtedness.
- - SIG may not make certain restricted payments including making loans or
advances to affiliates, repurchasing common stock or paying dividends in excess
of a stated limitation.
- - SIG may not increase its level of non-investment grade securities defined
as equities, mortgage loans, real estate, real estate loans and non-investment
grade fixed income securities.
These restrictions currently apply, as SIG's consolidated coverage ratio was
(0.70) at September 30, 2002, and will continue to apply until SIG's
consolidated coverage ratio complies with the terms of the trust indenture. SIG
was in compliance with these additional restrictions as of September 30, 2002.
3. REGULATORY AFFAIRS
Two of the SIG's insurance company subsidiaries, Pafco and IGF, are domiciled in
Indiana and prepare their statutory financial statements in accordance with
accounting practices prescribed or permitted by the Indiana Department of
Insurance ("IDOI"). While neither Pafco nor IGF currently has surplus from which
to pay dividends, statutory requirements place limitations on the amount of
funds that can be remitted to SIG from Pafco and IGF. The Indiana statute allows
10% of surplus in regard to policyholders or 100% of net income, whichever is
greater, to be paid as dividends only from earned surplus; however, the consent
orders with the IDOI, described below, prohibit the payment of any dividends by
Pafco and IGF. Another insurance company subsidiary, Superior and Superior's
insurance company subsidiaries, Superior American and Superior Guaranty, are
domiciled in Florida and prepare their statutory financial statements in
accordance with accounting practices prescribed or permitted by the Florida
Department of Insurance ("FDOI"). The Florida statute also contains limitations
with regard to the payment of dividends. Superior may pay dividends of up to 10%
of surplus or 100% of net income, whichever is greater, from earned surplus.
Prescribed statutory accounting practices include a variety of publications of
the National Association of Insurance Commissioners ("NAIC"), as well as state
laws, regulations, and general administrative rules. The NAIC adopted the
Codification of Statutory Accounting Principles guidance ("Codification"), as
the NAIC's primary guidance on statutory accounting effective January 1, 2001.
The IDOI and FDOI have adopted Codification. Permitted statutory accounting
practices encompass all accounting practices not so prescribed.
On June 6, 2001, IGF sold substantially all of its crop insurance assets to
Acceptance. On June 24, 2001, following the sale of IGF's crop insurance assets
and as a result of losses experienced by IGF in its crop insurance operations,
the IDOI and IGF entered into a consent order (the "Consent Order") relating to
IGF. IGF has discontinued writing new business and its operations are presently
in run off. The IDOI has continued to monitor the status of IGF. The Consent
Order prohibits IGF from taking any of the following actions without prior
written consent of the IDOI:
- - Sell or encumber any of its assets, property, or business in force;
- - Disburse funds, except to pay direct unaffiliated policyholder claims and
normal operating expenses in the ordinary course of business (which does not
include payment to affiliates except for the reimbursement of costs for running
IGF by SIG, and does not include payments in excess of $10,000);
- - Lend its funds or make investments, except in specified types of
investments;
- - Incur debts or obligations, except in the ordinary course of business to
unaffiliated parties;
- - Merge or consolidate with another company;
- - Enter into new, or amend existing, reinsurance agreements;
- - Complete, enter into or amend any transaction or arrangement with an
affiliate, and
- - Disburse funds or assets to any affiliate.
The Consent Order also requires IGF to provide the IDOI with monthly written
updates and immediate notice of any material change regarding the status of
litigation with Continental Casualty Company, statutory reserves, number of
non-standard automobile insurance policies in-force by state, and reports of all
non-claims related disbursements. IGF's failure to comply with the Consent Order
could cause the IDOI to begin proceedings to have a rehabilitator or liquidator
appointed for IGF or to extend the provisions of the Consent Order.
Pafco has been subject to an agreed to order of the IDOI since February 17, 2000
that requires Pafco, among other matters, to:
1. Refrain from doing any of the following without the IDOI's prior written
consent:
- Selling assets or business in force or transferring property, except
in the ordinary course of business;
- - Disbursing funds, other than for specified purposes or for normal
operating expenses and in the ordinary course of business (which does not
include payments to affiliates, other than under written contracts previously
approved by the IDOI, and does not include payments in excess of $10,000);
- - Lending funds;
- - Making investments, except in specified types of investments;
- - Incurring debt, except in the ordinary course of business and to
unaffiliated parties;
- - Merging or consolidating with another company; or
- - Entering into new, or modifying existing, reinsurance contracts.
2. Reduce its monthly auto premium writings, or obtain additional statutory
capital or surplus, such that the ratio of gross written premium to surplus and
net written premium to surplus does not exceed 4.0 and 2.4, respectively; and
provide the IDOI with regular reports demonstrating compliance with these
monthly writings limitations.
Continue to comply with prior IDOI agreements and orders to correct business
practices under which Pafco must provide monthly financial statements to the
IDOI, obtain prior IDOI approval of reinsurance arrangements and affiliated
party transactions, submit business plans to the IDOI that address levels of
surplus and net premiums written, and consult with the IDOI on a monthly basis.
Pafco's inability or failure to comply with any of the above conditions could
result in the IDOI requiring further reductions in Pafco's permitted premium
writings or in the IDOI instituting future proceedings against Pafco.
Restrictions on premium writings result in lower premium volume. Management fees
payable to Superior Group are based on gross written premium; therefore lower
premium volume results in reduced management fees paid by Pafco to Superior
Group.
Pafco has agreed with the Iowa Department of Insurance ("IADOI") that it will
not write any new non-standard business in Iowa, until such time as Pafco has
reduced its overall non-standard automobile policy counts in the state or:
- - Has increased surplus, or
- - Has achieved a net written premium to surplus ratio of less than three to
one, or
- - Has surplus reasonable to its risk.
Pafco has continued to service existing policyholders and renew policies in Iowa
and provide policy count information on a monthly basis in conformance with
IADOI requirements.
Superior and Pafco provide monthly financial information to the departments of
insurance in certain states in which they write business as such information is
requested by those states.
On July 7, 2000, the FDOI issued a notice of its intent to issue an order (the
"Notice") which principally addressed certain policy and finance fee payments by
Superior to Superior Group. A formal administrative hearing to review the
Notice and a determination that the order contemplated by the Notice not be
issued was held in February 2001. The administrative law judge entered a
recommended order on June 1, 2001 that was acceptable to SIG. On August 30,
2001, the FDOI rejected the recommended order and issued its final order which
SIG believes improperly characterized billing and policy fees paid by Superior
to Superior Group. On September 28, 2001, Superior filed an appeal of the final
order to the Florida District Court of Appeal. On March 4, 2002, the FDOI filed
a petition in the Circuit Court of the Second Judicial Circuit in and for Leon
County, Florida seeking court enforcement of the FDOI's final order. Superior
filed a motion with the FDOI for stay of the FDOI's final order. Superior also
filed a motion for stay with the District Court of Appeal, which was denied
pending a ruling from the FDOI. On April 5, 2002 the FDOI granted a stay of the
final order that was conditional upon the cessation of the payment of billing
fees by Superior to Superior Group and the posting of a $15 million appeal bond.
Superior did not agree to the conditions imposed by the FDOI's conditional stay.
On May 6, 2002 Superior filed a motion with the District Court of Appeal seeking
a stay of the final order pending Superior's appeal or, in the alternative, a
consolidation of the FDOI's enforcement action with the pending appeal. On June
19, 2002, the District Court of Appeal entered an order which struck the FDOI's
conditional requirement for the stay that Superior post a $15 million appeal
bond. However, the order denied Superior's request to consolidate the appeal
with the enforcement action. On September 26, 2002, the District Court of
Appeal affirmed the final order of the FDOI. On October 31, 2002 the Circuit
Court entered a final order which granted the FDOI's petition for enforcement of
the FDOI's final order and which requires Superior comply with the FDOI final
order. In accordance with such order, Superior ceased payment of finance and
service fees as of October 1, 2002 and has requested repayment from Superior
Group of $15 million of finance and service fees paid from 1997 through 1999 and
additional finance and service fees paid thereafter in the approximate amount of
$20 million. Without the payment of finance and service fee income to Superior
Group or an amendment to the management agreement or reallocation of operational
responsibilities, Superior Group can not operate profitably. Superior Group
therefore would be unable to continue to provide the same types of services to
Superior or to repay the finance and service fees. Superior and Superior Group
are seeking to identify operational alternatives and a repayment plan that would
be acceptable to the FDOI. Some of the alternatives being considered would
require the approval of the FDOI.
