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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 March 31, 2003
----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ____________
Commission File Number: 000-24366
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GORAN CAPITAL INC.
------------------
(Exact name of registrant as specified in its charter)
CANADA Not Applicable
- ------ ---------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2 Eva Road, Suite 200, Etobicoke, Ontario, M9C 2A8, Canada
----------------------------------------------------------
4720 Kingsway Drive, Indianapolis, Indiana, 46205, USA
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(Address of Principal Executive Offices)
(Zip Code)
(416) 622-0660 (Canada); (317) 259-6300 (USA)
---------------------------------------------
Registrant's telephone number, including area code
__________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
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
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
As of June 30, 2003, 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 MARCH 31, 2003
Page
Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets at March 31, 2003
(unaudited) and December 31, 2002 3
Unaudited Consolidated Statements of Operations
for the Three Months Ended March 31, 2003 and 2002 4
Unaudited Consolidated Statement of Stockholder's Equity
(Deficit) for the Three Months ended March 31, 2003 and 2002 5
Unaudited Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2003 and 2002 6
Condensed Notes to Unaudited Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3 Quantitative and Qualitative Disclosures about
Market Risk 19
Item 4 Controls and Procedures 19
PART II OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 2 Changes in Securities and Use of Proceeds 21
Item 3 Defaults Upon Senior Securities 21
Item 4 Submission of Matters to a Vote of Security Holders 21
Item 5 Other Information 21
Item 6 Exhibits and Reports on Form 8-K 21
SIGNATURES 21
Sarbanes-Oxley Act Section 302 Certifications 22
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GORAN CAPITAL INC.
CONSOLIDATED BALANCE SHEETS
(CANADIAN GAAP, stated in thousands of U.S. dollars)
March 31,
2003 December 31,
(Unaudited) 2002
----------- -----------
ASSETS:
Investments:
Fixed maturities $26,643 $36,035
Equity securities 9,339 10,778
Short-term investments, at amortized cost, which approximates market 8,693 8,495
Other invested assets 3,102 3,171
----------- --------------
Total investments 47,777 58,479
Investments in and advances to related parties 83 83
Cash and cash equivalents 3,003 2,131
Receivables, net of allowances of $752 and $319 28,887 28,302
Reinsurance recoverable on paid and unpaid losses, net 28,045 24,628
Prepaid reinsurance premiums 28,292 25,470
Property and equipment, net of accumulated depreciation 6,347 7,084
Deferred securities issuance costs 2,096 2,119
Other assets 2,057 3,309
Assets of discontinued operations 8,105 10,361
----------- --------------
TOTAL ASSETS 154,692 $161,966
=========== ==============
LIABILITIES AND STOCKHOLDER'S DEFICIT:
LIABILITIES:
Losses and loss adjustment expenses $69,339 $72,809
Unearned premiums 39,298 35,797
Reinsurance payables 13,061 17,128
Distributions payable on preferred securities 26,877 24,793
Deferred income 3,500 4,250
Other 16,874 15,673
Liabilities of discontinued operations 12,256 14,274
----------- --------------
TOTAL LIABILITIES 181,205 184,724
----------- --------------
MINORITY INTEREST:
Company-obligated mandatorily redeemable preferred stock of trust
Subsidiary holding solely parent debentures 67,994 67,994
----------- --------------
STOCKHOLDERS' DEFICIT:
Common stock 18,502 18,502
Contributed surplus 70,864 70,864
Cumulative translation adjustment (1,179) (1,023)
Retained (deficit) (182,694) (179,095)
----------- --------------
TOTAL STOCKHOLDERS' (DEFICIT) (94,507) (90,752)
----------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) $154,692 $161,966
=========== ==============
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
March 31,
--------------------
2003 2002
-------------------- --------
Gross premiums written. . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,952 $45,082
Less ceded premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,949 30,973
-------------------- --------
Net premiums written. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,003 $14,109
==================== ========
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,196 $13,093
Fee income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,687 2,814
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . 337 1,338
Other income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750 750
Net realized capital loss . . . . . . . . . . . . . . . . . . . . . . . . 245 (722)
-------------------- --------
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,215 17,273
-------------------- --------
Expenses:
Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . 5,905 13,948
Policy acquisition and general and administrative expenses. . . . . . . . 5,803 7,293
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . 22 43
-------------------- --------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,730 21,284
-------------------- --------
Loss from continuing operations before income taxes and minority interest (1,515) (4,011)
-------------------- --------
Total income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
-------------------- --------
Loss from continuing operations before minority interest. . . . . . . . . (1,515) (4,011)
-------------------- --------
Minority interest:
Distributions on preferred securities, net of tax of nil in both
2003 and 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,084 1,956
-------------------- --------
Loss from continuing operations . . . . . . . . . . . . . . . . . . . . . (3,599) (5,967)
