SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1995 Commission File No. 0-6478
FOREMOST CORPORATION OF AMERICA
(Exact name of registrant as specified in its charter)
Delaware 38-1863522
(State of Incorporation) (I.R.S. Employer
Identification No.)
5600 Beech Tree Lane, Caledonia, Michigan 49316
Mailing Address: P.O. Box 2450, Grand Rapids, Michigan 49501
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (616) 942-3000
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
(Title of Class)
Indicate by check mark whether the registrant (l) 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy statement incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates as of
March 20, 1996, was $463,951,671.
The number of shares outstanding of each of the Registrant's classes of common
stock as of March 20, 1996:
CLASS OUTSTANDING AT MARCH 20, 1996
Common Stock, $1.00 par value 10,049,394
Documents Incorporated by Reference
Part III Proxy Statement for Annual Meeting
of Stockholders to be held May 9, 1996
1
PART I
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ITEM 1. BUSINESS
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The Company is a holding company which, through its subsidiaries, provides
property and casualty and other insurance products primarily for mobile homes
and recreational vehicles. The Company believes that in 1995 it was the leading
writer of mobile home property and casualty insurance in the United States.
The Company sells its property and casualty insurance to mobile home and
recreational vehicle owners through independent agents and general agents, as
well as through dealer agents and agents affiliated with lending institutions.
The Company also writes its property and casualty insurance on a direct response
basis. In addition, the Company writes automobile and homeowner property and
casualty insurance. The Company also writes employee group life and health
insurance.
The Company's principal subsidiary, Foremost Insurance Company, Grand
Rapids, Michigan ("Foremost Insurance"), was founded in 1952. The Company was
incorporated in Delaware in 1967 and acquired all the outstanding capital stock
of Foremost Insurance in that year. The Company's principal executive offices
are located at 5600 Beech Tree Lane, Caledonia, Michigan 49316. The mailing
address is P.O. Box 2450, Grand Rapids, Michigan 49501, and the telephone number
is (616) 942-3000. As used herein the "Company" means Foremost Corporation of
America and its subsidiaries unless the context indicates otherwise.
During 1995, the Company's business was divided into two principal business
segments: property and casualty insurance and life insurance.
PROPERTY AND CASUALTY INSURANCE
The Company's largest business segment is property and casualty insurance
concentrated primarily in the mobile home and recreational vehicle markets. The
Company's property and casualty insurance is written by Foremost Insurance,
Foremost Signature Insurance Company, American Federation Insurance Company and
Foremost Property and Casualty Insurance Company (all four insurers may be
referred to herein collectively as "P&C subsidiaries").
Through its P&C subsidiaries, the Company writes mobile home and
recreational vehicle property and casualty insurance which may include, among
other things, coverages for (i) comprehensive physical damage, including wind,
flood and earthquake, (ii) fire and other stated physical damage to personal
effects, (iii) theft of personal effects, (iv) comprehensive personal liability
(similar to that provided under typical homeowners' policies), (v) physical
damage to adjacent structures, (vi) vendor's single interest, which insures the
lienholder in finance transactions against conversion, embezzlement or secretion
of the mobile home by the retail purchaser and against an otherwise uninsured
collision involving the mobile home, and (vii) collision coverage either on full
term or "trip" (30-day) basis. The Company also writes dwelling fire, homeowners
and automobile insurance. Foremost Insurance historically wrote commercial
property and casualty insurance for mobile home dealers and parks. However, the
Company curtailed its writings of these commercial coverages since 1990. The
Company plans to further limit commercial insurance products during 1996, except
it will continue to write only open lot coverages for mobile home dealers. The
Company also writes collateral protection insurance, which assists a lender by
tracking insurance coverage on mobile home loans and ensuring continuity of such
coverage. Foremost Property and Casualty Insurance Company primarily writes
mobile home property and casualty insurance on a direct response basis pursuant
to the Company's exclusive endorsement by the American Association of Retired
Persons.
2
In addition, the Company writes automobile and homeowners' property and casualty
insurance in limited markets. The Company's American Federation Insurance
Company subsidiary writes automobile, recreational vehicle and mobile home
property and casualty insurance generally for members of mobile home and
recreational vehicle owners associations based upon endorsements by such
associations.
The term of the Company's property and casualty policies ranges from one to
seven years. However, most of the Company's policies are annual policies.
Multiple-year policies, which are paid for with a single premium in the initial
year, are generated primarily in connection with new mobile homes purchased
through multiple-year finance contracts.
The Company's property and casualty insurance operations cover all states
and the District of Columbia, although not all forms of recreational vehicle
coverages are sold in all jurisdictions. The following table presents the
amounts and percentages of premium written and assumed on property and casualty
insurance written by the Company in the ten leading states during 1995:
STATE DOLLARS % OF TOTAL PREMIUM
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Texas 74,080,007 17.4
Florida 48,503,192 11.4
California 44,204,880 10.4
Michigan 18,016,707 4.2
Washington 15,438,225 3.6
South Carolina 14,827,635 3.5
Georgia 14,014,229 3.3
Alabama 13,177,533 3.1
North Carolina 12,810,099 3.0
Pennsylvania 12,515,748 2.9
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TOTAL $267,588,255 62.8%
A substantial portion of premium written in Texas is written by Foremost
County Mutual Insurance Company, a Texas county mutual insurance company, and
reinsured by the Company (included in "premium written and assumed").
The Company's insurance subsidiaries are subject to statutory restrictions
and to supervision by state insurance regulatory agencies in all jurisdictions
in which such subsidiaries transact insurance business. For information
concerning such restrictions and supervision, including rate regulations, see
"Business--Government Regulation".
3
LIFE INSURANCE
The Company had historically written credit life and credit accident and
health insurance primarily for purchasers of mobile homes, recreational vehicles
and automobiles. The Company ceased writing new credit life and credit accident
and health policies as of December 31, 1992. The Company writes group life and
health insurance for employee groups in select markets. The Company writes this
business through its life insurance subsidiary, Foremost Life Insurance Company,
which is licensed in the District of Columbia and all states except New York.
On January 31, 1996, the Company announced that it had signed a letter of
intent to sell its subsidiary Foremost Life Insurance Company ("Foremost Life")
to Woodmen Accident and Life Company of Lincoln, Nebraska ("Woodmen"). Under the
terms of the proposed transaction, Woodmen would acquire all of the outstanding
capital stock of Foremost Life. A Form 8-K Report was filed with the Securities
and Exchange Commission on February 1, 1996 reporting on this pending
transaction.
OTHER OPERATIONS
Secondary Market Financial Services
In August of 1982, Foremost Financial Services Corporation ("FFSC")
developed a Manufactured Housing Pass-Through program. FFSC issued certificates
privately placed with institutional investors, evidencing undivided interests in
pools of manufactured housing retail installment obligations ("Contracts"). FFSC
is contractually obligated to the certificate holders for servicing of the
Contracts. The certificates do not represent an interest in or obligation of
FFSC, however, FFSC is obligated, in the event of delinquencies or deficiencies
in payments on the Contracts, to advance cash obligations to the extent such
advances are reimbursable under the primary insurance policies or the pool
insurance policy. Each Contract is covered by a primary policy of private credit
insurance written by Foremost Insurance Company, which also wrote the pool
credit insurance policies. Under these secondary market programs, FFSC is
currently the Master Servicer of approximately 4,900 contracts with principal
balances aggregating approximately $41 million
Insurance Agencies
The Company has several Company-owned Insurance agencies: Foremost
Affiliated Insurance Services, Inc., Foremost Home Brokers, Inc., Starcrest
Commercial Agency, Inc., Western Star Underwriters, Inc., Pacific Way Insurance
Agency, Inc., Frontier Insurance Agency, Inc., Corvette General Agency, Inc.,
Sunrise Insurance Agency, Inc., Sunrise Insurance Agency of Arizona, Inc.,
Sunrise Insurance Agency of Texas, Inc., and Knight Agency, Inc. These agencies
generate commission income by selling the Company's specialty insurance products
to selected markets.
MARKETING
The Company's primary marketing strategy has been to provide insurance
products through four distribution channels: general and independent insurance
agents (agency); mobile home and recreational vehicle dealer agents
(point-of-sale); agents affiliated with lenders to the mobile home and
recreational vehicle markets (lender); and direct contact with insureds (direct
response).
4
Agency Channel
The Company writes insurance through numerous independent and a select
group of general agents. These agents, many of whom also represent one or more
competing insurance companies, are independent contractors selected and
appointed by the Company. Under the Company's agency agreement, each agent is
authorized to sell and bind insurance policies in accordance with procedures
specified in the agreement and to collect and remit premiums. The Company's
marketing force focuses on developing and maintaining relationships in this
channel. The Company also owns some captive agencies which operate like an
independent agency, except that they generally only sell the Company's insurance
products.
Point-of-Sale Channel
The Company sells its insurance through mobile home and recreational
vehicle dealer agents. The primary product sold through mobile home dealer
agents is mobile home property and casualty insurance. The primary product sold
through recreational vehicle dealer agents is recreational vehicle property and
casualty insurance. The Company provides open lot commercial insurance products
for certain property risk exposure of mobile home dealers. The Company's
marketing force develops and maintains relationships with mobile home and
recreational vehicle dealer agents.
Lender Channel
The Company markets its products and services through some agencies
affiliated with financial institutions which participate in the mobile home and
recreational vehicle markets. These financial institutions could be commercial
banks, thrift institutions, general agents producing through sub-agent lenders,
finance companies and mortgage bankers.
Direct Response Channel
The Company utilizes a direct response mail and telemarketing operation to
sell its property and casualty policies to insureds in cases where the Company
owns the renewal rights to policy expirations. In December of 1989, the Company
entered into a multi-year agreement with the American Association of Retired
Persons ("AARP") pursuant to which AARP has granted the Company the exclusive
right to offer its mobile home insurance to AARP members. The Agreement with
AARP runs for a term of ten (10) years and provides for early termination under
certain circumstances, including the unilateral right of AARP to terminate the
Agreement in the event of a change in control of the Company (as defined in the
Agreement). The Company markets its AARP mobile home policies exclusively on a
direct response basis and the Company owns the renewal rights to the AARP
policies. The Company also utilizes its direct response operation for the
offering of mobile home, recreational vehicle, auto and homeowners insurance to
other insureds.
TRADEMARKS
The Company owns several trademarks, including "Foremost", and the
"interlocking F" which it believes are important in marketing its products and
services. Although the registration of "Foremost" will expire on July 29, 2006,
and the "interlocking F" on October 13, 2007, further renewals for periods of 20
years are available under Federal trademark laws.
5
UNDERWRITING
The objective of the Company's underwriting and ratemaking strategy is to
achieve underwriting profits as well as to generate investable assets. Each of
the Company's P&C subsidiaries designs its own coverages and sets its own rates
for its policies; however, the Company's P&C subsidiaries do incorporate some of
the standard coverages and rates developed by ratemaking bureaus. Each
prospective policy is underwritten and rated based upon a combination of
numerous factors which include, in the case of mobile homes, type of mobile
home, location and other risk characteristics. Through this practice the Company
seeks to write policies only for those risks which meet its underwriting
criteria.
The Company believes that a key factor in its underwriting process is the
use of its extensive historical mobile home data base, which includes a
computerized data base of over 15 million earned policy years of experience with
mobile home insurance policies. This data base enables the Company to better
identify and quantify the loss experience associated with numerous risk
characteristics and is employed in the design of the coverage and rating used to
classify insurance risks.
The significant increase in catastrophe events since 1989 requires that the
Company manage its risk concentrations, especially in areas prone to hurricane,
flood and earthquake. Over the last several years the Company has implemented
various restrictions ceasing new business writings in some areas and has also
implemented non-renewals of policies in certain coastal areas running from Maine
to Texas on the Atlantic Ocean and the Gulf of Mexico (including Florida) and
California on the West Coast, in order to limit the Company's exposure to these
catastrophes.
CLAIMS
Approximately 97% of the Company's claims are handled by its own staff of
claim adjusters and the remainder by independent adjusters. Independent claim
adjusters are primarily used by the Company to assist in handling claims in
areas where insurance volume does not warrant the maintenance of a staff
adjuster and for certain non-mobile home related claims. If a claim or loss
cannot be settled and results in litigation, the Company retains outside counsel
to represent it. In view of the Company's commitment to mobile home and
recreational vehicle property and casualty insurance, the Company conducts
training programs for its adjusters on mobile home and recreational vehicle
construction and the settlement of mobile home and recreational vehicle claims.
The Company believes that its extensive use of its own trained claims adjustment
staff as opposed to independent adjusters permits it to more expeditiously
settle claims and limit underwriting losses and loss adjustment expenses.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
The Company maintains reserves for the payment of losses and loss
adjustment expenses for both reported and unreported claims. Loss reserves are
estimated at a given point in time at what the insurer expects to pay in
incurred losses based on facts and circumstances then known. Loss adjustment
expense reserves are intended to cover the ultimate cost of settling all losses
and defending lawsuits resulting from such losses. The amount of loss reserves
and loss adjustment expense reserves for reported claims is primarily based upon
a case-by-case evaluation of the type of claim involved, the circumstances
surrounding each claim and the policy provisions relating to the type of loss.
The amount of loss reserves and loss adjustment expense reserves for incurred
but not reported claims is determined on the basis of historical information by
line of insurance. Ultimate liability may be greater or lower than reserves.
Reserves are closely monitored and are reviewed by the Company quarterly using
new information on reported claims. The Company obtains a certification of the
adequacy of its reserves as of each December 31st by independent actuaries.
6
The Company does not discount to a present value that portion of its loss
reserves expected to be paid in future periods. Inflation is reflected in the
reserving process through analysis of cost trends and reviews of historical
reserving results.
LIMITS OF INSURANCE COVERAGE AND REINSURANCE
The Company offers property coverage based on the actual cash value, or
replacement cost, of the risk, depending on the coverage form written. The
Company's published limits of liability for mobile home physical damage varies
by state, with the highest limit being $150,000 for the state of California,
with the countrywide average mobile home insured at approximately $20,000.
Personal effects coverage is written at a percentage of the dwelling amount,
usually 20-75%, depending on the coverage form written. The Company's published
limits on liability coverage ranges from $25,000 to $500,000 per liability
occurrence for mobile homes, and vary with other products depending on the needs
and qualification of the policyholders.
A reinsurance transaction occurs when an insurance company transfers
(cedes) a portion of its exposure on business written by it to a reinsurer which
assumes that risk for a premium. Although the ceding of the insurance risk does
not discharge the original insurer from its primary liability to its
policyholder, it is the practice of insurers for accounting purposes to treat
the reinsured risks, to the extent of the insurance ceded, as though they were
risks for which the original insurer is not liable since the original insurer
would only assume liability in those situations where the reinsurer is unable to
meet the obligations assumed under the reinsurance agreements.
The Company's property and casualty subsidiaries maintain reinsurance
protection for catastrophes which indemnify the Company for the major part of
each single incurred loss in excess of the Company's retention up to the
reinsurance treaty limits. The Company reviews its catastrophe retention and
reinsurance coverage limits annually.
The Company monitors the financial condition of the reinsurers and attempts
to place its coverage only with substantial, financially sound carriers. Due to
fluctuations in capacity in the reinsurance market, there can be no assurance
that the Company's reinsurance agreements will be continued on current terms.
GOVERNMENT REGULATION
The Company's insurance subsidiaries are subject to regulation and
supervision by state insurance regulatory agencies in all jurisdictions in which
such subsidiaries are licensed to transact insurance business. Such regulation
and supervision relates to, among other things, capital and surplus
requirements, solvency standards, payments of dividends to stockholders,
licensing to permit the transaction of business, licensing of agents, policy
form and rate regulation, deposits of securities, methods of computing reserves
and investment standards and diversification. Such subsidiaries are also
required to file detailed annual and other reports with the regulatory agencies
in each of the states in which they do business and their business and accounts
are subject to examination at any time by such agencies. Under insurance
statutes and procedures established by the National Association of Insurance
Commissioners, the Company's insurance subsidiaries are examined periodically by
one or more of the supervisory agencies on behalf of states in which these
subsidiaries do business for both financial condition and market conduct
practices. The last financial examination of the Company's property and
casualty, and life insurance subsidiaries was completed in 1993 which
examination covered the period from January 1, 1990 through December 31, 1992,
except Foremost County Mutual Insurance Company was last examined in 1994 for
the period from October 1, 1990 through June 30, 1994; American Federation
Insurance Company was last examined for the period ending December 31, 1991 and
Foremost Property and Casualty Insurance Company was last examined for the
period ending December 31, 1989.
