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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended December 31, 1995
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _ _ _ _ _ to _ _ _ _ _ .
Commission File Number: 0-8678
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McM Corporation
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(Exact name of registrant as specified in its charter)
North Carolina 56-1171691
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Box 12317, 702 Oberlin Road, Raleigh, North Carolina 27605
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (919) 833-1600
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value - $1.00 per share
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(Title of Class)
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 twelve months, and (2) has been subject to such
filing requirements for the past ninety (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 or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
State the aggregate market value of the voting stock held
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by non-affiliates of the registrant as of March 18, 1995.
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Common Stock, $1.00 par value -- $6,277,000
At December 31, 1995, 4,675,038 shares of common stock of the registrant were
outstanding.
Documents Incorporated by Reference
-----------------------------------
Portions of the annual report to shareholders for the year ended December 31,
1995, are incorporated by reference into Parts I, II and IV.
Portions of the annual proxy statement for the year ended December 31, 1995,
are incorporated by reference into Part III.
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PART I
Item 1. Business
McM Corporation ("McM" or the "Company") is an insurance holding
company conducting its business through insurance and non-insurance
subsidiaries. The following schedule identifies the subsidiaries of McM and
the abbreviations by which they will be identified in this document.
Subsidiary Abbreviation
---------- ------------
PROPERTY AND CASUALTY
Occidental Fire & Casualty Company
of North Carolina OF&C
Wilshire Insurance Company Wilshire
OTHER:
Equity Holdings, Inc. Equity Holdings
In connection with, and because it desires to take advantage of, the
new "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, McM would like to caution readers regarding certain forward-looking
statements in the following discussion and elsewhere in this Form 10-K. While
McM believes in the veracity of all statements made herein, forward-looking
statements are necessarily based upon a number of estimates and assumptions
that, while considered reasonable by McM are inherently subject to significant
business, economic and competitive uncertainties and contingencies, many of
which are beyond McM's control and many of which, with respect to future
business decisions, are subject to change. These uncertainties and
contingencies can affect actual results and could cause its actual results to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, McM.
Item 1. (a) General Development of the Business
McM was organized as a North Carolina corporation on May 27, 1977, and
subsequently acquired or organized a number of insurance corporations and other
subsidiaries. From 1977 to 1991, McM operated as a multi-line holding company
with both life and health and property and casualty insurance operations.
The McMillen Trust, controlling shareholder of McM, owns 66% of the
outstanding stock of McM. A petition was filed on behalf of the McMillen Trust
in the Chancery Court of Delaware on December 2, 1986, seeking relief from the
requirement of the Trust that the Trust own at least 65% of the shares of McM.
The Court, on December 10, 1987, determined that the Trust must divest itself
of its ownership of the shares of McM and invest the proceeds in a diversified
portfolio for the
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benefit of present and future beneficiaries of the Trust. The Board of
Directors of McM and the Trust believed that the interests of all shareholders
would be best served by a coordinated sales process by which potential
purchasers could be qualified and due diligence reviews scheduled with minimal
disruption to ongoing operations. Accordingly, McM engaged an investment
banker, PaineWebber Incorporated ("PaineWebber"), to act as financial advisor
and agent in connection with any proposed sale or disposition of the McM group
of companies, whether in one or more transactions. At that time, the Trust
also looked to PaineWebber for assistance in any transaction which might
include all of the outstanding McM shares, including those owned by the Trust.
In 1991, McM decided to discontinue its life and health insurance
segment. On October 24, 1991, Occidental Life Insurance Company and Peninsular
Life Insurance Company were sold to Pennsylvania Life Insurance Company, a
privately held life insurance company domiciled in Pennsylvania. On June 22,
1992, Atlantic Southern Insurance Company was sold to Global Life Assurance
Company Limited, a subsidiary of Life of Jamaica Ltd. The sale of Atlantic
Southern Insurance Company completed the disposition of the Company's life and
health segment.
On January 29, 1993, McM's Board of Directors announced that it had
decided to discontinue efforts to sell the remaining companies in the McM group
which included OF&C and Wilshire. The Board's decision was prompted by market
and economic conditions as well as other factors which had an adverse affect on
the general sale process being conducted by PaineWebber. However, McM's Board
announced that PaineWebber would continue to serve the McM group as its
financial advisor.
In April 1993, the Court granted the petition of the Wilmington Trust
Company, Trustee of the McMillen Trust, for a clarification of existing orders
to make clear, among other things, that the timing and terms of any disposition
or sale of the Trust's shares shall be determined in the sound discretion of
the Trustee. On September 5, 1995, the Wilmington Trust Company entered into
an agreement with PaineWebber whereby PaineWebber is to advise the Trust with
respect to any possible sale of the Trust's shares and, in particular, with
respect to evaluating and qualifying inquiries and proposals from prospective
purchasers of the Trust's shares. However, the ultimate disposition of the
shares held by the Trust cannot be determined at the present time.
Total employees of McM and its subsidiaries numbered 129 at December
31, 1995, all of which are directly employed by the property and casualty
subsidiaries.