-------------------- --------
Discontinued operations:
Income (loss) from operations of discontinued segment, less applicable
income taxes of nil in both 2003 and 2002 . . . . . . . . . . . . . . . . - -
-------------------- --------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,599) $(5,967)
==================== ========
Weighted average shares outstanding - basic and fully diluted . . . . . . 5,394 5,394
==================== ========
Net loss from continuing operations per share - basic and fully diluted . $ (0.67) $ (1.11)
==================== ========
Net loss of discontinued operations per share - basic and fully diluted . $ - $ -
==================== ========
Net loss per share - basic and fully diluted. . . . . . . . . . . . . . . $ (0.67) $ (1.11)
==================== ========
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, 2001
$18,502 $ 42,465 $ (763) $(149,350) $ (89,146)
Purchase of Preferred Securities
- 28,399 - - 28,399
Change in cumulative translation
Adjustment . . . . . . . . . . . . . . . . . . . . . . . . - - (36) - (36)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . - - - (5,967) (5,967)
-------- --------- ------------ ---------- ----------------
Comprehensive income (loss). 28,399 (36) (5,967) 22,396
-------- --------- ------------ ---------- ----------------
Balance at March 31, 2002. . . . . . . . . . . . . . . . . $18,502 $ 70,864 $ (799) $(155,317) $ (66,750)
======== ========= ============ ========== =================
Balance at December 31, 2002
$18,502 $ 70,864 $ (1,023) $(179,095) $ (90,752)
Change in cumulative translation
Adjustment . . . . . . . . . . . . . . . . . . . . . . . . (156) (156)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . - - - (3,599) (3,599)
-------- --------- ------------ ---------- -----------------
Comprehensive income (loss). (156) (3,599) (3,755)
-------- --------- ------------ --------- -----------------
Balance at March 31, 2003. . . . . . . . . . . . . . . . . $18,502 $ 70,864 $ (1,179) $(182,694) $ (94,507)
======== ========= ============ ========== =================
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)
Three Months Ended
March 31,
2003 2002
-------------------- ---------
Cash flows from operating activities:
Net loss for the period . . . . . . . . . . . . . . . . . . . . . $ (3,599) $ (5,967)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization . . . . . . . . . . . . . . . . . . 796 876
Net realized capital loss . . . . . . . . . . . . . . . . . . . . (245) 722
Net changes in operating assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . (585) (5,781)
Reinsurance recoverable on paid and unpaid losses . . . . . . . (3,417) (4,340)
Prepaid reinsurance premiums. . . . . . . . . . . . . . . . . . (2,822) (3,893)
Deferred policy acquisition costs . . . . . . . . . . . . . . . -- (160)
Other assets and liabilities. . . . . . . . . . . . . . . . . . 2,453 1,790
Loss and loss adjustment expense reserves . . . . . . . . . . . (3,470) (2,727)
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . 3,501 5,046
Reinsurance payables. . . . . . . . . . . . . . . . . . . . . . (4,067) 6,642
Distribution payable on preferred securities. . . . . . . . . . 2,084 (4,369)
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . (750) (750)
Net assets from discontinued operations . . . . . . . . . . . . 102 -
-------------------- ---------
Net cash (used in) operations . . . . . . . . . . . . . . . . . . (10,019) (12,911)
-------------------- ---------
Cash flows from investing activities, net of assets acquired:
Net sale (purchase) of short-term investments . . . . . . . . . . (198) 2,918
Proceeds from sales, calls and maturities of fixed maturities . . 10,001 9,746
Purchase of fixed maturities. . . . . . . . . . . . . . . . . . . (382) (4,292)
Proceeds from sale of equity securities . . . . . . . . . . . . . 1,430 5,475
Purchase of equity securities . . . . . . . . . . . . . . . . . . -- (1,263)
Purchase of property and equipment. . . . . . . . . . . . . . . . (85) (134)
Net investing activities from discontinued operations . . . . . . 136 --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11) (125)
-------------------- ---------
Net cash provided by investing activities . . . . . . . . . . . . 10,891 12,325
-------------------- ---------
Cash flows from financing activities, net of assets acquired:
Purchase of subsidiary's preferred securities . . . . . . . . . . -- 1,535
Repayment of related party loans. . . . . . . . . . . . . . . . . -- 392
Net financing activities from discontinued operations . . . . . . -- --
-------------------- ---------
Net cash provided by (used in) financing activities . . . . . . . -- 1,927
-------------------- ---------
Increase in cash and cash equivalents . . . . . . . . . . . . . . 872 1,341
Cash and cash equivalents, beginning of period. . . . . . . . . . 2,131 11,263
-------------------- ---------
Cash and cash equivalents, end of period. . . . . . . . . . . . . $ 3,003 $ 12,604
==================== =========
See condensed notes to consolidated financial statements.
GORAN CAPITAL INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the Three Months Ended March 31, 2003
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 ("CDN GAAP"). 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 CDN
GAAP and contain references to United States Generally Accepted Accounting
Principles ("U.S. GAAP") accounting pronouncements. Note 6, United States
Accounting Principles, presents a reconciliation of CDN GAAP and U.S. GAAP.
The consolidated financial statements include the accounts, after intercompany
eliminations, of the Company and its subsidiaries, which are as follows:
1. Symons International Group, Inc. ("SIG") is a 73.8% 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 ;
2. Granite Reinsurance Company Ltd. ("Granite Re") a finite risk reinsurance
company domiciled in Barbados.