7
The insurance laws of most states provide that all property and casualty
insurance companies which do business in their state must belong to a statutory
property and casualty guaranty association. The purpose of these associations is
to protect policyholders by requiring solvent property and casualty insurance
companies to pay certain insurance claims of insolvent insurers. The association
rules assess the insurers in order to pay these claims proportionately to such
insurer's share of voluntary premium written in the given state. While most
guaranty associations do provide a procedure for recoupment of assessments
through rate increases, rate surcharges or premium tax credits, there is no
assurance that insurers recover these assessments and the time value of money
becomes a cost to the insurer assessed. The Company's share of these assessments
are not expected to have a material impact on the Company's property and
casualty insurance subsidiaries.
Many states have formed statutory residual market associations or plans to
write certain higher risk property and casualty insurance, which risks are not
eligible for the private market. These associations cover such risks as wind and
water in coastal areas, assigned risk for auto, worker's compensation, FAIR
plans for homeowners and various other joint underwriting associations due to
capacity shortfalls in the private market. By statute, each private insurer
writing voluntary business of the type written under these plans in the state
must be a member of these associations and, depending on the plan, may be
required to accept certain of these risks and is also required to participate in
the profit or loss of the association or plan. Exposures under these plans are
higher than voluntary writings because the plans accept higher risk business and
rates charged for this business are often lower than actuarially required due to
political influence of the governmental agency operating these plans. In recent
years, the Florida Residential Property and Casualty Joint Underwriting
Association and the Florida Windstorm Underwriting Association have grown in the
amount of exposures assumed due to the growth of wind and water exposure in
Florida with continued real estate development. The shortage of private capacity
after Hurricane Andrew in 1992, compounded by the inability of private insurers
and such Florida Associations to secure regulatory approval of adequate rates
for business written in the coastal areas, has caused further growth of
exposures in these Florida Associations. Florida has also imposed a non-renewal
moratorium which limits the amount of business an insurer may non-renew in that
state.
As the Company has implemented steps to reduce its exposure to catastrophes
in catastrophe prone areas, it has encountered some resistance to non-renewal
actions from insurance regulators of states in addition to Florida. However, the
Company believes that it will be able to continue its efforts to manage
catastrophe exposures, but with some delays and compromises imposed by state
insurance regulators.
Various states have enacted laws which require registration and periodic
reporting by insurance companies which are members of holding company systems.
The Company's insurance subsidiaries are subject to such legislation and are
registered under such statutes where required. Typically this legislation
requires (i) disclosure of all material members of the holding company system;
(ii) approval by the appropriate insurance commissioner of certain acquisitions
and mergers; (iii) disclosure and regulation of certain intra-system
transactions which are subject to certain standards; and (iv) advance notice of
proposed extraordinary dividends or other large distributions which are subject
to disapproval by the appropriate insurance commissioner. Under the terms of
applicable state insurance statutes, any person or entity desiring to purchase
more than a specified percentage (commonly 10%) of the Company's outstanding
voting securities would be required to obtain regulatory approval of the
purchase.
8
The Federal Government also has the power to regulate the business of
insurance in the event the various states fail to regulate such business. Except
in a few limited areas, that power has not been exercised. The U.S. Congress has
considered the issue of Federal regulation of certain aspects of the insurance
industry and it is possible that it may adopt Federal legislation in the future.
COMPETITION
All lines of business in which the Company engages are competitive. Large
national companies, such as State Farm Insurance Group and Allstate Insurance
Company, account for much of the competition, although the types of insurance
coverages sold by the Company are usually a relatively small portion of those
companies' businesses. Other companies specialize in these types of insurance
coverages and compete directly with the Company, primarily in limited
geographical areas. The Company's competition also includes other stock and
mutual companies, many of which have greater resources but which do not
specialize in the Company's principal lines of business. The Company competes
primarily on the basis of values although some of the Company's competitors use
price competition with respect to both premium rates and commission rates
offered to producers.
RAW MATERIALS
No raw materials are essential to the business of the Company.
SEASONALITY
Seasonality does not have a material effect upon the Company's business.
WORKING CAPITAL
The Company maintains liquid assets in excess of an amount needed to pay
its current operating expenses and claims.
DEPENDENCY UPON SINGLE CUSTOMER
No single customer of the Company accounted for 10% or more of the
Company's consolidated revenues in 1995, 1994 and 1993 and no material part of
the business is dependent upon a single customer or a few customers, the loss of
any one or more of whom would have a materially adverse effect on the business
of the Company.
BACKLOG
Backlog is not applicable to the business of the Company.
GOVERNMENT CONTRACTS
The Company does not have any material contracts with the Government.
RESEARCH ACTIVITIES
The Company did not spend a material amount on research and development
during 1995, 1994, and 1993.
ENVIRONMENTAL REGULATIONS
Compliance with Federal, State or Local provisions regulating the discharge
of materials into the environment, or otherwise relating to the protection of
the environment, will not materially affect the Company's expenditures or
earnings.
9
EMPLOYEES
The Company and its subsidiaries employed approximately 1,015 persons on
December 31, 1995.
FINANCIAL INFORMATION BY BUSINESS SEGMENT
Financial information by business segment for the five years ended
December 31, 1995 appears in Note 13 to the Consolidated Financial Statements,
at Item 8. below.
ITEM 2. PROPERTIES
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During 1988, the Company purchased a 587 acre parcel of land in Caledonia
Township (southeast of Grand Rapids) and constructed a 260,000 square foot
corporate headquarters building on part of this property. Approximately 36 acres
of this parcel is used for the corporate headquarters and the balance is held as
investment property. The Company also leases a 51,000 square foot facility in
Cascade Township near Grand Rapids, which it uses for distribution, printing and
warehouse. The Company has other short-term leasehold interests in real property
used for its claim service offices and captive agencies throughout the country.
ITEM 3. LEGAL PROCEEDINGS
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The Company and its subsidiaries are routinely engaged in litigation as
plaintiff and defendant in the normal course of their business. In the opinion
of management the litigation, including the litigation described below, is not
expected to have a material adverse effect on the Company's consolidated
financial position, cash flows or operating results. Various suits and claims
arising in the ordinary course of business are pending against the Company and
its subsidiaries, and the ultimate liability with respect to these claims is not
presently determinable.
The Company has been named as a defendant in a number of similar individual
lawsuits and several related class actions filed in Alabama state and federal
courts (the "Alabama Litigation"). The separate plaintiffs allege both
compensatory and punitive damages. In general, the complaints allege that the
Company or its Alabama agents failed to disclose information about insurance
coverages and premium structure, misinformed policyholders about coverages or
policy provisions, and in other ways misrepresented the nature and extent of
insurance sold in Alabama. The Company denies all allegations and is vigorously
defending all claims. The compensatory damages, if any, are likely to be nominal
for each individual claimant. The primary risk exposure facing the Company
involves the plaintiffs' claims for punitive damages.
In June of 1995, a jury awarded $15 million in punitive damages against the
Company, despite the fact that the amount of the compensatory damage award was
$12,500 in the Alabama litigation captioned Parham, et al. v. Foremost, et al.,
No. CV-94-44, in Bullock County Circuit Court, State of Alabama filed in
October, 1994. In March 1996, the Bullock County Circuit Court Judge reduced the
punitive damage award to $6.5 million and the compensatory damage award to
approximately $3,300. In February, 1996, a jury awarded two policyholders
$26,000 in compensatory damages and $3.25 million in punitive damages in the
Alabama litigation case captioned Cornner, et al., v. Foremost, et al., No.
CV-94-127, in Lowndes County Circuit Court, State of Alabama, filed in October,
1994. The Company believes that both Alabama Litigation awards, including the
amount of the trial court's remittitur in the Bullock County case, are erroneous
and is vigorously pursuing all post-trial remedies, including appeals of both
judgments to the Alabama Supreme Court. Although the outcome of the appeals in
uncertain, for each appeal the Company seeks to have a judgment entered in its
favor notwithstanding the jury verdict, a new trial, or, at a minimum, a
10
reduction of all or part of the punitive damages. The Company believes, due to
its understanding of Alabama law and the facts and circumstances of each case,
that both appeals will result, at a minimum, in a reduction in the punitive
damages awards entered by the trial courts.
The Company is in the process of seeking a settlement of consolidated state
class actions against the Company and other defendants that have been removed to
and are now pending in the United States District Court for the Northern
District of Alabama in the matter captioned Meadows, et al., v. Southtrust
Mobile Services, Inc., et al., Civil Action No. CV-95-P1213-W. The Company has
proposed to contribute approximately $3.65 million into a settlement fund that
will be used to fund payments to members of the settlement class, consisting of
Foremost policyholders in Alabama from 1989 through 1995. The Company
anticipates that the settlement of this class action, if approved by the federal
court, will foreclose further claims against the Company except for claims by
persons who affirmatively "opt out" of the settlement class.
The Company intends to seek an order from the federal court declaring that
90 percent of the Company's settlement contribution would be allocated to
compensate the settlement class for alleged punitive damages, that the amount
allocated to punitive damages is sufficient to satisfy the Company's punitive
damages obligation as a result of the alleged pattern and practice of wrongdoing
in Alabama, and that an award of any further punitive damages in other Alabama
Litigation cases would be unjust. The Company intends to use this federal class
action order to argue that additional punitive damages awards in the Alabama
Litigation would be duplicative and unjust, would violate the Company's
substantive due process rights, and are barred by the provisions of the federal
class action settlement order. While it is anticipated that a number of
claimants will opt out of the settlement class, the Company believes that the
settlement order being sought from the federal court, if entered, will
significantly delimit Foremost`s punitive damages exposure on the remaining
Alabama Litigation claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security-holders during the fourth
quarter of the fiscal year covered by this report.
SUPPLEMENTAL ITEM. - EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
The following table shows the names and ages of all executive officers of
the Company, the positions and offices held by such person and the period during
which each person served as an officer. The term of office of each person is
generally not fixed since each person serves at the discretion of the Board of
Directors of the Company. The information concerning executive officers who are
not directors has been omitted from the Registrant's Proxy Statement for the May
9, 1996 Annual Meeting of Stockholders pursuant to Instruction 3 of Regulation
S-K Item 401(b).
Richard L. Antonini
Age: 53
Officer Since: 1972
Mr. Antonini became Chairman of the Board on December 17, 1991, President on
May 8, 1986 and Chief Executive Officer on July 24, 1986. Before that he was
Executive Vice President and Chief Financial Officer since June 29, 1983. From
January 1, 1980 to June 28, 1983, he served as Executive Vice President and
Treasurer. Prior to that, he served as Senior Vice President and Treasurer.
Mr. Antonini has been a Director of the Company since 1973.
11
Kenneth C. Haines
Age: 36
Officer Since: 1994
Mr. Haines was elected to the office of Controller on September 1, 1994. Mr.
Haines joined Foremost Insurance Company, a subsidiary of the Company, in
September, 1986.
John J. Hannigan
Age: 48
Officer Since: 1987
Mr. Hannigan was elected to the office of Executive Vice President on March 1,
1987. Mr. Hannigan joined Foremost Insurance Company, a subsidiary of the
Company, as Vice President in 1983 and was elected to the position of
Executive Vice President of that Company in 1986.
David A. Heatherly
Age: 45
Officer Since: 1987
Mr. Heatherly was elected to the office of Executive Vice President on March
1, 1987. Mr. Heatherly joined Foremost Insurance Company, a subsidiary of the
Company, as Vice President in 1984 and was elected to the position of
Executive Vice President of that Company in 1986.
Larry J. Orange
Age: 54
Officer Since: 1987
Mr. Orange was elected Executive Vice President on March 1, 1987. Mr. Orange
has been employed by Foremost Insurance Company, a subsidiary of the Company,
since 1969 and as a Vice President since 1980. Mr. Orange is also President of
Foremost Financial Service Corporation. Mr. Orange was elected Director of the
Company in 1993.
F. Robert Woudstra
Age: 50
Officer Since: 1983
Mr. Woudstra was elected to the office of Executive Vice President on March
1, 1987 and has been Treasurer since June 29, 1983. Mr. Woudstra has been
treasurer of Foremost Insurance Company, a subsidiary of the Company for more
than the past five years. Mr. Woudstra was elected Director of the Company in
1988.
Paul D. Yared
Age: 46
Officer Since: 1982
Mr. Yared was elected Senior Vice President on December 10, 1992 and has
been the Company's Secretary and General Counsel since January 1, 1986. Mr.
Yared has been employed as a Corporate Attorney for the Company and its
subsidiaries since 1974. On December 28, 1984 he was elected Secretary.
12
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
- --------------------------------------------------------------------------
PRICE RANGE OF COMMON STOCK
The Company's Common Stock trades on the NASDAQ National Market tier of The
NASDAQ Stock Market under the symbol "FCOA". The following table sets forth the
high and low sale prices for the Company's Common Stock for the periods
indicated, all as reported by NASDAQ. The quotations reflect inter-dealer prices
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
1995 High Low
- ---- ------ ------
First Quarter......................................... $38.50 $35.25
Second Quarter ....................................... 42.00 36.75
Third Quarter ........................................ 44.25 38.00
Fourth Quarter ....................................... 52.75 50.75
1994 High Low
- ---- ------ ------
First Quarter ........................................ $37.50 $31.75
Second Quarter ....................................... 32.25 30.25
Third Quarter......................................... 32.50 31.00
Fourth Quarter ....................................... 35.75 31.75
The number of stockholders of record of the Common Stock was approximately
1,264 on March 1, 1996.
DIVIDENDS
The Company has paid regular cash dividends on its Common Stock each year
since 1978. During 1988, the Company paid its stockholders an extraordinary
dividend of $6.50 per share from the proceeds of the sale of its private
mortgage insurance subsidiaries. From 1988 through 1995 the Company paid a
regular quarterly dividend of $.27 per share of common stock, an annualized rate
of $1.08 per share. On February 1, 1996, the Company declared its First Quarter
dividend of $.27 per share. The Company expects to continue to pay dividends but
its ability to pay future dividends will necessarily depend upon its earnings
and financial condition.
The Company's principal source of funds for the payment of dividends on its
Common Stock is dividend income from its insurance subsidiaries, Foremost
Insurance and Foremost Life Insurance Company. The ability of these insurance
subsidiaries to pay dividends to the Company is governed by applicable insurance
laws. The information in Note 11 of the Consolidated Financial Statements,
included at Item 8. below, explains the current State Regulatory requirements
that may restrict the ability of the Company's insurance subsidiaries to pay
dividends to the Company.
