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McM CORPORATION
ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED
DECEMBER 31, 1995
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CORPORATE MISSION AND PROFILE
MISSION
To market specialized insurance products within well defined market areas at
competitive prices and with exceptional service to deliver better than average
returns on investor capital.
PROFILE
McM Corporation is an insurance holding company headquartered in Raleigh, North
Carolina, which owns these major operating subsidiary corporations:
Occidental Fire & Casualty Company of North Carolina Raleigh, North
Carolina
Wilshire Insurance Company
Raleigh, North Carolina
CONTENTS
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IFC Corporate Mission and Profile
Consolidated Financial Highlights
Common Stock
Report to Shareholders
Market Overview
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Auditors
Summary of Quarterly Results of Operations
Officers and Directors
Corporate Information
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CONSOLIDATED FINANCIAL HIGHLIGHTS
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McM CORPORATION AND SUBSIDIARIES 1995 1994 1993 1992 1991
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(Thousands of dollars, except per share data)
Assets $126,568 $137,665 $158,984 $187,006 $186,952
Liabilities 103,328 117,258 139,262 167,500 163,713
Retained earnings 16,623 14,413 13,059 13,354 17,087
Shareholders' equity 23,240 20,407 19,722 19,506 23,239
Net premiums earned 45,701 41,126 51,043 53,889 52,975
Net investment income 3,497 3,684 5,298 6,564 7,305
Realized investment gains 123 122 1,797 666 2,942
Total revenue 49,571 45,304 58,293 61,291 63,626
Income (loss) from continuing operations 2,210 1,354 (295) (3,764) 1,311
Income (loss) from discontinued operations 0 0 0 31 (11,987)
Net income (loss) 2,210 1,354 (295) (3,733) (10,676)
Per share data:
Shareholders' equity $ 4.97 $ 4.37 $ 4.22 $ 4.17 $ 4.97
Income (loss) from continuing operations 0.47 0.29 (0.06) (0.81) 0.28
Net income (loss ) 0.47 0.29 (0.06) (0.80) (2.28)
Cash dividends 0.00 0.00 0.00 0.00 0.00
Common Stock
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McM Corporation Common Stock is traded on the national over-the-counter
securities market, under the NASDAQ symbol, McMc.
The number of record shareholders of McM Corporation is 1,035 as of December 31,
1995.
The table below sets forth by quarters, for the years 1995 and 1994, the range
of the high and low bid prices of McM Corporation's Common Stock as reported in
The Wall Street Journal. No dividends were declared for the periods presented
below. See Management's Discussion and Analysis and Note B to the consolidated
financial statements for information regarding restrictions on the ability of
McM's subsidiaries to transfer funds to McM and discussion regarding nonpayment
of dividends.
1995 1994
High Low High Low
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First Quarter $2 7/8 $2 1/2 $2 3/4 $1 1/4
Second Quarter 3 1/8 2 3/4 2 5/8 2
Third Quarter 3 1/2 2 3/4 2 3/4 2
Fourth Quarter 4 7/8 3 1/2 2 3/4 2 1/4
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REPORT TO SHAREHOLDERS
We are pleased to provide you with McM Corporation's 1995 Annual
Report. McM continued to show strong improvement in 1995 reporting
consolidated net income of $2,210,000 or $.47 per share, up 64% from net income
of $1,354,000 or $.29 per share for the year 1994. The results for 1995
reflect the trend of reduced loss ratios and improving underwriting results in
the Company's property and casualty operations.
Consolidated gross revenues for the year 1995 were $50,045,000, an
increase of 9% when compared to consolidated gross revenues of $45,763,000 for
the year 1994. This increase in consolidated revenues reflects management's
planned premium growth in both of its primary property and casualty markets,
commercial automobile and private passenger automobile coverages, served by
McM's subsidiaries Occidental Fire & Casualty Company of North Carolina and
Wilshire Insurance Company. The increases in written premiums for 1995 follow
reductions in premiums written in the years 1994 and 1993 which reflected
management's strategy to eliminate unprofitable business in targeted markets
and establish mechanisms to help control future premium growth. Gross
investment income, excluding realized investment gains, showed a slight
decrease of $172,000 for the year 1995 when compared to that of the same period
last year. The decline in invested balances experienced in 1994 and 1993
slowed considerably in 1995 as premium volume increased and overall investment
returns improved.
As discussed in the Annual Report to Shareholders in previous years,
the McMillen Trust, which owns 66% of the outstanding stock of McM Corporation,
filed a petition on behalf of the Trust's beneficiaries 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 Corporation. The
Court, on December 10, 1987, decided that the Trust must divest itself of its
ownership of the shares of McM Corporation and invest the proceeds in a
diversified portfolio for the benefit of present and future beneficiaries of
the Trust. 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 such
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, Incorporated whereby PaineWebber is
to advise the Trust with respect to any possible
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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.
