SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1996
Commission File Number 0-6478
FOREMOST CORPORATION OF AMERICA
(Exact name of Registrant as specified in its charter)
Delaware 38-1863522
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) 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
The registrant 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 and has been subject to such filing requirements for the past 90
days.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the period covered by this report.
Class Outstanding at September 30, 1996
Common Stock, $1.00 par value 9,650,166
FOREMOST CORPORATION OF AMERICA
INDEX
Page No.
Part I. Financial Information:
Item 1. - Financial Statements:
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 1
Consolidated Statements of Income -
Nine Months Ended September 30, 1996 and 1995 2
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 30, 1996 and 1995 3
Condensed Notes to Consolidated Financial
Statements 4
Item 2. - Management's Discussion and Analysis 5-6
Part II. Other Information:
Item 6. - Exhibits and Reports on Form 8-K 7
Signatures 7
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOREMOST CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1996 1995
------------- ------------
(In thousands, except share data)
Assets:
Investments-
Fixed maturities held to maturity ................. $ 2,878 $ 7,131
Securities available for sale:
Fixed maturities ................................. 334,284 348,753
Equity securities ................................ 95,244 65,574
Mortgage loans and land contracts on real estate .. 12,295 12,527
Investment real estate ............................ 15,168 19,140
Short-term investments ............................ 29,765 39,955
--------- ---------
Total investments ................................ 489,634 493,080
Cash ............................................... 4,147 4,975
Accrued investment income .......................... 6,297 5,875
Premiums receivable ................................ 75,146 70,629
Due from reinsurance companies ..................... 28,281 23,341
Other receivables .................................. 5,328 7,360
Prepaid policy acquisition costs ................... 73,407 72,560
Prepaid reinsurance premiums ....................... 39 62
Real estate and equipment .......................... 34,798 36,035
Other assets ....................................... 13,665 13,644
Net assets - discontinued operations ............... 0 18,806
--------- ---------
Total assets ...................................... $ 730,742 $ 746,367
========= =========
Liabilities:
Unearned premium ................................... $ 257,951 $ 248,953
Insurance losses and loss adjustment expenses ...... 90,127 93,771
Accounts payable and accrued expenses .............. 34,305 35,728
Notes and other obligations payable ................ 95,663 99,247
Income taxes ....................................... 9,248 11,575
Other liabilities .................................. 15,352 12,896
--------- ---------
Total liabilities ................................. 502,646 502,170
--------- ---------
Shareholders' Equity:
Common stock $1 par - shares authorized 35,000,000,
issued 14,000,000 ................................. 14,000 14,000
Additional paid-in capital ......................... 138,852 139,344
Unrealized appreciation (depreciation) of securities
available for sale, net of applicable taxes ....... 12,178 13,802
Retained earnings .................................. 192,964 183,944
Restricted stock - deferred compensation ........... (4) (5)
--------- ---------
Total ............................................. 357,990 351,085
Treasury stock at cost, 4,349,834
and 3,965,220 shares ............................. (129,894) (106,888)
--------- ---------
Total shareholders' equity ........................ 228,096 244,197
--------- ---------
Total liabilities and shareholders' equity ........ $ 730,742 $ 746,367
========= =========
<FN>
See accompanying condensed notes to consolidated financial statements.