3. Granite Insurance Company ("Granite") a Canadian federally licensed
insurance company.
4. Symons International Group (Florida) Inc. ("SIGF") a Florida domestic
corporation.
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."
The financial statements included in this report are the consolidated financial
statements of the Company and its subsidiaries. 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 ("GAAP") 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 should be read in conjunction with the financial statements and notes for
the year ended December 31, 2002 included in the Company's 2002 Annual Report on
Form 10-K. Results for any interim period are not necessarily indicative of
results to be expected for the year.
2. PREFERRED SECURITIES
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 10 years after the
issue date.
SIG elected to defer the semi-annual interest payments due in February and
August 2000, 2001 and 2002 and in February 2003. SIG expects to continue this
practice through 2003 and 2004. The unpaid interest installment amounts accrue
interest at 9.5%.
SIG may continue to defer semi-annual interest payments for up to an aggregate
of five years as permitted by the indenture for the Preferred Securities. All
of the deferred interest (approximately $84 million, if all payments due in 2003
and 2004 are deferred) will become due and payable in February 2005 along with
the semi-annual interest due at that time. SIG relies on the payment of finance
and service fees by its subsidiaries to fund its operations, including its
payment of interest on the Preferred Securities. Certain state regulators,
including the FDOI, have issued orders prohibiting SIG's subsidiaries from
paying such fees to SIG. There can be no assurance that SIG will have
sufficient revenue to fund its operations and pay the deferred interest on the
Preferred Securities. Such failure to pay could result in default under the
indenture and acceleration of the payment of the Preferred Securities.
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
(0.42) at March 31, 2003, and will continue to apply until SIG's consolidated
coverage ratio complies with the terms of the trust indenture. SIG complied with
these additional restrictions as of December 31, 2001 and 2002 and is in
compliance as of June 30, 2003.
3. REGULATORY ACTIONS
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 notices 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 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.
3. 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 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 is in regular
contact with the IDOI regarding its financial condition.
At March 31, 2003, Pafco's gross written premium to surplus and net written
premium to surplus exceeded the ratios allowed under the agreed order. SIG has
reduced written premium and will be in compliance at December 31, 2003. Pafco
has agreed with the IDOI to maintain its surplus above $2.5 million through
August 2003.
In March 2000, Pafco agreed with the Iowa Department of Insurance ("IADOI") that
it would 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:
- - as 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.
On June 30, 2003 the Missouri Department of Insurance instituted proceedings to
suspend Pafco's certificate of authority in Missouri. Pafco had previously
ceased writing new business in Missouri and has initiated discussions with the
Missouri Department of Insurance intended to identify alternatives to the
pending proceeding.
Superior and Pafco provide monthly financial information to the departments of
insurance in certain states in which they write business at the states'
request(s).
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 to comply with the FDOI final
order.
In accordance with the FDOI's final 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 could not operate profitably. Accordingly, on
October 1, 2002, Superior Group discontinued the provision of certain claims
services to Superior. Superior provided a number of proposals to the FDOI in an
effort to establish an acceptable repayment plan in accordance with the final
order. None of the proposals were acceptable to the FDOI.
On March 21, 2003 the FDOI filed a Motion for Enforcement of Final Order
Granting Petition to Enforce Agency Action (the "Motion for Enforcement") in the
Circuit Court which seeks to hold Superior in contempt for failing to obtain the
immediate repayment of approximately $15 million from Superior Group. Superior
Group presently does not have the ability to make a $15 million repayment, and
Superior believes that this petition seeks to fashion a remedy not intended by
the Circuit Court's November 1, 2002 order and contravenes the spirit of
numerous discussion between the FDOI and Superior to resolve the issues during
the pendency of Superior's appeal to the District Court of Appeal and the
original enforcement action. On May 7, 2003 a hearing was held on the Motion for
Enforcement, and an order has not yet been issued.
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, which was denied on
December 17, 2002.
On November 20, 2002, the FDOI issued a notice and order to show cause which
seeks to suspend or revoke Superior's certificate of authority principally based
upon allegations that Superior did not comply with the FDOI's August 30, 2001
final order during the pendency of the appeal of the order to the District Court
of Appeal. Superior believes that it has fully and timely complied with the
final order and that the action brought by the FDOI is barred by res judicata.
A formal administrative hearing to review the notice and a determination that
the order or administrative action contemplated by the notice not be issued was
held in May 2003. A recommended order, which the FDOI may accept or reject, has
not been issued.
The FDOI has engaged an actuary to perform a review of Superior's reserves as of
May 31, 2003.
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 for November 18, 2002 to determine whether
Superior's license to transact insurance business in Virginia should be
suspended. The Virginia Commission continued the hearing indefinitely.
Superior has provided additional financial information to and continues to be in
contact with the Virginia Commission. On July 10, 2003, the Virginia Commission
entered an order which directs Superior to stop writing business in Virginia
until its surplus is at least $3 million. Although Superior's surplus as of May
31, 2003 is above $3 million, the order also requires Superior to provide the
Virginia commission with an interim audited financial statement. Superior
anticipates that it will meet the conditions set forth in the order prior to
July 31, 2003. The nonstandard automobile insurance policies written in
Virginia by Superior accounted for approximately 16.0% and 14.5% of SIG's total
gross written premiums through March 31, 2003 and December 31, 2002,
respectively.