Item 1. (b) Financial Information About Industry Segments
As a result of discontinuing its life and health insurance segment,
McM, through its subsidiaries, is engaged only in the marketing and
underwriting of property and casualty insurance. Information concerning
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industry segments, therefore, is no longer applicable.
Item 1. (c) Narrative Description of Business
PROPERTY AND CASUALTY INSURANCE
McM's property and casualty insurance business is conducted through
two insurance companies, OF&C and Wilshire. The business is concentrated in
liability, physical damage and cargo coverages for the trucking transportation
industry as well as non-standard private passenger automobile coverages. These
insurance policies are generally marketed through general and independent
agents who have no authority to alter any terms of the policies.
The agents who produce business for OF&C and Wilshire are not
exclusive agents of the companies and generally have affiliations with other
insurance companies which may compete with McM. No single agent or agency
accounts for a material amount of premium income to the property and casualty
business of McM.
OF&C is licensed in the District of Columbia and all states other than
Connecticut and Hawaii. Certain states have placed restrictions on the amount
of premium that OF&C may write in those states. Wilshire is licensed in
nineteen states comprised of Arizona, California, Colorado, Hawaii, Idaho,
Iowa, Kansas, Minnesota, Montana, Nebraska, Nevada, New Mexico, North Carolina,
Ohio, Oregon, South Dakota, Utah, Washington and Wisconsin. Wilshire is also
approved, as a non-admitted carrier, to write coverages in the states of
Alabama, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Maryland,
Minnesota, North Dakota, Oklahoma, Pennsylvania, Texas and Wyoming. A
non-admitted carrier may write coverages at rates in excess of the rates
approved by the various states, provided that licensed carriers in those states
are unwilling to provide coverages at the approved rates. Wilshire's premium
writings are not restricted by any state. Also see "Geographic Distribution of
Premiums Received."
Competition. The property and casualty insurance business is highly
competitive. In most jurisdictions in which McM's property and casualty
insurance subsidiaries market their policies, there are numerous large standard
lines stock and mutual companies as well as other specialty companies competing
for the same business. Many of the companies have greater financial resources,
larger marketing organizations and broader diversification of risks than the
McM companies. McM believes that the policies, rates, commissions and services
of its companies are competitive with other companies writing these types of
business.
Regulation. All insurance companies are subject to regulation and supervision
by the jurisdictions in which the companies are authorized to transact
business. These regulatory bodies have broad administrative powers relating to
the standards of solvency which must be met and maintained by insurance
companies, minimum capital and surplus
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requirements, limitations on the investments of capital and surplus, granting
and revoking of licenses, licensing of agents, filing and approval of policy
forms and rates, maintenance of required reserves, unfair discrimination, form
and content of financial statements and other reporting forms, issuance and
sale of stock, types of allowable investments, and numerous other matters
pertaining to insurance.
Insurance companies must keep assets equal to the minimum capital
required by law plus the accumulated reserves invested in certain classes of
investments as specified in the statutes applicable to such companies. In
addition, the National Association of Insurance Commissioners ("NAIC") has
adopted Risk-Based Capital ("RBC") requirements for property and casualty
insurance companies. RBC was developed to evaluate the adequacy of statutory
capital and surplus in relation to investment and insurance risks. The RBC
formula serves as an early warning tool for state insurance regulators to help
identify, for the purpose of initiating regulatory action, companies which are
potentially inadequately capitalized. The capital and surplus for McM's
insurance subsidiaries are well in excess of any regulatory action thresholds
as defined by the NAIC.
The reporting practices for McM's property and casualty subsidiaries
are prescribed or permitted by state regulatory authorities ("statutory
accounting") and may differ from generally accepted accounting principles
("GAAP"). OF&C (which includes Wilshire on a statutory equity basis) reported
to insurance regulatory authorities combined statutory accounting capital and
surplus of $19.2 million and $16.5 million at December 31, 1995 and 1994,
respectively. Combined captial and surplus on a GAAP basis was $24.3 million
and $22.0 million at December 31, 1995 and 1994, respectively.
There are two major reconciling differences between the statutory
accounting and GAAP capital and surplus balances of McM's property and casualty
subsidiaries. In GAAP accounting, costs which vary with and are primarily
related to the production of property and casualty business are deferred to the
extent recoverable and are amortized over the lives of the policies in
proportion to the recognition of premium earned. Statutory accounting does not
permit this deferral methodology and requires property and casualty companies
to fully recognize these expenses in the period they were incurred. At
December 31, 1995, McM's property and casualty subsidiaries recorded $3.3
million in deferred policy acquisition as an asset on the GAAP balance sheet
compared to $3.2 million at December 31, 1994. Statutory accounting also
requires property and casualty companies to record as a liability and
restriction to capital and surplus the uncollateralized portion of balances
receivable from non-admitted reinsurers ("Schedule F Penalty"). The combined
Schedule F Penalty recorded by McM's property and casualty subsidiaries
totalled $403,000 and $614,000 at December 31, 1995 and 1994, respectively.
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Insurance holding company laws grant additional powers to insurance
regulators with respect to acquisitions and control of insurance companies by
holding companies and the requirements of disclosure relating to transactions
with affiliated companies.