</FN>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
FOREMOST CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
-------- -------- -------- --------
(In thousands except per share data)
Income:
Property and casualty premium earned . $107,430 $108,136 $320,885 $320,058
Net investment income ................ 6,840 7,052 20,269 20,592
Realized gains ....................... 83 10 2,253 6
Other ................................ 705 749 2,388 2,168
-------- -------- -------- --------
Total income ....................... 115,058 115,947 345,795 342,824
-------- -------- -------- --------
Expense:
Insurance losses...................... 67,337 58,223 211,723 183,452
Amortization of prepaid policy
acquisition costs .................. 29,978 31,213 91,229 93,786
Operating ............................ 5,314 4,462 15,942 14,269
Interest ............................. 2,031 2,238 6,172 7,555
-------- -------- -------- --------
Total expense ...................... 104,660 96,136 325,066 299,062
-------- -------- -------- --------
Income before taxes .............. 10,398 19,811 20,729 43,762
Income tax provision ................... (2,516) (6,146) (4,019) (12,484)
-------- -------- -------- --------
Net income - continuing operations ... 7,882 13,665 16,710 31,278
Net income-discontinued operations ..... 0 524 383 1,553
-------- -------- -------- --------
Net income ........................... $ 7,882 $ 14,189 $ 17,093 $ 32,831
======== ======== ======== ========
Per share of common stock:
Net income - continuing operations .... $ 0.80 $ 1.34 $ 1.68 $ 3.05
Net income-discontinued operations .... 0.00 0.05 0.04 0.15
-------- -------- -------- --------
Net income .......................... $ 0.80 $ 1.39 $ 1.72 $ 3.20
======== ======== ======== ========
Average shares outstanding ............. 9,888 10,204 9,965 10,268
======== ======== ======== ========
Cash dividends per share ............... $ 0.27 $ 0.27 $ 0.81 $ 0.81
======== ======== ======== ========
<FN>
See accompanying condensed notes to consolidated financial statements.
</FN>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
FOREMOST CORPORATION OF AMERICA
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
1996 1995
--------- ---------
(In thousands)
Operating Activities:
Net cash from operating activities ............. $ 13,035 $ 68,078
--------- ---------
Investing Activities:
Purchases of securities and loans made ............ (106,868) (138,834)
Purchases of real estate and equipment ............ (262) (169)
Sales of securities ............................... 29,483 100,886
Maturities of securities and receipts
from repayments of loans ......................... 69,236 23,098
Sales of real estate and equipment ................ 3,939 994
Net proceeds from sale of subsidiary .............. 17,437 0
Decrease (increase) in short-term investments ..... 10,003 (30,917)
--------- ---------
Net cash from (for) investing activities ......... 22,968 (44,942)
--------- ---------
Financing Activities:
Repayments of long-term debt ...................... (1,584) (7,601)
Acquisition of treasury shares .................... (27,339) (7,547)
Dividends paid .................................... (8,073) (8,330)
Decrease in short-term debt ....................... (2,000) (2,000)
Receipts from exercise of stock options ........... 2,165 68
--------- ---------
Net cash for financing activities ................ (36,831) (25,410)
--------- ---------
Cash increase (decrease) ................. (828) (2,274)
Cash at beginning of year .......................... 4,975 3,899
--------- ---------
Cash at end of year ...................... $ 4,147 $ 1,625
========= =========
<FN>
See accompanying condensed notes to consolidated financial statements.
</FN>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
FOREMOST CORPORATION OF AMERICA
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The notes to the consolidated financial statements are condensed and
do not contain all information required by generally accepted
accounting principles to be included in a full set of financial
statements.
2. All information is unaudited; however, in the opinion of management,
all adjustments (consisting only of normal recurring accruals) have
been made which are necessary to present fairly the results shown. All
significant intercompany balances and transactions have been
eliminated in consolidation. Interim results are not necessarily
indicative of the results to be expected in any other period.
3. On June 11, 1996, the Company completed the sale of its life insurance
subsidiary, Foremost Life Insurance Company, to Woodmen Accident and
Life Company for a final purchase price of $40,133,000. The net loss
on the sale was $676,000 after taxes totaling $6,167,000. Accordingly,
the Consolidated Financial Statements presented herein have been
restated to reflect the Life Insurance Segment as discontinued
operations for all periods presented.
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
FOREMOST CORPORATION OF AMERICA
OPERATING RESULTS AND FINANCIAL POSITION
Operating Results
The continued emphasis of Foremost Corporation of America on managing
catastrophe exposures allowed the Company to record solid third quarter
earnings, despite significant weather related events in hurricanes Bertha and
Fran. Net income from continuing operations for the third quarter of 1996 was
$.80 per share, including $.01 per share in realized gains, compared to $1.34
per share, with no realized gains or losses in the same period last year. Net
income from continuing operations for the first nine months of 1996 was $1.68
per share compared to $3.05 per share in 1995. Realized gains of $.15 per share
for 1996 are included in the nine months net income figure, with no realized
gains or losses in the same period last year.