On September 10, 2002, the FDOI filed a petition in the Circuit Court of the
Second Judicial Circuit in and for Leon County, Florida for an order to show
cause and notice of automatic stay which sought the appointment of a receiver
for the purpose of rehabilitation of Superior. The court entered an order to
show cause, temporary injunction and notice of automatic stay on September 13,
2002 and a hearing was held on October 24, 2002. On November 1, 2002, the court
entered an order that denied the FDOI's petition for appointment of a receiver.
On November 8, 2002, the FDOI filed a motion for rehearing. Superior believes
the FDOI's motion lacks merit and has filed a motion in opposition to the motion
for rehearing.
In 1999, Superior ceased writing business in Illinois and agreed to obtain the
approval of the Illinois Department of Insurance prior to writing any new
business in Illinois. In July 2001, Superior agreed with the Department of
Insurance in Texas to obtain its prior approval before writing any new business
in that state.
On October 9, 2001, the State Corporation Commission of Virginia ("Virginia
Commission") issued an order to take notice regarding an order suspending
Superior's license to write business in that state. An administrative hearing
for a determination that the suspension order not be issued was held March 5,
2002. On May 3, 2002, the hearing examiner issued his report and recommended
that Superior's license not be suspended and that Superior file its risk based
capital plans and monthly and quarterly financial information with the Virginia
Bureau of Insurance ("Bureau"). On June 19, 2002 the Virginia Commission
entered an order which adopted the findings of the hearing examiner, continued
the matter until such time as the Bureau requests further action and requires
the continued monitoring of the financial condition of Superior by the Bureau.
On October 11, 2002, the Virginia Commission filed an administrative Rule to
Show Cause. A hearing was scheduled on November 18, 2002 to determine whether
Superior's license to transact insurance business in Virginia should be
suspended. Because of Superior's improved financial condition, the Virginia
Commission has continued the hearing indefinitely. The nonstandard automobile
insurance policies written in Virginia by Superior accounted for approximately
13.1% and 17.2% of the total gross written premiums of SIG in 2001 and through
September 30, 2002, respectively.
SIG's operating subsidiaries, their business operations, and their transactions
with affiliates, including SIG and the Company, are subject to regulation and
oversight by the IDOI, the FDOI and the insurance regulators of other states in
which the subsidiaries write business. SIG is a holding company and all of its
operations are conducted by its subsidiaries. Regulation and oversight of
insurance companies and their transactions with affiliates is conducted by state
insurance regulators primarily for the protection of policyholders and not for
the protection of other creditors or of shareholders. Failure to resolve issues
with the IDOI and the FDOI or other state insurance regulators in a mutually
satisfactory manner could result in future regulatory actions or proceedings
that materially and adversely affect SIG and the Company.
4. COMMITMENTS AND CONTINGENCIES
As previously reported, IGF had been a party to a number of pending legal
proceedings and claims relating to agricultural production interruption
insurance policies (the "AgPI Program") which were sold during 1998. All of the
policies of insurance issued in the AgPI Program were issued by and under the
name of Mutual Service Casualty Insurance Company ("MSI"), a Minnesota
corporation with its principal place of business located in Arden Hills,
Minnesota. Sales of this product resulted in large underwriting losses by IGF.
Approximately $29 million was paid through September 30, 2002 in settlement of
legal proceedings and policyholder claims related to the AgPI Program. All AgPI
policyholder claims were settled during 2000. However, on January 12, 2001 a
case was filed in the Superior Court of California, County of Fresno, entitled
S&W Seed Company, Dudley Silveira, Ric Blanchard and Darrell Silveira v. Mutual
Service Casualty Insurance Company, IGF Insurance Company, and Dibuduo &
Defendis Insurance Agency, Inc.; Case No. OICE CG 00137. The case was brought by
four AgPI policyholders who had previously settled their AgPI claims pursuant to
binding settlement agreements who now seek additional compensation by asserting
through litigation that IGF and the third party carrier paid less than the
policy limits they were promised when they purchased the policy and that each
settling policyholder was forced to accept the lesser amount due to their
economic duress - a legal theory recognized in California if certain elements
can be established. On January 16, 2002, the court entered an order granting
IGF's motion for judgment on the pleadings and required plaintiffs to show an
insurable interest. Plaintiffs amended their complaint attempting to allege an
insurable interest, and on March 19, 2002, the court granted IGF's demurrer to
the amended complaint. In granting the demurrer the court held that any recovery
payable to plaintiff would be limited to their actual economic losses regardless
of how much plaintiffs thought they had been promised (i.e. plaintiffs cannot be
paid policy limits without regard to actual losses incurred). The plaintiffs
then filed their third amended complaint to which MSI filed a demurrer
challenging the insurance contract allegations, as the issuer of the AgPI
policies, contending that plaintiffs failed to make the amendments to show an
insurable interest as required by the court's previous rulings. This demurrer
was granted, without leave to amend, based on the court's analysis that
plaintiffs' claims continued to reveal they did not have an insurable interest,
rendering the contract they alleged an unenforceable wager agreement, not
insurance. Thereafter, the court vacated its "without leave to amend" ruling in
response to a motion for reconsideration filed by the plaintiffs who contended
they could cure the fatal defect if they were allowed to file a fourth amended
complaint. However, the new version of the complaint still claims coverage
amounts based on a formula which is not tied to plaintiffs' economic losses.
Accordingly, a demurrer to the fourth amended complaint was filed by MSI and a
motion to strike was filed by IGF. A hearing on these issues was held on
November 8, 2002, and the court has not yet issued its ruling.
As previously reported, SIG and two of its subsidiaries, IGFH and IGF, are
parties to a "Strategic Alliance Agreement" dated February 28, 1998 (the "SAA")
with Continental Casualty Company ("CNA"), pursuant to which IGF acquired
certain crop insurance operations of CNA. The obligations of SIG, IGFH, IGF and
CNA under the SAA are the subject of an action pending in United States District
Court for the Southern District of Indiana, Indianapolis Division. Claims have
also been asserted in the action against the Company, Granite Re, Pafco,
Superior and certain members of the Symons family. Although the Company
continues to believe that it has claims against CNA and defenses to CNA's claims
which may offset or reduce amounts owing by the Company or its affiliates to
CNA, there can be no assurance that the ultimate resolution of the claims
asserted by CNA against the Company and its affiliates will not have a material
adverse effect upon the Company's and its affiliates' financial condition or
results of operations. There have been no material developments since last
reported in the Company's June 30, 2002 Form 10-Q.
As previously reported, SIG is a defendant in a case filed on February 23, 2000,
in the United States District Court for the Southern District of Indiana
entitled Robert Winn, et al. v. Symons International Group, Inc., et al., Cause
No. IP 00-0310-C-B/S. Other parties named as defendants are the Company, three
individuals who were or are officers or directors of the Company or of SIG,
PricewaterhouseCoopers LLP and Schwartz Levitsky Feldman, LLP. The case purports
to be brought on behalf of a class consisting of purchasers of the Company's
stock or SIG's stock during the period February 27, 1998, through and including
November 18, 1999. Plaintiffs allege, among other things, that defendants
misrepresented the reliability of SIG's reported financial statements, data
processing and financial reporting systems, internal controls and loss reserves
in violation of Section 10(b) of the Securities Exchange Act of 1934 (the "1934
Act") and SEC Rule 10b-5 promulgated thereunder. The individual defendants are
also alleged to be liable as "controlling persons" under Sec.20 (a) of the 1934
Act. During the third quarter of 2002, the Company, SIG and the individual
defendants entered into an agreement with the plaintiffs for settlement. The
settlement is subject to certain terms and conditions and court approval.
As previously reported, an action was brought in Florida against Superior which
purported to be brought on behalf of a class consisting of healthcare providers
improperly paid discounted rates on services to patients based upon a preferred
provider contract with a third party. The plaintiff alleged that Superior
breached a third party beneficiary contract, committed fraud and engaged in
racketeering activity in violation of federal and Florida law by obtaining
discounted rates offered by a third party with whom the plaintiff contracted
directly. Superior believes that the allegations of wrongdoing as alleged in
the complaint are without merit and intends to vigorously defend the claims
brought against it. There have been no material developments since last
reported in the Company's June 30, 2002 Form 10-Q.