Each company files a detailed annual report with the insurance
department of each state or governmental jurisdiction in which it is licensed
to do business. Insurance companies are also subject to periodic examinations
by the regulatory bodies. Some of the jurisdictions in which OF&C is licensed
to do business have, for various reasons, instituted restrictions or
limitations on the amount of business written in that state. These
restrictions were imposed years ago when the property and casualty companies
were generating substantial losses and experiencing financial difficulties.
Generally they involved states in which the Company was not actively writing
business nor had intentions to write business. These restrictions have no
current effect on liquidity, captial resources or results of operations. In
the future, should the Company desire to further expand its market presence
into any state with such restrictions, it will then pursue the lifting of such
restrictions by providing current financial and operational information as
required by individual state regulatory authorities.
In May 1993, the North Carolina Commissioner of Insurance issued an
administrative order superseding any and all other orders then in place. The
order required the property and casualty operations to maintain a specified net
premiums to surplus ratio and required prior approval of the Commissioner for
certain transactions. During 1993, management undertook measures necessary to
comply with the conditions of the order. In June 1994, the Commissioner
vacated the order.
Reinsurance As with other property and casualty insurance companies, the McM
property and casualty insurance companies reinsure a portion of the insurance
they write in order to control their exposure on large individual risks or in
the event of catastrophic losses. The companies remain contingently liable on
that portion of the risk reinsured should the reinsurer be unable to meet its
obligations under the reinsurance agreements. See Note C of the Notes to
Consolidated Financial Statements.
The largest liability exposure insured for any one risk is $2,000,000.
Reinsurance is in place to reduce the companies' exposure on premiums earned
subsequent to January 1, 1992, to $100,000 per risk. The retention per risk on
premiums earned prior to January 1, 1992, generally is $100,000 with the
exception of 1991 when the loss retention was $250,000. Premiums payable under
certain of the companies' liability reinsurance treaties prior to January 1,
1990, are based in part on actual loss experience. Premiums for the liability
treaties subsequent to 1990 are calculated on a flat rate based on policy
limits. Separate physical damage (excluding theft and collision) and motor
cargo catastrophe reinsurance treaties provide reinsurance on any one
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catastrophic occurrence. Coverages under these treaties are limited to a
maximum of 95% of $3,500,000 in excess of the first $500,000 of losses paid.
Quota share reinsurance coverages, by which the Company and its
reinsurers share risk on a proportionate basis, are also in place for both
commercial and private passenger automobile business. The companies cede 5% of
the retained commercial auto liability coverages and 40% of private passenger
liability and physical damage risks. These quota share arrangements allow the
companies to better control premium growth.
The principal reinsurers of the companies for current business are
Zurich Reinsurance, Ltd., Unionamerica Insurance Company, CNA International
Reinsurance Company, Ltd., Lloyds Underwriters, AXA Reassurance Company,
Hannover Ruckversicherungs, Sphere Drake Insurance, PLC and Terra Nova
Insurance Company, Ltd. Reinsurance agreements cover commercial and private
passenger automobile liability, physical damage (excluding theft and
collision), motor cargo and ancillary coverages. In addition to the reinsurers
named above, principal reinsurers of the companies for prior years' reinsurance
treaties are Employers Reinsurance Corporation, National Reinsurance Company
and Reinsurance Corporation of New York.
Loss Reserves and Loss Adjustment Expenses
The consolidated financial statements include the estimated liability
for unpaid losses and loss adjustment expenses ("LAE") of the property and
casualty insurance subsidiaries. The liabilities for losses and LAE are
determined using case basis evaluations and statistical projections and
represent estimates of the ultimate net cost of all unpaid losses and LAE
incurred through December 31 of each year. These estimates give effect to
trends in claims severity and other factors which may vary as the liabilities
are ultimately settled. The estimates are continually reviewed and, as
adjustments to these liabilities become necessary, such adjustments are
reflected in current operations.
The following table provides a reconciliation of beginning and ending
liability balances for 1995, 1994 and 1993.
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RECONCILIATION OF NET LIABILITY FOR LOSSES
AND LOSS ADJUSTMENT EXPENSES
1995 1994 1993
-------- -------- ---------
(Thousands of Dollars)
GAAP
Property and Casualty reserves:
Net reserves at beginning of year $ 38,415 $ 51,625 $ 59,580
Net incurred losses and LAE
Provision for insured events of
the current year 31,282 29,106 37,196
(Decrease) increase in provision
for insured events of prior years (248) 18 1,269
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31,034 29,124 38,465
Payments for:
Losses and LAE attributable to
insured events of the current year 18,113 15,307 17,920
Losses and LAE attributable to
insured events of prior years 21,339 27,027 28,500
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39,452 42,334 46,420
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Net reserves at end of year 29,997 38,415 51,625
Reinsurance receivable on unpaid
losses and LAE at end of current year 36,155 42,471 48,752
-------- -------- ---------
Gross reserves for losses and LAE $ 66,152 $ 80,886 $ 100,377
======== ======== ==========
The reconciliation above shows that a $248,000 redundancy in the
December 31, 1994, reserve emerged in 1995. McM's reserves for losses and LAE,
net of reinsurance recoverables, at December 31, 1993, were increased in 1994
by $18,000 for claims that had occurred on or prior to December 31, 1993.
