MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL EXHIBIT 13(b)
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CONDITION AND RESULTS OF OPERATIONS.
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The following discussion and analysis of EMC Insurance Group Inc. and its
subsidiaries' financial condition and results of operations should be read in
conjunction with the Consolidated Financial Statements and Notes to
Consolidated Financial Statements included elsewhere herein.
OVERVIEW
EMC Insurance Group Inc., an approximately 67 percent owned subsidiary of
Employers Mutual Casualty Company (Employers Mutual), is an insurance holding
company with operations in property and casualty insurance, reinsurance,
nonstandard risk automobile insurance and an excess and surplus lines
insurance agency. Property and casualty insurance is the most significant
segment, representing 75.0 percent of consolidated premiums earned. For
purposes of this discussion, the term "Company" is used interchangeably to
describe EMC Insurance Group Inc. (Parent company only) and EMC Insurance
Group Inc. and its subsidiaries.
The three property and casualty insurance subsidiaries of the Company and
two subsidiaries and an affiliate of Employers Mutual are parties to
reinsurance pooling agreements with Employers Mutual (collectively the
"pooling agreement"). Under the terms of the pooling agreement, each company
cedes to Employers Mutual all of its insurance business, with the exception of
any voluntary reinsurance business assumed from nonaffiliated insurance
companies, and assumes from Employers Mutual an amount equal to its
participation in the pool. All losses, settlement expenses and other
underwriting and administrative expenses, excluding the voluntary reinsurance
business assumed by Employers Mutual from nonaffiliated insurance companies,
are prorated among the parties on the basis of participation in the pool. The
aggregate participation of the Company's property and casualty insurance
subsidiaries is 22 percent. Operations of the pool give rise to intercompany
balances with Employers Mutual, which are settled on a quarterly basis. The
investment activities and income tax liabilities of the pool participants are
not subject to the pooling agreement.
The purpose of the pooling agreement is to spread the risk of an exposure
insured by any of the pool participants among all the companies. The pooling
agreement produces a more uniform and stable underwriting result from year to
year for all companies in the pool than might be experienced individually. In
addition, each company benefits from the capacity of the entire pool, rather
than being limited to policy exposures of a size commensurate with its own
assets, and from the wide range of policy forms, lines of insurance written,
rate filings and commission plans offered by each of the companies. A single
set of reinsurance treaties is maintained for the protection of all seven
companies in the pool.
Effective January 1, 1997, Hamilton Mutual Insurance Company (Hamilton
Mutual), a new affiliate of Employers Mutual, became a participant in the
pooling agreement. In connection with this change in the pooling agreement,
the Company's liabilities increased $6,393,000 and invested assets increased
$5,674,000. The Company reimbursed Employers Mutual $794,000 for commissions
incurred to generate this business and Employers Mutual paid the Company
$75,000 in interest income as the actual cash transfer did not occur until
March 24, 1997.
On December 19, 1997, the Company announced that its nonstandard risk
automobile insurance subsidiary (Farm and City Insurance Company) will become
a participant in the pooling agreement effective January 1, 1998. The
nonstandard risk automobile insurance subsidiary will receive a 1.5 percent
participation in the pool, which will increase the Company's aggregate
participation to 23.5 percent. Revenues of the Company are expected to
increase by approximately $2,000,000 due to the increase in the size of the
pool.
The Company's reinsurance subsidiary assumes a quota share portion of
Employers Mutual's assumed reinsurance business, exclusive of certain
reinsurance contracts. The reinsurance subsidiary assumes its quota share
portion of all premiums and related losses and settlement expenses of this
business, subject to a maximum loss per event. The reinsurance subsidiary
does not reinsure any of Employers Mutual's direct insurance business, nor any
"involuntary" facility or pool business that Employers Mutual assumes pursuant
to state law. In addition, the reinsurance subsidiary is not liable for
credit risk in connection with the insolvency of any reinsurers of Employers
Mutual.