As also discussed in prior years' reports to you, the McM Board of
Directors has discontinued its efforts to sell the remaining companies in the
McM Group of Companies. The Board also announced that PaineWebber would
continue to serve the Company in the role of financial advisor to the McM Group
of Companies. Management believes that the property and casualty companies are
now well-positioned and will continue to grow profitably. Discontinuing the
sales process allows management to focus all of its energies on increasing
shareholder value.
Both the quality and the administration of all aspects of the property
and casualty business are continually being addressed. This focus is
illustrated by the Company's conversion in 1995 to advanced and leading-edge
technology for the administration of current and anticipated insurance
products. This new automation has enabled Occidental Fire & Casualty and
Wilshire to migrate to systems which provide greater efficiency and better
service to our agents and policyholders.
As previously reported, on November 8, 1988, California voters passed
an initiative entitled Proposition 103 that called for certain insurers,
including McM subsidiary Wilshire Insurance Company, to roll back rates by 20%
for certain California policies issued during the twelve month period following
November 8, 1988. Initial California Department of Insurance calculations
produced a rollback liability for Wilshire of $6.1 million plus accrued
interest. The newly-elected California Insurance Commissioner publicly
announced his commitment to settle all Proposition 103 liability issues within
the first six months of his term thereby providing an opportunity to resolve
this continuing source of uncertainty for the Company. McM's management was
successful in negotiating a final settlement of the Company's rollback
obligation of $500,000, including interest. This settlement amount is
reflected as a reduction of earned premiums in the consolidated income
statement for the year 1995. Also, included in income for 1995 and offsetting
the Proposition 103 charge is a $539,000 favorable arbitration settlement
related to discontinued property and casualty programs of the Company.
The investment portfolios of Occidental Fire & Casualty Company and
Wilshire consist almost exclusively of the highest quality government
securities. McM and its subsidiaries have no investments in real estate.
Though the conservative nature of these investments generally results in lower
investment yields, the high level of liquidity provided by these types of
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investments ensure that the Company's obligations to its policyholders are met
in a timely manner. Occidental Fire & Casualty Company's 100% ownership of the
outstanding stock of Wilshire Insurance Company is the only common stock
investment contained in the portfolios of McM's insurance subsidiaries.
Insurance regulators have also intensified their oversight of an
insurance company's statutory capital positions, reserving and underwriting
activities. This oversight culminated in the adoption and implementation of
Risk- Based Capital standards and requirements for all property and casualty
insurance companies in 1994. Risk-Based Capital requirements were developed to
evaluate the adequacy of an insurance company's statutory capital and surplus
in relation to its investment and insurance risks such as underwriting, credit,
asset quality, loss reserve adequacy and other business environmental factors.
The Risk-Based Capital formula will be used by insurance regulators as
an early warning tool to identify, for the purpose of regulatory intervention,
insurance companies that are potentially inadequately capitalized. Companies
whose Risk-Based Capital calculations indicate undercapitalization are
classified by the regulators into various levels, each of which requires
specific corrective actions be undertaken by the insurance company and/or the
state regulator. McM's property and casualty insurance subsidiaries' capital
positions continue to be in excess of any regulatory action thresholds defined
under the Risk-Based Capital requirements.
The Board of Directors, on a quarterly basis, carefully reviewed the
financial position of the Company during the year 1995, and determined it was
not yet in a position to authorize payment of cash dividends. The current
Board will continue to carefully consider the capital constraints and financial
position of the Company each quarter when determining whether to declare a cash
dividend.
In summary, we are extremely pleased with the continuing progress made
in the overall operating results of the Company and our current financial
position. Improved operating results were experienced in each quarter in 1995
when compared to the same periods last year. Our 1995 operations reflected
planned moderate growth in premium production which we fully expect to continue
throughout 1996. The year 1995 also showed reductions in the Company's overall
loss ratio and continued improvement in underwriting results. Loss reserves
continue to show overall adequacy as reflected in the favorable development of
$248,000 experienced in 1995 on the Company's prior years' reserves. Although
pleased with the progress to date, management is continuing its focus on
enhancing the profitability of the Company by increasing the contribution from
each of our markets through improved product mix, continued utilization of
current
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and new technology and overall expense control.
The strengthened capital position of the McM companies has enabled
the insurance subsidiaries to receive favorable recognition from the rating
organizations and to improve the credibility of the Company within its markets
and the regulatory environment. As we move into 1996, management remains
confident with the path it has chosen for the continuing enhancement of
operating results and shareholder value.
GEORGE E. KING
President and Chief Executive Officer
Stephen L. Stephano
Chief Operating Officer
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MARKET OVERVIEW
McM Corporation provides its property and casualty products and
services through two North Carolina subsidiaries, Occidental Fire & Casualty
Company of North Carolina and Wilshire Insurance Company.
Currently the focus of these companies is transportation insurance.
Both Wilshire and Occidental provide a competitive market to the trucking
industry for local, intermediate and long haul coverages. Occidental also
writes nonstandard private passenger auto coverages in select geographical
areas.