13
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
FOREMOST CORPORATION OF AMERICA AND SUBSIDIARIES
FIVE YEAR SELECTED FINANCIAL DATA
Consolidated Financial Information 1995 1994 1993 1992 1991
- ---------------------------------- ----------- ----------- ----------- ----------- -----------
(All dollar amounts, except share
data and ratios, in thousands)
Insurance premium written
and assumed ..................... $ 449,037 $ 438,400 $ 419,708 $ 424,669 $ 394,933
Net insurance premium earned ..... $ 448,079 $ 431,846 $ 421,379 $ 423,138 $ 414,414
Total income ..................... $ 481,178 $ 464,191 $ 457,262 $ 460,470 $ 449,001
Net income ....................... $ 45,325 $ 29,697 $ 32,240 $ 24,126 $ 9,693
Net income per share ............. $ 4.43 $ 2.80 $ 3.01 $ 2.25 $ 0.90
Total assets ..................... $ 758,494 $ 721,073 $ 748,106 $ 744,913 $ 728,338
Invested assets-at cost .......... $ 498,927 $ 463,447 $ 479,188 $ 461,240 $ 457,175
Invested assets-at market ........ $ 521,426 $ 458,329 $ 498,388 $ 473,731 $ 467,054
Short-term debt outstanding ...... $ 4,199 $ 9,981 $ 7,795 $ 7,627 $ 8,535
Long-term debt outstanding ....... $ 95,048 $ 97,425 $ 105,568 $ 113,509 $ 119,104
Shareholders' equity ............. $ 244,197 $ 206,626 $ 213,122 $ 185,007 $ 162,806
Shareholders' equity per share ... $ 24.33 $ 19.93 $ 19.88 $ 17.26 $ 15.19
Return on beginning shareholders'
equity .......................... 21.9% 13.9% 17.4% 14.8% 6.5%
Average shares outstanding ....... 10,221,799 10,603,584 10,719,851 10,716,827 10,715,891
Shares outstanding at year end ... 10,034,780 10,365,996 10,721,143 10,717,083 10,715,889
Dividends paid per share ......... $ 1.08 $ 1.08 $ 1.08 $ 1.08 $ 1.08
Price range - high ............... $52 3/4 $37 1/2 $37 3/4 $33 1/4 $21 3/4
Price range - low ................ $35 1/4 $30 1/4 $31 1/4 $19 3/4 $ 14
Price/earnings ratio ............. 8-12 11-13 10-13 9-15 16-24
Number of shareholders ........... 1,272 1,338 1,381 1,490 1,516
Number of employees .............. 1,015 1,008 1,093 1,117 1,355
Property and Casualty Information:
Statutory policyholders' surplus . $ 200,458 $ 181,269 $ 176,245 $ 162,458 $ 136,830
Ratio of net premiums written to
statutory policyholders' surplus 2.1 2.1 2.1 2.3 2.5
Ratio of loss and loss expense
reserves to statutory
policyholders' surplus .......... 0.5 0.5 0.6 0.7 0.8
Combined loss and expense
ratio-GAAP basis ................ 91.1% 96.3% 95.9% 98.0% 104.0%
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS
Written Premium
Written premium for the property and casualty segment was $427 million in
1995, which represents an increase of 3% over the $416.2 million written in
1994. The 1994 writings were 5% greater than the $397.8 million written in 1993,
while 1993's total was down 1% from the previous year. Within the property and
casualty segment, combined written premium for mobile home, motor home and
travel trailer lines was up 3% in 1995 to $401.4 million, following increases of
6% in 1994 and 4% in 1993 when written premium in these lines was $391.2 million
and $370.8 million, respectively. The growth in the Company's core lines of
mobile home and recreational vehicle insurance was slowed in 1995 by its
catastrophe exposure management program, which has aggressively reduced the
Company's coastal exposure to hurricanes from Maine to Texas, and its earthquake
exposure in California.
The Company will continue to focus the majority of its resources on
profitable opportunities in the mobile home and recreational vehicle product
lines, although the Company is pursuing opportunities to write auto and
homeowners insurance on a direct basis. The exclusive endorsement of the Company
by the American Association of Retired Persons (AARP), to offer mobile home
insurance to its members, has continued to produce good results.
Written premium for the life segment in 1995 was $22 million, down slightly
from 1994 when written premium totaled $22.2 million. The 1994 writings were up
1% from 1993 when they were $22 million. Since the Company's decision to exit
the credit life and credit accident and health business at the end of 1992, the
remaining product line is employee group benefit insurance for small employers.
Underwriting Results and Loss Reserves
The combined loss and expense ratio for the Company's property and casualty
insurance operations was 91.1% in 1995 compared to 96.3% in 1994 and 95.9% in
1993. The underwriting profit from these operations was $38.2 million in 1995,
$15.4 million in 1994 and $16.6 million in 1993. The continued emphasis on rate
adequacy, disciplined underwriting, catastrophe exposure management, and
strategic expense reduction programs, are the reasons for the Company's positive
underwriting results over the last three years.
The property and casualty results were impacted by record levels of
catastrophe losses, which amounted to, net of reinsurance, $51.9 million in
1995, $62.7 million in 1994 and $39.7 million in 1993. During 1995, hurricanes
Opal and Erin along with spring and winter storms on the west coast, which
produced wind and flood damage, contributed to the second-worst catastrophe year
in the Company's history. The record level of catastrophe losses in 1994 was
primarily due to the January Northridge earthquake in California, intense storms
with flooding in Georgia and Texas, and the east coast winter storms in the
first quarter. The spring storm Joshua, along with the flooding due to the
severe weather in the Midwest, were the significant catastrophe losses of 1993.
15
Management continually monitors its exposure to catastrophic risk and has
taken aggressive action in coastal areas and earthquake prone areas. In 1995,
the Company started a coastal strategy that will eliminate approximately 21,000
policies in the coastal counties from Maine to Texas and will be completed by
June 30, 1996. Management has also pursued the reduction of the Company's
earthquake exposure by non-renewing 20,000 policies in California with units
greater than $50,000 in value. Since July 1, 1995, the Company's California
policies only provide earthquake coverage on an optional basis, which will
continue to reduce exposure to catastrophic loss due to earthquakes. Management
will continue to take actions in the future where necessary.
Expense reduction actions taken to control policy acquisition costs and
general and administrative expenses have helped reduce the Company's expense
ratio for the seventh consecutive year. The expense ratio has declined by 2.8
points from 1993 to 1995. Management is committed to controlling expenses by
closely monitoring various expense categories and developing programs to
continuously improve the results.
The life operations also produced strong results in 1995 with its third
consecutive year of underwriting profits of $1.3 million. The consistent
performance of the employee group benefits products written in West Michigan was
the primary reason for the good results over the past three years. The employee
group benefits business has produced combined ratios of 93.8%, 92.9% and 91.9%
for the years 1995, 1994 and 1993, respectively.
In 1992 the Company established a $2.1 million reserve to cover future
underwriting losses from the run-off of discontinued credit life products.
During 1995, 1994 and 1993, $90,000, $300,000 and $500,000, respectively, were
added to the reserve due to adverse experience.
The Company engages outside actuarial firms to attest to the adequacy of
its carried life, and property and casualty reserves. These firms have rendered
their opinions for the year ended December 31, 1995, and they attest to the
adequacy of the Company-held reserves. The Company is committed to maintaining
adequate loss reserves and places a high priority on balance sheet integrity.
The Company discontinued writing private credit insurance in 1985, and
established a reserve to cover anticipated losses from the run-off of the
product. Management continues to be pleased with the experience in the run-off
of this business, and accordingly, reduced the reserve by $1.9 million in 1995,
$2.7 million in 1994 and $2.4 million in 1993. These reductions are not
reflected in the underwriting results of the insurance operations, but are a
component of the parent company and other operational results. Management
believes that the aggregate reserves for this discontinued product are adequate
at December 31, 1995, but will continue to review and adjust them as needed.
CAPITAL STRUCTURE
At December 31, 1995, the Company's capital structure consisted of
10,034,780 common shares outstanding.
In 1995, the Company negotiated and entered into a credit agreement under
which its lenders committed to provide a seven year non-amortizing $50 million
term loan and a five year $40 million revolving credit facility. At year-end
1995, $50 million remained outstanding on the term loan, $8 million was
outstanding on the revolving credit facility, and $2 million was outstanding on
an uncommitted line of credit.
16
During 1995, the Company entered into interest rate swap agreements with a
financial institution. The notional principal amount of the swaps is $46 million
and $12 million, with both maturing August 31, 2000. These agreements
effectively fixed the interest rate on the entire $58 million outstanding under
the credit agreement to 7.15%. The interest rate swaps are non-amortizing. The
Company's exposure to credit risk is limited to interest movements and is
considered to be negligible.
LIQUIDITY
Cash Flow
In the years 1993 through 1995, the Company and its subsidiaries generated
positive cash flow of $126.1 million from operations, and paid back $23.9
million on long-term borrowings. The Company paid $34.1 million in dividends
during the same period and repurchased $25.7 million of its common stock.
The Company expects continuing positive cash flow from operations.
Additionally, the investment portfolios of the Company's insurance operations
have been structured to provide liquidity for operations. The portfolios are
structured so that $30 to $40 million of investments mature every year, and are
available for reinvestment or use in operations as required. The insurance
products written by the Company's insurance subsidiaries are primarily property
coverages which result in rapid claims payments. For proper asset/liability
matching, the average maturity of investments is approximately five years. The
Company believes that its liquid assets plus cash flow from operations will be
adequate to meet foreseeable cash requirements.
In February 1994, the Company's Board of Directors approved a stock
buy-back program of up to 1 million shares, of which, 699,607 shares were
purchased as of December 31, 1995 at an average price of $36.72 per share. On
February 21, 1996, the Company's Board of Directors authorized an additional
500,000 shares for the stock repurchase program. The Company will continue to
evaluate the purchase of its common stock from excess cash flow generated from
operations.
The Company's insurance subsidiaries are subject to certain restrictions on
their ability to transfer funds to the parent company in the form of cash
dividends, loans or advances without regulatory approval. These restrictions are
not expected to impair the ability of the Company to meet its cash obligations.
Investments
After-tax investment income increased 6% in 1995, after declines of 2% in
1994 and 10% in 1993. The increase in 1995 is the product of positive cash flow
generated from the strong underwriting performance during the year. The declines
in 1994 and 1993 are the result of the impact of lower interest rates on new
investments made due to calls and maturities of higher-yielding securities.
Average invested assets expanded by over 7% in 1995 after a slight decline in
1994 and an increase of 4% in 1993.
Since the concern over a federal flat tax has affected the municipal bond
market, the Company has invested the majority of its cash flow and maturities in
taxable bonds and equity securities to capitalize on opportunities to improve
after-tax investment performance. Purchases made by the Company in the municipal
bond market will tend to be shorter duration bonds. The Company will continue
its program of investing the proceeds from the sale and/or payoffs of real
estate and mortgage loans in equity securities as opportunities arise.
17
At December 31, 1995 the Company held securities in its investment
portfolio which were either unrated or less than investment grade, high-yield
corporate debt securities, including certain preferred stocks and limited
partnerships. These securities had a cost basis of $26 million, with an
aggregate market value of $26.3 million, and none of them individually exceeded
$5.7 million. These securities have different risks than other investment grade
securities. Risk of loss upon default by the borrower is greater with these
investments than with other corporate or governmental debt securities because
these securities are generally unsecured and are often subordinated to other
creditors of the issuer. These issuers usually have high levels of indebtedness
and are more sensitive to adverse economic conditions than are investment grade
issuers.
Included in investment real estate at December 31, 1995 are three
properties which were foreclosed upon in 1991 totaling $3.8 million. Of the
original properties foreclosed on in 1991, the Company has successfully sold
four of the properties at their carrying values, which includes a twelve-acre
parcel sold during 1995. Included in the remaining three properties is a
forty-acre parcel valued at $3.1 million that the Company has agreed to terms
with a developer and has signed an Offer to Purchase. The sale was finalized in
March 1996, with no adjustment to the carrying value required. The Company has
current appraisals for all of its foreclosed real estate, and has valued it in
accordance with provisions of the AICPA Statement of Position 92-3, "Accounting
for Foreclosed Assets." No adjustments were made to the carrying values of these
assets during 1995, 1994 and 1993. The Company expects no further reductions in
these values. At year-end 1994, two real estate related securities totaling $1.2
million were in default. The Company foreclosed and subsequently sold both of
these properties in 1995 at their respective book values.
In accordance with FASB Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," the Company has classified a portion
of its fixed maturity investments and its equity securities into a category
entitled "securities available for sale" which is adjusted to reflect market
value. Due to the restrictive definition of assets qualifying to be categorized
as held to maturity, most of the Company's fixed investment securities are
considered to be available for sale, and are therefore adjusted to reflect
market values. Unrealized investment gains and losses on securities available
for sale are credited or charged directly to shareholders' equity net of
applicable tax provisions or credits. The net unrealized gain or loss on
securities available for sale was an unrealized gain of $13.8 million at
December 31, 1995, an unrealized loss of $3.4 million at December 31, 1994 and
an unrealized gain of $10.1 million at December 31, 1993. Although the Company
has the general intent and ability to hold most of its fixed maturities to
maturity, sales may be made from this category due to changes in market
conditions, relative yields available, tax planning and asset/liability
management considerations. Since the Company does not purchase fixed maturity
investments with a view to resale, the "available for sale" classification does
not denote a trading account.
At December 31, 1995, the Company had $47.9 million of its consolidated
assets in cash and other short-term investments.
LITIGATION
The Company has been named as a defendant in a number of similar individual
lawsuits and several related class actions filed in Alabama state and federal
courts. In general, the cases allege fraud and misrepresentation in the sale of
insurance. The Company denies all allegations and is vigorously defending each
suit.
18
In June 1995, a Bullock County, Alabama jury awarded $15 million in
punitive damages against the Company, despite the fact that the amount of the
compensatory damage award in the case was $12,500. The punitive damages have
since been reduced by the trial court judge to $6.5 million and the compensatory
damage award has been reduced to approximately $3,300. In February 1996, a
Lowndes County, Alabama jury awarded two policyholders $26,000 in compensatory
damages and $3.25 million in punitive damages. The Company believes that both
awards, including the amount of the trial court's remittitur in the Bullock
County case, are erroneous and not supported by the law or the facts of either
case. The Company is vigorously pursuing all post-trial remedies. Since the
amount of loss cannot be reasonably estimated, no damages have been provided for
in the financial statements.
The Company is in the process of seeking a settlement of consolidated state
class actions against the Company and other defendants pending in the United
States District Court for the Northern District of Alabama. The Company has
proposed to contribute approximately $3.65 million into a settlement fund that,
if approved by the federal court, will foreclose further claims against the
Company except for claims by persons who affirmatively "opt out" of the
settlement class. Although the Company has not established a specific reserve
for this proposed settlement, sufficient reserves are available to cover the
amount of the proposed settlement without affecting income or the adequacy of
remaining held reserves.
In November 1995, an Iowa jury returned a verdict of $688,000 in
compensatory damages and $8 million in punitive damages against the Company for
alleged fraud, breach of contract and misappropriation of trade secrets in the
termination of an agent's contract. The Company believes the verdict was
erroneous and is currently pursuing all post-trial remedies. The Company has not
accounted for the damages in its financial statements because the amount of the
loss cannot be reasonably estimated.
The Company and its subsidiaries are routinely engaged in litigation in the
normal course of their business. In the opinion of management, all litigation
matters, as well as the litigation described above, are not expected to have a
material adverse effect on the Company's consolidated financial position,
operating results and cash flow. See Note 12 in Item 8. below for further
discussion of these matters.
SUBSEQUENT EVENT
On January 31, 1996, the Company signed a letter of intent to sell its
subsidiary Foremost Life Insurance Company ("FLIC"). The sale is subject to
certain conditions including the negotiations and execution of a definitive
purchase agreement, completion of the buyer's due diligence review and obtaining
all regulatory approvals and authorizations.
The anticipated sale price would yield approximately $17 million in cash
after taxes. Management projects that the Company will incur an after-tax loss
on the sale of approximately $1.3 million.
Management expects to use a significant portion of the proceeds from the
sale to further implement the Company's stock repurchase program and does not
anticipate that the divestiture will be dilutive of earnings per share.
RECENT ACCOUNTING PRONOUNCEMENTS
As required, the Company adopted and incorporated into its Consolidated
Financial Statements for the year ended December 31, 1995, the following two
Financial Accounting Standards Board (FASB) Statements: Statement No. 114,
"Accounting by Creditors for Impairment of a Loan," and Statement No. 118,
19
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures," an amendment of FASB Statement No. 114. The Company also adopted
the American Institute of Certified Public Accountants' Statement of Position
94-6, "Disclosures of Certain Significant Risks and Uncertainties." None of
these pronouncements had a significant impact on the Company's financial
statements.
During 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which requires that an impairment loss be recognized when the expected future
cash flows resulting from the use of the asset is less than the carrying amount.
The FASB also issued Statement No. 123, "Accounting for Stock-Based
Compensation," which requires companies to recognize or disclose the cost of
stock-based employee compensation plans. Both of these Statements are effective
for fiscal years beginning after December 15, 1995, and are not expected to
materially impact the Company upon adoption. In regards to FASB Statement No.