On April 21, 2003 the Alabama Department of Insurance issued an order to show
cause to Superior for suspension of Superior's certificate of authority in
Alabama due to the decline in Superior's surplus. Superior is in communication
with and providing additional financial information to the Alabama Department of
Insurance. An administrative hearing has not been scheduled. Policies of
insurance written in Alabama account for less than 1% of Superior's gross
written premiums.
Due to the losses experienced by Superior, it is in regular ongoing contact with
the departments of insurance of Florida, Virginia and California and insurance
regulators in other states in which it writes business. Superior closely
monitors its risk based capital based upon its financial projections.
4. COMMITMENTS AND CONTINGENCIES
Superior is a defendant in a case filed June 16, 2003 in the Superior Court of
Muscogee County, Georgia entitled Kenneth P. Chung v. Superior Insurance
Company. The case purports to be brought on behalf of former and current
insureds of Superior who presented first party physical damage coverage claims
during the six year period preceding June 16, 2003. The plaintiff seeks
recovery of alleged diminution in vehicle value from physical damage. Superior
believes that the allegations of wrongdoing as alleged in the complaint were
without merit and intends to vigorously defend the claims brought against it.
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 December 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 sought 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. IGF filed a motion for summary judgment to dismiss the claims
in the plaintiff's fourth amended complaint on the basis that releases
previously executed by the plaintiffs are binding, which was granted. The cross
claims between the selling brokers and MSI and IGF remain pending. The trial is
scheduled to begin in August 2003.
The Company 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 SIG, three individuals who were or are
officers or directors of the Company or of SIG, PricewaterhouseCoopers LLP and
Schwartz Levitsky Feldman, LLP. The case purports to be brought on behalf of a
class consisting of purchasers of the Company's stock or SIG's stock during the
period February 27, 1998, through and including November 18, 1999. Plaintiffs
allege, among other things, that defendants misrepresented the reliability of
the Company's reported financial statements, data processing and financial
reporting systems, internal controls and loss reserves in violation of Section
10(b) of the Securities Exchange Act of 1934 (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. As previously
reported in the Company's September 30, 2002 Form 10-Q, 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.
SIG and two of its subsidiaries, IGFH and IGF, were 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 filed on June 4, 2001 and 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. Discovery is
proceeding. 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.
Superior was a defendant in a case filed on May 8, 2001 in the United States
District Court Southern District of Florida entitled The Chiropractic Centre,
Inc. v. Superior Insurance Company, Case No. 01-6782. The case 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. On
September 30, 2002, the court issued an administrative order which dismissed the
case. The court's order administratively closing the case could be temporary or
permanent. Superior believes that the allegations of wrongdoing as alleged in
the complaint were without merit and in the event the order is temporary,
Superior intends to vigorously defend the claims brought against it.
IGF is a defendant in a case filed on December 31, 2002 in the Circuit Court of
Greene County, Missouri entitled Kevin L. Stevens v. Wilkerson Insurers, et al.,
Case No. 102CC5135. Other parties named as defendants are the Company, the
Company's subsidiaries, Symons International Group (Florida), Inc. and Granite
Re, Superior Group Management, Superior, Superior American, Superior Guaranty,
Pafco and three individuals who were or are officers or directors of the Company
and/or SIG. The Company, Granite Re, Symons International Group (Florida), Inc,
Superior Group Management, Superior, Superior American, Superior Guaranty and
certain individual defendants filed motions to dismiss for lack of personal
jurisdiction which were denied. The case purports to be brought on behalf of an
IGF insured seeking to recover alleged damages based on allegations of bad
faith, negligent claims handling and breach of fiduciary duties with respect to
a claim which arose from an accident caused by the IGF insured. IGF believes
that the allegations of wrongdoing as alleged in the complaint are without merit
and intends to vigorously defend the claims brought against it.
See Note 3, "Regulatory Actions," for additional legal matters.
The Company's insurance subsidiaries are parties to other litigation arising in
the ordinary course of business which the Company does not believe will have a
material adverse effect upon the Company's and its affiliates financial
conditions or results. The Company, through its claims reserves, reserves for
both the amount of estimated damages attributable to these lawsuits and the
estimate costs of litigation.
5. 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 (in thousands):
Three Months Ended
March 31,
2003 2002
------------------ -----
Basic:
Weighted-average common shares outstanding 5,394 5,394
================== =====
Diluted:
Weighted-average common shares outstanding 5,394 5,394
================== =====
The Company has 428,750 stock options outstanding as of March 31, 2003. Common
stock equivalents are anti-dilutive. Therefore, fully diluted loss per share is
the same as basic loss per share.
6. UNITED STATES ACCOUNTING PRINCIPLES
These unaudited consolidated financial statements have been prepared in
accordance with CDN GAAP. There are no differences between CDN GAAP and U.S.