Effective January 1, 1997, the reinsurance subsidiary's quota share
participation was increased from 95 percent to 100 percent and the maximum
loss assumed per event was increased from $1,000,000 to $1,500,000. In
connection with the change in the quota share percentage, the Company's
liabilities increased $3,174,000 and invested assets increased $3,067,000.
The Company reimbursed Employers Mutual $107,000 for commissions incurred to
generate this business.
The Company's nonstandard risk automobile insurance subsidiary
specializes in insuring private passenger automobile risks that are found to
be unacceptable in the standard automobile insurance market.
The excess and surplus lines insurance agency provides insurance agents
access to the excess and surplus lines markets and also functions as managing
underwriter for such lines for Employers Mutual and several of the pool
members.
CONSOLIDATED RESULTS OF OPERATIONS
Operating results for the three years ended December 31, 1997 are as follows:
($ in thousands) 1997 1996 1995
-------- -------- --------
Premiums earned .......................... $177,218 $165,191 $162,266
Losses and settlement expenses ........... 129,853 115,367 108,152
Acquisition and other expenses ........... 58,641 55,227 54,359
-------- -------- --------
Underwriting loss ........................ (11,276) (5,403) (245)
Net investment income .................... 23,760 23,907 23,174
Realized investment gains ................ 4,100 1,891 1,043
Other income ............................. 219 274 344
-------- -------- --------
Operating income before income taxes ..... $ 16,803 $ 20,669 $ 24,316
======== ======== ========
Incurred losses and settlement expenses:
Insured events of the current year ..... $137,300 $131,375 $123,877
Decrease in provision for insured
events of prior years ................ (7,447) (16,008) (15,725)
-------- -------- --------
Total losses and settlement expenses $129,853 $115,367 $108,152
======== ======== ========
Catastrophe and storm losses ............. $ 5,846 $ 9,192 $ 6,603
======== ======== ========
Operating income before income taxes declined in 1997 and 1996 after
increasing substantially in 1995. The decline in 1997 operating results is
primarily attributable to the property and casualty insurance subsidiaries,
although all segments contributed to the decline. The major factor
influencing this decline was a substantial decrease in the amount of favorable
development experienced in the actual settlement of claims and changes in
reserves associated with prior year losses. The decline in 1996 operating
results was also attributable to the property and casualty insurance
subsidiaries, which experienced an unusually large number of commercial
property losses. Results for 1995 reflect a substantial improvement in the
operations of the reinsurance subsidiary and a solid increase in the
performance of the property and casualty insurance subsidiaries.
Premium income increased substantially in 1997 after rising moderately in
1996. The majority of this increase came from the property and casualty
insurance subsidiaries, which benefitted from the addition of Hamilton Mutual
to the pooling agreement. The nonstandard risk automobile insurance
subsidiary also reported an increase in premium income while the reinsurance
subsidiary experienced a decline. For the year 1996, the property and
casualty insurance subsidiaries and the reinsurance subsidiary had increases
in premium income while the nonstandard risk automobile insurance subsidiary
reported a decline.
Losses and settlement expenses increased significantly in 1997,
reflecting a substantial decrease in the amount of favorable development
experienced in the actual settlement of claims and changes in reserves
associated with prior year losses. This decrease in favorable development was
partially offset by lower catastrophe and storm losses reported by the
reinsurance subsidiary and the property and casualty insurance subsidiaries.
For the year 1996, losses and settlement expenses increased despite the
benefit of an elevated level of favorable development in the actual settlement
of claims and changes in reserves associated with prior year losses. This was
primarily due to an unusually large number of commercial property losses
experienced by the property and casualty insurance subsidiaries and a
substantial increase in catastrophe losses in the reinsurance subsidiary.