McM's reserves for losses and LAE, net of reinsurance recoverables, at December
31, 1992, were increased in 1993 by $1,269,000 for claims that had occurred on
or prior to December 31, 1992. This claims development results primarily from
reserves for the commercial auto liability line of business which experienced
adverse development of approximately $830,000 in 1993, most of which was
attributed to the 1990 accident year. Reserves for the private passenger auto
liability line of business at December 31, 1992, also experienced adverse
development during 1993 of approximately $577,000. An additional $411,000 of
unfavorable development is related to participation in involuntary pools and
other residual market mechanisms in which OF&C and Wilshire are required to
participate by the various states in which the companies write insurance.
Favorable reserve development of $549,000 was experienced during 1993 in other
miscellaneous lines of business, most of which was related to auto physical
damage coverages.
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The anticipated effect of inflation is implicitly considered when
estimating liabilities for losses and LAE. While anticipated cost increases
due to inflation are considered in estimating the ultimate claim costs, the
increase in average severity of claims is caused by a number of factors that
vary with the individual type of policy written. Future average severity is
projected based on historical trends adjusted for anticipated changes in these
trends and general economic conditions. These anticipated trends are monitored
based on actual development and are modified as necessary.
The liability for losses and LAE of $66,152,000 reported in the
accompanying financial statements in accordance with generally accepted
accounting principles (GAAP) is reported on a gross basis, i.e., without
reduction for reinsurance, and differs from that reported in the annual
statements filed with state insurance departments in accordance with statutory
accounting practices (SAP), which are reported net of reinsurance. See Note A
of the accompanying 1995 financial statements.
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ANALYSIS OF LOSS AND LOSS ADJUSTMENT
EXPENSE DEVELOPMENT
NET OF REINSURANCE WITH SUPPLEMENTAL GROSS DATA
(Thousands of dollars)
YEAR ENDED 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
- ---------- ------- -------- -------- ------- ------- ------- ------- ------- ------- ------- -------
Liability for Unpaid
Claims and Claim
Adjustment Expense $55,502 $100,942 $103,115 $96,308 $78,120 $64,002 $64,304 $59,580 $51,625 $38,415 $29,997
Paid (Cumulative) as of:
One year later $11,068 $ 48,008 $ 45,676 $48,461 $42,731 $41,726 $29,635 $28,500 $27,034 $21,338 $0
Two years later 37,166 76,162 75,454 72,353 63,893 47,833 44,905 44,659 39,119
Three years later 53,570 96,646 90,546 84,912 67,649 56,343 54,980 51,326
Four years later 65,497 105,561 99,200 87,368 72,305 61,006 58,364
Five years later 71,059 109,964 101,072 90,495 75,568 62,341
Six years later 74,502 110,513 103,242 93,146 76,350
Seven years later 75,351 112,133 105,555 93,769
Eight years later 76,773 114,270 105,791
Nine years later 78,825 114,405
Ten years later 78,872
Liability Reestimated as of:
One year later $70,706 $112,928 $108,844 $97,562 $77,625 $68,679 $64,175 $60,849 $51,643 $38,167 $0
Two years later 80,254 118,303 109,955 95,362 78,970 66,266 64,686 59,881 50,184
Three years later 81,855 118,933 108,203 96,354 79,861 67,429 64,167 58,563
Four years later 82,151 117,628 109,058 96,874 80,345 67,540 63,204
Five years later 81,468 118,120 109,164 97,453 80,695 66,357
Six years later 82,218 117,622 109,198 97,619 79,909
Seven years later 82,009 117,739 109,415 97,251
Eight years later 82,115 118,238 109,226
Nine years later 82,599 117,618
Ten years later 82,051
------- -------- -------- ------- ------- ------- ------- ------- ------- ------- -------
Cumulative Deficiency
(Redundancy) $ 26,549 $ 16,676 $ 6,111 $ 943 $ 1,789 $ 2,355 ($1,100) ($1,017) ($1,441) ($248) $0
======== ======== ======== ======= ======= ======= ======= ======= ======= ======= =======
Gross Data at End of Year
- -------------------------
Gross Liability $80,886 $66,152
Reinsurance Recoverable 42,471 36,155
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Net Liability $38,415 $29,997
======= =======
Reestimation of Gross Data
As of Latest Balance Sheet Date
Gross Liability $81,546
Reinsurance Recoverable 43,379
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Net Liability $38,167
=======
Gross Cumulative Deficiency $ 660
=======
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The table above presents the development of balance sheet liabilities
for 1985 through 1995. The top line of the table shows the estimated liability
for unpaid losses and LAE recorded at the balance sheet date for each of the
indicated years. This liability represents the estimated amount of losses and
LAE for claims arising in all prior years that are unpaid at the balance sheet
date, including losses that had been incurred but not yet reported to the
Company. The lower portion of the table shows the re-estimated amount of the
previously recorded liability based on experience as of the end of each
succeeding year. The estimate is increased or decreased as more information
becomes known about the frequency and severity of claims for individual years.