Occidental Fire & Casualty Company of North Carolina actively markets
local, intermediate and long haul coverages in fourteen states utilizing twelve
managing general agents. Non-standard auto coverages are marketed through
Occidental's branch office located in Scottsdale, Arizona, and one managing
general agent. The majority of the commercial auto premium volume is produced
through the Company's annual bill program.
The insureds of the Wilshire Insurance Company are served by the
Marketing and Service Center located in Lancaster, California, and four
managing general agents supervised by the home office. The California
marketing unit deals directly with selected local retail agents and is a major
factor in the West Coast truck marketplace utilizing a specialized monthly
direct bill policy. The managing general agents market intermediate and long
haul coverages through an annual bill program.
The home office located in Raleigh, North Carolina, provides general
management for both Occidental Fire & Casualty and Wilshire Insurance Company
operations including the corporate staff for underwriting, claims, accounting,
legal, data processing and investment functions. Also located in the home
office are the marketing, underwriting and service functions for all commercial
automobile business written through managing general agents.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
McM Corporation and Subsidiaries
REVIEW OF OPERATIONS
Consolidated net income for 1995 was $2,210,000 or $.47 per share
compared to $1,354,000 or $.29 per share for 1994 and a net loss of $295,000 or
$.06 per share for 1993.
Reduced loss ratios and improved overall underwriting results in the
Company's property and casualty operations in 1995 continued the improving
trend in the Company's favorable consolidated operating results.
Consolidated results for 1994 also showed improved loss ratios and
overall underwriting results when compared to those of 1993. In addition, the
completely successful culmination of a legal action against McM by Pennsylvania
Life Insurance Company in connection with the 1991 sale of certain life
insurance operations of the Company helped reduce overall administrative
expenses in 1994 when compared to those experienced in 1993. Consolidated
results for 1993 were adversely affected by a $2.5 million litigation
settlement with the liquidator of one of the Company's insolvent reinsurers.
Consolidated revenues increased approximately 9.4% in 1995 compared to
1994 reversing the trend experienced in 1994 and 1993. Consolidated revenues
showed decreases of approximately 22.3% and 4.9% in 1994 and 1993,
respectively.
Net earned property and casualty insurance premiums for 1995 were
$45.7 million compared to $41.1 million in 1994 and $51.0 million in 1993. The
increase in net premium revenue in 1995 reflects management's planned growth in
both of its primary products, commercial and private passenger automobile
coverages. Gross written premium in the Company's commercial auto lines of
business, which comprised approximately 83.5% of gross written premiums in
1995, showed an increase of approximately 3.2% to $60.2 million when compared
to 1994. Gross production of the Company's private passenger auto coverages in
1995, comprising 16.5% of gross written premiums in 1995, showed a more
dramatic increase of 64.2% to $11.8 million when compared to 1994. These
increases follow the declines in net premiums in 1994 and 1993 which reflected
management's strategy to eliminate unprofitable business in targeted markets
and to establish mechanisms to help contol future premium growth. To help
control future premium growth, management increased the level of premiums ceded
to the Company's reinsurers by entering into quota share reinsurance
arrangements for its commercial auto liability and private passenger automobile
coverages. In 1995, the Company maintained a 40% quota share
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reinsurance arrangement on its private passenger business and a 5% quota share
arrangement (reduced from 10% in 1994) on its commercial automobile liability
business retained after excess of loss reinsurance coverage. The level of
quota share participation necessary to help control premium growth is reviewed
annually by management. In 1993, the Company, in its ongoing efforts to
improve the performance of its agency force, discontinued relations with three
managing general agents who had been producing unprofitable commercial
automobile business.
The reduction in total revenues in 1994 was also impacted by a $1.6
million decline in net investment income, excluding realized investment gains.
The decline in net investment income for 1994 was attributed to an overall
reduction of $16.0 million (19.3%) in invested balances. Net investment income
showed a slight decrease of $187,000 or 5.1% in 1995 when compared to 1994 as
the decline in invested balances slowed considerably and net invesment returns
improved. Invested balances decreased $4.1 million or 6.2% when compared to
1994. Realized investment gains of $123,000 are included in 1995 revenues
compared to $122,000 in 1994 and $1.8 million in 1993.
Historically, property and casualty insurance writings focused on
liability, cargo and physical damage coverages associated with the
transportation market with a primary emphasis on commercial trucking insurance.
To diversify its premium distribution, Occidental Fire & Casualty entered the
nonstandard personal auto market in 1989. Private passenger auto business
comprised approximately 16.5% of gross written property and casualty premium in
1995 compared to 11.0% and 16.3% in 1994 and 1993, respectively. The increase
in private passenger auto written premiums in 1995 reflects management's
commitment to controlled growth in this market. During 1994 and 1993,
management re- engineered the underwriting controls for this portion of the
Company's business. This re-engineering effort contributed to the decrease in
private passenger written premiums in 1994 as management kept production at
minimum levels while new rates, underwriting guidelines and personnel with
extensive experience in the complexities of this market were integrated into
this book of business. Loss ratios and underwriting results for this line of
business showed improvement in 1995 and 1994 as a result of focused effort.