Acquisition and other expenses have increased steadily over the last
three years. These increases are primarily attributable to higher commission
rates associated with the property business written by the property and
casualty insurance subsidiaries, increased contingent commission expense on
the reinsurance subsidiary's assumed business and various loss control
functions that have been implemented. The increase for 1997 also reflects
commission expense incurred by the property and casualty insurance
subsidiaries in connection with the addition of Hamilton Mutual to the pooling
agreement and the reinsurance subsidiary in connection with the increase in
the quota share percentage.
Investment income declined in 1997 after increasing in 1996 and 1995.
This decline was attributable to a reduction in the average rate of return
earned on fixed maturity investments, which more than offset an increase in
the Company's average invested asset balance.
Realized gains on investments increased significantly in 1997 and more
moderately in 1996 as a result of capital gain distributions from the
Company's investment in common stock mutual funds. Proceeds from these
distributions were reinvested in the mutual funds.
SEGMENT RESULTS
Property and Casualty Insurance
Operating results for the three years ended December 31, 1997 are as follows:
($ in thousands) 1997 1996 1995
-------- -------- --------
Premiums earned .......................... $132,874 $119,282 $116,439
Losses and settlement expenses ........... 97,083 82,034 74,926
Acquisition and other expenses ........... 44,027 41,150 40,030
-------- -------- --------
Underwriting (loss) gain ................. (8,236) (3,902) 1,483
Net investment income .................... 15,529 15,828 15,428
Realized investment gains ................ 4,071 1,790 1,027
-------- -------- --------
Operating income before income taxes ..... $ 11,364 $ 13,716 $ 17,938
======== ======== ========
Incurred losses and settlement expenses:
Insured events of the current year ..... $102,557 $ 93,965 $ 87,411
Decrease in provision for insured
events of prior years ................ (5,474) (11,931) (12,485)
-------- -------- --------
Total losses and settlement expenses $ 97,083 $ 82,034 $ 74,926
======== ======== ========
Catastrophe and storm losses ............. $ 4,570 $ 4,935 $ 5,671
======== ======== ========
Premium income increased substantially in 1997 after rising moderately in
1996 and 1995. The large increase for 1997 was due in part to the addition of
Hamilton Mutual to the pooling agreement, which added $8,634,000 to premium
income. The remaining increase was generated from the existing branch
structure, where competitive rates and a strong working relationship with
local agents played a critical role in this very competitive environment.
Marketing programs emphasizing property insurance targeted at commercial
insureds contributed to this increase in production, as did an increased
marketing emphasis in the South. Premium income from mandatory assigned risk
business continued to decline in 1997; however, this decline is looked at
favorably as losses associated with this type of business are generally higher
than losses associated with controlled business. Premium growth in the
workers' compensation line of business continued to be hampered by rate
decreases in 1997, although not to the extent experienced in 1996 when the
states of Iowa, Illinois, Kansas and Nebraska implemented large rate
decreases.
Losses and settlement expenses increased substantially in 1997 and 1996
after declining in 1995. The large increase for 1997 was attributable to a
significant decrease in the amount of favorable development experienced in the
actual settlement of claims and changes in reserves associated with prior year
losses as well as the increase in the size of the pool with the addition of
Hamilton Mutual. The decline in favorable development was not unexpected and
has been discussed in previous comments published by the Company. The large
increase for 1996 was primarily due to an unusually large number of severe
commercial property losses.
Acquisition and other expenses increased in 1997 as a result of the
increase in the size of the pool and the payment of $794,000 of commission
expense related to the transfer of unearned premiums to the Company in
connection with the pool change. Additional items affecting the growth in
expenses include higher commission rates on the growing book of property
business as well as expenses associated with various loss control functions
that have been implemented.