GAAP for both the net loss and the net loss per share. The differences between
CDN GAAP and U.S. GAAP for stockholders' (deficit) are as follows (in
thousands):
March 31, 2003 December 31, 2002
---------------- -----------------
Stockholders (deficit) in accordance with
Canadian GAAP. . . . . . . . . . . . $ (94,507) $ (90,752)
Deduct effects of difference in accounting for:
Receivable from sale of capital stock (1,258) (1,258)
Unrealized (loss) on investments (3,443) (2,366)
---------- ----------
Stockholders' (deficit) in accordance with
U.S. GAAP $ (99,208) $ (94,376)
========== =========
U.S. GAAP requires the presentation of a statement of comprehensive income (loss).
CDN GAAP does not require a similar disclosure. The Company's comprehensive (loss)
Is as follows (in thousands):
Three Months Twelve Months
Ended. Ended .
March 31, 2003 . December 31, 2002
-------------- ----------------
Net (Loss) per Statement of Operations $ (3,599) $ (29,745)
Purchase of Preferred Securities -- 28,399
Change in cumulative translation adjustment (156) (260)
Unrealized (loss) on investments (3,443) (2,366)
-------- --------
Comprehensive (Loss) $ (7,198) $ (3,972)
========== =========
7. STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation using the intrinsic
value method under APB Opinion 25, "Accounting for Stock Issued to Employees,"
and related interpretations as permitted under SFAS 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). Accordingly
no compensation expense is recognized if the market price of the underlying
stock does not exceed the exercise price at the date of grant.
If the Company had applied the fair value recognition provisions of SFAS 123,
"Accounting for Stock-Based Compensation," to stock-based employee compensation
and non-employee director compensation, the effect on net loss and net loss per
share attributable to common stockholders would not be materially affected.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements
All statements, trend analyses, and other information herein contained relative
to markets for the Company's products and/or the Company's operations or
financial results constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 (the Act). Forward-looking
statements include statements which are predictive in nature, which depend upon
or refer to future events or conditions, which include words such "anticipate,"
"could," "feel(s)," "believes," "plan," "estimate," "expect," "should,"
"intend," "will," and other similar expressions . In addition, any statements
concerning future financial performance, ongoing business strategies or
prospects and possible future Company actions which may be provided by
management are also forward-looking statements as defined by the Act.
Forward-looking statements are based on current expectations and projections
about future events and 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, but
are not limited to, the effect on customers, agents, employees and others due
to SIG's and its subsidiaries' receipt of going concern opinions from their
accountants; general economic conditions, including prevailing interest rate
levels and stock market performance; factors affecting the Company's nonstandard
automobile operations such as rate increase approval, policy renewals, new
business written, and premium volume; and the factors described in this section
and elsewhere in this report. These forward-looking statements are not
guaranties of future performance and the Company has no specific intention to
update these statements.
Overview of Business
Goran Capital Inc. ("Goran" or the "Company") is a Canadian federally
incorporated holding company principally engaged in the business of underwriting
property and casualty insurance through its nonstandard automobile insurance
subsidiaries Pafco General Insurance Company ("Pafco") and Superior Insurance
Company ("Superior"), which maintain their headquarters in Indianapolis,
Indiana. Goran owns approximately 73.8% of a U.S. holding company, Symons
International Group, Inc. ("SIG"). SIG owns IGF Holdings, Inc. ("IGFH") and
Superior Insurance Group Management, Inc. ("Superior Management") which are the
holding companies for the insurance subsidiaries. Superior Management owns
Superior Insurance Group, Inc. ("Superior Group") which is the management
company for the insurance subsidiaries. SIG's revenue represents approximately
90% of Goran's consolidated revenues. Goran's other subsidiaries are Granite
Reinsurance Company Ltd. ("Granite Re"), Granite Insurance Company ("Granite"),
and Symons International Group (Florida) Inc. ("SIGF").
Granite Re is a specialized reinsurance company that underwrites niche products
such as nonstandard automobile, crop, property casualty reinsurance and offers
(on a non-risk bearing, fee basis), rent-a-captive facilities for Bermudian,
Canadian and U.S. reinsurance companies. Through a rent-a-captive program,
Granite Re offers the use of its capital and its underwriting facilities to
write specific programs on behalf of its clients, including certain programs
ceded from IGF and Pafco. Granite Re alleviates the need for a client to
establish its own insurance company and also offers this facility in an offshore
environment.
Granite, a Canadian federally licensed insurance company, sold its book of
business in January 1990 to an affiliate which subsequently sold to third
parties in June 1990. Granite currently has one outstanding claim and maintains
an investment portfolio sufficient to support this claim liability. Goran
anticipates that the outstanding claim will be resolved by 2004.
SIGF, a Florida corporation, is primarily engaged in the operation of a
property/casualty insurance brokerage and a flood insurance brokerage.
Strategic Alignment
As previously announced, in the fourth quarter of 2000, management initiated a
strategic review of the Company's U.S. operations. This review resulted in a
plan to divest of the Company's crop insurance segment, allowing management to
focus on nonstandard automobile insurance. In June 2001, the Company sold its
crop insurance segment and adopted a plan to wind-down the remaining crop
insurance segment obligations. Accordingly, financial results of the crop
insurance segment are presented as discontinued operations in the Company's
financial statements. Continuing operations of the Company consist primarily of
the nonstandard automobile insurance segment.