The deficiency/(redundancy) represents the aggregate change in the
estimates over all prior years. For example, through 1995, the 1987 liability
has developed a $6,111,000 deficiency which has been recognized in operations
over the eight year period. The effects on income of the past three years of
changes in estimates of the liabilities for losses and LAE is shown in the
preceding table, "Reconciliation of Net Liability for Losses and Loss
Adjustment Expenses".
The upper section of the table, "Analysis of Loss and Loss Adjustment
Expense Development", shows the cumulative amount paid with respect to the
previously recorded liability as of the end of each succeeding year. For
example, as of December 31, 1995, the Company paid $78,872,000 of the current
re-estimated reserve for losses and loss adjustment expenses at December 31,
1985, of $82,051,000. Thus an estimated $3,179,000 of losses incurred through
1985 remain unpaid as of the current financial statement date.
In evaluating this information, it should be noted that each amount
includes the effects of all changes in amounts for prior periods. For example,
the amount of the deficiency related to losses settled in 1987, but incurred in
1985, will be included in cumulative redundancy (deficiency) amount for years
1985 and 1986. This table does not present accident or policy year development
data. Conditions and trends that have affected development of the liability in
the past may not necessarily occur in the future. In addition, the Company has
entered into numerous reinsurance commutations and assumption transactions, as
discussed below, which are included in the information presented. Accordingly,
it may not be appropriate to extrapolate future deficiencies or redundancies
based on this table.
On March 5, 1987, the Company entered into a commutation agreement
with Omaha Indemnity Company (OIC), a subsidiary of Mutual of Omaha, whereby
OIC remitted $26 million of cash to the Company in satisfaction of all
liabilities due under various reinsurance treaties. Of this amount, $5.5
million reimbursed existing paid loss recoverables leaving $20.5 million
available to cover future loss payments on the commuted block of reserves.
Based on a review of the commuted reserves by the
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Company's actuary and by an independent actuarial consulting firm, the
projected ultimate value of commuted reserves and paid loss recoverables
exceeded the commutation proceeds by $5.5 million. This transaction was
recorded in the 1986 consolidated GAAP financial statements, and is reflected
in the loss development schedule as additional adverse reserve development of
approximately $5.3 million relating to year-end reserves for 1985, as of
December 31, 1986. Loss and loss adjustment expense reserves related to this
block of business and recorded at December 31, 1995, are not significant.
During 1985 McM entered into a commutation agreement with Universal
Reinsurance Corporation and Northwestern National Insurance Company, whereby
they remitted $15.5 million of cash to McM's property and casualty subsidiaries
in satisfaction of all liabilities due under the various reinsurance treaties.
This cash settlement was supplemented by $1 million in development recorded
during 1986. An additional $1.7 million in development was recorded during
1987. The Company has experienced no significant development on this business
since 1987 and remaining loss and loss adjustment expense reserves at December
31, 1995, are not significant.
Additionally, the Company experienced adverse development of $1.2
million during 1987 on reserves commuted with several other reinsurers. No
significant development has been experienced on these reserves since 1987.
Effective December 31, 1985, OF&C assumed the liabilities on business
previously written by Peninsular Fire Insurance Company ("PFICO"), a former
subsidiary of McM. The coverages, which were primarily workers' compensation
and commercial multi-peril, are being run off and no new coverages have been
underwritten. Development on the PFICO reserves was $2.5 million in 1985, $3.1
million in 1986, $3.9 million in 1987, and $3.1 million in 1988. Adverse
development since 1988 has not been significant.
The information below the table is a reconciliation of the data in the
table, which is reported net of reinsurance, to the reserves in the balance
sheet which are stated gross of reinsurance. The lower portion of the exhibit
is a reestimation of the prior year's gross reserves as of December 31, 1995.
The reestimation is compared to the prior year estimate of gross reserves to
calculate the gross development of the prior year balance sheet reserves.
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Geographic Distribution of Premiums Received
The following is a summary of property and casualty premiums written
in 1995 by geographic location. States accounting for less than five percent
(5%) of premiums are combined in "Other".
STATE PERCENT
----- -------
Alabama 6%
California 37
Florida 7
Nevada 9
Ohio 7
Utah 5
Other 29
---
100%
Item 1. (d) Financial Information About Foreign and Domestic Operations
and Export Sales
The information called for under this item does not apply.
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Item 2. Properties
McM and its subsidiaries lease home office properties in various
locations. The major locations are set forth in the following table:
Square Book Annual
Footage Value Rent
------- --------- ---------
Raleigh, North Carolina
OF&C 23,643 Not Owned $ 427,120
Wilshire
McM
Lancaster, California
Wilshire 8,322 Not Owned $ 125,595
Scottsdale, Arizona
OF&C 6,528 Not Owned $ 97,920
Item 3. Legal Proceedings
The information called for under this item does not apply.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during
the fourth quarter of 1995.
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Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The market information and related stockholder matters are
incorporated by reference from the Annual Report to Shareholders for the year
ended December 31, 1995. This information is included on page 1 of the Annual
Report to Shareholders and is on page 33 of this report.