Management has also intensified its focus on improving the
profitability of the Company's commercial truck business. As previously
mentioned, the Company discontinued relations with several managing general
agents in 1993 who had been producing unprofitable commercial auto business.
This focus was carried into 1994 and 1995 as management implemented strategies
to help reduce loss ratios and improve the product mix within this portion of
the Company's business. Underwriting results for cargo and auto physical
damage coverages are historically more profitable than commercial auto
liability coverages because claim costs for
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property coverages are easier to determine and claims are settled more rapidly.
Commercial auto written premiums comprised 83.5% of gross written property &
casualty premium in 1995 compared to 89.0% and 83.7% in 1994 and 1993,
respectively. The percentage of cargo and commercial auto physical damage
premiums to total commercial auto premiums increased to 26.6% in 1995 compared
to 23.3% and 20.3% in 1994 and 1993, respectively.
Net investment income included in consolidated revenues was $3.5
million in 1995, $3.7 million in 1994 and $5.3 million in 1993. Lower interest
rates on invested balances in 1993 and a 36.1% or $38.0 million reduction in
invested balances from 1992 through 1994 contributed to the reduction in
investment income for 1993 and 1994. The decline in invested assets from 1992
to 1994 resulted from reduced premium writing levels and the settlement of
claim liabilities on prior years' business during this period. Overall
liabilities decreased $22 million during 1994 and have been reduced by $64.2
million since 1992. As previously mentioned, the decline in invested balances
slowed significantly during 1995, reflecting a decrease of $4.1 million or 6.2%
when compared to 1994, while overall liabilities decreased by $13.9 million
during this same period.
As mentioned above, realized investment gains totalled $123,000,
$122,000 and $1.8 million in 1995, 1994 and 1993, respectively. The gains
realized in 1993 were primarily related to the sales of mortgage-backed
securities and management's decision to realize gains experienced in the
Company's investment portfolio as a result of declining interest rates. At
December 31, 1995, the market value of the long-term fixed income portfolio was
$664,000 greater than amortized cost and $199,000 greater than its carrying
value. This unrealized gain of $199,000 relates to those investments the
Company intends to hold to maturity. The full value of these securities will
be realized as they mature (see Note F to the consolidated financial
statements). At December 31, 1994, the market value of the fixed income
portfolio was $2.1 million less than its amortized cost and $2.0 million less
than its carrying value.
The overall ratio of net loss and settlement expenses to net premiums
earned was 67.9% for 1995 compared to 70.8% for 1994 and 75.4% for 1993.
Continued improvement in underwriting results and favorable or minimal
development on reserves of prior accident years during 1995 and 1994
contributed to the improvement in the loss ratios for 1995 and 1994. Favorable
underwriting results in 1993 were partially offset by the strenghtening of
prior accident years' reserves.
As discussed above, in April 1993, the Company entered into a 40%
quota share reinsurance treaty on its private passenger auto business to reduce
the Company's statutory net writings to surplus ratio and to help control
future premium growth in that market. A
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portion of the Company's retained commercial auto liability business was also
included in the arrangement. The Company also maintains a 5% (10% for 1994 and
1993) quota share reinsurance arrangement on its net retained commercial auto
liability business net of excess of loss reinsurance coverage. Management
annually evaluates the necessity and levels of these quota share arrangements
and makes adjustments when appropriate.
The Company utilizes a reinsurance intermediary with which it has a
long term relationship to assist in the development and placement of the
Company's reinsurance program. The Company's current reinsurance program has
been placed with high quality and financially sound reinsurers specializing in
personal and commercial auto business. The creditworthiness of the Company's
reinsurers is reviewed annually by management and the intermediary. The
majority of the Company's reinsurance is placed through the London reinsurance
market. Participating reinsurers are very large international reinsurers with
capital and surplus in excess of $100 million and hold ISI or S&P ratings of
BBB or better. Participating Lloyds syndicates are well regarded syndicates
which have been approved by the National Association of Insurance Commissioners
("NAIC"). The Company's U.S. reinsurers are all rated A- or higher by A.M.
Best. For those reinsurers not admitted by the Company's state of domicile,
collateral is secured for the exposure ceded to them in the form of letters of
credit or other reinsurer funds held by the Company. This collateral would
minimize the impact of a potential reinsurer insolvency on the Company's
operations. A schedule of the Company's reinsurers whose balances are
approximately 10% of McM's shareholders' equity or greater is provided below:
Ceded
Reinsurer Balances Receivable
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(Thousands of dollars)
Lloyds of London $11,732
CNA International 5,645
Unionamerica 5,495
Zurich Re 4,692
AXA Reassurance 2,981
Sphere Drake 2,102
All other 11,912
Total $44,559
The allowance for bad debts on liquidated reinsurers relating to
discontinued property and casualty programs was increased by $103,000 in 1995,
decreased by $41,000 in 1994 and increased by $1.3 million in 1993. The
increase in the 1993 provision reflects the $2.5 million litigation settlement
previously mentioned. Other than the resolution of this litigation, overall
exposure to losses associated with discontinued property and casualty business
has decreased significantly over the past three years and has not had a
material impact on operations since 1990.