Significant Losses Have Been Reported and are Likely to Continue
The net loss from continuing operations for the three months ended March 31,
2003 was $(3,599,000). The net loss from continuing operations for the three
months ended March 31, 2002 was $(5,967,000). The Company reported losses from
continuing operations of $(29,745,000), $(31,937,000) and $(63,224,000) for
2002, 2001 and 2000, respectively. Losses from continuing operations increased
in 2002 from 2001 due to significant adverse development on new business
generated in the first quarter of 2002, primarily due to increased frequency of
losses. The Company's losses continued for the period ending March 31,2003;
however, the Company continues to work towards operational improvements. The
financial condition of the company's U.S. insurance subsidiaries continues to be
of concern to the insurance regulators and has resulted in heightened regulatory
oversight. 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 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 IDOI, the FDOI and the insurance
regulators of other states in which the 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
Actions," in the condensed notes to the consolidated financial statements
above). The primary purpose of insurance regulation is the protection of
policyholders rather than shareholders. Failure to resolve issues with the IDOI
and the FDOI, and with 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 and/or its subsidiaries are
involved in a number of pending civil 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, 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 they are costly to defend, whether or not the
Company is ultimately successful.
The Terms of the Trust Preferred Securities May Restrict SIG's Ability to Act
SIG has issued through a wholly owned trust subsidiary $135 million aggregate
principal amount in trust originated preferred securities ("Preferred
Securities"). The Preferred Securities have a term of 30 years with annual
interest at 9.5% paid 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 the payment due in February 2003
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) approximating $84
million will become due and payable in February 2005. Although there is no
present default under the indenture that would accelerate the payment of the
Preferred Securities, 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 and the Company.
Review Of Consolidated Operations
Net Loss
The net loss for the three months ended March 31, 2003 was $(3,599,000) or
$(0.67) per share (basic and diluted). The net loss for the three months ended
March 31, 2002 was $(5,967,000) or $(1.11) per share (basic and diluted). The
decreased loss is due primarily to reduced loss and loss adjustment expenses
(LAE). There was no loss on discontinued operations for the three months ended
March 31, 2003 and 2002, respectively.
Gross Premiums Written
Gross premiums written decreased 38.0% for the first quarter of 2003 compared to
the first quarter of 2002. The primary reasons for this decline in volume are
the withdrawal from certain competitive markets and other underwriting
initiatives intended to increase profitability.
Net Premiums Written
Net premiums written represent the portion of premiums that are being retained
by the Company after consideration for risk sharing through reinsurance
contracts. As a result of losses in the Company's U.S. insurance subsidiaries,
the growth in retained deficit and to manage overall risk retention, 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 March 31, 2003, SIG ceded approximately 75% of
its gross written premiums.
Net Premiums Earned
Net premiums earned decreased 52.7% for the three months ended March 31, 2003,
as compared to the same period in 2002. Premiums are earned ratably over the
term of the underlying insurance contracts and the reduction in net premiums
earned is a result of the decrease 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 4.5% for the three months ended March 31,
2003, as compared to the same period in 2002 .
Net Investment Income
Net investment income for the three months ended March 31, 2003 was 74.8% lower
than for the three months ended March 31, 2002. This decrease reflects the
decline in invested assets during a period of declining premiums and the
liquidation of investments during 2002 to pay prior year losses settled in 2002.
Net Realized Capital Gain (Loss)
Net realized capital gain for the three months ended March 31, 2003 was
$245,000. Net realized capital (loss) for the three months ended March 31, 2002
was $(722,000). The net capital gain for the three months ended March 31, 2003
resulted from a shift in management investing approach toward a secure and less
risky bond market. Also in the first quarter of 2003, the fixed maturities
investment portfolio generated net capital gain attributable to the fixed
maturities' positive yields as opposed to the highly volatile stock market. The
net capital loss for the three months ended March 31, 2002 resulted primarily
from the liquidation of longer duration fixed income securities in order to
rebalance the investment positions in the portfolio. These transactions resulted
in higher cash proceeds that were reinvested in shorter duration investment
instruments. The net capital loss was also caused by the continued liquidation
of investments to fund operations and claim payments under unfavorable market
conditions.
Losses and LAE
SIG's loss and LAE ratio for the three months ended March 31, 2003 was 90.1% of
net premiums earned. SIG's loss and LAE ratio for the three months ended March
31, 2002 was 107.7% of net premiums earned. SIG's loss and LAE ratio for the
twelve months ended December 31, 2002 was 127.9% of net premiums earned.
Policy Acquisition and General and Administrative Expense
Policy acquisition and general and administrative expenses for the three months
ended March 31, 2003 were $5,803,000. Policy acquisition and general and
administrative expenses for the three months ended March 31, 2002 were
$7,293,000. This decrease reflects the decline in gross written premiums, an
increase in ceding commissions associated with the quota share reinsurance
contract, and overall operating expense reduction initiatives.
Provision (Benefit) for Income Taxes
At March 31, 2003 the Company's net deferred tax assets were fully offset by a
100% valuation allowance that resulted in no tax benefit for the three months
ended March 31, 2003. At March 31, 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 months ended March 31, 2002.
