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 March 31, 1998 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 (Address of principal executive offices) (Zip Code) Mailing address: P.O. Box 2450, Grand Rapids, Michigan 49501 Registrant's telephone number including area code: (616)942-3000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- 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. Common Stock, $1.00 par value, Outstanding at March 31, 1998: 27,496,204 shares FOREMOST CORPORATION OF AMERICA INDEX Page No. Part I. Financial Information: Item 1. - Financial Statements: Consolidated Balance Sheets - March 31, 1998 and December 31, 1997 1 Consolidated Statements of Income - Three Months Ended March 31, 1998 and 1997 2 Consolidated Condensed Statements of Cash Flows - Three Months Ended March 31, 1998 and 1997 3 Condensed Notes to Consolidated Financial Statements 4-5 Item 2. - Management's Discussion and Analysis 6-7 Part II. Other Information: Item 6. - Exhibits and Reports on Form 8-K 8 Signatures 8 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FOREMOST CORPORATION OF AMERICA CONSOLIDATED BALANCE SHEETS March 31, December 31, 1998 1997 ----------- ----------- (In thousands, except share data) Assets: Investments- Fixed maturities held to maturity .................. $ 1,511 $ 1,974 Securities available for sale: Fixed maturities .................................. 379,263 376,868 Equity securities ................................. 88,238 83,677 Mortgage loans and land contracts on real estate ... 12,273 12,350 Investment real estate ............................. 12,496 11,920 Short-term investments ............................. 15,054 26,656 ----------- ----------- Total investments ................................. 508,835 513,445 Cash ................................................ 1,292 2,409 Accrued investment income ........................... 6,392 6,293 Premiums receivable ................................. 71,826 71,541 Due from reinsurance companies ...................... 22,203 20,645 Other receivables ................................... 2,304 2,568 Prepaid policy acquisition costs .................... 75,317 74,179 Prepaid reinsurance premiums ........................ 422 979 Real estate and equipment ........................... 42,176 38,341 Other assets ........................................ 14,978 14,380 ----------- ----------- Total assets ....................................... $ 745,745 $ 744,780 =========== =========== Liabilities: Unearned premium .................................... $ 246,905 $ 246,429 Insurance losses and loss adjustment expenses ....... 86,648 82,722 Accounts payable and accrued expenses ............... 26,530 33,022 Notes and other obligations payable ................. 91,716 92,201 Income taxes ........................................ 20,308 20,853 Other liabilities ................................... 14,388 14,102 ----------- ----------- Total liabilities .................................. 486,495 489,329 ----------- ----------- Shareholders' Equity: Common stock $1 par - shares authorized 35,000,000, issued 32,467,248 .................................. 32,467 32,467 Additional paid-in capital .......................... 117,251 120,536 Unrealized appreciation (depreciation) of securities available for sale, net of applicable taxes ........ 21,315 20,894 Retained earnings ................................... 246,704 237,621 Restricted stock - deferred compensation ............ (4) (4) ----------- ----------- Total .............................................. 417,733 411,514 Treasury stock at cost, 4,971,044 and 4,766,376 shares .............................. (158,483) (156,063) ----------- ----------- Total shareholders' equity ......................... 259,250 255,451 ----------- ----------- Total liabilities and shareholders' equity ......... $ 745,745 $ 744,780 =========== =========== <FN> See accompanying condensed notes to consolidated financial statements. </FN> -1- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (CONTINUED) FOREMOST CORPORATION OF AMERICA CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31, ----------------------- 1998 1997 ---------- ---------- (In thousands except per share data) Income: Property and casualty premium earned ..... $ 108,307 $ 106,578 Net investment income .................... 6,340 6,279 Realized gains ........................... 1,617 1,539 Other .................................... 726 658 --------- --------- Total income ........................... 116,990 115,054 --------- --------- Expense: Insurance losses and loss expenses ....... 62,562 71,704 Amortization of prepaid policy acquisition costs ...................... 32,209 30,926 Operating and other ...................... 6,939 7,049 --------- --------- Total expense .......................... 101,710 109,679 --------- --------- Income before taxes .................. 15,280 5,375 Income tax credit .......................... (3,719) (566) --------- --------- Net income ............................... $ 11,561 $ 4,809 ========= ========= Earnings per share of common stock: Net income ............................... $ 0.42 $ 0.17 ========= ========= Average shares outstanding ................. 27,591 28,434 ========= ========= Earnings per share of common stock - diluted Net income ............................... $ 0.41 $ 0.16 ========= ========= Average shares outstanding ................. 28,215 29,149 ========= ========= <FN> See accompanying condensed notes to consolidated financial statements. </FN> -2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (CONTINUED) FOREMOST CORPORATION OF AMERICA CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS Three Months Ended March 31, ---------------------- 1998 1997 (In thousands) ---------- ---------- Operating Activities: Net cash from (for) operating activities . $ 6,441 $ (7,016) ---------- ---------- Investing Activities: Purchases of securities and loans made ...... (35,253) (28,003) Purchases of real estate and equipment ...... (4,920) (177) Sales of securities ......................... 21,946 21,583 Maturities of securities and receipts from repayments of loans ................... 8,928 11,536 Sales of real estate and equipment .......... 181 642 Decrease (Increase) in short-term investments 11,602 7,790 ---------- --------- Net cash from investing activities ......... 2,484 13,371 ---------- --------- Financing Activities: Net change in short-term debt ............... -- 7,000 Repayments of long-term debt ................ (484) (572) Acquisition of treasury shares .............. (5,679) (13,839) Dividends paid .............................. (2,477) (2,584) Exercise of stock options: Receipts ......... 