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In the second quarter of 1995, the Company resolved a long standing
uncertainty concerning Proposition 103 by settling this issue with the
California Department of Insurance. The Company fully recognized this
settlement and its related cost in 1995 by including in consolidated results a
$500,000 reduction of earned premiums attributable to this settlement.
Offsetting this charge and also included in results for 1995 is a $539,000
favorable arbitration settlement related to discontinued property and casualty
programs.
Amortization of deferred policy acquisition costs from continuing
operations was $7.1 million in 1995, compared to $6.1 million in 1994 and $9.9
million in 1993. Direct and assumed premiums written increased by $6.5 million
in 1995 resulting in an increase in the related amortization of deferred policy
acquisition costs. Conversely, reductions in direct and assumed premium
written of $7.2 million in 1994 and $11.7 million in 1993 resulted in a
decrease in the related deferral and amortization of policy acquisition costs.
INCOME TAXES
McM Corporation files a consolidated tax return. The Company had
cumulative net operating loss tax carryforwards of approximately $87.0 million
as of December 31, 1995 (see Note D to the consolidated financial statements).
Subject to certain limitations and alternative minimum tax considerations,
future operations can earn up to the amount of these loss carryforwards without
being subject to federal income taxation.
LIQUIDITY AND CAPITAL RESOURCES
By statute, the majority of the Company's investments are required to
be held in investment grade securities which provide ample protection for both
the policyholder and the shareholder. Significant amounts of short-term
investments are held to meet the liquidity needs of the property and casualty
insurance operations.
As shown in the Consolidated Statements of Cash Flows, the Company
experienced negative cash flows from operations on a consolidated basis of $4.0
million in 1995 compared to $14.6 million in 1994 and $23.3 million in 1993.
The main source of the Company's cash flows is derived from its property and
casualty subsidiaries.
The Company's property and casualty subsidiaries experienced
consolidated negative cash flows from operations of $2.7 million, $19.2 million
and $26.9 million in 1995, 1994 and 1993, respectively. The negative cash
flows for the property and casualty operations can be primarily attributed to
the substantial settlement of claim liabilities including settlements on
discontinued run-off business and the decreased premium production
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levels, a primary source of long and short-term liquidity, in 1994 and 1993.
The reduction in written premiums during 1994 and 1993 was a result of
management's successful strategy to reduce premium writings in unprofitable
markets and to reduce the Company's net writings to surplus ratio. As
previously mentioned, the property and casualty companies are now experiencing
planned moderate growth in premium writings and anticipate this trend will
continue through 1996. Liabilities for losses and loss settlement expenses and
policyholder liabilities decreased $12.5 million in 1995, $19.7 million in 1994
and $18.5 million in 1993. The negative operating cash flow for 1993 was also
impacted by the $2.5 million litigation settlement paid in May 1993 to the
liquidator of an insolvent reinsurer.
Short-term investments held at December 31, 1995, were $14.8 million
compared to $17.7 million at December 31, 1994. This decline in liquidity is
primarily attributable to the settlement of claim and policyholder liabilities
discussed above. Total consolidated cash and invested assets at December 31,
1995, were approximately $64.7 million compared to $68.6 million at the end of
1994. Management believes the current level of cash and short-term balances,
as well as anticipated sources of cash in 1996, are more than adequate to meet
projected expenditures during the next year and that the long-term investment
portfolio is structured to meet the Company's long-term liquidity needs.
At December 31, 1995, securities with an amortized cost of $25.8
million previously classified as held-to- maturity were transferred to the
available-for-sale portfolio. As a result of this transfer, unrealized gains
of $298,000 were recognized in the unrealized appreciation component of
shareholders' equity. This transfer was made to provide the Company greater
flexibility in managing its portfolio and was done in accordance with the
implementation guidance issued in November 1995 by the staff of the Financial
Accounting Standards Board.
Of the total cash and invested assets at December 31, 1995,
approximately 49.4% or $31.9 million were comprised of fixed maturities
available-for-sale and 25.1% or $16.2 million were classified as securities
held-to-maturity. Cash and short-term investments totalling $16.5 million
comprised the remaining 25.5% of the investment portfolio. At December 31,
1994, approximately 14.8% or $10.1 million of cash and invested assets were
comprised of fixed maturities available-for-sale, 57.3% or $39.4 million were
recorded as securities held-to-maturity and 27.9% or $19.2 million represented
cash and short-term investments. The fixed maturity portfolio has a range of
expected maturities which, as mentioned previously, management believes are
adequate to meet long-term liquidity needs. The total market value of fixed
maturity investments was $48.4 million and $47.5 million at December 31, 1995,
and 1994, respectively.