The decline in 1997 underwriting results is primarily related to the
large decrease in the amount of favorable development experienced in the
actual settlement of claims and changes in reserves associated with prior year
losses. As previously noted, this decline in favorable development was not
unexpected; however, the impact of the decline was compounded by a second
consecutive year of an elevated loss and settlement expense ratio associated
with current accident year losses. Unlike 1996, when the elevated loss and
settlement expense ratio was attributable to an increase in loss frequency and
severity, the elevated loss and settlement expense ratio for 1997 is more
closely associated with the highly competitive marketplace for commercial
lines of insurance. Rates for commercial lines of insurance continue to
decline due to excess capitalization in the insurance industry. As a result,
increases in premium income are not keeping pace with increases in loss costs.
Management is aware of the narrowing profit margin on commercial lines of
insurance and continues to emphasize the use of strict underwriting
guidelines.
Reinsurance
Operating results for the three years ended December 31, 1997 are as follows:
($ in thousands) 1997 1996 1995
-------- -------- --------
Premiums earned ............................ $ 34,106 $ 36,675 $ 35,826
Losses and settlement expenses ............. 23,306 25,180 23,744
Acquisition and other expenses ............. 11,752 11,457 11,584
-------- -------- --------
Underwriting (loss) gain ................... (952) 38 498
Net investment income ...................... 6,615 6,436 6,068
Realized investment gains .................. 23 73 13
Other income ............................... 219 274 344
-------- -------- --------
Operating income before income taxes ....... $ 5,905 $ 6,821 $ 6,923
======== ======== ========
Incurred losses and settlement expenses:
Insured events of the current year ....... $ 25,109 $ 28,877 $ 26,668
Decrease in provision for insured
events of prior years .................. (1,803) (3,697) (2,924)
-------- -------- --------
Total losses and settlement expenses $ 23,306 $ 25,180 $ 23,744
======== ======== ========
Catastrophe losses ......................... $ 1,276 $ 4,257 $ 932
======== ======== ========
Premium income decreased in 1997 despite an increase in the quota share
percentage from 95 percent to 100 percent and the cancellation of an aggregate
reinsurance treaty with Employers Mutual. This decrease is primarily due to
rate reductions caused by the competitive reinsurance marketplace and the
absence of run-off premium recognized in 1996 related to the cancellation of
several large pro rata treaties in 1995. For the year 1996, premium income
increased slightly despite a decline in production. This increase was
primarily attributable to a change in the mix of business from pro rata
reinsurance to excess of loss reinsurance, which generally earns premiums more
rapidly.
Losses and settlement expenses have fluctuated over the last three years
in connection with the changes experienced in premium volume. Results for
1997 benefitted from a substantial decrease in catastrophe losses; however,
this decline was partially offset by a reduction in the amount of benefit
realized from the actual settlement of claims and changes in reserves
associated with prior year losses. Results for 1996 were negatively impacted
by a large increase in catastrophe losses.
Acquisition and other expenses increased slightly in 1997, despite the
decline in premium income. This increase is primarily due to an increase in
the reserve for contingent commissions, which is associated with the favorable
loss results experienced on the reinsurance book of business.
Underwriting results have declined during the last two years from the
exceptionally good results achieved in 1995, but are still considered very
favorable. Excluding the effect of catastrophe losses, which vary greatly
from year to year, the loss and settlement expense ratio associated with
insured events of the current year deteriorated in 1997. This decline is
primarily due to the rate reductions noted above, which are the result of
excess capacity in the reinsurance marketplace. The reinsurance subsidiary is
working to address this issue by accepting a larger share of coverage on
desirable programs and strengthening its relationships with reinsurance
intermediaries. Management is aware of the narrowing profit margin on
reinsurance business and continues to emphasize profitability over premium
volume.