As previously reported, an action was brought in Florida against Superior which
purported to be brought on behalf of a class consisting of healthcare providers
that rendered treatment to and obtained a valid assignment of benefits from
Superior. The plaintiff alleged that Superior reduced or denied claims for
medical expenses payable to the plaintiff without first obtaining a written
report in violation of Florida law and that Superior inappropriately reduced the
amount of benefits payable to the plaintiff in breach of Superior's contractual
obligations to the plaintiff. The case was dismissed on August 13, 2002 pursuant
to a settlement between the parties.
As previously reported, an action was brought against Superior in Florida by a
purported class consisting of (i) healthcare providers that rendered treatment
to Superior insureds and claimants of Superior insureds and (ii) such insureds
and claimants. The plaintiff alleged that Superior improperly reduced medical
benefits payable and improperly calculated interest in violation of Florida law.
The case was dismissed on September 3, 2002 pursuant to a settlement between the
parties.
As previously reported, actions have been brought in Florida against Superior
Guaranty purporting to be on behalf of a class of purchasers of insurance from
Superior Guaranty allegedly charged service or finance charges in violation of
Florida law. Superior Guaranty believes that the allegations of wrongdoing as
alleged in the complaints are without merit and intends to vigorously defend the
claims brought against it. There have been no material developments since last
reported in the Company's June 30, 2002 Form 10-Q.
SIG is a 50% owner in a limited liability corporation ("LLC") established to
provide business services to SIG and an unrelated third party. The fair market
value of the LLC's operating assets approximated its outstanding debt at June
30, 2002.
SIG's insurance subsidiaries are involved in a number of pending regulatory
matters (see Note 3, "Regulatory Affairs" in the Condensed Notes to the
Consolidated Financial Statements). SIG and its subsidiaries are named as
defendants in various other lawsuits relating to their business. Legal actions
arise from claims made under insurance policies issued by SIG's subsidiaries.
SIG, in establishing its loss reserves, has considered these actions. There can
be no assurance that the ultimate disposition of these lawsuits will not have an
adverse material affect upon SIG's operations or financial position.
5. LOSS DEVELOPMENT ON PRIOR ACCIDENT YEARS
During the three months ended September 30, 2002 SIG experienced unfavorable
development on its year-end 2001 loss and LAE reserves in the amount of $1.2
million. This was the result of unfavorable settlement of outstanding claims
which increased the loss and LAE ratio for the quarter by 15.5%.
6. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
year presentation.
7.
MATERIAL CONTRACT WITH FORMER CHIEF EXECUTIVE OFFICER
As previously reported, the Company's CEO retired effective May 31, 2002. The
Company entered into a consulting agreement with an entity owned by the former
CEO during the third quarter of 2002. The agreement provides for certain
specified services to be rendered as and when requested by the Company in
exchange for an annual fee of $500,000. The agreement renews annually unless
either the Company or the former CEO elects otherwise.
8. LOSS PER SHARE
Basic and diluted net loss per share is computed by dividing net loss as
reported by the average number of shares outstanding as follows:
Three Months Ended Nine Months Ended
(in thousands) September 30 September 30
2002 2001 2002 2001
----- ----- ----- -----
Basic:
Weighted-average common shares outstanding 5,394 5,776 5,394 5,776
===== ===== ===== =====
Diluted:
Weighted-average common shares outstanding 5,394 5,776 5,394 5,776
===== ===== ===== =====
The Company had 847,187 stock options outstanding as of September 30, 2002.
Common stock equivalents are anti-dilutive. Therefore, fully diluted loss per
share is the same as basic loss per share.
9. UNITED STATES ACCOUNTING PRINCIPLES
These unaudited consolidated financial statements have been prepared in
accordance with Canadian (CDN) GAAP. There are no differences between CDN GAAP
and US GAAP for both the net loss and the net loss per share. The differences
between CDN GAAP and US GAAP for stockholders' (deficit) are as follows (in
thousands):
(in thousands) September 30, 2002 December 31, 2001
-------------------- -------------------
Stockholders (deficit) in accordance with
Canadian GAAP . . . . . . . . . . . . . . . . . . . . $ (78,362) $ (89,146)
Add (deduct) effect of difference in accounting for:
Receivable from sale of capital stock. . . . . . (1,258) (1,258)
Unrealized gain (loss) on investments. . . . . . (5,200) (2,246)
-------------------- -------------------
Stockholders' (deficit) in accordance with
US GAAP . . . . . . . . . . . . . . . . . . . . . . . $ (84,820) $ (92,650)
==================== ===================
10. DISCONTINUED OPERATIONS
In December 2000, SIG initiated the divestiture of its crop insurance segment.
This business was predominantly written through IGF. The transaction was
completed in June 2001 and transferred ownership of substantially all of the
crop insurance assets of SIG and IGF, effective with the 2001 crop cycle, to
Acceptance. Upon completion of the sale, the net assets of the discontinued
operations were reduced to zero. IGF and its affiliates received approximately
$27.4 million at closing and Acceptance assumed all of the crop insurance
in-force policies for the 2001 crop year. For agreeing not to compete in the
crop insurance industry for a period of three years from the date of sale, the
Company and SIG each received $4.5 million at closing that is being amortized to
income on a straight-line basis over three years. An additional $9.0 million in
reinsurance premium is payable by Acceptance to Granite Re under a multi-year
reinsurance treaty whereby Granite Re has agreed to reinsure a portion of the
crop insurance business of Acceptance and provide an indemnity on behalf of IGF.
The results of the crop insurance segment have been reflected as "Discontinued
Operations" in the accompanying unaudited consolidated financial statements in
accordance with Accounting Principles Board Opinion No. 30 "Reporting the
Results of Operations --- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions."
Summarized results of operations for discontinued operations were as follows:
STATEMENTS OF OPERATIONS:
(in thousands)
Three Months Ended
September 30
-----------------
2002 2001
------ --------
Gross premiums written. . . . . . . . . . . . . . . . . . . $(101) $56,236
====== ========
Net premiums written. . . . . . . . . . . . . . . . . . . . $ - $ 154
====== ========
Net premiums earned . . . . . . . . . . . . . . . . . . . $ - $ 154
Net investment and fee income . . . . . . . . . . . . . . 519 (26)
Net realized capital gain (loss). . . . . . . . . . . . . (470) (6)
------ --------
Total revenues. . . . . . . . . . . . . . . . . . . . . . . 49 122
------ --------
Loss and loss adjustment expenses . . . . . . . . . . . . . (507) 1,546
Policy acquisition and general and administrative expenses. 556 (1,424)
Interest and amortization expense . . . . . . . . . . . . . - -
------ --------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . 49 122
------ --------
Earnings before income taxes. . . . . . . . . . . . . . . . - -
Income tax expense. . . . . . . . . . . . . . . . . . . . . - -
------ --------
Net earnings from discontinued operations . . . . . . . . . $ - $ -
====== ========
STATEMENTS OF OPERATIONS:
(in thousands)
Nine Months Ended
September 30
----------------
2002 2001
------- ---------
Gross premiums written. . . . . . . . . . . . . . . . . . . $ (293) $239,195
======= =========
Net premiums written. . . . . . . . . . . . . . . . . . . . $ - $ (172)
======= =========
Net premiums earned . . . . . . . . . . . . . . . . . . $ - $ (172)
Net investment and fee income . . . . . . . . . . . . . 1,002 961
Net realized capital gain (loss). . . . . . . . . . . . (548) 636
------- ---------
Total revenues. . . . . . . . . . . . . . . . . . . . . . . 454 1,425
------- ---------
Loss and loss adjustment expenses . . . . . . . . . . . . (700) 5,238
Policy acquisition and general and administrative expenses. 1,154 (300)
Interest and amortization expense . . . . . . . . . . . . . - (1,357)
------- ---------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . 454 3,581
------- ---------
Earnings before income taxes. . . . . . . . . . . . . . . . - (2,156)
Income tax expense. . . . . . . . . . . . . . . . . . . . . - -
------- ---------
Net earnings from discontinued operations . . . . . . . . . $ - $ (2,156)
======= =========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS AND CERTAIN RISKS
All statements, trend analyses, and other information contained in this report
relative to markets for the Company's products and/or trends in the Company's
operations or financial results, as well as other statements which include words
such as "anticipate," "could," "feel(s)," "believes," "plan," "estimate,"
"expect," "should," "intend," "will," and other similar expressions, constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to known and unknown risks,
uncertainties and other factors which may cause actual results to be materially
different from those contemplated by the forward-looking statements. Such
factors include, among other things: (i) the effect on customers, agents,
employees and others due to SIG's receipt of a going concern opinion from its
independent auditor; (ii) general economic conditions, including prevailing
interest rate levels and stock market performance; (iii) factors affecting the
Company's nonstandard automobile operations such as rate increase approval,
policy renewals, new business written, and premium volume; (iv) the factors
described in this section and elsewhere in this report; and (v) adverse actions
by insurance regulatory officials.