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Statutory capital positions of the property and casualty insurance
companies are closely monitored by the Company. In addition, the NAIC adopted
Risk-Based Capital ("RBC") requirements for property and casualty insurance
companies in December 1993 to be applied to annual statutory financial
statements beginning December 31, 1994. Annual statutory financial statements
are filed with state insurance regulators on or before March 1 following each
year's end.
RBC was developed to evaluate the adequacy of statutory capital and
surplus in relation to investment and insurance risks such as asset quality,
asset and liability matching, loss reserve adequacy and other business
environmental factors. The RBC formula will be used by state insurance
regulators as an early warning tool to identify, for the purpose of initiating
regulatory action, insurance companies that potentially are inadequately
capitalized. Regulatory compliance is determined by a ratio of the
enterprise's regulatory total adjusted capital, as defined by the NAIC, to its
authorized control level RBC, as defined by the NAIC. Enterprises below
specific ratios are classified within certain levels, each of which requires
specific corrective action. The ratios of total adjusted capital to authorized
control level RBC for McM's property and casualty insurance subsidiaries are in
excess of any regulatory action thresholds defined by the NAIC.
Combined statutory capital and surplus of the property and casualty
subsidiaries increased $2.6 million to $19.2 million at December 31, 1995,
compared to $16.5 million at December 31, 1994.
As previously reported, the Administrative Consent Order agreed to by
the Company and the Commissioner of the North Carolina Department of Insurance
on May 24, 1993, was vacated by the Commissioner in June 1994 upon management's
satisfactory compliance to the terms of the Consent Order. The Consent Order
directly concerned the property & casualty operations' net premium writings to
surplus ratio.
At December 31, 1995, consolidated shareholders' equity was $23.2
million, an increase of 13.9% when compared to $20.4 million at December 31,
1994. Although consolidated shareholders' equity has increased significantly,
the Company's main source of funds from which dividends are paid to its
shareholders is its insurance subsidiaries which are subject to certain
restrictions as to the amount of dividends that can be paid in a given year.
These restrictions are discussed in Note B to the consolidated financial
statements. The Company has not paid a quarterly dividend since the second
quarter of 1987. The Board will continue to carefully consider the Company's
earnings, capital requirements, financial condition and other relevant factors
with regard to the payment of dividends.
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CONSOLIDATED BALANCE SHEETS
McM CORPORATION AND SUBSIDIARIES
Thousands of dollars)
December 31
ASSETS 1995 1994
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Invested Assets:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost: 1995 - $31,477;
1994 - $10,291) $ 31,942 $ 10,133
Fixed maturities held-to-maturity, at amortized cost
(fair value: 1995 - $16,429; 1994 - $37,370) 16,230 39,352
Short-term investments 14,848 17,678
-------- --------
63,020 67,163
Cash 1,637 1,497
Accrued investment income 840 1,016
Premiums receivable 9,935 8,792
Reinsurance balances recoverable on:
Paid losses and settlement expenses 3,461 6,134
Unpaid losses and settlement expenses 36,155 42,471
Unearned premiums 4,943 3,482
Deferred policy acquisition costs 3,343 3,235
Equipment, at cost less accumulated depreciation
(1995 - $1,437; 1994 - $1,166) 1,105 1,187
Other assets 2,129 2,688
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TOTAL ASSETS $126,568 $137,665
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Reserves for losses and settlement expenses $ 66,152 $ 80,886
Unearned premiums 17,234 14,811
Other policyholder funds 7,247 7,397
Amounts payable to reinsurers 2,202 3,105
Accrued expenses and other liabilities 10,493 11,059
-------- --------
103,328 117,258
Commitments and contingencies - Notes A, B, C and H
Shareholders' equity:
Common Stock, par value $1 per share-authorized 1995 -
10,000,000 shares ; 1994 - 5,000,000 shares;
issued and outstanding 1995 and 1994 - 4,675,038 4,675 4,675
Additional paid-in capital 1,477 1,477
Unrealized gain (loss) on securities availabe-for-sale 465 (158)
Retained earnings 16,623 14,413
-------- --------
TOTAL SHAREHOLDERS' EQUITY 23,240 20,407
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $126,568 $137,665
======== ========
See notes to consolidated financial statements.