123, the Company will continue to apply APB Opinion 25 and will include
pro-forma footnote disclosure of the impact as if the new expense recognition
standards were actually reflected in the financial statements.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
FOREMOST CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 1994
---------- ----------
(In thousands, except share data)
Assets:
Investments:
Fixed maturities held to maturity ................... $ 7,511 $ 14,810
Securities available for sale:
Fixed maturities ................................... 372,210 351,241
Equity securities .................................. 66,084 46,611
Mortgage loans and land contracts on real estate .... 12,550 14,525
Investment real estate (net of $1,350 and $1,117
accumulated depreciation, respectively) ............ 19,140 19,284
Short-term investments .............................. 42,666 11,798
--------- ---------
Total investments .................................. 520,161 458,269
Cash ................................................. 5,184 4,195
Accrued investment income ............................ 6,246 6,567
Premiums receivable (net of $94 and $180 allowance
for uncollectible accounts) ......................... 72,387 69,806
Due from reinsurance companies ....................... 23,342 34,798
Other receivables (net of $20 allowance for
uncollectible accounts, respectively) ............... 7,381 9,784
Prepaid policy acquisition costs ..................... 74,052 75,082
Prepaid reinsurance premiums ......................... 62 10,181
Real estate and equipment ............................ 36,035 38,377
Other assets ......................................... 13,644 14,014
--------- ---------
Total assets ........................................ $ 758,494 $ 721,073
========= =========
Liabilities:
Unearned premium ..................................... $ 251,630 $ 254,653
Insurance losses and loss adjustment expenses ........ 97,504 95,496
Accounts payable and accrued expenses ................ 39,269 36,976
Notes and other obligations payable .................. 99,247 107,406
Income taxes ......................................... 13,017 7,114
Other liabilities .................................... 13,630 12,802
--------- ---------
Total liabilities ................................... 514,297 514,447
--------- ---------
Shareholders' Equity:
Common stock $1 par - shares authorized 35,000,000,
issued 14,000,000 ................................... 14,000 14,000
Additional paid-in capital ........................... 139,344 139,380
Unrealized appreciation (depreciation) of securities
available for sale, net of applicable taxes ......... 13,802 (3,365)
Retained earnings .................................... 183,944 149,671
Restricted stock - deferred compensation ............. (5) (16)
--------- ---------
Total ............................................... 351,085 299,670
Treasury stock at cost, 3,965,220 and 3,634,004 shares (106,888) (93,044)
--------- ---------
Total shareholders' equity .......................... 244,197 206,626
--------- ---------
Total liabilities and shareholders' equity .......... $ 758,494 $ 721,073
========= =========
<FN>
- ----------
See accompanying notes to consolidated financial statements
</FN>
21
FOREMOST CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, 1995 1994 1993
---------- ---------- ----------
(In thousands except per share data)
Income:
Property and casualty premium earned ..... $ 426,282 $ 409,929 $ 399,640
Life premium earned ...................... 21,797 21,917 21,739
Net investment income .................... 29,344 26,923 27,734
Realized gains ........................... 369 591 1,960
Other .................................... 3,386 4,831 6,189
--------- --------- ---------
Total income ........................... 481,178 464,191 457,262
--------- --------- ---------
Expense:
Insurance losses, death and other benefits 259,133 264,001 250,729
Amortization of prepaid policy
acquisition costs ...................... 130,457 130,637 132,853
Operating ................................ 18,329 21,462 20,810
Interest ................................. 9,711 9,048 9,205
--------- --------- ---------
Total expense .......................... 417,630 425,148 413,597
--------- --------- ---------
Income before taxes .................. 63,548 39,043 43,665
Income tax provision ....................... (18,223) (9,346) (11,425)
--------- --------- ---------
Net income ............................... $ 45,325 $ 29,697 $ 32,240
========= ========= =========
Per share of common stock:
Net income ............................... $ 4.43 $ 2.80 $ 3.01
========= ========= =========
<FN>
- ----------
See accompanying notes to consolidated financial statements
</FN>
22
FOREMOST CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Unrealized Restricted
Additional Appreciation Stock- Total
Common Paid-in (Depreciation) Retained Deferred Treasury Shareholders'
Stock Capital of Securities Earnings Compensation Stock Equity
-------- ---------- -------------- ---------- ------------ ----------- -------------
(In thousands except share data)
Balances - January 1, 1993....... $ 14,000 $ 139,461 $ 2,753 $ 110,772 $ (112) $ (81,867) $ 185,007
Net income....................... 32,240 32,240
Unrealized appreciation of
securities available for sale,
net of tax..................... 7,327 7,327
Amortization of deferred
compensation in
connection with
restricted stock plan.......... 49 49
Stock options exercised for
4,100 shares from treasury..... (80) 159 79
Restricted stock issued for
30 shares from treasury........ (1) 1 --
Purchase of 70 treasury shares... (2) (2)
Cash dividends - $1.08 per share. (11,578) (11,578)
-------- ---------- -------------- ---------- ------------ ----------- -------------
Balances - December 31, 1993... 14,000 139,381 10,080 131,434 (64) (81,709) 213,122
Net income....................... 29,697 29,697
Unrealized depreciation of
securities available for sale,
net of tax..................... (13,445) (13,445)
Amortization of deferred
compensation in
connection with
restricted stock plan.......... 52 52
Restricted stock issued for
135 shares from treasury....... (1) (4) 5 --
Purchase of 355,282
treasury shares................ (11,340) (11,340)
Cash dividends - $1.08 per share. (11,460) (11,460)
-------- ---------- -------------- ---------- ------------ ----------- -------------
Balances - December 31, 1994... 14,000 139,380 (3,365) 149,671 (16) (93,044) 206,626
Net income....................... 45,325 45,325
Unrealized appreciation of
securities available for sale,
net of tax..................... 17,167 17,167
Amortization of deferred
compensation in
connection with
restricted stock plan.......... 16 16
Issued 10,962 shares of common
from treasury in connection
with LTIP and Director's
Stock Plan..................... (26) 424 398
Stock options exercised for
2,000 shares from treasury..... (10) 78 68
Restricted stock issued for
147 shares from treasury....... (5) 5 --
Purchase of 344,325
treasury shares................ (14,351) (14,351)
Cash dividends - $1.08 per share. (11,052) (11,052)
-------- ---------- -------------- ---------- ------------ ----------- -------------
Balances - December 31, 1995..... $ 14,000 $ 139,344 $ 13,802 $ 183,944 $ (5) $ (106,888) $ 244,197
======== ========== ============== ========== =========== =========== =============
<FN>
- ----------
See accompanying notes to consolidated financial statements.
</FN>
23
FOREMOST CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1995 1994 1993
(In thousands) --------- --------- ---------
Operating Activities:
Net income ................................ $ 45,325 $ 29,697 $ 32,240
Adjustments to reconcile net income to net
cash provided by operating activities:
Change in:
Unearned premium ....................... (3,023) 1,514 (15,435)
Insurance losses and loss
adjustment expenses ................... 2,008 (15,062) (12,238)
Prepaid policy acquisition costs ....... 1,030 5,453 7,756
Premiums receivable .................... (2,581) (1,842) 4,794
Other receivables ...................... 23,978 (16,491) 17,185
Accrued investment income .............. 321 540 (306)
Accounts payable and accrued expenses .. 2,293 6,605 5,287
Income tax liability ................... (2,491) 1,101 66
Provision for private credit
insurance loss reserves ............... (1,381) (169) (1,555)
Other - net ............................ 2,015 (4,043) (2,265)
Provision for depreciation and
amortization ........................... 2,460 2,864 2,726
Amortization of fixed maturities ........ 1,766 3,439 2,994
Deferred income taxes ................... (850) 1,074 2,264
Net realized gains and losses ........... (369) (591) (1,960)
--------- --------- ---------
Net cash from operating activities ..... 70,501 14,089 41,553
--------- --------- ---------
Investing Activities:
Purchases of securities and loans made .... (179,284) (149,637) (152,331)
Purchases of real estate and equipment .... (189) (3,275) (372)
Sales of securities ....................... 109,182 106,512 67,161
Maturities of securities and receipts
from repayments of loans ................. 62,829 57,411 67,006
Sales of real estate and equipment ........ 2,312 4,799 501
Increase in short-term investments ........ (30,868) (2,167) (198)
--------- --------- ---------
Net cash from (for) investing activities . (36,018) 13,643 (18,233)
--------- --------- ---------
Financing Activities:
Repayments of long-term debt .............. (8,159) (7,957) (7,773)
Acquisition of treasury shares ............ (14,351) (11,340) (2)
Dividends paid ............................ (11,052) (11,460) (11,578)
Increase in short-term debt ............... -- 2,000 --
Receipts from exercise of stock options ... 68 -- 79
--------- --------- ---------
Net cash for financing activities ........ (33,494) (28,757) (19,274)
--------- --------- ---------
Cash increase (decrease) ......... 989 (1,025) 4,046
Cash at beginning of year .................. 4,195 5,220 1,174
--------- --------- ---------
Cash at end of year .............. $ 5,184 $ 4,195 $ 5,220
========= ========= =========
<FN>
- ----------
See accompanying notes to consolidated financial statements.
</FN>
24
PROPERTY AND CASUALTY INSURANCE STATEMENTS OF INCOME
Year Ended December 31, 1995 1994 1993
(In thousands) --------- --------- ---------
Premium written and assumed ................... $ 426,988 $ 416,244 $ 397,750
Less reinsurance ceded ........................ 1,542 723 2,950
--------- --------- ---------
Net premium written ......................... $ 425,446 $ 415,521 $ 394,800
========= ========= =========
Premium earned ................................ $ 426,282 $ 409,929 $ 399,640
--------- --------- ---------
Losses and loss expenses ...................... 244,081 249,533 236,851
Amortization of prepaid policy acquisition cost 125,266 125,241 127,334
Operating expenses ............................ 18,724 19,783 18,884
--------- --------- ---------
Total losses and expenses ................... 388,071 394,557 383,069
--------- --------- ---------
Underwriting income ....................... 38,211 15,372 16,571
Investment and other income, less expenses .... 27,472 24,545 25,354
Realized gains ................................ 480 572 2,159
--------- --------- ---------
Income before taxes ......................... 66,163 40,489 44,084
Income tax provision .......................... (19,315) (9,953) (11,757)
--------- --------- ---------
Net income .................................. $ 46,848 $ 30,536 $ 32,327
========= ========= =========
LIFE INSURANCE STATEMENTS OF INCOME
Year Ended December 31, 1995 1994 1993
(In thousands) --------- --------- ---------
Premium written and assumed ................... $ 22,048 $ 22,156 $ 21,958
Less reinsurance ceded ........................ 251 239 219
--------- --------- ---------
Net premium written ......................... $ 21,797 $ 21,917 $ 21,739
========= ========= =========
Premium earned ................................ $ 21,797 $ 21,917 $ 21,739
--------- --------- ---------
Death and other benefits ...................... 15,052 14,468 13,878
Amortization of prepaid policy acquisition cost 5,342 5,570 5,685
Operating expenses ............................ 147 620 923
--------- --------- ---------
Total losses and expenses ................... 20,541 20,658 20,486
--------- --------- ---------
Underwriting income ....................... 1,256 1,259 1,253
Investment and other income, less expenses .... 2,040 2,183 2,514
Realized losses ............................... (111) (36) (61)
--------- --------- ---------
Income before taxes ......................... 3,185 3,406 3,706
Income tax provision .......................... (1,098) (1,145) (1,514)
--------- --------- ---------
Net income .................................. $ 2,087 $ 2,261 $ 2,192
========= ========= =========
<FN>
- ----------
See accompanying notes to consolidated financial statements.
</FN>
25
PARENT COMPANY AND OTHER STATEMENTS OF OPERATIONS
(Excluding equity in income of consolidated subsidiaries)
Year Ended December 31, 1995 1994 1993
(In thousands) --------- --------- ---------
Income:
Financial service fees and interest ...... $ 2,061 $ 2,871 $ 2,557
Commissions .............................. 503 2,197 2,111
Other income ............................. 7,626 7,385 8,889
Realized gains (losses) .................. -- 55 (138)
--------- --------- ---------
Total income ......................... 10,190 12,508 13,419
--------- --------- ---------
Expense:
Operating ................................ 6,616 8,661 8,719
Interest ................................. 9,374 8,699 8,825
--------- --------- ---------
Total expense ........................ 15,990 17,360 17,544
--------- --------- ---------
Loss before taxes ........................ (5,800) (4,852) (4,125)
Income tax credit .......................... 2,190 1,752 1,846
--------- --------- ---------
Net loss ................................. $ (3,610) $ (3,100) $ (2,279)
========= ========= =========
<FN>
- ----------
See accompanying notes to consolidated financial statements.
</FN>
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Business
The Company is a holding company which, through its subsidiaries, provides
property and casualty, and other insurance products to those who buy, sell or
finance mobile homes and recreational vehicles. The Company also writes
automobile and homeowners property and casualty insurance. The Company's life
insurance subsidiary writes accident and health, and credit life insurance. See
Note 15, Subsequent Events.
Principles of Consolidation
The accounts of Foremost Corporation of America and its subsidiaries have
been included in the accompanying financial statements. Intercompany investments
and all significant intercompany balances and transactions have been eliminated
in consolidation. In order to more clearly reflect the operations of the
segments of the consolidated group, certain intercompany charges, consisting
principally of rent, interest and commissions, have been included in the
operating income and expenses of the segments, but are eliminated from
consolidated revenues and expenses.
Insurance Companies
The Company's property and casualty insurance subsidiaries and life
insurance subsidiary are included in the accompanying financial statements in
accordance with generally accepted accounting principles for insurance
companies. These principles are summarized as follows:
a. Insurance premium is recognized as income over the terms of the policies.
b. Commissions, premium taxes and other costs of acquiring new business have
been deferred and are being amortized by charges to income as the related
premium is earned.
c. The liability for insurance losses and loss adjustment expenses is based upon
(1) accumulation of case estimates for losses reported prior to the close of the
accounting period, (2) estimates of incurred but unreported losses based upon
past experience, and (3) estimates of expenses for investigating and adjusting
claims. The liability for such losses is stated after estimated recoveries for
salvage and subrogation.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant Estimates
The most significant estimates in the Company's balance sheet are the
determination of prepaid policy acquisition costs and the reserve for insurance
losses and loss adjustment expenses. Management's best estimate of prepaid
policy acquisition costs is based on historical studies and assumptions made
regarding costs incurred. Management's best estimate of insurance losses and
loss adjustment expenses is based on past loss experience and consideration of
current claim trends as well as prevailing social, economic and legal
conditions. Although management's estimates are not expected to change in the
near term, the costs the Company will ultimately incur could differ from the
amounts assumed will be incurred based on the assumptions made.
27
Investments
In accordance with Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity Securities," the
Company has classified its investments in fixed maturities and equity securities
into two categories, "fixed maturities held to maturity" and "securities
available for sale." Fixed maturities held to maturity and mortgage loans and
land contracts are reported at amortized cost. The Company expects that the
investments in these categories will be held to maturity and, therefore, no
unrealized gains or losses are recognized on such investments. Securities
available for sale are reported at market value. The unrealized gains and losses
of the investments in this category are credited or charged directly to
shareholders' equity, net of applicable taxes. Although the Company has the
general intent and ability to hold securities segregated as securities available
for sale to maturity, sales from this category may be undertaken due to changes
in market conditions, relative yields available, tax planning and
asset/liability management considerations.
The Company's debt securities investment portfolio is predominantly
comprised of investment grade securities. Investment real estate consists
primarily of land and buildings held for development and sale. Investment real
estate is carried at cost less applicable accumulated depreciation. Investment
real estate acquired through foreclosure is carried at the lower of cost or
market.
Short-term investments are reported at cost, which approximates market.
Realized investment gains and losses, based on specific identification of
securities sold, are reported separately, on a pretax basis, as part of total
income.
Real Estate and Equipment
Real estate and equipment owned by the Company is carried at cost less
accumulated depreciation. Depreciation is computed over the estimated useful
lives of the assets, primarily by the straight-line method for financial
reporting and accelerated methods for income tax purposes.
Income Taxes
The Company accounts for certain income and expenses in different periods
for financial reporting and income tax purposes. Deferred income taxes are
provided in the accompanying financial statements for the temporary differences
between taxes currently payable and taxes based on financial income. The Company
utilizes the liability method to account for deferred income taxes by applying
statutory tax rates in effect at the balance sheet date to differences between
the book cost and tax basis of assets and liabilities. The resulting deferred
tax liabilities or assets are adjusted to reflect changes in tax laws or rates
by means of charges or credits to income tax expense.
Advertising
The Company expenses the costs of advertising as incurred. Advertising
expense was $2,021,000 in 1995, $1,617,000 in 1994 and $1,820,000 in 1993.
Supplemental Cash Flow Information
The Company does not consider any of its assets cash equivalents for the
purposes of the Consolidated Statements of Cash Flows.
Interest paid was $9,089,000 in 1995, $8,499,000 in 1994 and $8,799,000 in
1993.