OVERVIEW OF THE COMPANY
Goran Capital, Inc. ("the Company") owns 73.1% of Symons International Group,
Inc. ("SIG"). SIG owns insurance companies that underwrite and market
nonstandard private passenger automobile insurance. SIG's principal insurance
company subsidiaries are Pafco General Insurance Company ("Pafco") and Superior
Insurance Company ("Superior"). Additionally, the Company owns 100% of Granite
Reinsurance Company Ltd. ("Granite Re"), Granite Insurance Company ("Granite")
and Symons International Group (Florida) Inc. ("SIGF").
Pafco, Superior and Superior's subsidiaries, Superior Guaranty Insurance Company
("Superior Guaranty"), and Superior American Insurance Company ("Superior
American"), are engaged in the writing of insurance coverage for automobile
physical damage and liability policies for nonstandard risks. Nonstandard risk
insureds are those individuals who are unable to obtain insurance coverage
through standard market carriers due to factors such as poor premium payment
history, driving experience or violations, particular occupation or type of
vehicle. SIG offers several different policies that are directed towards
different classes of risk within the nonstandard market. Premium rates for
nonstandard risks are higher than for standard risks. Since it can be viewed as
a residual market, the size of the nonstandard private passenger automobile
insurance market changes with the insurance environment and grows when the
standard coverage becomes more restrictive. Nonstandard policies have
relatively short policy periods and low limits of liability. Also, since the
nonstandard automobile insurance business typically experiences lower rates of
retention than standard automobile insurance, the number of new policyholders
underwritten by nonstandard automobile insurance carriers each year is
substantially greater than the number of new policyholders underwritten by
standard carriers.
As previously announced, SIG sold its crop insurance operations to Acceptance
Insurance Companies Inc. ("Acceptance") on June 6, 2001. The crop insurance
business was written through SIG's subsidiary, IGF Insurance Company (IGF),
which is in runoff. Accordingly, the financial statements included in this
report reflect the results of the crop insurance segment as "discontinued
operations."
Granite Re is a finite risk reinsurance company based in Barbados.
Granite is a Canadian federally licensed insurance company that ceased writing
new insurance policies on January 1, 1990.
SIGF is a Florida domestic corporation engaged in several lines of business,
including a property/casualty insurance brokerage and a flood insurance
brokerage.
SIGNIFICANT LOSSES HAVE BEEN REPORTED AND ARE LIKELY TO CONTINUE
The net loss from continuing operations for the three months ended September 30,
2002 was $(3,322,000). The net loss from continuing operations for the three
months ended September 30, 2001 was $(9,041,000). The net loss from continuing
operations for the nine months ended September 30, 2002 was $(17,675,000). The
net loss from continuing operations for the nine months ended September 30, 2001
was $(22,528,000). The net loss from continuing operations for the twelve
months ended December 31, 2001 was $(31,937,000). The net loss from continuing
operations for the twelve months ended December 31, 2000 was $(63,224,000). The
net loss from continuing operations for the nine months ended September 30, 2002
decreased from the net loss from continuing operations for the nine months ended
September 30, 2001 primarily due to lower volume and corresponding actions taken
to reduce operating expenses. Although the Company has taken a number of
actions to address factors contributing to these past losses, there can be no
assurance that operating losses will not continue.
RECENT AND FURTHER REGULATORY ACTIONS MAY ADVERSELY AFFECT THE COMPANY'S FUTURE
OPERATIONS
The Company's U.S. insurance company subsidiaries, their business operations,
and their transactions with affiliates, including the Company, are subject to
extensive regulation and oversight by the Indiana Department of Insurance
("IDOI"), the Florida Department of Insurance ("FDOI") and the insurance
regulators of other states in which the U.S. insurance company subsidiaries
write business. Moreover, the U.S. insurance company subsidiaries' losses,
adverse trends and uncertainties discussed in this report have been and continue
to be matters of concern to the domiciliary and other insurance regulators of
the Company's U.S. insurance company subsidiaries and have resulted in enhanced
scrutiny and regulatory action by several regulators (see Note 3, "Regulatory
Affairs" in the Condensed Notes to the Consolidated Financial Statements). The
primary purpose of insurance regulation is the protection of policyholders
rather than shareholders. Failure to resolve issues with the IDOI, the FDOI and
other regulators, in a manner satisfactory to the Company could impair the
Company's ability to execute its business strategy or result in future
regulatory actions or proceedings that could otherwise materially and adversely
affect the Company's operations.
THE COMPANY IS SUBJECT TO A NUMBER OF PENDING LEGAL PROCEEDINGS
As discussed elsewhere in this report, the Company is involved in a number of
pending legal proceedings (see Part II, Item 1, "Legal Proceedings"). Although
the Company believes that many of the allegations of wrongdoing are without
merit and intends to vigorously defend the claims brought against it and/or its
subsidiaries, there can be no assurance that such proceedings will not have a
material adverse effect on the Company's financial position or results of
operations. Furthermore, the existence of these lawsuits diverts the time and
attention of management and results in continued expense irrespective of the
ultimate outcome
THE TERMS OF THE TRUST PREFERRED SECURITIES MAY RESTRICT THE COMPANY'S ABILITY
TO ACT
SIG has issued, through a wholly owned trust subsidiary, $135 million aggregate
principal amount in trust originated preferred securities (the "Preferred
Securities"). The Preferred Securities have a term of 30 years and bear
interest at an annual rate of 9.5%, payable semi-annually. The obligations of
the Preferred Securities were expected to be funded from SIG's nonstandard
automobile insurance management company. SIG elected to defer the semi-annual
interest payments due in February and August 2000, 2001 and 2002 and may
continue to defer such payments for up to an aggregate of five years as
permitted by the indenture for the Preferred Securities. All of the deferred
interest (if all payments due in 2003 and 2004 are deferred) of approximately
$96.8 million will become due and payable in February 2005. The indenture
contains a number of covenants that may restrict SIG's ability to act in the
future. These covenants include restrictions on SIG's ability to incur or
guarantee debt, make payment to affiliates, repurchase its common stock, pay
dividends on common stock or increase its level of certain investments other
than investment-grade, fixed-income securities. There can be no assurance that
compliance with these restrictions and other provisions of the indenture for the
Preferred Securities will not adversely affect the cash flow of SIG.
CASH FLOW CONSTRAINTS TO SUPERIOR GROUP MAY ADVERSELY AFFECT SIG'S ABILITY TO
FUND OPERATIONS AND TO SERVICE THE OBLIGATIONS OF THE TRUST PREFERRED SECURITIES
Under SIG's present structure, claims, agent commissions and premium taxes are
paid directly by SIG's insurance company subsidiaries. However, pursuant to the
terms of the management agreement Superior Group is responsible for all payroll,
facilities, data processing, computer systems and other functions necessary for
the operations of the Company and its subsidiaries. The insurance companies pay
for such services through management fees that are calculated as a percentage of
gross written premiums. Therefore, declines in written premiums result in
reduced cash flow to Superior Group.
As discussed in "ITEM 1- Business - Recent Developments" in the Company's annual
report on Form 10-K for 2001, SIG projected a material decrease in gross written
premiums for 2002 from 2001 levels with a corresponding decrease in management
fees payable to Superior Group. However, the decrease in written premiums for
the three months ended September 30, 2002 was significantly higher than what SIG
management had originally anticipated. Unless SIG is able to increase written
premiums or reduce expenses to correspond with the reduced level of written
premiums, cash flow will be inadequate to fund operations, including servicing
of the Preferred Securities. See, "ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations - LIQUIDITY AND CAPITAL
RESOURCES."
There can be no assurance that current levels of reduced cash flows will not
have a material adverse affect on SIG's financial position, results of
operations and its ability to meet short and long-term obligations.
REVIEW OF CONSOLIDATED OPERATIONS
NET LOSS
The net loss for the three months ended September 30, 2002 was $(3,322,000) or
$(0.62) per share (basic and diluted). The net loss for the three months ended
September 30, 2001 was $(9,041,000) or $(1.57) per share (basic and diluted).