Item 6. Selected Financial Data
The selected financial data is incorporated by reference from page 1
of the Annual Report to Shareholders for the year ended December 31, 1995. See
page 33 of this report.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Management's discussion is incorporated by reference from pages 5
through 7 of the Annual Report to Shareholders for the year ended December 31,
1995. See pages 39 through 45 of this report.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of McM Corporation and
subsidiaries and the report of independent auditors filed in response to Item 8
are incorporated by reference from the Annual Report to Shareholders beginning
on page 8. See page 46 of this report.
A summary of the quarterly results of operations for the years ended
December 31, 1995, and December 31, 1994, is incorporated by reference from the
Annual Report to Shareholders on page 20. See page 69 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
The information called for under this item does not apply.
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PART III
Item 10. Directors and Executive Officers of the Registrant
The information called for is incorporated by reference and will be
filed with the Commission with the definitive proxy statement within the
required 120-day period.
Item 11. Executive Compensation
The information called for is incorporated by reference and will be
filed with the Commission with the definitive proxy statement within the
required 120-day period.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information called for is incorporated by reference and will be
filed with the Commission with the definitive proxy statement within the
required 120-day period.
Item 13. Certain Relationships and Related Transactions
The information called for is incorporated by reference and will be
filed with the Commission with the definitive proxy statement within the
required 120-day period.
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
Page
----
(a) The following documents are filed as a part of this report.
1. Financial Statements--The financial statements required by
this item are incorporated byreference from the Annual Report
to Shareholders. The following consolidated financial
statements of McM and subsidiaries are filed in response to
Item 8:
Consolidated Balance Sheets - December 31, 1995 and 1994. 46
Consolidated Statements of Operations - Years Ended December
31, 1995, 1994 and 1993. 47
Consolidated Statements of Shareholders' Equity Years Ended
December 31, 1995, 1994 and 1993. 48
Consolidated Statements of Cash Flows - Years Ended December
31, 1995, 1994 and 1993. 49
Notes to Consolidated Financial Statements 50
Report of Independent Auditors 68
2. Financial Statement Schedules--The following schedules are
filed in accordance with the requirements of Article 7 of
Regulation S-X:
Schedule 1 - Summary of Investments - Other than 22
Investments in Related Parties (In
compliance with Schedule I of Rule 7-05):
Schedule 2 - Condensed Financial Information of Registrant 23
(In compliance with Schedule II of Rule 7-05):
Schedule 3 - Reinsurance (In compliance with Schedule IV 27
of Rule 7-05):
Schedule 4 - Valuation and Qualifying Accounts (In 28
compliance with Schedule V of Rule 7-05):
16
18
Page
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Schedule 5 - Supplemental Information for Property & 29
Casualty Insurance Underwriters (In
compliance with Schedule IV of Rule 7-05):
All other schedules to the consolidated
financial statements required by Article 5 or
7 of Regulation S-X are not applicable and,
therefore, have been omitted.
3. The following exhibits are included in accordance with the
requirements of Item 601 of Regulation S-K.
Exhibit (3): a) Amended Articles of Incorporation are
attached. 84
b) Amended By-laws of McM Corporation are attached. 72
Exhibit (9): McMillen Trust Agreement is incorporated by
reference from Form 10, dated April 24, 1978.
Exhibit (10): Material contracts:
a) The 1986 Stock Option Plan (as amended) is incorporated
by reference from the December 31, 1994 Form 10K
b) The Phantom Stock Plan is incorporated by reference
from the December 31, 1994 Form 10K
c) Employment and retention bonus contracts for certain
executive officers are incorporated by reference from
the December 31, 1989, 1992, 1993 and 1994 Forms 10K
d) The Key Executive Incentive Compensation Plan is incorporated
by reference from the December 31, 1994 Form 10K
e) The Equity Appreciation Rights Plan is incorporated
by reference from the 1993 Proxy Statement
Exhibit (13): Annual Report to Shareholders for year ended 31
December 31, 1995.
Exhibit (21): Subsidiaries of the Registrant. 88
Exhibit (23): Consent of Independent Auditors. 21
Exhibit (29): Information from reports furnished to state P
insurance regulatory authorities.
17
19
(b) There were no reports on Form 8-K filed by McM during the last quarter
of the period covered by this report.
(c) Exhibits--The response to this portion of Item 14 is submitted as a
separate section of this report beginning on page 31.
(d) Financial Statement Schedules--The response to this portion of Item 14
is submitted as a separate section of this report beginning on page 20.
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20
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, thereto duly authorized.
McM CORPORATION By: GEORGE E. KING
(Registrant) ---------------------------------
George E. King, President
Date: MARCH 28, 1996
--------------------------------
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 dates indicated.
GEORGE E. KING 3/28/96 MICHAEL E. DIGREGORIO 3/28/96
- ---------------------------------- -------------------------------------
George E. King, President Michael A. DiGregorio
Chief Executive Officer Director
and Director
STEPHEN L. STEPHANO 3/28/96 LAURENCE R. LEE, JR. 3/28/96
- ---------------------------------- -------------------------------------
Stephen L. Stephano Laurence F. Lee, Jr.