Nonstandard Risk Automobile Insurance
Operating results for the three years ended December 31, 1997 are as follows:
($ in thousands) 1997 1996 1995
-------- -------- --------
Premiums earned ............................ $ 10,238 $ 9,234 $ 10,001
Losses and settlement expenses ............. 9,464 8,153 9,482
Acquisition and other expenses ............. 2,965 2,640 2,775
-------- -------- --------
Underwriting loss .......................... (2,191) (1,559) (2,256)
Net investment income ...................... 1,011 1,111 1,175
Realized investment gains .................. 6 28 3
-------- -------- --------
Operating loss before income taxes ......... $ (1,174) $ (420) $ (1,078)
======== ======== ========
Incurred losses and settlement expenses:
Insured events of the current year ....... $ 9,634 $ 8,533 $ 9,798
Decrease in provision for insured
events of prior years .................. (170) (380) (316)
-------- -------- --------
Total losses and settlement expenses $ 9,464 $ 8,153 $ 9,482
======== ======== ========
Premium income increased in 1997 for the first time since 1993. This
increase was the result of renewed marketing efforts toward new and existing
agents and a competitive rate structure. The nonstandard marketplace remains
highly competitive. Standard carriers in search of premium income continue to
actively pursue marginal risks that previously would have stayed in the
nonstandard market. As a result, nonstandard carriers are competing for a
smaller pool of potential insureds, which has led to intense rate competition.
Losses and settlement expenses have fluctuated over the last three years
in connection with the change in premium volume; however, the amounts for 1997
and 1995 also reflect a higher level of losses associated with poor winter
driving conditions. Results for 1997 also include a change to a more
conservative reserving methodology.
Acquisition and other expenses increased slightly in 1997 after declining
in 1996 and 1995. This increase primarily reflects costs associated with the
company's renewed marketing efforts.
Underwriting results remained unprofitable for the third consecutive
year, the result of conflicting market forces at work in the nonstandard
marketplace. As previously noted, the nonstandard market has been faced with
a smaller pool of potential insureds due to the relaxed underwriting standards
being utilized by the standard carriers. This reduction in potential insureds
has led to increased rate competition, even though the pool of potential
insureds contains a higher percentage of high risk drivers. The combination
of reduced rates and increased loss costs has resulted in very poor
underwriting results. Management is working to improve both rate adequacy and
the overall quality of the book of business in 1998.
As previously noted, the nonstandard risk automobile insurance subsidiary
will become a participant in the pooling agreement effective January 1, 1998.
As a result of this change, future operating results for the nonstandard risk
automobile insurance subsidiary will be included in the amounts reported for
the property and casualty insurance subsidiaries and will no longer be
presented as a separate segment of business.
Excess and Surplus Lines Insurance Agency
Operating income before income taxes increased to $576,000 in 1997, up
from $458,000 in 1996 and $483,000 in 1995. The increase for 1997 reflects
increased commission income resulting from the introduction of a new long-haul
trucking program. Prior to 1997, operating income before income taxes had
decreased three consecutive years. These declines were primarily due to a
reduction in commission income caused by increased competition for excess and
surplus lines business. Competition for excess and surplus lines business
remains intense as a number of insurance carriers continue to pursue
opportunities in the excess and surplus lines market.
Parent Company
Operating income before income taxes increased to $132,000 in 1997 from
$94,000 in 1996 and $50,000 in 1995. The improvement in 1997 and 1996 is
primarily due to additional investment income that resulted from an increase
in the invested asset balance.
LOSS AND SETTLEMENT EXPENSE RESERVES
Loss and settlement expense reserves are the Company's largest liability.
Management continually reviews these reserves using a variety of statistical
and actuarial techniques to analyze claim costs, frequency and severity data,
and social and economic factors. Significant periods of time may elapse
between the occurrence of an insured loss, the reporting of the loss and the
settlement of the loss. During the loss settlement period, additional facts
regarding individual claims become known, and accordingly, it often becomes
necessary to refine and adjust the estimates of liability on a claim. Changes
in reserve estimates are reflected in operating results in the year such
changes are recorded.