Income taxes paid were $21,557,000, $7,650,000 and $9,095,000 for 1995,
1994, and 1993, respectively.
In 1994, the Company sold three buildings for $6.8 million for which the
Company provided mortgage financing on approximately 56% of the purchase price,
at an interest rate of 8%.
28
Income Per Share
Income per share amounts are computed based on the weighted average number
of common shares outstanding during each year, including equivalents. There were
average shares outstanding of 10,222,000 in 1995, 10,604,000 in 1994 and
10,720,000 in 1993.
Credit Risk
The Company performs ongoing risk and credit evaluations of its agents and
insureds. Insurance is written throughout the United States with concentration
in the southern and southwestern states.
Reclassifications
Certain reclassifications have been made in the 1994 and 1993 financial
statements to conform to those classifications used in 1995.
29
NOTE 2 - INVESTMENTS
The amortized cost and estimated market values of investments in financial
instruments held by the Company are as follows:
Gross Gross
Amortized Unrealized Unrealized Market
December 31, 1995 Cost Gains Losses Value
---------- ---------- ---------- ----------
(In thousands)
Fixed maturities held to maturity:
Bonds:
Obligations of states and
political subdivisions ........ $ 7,511 $ 163 $ (83) $ 7,591
-------- -------- -------- --------
Total fixed maturities held
to maturity ................. 7,511 163 (83) 7,591
-------- -------- -------- --------
Securities available for sale:
Fixed maturities:
Bonds:
U.S. Treasury Securities
and obligations of U.S.
government agencies .......... 135,418 6,147 -- 141,565
Obligations of states and
political subdivisions ....... 178,722 9,272 (36) 187,958
Foreign governments ........... 860 4 -- 864
Corporate securities .......... 30,570 593 (88) 31,075
Mortgage-backed securities .... 5,681 134 -- 5,815
-------- -------- -------- --------
Total bonds .................. 351,251 16,150 (124) 367,277
Redeemable preferred stocks .... 4,842 91 -- 4,933
-------- -------- -------- --------
Total fixed maturities
available for sale ........... 356,093 16,241 (124) 372,210
-------- -------- -------- --------
Equity securities:
Common stocks .................. 45,811 6,409 (1,416) 50,804
Preferred stocks ............... 15,156 542 (418) 15,280
-------- -------- -------- --------
Total equity securities
available for sale ........... 60,967 6,951 (1,834) 66,084
-------- -------- -------- --------
Mortgage loans and land contracts. 12,550 1,185 -- 13,735
Short-term investments ........... 42,666 -- -- 42,666
-------- -------- -------- --------
Total financial assets .......... $479,787 $ 24,540 $ (2,041) $502,286
======== ======== ======== ========
30
Gross Gross
Amortized Unrealized Unrealized Market
December 31, 1994 Cost Gains Losses Value
---------- ---------- ---------- ----------
(In thousands)
Fixed maturities held to maturity:
Bonds:
Obligations of states and
political subdivisions ........ $ 14,810 $ 234 $ (110) $ 14,934
-------- -------- -------- --------
Total fixed maturities held
to maturity ................. 14,810 234 (110) 14,934
-------- -------- -------- --------
Securities available for sale:
Fixed maturities:
Bonds:
U.S. Treasury Securities
and obligations of U.S.
government agencies .......... 85,001 353 (551) 84,803
Obligations of states and
political subdivisions ....... 212,946 1,039 (4,352) 209,633
Foreign governments ........... 2,883 -- (90) 2,793
Corporate securities .......... 38,056 971 (495) 38,532
Mortgage-backed securities .... 9,947 41 (197) 9,791
-------- -------- -------- --------
Total bonds .................. 348,833 2,404 (5,685) 345,552
Redeemable preferred stocks .... 5,982 7 (300) 5,689
-------- -------- -------- --------
Total fixed maturities
available for sale ........... 354,815 2,411 (5,985) 351,241
-------- -------- -------- --------
Equity securities:
Common stocks .................. 18,091 1,754 (596) 19,249
Preferred stocks ............... 30,124 376 (3,138) 27,362
-------- -------- -------- --------
Total equity securities
available for sale ........... 48,215 2,130 (3,734) 46,611
-------- -------- -------- --------
Mortgage loans and land contracts. 14,525 285 (349) 14,461
Short-term investments ........... 11,798 -- -- 11,798
-------- -------- -------- --------
Total financial assets .......... $444,163 $ 5,060 $(10,178) $439,045
======== ======== ======== ========
31
The amortized cost and market values of fixed maturities are shown below by
contractual maturity. Actual maturities will differ from contractual maturities
because securities may be called or prepaid with or without prepayment
penalties.
Held to Maturity Available for sale
-------------------- ----------------------
Amortized Market Amortized Market
December 31, 1995 Cost Value Cost Value
--------- --------- --------- ----------
(In thousands)
Due to mature (years):
One or less ..................... $ 5,003 $ 5,090 $ 28,588 $ 28,987
After one through five .......... 548 566 147,044 152,154
After five through ten .......... 962 1,020 119,884 128,251
After ten ....................... 998 915 50,084 52,100
-------- -------- -------- --------
Total .......................... 7,511 7,591 345,600 361,492
Mortgage-backed securities ....... -- -- 5,651 5,785
Redeemable preferred stocks ...... -- -- 4,842 4,933
-------- -------- -------- --------
Total fixed maturities .......... $ 7,511 $ 7,591 $356,093 $372,210
======== ======== ======== ========
The change in unrealized gains and losses on fixed maturity and equity
security investments is summarized as follows:
Year Ended December 31, 1995 1994 1993
--------- --------- ---------
(In thousands)
Fixed maturities ....................... $ 19,647 $ (19,262) $ 2,706
Equity securities ...................... 6,721 (2,181) 1,727
--------- --------- ---------
Combined .............................. $ 26,368 $ (21,443) $ 4,433
========= ========= =========
The following methods and assumptions were used to estimate market value:
Investment Securities
Quoted market prices for specific instruments owned, or for similar
securities, are used to determine market value.
Mortgage Loans and Land Contracts
The present value of future cash flows is used to determine market value.
The rates used are the current rates at which loans with similar terms would be
made to borrowers with similar credit ratings.
Short-Term Investments
The recorded book value is presumed to be a reasonable estimate of market
value.
To conform with statutory requirements, bonds and certificates of deposit
in principal amounts totaling $14,195,000 were on deposit with various
regulatory agencies at December 31, 1995.
32
The mortgage loans and land contracts are primarily the result of financing
sales associated with the development of an office park, an industrial park and
a condominium development by the Company. At December 31, 1995, 98% of the
mortgage loans and land contracts were categorized as commercial, and 2% as
residential. Investment real estate consists primarily of vacant land for a
future office park and real estate acquired through foreclosure on mortgage
loans totaling $3.8 million. The majority of mortgage loans, land contracts and
investment real estate is concentrated in Michigan.
Pretax investment income by source is summarized as follows:
Year Ended December 31, 1995 1994 1993
--------- --------- ---------
(In thousands)
Fixed maturities ....................... $ 25,254 $ 23,093 $ 24,707
Equity securities ...................... 2,951 3,119 2,293
Mortgage loans and real estate ......... 38 685 1,024
Short-term investments ................. 2,461 1,055 774
--------- --------- ---------
Total ................................. 30,704 27,952 28,798
Investment expense ..................... 1,360 1,029 1,064
--------- --------- ---------
Net investment income ................. $ 29,344 $ 26,923 $ 27,734
========= ========= =========
Realized gains and losses are summarized as follows:
Year Ended December 31, 1995 1994 1993
--------- --------- ---------
(In thousands)
Fixed maturities ....................... $ (1,586) $ (795) $ 2,486
Equity securities ...................... 2,013 1,464 (272)
Real estate ............................ (58) (78) (254)
--------- --------- ---------
Net gain ............................. $ 369 $ 591 $ 1,960
========= ========= =========
Proceeds from sales of investments in fixed maturities totaled $69,716,000
in 1995, $42,417,000 in 1994 and $37,276,000 in 1993. Gross gains of $711,000,
$970,000 and $3,267,000 and gross losses of $1,322,000, $1,464,000 and $781,000
were realized on those sales in 1995, 1994 and 1993, respectively.
33
NOTE 3 - PREPAID POLICY ACQUISITION COSTS
Acquisition costs are recognized on all premium written by the Company.
Such costs are amortized over policy terms which are principally annual, but
which range up to seven years. Policy acquisition costs deferred and amortized
are as follows:
1995 1994
--------- ---------
(In thousands)
Balance at January 1, ............................. $ 75,082 $ 80,535
--------- ---------
Policy acquisition costs incurred:
Commission and brokerage ......................... 79,364 82,264
General and administrative ....................... 36,079 33,047
Taxes, licenses and fees ......................... 10,926 11,180
Reinsurance cost (recoveries) .................... 3,058 (1,307)
--------- ---------
Total ........................................... 129,427 125,184
--------- ---------
Charged to expense ................................ (130,457) (130,637)
--------- ---------
Balance at December 31, .......................... $ 74,052 $ 75,082
========= =========
NOTE 4 - REAL ESTATE AND EQUIPMENT
Real estate and equipment utilized by the Company is summarized as follows:
December 31, 1995 1994
--------- ---------
(In thousands)
Owned land and buildings .......................... $ 43,475 $ 43,634
Equipment and other ............................... 3,016 3,016
--------- ---------
Total cost ....................................... 46,491 46,650
Less accumulated depreciation ..................... 10,456 8,273
--------- ---------
Real estate and equipment - net .................. $ 36,035 $ 38,377
========= =========
34
NOTE 5- LIABILITY FOR INSURANCE LOSSES AND LOSS ADJUSTMENT EXPENSES
The incurred and paid activity in the liability for insurance losses and
loss adjustment expenses is as follows:
1995 1994
--------- ---------
(In thousands)
Balance at January 1, ............................. $ 95,496 $ 110,558
Less reinsurance recoverables .................... 3,158 4,167
--------- ---------
Net balance January 1, .......................... 92,338 106,391
--------- ---------
Incurred related to:
Current year ..................................... 256,568 278,790
Prior years ...................................... 2,565 (14,789)
--------- ---------
Total incurred .................................. 259,133 264,001
--------- ---------
Paid related to:
Current year ..................................... 202,068 226,741
Prior years ...................................... 54,308 51,313
--------- ---------
Total paid ...................................... 256,376 278,054
--------- ---------
Net balance at December 31, .................... 95,095 92,338
Plus reinsurance recoverables ..................... 2,409 3,158
--------- ---------
Balance at December 31, .......................... $ 97,504 $ 95,496
========= =========
The majority of the reduction in prior years incurred of $14.8 million in
1994 was the result of lower than anticipated losses and loss adjustment
expenses in the run-off of the Company's discontinued commercial lines business.
35
NOTE 6- NOTES AND OTHER OBLIGATIONS PAYABLE
Notes and other obligations payable consist of the following:
December 31, 1995 1994
--------- ---------
(In thousands)
Current portion of long-term notes payable ........ $ 4,061 $ 9,869
Current portion of capital lease obligations ...... 138 112
--------- ---------
Total short-term debt ............................ 4,199 9,981
--------- ---------
Long-term notes payable ........................... 92,351 94,590
Obligations under capitalized leases .............. 2,697 2,835
--------- ---------
Total long-term debt ............................. 95,048 97,425
--------- ---------
Total ........................................... $ 99,247 $ 107,406
========= =========
Notes payable consist primarily of an unsecured credit agreement with a
group of banks and a loan secured by a mortgage on the Company's corporate
headquarters building. A new unsecured credit agreement was entered into in
April 1995, replacing an existing agreement. The new credit agreement provides
for a revolving credit facility not to exceed $40 million and a term loan of $56
million, which reduced to $50 million on August 31, 1995. The credit agreement
expires in April 2002. At December 31, 1995, the term loan had a balance of $50
million, the revolving credit facility had a balance of $8 million and the
building mortgage had a balance of $36.4 million. In addition to the remaining
$32 million available under the revolving credit facility, the Company has
several uncommitted money market lines of credit with various banks, all of
which may not exceed $10 million at any one time. At December 31, 1995, the
Company had borrowed $2 million under these credit lines.
The credit agreement and mortgage loan agreement subject the Company to
certain restrictions and covenants related to, among others: the payment of
dividends; minimum net worth levels; the sale, lease, transfer or other disposal
of properties and assets other than in the ordinary course of business; new
indebtedness; the assumption or creation of liens; and maintenance of certain
ratios.
Borrowing rates on the term loan and revolving credit facility of the
credit agreement are based on eurodollar and negotiated rates. During 1995, the
Company entered into interest rate swap agreements with a financial institution.
The notional principal amount of the swaps is $46 million and $12 million, with
both maturing August 31, 2000. These agreements effectively fixed the interest
rate on the entire $58 million outstanding under the credit agreement to 7.15%.
The interest rate swaps are non-amortizing. The Company's exposure to credit
risk is limited to interest movements and is considered to be negligible.
The borrowing rate on the mortgage loan is fixed at 9.8%. The interest rate
on the money market credit line was 6.29% at December 31, 1995.
The Company does not hold or issue any other forms of derivative financial
instruments.
36
Maturities of long-term debt for each of the five years succeeding December
31, 1995 are as follows:
Year Ending December 31:
(In thousands)
1996 ........................................................... $ 4,199
1997 ........................................................... 2,630
1998 ........................................................... 2,903
1999 ........................................................... 3,205
2000 ........................................................... 11,538
Thereafter ..................................................... 74,772
---------
Total .......................................................... $ 99,247
=========
The fair value of financial liabilities and off-balance-sheet financial
instruments are as follows:
Net Book Fair
December 31, 1995 Value Value
--------- ---------
(In thousands)
Financial liabilities:
Mortgage note .................................... $ 36,412 $ 43,582
Variable notes ................................... 60,000 60,000
--------- ---------
Total financial liabilities ..................... $ 96,412 $ 103,582
========= =========
Off-balance sheet financial instruments:
Interest rate swap agreements .................... $ -- $ (2,371)
========= =========
The following methods and assumptions were used to estimate fair value:
Mortgage Note
The present value of future cash flows and the prepayment penalty are used
to determine estimated fair value. The rate used was based on quoted market
prices for similar issues.
Variable Rate Notes
For financial instruments bearing variable interest rates, it is presumed
that recorded book values are reasonable estimates of fair value.
Interest Rate Swap Agreements
The fair value of interest rate swaps is the estimated amount the Company
would pay or receive to terminate the agreement at the reporting date, taking
into account current interest rates.
37
NOTE 7- INCOME TAXES
The Company files a consolidated tax return with its subsidiaries,
including its life insurance subsidiary. For tax purposes, certain amounts have
been accumulated by the life insurance subsidiary in a memorandum policyholders'
surplus account and will be taxed only when distributed to shareholders, or when
they exceed prescribed limits. In 1993, these limits were exceeded by the life
subsidiary, resulting in $245,000 of income taxes being charged to operating
income. Policyholders' surplus on a tax basis amounted to $10.5 million at
December 31, 1995. In the event written premium is less than $21 million in
1996, a portion of the policyholders' surplus could become taxable again.