Executive Vice President Director
Chief Operating Officer
and Director
KEVIN J. HAMM 3/28/96 LAURENCE R. LEE III 3/28/96
- ---------------------------------- -------------------------------------
Kevin J. Hamm Laurence F. Lee III
Vice President/CFO Director
CLAUDE G. SANCHEZ, JR. 3/28/96 R. PEYTON WOODSON, III 3/28/96
- ---------------------------------- -------------------------------------
Claude G. Sanchez, Jr. R. Peyton Woodson III
Director Director
19
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ANNUAL REPORT ON FORM 10-K
Item 14 (d) - Financial Statement Schedules
and
Item 14 (c) - Exhibits
Year Ended December 31, 1995
McM CORPORATION AND SUBSIDIARIES
20
22
SCHEDULE 1 -- SUMMARY OF INVESTMENTS
McM CORPORATION AND SUBSIDIARIES
December 31, 1995
AMOUNT
SHOWN ON
MARKET BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
------------------ -------- ------- -------
(Thousands of dollars)
FIXED MATURITY SECURITIES AVAILABLE-FOR-SALE
- --------------------------------------------
Bonds
Mortgage-backed securities $ 4,445 $ 4,691 $ 4,691
U.S. Government, government
agencies and authorities 25,998 26,327 26,327
Public utilities 758 754 754
All other corporate bonds 276 170 170
-------- ------- -------
Total Fixed Maturities Available for Sale 31,477 31,942 31,942
Short-term investments
Cash equivalents earning interest 14,848 14,848 14,848
-------- ------- -------
Total Securities Available-for-Sale 46,325 46,790 46,790
HELD-TO-MATURITY
- ----------------
U.S. Government, government
agencies and authorities 16,037 16,203 16,037
States, municipalities and political
subdivisions 193 226 193
-------- ------- -------
Total Securities Held To Maturity 16,230 16,429 16,230
-------- ------- -------
Total Investments $62,555 $63,219 $63,020
======== ======= =======
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SCHEDULE 2 - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
McM CORPORATON (PARENT COMPANY)
(Thousands of dollars)
December 31
1995 1994
------- -------
ASSETS
Fixed maturities available-for-sale $ 95 $ 95
Cash 101 77
Other assets 118 115
------- -------
314 287
Investments in wholly-owned subsidiaries
at equity * 25,189 22,323
------- -------
TOTAL ASSETS $25,503 $22,610
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accrued expenses $ 1,509 $ 1,581
Income taxes payable to wholly-owned 205 79
subsidiaries *
Payable to wholly-owned subsidiaries * 549 543
------- -------
TOTAL LIABILITIES 2,263 2,203
Shareholders' Equity:
Common stock 4,675 4,675
Additional paid-in capital 1,477 1,477
Unrealized gain (loss) on securities
available-for-sale (including unrealized
gain (loss) on securities held by
subsidiaries: 1995 - $570 ; 1994 - ($53)) 465 (158)
Retained earnings 16,623 14,413
------- -------
TOTAL SHAREHOLDERS' EQUITY 23,240 20,407
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $25,503 $22,610
======= =======
* Eliminated in consolidation
See notes to condensed financial information.
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SCHEDULE 2 - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
McM CORPORATON (PARENT COMPANY)
(Thousands of dollars)
Year Ended December 31
1995 1994 1993
------ ------ -------
INCOME
Administrative charges
to subsidiaries * - Note B $ 650 $1,200 $1,280
Realized investment income 5 10 145
Other income 0 1 306
------ ------ -------
655 1,211 1,731
General and administrative expenses 680 866 1,765
------ ------ -------
INCOME (LOSS) BEFORE TAXES,
AND EQUITY IN UNDISTRIBUTED
INCOME (LOSSES) OF SUBSIDIARIES (25) 345 (34)
Income taxes ( benefits) 8 79 (458)
------ ------ -------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED
INCOME (LOSSES) OF SUBSIDIARIES (33) 266 424
Equity in undistributed income (losses)
of subsidiaries 2,243 1,088 (719)
------ ------ -------
NET INCOME (LOSS) $2,210 $1,354 ($ 295)
====== ====== =======
* Eliminated in consolidation.
See notes to condensed financial information.
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SCHEDULE 2 - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
McM CORPORATON (PARENT COMPANY)
(Thousands of dollars)
Year Ended December 31
1995 1994 1993
------ ------ ------
OERATING ACTIVITIES
Net Income (Loss) $2,210 $1,354 ($295)
Adjustments to reconcile net income (loss)
to net cash provided by (used by)
operating activities:
Depreciation 4 12 14
Equity in income of subsidiaries (2,243) (1,088) 726
Other assets (7) 227 208
Other liabilities (72) (617) (181)
Provisions for income taxes 126 114 (2,342)
Payables to wholly-owned subsidiaries 6 (17) 560
------ ------ ------
CASH PROVIDED BY (USED BY) OPERATING ACTIVITIES 24 (15) (1,310)
INVESTING ACTIVITIES
Disposals of fixed maturities 0 0 1,127
Decrease in short-term investments 0 0 438
------ ------ ------
CASH USED BY INVESTING ACTIVITIES 0 0 1,565
------ ------ ------
INCREASE (DECREASE) IN CASH $ 24 ($ 15) $255
====== ====== ======
25
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SCHEDULE 2 -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
McM CORPORATION (PARENT COMPANY)
The accompanying condensed financial information should be read in conjunction
with the consolidated financial statements and notes thereto of McM Corporation
and Subsidiaries.