Review Of Consolidated Financial Condition
Cash and Investments
Total cash and investments at March 31, 2003 and December 31, 2002 were
$50,780,000 and $60,610,000, respectively. The decrease resulted from continued
liquidations to fund claim payments and operating expenses, as well as the
portfolio rebalancing discussed in PART I, Item 2, "Net Realized Capital Gain
(Loss)" above.
Reinsurance Receivables and Payables
SIG negotiated a third-party quota share reinsurance agreement that became
effective January 1, 2001. 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 up to 75% of
Pafco's earned premiums. SIG's ceding percentage for the first quarter of 2003
totaled 75% for Superior and 60% for Pafco. 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
Net receivables increased by $585,000, or 2.1%, from December 31, 2002. This
increase is primarily attributable to an increase in billable premiums due to
higher written premiums in the first quarter of 2003 versus the fourth quarter
of 2002. The allowance for doubtful accounts increased by $433,000 from
December 31, 2002.
Loss and LAE Reserves
Total loss and LAE reserves decreased from $72,809,000 as of December 31, 2002
to $69,339,000 as of March 31, 2003. This decrease is consistent with the
Company's declining volume of business.
Unearned Premiums
Unearned premiums increased from $35,797,000 as of December 31, 2002 to
$39,298,000 as of March 31, 2003. This increase is consistent with the increase
in receivables discussed above.
Deferred Income
In connection with the sale of the crop insurance book of business to Acceptance
on June 6, 2002, 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 $(94,507,000) as of March 31, 2003. Stockholders'
(deficit) was $(90,752,000) as of December 31, 2002. The increased deficit was
primarily the result of the net loss of $(4,138,000) for the three months ended
March 31, 2003.
Liquidity And Capital Resources
The primary source of funds for Goran is through dividend and loans from Granite
Re.
The primary sources of funds for SIG are fees from policyholders and management
fees from its subsidiaries.
Superior Insurance Group, Inc. ("Superior Group") collects billing fees charged
to Pafco policyholders who elect to make their premium payments in installments,
and managing general agent ("MGA") fees charged to Superior policyholders.
Superior Group also receives management fees under its management agreement with
its insurance subsidiaries. When the Florida Department of Insurance ("FDOI")
approved the acquisition of Superior by Superior Group, it prohibited Superior
from paying any dividends (whether extraordinary or not) for four years from the
date of acquisition (May 1, 1996) without the prior written approval of the
FDOI, which restriction expired in April 2000. As a result of regulatory
actions taken by the Indiana Department of Insurance ("IDOI") with respect to
Pafco and IGF, those subsidiaries may not pay dividends without prior approval
by the IDOI. 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 source of funds is
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, the
Company maintains investment programs intended to provide adequate funds to pay
claims. Due to reduced premium volume during 2002 and 2001, SIG 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 caused SIG to shorten the duration of its investments. SIG may incur
additional costs in selling longer term bonds to pay claims, as claim payments
tend to lag premium receipts. Due to the decline in premium volume, SIG
experienced a reduction in its investment portfolio, but to date has not
experienced any problems meeting its obligations for claims payments.
On August 12, 1997, SIG 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 10 years after the
issue date.
SIG elected to defer the semi-annual interest payments due in February and
August 2000, 2001 and 2002 and February 2003. SIG expects to continue this
practice through 2003 and 2004. The unpaid interest installment amounts accrue
interest at 9.5%.
SIG may continue to defer the semi-annual interest payments for up to an
aggregate of five years as permitted by the indenture for the Preferred
Securities. All of the deferred interest (approximately $84 million, if all
payments due in 2003 and 2004 are deferred) will become due and payable in
February 2005 along with the semi-annual interest due at that time. SIG relies
on the payment of finance and service fees by its subsidiaries to fund its
operations, including its payment of interest on the Preferred Securities.
Certain state regulators, including the FDOI, have issued orders prohibiting
SIG's subsidiaries from paying such fees to SIG. In the event such orders
continue, SIG may not have sufficient revenue to fund its operations or to pay
the deferred interest on the Preferred Securities. Such failure to pay could
result in default under the indenture and acceleration of the payment of the
Preferred Securities.
The trust indenture contains certain restrictive 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 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
(0.42) at March 31, 2003, and will continue to apply until SIG's consolidated
coverage ratio complies with the terms of the trust indenture. SIG complied with
these additional restrictions as of December 31, 2001 and 2002 and was in
compliance as of June 30, 2003.
Net cash used by the Company's operating activities during the three months
ended March 31, 2003 was $(10,019,000). Net cash used by the Company's operating
activities during the three months ended March 31, 2002 was $(12,911,000). Net
cash used by the Company's operating activities in 2002 and 2001was
$(68,801,000) and $(23,490,000), respectively.
As reported in the Company's December 31, 2002 Form 10-K, during 2002 SIG took a
number of actions to improve its financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information related to Qualitative and Quantitative Disclosures about Market
Risk was included under Part II, Item 7A " Quantitative And Qualitative
Disclosures About Market Risk" in the Company's December 31, 2002 Form 10-K. No
material changes have occurred in market risk since this information was
disclosed in the Company's December 31, 2002 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation Of Disclosure 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.