The net loss for the nine months ended September 30, 2002 was $(17,675,000) or
$(3.28) per share (basic and diluted). The net loss for the nine months ended
September 30, 2001 was $(24,684,000) or $(4.28) per share (basic and diluted).
The decreased loss is due primarily to lower volume, corresponding actions taken
to reduce operating expenses and the loss from discontinued operations in the
nine months ended September 30, 2001. There was no loss on discontinued
operations for the nine months ended September 30, 2002. There was no loss on
discontinued operations for the three months ended September 30, 2001. The loss
on discontinued operations for the nine months ended September 30, 2001 was
$(2,156,000). Refer to Note 9, "Discontinued Operations", of the Condensed
Notes to Consolidated Financial Statements for additional information.
GROSS PREMIUMS WRITTEN
Gross premiums written decreased 35.58% for the three months ended September 30,
2002 compared to the three months ended September 30, 2001. Gross premiums
written decreased 31.29% for the nine months ended September 30, 2002 compared
to the nine months ended September 30, 2001. The primary reasons for this
decline in volume are SIG's withdrawal from certain competitive markets and a
reduction in policies in force. Refer to "Liquidity and Capital Resources" for
additional volume-related disclosure.
NET PREMIUMS WRITTEN
Net premiums written represent the portion of premiums retained by the Company
after consideration for risk sharing through reinsurance contracts. As a result
of declines in surplus in the Company's U.S. insurance subsidiaries and to
manage overall risk retention, in 2000 SIG entered into a reinsurance agreement
to cede a portion of its gross written premiums to National Union Fire Insurance
Company of Pittsburgh, PA, an unrelated third party. For the three months ended
September 30, 2002, SIG ceded 76.1% of its gross written premiums. For the nine
months ended September 30, 2002, SIG ceded 72.7% of its gross written premiums.
NET PREMIUMS EARNED
Net premiums earned decreased 66.19% and 51.99% for the three and nine months
ended September 30, 2002, respectively, as compared to the same periods in 2001.
Premiums are earned ratably over the term of the underlying insurance contracts
and the reduction in net premiums earned is a result of the decreases in written
premiums and policies in force.
FEE INCOME
Fee income is derived from installment billings and other services provided to
policyholders. Fee income decreased 44.15% and 32.45% for the three and nine
months ended September 30, 2002, respectively, as compared to the same periods
in 2001. The decreases are attributable to the reduction in policies in force
and the overall decline in written premium in 2002.
NET INVESTMENT INCOME
Net investment income decreased 32.94% and 25.73% for the three and nine months
ended September 30, 2002, respectively, as compared to the same periods in 2001.
The decreases reflect the decline in invested assets during the periods and the
liquidation of investments to pay current year and prior year losses settled in
2002.
NET REALIZED CAPITAL GAINS (LOSSES)
Net realized capital gains were $543,000 and $793,000 for the three months ended
September 30, 2002 and 2001, respectively. Net realized capital losses were
$(804,000) and $(283,000) for the nine months ended September 30, 2002 and 2001,
respectively. Capital losses resulted primarily from the liquidation of
investments to fund operations and claim payments under unfavorable market
conditions.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The loss and LAE ratio for SIG for the three and nine months ended September 30,
2002, was 109.2% and 111.2%, respectively, of net premiums earned. The loss and
LAE ratio for SIG for the three and nine months ended September 30, 2001, was
83.5% and 88.4%, respectively, of net premiums earned. The loss and LAE ratio
for SIG for the year ended December 31, 2001 was 91.5%. The ratio increases
during 2002 are primarily attributable to unfavorable development on SIG's loss
and LAE reserves for accidents occurring in 2001 and prior.
POLICY ACQUISITION AND GENERAL AND ADMINISTRATIVE EXPENSES
Policy acquisition and general and administrative expenses were $5,485,000 and
$15,696,000 for the three months ended September 30, 2002 and 2001,
respectively. Policy acquisition and general and administrative expenses were
$21,327,000 and $38,634,000 for the nine months ended September 30, 2002 and
2001, respectively. As a percentage of gross premiums earned, SIG experienced a
decrease in its operating expense ratio, net of fee income, from 40.5% for the
three months ended September 30, 2001 to 21.9% for the three months ended
September 30, 2002. The decreases reflect the decline in SIG's gross written
premiums and SIG's overall operating expense reduction initiatives. The decrease
in SIG's expense ratio is the result of overall operating expense reduction
initiatives during 2002.
INCOME TAXES
At September 30, 2002 the Company's net deferred tax assets were fully offset by
a 100% valuation allowance that resulted in no tax benefit for the three and
nine months ended September 30, 2002, respectively. At September 30, 2001 the
Company's net deferred tax assets were fully offset by a 100% valuation
allowance that resulted in no tax benefit for the three and nine months ended
September 30, 2001, respectively.
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
CASH AND INVESTMENTS
Total cash and investments were $90,817,000 and $125,058,000 at September 30,
2002 and December 31, 2001, respectively. The decrease results from continued
liquidations to fund claim payments and operating expenses in a period of
declining premium volume.
REINSURANCE RECEIVABLES AND PAYABLES
SIG negotiated a third-party quota share reinsurance agreement that became
effective January 1, 2000. Under the quota share agreement, SIG may cede a
portion of its non-standard automobile insurance premiums and related losses
based on a variable percentage of up to 75% of Superior's and Pafco's earned
premiums. SIG's ceding percentage for the three months ended September 30, 2002
totaled 72.7%. The decrease in the amount of premiums and losses ceded under
this contract directly affect reinsurance balances due and payable on the face
of the financial statements.
RECEIVABLES
Receivables, exclusive of the allowance for doubtful accounts, decreased by
$18,676,000, or 39.37%, from December 31, 2001 to September 30, 2002. This
decrease is primarily attributable to a decrease in billable premiums due to
lower written premiums in the three and nine months ended September 30, 2002
compared to the fourth quarter of 2001. The allowance for doubtful accounts
decreased by $1,211,000, or 79.36, from December 31, 2001 to September 30, 2002,
primarily due to the final reconciliation of receivables previously maintained
on a legacy policy administration system that is no longer in service.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Total loss and LAE reserves decreased by $13,852,000, or 16.32%, from December
31, 2001 to September 30, 2002. This decrease is consistent with SIG's
declining volume of business.
UNEARNED PREMIUMS
Unearned premiums decreased by $21,224,000, or 35.84%, from December 31, 2001 to
September 30, 2002. This decrease is consistent with the decrease in
receivables discussed above.
DEFERRED INCOME
In connection with the sale of the crop insurance book of business to Acceptance
on June 6, 2001, the Company and SIG each received a payment of $4.5 million for
agreeing not to engage in the crop insurance business for three years from the
sale date. The payment is being amortized to income on a straight-line basis
over the three-year period.
STOCKHOLDERS' (DEFICIT)
Stockholders' (deficit) was $(78,362,000) and $(89,146,000) as of September 30,
2002 and December 31, 2001, respectively. This increase is primarily the result
of the net loss of $(17,625,000) for the nine months ended September 30, 2002,
offset by an increase in combined surplus of $28,399,000 due to the purchase by
the Company of SIG's Preferred Securities.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of funds for the Company are dividends and loans from
Granite Re.
The primary source of funds available to SIG are fees from policyholders and
management fees and dividends from its insurance company subsidiaries.
Superior Insurance Group, Inc. ("Superior Group") collects billing fees charged
to policyholders who elect to make their premium payments in installments.
Superior Group also receives management fees under its management agreement with
its insurance subsidiaries. When the FDOI approved the acquisition of Superior
by Superior Group, it prohibited Superior from paying any dividends (whether
extraordinary or not) for four years from the date of acquisition (May 1, 1996)
without the prior written approval of the FDOI, which restriction expired in
April 2000. As a result of regulatory actions taken by the IDOI with respect to
Pafco and IGF, those subsidiaries may not pay dividends without prior approval
by the IDOI. Pafco cannot pay extraordinary dividends, within the meaning of
the Indiana Insurance Code, without the prior approval of the Indiana Insurance
Commissioner. The management fees charged to Pafco, Superior and IGF are
subject to review by the IDOI and FDOI.
The nonstandard automobile insurance subsidiaries' primary sources of funds are
premiums, investment income and proceeds from the maturity or sale of invested
assets. Such funds are used principally for the payment of claims, payment of
claims settlement costs, operating expenses (primarily management fees),
commissions to independent agents, premium taxes, dividends and the purchase of
investments. There is variability in cash outflows because of uncertainties
regarding settlement dates for liabilities for unpaid losses. Accordingly, SIG
maintains investment programs intended to provide adequate funds to pay claims.