NOTE A -- Significant Accounting Policies
In the parent company financial statements the Company's investments
in operations of McM and its wholly-owned subsidiaries are stated at cost plus
equity in undistributed earnings of the subsidiaries. McM is actively engaged
through certain of its subsidiaries in the property and casualty insurance
business. All significant intercompany accounts and transactions have been
eliminated.
NOTE B -- Administrative Charges
McM is compensated by its subsidiaries in the form of management fees
for providing management support, planning assistance, financial reporting and
investment services.
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27
SCHEDULE 3 - REINSURANCE
McM CORPORATION AND SUBSIDIARIES
Year Ended December 31, 1995, 1994, and 1993
Premiums Earned
----------------------------------------
Percentage
Ceded to Assumed of Amount
Gross Other From Other Net Assumed
(Thousands of dollars) Amount Companies Parties Amount to Net
------- -------- ------- ------- ------
YEAR ENDED DECEMBER 31, 1995 $63,731 $23,901 $5,871 $45,701 12.85%
======= ======= ====== =======
YEAR ENDED DECEMBER 31, 1994 $65,572 $25,720 $1,274 $41,126 3.10%
======= ======= ====== =======
YEAR ENDED DECEMBER 31, 1993 $78,475 $28,375 $ 943 $51,043 1.85%
======= ======= ====== =======
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SCHEDULE 4 - VALUATION AND QUALIFYING ACCOUNTS
McM CORPORATION AND SUBSIDIARIES
(Thousands of dollars)
ADDITIONS
---------------------------------
(1) (2)
Charged to Charged to
Balance at (Recovery of) Other Balance
Beginning Costs and Accounts Deductions at End
DESCRIPTION of Period Expenses (Describe) (Describe) of Period
----------- ------------ ------------- ----------- ----------
YEAR ENDED DECEMBER 31, 1995
Deducted from asset account:
Allowance for uncollectible accounts $ 315 $ 30 $ 0 $ 0 $ 345
====== ====== ==== ====== ======
Included as liability account:
Allowance for bad debts on liquidated
reinsurers $1,349 $ 103 $ 0 $ 392 (1) $1,060
====== ====== ==== ====== ======
YEAR ENDED DECEMBER 31, 1994
Deducted from asset account:
Allowance for uncollectible accounts $ 412 ($97) $ 0 $ 0 $ 315
====== ====== ==== ====== ======
Included as liability account:
Allowance for bad debts on liquidated
reinsurers $2,095 ($41) $ 0 $ 705 (1) $1,349
====== ====== ==== ====== ======
YEAR ENDED DECEMBER 31, 1993
Deducted from asset accounts:
Allowance for uncollectible accounts $ 0 $ 412 $ 0 $ 0 $ 412
====== ====== ==== ====== ======
Included as liability account:
Allowance for bad debts on liquidated
reinsurers $4,063 $1,298 $ 0 $3,266 (1) $2,095
====== ====== ==== ====== ======
(1) Write-off of paid recoverable balances for insolvent/liquidated reinsurers
against provision established.
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SCHEDULE 5 - SUPPLEMENTAL INSURANCE INFORMATION
PROPERTY/CASUALTY INSURANCE SUBSIDIARIES
YEAR ENDED DECEMBER 31, 1995, 1994 AND 1993
(Thousands of dollars)
RESERVES FOR
DEFERRED UNPAID CLAIMS DISCOUNT
POLICY AND CLAIM IF ANY
ACQUISITION ADJUSTMENT DEDUCTED IN UNEARNED EARNED
COSTS EXPENSES RESERVES PREMIUMS PREMIUMS
----------- ------------ ----------- -------- --------
YEAR ENDED DECEMBER 31:
Net of Reinsurance
1995 $3,343 $ 29,997 --- $12,291 $45,701
1994 3,235 38,415 --- 11,329 41,126
1993 3,532 51,618 --- 14,433 51,043
Gross of Reinsurance
1995 $3,343 $ 66,152 --- $17,234 $69,602
1994 3,235 80,886 --- 14,811 66,846
1993 3,532 100,377 --- 16,109 79,418
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CLAIMS AND CLAIM
ADJUSTMENT EXPENSES
INCURRED RELATED TO AMORTIZATION
------------------------ OF DEFERRED PAID CLAIMS
(1) (2) POLICY AND CLAIM
INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS
INCOME YEAR YEAR COSTS EXPENSES WRITTEN
- ----------- -------- ------ ------------ ------------ --------
$3,492 $31,282 ($248) $7,141 $39,452 $46,663
3,674 29,106 18 6,098 42,334 38,020
5,153 37,196 1,269 9,948 46,420 43,216
$3,492 $45,395 $ 660 $7,141 $71,403 $72,025
3,674 46,262 (774) 6,098 64,981 65,547
5,153 52,937 1,063 9,948 66,052 72,734
30