46
17
CONSOLIDATED STATEMENTS OF OPERATIONS
McM CORPORATION AND SUBSIDIARIES
(Thousands of dollars, except per share data)
Year Ended December 31
-------------------------------
1995 1994 1993
-------------------------------
REVENUES
Premiums earned $69,602 $66,846 $79,418
Premiums ceded (23,901) (25,720) (28,375)
-----------------------------
Net premiums earned 45,701 41,126 51,043
Investment income, less investment expenses
(1995 - $474; 1994 - $459; 1993 - $597) 3,497 3,684 5,298
Realized investment gains 123 122 1,797
Other income 250 372 155
-----------------------------
TOTAL REVENUES 49,571 45,304 58,293
LOSSES AND EXPENSES
Losses and settlement expenses 46,055 45,488 54,000
Losses and settlement expenses ceded (15,021) (16,364) (15,535)
-----------------------------
Net losses and settlement expenses 31,034 29,124 38,465
Underwriting, acquisition and administrative
expenses 16,224 14,867 18,825
Provision for (recoveries of) bad debts on
liquidated reinsurers 103 (41) 1,298
-----------------------------
TOTAL LOSSES AND EXPENSES 47,361 43,950 58,588
-----------------------------
NET INCOME (LOSS) $ 2,210 $ 1,354 ($295)
=============================
PER SHARE DATA:
Income (loss) per share $ 0.47 $ 0.29 ($0.06)
=============================
See notes to consolidated financial statements
47
18
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
McM CORPORATION AND SUBSIDIARIES
(Thousands of dollars)
Net
Additional Unrealized
Common Paid-in Investment Retained
Stock Capital Gain (Loss) Earnings
------------------------------------------
BALANCES AT JANUARY 1, 1993 $4,675 $1,477 $ 0 $13,354
Net loss for 1993 (295)
Change in net unrealized gain
or (loss) on securities
available-for-sale 511
------------------------------------------
BALANCES AT DECEMBER 31, 1993 4,675 1,477 511 13,059
Net income for 1994 1,354
Change in net unrealized gain
or (loss) on securities (669)
available-for-sale
------------------------------------------
BALANCES AT DECEMBER 31, 1994 4,675 1,477 (158) 14,413
Net income for 1995 2,210
Change in net unrealized gain
or (loss) on securities
available-for-sale 623
------------------------------------------
BALANCES AT DECEMBER 31, 1995 $ 4,675 $1,477 $465 $16,623
48
19
CONSOLIDATED STATEMENTS OF CASH FLOWS
McM CORPORATION AND SUBSIDIARIES
(Thousands of dollars)
Year Ended December 31
--------------------------------
1995 1994 1993
--------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 2,210 $ 1,354 ($295)
Adjustments to reconcile net income (loss) to
net cash used by operating activities:
Policy liabilities (12,461) (19,706) (18,479)
Premiums receivable (1,143) (244) 2,751
Accrued investment income 176 (251) 365
Net recoverable from reinsurers 6,625 3,342 (6,048)
Amortization of deferred policy
acquisition costs 7,141 6,098 9,948
Policy acquisition costs deferred (7,249) (5,801) (7,950)
Other 673 590 (3,597)
-----------------------------
CASH USED BY OPERATING ACTIVITIES (4,028) (14,618) (23,305)
INVESTING ACTIVITIES
Fixed maturity securities available-for-sale:
Purchases (109) (3,824) (1,009)
Sales 3,377 3,372 37,693
Maturities 1,408 3,306 4,459
Fixed maturity securities held-to-maturity:
Purchases (2,984) (10,107) (7,931)
Maturities 120 3,095 7,585
Purchases of property and equipment (474) (142) (475)
Change in short-term investments 2,830 19,397 (16,715)
-----------------------------
CASH PROVIDED BY INVESTING ACTIVITIES 4,168 15,097 23,607
-----------------------------
NET INCREASE IN CASH $ 140 $ 479 $ 302
=============================
See notes to consolidated financial statements
49
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCM CORPORATION AND SUBSIDIARIES
NOTE A SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles (GAAP)
which, as to the insurance subsidiaries, vary in some respects from statutory
accounting practices which are prescribed or permitted by the various state
insurance departments.
The consolidated financial statements include the accounts and
operations of McM and its wholly-owned 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. The Company's subsidiaries are as follows:
Subsidiary Abbreviation
- ---------------------------------------------------------------------------------
Property and Casualty:
Occidental Fire & Casualty Company of North Carolina OF&C
Wilshire Insurance Company Wilshire
Other:
Equity Holdings, Inc. Equity
- ---------------------------------------------------------------------------------
The property and casualty insurance subsidiaries are primarily
involved in the sale of commercial automobile and private passenger automobile
insurance. The commercial automobile insurance consists primarily of
liability, physical damage and inland marine coverages. The commercial
automobile lines of business represented 83.5%, 89% and 83.7% of gross written
premium in 1995, 1994 and 1993, respectively. Private passenger automobile
insurance, which represents the remainder of gross written premiums, consists
primarily of liability and physical damage coverages. The Company's products
are generally marketed through general and independent agents. In 1995,
premiums were written in 27 states throughout the U.S. Direct premiums written
in California, all of which were for commercial automobile insurance products,
represented 37%, 40% and 30% of total direct written premiums in 1995, 1994 and
1993, respectively.