During 2000, 2001 and the first three quarters of 2002, due to reduced premium
volume, SIG has liquidated investments to pay claims. SIG historically has
tried to maintain duration averages of 3.5 years. However, the reduction in new
funds due to lower premium volume has and will continue to cause SIG to shorten
the duration of its investments. SIG may incur additional costs in selling
longer bonds to pay claims, as claim payments tend to lag premium receipts. Due
to the decline in premium volume, SIG has experienced a reduction in its
investment portfolio, but to date has not experienced any problems meeting its
obligations for claims payments.
As of October 31, 2002, SIG has borrowed $3.5 million from Granite Re, a related
party. Under the terms of the loans monthly interest is payable at the prime
rate (as printed in the Wall Street Journal on the first business day of each
month) plus 5.25% (the total rate was 10.0% at November 1, 2002) computed on an
annual basis and not to exceed 18% per annum calculated on the average principal
outstanding each month. All principal borrowed under the loans is due on
December 20, 2004.
On August 12, 1997, SIG issued through a wholly owned trust subsidiary $135
million aggregate principal amount in trust originated preferred securities (the
"Preferred Securities"). The Preferred Securities have a term of 30 years with
semi-annual interest payments of $6.4 million that commenced February 15, 1998.
SIG may redeem the Preferred Securities in whole or in part after 10 years. SIG
may defer interest payments in accordance with the terms of the trust indenture
for a period of up to five years. The unpaid interest installment amounts accrue
interest at 9.5%. SIG deferred the semi-annual interest payments due in February
and August 2000, 2001 and 2002 and may continue this deferral practice for all
remaining payments due in 2003 and 2004.
The following table sets forth the minimum required obligations of SIG under the
Preferred Securities for interest and principal payments for each of the next
four years and thereafter assuming all semi-annual interest payments due in 2003
and 2004 are deferred (in thousands):
2003 2004 2005 Thereafter Total
----- ----- ------- ----------- --------
Interest payments. $ - $ - $96,779 $ 282,150 $378,929
Principal payments - - - 135,000 135,000
----- ----- ------- ----------- --------
Total due. . . . . $ - $ - $96,779 $ 417,150 $513,929
===== ===== ======= =========== ========
The trust indenture contains certain restrictive covenants including those based
upon SIG's consolidated coverage ratio of earnings before interest, taxes,
depreciation and amortization (EBITDA). If SIG's EBITDA falls below 2.5 times
consolidated interest expense (including Preferred Securities distributions) for
the most recent four quarters, the following restrictions become effective:
- - SIG may not incur additional indebtedness or guarantee additional
indebtedness.
- - SIG may not make certain restricted payments including making loans or
advances to affiliates, repurchasing common stock or paying dividends in excess
of a stated limitation.
- - SIG may not increase its level of non-investment grade securities defined
as equities, mortgage loans, real estate, real estate loans and non-investment
grade fixed income securities.
These restrictions currently apply, as SIG's consolidated coverage ratio was
(0.70) at September 30, 2002, and will continue to apply until SIG's
consolidated coverage ratio complies with the terms of the trust indenture. SIG
was in compliance with these additional restrictions as of September 30, 2002.
Beginning in the fourth quarter of 2001 and continuing through the first quarter
of 2002, SIG experienced adverse loss experience on a substantial portion of its
new business written in certain markets. In late February and early March 2002,
SIG commenced further analysis of loss ratios by individual agency and a review
of claim settlement procedures. Based on this and other analysis, SIG took the
following actions in late March and in April 2002 to improve its financial
position and operating results:
- - Eliminated reinstatements in all markets, i.e., upon policy cancellation,
the insured must obtain a new policy at prevailing rates and current
underwriting guidelines;
- - Terminated or placed on new business moratorium several hundred agents
whose loss ratios were abnormally high when compared to the average for the
remaining agents (these agents accounted for approximately 16% of the total
gross written premium in 2001);
- - Increased underwriting requirements in certain markets including: higher
down payments, new policy fees, and shorter policy terms;
- - Hired a consultant with significant auto claims experience to review
processes and suggest modifications to the claims function.
As previously reported in the Company's December 31, 2001 Annual Report on Form
10-K, SIG expected the above actions to result in a decline of approximately 10
to 15% in gross written premiums from 2001 levels. Based on actual results
through September 2002, SIG now expects a decline ranging from 30% to 35% in
gross written premiums for calendar year 2002 from 2001 levels with a
corresponding decrease in management fees payable to Superior Group. In April
2002, SIG eliminated approximately 60 full-time positions, primarily in its
claims and underwriting departments, representing approximately 17% of its
employees before the layoffs. In addition, SIG has undertaken other cost savings
initiatives and process changes in order to reduce operating expenses.
Net cash used by operating activities during the nine months ended September 30,
2002 and 2001 were $(36,839,000) and $(18,590,000), respectively. The decrease
is primarily due to SIG's lower premium volume in 2002, the increase in SIG's
ceding percentage, unfavorable development on SIG's loss and LAE reserves for
2001 and prior claims and the receipt in 2001 of $9.0 million for the
non-compete agreement with Acceptance. See Note 8 "Discontinued Operations" in
the Condensed Notes to the Financial Statements.
SIG's present projected level of cash flow from premium volume, investment
income and billing fees will be insufficient to fund its operating expenses at
their present levels through the end of 2002. SIG is considering alternative
sources of working capital which may be available in order to fund operations.
Among the alternate sources contemplated by SIG are capital contributions and
loans from the Company and its affiliates. In addition, SIG continues to reduce
operating expenses commensurate with cash inflows and has decreased premium
volume in the third and fourth quarters of 2002 in certain states in an attempt
to ensure that new business written generates an underwriting profit. In the
event SIG's insurance company subsidiaries continue to reduce premium volume,
the result will be continued reductions in management fees paid to Superior
Group and billing fees paid to Superior Group and Superior which will reduce
cash flow and sources of funds available to fund operating expenses and other
obligations, including the Preferred Securities.
In addition, in accordance with the final order of the FDOI, Superior Group is
unable to continue to collect finance and service fees from Superior. Superior
must also seek repayment from Superior Group of prior years finance and service
fees in the approximate amount of $15 million. The operating expenses of
Superior Group attributable to the business of Superior exceed the management
fees payable by Superior under the management agreement. Superior and Superior
Group are reviewing alternatives including an amendment to the agreement to
provide for a management fee commensurate with the expenses associated with
Superior's business or reallocation of operational responsibilities. Any
amendment of the management agreement would require prior approval of the FDOI.
See Note 3, "Regulatory Affairs" in the Consolidated Notes to the Financial
Statements.
Shareholders' equity reflected a deficit of $(78.27) million at September 30,
2002, which does not reflect the statutory surplus upon which the Company
conducts its U.S. insurance operations. The Company's U.S. insurance
subsidiaries, not including IGF, after the effects of Codification, had
statutory surplus of approximately $14.6 million at September 30, 2002.
Given the financial position and loss experience of SIG over the past several
years as described above, SIG's independent auditors issued an opinion based
upon their audit of SIG's December 31, 2001 Consolidated Financial Statements
which includes an emphasis paragraph that raises the question of whether or not
SIG can continue as a going concern. SIG's plans to improve financial results
are described above.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Information related to Qualitative and Quantitative Disclosures about Market
Risk was included under Part I, Item 1 "Business" in the December 31, 2001 Form
10-K. No material changes have occurred in market risk since this information
was disclosed in the December 31, 2001 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
The Company and SIG maintain disclosure controls and procedures designed to
ensure that information required to be disclosed in reports filed under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the specified time periods. Within the 90 days prior to the
date of filing this Quarterly Report on Form 10-Q, the Company and SIG carried
out evaluations, under the supervision and with the participation of the
Company's and SIG's management, including the Company's CEO, The Company's CFO
and SIG's CFO, of the effectiveness of the design and operation of the Company's
and SIG's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Company's CEO, the Company's CFO and
SIG's CFO concluded that the Company's and SIG's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company and SIG (including their consolidated subsidiaries)
required to be included in the Company's periodic SEC filings. Subsequent to the
date of that evaluation, there have been no significant changes in the Company's
or SIG's internal controls or in other factors that could significantly affect
internal controls, nor were any corrective actions required with regard to
significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, IGF, which is a wholly owned subsidiary of SIG, had been
a party to a number of pending legal proceedings and claims relating to
agricultural production interruption insurance policies (the "AgPI Program")
which were sold during 1998. All of the policies of insurance which were issued
in the AgPI Program were issued by and under the name of Mutual Service Casualty
Insurance Company ("MSI"), a Minnesota corporation with its principal place of
business located in Arden Hills, Minnesota. Sales of this product resulted in
large underwriting losses by IGF.