The provisions (credits) for income taxes in the Consolidated Statements of
Income are made up of the following components:
Year Ended December 31, 1995 1994 1993
--------- --------- ---------
(In thousands)
Current federal income tax expense ..... $ 19,073 $ 8,272 $ 9,161
Deferred federal income tax expense .... (850) 1,074 2,264
--------- --------- ---------
Income tax provision .................. $ 18,223 $ 9,346 $ 11,425
========= ========= =========
Deferred tax liabilities (assets) are composed of the following:
December 31, 1995 1994
--------- ---------
(In thousands)
Policy acquisition costs related to
unearned premium ................................. $ 28,124 $ 28,753
Unrealized gains on securities .................... 7,432 --
Excess tax over book basis of fixed assets ........ 1,610 1,048
Life policy actuarial reserves .................... 800 471
Unearned premium adjustments ...................... 234 614
Bond discount amortization ........................ 417 1,599
Windstorm pool recovery ........................... 1,331 --
Other ............................................. 939 1,137
--------- ---------
Gross deferred tax liabilities ................... 40,887 33,622
--------- ---------
Unearned premium adjustments ...................... (17,505) (16,854)
Difference between book and tax reserves .......... (4,771) (5,378)
Deferred compensation ............................. (2,601) (2,348)
Unrealized losses on securities ................... -- (1,812)
Other ............................................. (2,564) (2,179)
--------- ---------
Gross deferred tax assets ........................ (27,441) (28,571)
--------- ---------
Net deferred tax liability ...................... $ 13,446 $ 5,051
========= =========
38
In addition to the Company's net deferred tax liability, the liability for
income taxes includes a current tax liability (recovery) of $(429,000) and
$2,063,000 at December 31, 1995 and 1994, respectively
A reconciliation of the federal statutory tax rate to the Company's
effective tax rate is as follows:
% of Pre-tax Income
-----------------------------------
Year Ended December 31, 1995 1994 1993
--------- --------- ---------
Federal statutory tax rate ............. 35.0% 35.0% 35.0%
Increase (reduction) in income taxes
relating to:
Tax-exempt municipal bond interest ... -5.3% -8.9% -7.9%
Dividends received deduction ......... -0.7% -1.5% -1.3%
Tax credits and other ................ -0.3% -0.7% 0.4%
--------- --------- ---------
Effective tax rate .................. 28.7% 23.9% 26.2%
========= ========= =========
NOTE 8 - REINSURANCE
The Company was party to both proportional and non-proportional reinsurance
agreements in 1995, primarily to protect itself against catastrophic losses, but
also to limit losses on individual claims for benefit payments and certain other
risks.
Reinsurance contracts do not relieve the Company from its primary
obligation to the policyholder; consequently, a contingent liability exists to
the extent that losses recoverable under reinsurance treaties are not paid to
the Company by reinsurers. The Company performs due diligence to ensure that
reinsurers with whom the Company has reinsurance contracts are financially able
to perform under the terms of the contract.
In accordance with the adoption of SFAS No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts" in 1994, the
Company's reinsurance receivables and prepaid reinsurance premiums are reported
as assets and no longer netted against unearned premiums and the liability for
losses and loss adjustment expenses.
The Company considers its catastrophe reinsurance costs to be an additional
loss cost. Ceded reinsurance premiums, losses and commissions for these
coverages are combined and presented in the insurance losses, death and other
benefits line. All non-catastrophe reinsurance amounts are reflected in their
respective line items in the accompanying Consolidated Statements of Income.
References to reinsurance ceded in the segment Statements of Income are for
non-catastrophe reinsurance only.
Due from reinsurance companies balances are primarily premium amounts due
from unconsolidated insurance subsidiaries for business assumed, and loss
recoverables from a major U.S. reinsurance company.
39
The following amounts summarize the effect of reinsurance on the Company's
financial statements:
Year Ended December 31, 1995 1994 1993
--------- --------- ---------
(In thousands)
Direct:
Written premiums ......................... $ 380,981 $ 373,605 $ 360,197
Earned premiums .......................... 382,798 370,152 369,596
Insurance losses, death and other benefits 216,521 238,781 226,575
Assumed:
Written premiums ......................... 68,055 64,795 59,512
Earned premiums .......................... 67,119 62,733 57,318
Insurance losses, death and other benefits 27,348 33,449 23,894
Ceded - Catastrophe:
Written premiums ......................... 6,075 38,047 20,450
Earned premiums .......................... 16,149 32,720 22,123
Insurance losses, death and other benefits 84 38,035 17,998
Ceded - Non-Catastrophe:
Written premiums ......................... 1,793 962 3,169
Earned premiums .......................... 1,838 1,039 5,535
Insurance losses, death and other benefits 1,364 (619) 2,226
Assumed reinsurance is predominantly from unconsolidated affiliates.
In 1990 and 1989, the Company assumed credit life premium under various
reinsurance treaties. Under the terms of these treaties, the Company is
obligated to reimburse the ceding companies only if the overall incurred loss
ratio exceeds a certain percentage. In the fourth quarter of 1990, the ceding
companies were declared insolvent and placed into liquidation. The Company
believes that its obligations under these treaties are such that it is not
responsible to pay claims unless the prescribed loss ratios are exceeded.
Regarding any obligation the Company may have to indemnify the ceding companies
for claims arising under the treaties should the ceding companies be unable to
pay, it is the opinion of management and its outside legal counsel that the
Company has the right to net any liabilities associated with these treaties
against the premium owed to it, in which case there would be no material adverse
impact to the Company. To date, no claims have been made against the Company for
payment of claims.
NOTE 9- EMPLOYEE BENEFIT PLANS
Money Purchase Pension Plan
The Company provides a Money Purchase Pension Plan for all employees with
one or more years of service. Under the Money Purchase Pension Plan, the Company
is required to make annual contributions equal to 6% of the eligible
compensation of all eligible plan participants.
Profit-Sharing Retirement and Savings Plan
The Company also provides a Profit-Sharing Retirement and Savings Plan for
all employees with one or more years of service. Under this plan the Company can
make discretionary profit-sharing contributions as a percentage of eligible
compensation. In 1995 and 1994, contributions equal to 5% of eligible
compensation of all eligible employees were made by the Company. The savings
feature of the plan is a 401(k) plan that allows for voluntary contributions by
employees and provides a 50% Company-paid match of the employee's contribution,
limited to 2% of the employee's eligible income.
40
Retirement Supplement Plan
The Company provides a Retirement Supplement Plan for certain key employees
which provides monthly lifetime payments or lump sum payments upon retirement or
disability, and lump sum payments to beneficiaries upon death. The retirement
benefit is based on a percentage of the participant's final average earnings,
less the participant's Money Purchase Pension Plan and Profit Sharing Plan
benefits (excluding 401(k) plan benefits). The retirement benefits expected to
be paid total $4,261,000 and are being amortized over the participants'
anticipated employment with the Company, which range from 1 to 16 years. Life
insurance contracts have been purchased to fund the retirement benefits. Key
employees would receive their entire retirement benefit in the event of a change
in control of the Company and their subsequent termination. The maximum
contingent liability as of December 31, 1995 relating to the change in control
provision is approximately $6,762,000.
Deferred Compensation Plan
The Company has a non-qualified Deferred Compensation Plan for the benefit
of certain key employees. The plan allows for the participants to defer a
percentage of their base salary and incentive payments, and provides a declared
rate of return on an annual basis. The Company purchases life insurance
contracts on plan participants to fund the plan.
Long-Term Incentive Plan
The Company has a Long-Term Incentive Plan (LTIP) which provides awards to
certain key employees based on the Company's return on shareholders' equity over
three year periods. The LTIP was amended in December 1994 and approved by the
shareholders for 70% of the awards to be paid in the Company's common stock. The
awards are fully vested upon issuance; however, the stock is restricted to
resale for three years from the date of the award. In 1995, 9,804 shares were
issued under the plan.
Stock Option Plan
The Company has a non-qualified stock option plan which authorizes the
granting of options on 650,000 shares of the Company's common stock to certain
key employees. During 1995, the Company's Board of Directors authorized, and the
shareholders' approved, an additional 400,000 shares of the Company's common
stock for future grants under the plan, making the total authorized under the
plan 1,050,000. The options, granted at market value, vest at either 33.3% or
25% per year over a three or four year period. There were 623,586 options fully
vested as of February 1996.
41
The following is a summary of the stock option transactions during 1995,
1994 and 1993:
Options Options
Reserved Options Outstanding
for Grant Granted Price/Share
--------- --------- -------------
Balance, January 1, 1993 ............. 6,055 626,786 $18.25-$34.50
Granted ............................ (6,000) 6,000 $ 32.50
Exercised .......................... -- (4,100) $18.25-$21.00
Forfeited .......................... 2,100 (2,100) $18.25-$21.00
--------- ---------
Balance, December 31, 1993 ........... 2,155 626,586 $18.25-$34.50
Granted ............................ (2,000) 2,000 $ 31.25
--------- ---------
Balance, December 31, 1994 ........... 155 628,586 $18.25-$34.50
Authorized ......................... 400,000
Granted ............................ (173,500) 173,500 $ 38.00
Exercised .......................... -- (2,000) $33.25-$34.50
--------- ---------
Balance, December 31, 1995 ........... 226,655 800,086
========= =========
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123,"Accounting for Stock-Based Compensation." SFAS No. 123 allows companies to
continue to account for their stock-based compensation plans in accordance with
APB Opinion 25, but encourages the adoption of a new accounting method to record
compensation expense based on the estimated fair value of employee stock-based
compensation. Companies electing not to follow the new fair value based method
are required to provide expanded footnote disclosures, including pro forma net
income and earnings per share, determined as if the company had adopted the new
method. The Statement is required to be adopted for fiscal years beginning after
December 15, 1995. Management intends to continue to account for its stock-based
compensation plans in accordance with APB Opinion 25 and provide the
supplemental disclosures as required by SFAS No. 123, beginning in 1996.
Restricted Stock Plan
The Company also has a restricted stock plan under which certain key
employees were issued 64,814 shares of the Company's common stock in 1988,
representing all of the shares available under the plan. The shares are
registered in the name of the participant, who has all the rights of a
shareholder, subject to restrictions as to transfer until they vest.
Compensation expense is recorded over the periods in which they vest. The
unamortized market value of the shares awarded is shown separately in
shareholders' equity. As of December 31, 1995, 62,979 were vested, 147 shares
were issued and non-vested and 1,688 shares remained unissued from forfeitures.
In 1995, the Company adopted and the shareholders' approved a restricted
stock plan for the Company's Directors. Under the plan, the Company's Directors
may elect to receive shares of the Company's common stock in lieu of their
annual retainer fees. The shares are issued at market value and are registered
in the name of the participant, who has all the rights of a shareholder, subject
to restrictions as to transfer until they vest. Vesting occurs upon the
completion of the Director's term. Up to 20,000 shares may be issued under the
plan, and in 1995, 1,158 shares were issued.
The cost of the aforementioned benefit plans, excluding post-retirement
benefits, for 1995, 1994 and 1993 was $4,339,000, $4,307,000 and $2,982,000,
respectively.
42
Post-Retirement Benefit Plan
The Company maintains a defined benefit post-retirement plan for
substantially all employees which provides certain health care, dental and life
insurance benefits. Eligibility and benefits are based on age and years of
service for the health care and dental benefits, which also require
contributions from retirees under certain circumstances. The life insurance
benefits are non-contributory and are calculated as a percentage of the
employee's base annual compensation in the year of retirement. The benefit is
reduced at age 70 to an ultimate benefit of $5,000. In 1993, the Company adopted
SFAS No. 106, "Employers' Accounting for Post-Retirement Benefits Other Than
Pensions," which requires companies to accrue post-retirement benefits during
the employees' working years rather than expensing on a cash basis. The Company
does not prefund its post-retirement benefit plan and has elected to amortize
the transition obligation over a 20 year period.
The plan's funded status reconciled with the amounts included in other
liabilities in the Company's Consolidated Balance Sheets is as follows:
December 31, 1995 1994
--------- ---------
(In thousands)
Accumulated post-retirement benefit obligation:
Retirees ......................................... $ 1,559 $ 2,961
Fully eligible active plan participants .......... 773 347
Other active plan participants ................... 2,842 2,051
--------- ---------
Total ........................................... 5,174 5,359
Plan assets ....................................... -- --
--------- ---------
Accumulated post-retirement benefit obligation
in excess of plan assets ......................... 5,174 5,359
Unrecognized:
Transition obligation ............................ 4,602 4,873
Actuarial (gain) loss ............................ (1,226) (813)
--------- ---------
Accrued post-retirement benefit liability ....... $ 1,798 $ 1,299
========= =========
Net periodic post-retirement benefit costs included the following
components:
Year Ended December 31, 1995 1994 1993
--------- --------- ---------
(In thousands)
Service cost ........................... $ 274 $ 259 $ 214
Interest on accumulated post-retirement
obligation ............................ 391 438 419
Amortization of:
Transition obligation ................ 271 271 271
Actuarial (gain)/loss ................ (48) -- --
--------- --------- ---------
Total costs ........................... $ 888 $ 968 $ 904
========= ========= =========
43
The health care trend rate assumed was 7.75% for 1996, decreasing .25% per
year to 6% in 2003 and thereafter. The dental trend rate was 6% per year. The
rate of compensation increase regarding life insurance benefits was 5%. A 1%
increase in the health care trend rate would increase the accumulated
post-retirement benefit obligation as of December 31, 1995 by $145,000 and the
net periodic benefit cost for the year then ended by $20,000.
The weighted average discount rate used in determining the accumulated
post-retirement benefit obligation was 8%.
NOTE 10 - LEASE COMMITMENTS
The Company leases buildings and the majority of its furniture and
equipment under capital and operating leases. Operating leases generally include
renewal options for periods ranging from two to seven years and require the
Company to pay utilities, taxes, insurance and maintenance expenses.
The following is a schedule of future minimum lease payments under
cancelable and noncancelable operating leases for each of the five years
succeeding December 31, 1995 and thereafter, excluding renewal options:
Year Ending December 31:
(In thousands)
1996 ........................................................... $ 3,203
1997 ........................................................... 2,186
1998 ........................................................... 1,815
1999 ........................................................... 1,276
2000 ........................................................... 424
Thereafter ..................................................... 175
The following is a schedule of future minimum lease payments under the
Company's capitalized finance leases together with the present value of the net
minimum lease payments as of December 31, 1995:
Year Ending December 31:
(In thousands)
1996 ........................................................... $ 462
1997 ........................................................... 468
1998 ........................................................... 468
1999 ........................................................... 468
2000 ........................................................... 468
Thereafter ..................................................... 2,587
---------
Total minimum lease payments ................................... 4,921
Less amount representing interest .............................. 2,086
---------
Present value of net minimum lease payments .................... $ 2,835
=========
Rental expense charged to operations in 1995, 1994 and 1993 amounted to
$4,693,000, $4,856,000 and $4,485,000, respectively, including amounts paid
under short-term cancelable leases.
44
NOTE 11 - STATUTORY INFORMATION
As a holding company, the principal source of the parent company's cash
available for debt service and payment of dividends (other than through the use
of borrowed funds or the employment of other assets) is dividends received from
its principal property and casualty insurance subsidiary, Foremost Insurance
Company, and its life insurance subsidiary, Foremost Life Insurance Company.
State regulatory requirements limit the amount of annual dividends these
companies can pay to the holding company without obtaining prior insurance
department approval. These restrictions are not expected to significantly affect
the holding company's ability to meet its foreseeable cash requirements. The
amount of dividends which the combined insurance operations can pay to the
holding company in 1996 without obtaining prior insurance department approval
under the current statute is $50.6 million. In 1995 these companies paid
dividends in cash and other assets to the parent company totaling $37.2 million.
At December 31, 1995, $90.4 million of consolidated shareholders' equity
represents net assets of the Company's insurance subsidiaries that cannot be
transferred in the form of dividends, loans or advances to the parent company.
Policyholders' surplus for the combined property and casualty insurance
companies at December 31, 1995 and 1994 was $200.5 million and $181.3 million,
respectively. Policyholders' surplus for the life insurance company at December
31, 1995 and 1994 was $24 million and $24.5 million, respectively. Statutory net
income for the combined property and casualty insurance companies for the years
ended December 31, 1995, 1994 and 1993 was $49.3 million, $44.2 million and
$33.6 million, respectively. Statutory net income for the life insurance company
for the years ended December 31, 1995, 1994 and 1993 was $3.6 million, $4.7
million and $6.2 million, respectively.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Agreements and Contracts
The Company has assigned its interest as tenant in a capital lease
obligation. In the event of default by the assignee, a contingent liability
exists of approximately $1.9 million at December 31, 1995.
The Company is a party to a long-term agreement with a service company
which provides data processing services and equipment. Under the agreement the
Company is required to pay minimum service charges and resource charges or
credits depending on the volume of transactions processed. The minimum service
charges are approximately $15.1 million per year and are subject to annual cost
of living increases. The agreement expires on December 31, 2001.
Stock Purchase Rights
In 1989 the Company's Board of Directors declared a dividend of one common
stock purchase right for each share of the Company's outstanding common stock.
Each right may be exercised at any time to purchase one one-hundredth of a share
of the Company's common stock at a purchase price of $110 per right.