Changes In Internal Controls
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,
subsequent to the date of the evaluation described above (Part I, Item 4 -
"Evaluation Of Disclosure Controls And Procedures"). No corrective actions were
required with regard to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Superior is a defendant in a case filed June 16, 2003 in the Superior Court of
Muscogee County, Georgia entitled Kenneth P. Chung v. Superior Insurance
Company. The case purports to be brought on behalf of former and current
insureds of Superior who presented first party physical damage coverage claims
during the six year period preceding June 16, 2003. The plaintiff seeks
recovery of alleged diminution in vehicle value from physical damage . Superior
believes that the allegations of wrongdoing as alleged in the complaint were
without merit and intends to vigorously defend the claims brought against it.
IGF, which is a wholly owned subsidiary of the Company, 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 December 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. The plaintiff's amended their complaint four times during
2002. A demurrer to the fourth amended complaint was filed by MSI and a motion
to strike was filed by IGF, which were denied. IGF filed a motion for summary
judgment to dismiss the claims in the plaintiff's fourth amended complaint on
the basis that releases previously executed by the plaintiffs are binding, which
was granted. The cross claims between the selling brokers and MSI and IGF
remain pending. The trial is scheduled to begin in August 2003.
The Company 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 SIG, three individuals who were or are
officers or directors of the Company or of SIG, PricewaterhouseCoopers LLP and
Schwartz Levitsky Feldman, LLP. The case purports to be brought on behalf of a
class consisting of purchasers of the Company's stock or SIG's stock during the
period February 27, 1998, through and including November 18, 1999. Plaintiffs
allege, among other things, that defendants misrepresented the reliability of
the Company's reported financial statements, data processing and financial
reporting systems, internal controls and loss reserves in violation of Section
10(b) of the Securities Exchange Act of 1934 (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. As previously
reported in the Company's December 31, 2002 Form 10-K, 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.
SIG and two of its subsidiaries, IGFH and IGF, were 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 the Company, IGFH, IGF and CNA under the
SAA are the subject of an action filed on June 4, 2001 and pending in United
States District Court for the Southern District of Indiana, Indianapolis
Division. Claims have also been asserted in the action against Goran, Granite
Re, Pafco, Superior and certain members of the Symons family. Discovery is
proceeding. Although SIG continues to believe that it has claims against CNA
and defenses to CNA's claims which may offset or reduce amounts owing by SIG or
its affiliates to CNA, there can be no assurance that the ultimate resolution of
the claims asserted by CNA against SIG and its affiliates will not have a
material adverse effect upon the Company's and its affiliates' financial
condition or results of operations.
Superior was a defendant in a case filed on May 8, 2001 in the United States
District Court Southern District of Florida entitled The Chiropractic Centre,
Inc. v. Superior Insurance Company, Case No. 01-6782. The case 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. On
September 30, 2002, the court issued an administrative order which dismissed the
case. The court's order administratively closing the case could be temporary or
permanent. Superior believes that the allegations of wrongdoing as alleged in
the complaint were without merit and in the event the order is temporary,
Superior intends to vigorously defend the claims brought against it.
IGF is a defendant in a case filed on December 31, 2002 in the Circuit Court of
Greene County, Missouri entitled Kevin L. Stevens v. Wilkerson Insurers, et al.,
Case No. 102CC5135. Other parties named as defendants are Goran, Goran's
subsidiaries, Symons International Group (Florida), Inc. and Granite Re,
Superior Group Management, Superior, Superior American, Superior Guaranty, Pafco
and three individuals who were or are officers or directors of the Company.
Goran, Granite Re, Symons International Group (Florida), Inc, Superior Group
Management, Superior, Superior American, Superior Guaranty and certain
individual defendants have filed motions to dismiss for lack of personal
jurisdiction which are pending. The case purports to be brought on behalf of an
IGF insured seeking to recover alleged damages based on allegations of bad
faith, negligent claims handling and breach of fiduciary duties with respect to
a claim which arose from an accident caused by the IGF insured. IGF believes
that the allegations of wrongdoing as alleged in the complaint are without merit
and intends to vigorously defend the claims brought against it.
See Note 3, "Regulatory Actions," and Note 4, "Commitments and Contingencies,"
to the Company's consolidated financial statements in Part I, Item 1 of this
report, incorporated herein by reference for additional legal matters.
The Company's insurance subsidiaries are parties to other litigation arising in
the ordinary course of business which the Company does not believe will have a
material adverse effect upon the Company's and its affiliates financial
conditions or results. The Company, through its claims reserves, reserves for
both the amount of estimated damages attributable to these lawsuits and the
estimated costs of litigation.
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 required by Item 601 of Regulation S-K
The Exhibits set forth on the Index to Exhibits
are incorporated herein by reference.
(b) Reports on Form 8-K
None
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 July 16, 2003.
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: July 16, 2003 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: July 16, 2003 By: /s/ John G. Pendl
--------------- --------------------
John G. Pendl
Chief Financial Officer