Approximately $29 million was paid through March 31, 2002 in settlement of legal
proceedings and policyholder claims related to the AgPI Program. All AgPI
policyholder claims were settled during 2000. However, on January 12, 2001 a
case was filed in the Superior Court of California, County of Fresno, entitled
S&W Seed Company, Dudley Silveira, Ric Blanchard and Darrell Silveira v. Mutual
Service Casualty Insurance Company, IGF Insurance Company, and Dibuduo &
Defendis Insurance Agency, Inc.; Case No. OICE CG 00137. The case was brought
by four AgPI policyholders who had previously settled their AgPI claims pursuant
to binding settlement agreements who now seek additional compensation by
asserting through litigation that IGF and the third party carrier paid less than
the policy limits they were promised when they purchased the policy and that
each settling policyholder was forced to accept the lesser amount due to their
economic duress - a legal theory recognized in California if certain elements
can be established. On January 16, 2002, the court entered an order granting
IGF's motion for judgment on the pleadings and required plaintiffs to show an
insurable interest. Plaintiffs amended their complaint attempting to allege an
insurable interest, and on March 19, 2002, the court granted IGF's demurrer to
the amended complaint. In granting the demurrer the court held that any
recovery payable to plaintiff would be limited to their actual economic losses
regardless of how much plaintiffs thought they had been promised (i.e.
plaintiffs cannot be paid policy limits without regard to actual losses
incurred). The plaintiffs then filed their third amended complaint to which MSI
filed a demurrer challenging the insurance contract allegations, as the issuer
of the AgPI policies, contending that plaintiffs failed to make the amendments
necessary to show an insurable interest as required by the court's earlier
rulings. This demurrer was granted -- without leave to amend -- based on the
court's analysis that plaintiffs' claims continued to reveal they did not have
an insurable interest, rendering the contract they alleged an unenforceable
wager agreement, not insurance. Thereafter, the court vacated its "without
leave to amend" ruling in response to a motion for reconsideration filed by the
plaintiffs who contended they could cure the fatal defect if they were allowed
to file a fourth amended complaint. However, the new version of the complaint
still claims coverage amounts based on a formula which is not tied to
plaintiffs' economic losses. Accordingly, a demurrer to the fourth amended
complaint was filed by MSI and a motion to strike was filed by IGF. A hearing
on these issues was held on November 8, 2002, and the court has not yet issued
its ruling.
SIG is a defendant in a case filed on February 23, 2000, in the United States
District Court for the Southern District of Indiana entitled Robert Winn, et al.
v. Symons International Group, Inc., et al., Cause No. IP 00-0310-C-B/S. Other
parties named as defendants are the Company, three individuals who were or are
officers or directors of the Company or of SIG, PricewaterhouseCoopers LLP and
Schwartz Levitsky Feldman, LLP. The case purports to be brought on behalf of a
class consisting of purchasers of the Company's stock or SIG's stock during the
period February 27, 1998, through and including November 18, 1999. Plaintiffs
allege, among other things, that defendants misrepresented the reliability of
SIG's reported financial statements, data processing and financial reporting
systems, internal controls and loss reserves in violation of Section 10(b) of
the Securities Exchange Act of 1934 (the "1934 Act") and SEC Rule 10b-5
promulgated thereunder. The individual defendants are also alleged to be liable
as "controlling persons" under Sec.20 (a) of the 1934 Act. During the third
quarter of 2002, the Company, SIG and the individual defendants entered into an
agreement with the plaintiffs for settlement . The settlement is subject to
certain terms and conditions and court approval.
As previously reported, Superior was a defendant in a case filed September 15,
2000 in the Circuit Court for Lee County, Florida entitled Charles L. Fulton,
D.C. v. Superior Insurance Company. The case was purported to be brought on
behalf of a class consisting of healthcare providers that rendered treatment to
and obtained a valid assignment of benefits from persons insured by Superior.
The case was settled and the action was dismissed on August 13, 2002.
As previously reported, Superior was a defendant in a case entitled Oviedo
Family Chiropractic Center, P.A. v. Superior Insurance Company originally filed
February 4, 2000 in the Circuit Court for Dade County, Florida, formerly
entitled Medical Re-Hab Center v. Superior Insurance Company. The case was
settled and the action was dismissed on September 3, 2002.
SIG's insurance subsidiaries are involved in a number of pending regulatory
actions (see Note 3, "Regulatory Affairs" in the Condensed Notes to the
Consolidated Financial Statements). SIG and its subsidiaries are named as
defendants in various other lawsuits relating to their business. Legal actions
arise from claims made under insurance policies issued by SIG's subsidiaries.
SIG, in establishing its loss reserves, has considered these actions. There can
be no assurance that the ultimate disposition of these regulatory actions and
lawsuits will not have an adverse material affect SIG's operations or financial
position.
Except as set forth above, there have been no other material developments in any
of the pending legal proceedings previously reported by the Company in the June
30, 2002 Form 10-Q.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
10.29 Consulting Agreement between Goran Capital Inc.
and AGS Capital Ltd. effective May 1, 2002.
99.1 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (CEO)
99.2 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (CFO)
b. Reports on Form 8-K
None
Goran Capital Inc. - Consolidated
Analysis of Loss Per Share
US GAAP - Treasury Method
Nine Months Nine Months
Ended Ended
September 30, 2002 September 30, 2001
-------------------- -------------------
Average Price (US $). . . . . . . . . . . . . . . . . . N/A N/A
Proceeds from Exercise of Warrants and Options (US $) . Nil Nil
Shares Repurchased - Treasury Method. . . . . . . . . . Nil Nil
Shares Outstanding - Weighted Average . . . . . . . . . 5,393,698 5,775,000
Add: Options and Warrants Outstanding (1). . . . . . . Nil Nil
Less: Treasury Method - Shares Repurchased . . . . . . Nil Nil
Shares Outstanding for US GAAP Purposes . . . . . . . . 5,393,698 5,775,000
Net Loss in Accordance with US GAAP . . . . . . . . . . $ (17,675,000) $ (24,684,000)
Net Loss Per Share - US GAAP - Basic and Fully Diluted. $ (3.28) $ (4.28)
(1) Only those options with a dilutive effect were included above for the nine months ended
September 30, 2002 and 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on November 14, 2002.
By: /s/ Douglas H. Symons
------------------------
Douglas H. Symons
Chief Executive Officer
(principal executive officer)
By: /s/ John G. Pendl
--------------------
John G. Pendl
Chief Financial Officer
(principal financial and accounting officer)
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Douglas H. Symons, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Goran Capital Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a014 and 15d-14) for the registrant, and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: November 14, 2002
-------------------
By: /s/ Douglas H. Symons
------------------------
Douglas H. Symons
Chief Executive Officer
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, John G. Pendl, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Goran Capital Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a014 and 15d-14) for the registrant, and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: November 14, 2002 By: /s/ John G. Pendl
------------------- --------------------
John G. Pendl
Chief Financial Officer
EXHIBIT INDEX
REFERENCE TO
REGULATION S-K
EXHIBIT NO. DOCUMENT
10.29* Consulting Agreement between Goran Capital Inc. and AGS Capital Ltd.
effective May 1, 2002.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(CEO)
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(CFO)
* Compensation related agreement
30
EXHIBIT 10.29
CONSULTING AGREEMENT with an effective date of May 31, 2002
BETWEEN: GORAN CAPITAL INC., a body politic and corporate duly incorporated,
having its head office in Toronto Canada and GRANITE REINSURANCE COMPANY LTD.,
a body politic and corporate duly incorporated, having its office at Bishop's
Court Hill, P.O. Box 111, St. Michael, Barbados, West Indies (hereinafter
referred to as the "Companies")
AND: AGS CAPITAL LTD., a body politic and corporate duly incorporated, with
offices at 20 Eagle Road, Toronto Ontario M82 4HS, (hereinafter referred to as
the "Consultant")
WHEREAS the Companies actively engaged internationally in the business of
insurance and reinsurance;
WHEREAS the Consultant, through its President, has expertise in the field
of insurance and reinsurance and is desirous of entering into this Agreement
with respect to providing international consulting services on demand to the
Companies as outlined in Appendix A and additional appendix as maybe attached
hereto in writing;
WHEREAS the Companies wishes to engage the services offered by the
Consultant and the Consultant is willing to enter into an agreement to provide
services on the terms and conditions described herein:
NOW, THEREFORE, BE IT AGREED AS FOLLOWS:
1. PREAMBLE The whereas clauses mentioned above shall form an integral part of
this Agreement as it fully-recited at length herein.