In the event any person or group becomes the beneficial owner of 20% or
more of the Company's common stock, or if a holder of 20% or more of the
Company's common stock engages in self-dealing transactions, or if the Company
becomes involved in a merger transaction, or sells 50% or more of its assets or
earning power to another person, then each right not owned by the acquiring
person or group will entitle its holder to purchase, at the right's then current
exercise price, shares of the Company's common stock, or the common stock of the
acquiring or surviving entity (or in certain circumstances, cash, property or
securities of the Company) having a market value equal to twice the exercise
price. While a shareholder group owns in excess of 20% of the Company's
outstanding common stock, any increase of more than 2% in their aggregate
ownership would also make the rights exercisable.
45
The rights expire on December 14, 1999 and may be redeemed by the Company
for $.01 per right at any time until the 10th day following the public
announcement that a person or group, other than the existing shareholder group,
has acquired 20% or more of the Company's common stock. The Company has reserved
200,000 shares of its common stock for issuance upon exercise of the rights.
Litigation
The Company and its subsidiaries are routinely engaged in litigation as
plaintiff and defendant in the normal course of business. In the opinion of
management, all litigation matters, as well as the litigation described below
are not expected to have a material adverse effect on the Company's consolidated
financial position, operating results and cash flows. The aggregate ultimate
liability, if any, of the Company and its subsidiaries for the following claims
is not determinable at December 31, 1995.
The Company has been named as a defendant in a number of similar individual
lawsuits and several related class actions filed in Alabama state and federal
courts (the "Alabama Litigation"). The cases in the Alabama Litigation allege
both compensatory and punitive damages. In general, the complaints allege that
the Company or its Alabama agents failed to disclose information about insurance
coverages and premium structure, misinformed policyholders about coverages or
policy provisions, and in other ways misrepresented the nature and extent of
insurance sold in Alabama. The Company denies all allegations and is vigorously
defending each suit. The compensatory damages, if any, are likely to be nominal
for each individual claimant. The primary risk exposure facing the Company
involves the plaintiffs' claims for punitive damages.
In June 1995, a Bullock County, Alabama jury awarded $15 million in
punitive damages against the Company, despite the fact that the amount of the
compensatory damage award in the Alabama Litigation case was $12,500. The
punitive damage element of the Bullock County jury award has been reduced by the
trial court judge to $6.5 million and the compensatory damage element of the
Bullock County jury award has been reduced to approximately $3,300. In February
1996, a Lowndes County, Alabama jury awarded two policyholders $26,000 in
compensatory damages and $3.25 million in punitive damages. The Company believes
that both Alabama Litigation awards, including the amount of the trial court's
remittitur in the Bullock County case, are erroneous and is vigorously pursuing
all post-trial remedies, including appeals of both judgments to the Alabama
Supreme Court. Although the outcome of the appeals is uncertain, for each appeal
the Company seeks to have a judgment entered in its favor notwithstanding the
jury verdict, a new trial, or, at a minimum, a reduction of all or part of the
punitive damages. The Company believes, due to its understanding of Alabama law
and the facts and circumstances of each case, that both appeals will result, at
a minimum, in a reduction in the punitive damage awards entered by the trial
courts. The Company has not accounted for the damages in its financial
statements because the amount of the loss cannot be reasonably estimated.
The Company is in the process of seeking a settlement of consolidated state
class actions against the Company and other defendants that have been removed to
and are now pending in the United States District Court for the Northern
District of Alabama. The Company has proposed to contribute approximately $3.65
million into a settlement fund that will be used to fund payments to members of
the settlement class, consisting of Foremost policyholders in Alabama from 1989
through 1995. The Company anticipates that the settlement of this class action,
if approved by the federal court, will foreclose further claims against the
Company except for claims by persons who affirmatively "opt out" of the
settlement class. Although the Company has not established a specific reserve
for this proposed settlement, sufficient reserves are available to cover the
amount of the proposed settlement without affecting income or the adequacy of
remaining held reserves.
46
The Company intends to seek an order from the federal court declaring that
90% of the Company's settlement contribution would be allocated to compensate
the settlement class for alleged punitive damages, that the amount allocated to
punitive damages is sufficient to satisfy the Company's punitive damages
obligation as a result of the alleged pattern and practice of wrongdoing in
Alabama, and that an award of any further punitive damages in other Alabama
Litigation cases would be unjust. The Company intends to use this federal class
action order to argue that additional punitive damages awards in Alabama
Litigation would be duplicative and unjust, would violate the Company's
substantive due process rights, and are barred by the provisions of the federal
class action settlement order. While it is anticipated that a number of
claimants will opt out of the settlement class, the Company believes that the
settlement order being sought from the federal court, if entered, will
significantly delimit the Company's punitive damages exposure on the remaining
Alabama Litigation claims.
In November 1995, an Iowa jury returned a verdict of $688,000 in
compensatory damages and $8 million in punitive damages against the Company for
alleged fraud, breach of contract and misappropriation of trade secrets in the
termination of an agent's contract. The Company believes the verdict was
erroneous and is currently pursuing post-judgment motions for judgment
notwithstanding the jury verdict, a new trial and remittitur. The Company has
not accounted for the damages in its financial statements because the amount of
the loss cannot be reasonably estimated.
47
NOTE 13 - INFORMATION BY BUSINESS SEGMENTS
The Company's operations are principally in two segments of the insurance
industry. Its property and casualty insurance subsidiaries primarily furnish
insurance to the mobile home and recreational vehicle markets. Its life
insurance subsidiary furnishes small employer group benefit insurance and credit
life insurance; however, new credit life writings were discontinued as of
December 31, 1992. Insurance is written throughout the United States with
concentrations in the southern and southwestern states. The nature of the
Company's insurance operations expose it to risk in the case of numerous, severe
catastrophic events. To minimize this risk, the Company performs ongoing
evaluations of its insurance exposures, utilizes reinsurance when appropriate
and performs credit and risk evaluations of its agents and insureds.
Detailed operating information for the property and casualty, and life
insurance segments is presented herein. There are no significant intercompany
transactions among the segments.
INFORMATION BY BUSINESS SEGMENT
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
Net Insurance Premium Written
and Assumed (In millions)
Property and casualty:
Mobile home .................... $ 352.3 $ 341.5 $ 324.3 $ 312.2 $ 279.0
Recreational Vehicle ........... 49.1 49.7 46.5 46.0 42.8
Automobile ..................... 12.4 14.1 16.8 22.1 24.6
Homeowners ..................... 6.9 5.5 4.7 4.2 4.4
Commercial products ............ 1.5 0.8 2.4 13.3 16.3
Collateral protection .......... 1.0 0.7 0.5 0.4 1.6
Other .......................... 3.8 3.9 2.5 2.8 2.2
Life ............................ 22.0 22.2 22.0 23.6 24.0
----------- ----------- ----------- ----------- -----------
Total .......................... 449.0 438.4 419.7 424.6 394.9
Less reinsurance ceded .......... 1.8 1.0 3.2 8.2 5.9
----------- ----------- ----------- ----------- -----------
Total .......................... $ 447.2 $ 437.4 $ 416.5 $ 416.4 $ 389.0
=========== =========== =========== =========== ===========
Net Insurance Premium Earned
(In millions)
Property and casualty:
Mobile home .................... $ 353.2 $ 335.7 $ 325.4 $ 302.4 $ 277.0
Recreational Vehicle ........... 49.3 47.8 45.2 43.4 41.4
Automobile ..................... 12.9 15.7 17.4 21.0 24.4
Homeowners ..................... 6.1 5.0 4.2 4.3 4.8
Commercial products ............ 1.0 0.9 2.9 12.9 15.4
Collateral protection .......... 0.8 0.6 0.6 0.5 1.9
Other .......................... 3.0 4.2 4.0 4.0 4.9
Life ............................ 21.8 21.9 21.7 34.6 44.6
----------- ----------- ----------- ----------- -----------
Total .......................... $ 448.1 $ 431.8 $ 421.4 $ 423.1 $ 414.4
=========== =========== =========== =========== ===========
48
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
Income Before Taxes
(In thousands)
Underwriting income (loss):
Property and casualty ........... $ 38,211 $ 15,372 $ 16,571 $ 7,866 $ (14,678)
Life ............................ 1,256 1,259 1,253 (1,008) 232
----------- ----------- ----------- ----------- -----------
Total .......................... 39,467 16,631 17,824 6,858 (14,446)
----------- ----------- ----------- ----------- -----------
Investment and other income
(including realized gains
and losses):
Property and casualty ........... 27,952 25,117 27,513 31,453 31,522
Life ............................ 1,929 2,147 2,453 2,607 3,748
----------- ----------- ----------- ----------- -----------
Total .......................... 29,881 27,264 29,966 34,060 35,270
Other-net (parent company &
non-insurance operations) (1) ... (5,800) (4,852) (4,125) (8,878) (15,022)
----------- ----------- ----------- ----------- -----------
Income before taxes .......... $ 63,548 $ 39,043 $ 43,665 $ 32,040 $ 5,802
=========== =========== =========== =========== ===========
Identifiable Assets
(In millions)
Property and casualty ........... $ 669.8 $ 625.1 $ 640.4 $ 612.6 $ 579.8
Life ............................ 30.9 35.0 41.7 51.1 73.7
Parent company and other (2) .... 57.8 61.0 66.0 66.8 74.8
----------- ----------- ----------- ----------- -----------
Total .......................... $ 758.5 $ 721.1 $ 748.1 $ 730.5 $ 728.3
=========== =========== =========== =========== ===========
<FN>
(1) General Corporate expenses were $1,945,000, $2,236,000 and $2,202,000 and
interest expense was $5,696,000, $4,739,000 and $4,783,000 in 1995, 1994 and
1993, respectively.
(2) Identifiable corporate assets were $11.4 million, $10.9 million and $11.1
million in 1995, 1994 and 1993, respectively.
</FN>
NOTE 14 - RELATED PARTY TRANSACTIONS
A Director and Major Shareholder has investment advisory agreements with
the Company and currently manages approximately 12% of the Company's investment
portfolio. During 1995, $424,365 of fees and commissions were earned under these
agreements. This Director has also been advised by another Director in regards
to the management of certain investments for the Company.
The Company has retained the law firm of which a Director is a partner
thereof and plans to continue to do so in the future for certain legal matters.
Fees in the amount of $396,840 were paid to this law firm in 1995.
49
NOTE 15 - SUBSEQUENT EVENTS
On January 31, 1996, the Company signed a Letter of Intent to sell its life
insurance subsidiary, Foremost Life Insurance Company. The sale is subject to
certain conditions including the negotiation and execution of a definitive
purchase agreement, completion of the buyer's due diligence review and obtaining
all regulatory approvals and authorizations.
The anticipated sale price would yield approximately $17 million in cash
after taxes. Management projects that the Company will incur an after-tax loss
on the sale of approximately $1.3 million primarily due to the effects of taxes
related to policyholders' surplus, discussed in Note 7.
INDEPENDENT ACCOUNTANTS' REPORT
To the Shareholders and Board of Directors
Foremost Corporation of America
Grand Rapids, Michigan
We have audited the accompanying consolidated balance sheets of Foremost
Corporation of America as of December 31, 1995 and 1994, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Foremost
Corporation of America at December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
Our audits of the consolidated financial statements were performed for the
purpose of forming an opinion on those financial statements taken as a whole.
The supplemental statements on pages 25 and 26 are presented for additional
analysis and are not a required part of the consolidated financial statements.
Such information has been subjected to the auditing procedures applied in the
audits of the consolidated financial statements and, in our opinion, is fairly
stated in all material respects in relation to the consolidated financial
statements taken as a whole.
BDO SEIDMAN, LLP
- ----------------
BDO SEIDMAN, LLP
February 15, 1996
Grand Rapids, Michigan
50
SUPPLEMENTARY DATA
Results By Quarter
1st 1st 2nd 2nd 3rd 3rd 4th 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
Consolidated Statements of Income 1995 1994 1995 1994 1995 1994 1995 1994
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands except per share data)
Total income from operations ....... $119,791 $115,757 $119,292 $115,075 $121,763 $116,336 $120,332 $117,023
======== ======== ======== ======== ======== ======== ======== ========
Income (loss):
Property and casualty insurance ... $ 9,397 $ 2,449 $ 10,432 $ 7,943 $ 14,463 $ 8,687 $ 12,556 $ 11,457
Life insurance .................... 557 523 472 492 503 701 555 545
-------- -------- -------- -------- -------- -------- -------- --------
Total insurance operations ....... 9,954 2,972 10,904 8,435 14,966 9,388 13,111 12,002
Parent company and other .......... (986) (686) (1,230) (769) (777) (581) (617) (1,064)
-------- -------- -------- -------- -------- -------- -------- --------
Net income ....................... $ 8,968 $ 2,286 $ 9,674 $ 7,666 $ 14,189 $ 8,807 $ 12,494 $ 10,938
======== ======== ======== ======== ======== ======== ======== ========
Change in unrealized appreciation
(depreciation) of securities
available for sale, net of tax .... $ 7,397 $ (6,352) $ 6,018 $ (2,836) $ 3,611 $ (684) $ 141 $ (3,573)
======== ======== ======== ======== ======== ======== ======== ========
Per share of common stock:
Net income ...................... $ 0.87 $ 0.21 $ 0.94 $ 0.72 $ 1.39 $ 0.83 $ 1.24 $ 1.05
======== ======== ======== ======== ======== ======== ======== ========
Average shares outstanding ......... 10,349 10,721 10,253 10,674 10,204 10,604 10,085 10,417
======== ======== ======== ======== ======== ======== ======== ========
Dividends per share of common stock. $ 0.27 $ 0.27 $ 0.27 $ 0.27 $ 0.27 $ 0.27 $ 0.27 $ 0.27
======== ======== ======== ======== ======== ======== ======== ========
Price range of common stock - high.. $ 38 1/2 $ 37 1/2 $ 42 $ 32 1/4 $ 44 1/4 $ 32 1/2 $ 52 3/4 $ 35 3/4
======== ======== ======== ======== ======== ======== ======== ========
Price range of common stock - low... $ 35 1/4 $ 31 3/4 $ 36 3/4 $ 30 1/4 $ 38 $ 31 $ 50 3/4 $ 31 3/4
======== ======== ======== ======== ======== ======== ======== ========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- -----------------------------------------------------------------------
None.
51
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
The information regarding directors of the Company contained in the
definitive Proxy Statement of the Company relating to its May 9, 1996 Annual
Meeting of Stockholders under the captions "Nominees for Election as Directors,"
"Directors" and "Compliance with Section 16(a) of the Exchange Act" are
incorporated herein by reference. The information regarding Executive Officers
is provided in the Supplemental Item following Item 4. of Part I above.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The information regarding Executive Compensation contained in the
definitive Proxy Statement of the Company relating to its May 9, 1996 Annual
Meeting of Stockholders under the captions "Executive Compensation" and
"Compensation Committee Interlocks and Insider Participation" is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The information regarding security ownership of certain beneficial owners
and management contained in the definitive Proxy Statement of the Company
relating to its May 9, 1996 Annual Meeting of Stockholders under the captions
"Security Ownership of Certain Beneficial Owners" and "Security Ownership of
Management" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The information regarding relationships and related transactions contained
in the definitive Proxy Statement of the Company relating to its May 9, 1996
Annual Meeting of Stockholders under the captions "Executive Compensation,"
"Compensation Committee Interlocks and Insider Participation" and "Transactions
with Management and Others" is incorporated herein by reference.
52
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
ITEM 14(A)1. LIST OF FINANCIAL STATEMENTS
The following Financial Statements are filed as part of this Form 10-K
Report:
Page No.
Consolidated Balance Sheets at December 31, 1995 and 1994 ............ 21
Consolidated Statements of Income for the years ended
December 31, 1995, 1994 and 1993 ................................... 22
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1995, 1994 and 1993 ............................. 23
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 ................................... 24
Property and Casualty Statements of Income for the years ended
December 31, 1995, 1994 and 1993 ................................... 25
Life Insurance Statements of Income for the years ended
December 31, 1995, 1994 and 1993 ................................... 25
Parent Company and Other Statement of Operations for the years
ended December 31, 1995, 1994 and 1993 ............................. 26
Notes to Consolidated Financial Statements ........................... 27-50
Independent Accountants' Report ...................................... 50
Supplementary Data - Results by Quarter .............................. 51
ITEM 14(A)2. FINANCIAL STATEMENT SCHEDULES
The following Financial Statement Schedules are filed as part of this Form
10-K report:
Page No.