Estimating loss and settlement expense reserves for asbestos and
environmental claims is very difficult due to the many uncertainties
surrounding these types of claims. Such uncertainties include the fact that
the assignment of responsibility varies widely by state and claims often
emerge long after the policy has expired, which makes assignment of damages to
the appropriate party and to the time period covered by a particular policy
difficult. In establishing reserves for these types of claims, management
monitors the relevant facts concerning each claim, the current status of the
legal environment, the social and political conditions and the claim history
and trends within the Company and the industry.
The Company's financial results have not been materially affected by
losses associated with asbestos and environmental exposures. The Company's
environmental claims activity is predominately related to pollution from
hazardous waste of former insureds. The parties to the pooling agreement have
not written primary coverage for the major oil or chemical companies. The
greatest exposure arises out of claims from small regional operations or local
businesses having pollution on their own property due to hazardous material
use or leaking underground storage tanks. These insureds include small
manufacturing operations, tool makers, automobile dealerships, contractors,
and gasoline stations. The remaining exposure arises out of commercial
general liability and umbrella policies issued to municipalities during the
1970s which allegedly cover contamination emanating from closed landfills.
The Company's asbestos claims activity is predominately from insureds
that have been named as one of multiple defendants covering exposure over many
years. The Company has not found any evidence of injury as a result of
exposure to the Company's insured's products during the policy periods.
LIQUIDITY AND INVESTMENTS
The Company maintains a portion of the investment portfolio in relatively
short-term and highly liquid investments to ensure the availability of funds
to meet claims and expenses. The remainder of the investment portfolio is
invested in securities with maturities that approximate the anticipated
liabilities of the insurance issued. Unrealized holding gains on fixed
maturity securities available-for-sale, net of tax, totaled $4,577,000 at
December 31, 1997 compared to $2,141,000 and $3,472,000 at December 31, 1996
and 1995, respectively. Since the Company does not actively trade in the bond
market, such fluctuations in the fair value of these investments are not
expected to have a material impact on the operations of the Company, as forced
liquidations of investments are not anticipated. The Company closely monitors
the bond market and makes appropriate adjustments in investment policy as
changing conditions warrant.
The majority of the Company's assets are invested in fixed maturities.
These investments provide a substantial amount of income which supplements
underwriting results and contributes to net earnings. As these investments
mature the proceeds will be reinvested at current rates, which may be higher
or lower than those now being earned; therefore, more or less investment
income may be available to contribute to net earnings depending on the
interest rate level.
The major ongoing sources of the Company's liquidity are insurance
premium income, investment income and cash provided from maturing or
liquidated investments. The principal outflows of cash are payments of
claims, commissions, premium taxes, operating expenses, income taxes,
dividends and investment purchases.
During 1997, the Company generated positive cash flows from operations of
$22,564,000 compared to $17,097,000 in 1996 and $24,651,000 in 1995. The
amount for 1997 includes $8,741,000 received from Employers Mutual in
connection with the change in the pooling agreement and the increase in the
quota share percentage.
CAPITAL RESOURCES
As of December 31, 1997, the Company had no material commitments for
capital expenditures.
Insurance company operations require capital to support premium writings.
The Company believes that its insurance company subsidiaries have sufficient
capital to support their expected near-term writings. The Company's insurance
agency operation does not require a large amount of capital.
The National Association of Insurance Commissioners (NAIC) maintains
certain risk-based capital standards for property and casualty insurance
companies. Risk-based capital requirements attempt to measure minimum
statutory capital needs based upon the risks in a company's mix of products
and investment portfolio. At December 31, 1997, each of the Company's
insurance subsidiaries has a ratio of total adjusted capital to risk-based
capital well in excess of the minimum level required.
A major source of cash flows for the Company is dividend payments from
its subsidiaries. State insurance regulations restrict the maximum amount of
dividends insurance companies can pay without prior regulatory approval. See
note 6 of Notes to Consolidated Financial Statements for additional
information regarding dividend restrictions. The Company received $3,750,000,
$3,060,000 and $3,200,000 of dividends from its insurance subsidiaries in
1997, 1996 and 1995, respectively, and $1,000,000 from its insurance agency in
1995. The Company paid cash dividends to its stockholders totaling
$4,314,000, $4,017,000 and $3,653,000 in 1997, 1996 and 1995, respectively.