In spite of hurricanes Bertha and Fran, the combined loss and expense
ratio for the property and casualty group was 94.9% for the third quarter
compared to 87.2% for the same period last year. The combined ratio for the
first nine months of 1996 was 98.7% compared to 91.4% in the prior year. The
rise in the combined ratios was largely due to catastrophe losses, which
increased the third quarter and nine month ratios by 6.7 and 5.6 points,
respectively, over their previous periods. The exposure management program to
reduce the impacts of catastrophic losses have proven to be a worthy strategy.
The Company's catastrophe loss from Hurricane Fran would have been twice as much
if this program had not been started.
Growth in mobile home written premium has been surpressed during 1996
because of the Company's catastrophe exposure management program. This strategy
reduced mobile home written premium by $3.2 million in the third quarter and
$12.6 million in the first nine months. Without these reductions, mobile home
written premium would have increased by 3.7% in the third quarter and 3.5% for
the first nine months, when compared to their respective previous periods.
Written premium by major product line is as follows:
%
3rd Quarter Increase
1996 1995 (Decrease)
-------- -------- ----------
(In thousands)
Mobile Home ......... $ 93,755 $ 93,483 0.3
RV .................. 10,950 11,798 (7.2)
-------- -------- -------
Subtotal ........ 104,705 105,281 (0.5)
Automobile .......... 2,575 2,930 (12.1)
Homeowners .......... 2,185 1,765 23.8
Other ............... 1,888 2,110 (10.5)
-------- -------- -------
Total ........... $111,353 $112,086 (0.7)
======== ======== =======
%
Nine Months Increase
1996 1995 (Decrease)
-------- -------- ----------
(In thousands)
Mobile Home ......... $272,139 $275,132 (1.1)
RV .................. 40,523 41,348 (2.0)
-------- -------- -------
Subtotal ........ 312,662 316,480 (1.2)
Automobile .......... 7,845 9,064 (13.4)
Homeowners .......... 5,617 5,453 3.0
Other ............... 4,657 4,840 (3.8)
-------- -------- -------
Total ........... $330,781 $335,837 (1.5)
======== ======== =======
During the third quarter of 1996, the Company began the automobile and
homeowners insurance program with First USA, Inc., with the direct mailing of
information to 25,000 customers in two states.
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After-tax investment income from continuing operations increased 0.9%
from the third quarter last year and was down 0.7% for the year. The relatively
flat results for the year are primarily due to the impact of catastrophe loss
payments and common stock buy backs on the Company's cash flow and investable
asset base.
Financial Position
The principal sources of cash for the first nine months of 1996 were
$108.7 million from sales and maturities of investments, $17.4 million from the
sale of Foremost Life Insurance Company, $13 million provided from operations,
$3.9 million from sales of real estate and $2.2 million in receipts from the
exercise of stock options. The Company used $106.9 million for the purchase of
securities, purchased $27.3 million of treasury stock, paid $8.1 million in
dividends to shareholders and repaid $3.6 million of debt. The Company had $33.9
million in cash and other liquid assets at September 30, 1996. Interest paid
for the first nine months of 1996 totaled $5.7 million compared to $6.6 million
for the same period last year.
The cost basis of total invested assets from continuing operations at
September 30, 1996 was $470.9 million compared to $471.8 million at December 31,
1995. Market values of securities available for sale decreased $1.6 million net
of taxes in the first nine months of 1996.
The Company continued to purchase its own common stock under a 1.5
million share buy back plan announced in February 1994 and amended in the first
quarter of 1996. Since June 30, 1996, the Company has purchased 386,592 shares
of its common stock outstanding at an average price of $55.06 per share. The
year to date purchases for 1996 total 580,055 shares at an average price of
$55.14 per share. Since the inception of this buy back plan, the Company has
purchased 1,279,662 shares at an average price of $45.07 per share.
Book value per share was $23.64 at September 30, 1996 with 9,650,000
shares outstanding compared to $24.33 per share at December 31, 1995 with
10,035,000 shares outstanding.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(b) Reports on 8-K - There were no reports filed on Form 8-K for the
quarter ended September 30, 1996.
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
(Registrant)
Date: November 13, 1996 Paul D. Yared
------------------------------
Paul D. Yared
Its: Senior Vice President,
Secretary and General
Counsel
Date: November 13, 1996 Kenneth C. Haines
------------------------------
Kenneth C. Haines
Its: Controller
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