2. ENGAGEMENT
2.1 The Companies hereby retains the services of the Consultant and the
Consultant hereby accepts such engagement.
2.2 During the term of this Agreement, the Consultant shall, at its sole costs,
make available to the Companies and provide upon its request a duly
qualified representative for purposes of fulfilling the Consultant's
obligations under this Agreement.
3. TERM
(A) This is an annual renewable contract, unless notice is given by either
party at least 90 days before June 1st of any year. The contract shall then
expire on the 1st of June following notice. At any time prior to the 90-day
notice period, the Company, at it's option, may choose to extend this
contract for an additional one-year term.
(B) Change of control, should Gordon Symons and or Douglas Symons no longer
control the appointment of board members of Goran, and in order to cause
continuity of these very important projects, this contract shall
automatically extend for a further two year term, from the date of the last
renewal.
4. NATURE OF CONSULTING SERVICES
4.1 The Consultant agrees to provide consulting services on behalf of the
Companies as and when requested by the Companies during the term of this
Agreement and, without limiting the generality of such services, to furnish
a representative to oversee and supervise the business activities outlined
in Appendix A. The essence of this contract is to utilize the experience
and knowledge of Alan G. Symons, his previous duties with the Companies and
personnel. Alan G. Symons shall be assigned as the consultant performing
the services to the Companies, however, it is understood and agreed that
certain work may be performed by others under the control of AGS Capital
Ltd. At all times, Alan G. Symons shall effect direct supervision over the
work performed. Any substitution of Alan G. Symons to perform the services
being contracted for under this agreement without the written consent of
the Companies shall render the contract null and void.
4.2 The Consultant and its representative warrant to perform such services as
requested to the best of its talents, efforts and abilities in accordance
with standard business practices.
4.3 This agreement may not be assigned by either party.
5. COMPENSATION The Companies shall compensate the Consultant for services
rendered under this Agreement at an annual rate of FIVE HUNDRED THOUSAND
dollars (U.S.) ($500,000.00 U.S.), payable in equal monthly installments,
in arrears, and in each successive calendar year of the term, the annual
rate shall be increased by the greater of (1) 2.5% or (2) the U.S. consumer
price index for the immediately preceding calendar year. The Companies
shall not be responsible to the Consultant for any ordinary operating
expenses of the Consultant such as general administrative, rent, staff,
overhead, etc.
5. INSURANCE The Companies will continue to provide for the Consultant and one
assistant to participate in the life, medical and dental plans of its
subsidiary, Symons International Group, Inc. ("SIG").
7. REIMBURSEMENT FOR OUT-OF-POCKET EXPENSES The parties recognize that in the
course of performing its services hereunder, the Consultant may incur
out-of-pocket expenses. The Consultant agrees to submit, at designated
intervals to be determined by the parties hereto, invoices with original
vouchers attached thereto, to the Companies. The Consultant agrees that the
said expenses shall be reasonable and necessary, in the opinion of the
Companies, as well as be incurred in the direct performance of its services
hereunder, failing which they may not be reimbursed to the Consultant.
8. BONUS In addition to the forgoing, the Companies will pay a bonus
immediately upon completion of certain projects and the financial benefit
to the Companies has been received as outlined in the attached or future
appendix to this agreement.
9. INDEPENDENT CONSULTANT 9.1 It is understood that the Consultant is retained
by the Companies only for the purposes set forth herein and its relation to
the Companies shall be of an independent Consultant.
9.2 The Consultant agrees that it shall not be considered under the provisions
of this Agreement or otherwise as having a joint venture or partnership
status with the Companies or being entitled to participate in any plans,
arrangements, benefits, or distributions of the Companies.
9.3 Notwithstanding items 9.1 and 9.2, the consultant is engaged to render
services in accordance with the terms of this agreement in an expeditious
and professional manner and to keep the Companies fully informed of the
status of the matters entrusted to them for their assistance on a monthly
basis.
10. CONFIDENTIALITY As an essential condition of the Agreement, the Consultant
warrants that it shall not, at any time, either during the term of this
Agreement or thereafter, divulge to any competitor person, or competitor
corporation, any information or documentation received by it during the
course of its engagement and all such information shall be kept strictly
confidential and shall not in any manner be revealed to competitor person
or competitor corporation. At the termination of this Agreement, the
Consultant agrees if requested of same to return and give to the Companies
all documentation relating to the Companies in its possession and/or
control.
11. TERMINATION The Companies shall have the right to terminate the services
hereunder of the Consultant "for cause" at any time which shall be defined
and limited to acts of dishonesty, fraud or gross negligence of the
Consultant or its representative committed from and after the effective
date of this agreement.
12. INTEREST ON MONIES DUE Any balance due either party past due greater than
30 days shall bear interest at 1% per month or part thereof until fully
paid.
13. NOTICE All notices called for or contemplated hereunder shall be in writing
and shall be sent by certified or registered mail or by courier to the
addresses mentioned in the heading of this Agreement. All notices will be
deemed given when received if delivered by courier, and if sent by mail
then five (5) business days after mailing. Either party may change their
address by written notice to the other party.
14. SET OFF There shall be no right of set off against the base compensation
included under Section 5, but up to 50% of any additional compensation such
as that contemplated under Section 8 can be at the Company's option set off
against balances due the Companies.
15. ENTIRE AGREEMENT This Agreement constitutes the entire understanding
between the parties with respect to the subject matter hereof, superseding
all negotiations, previous agreements, verbal or written, and no variation
hereof shall be of any force and effect unless reduced to writing and
signed by the parties hereto.
WHEREOF, THE PARTIES HAVE SIGNED HEREIN BELOW:
GRANITE REINSURANCE COMPANY LTD. AGS CAPITAL LTD.
PER: /S/ G. GORDON SYMONS PER: /S/ ALAN G. SYMONS
----------------------- ---------------------
DATE: MAY 31, 2002 DATE: MAY 31, 2002
-------------- --------------
GORAN CAPITAL, INC.
PER: /s/ DOUGLAS H. SYMONS
-----------------------
DATE: MAY 31, 2002
--------------
WITNESS: WITNESS:
___________________________________ ___________________________
APPENDIX A
The consultant is hereby engaged for the following projects on behalf of the
Companies. The consultant shall not represent the Company with respect to any
other matters other than the following without prior written consent.
(A) The Consultant shall: Assist the management of IGF Insurance Company with
respect to the run-off of its crop insurance operations and the collection
of debts and obligations due to IGF.
(B) Manage the litigation known as AgPi. Should the litigation result in IGF or
other affiliates to IGF including but not limited to Granite Re and Goran,
being awarded compensation of a calculated value, the Consultant will be
entitled to 10% on the net proceeds over $1 million (U.
S.)
(C) Manage the litigation between Toronto Dominion Bank and Granite Insurance
Company. Should the litigation result in compensation of a calculated
value, the Consultant will be entitled to a bonus of 10% on net proceeds
over $1 million (CAN).
(D) At the request of the Company, the Consultant shall work with designated
representatives of the Companies to acquire or restructure outstanding
trust preferred securities due 2027 and shall not assist directly or
indirectly any other person or entity other than the Companies with respect
to all matters associated with the purchase or restructuring of the trust
preferred securities.
EXHIBIT 99.1
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
I, Douglas H. Symons, Chief Executive Officer of Goran Capital Inc. (the
"Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350, that to the best of my knowledge:
(1)the Quarterly Report on Form 10-Q of the Company for the quarterly period
ended September 30, 2002 (the "Report") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or
78o(d)); and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: November 14, 2002 By: /s/ Douglas H. Symons
---------------------
Douglas H. Symons
Chief Executive Officer
EXHIBIT 99.2
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
I, John G. Pendl, Chief Financial Officer of Goran Capital Inc. (the "Company"),
certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350, that to the best of my knowledge:
(1)the Quarterly Report on Form 10-Q of the Company for the quarterly period
ended September 30, 2002 (the "Report") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or
78o(d)); and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: November 14, 2002 By: /s/ John G. Pendl
--------------------
John G. Pendl
Chief Financial Officer