Total dividends, including amounts reinvested in shares of the Company's
common stock, amounted to $6,715,000, $6,234,000 and $5,662,000 in 1997, 1996
and 1995, respectively. For the last three years, Employers Mutual has
elected to receive 50 percent of its dividends in common stock under the
Company's dividend reinvestment and common stock purchase plan.
IMPACT OF INFLATION
Inflation has a widespread effect on the Company's results of operations,
primarily through increased losses and settlement expenses. The Company
considers inflation, including social inflation which reflects an increasingly
litigious society and increasing jury awards, when setting reserve amounts.
Premiums are also affected by inflation, although they are often restricted or
delayed by competition and the regulatory rate-setting environment.
IMPACT OF YEAR 2000 REMEDIATION ON OPERATIONS
Employers Mutual owns and maintains the computer systems utilized in the
operation of the Company's businesses. Employers Mutual is currently in the
process of finalizing changes to these systems in order to be Year 2000
compliant. Most systems have been updated and all remaining work is scheduled
for completion and testing in 1998. The Company, under the terms of the
pooling agreement, will be a 23.5 percent participant in the remaining costs
associated with this project. These costs are not expected to be material to
the Company's financial position or its results of operations.
Employers Mutual is also aware of and monitoring Year 2000 compliance on
systems from outside third parties with which it interacts. By verifying Year
2000 compliance with these parties, management is further minimizing the risks
of Year 2000 noncompliance.
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards (SFAS)
128, "Earnings Per Share" in the fourth quarter of 1997. SFAS 128 simplifies
the computation of net income per share and specifies the disclosure
requirement of basic and diluted net income per share. Adoption of this
statement did not change the income or the number of shares used to compute
the Company's net income per share.
The Company will adopt the disclosure requirements of SFAS 130,
"Reporting Comprehensive Income" in the first quarter of 1998. Adoption of
this statement will have no effect on the income of the Company.
The Company will adopt the presentation requirements of SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information" in the
fourth quarter of 1998. Management is currently in the process of evaluating
the segment reporting disclosure requirements. Adoption of this statement
will have no effect on the income of the Company.
The Company will adopt the disclosure requirements of SFAS 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits" in
the first quarter of 1998. Adoption of this statement will have no effect on
the income of the Company.
DEVELOPMENTS IN INSURANCE REGULATION
In 1996 the NAIC adopted model legislation governing insurance company
investments. This model investment law has been adopted by one state
(Illinois) and is not expected to have a material impact on the operations of
the Company's insurance subsidiaries.
The NAIC is in the final stages of a project to codify statutory
accounting principles. The goal of this project is to establish a uniform set
of accounting rules and regulations that will be utilized by all insurance
companies when preparing financial reports submitted to regulatory
authorities. Nearly all issue papers documenting this new comprehensive basis
of accounting have been finalized; however, the approval process is not yet
complete. The Company has begun a study to determine the impact of adopting
the proposed accounting and reporting requirements in the codification of
statutory accounting principles, but is unable to determine what impact, if
any, this project will have on the statutory surplus of its insurance
subsidiaries when enacted.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
The 1995 Private Securities Litigation Reform Act provides issuers the
opportunity to make cautionary statements regarding forward-looking
statements. Accordingly, any forward-looking statement contained herein or in
any other oral or written statement by the Company or any of its officers,
directors or employees is qualified by the fact that actual results of the
Company may differ materially from such statement due to the following
important factors, among other risks and uncertainties inherent in the
Company's business: catastrophic events, state insurance regulations, rate
competition, adverse changes in interest rates, unforeseen losses with respect
to loss and settlement expense reserves for unreported and reported claims,
including asbestos and environmental claims.