940 -- Exercise of stock options: Repurchases ...... (2,342) -- ---------- --------- Net cash from financing activities ......... (10,042) (9,995) ---------- --------- Cash decrease ...................... (1,117) (3,640) Cash at beginning of year .................... 2,409 5,141 --------- --------- Cash at end of period .............. $ 1,292 $ 1,501 ========= ========= <FN> See accompanying condensed notes to consolidated financial statements. </FN> -3- 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. During the first quarter of 1998, Foremost Corporation of America adopted Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income", which requires that all components of comprehensive income and total comprehensive income be reported on one of the following: a statement of income and comprehensive income, a statement of comprehensive income or a statement of stockholder's equity. Comprehensive income is comprised of net income and all changes to stockholder's equity, except those due to investments by owners (changes in paid in capital) and distributions to owners (dividends). For interim reporting purposes, SFAS 130 requires disclosure of total comprehensive income. Comprehensive income and its components consist of the following: For the Three Months Ended March 31, 1998 1997 ------- -------- (In thousands) Net Income $11,561 $ 4,809 Other Comprehensive Income: Unrealized Gain (Loss) on Securities Available for Sale, (Net of Tax of $227 and ($1,731)) $ 421 $(3,215) -------- -------- Comprehensive Income $11,982 $ 1,594 ======== ======== -4- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (CONTINUED) FOREMOST CORPORATION OF AMERICA CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. Earnings per share amounts are computed based on the weighted average number of common shares outstanding during each quarter. The reconciliation of basic to diluted earnings per share amounts is as follows: For The Three Months Ended March 31, 1998 ------------------------------------- Net Outstanding Per-Share Income Shares Amount --------- ----------- --------- (In thousands, except per share amounts) Basic EPS $ 11,561 27,591 $ .42 O/S Stock Options 624 --------- ---------- --------- Diluted EPS $ 11,561 28,215 $ .41 ========= ========== ========= For The Three Months Ended March 31, 1997 ------------------------------------- Net Outstanding Per-Share Income Shares Amount --------- ----------- --------- (In thousands, except per share amounts) Basic EPS $ 4,809 28,434 $ .17 O/S Stock Options 715 --------- ----------- --------- Diluted EPS $ 4,809 29,149 $ .16 ========= =========== ========= -5- PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS FOREMOST CORPORATION OF AMERICA OPERATING RESULTS AND FINANCIAL POSITION Results of Operations Foremost Corporation of America reported record results for the first quarter of 1998. This is the fourth consecutive record setting quarter. Net income for the first quarter was $.42 per share, including $.04 per share in realized gains, compared to $.17 per share in 1997,including $.04 per share in realized gains. The per share results reflect adjustment for the three-for one stock split of January 1998. The combined loss and expense ratio for the property and casualty group was 92.7% for the first quarter of 1998 compared to 100.8% for the same period last year. The improvement in the combined ratio can be attributed to a decline in catastrophe losses of $14.5 million, while the industry was experiencing a 16% increase in catastrophe related losses in the same period. The Company's written premium decreased 0.2% for the first quarter of 1998 compared to the same period in 1997. What is not apparent are the three positive trends in the mix of business written during the first quarter of 1998. First, by taking out the effect of our on-going catastrophe management programs of not accepting new business in Florida and in certain portions of California, our mobile home written premium, in the non-restricted areas, increased by 2.4% over the first quarter of 1997. Second, our direct response automobile written premium almost tripled over the results for the first quarter of 1997. The Company wrote $1.4 million in direct response automobile premium in the first quarter of 1998 compared with $0.5 million in the same quarter of 1997. Our agency-produced automobile business continues to decline as planned, as we implement our direct response automobile strategy. Third, our dwelling fire insurance, called BASICS, continues its strong growth with a 17.4% increase in written premium over the same period last year. Written premium by major product line is as follows: % 1st Quarter Increase 1998 1997 (Decrease) -------- -------- ---------- (In thousands) Mobile Home $ 87,804 $ 86,696 1.3 RV 13,399 14,125 (5.1) Automobile 4,126 4,381 (5.8) BASICS 1,899 1,618 17.4 Homeowners 563 910 (38.1) Other 1,213 1,529 (20.7) -------- -------- --------- Total $109,004 $109,259 (0.2) ======== ======== ======== After-tax investment income increased 2.8% from the first quarter last year. The primary reason for the increase is the growth in the investable asset base resulting from the excellent underwriting results over the 12 month period. -6- PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) Financial Position The principal sources of cash for the first three months of 1998 were $42.7 million from sales and maturities of investments and $6.4 million from operations. The Company used $40.2 million for the purchase of securities, purchased $8.0 million of treasury stock, paid $2.5 million in dividends to shareholders and repaid $.5 million of long-term debt. Also, during the first quarter of 1998, the Company received $.9 million from the exercise of 98,700 shares of stock options by employees. The Company had $16.3 million in cash and other liquid assets at March 31, 1998. Total invested assets on a cost basis decreased 1.1%, or $5.3 million during the first quarter of 1998 compared to year end 1997. Market values of securities available for sale increased $.4 million net of tax in the first quarter of 1998. The Company uses its stock repurchase program to manage its capital base and leverage ratios. The number of shares repurchased in the first quarter was 341,258. Since the inception of this repurchase plan in February 1994, the Company has purchased 2,103,496 shares. -7- 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 March 31, 1998. 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: May 8, 1998 s/Paul D. Yared ------------------------------ Paul D. Yared Its: Senior Vice President, Secretary and General Counsel Date: May 8, 1998 s/Kenneth C. Haines ------------------------------ Kenneth C. Haines Its: Controller -8-