Report of Independent Certified Public Accountants on
Financial Statement Schedules ...................................... 57
Schedule I - Summary of Investments - Other Than Investments
in Related Parties ................................................. 58
Schedule II - Condensed Financial Information of Registrant .......... 59-61
Schedule III - Supplementary Insurance Information ................... 62
Schedule IV - Reinsurance ............................................ 63
Schedule VI - Supplemental Information of Property and Casualty
Operations ......................................................... 64
All other schedules have been omitted as not applicable or the required
information is given in the financial statements, including the notes thereto.
53
ITEM 14(A)3. LIST OF EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
3(a) Restated Certificate of Incorporation. (Incorpor-
ated by reference to Company's Annual Report on
Form 10-K for the year ended December 31, 1985
dated February 27, 1986)
3(b) Certificate of Amendment of Restated Certificate of
Incorporation dated May 8, 1987. (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1987, dated February 29,
1988).
3(c) Certificate of Amendment of Restated Certificate of
Incorporation dated May 6, 1988. (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ending December 31, 1988, dated February 28,
1989).
3(d) Bylaws of the Company, as amended. (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ending December 31, 1988, dated February 28,
1989).
4(a) Specimen Certificate of Common Stock of registrant.
(Incorporated by reference to Exhibit 4(a) of the
Company's Registration Statement No. 2-43490,
effective May 11, 1972).
4(b) Rights Agreement. (Incorporated by reference to
Exhibit 2.1 of the Company's Registration Statement
on Form 8-A, effective January 8, 1990).
10(a) Company's Annual Incentive Plan* (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993, dated February 24,
1994).
10(b) Company's Long-Term Incentive Plan dated December 8,
1994* (Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ending December 31,
1994, dated February 23, 1995).
10(c) Company's Retirement Supplement Plan, as amended
effective January 1, 1994* (Incorporated by reference to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1993, dated February 24, 1994).
10(d) Company's Non-Qualified Stock Option Plan, dated
February 23, 1995* (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ending
December 31, 1994, dated February 23, 1995).
- ----------
* Management Contract or compensatory plan or arrangement.
54
10(e) Agreement made as of the 7th day of December, 1989
between the Company and the American Association of
Retired Persons. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1989, dated February 22, 1990).
10(f) Director's Deferred Compensation Plan, as amended
effective January 1, 1994* (Incorporated by reference to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1993, dated February 24, 1994).
10(g) Executive Deferred Compensation Plan, as amended
effective January 1, 1994* (Incorporated by reference to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1993, dated February 24, 1994).
10(h) Employment Agreements dated as of January 1, 1990 between
the Company and certain of its employees.* (Incorporated
by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1989, dated February 22,
1990).
10(i) Directors' Restricted Stock Plan, dated December 8,
1994.* (Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ending December 31,
1994, dated February 23, 1995).
12 Statement Re: Computation of Ratios
21 Corporate Organization Chart of Subsidiaries of the
Registrant.
23 Consent of Independent Certified Public Accountants.
27 Financial Data Schedule
28 Information from Reports Furnished to State Insurance
Regulatory Authorities.
- ----------
* Management Contract or compensatory plan or arrangement.
ITEM 14(B). REPORTS ON FORM 8-K
No reports on Form 8-K were filed in the fourth quarter of the fiscal year
ended December 31, 1995.
55
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.
FOREMOST CORPORATION OF AMERICA
Date: March 20, 1996 By R. L. ANTONINI
----------------------------------
R. L. Antonini
Chairman of the Board, President
& Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
SIGNATURE TITLE DATE
R. L. Antonini Chairman of the Board, March 20, 1996
- ------------------------- President and Chief
R. L. Antonini Executive Officer
John C. Canepa Director March 20, 1996
- -------------------------
John C. Canepa
Thomas D. Gleason Director March 20, 1996
- -------------------------
Thomas D. Gleason
Arthur E. Hall Director March 20, 1996
- -------------------------
Arthur E. Hall
Richard A. Kayne Director March 20, 1996
- -------------------------
Richard A. Kayne
John F. Knight Director March 20, 1996
- -------------------------
John F. Knight
Larry J. Orange Executive Vice President March 20, 1996
- ------------------------- and Director
Larry J. Orange
Joseph A. Parini Director March 20, 1996
- -------------------------
Joseph A. Parini
Robert M. Raives Director March 20, 1996
- -------------------------
Robert M. Raives
F. Robert Woudstra Executive Vice President, March 20, 1996
- ------------------------- Treasurer and Director
F. Robert Woudstra
56
REPORT OF INDEPENDENT CERTIFIED PUBILC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
- -----------------------------------------------------
Foremost Corporation of America
Grand Rapids, Michigan
The audits referred to in our report dated February 15, 1996 relating to
the consolidated financial statements of Foremost Corporation of America and
Subsidiaries which is contained in Item 8. of this Form 10-K, included the audit
of the financial statement schedules listed in the accompanying index. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits.
In our opinion, the financial statement schedules, present fairly, in all
material respects, the information set forth therein.
BDO SEIDMAN, LLP
- ----------------
BDO SEIDMAN, LLP
March 28, 1996
Grand Rapids, Michigan
57
SCHEDULE I
- ----------
FOREMOST CORPORATION OF AMERICA AND SUBSIDIARIES
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1995
Amount
shown
in the
Amortized Market Balance
Type of Investment Cost Value Sheet
- -------------------------------------------------- --------- -------- --------
(In thousands)
Fixed maturities held to maturity:
Bonds:
Obligations of states and political subdivisions $ 7,511 $ 7,591 $ 7,511
-------- -------- --------
Total fixed maturities held to maturity ....... 7,511 $ 7,591 7,511
-------- ======== --------
Securities available for sale:
Fixed maturities:
Bonds:
U.S. Treasury Securities and obligations of U.S.
government agencies ........................... 135,418 $141,565 141,565
Obligations of states and political subdivisions 178,722 187,958 187,958
Foreign governments ............................ 860 864 864
Corporate securities ........................... 30,570 31,075 31,075
Mortgage-backed securities ..................... 5,681 5,815 5,815
-------- -------- --------
Total bonds ................................... 351,251 367,277 367,277
Redeemable preferred stocks ..................... 4,842 4,933 4,933
-------- -------- --------
Total fixed maturities available for sale ...... 356,093 $372,210 372,210
-------- ======== --------
Equity securities:
Common stocks ................................... 45,811 $ 50,804 50,804
Preferred stocks ................................ 15,156 15,280 15,280
-------- -------- --------
Total equity securities available for sale ..... 60,967 $ 66,084 66,084
-------- ======== --------
Mortgage loans and land contracts ................. 12,550 XXXXXXX 12,550
Real estate ....................................... 19,140 XXXXXXX 19,140
Short-term investments ............................ 42,666 XXXXXXX 42,666
-------- --------
Total investments ................................ $498,927 $520,161
======== ========
<FN>
- ----------
See Notes to Consolidated Financial Statements in Item 8.
</FN>
58
SCHEDULE II
- -----------
FOREMOST CORPORATION OF AMERICA (PARENT ONLY)
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED BALANCE SHEETS
December 31, 1995 1994
-------- --------
(In thousands)
Assets:
Investment in unconsolidated subsidiaries ................. $306,478 $279,283
Other invested assets ..................................... 450 84
Cash ...................................................... 43 27
Due from affiliates ....................................... 726 58
Real estate and equipment (net of accumulated depreciation) 35,998 38,153
Other assets .............................................. 11,728 11,802
-------- --------
Total assets ........................................... $355,423 $329,407
======== ========
Liabilities:
Notes payable ............................................. $ 96,412 $104,459
Due to affiliates ......................................... 2,651 5,905
Other liabilities ......................................... 12,163 12,417
-------- --------
Total liabilities ...................................... 111,226 122,781
-------- --------
Shareholders' Equity:
Common stock ............................................... 14,000 14,000
Other shareholders' equity ................................. 230,197 192,626
-------- --------
Total shareholders' equity ............................... 244,197 206,626
-------- --------
Total liabilities and shareholders' equity ............... $355,423 $329,407
======== ========
<FN>
- ----------
See Notes to Consolidated Financial Statements in Item 8.
</FN>
59
SCHEDULE II (Cont.)
- -------------------
FORMOST CORPORATION OF AMERICA (PARENT ONLY)
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED STATEMENTS OF INCOME
Year Ended December 31, 1995 1994 1993
-------- -------- --------
(In thousands)
Income:
Intercompany income ............................. $ 6,726 $ 7,090 $ 7,088
Investment and other ............................ 505 317 1,351
Realized gains (losses) on investments .......... -- 55 (138)
-------- -------- --------
Total income .................................. 7,231 7,462 8,301
-------- -------- --------
Expense:
Operating ....................................... 4,963 5,613 5,597
Interest ........................................ 9,374 8,699 8,825
-------- -------- --------
Total expense ................................. 14,337 14,312 14,422
-------- -------- --------
Loss before income tax credit and
income of unconsolidated subsidiaries ..... (7,106) (6,850) (6,121)
Income tax credit ................................ 2,648 2,451 2,499
-------- -------- --------
Loss before income of unconsolidated subsidiaries (4,458) (4,399) (3,622)
Income of unconsolidated subsidiaries * .......... 49,783 34,096 35,862
-------- -------- --------
Net income ...................................... $ 45,325 $ 29,697 $ 32,240
======== ======== ========
<FN>
- ----------
* Includes dividends to parent company of: ...... $ 37,240 $ 38,700 $ 29,500
======== ======== ========
See Notes to Consolidated Financial Statements in Item 8.
</FN>
60
SCHEDULE II (Cont.)
- -------------------
FORMOST CORPORATION OF AMERICA (PARENT ONLY)
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1995 1994 1993
-------- -------- --------
(In thousands)
Net cash for operating activities ............. $ (2,734) $ (277) $ (5,464)
Investing Activities:
Maturities of invested assets ............... 34 38 36
Purchases of real estate and equipment ...... (42) (3,148) (41)
Distributions from subsidiaries - net ....... 36,540 30,800 25,500
Decrease (increase) in short-term investments (400) 1,050 (1,100)
-------- -------- --------
Net cash from investing activities ........ 36,132 28,740 24,395
-------- -------- --------
Financing Activities:
Repayment of long-term debt ................. (8,047) (7,857) (7,684)
Increase in short-term debt ................. -- 2,000 --
Acquisition of treasury shares .............. (14,351) (11,340) (2)
Dividends paid .............................. (11,052) (11,460) (11,578)
Receipts from exercise of stock options ..... 68 -- 79
-------- -------- --------
Net cash for financing activities ......... (33,382) (28,657) (19,185)
-------- -------- --------
Cash (decrease) increase ................ 16 (194) (254)
Cash at beginning of year ..................... 27 221 475
-------- -------- --------
Cash at end of year ......................... $ 43 $ 27 $ 221
======== ======== ========
<FN>
- ----------
See Notes to Consolidated Financial Statements in Item 8.
</FN>
61
SCHEDULE III
- ------------
FOREMOST CORPORATION OF AMERICA AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Future
policy Benefits,
benefits, claims, Amortization
Prepaid losses, losses prepaid
policy claims Net and policy Other Net
acquisition and loss Unearned Premium investment settlement acquisition operating premium
Segment cost expenses premiums revenue income expenses costs expenses* written
- -------------------------- -------- --------- -------- --------- -------- --------- ------------ -------- ---------
(In thousands)
Year Ended December 31,:
1995
Property and casualty ... $72,560 $ 93,771 $248,953 $426,282 $27,212 $244,081 $125,115 $11,835 $425,446
Life .................... 1,492 3,733 2,677 21,797 2,036 15,052 5,342 147 21,797
Other ................... -- -- -- -- 96 -- -- 6,347 --
------- -------- -------- -------- ------- -------- -------- ------- --------
Total ................. $74,052 $ 97,504 $251,630 $448,079 $29,344 $259,133 $130,457 $18,329 $447,243
======= ======== ======== ======== ======= ======== ======== ======= ========
1994
Property and casualty ... $72,385 $ 90,722 $249,855 $409,929 $24,610 $249,533 $125,067 $12,342 $415,521
Life .................... 2,697 4,774 4,798 21,917 2,183 14,468 5,570 620 21,917
Other ................... -- -- -- -- 130 -- -- 8,500 --
------- -------- -------- -------- ------- -------- -------- ------- --------
Total ................. $75,082 $ 95,496 $254,653 $431,846 $26,923 $264,001 $130,637 $21,462 $437,438
======= ======== ======== ======== ======= ======== ======== ======= ========
1993
Property and casualty ... $75,604 $104,542 $244,408 $399,640 $25,142 $236,851 $127,168 $11,344 $394,800
Life .................... 4,931 6,016 8,731 21,739 2,510 13,878 5,685 923 21,739
Other ................... -- -- -- -- 82 -- -- 8,543 --
------- -------- -------- -------- ------- -------- -------- ------- --------
Total ................. $80,535 $110,558 $253,139 $421,379 $27,734 $250,729 $132,853 $20,810 $416,539
======= ======== ======== ======== ======= ======== ======== ======= ========
<FN>
- ----------
* Allocations of other operating expenses are based on a number of assumptions
and estimates and results would change if different methods were applied.
See Notes to Consolidated Financial Statements in Item 8.
</FN>
62
SCHEDULE IV
- -----------
FOREMOST CORPORATION OF AMERICA AND SUBSIDIARIES
REINSURANCE
Ceded to
Other Assumed % of
Gross Companies from Other Net Assumed
Amount (1) Companies Amount to Net
--------- -------- ---------- --------- -------
(In thousands)
Year Ended December 31, 1995
Life insurance in force ....... $228,675 $31,512 $ 32 $197,195 0.0%
======== ======= ======= ======== ====
Earned Premium
Life insurance .............. $ 702 $ 15 $ -- $ 687 0.0%
Accident and health insurance 21,347 237 -- 21,110 0.0%
Property and casualty ....... 360,750 1,587 67,119 426,282 15.7%
-------- ------- ------- -------- ----
Total premiums ........... $382,799 $ 1,839 $67,119 $448,079 15.0%
======== ======= ======= ======== ====
Year Ended December 31, 1994
Life insurance in force ....... $305,301 $30,371 $16,556 $291,486 5.7%
======== ======= ======= ======== ====
Earned Premium
Life insurance .............. $ 683 $ 12 $ -- $ 671 0.0%
Accident and health insurance 21,473 227 -- 21,246 0.0%
Property and casualty ....... 347,996 800 62,733 409,929 15.3%
-------- ------- ------- -------- ----
Total premiums ........... $370,152 $ 1,039 $62,733 $431,846 14.5%
======== ======= ======= ======== ====
Year Ended December 31, 1993
Life insurance in force ....... $399,045 $25,037 $50,884 $424,892 12.0%
======== ======= ======= ======== ====
Earned Premium
Life insurance .............. $ 672 $ 13 $ -- $ 659 0.0%
Accident and health insurance 21,286 206 -- 21,080 0.0%
Property and casualty ....... 347,638 5,316 57,318 399,640 14.3%
-------- ------- ------- -------- ----
Total premiums ........... $369,596 $ 5,535 $57,318 $421,379 13.6%
======== ======= ======= ======== ====
<FN>
- ----------
(1) The Company considers its catastrophe reinsurance costs to be an additional
loss cost. Ceded reinsurance premiums, losses and commissions for these
coverages are combined and presented in insurance losses, death and other
benefits. The property and casualty insurance premium ceded for catastrophe
reinsurance was $16,149, $32,720 and $22,123 for 1995, 1994 and 1993,
respectively.
See Notes to Consolidated Financial Statements in Item 8.
</FN>
63
SCHEDULE VI
- -----------
FOREMOST CORPORATION OF AMERICA AND SUBSIDIARIES
SUPPLEMENTAL INSURANCE INFORMATION CONCERNING PROPERTY-CASUALTY
INSURANCE OPERATIONS
Claims and Claim
Adjustment Expenses
Incurred Related To: Claims
-------------------- and Claim
Current Prior Adjustment
Segment Year Years Expenses
- ----------------------------------- --------- --------- ---------
(In thousands)
Year Ended December 31, 1995
Property and casualty group ..... $241,323 $ 2,758 $240,283
======== ======== ========
Year Ended December 31, 1994
Property and casualty group ..... $263,798 $(14,265) $262,344
======== ======== ========
Year Ended December 31, 1994
Property and casualty group ..... $247,014 $(10,163) $245,334
======== ======== ========
<FN>
- ----------
See Notes to Consolidated Financial Statements in Item 8.
</FN>
64