Investments: Fixed maturity securities are classified as either
held-to-maturity, available-for-sale or trading. Management determines the
appropriate classification of fixed-maturity securities at the time of purchase
and reevaluates such designation as of each balance sheet date. The Company
has identified and accounted for its investments as follows:
50
21
Securities held-to-maturity and available-for-sale: Debt securities are
classified as held-to-maturity when the Company has the positive intent and
ability to hold the securities to maturity. Held-to-maturity securities are
stated at amortized cost. Securities not classified as held-to-maturity are
classified as available-for-sale. Available-for-sale securities are stated at
fair value, with the unrealized gains and losses reported as a separate
component of shareholders' equity. The amortized cost of securities classified
as held-to-maturity or available-for-sale is adjusted for amortization of
premiums and accretion of discounts to maturity, or in the case of
mortgage-backed securities, over the estimated life of the security. Such
amortization is included in investment income. Realized gains and losses
include any declines in value judged to be other-than-temporary. The cost of
securities sold is based on the specific identification method. Short-term
investments are comprised of corporate master notes and United States Treasury
Notes and Bills maturing in twelve months or less. These investments are
carried at fair value.
At December 31, 1995, securities with an amortized cost of $25,803,000
classified as held-to-maturity were transferred from the held-to-maturity
portfolio to the available-for-sale portfolio. As a result of the transfer,
unrealized gains of $298,000 were recognized in the unrealized appreciation
component of shareholders' equity. This transfer was made to provide the
Company with greater flexibility in managing its portfolio and was done in
accordance with the implementation guidance issued in November 1995 by the
staff of the Financial Accounting Standards Board.
Cash: Cash represents cash balances deposited in banking institutions.
Balances invested in corporate master notes and other interest bearing cash
equivalents are included in short-term investments.
Equipment: Equipment is stated at cost less allowances for accumulated
depreciation which are computed principally on the straight-line method.
Recognition of Insurance Revenues: Premiums for property and casualty
insurance policies are recognized as revenues on a monthly pro rata basis over
the terms of the policies.
The Company utilizes a general agency force to market its annual
commercial automobile business and a portion of its private passenger
automobile business. As of December 31, 1995, agents balances receivable of
approximately $4.6 million were associated with three general agents.
51
22
Deferred Policy Acquisition Costs: Costs which vary with and are primarily
related to the production of property and casualty policies are deferred to the
extent recoverable and are amortized over the lives of the policies in
proportion to the recognition of premiums earned. Anticipated investment
income is considered in the evaluation of recoverability of unamortized
deferred acquisition costs.
Reserves for Losses and Settlement Expenses: Reserves for estimated losses are
determined on a case basis for reported claims and on estimates based on
Company experience for loss settlement expenses and incurred but not reported
claims. These liabilities give effect to trends in claims severity and other
factors which may vary as the losses are ultimately settled. Although
considerable variability is inherent in such estimates for losses and loss
settlement expenses, management believes that these liabilities are adequate.
The estimates are continually reviewed and, as adjustments to these liabilities
become necessary, such adjustments are reflected in current operations.
The reserves for losses include amounts assumed from involuntary pools
and other residual market mechanisms of the various states in which the
Companies have written policies. The estimated liability for the assumed pools
is recorded based on information provided to the Company by the pools.
Reinsurance: McM assumes and cedes reinsurance and participates in various
pools and associations. The reinsurance arrangements allow management to
control exposure to potential losses arising from large risks, and provide
additional capacity for growth. The reinsurance is effected under quota-share
contracts and by excess-of-loss contracts. Amounts recoverable from
reinsurers for unpaid losses and settlement expenses are estimated in a manner
consistent with the related liabilities associated with reinsured policies.
Income Taxes: The Company accounts for income taxes using the liability
method. Deferred tax assets, net of a valuation allowance, and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Leases: The Company and its subsidiaries rent office space and equipment under
various operating lease agreements. The aggregate rental expense charged to
operations was approximately
52
23
$737,000 in 1995, $658,000 in 1994, and $763,000 in 1993. Future minimum lease
commitments require payments of approximately $651,000 in 1996 and $428,000 in
1997.
Use of Estimates: The preparation of financial statements requires management
to make estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Such estimates and assumptions could change
in the future as more information becomes known which could impact the amounts
reported and disclosed herein.
New Accounting Standards: In March 1995, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" ("SFAS 121"). SFAS 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. SFAS 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company will adopt SFAS 121 in the first quarter of 1996 and, based on the
current circumstances, does not believe the effect of adoption will be
material.
In 1995, FASB also issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The
pronouncement introduces a fair-value based method of accounting for
stock-based compensation and encourages, but does not require, compensation
expense recognition for grants of stock, stock options and other equity
instruments to employees based on the new fair-value accounting rules.
Companies that choose not to adopt the new rules will continue to apply
existing accounting rules but will be required to disclose pro forma net income
and earnings per share under the new method. Currently, management intends to
continue applying the existing accounting rules and adopt the disclosure
provisions of SFAS 123 as required in 1996.
NOTE B STATUTORY RESULTS AND DIVIDEND RESTRICTIONS
The reporting practices for McM's insurance subsidiaries prescribed or
permitted by state regulatory authorities ("statutory accounting") differ from
generally accepted accounting principles. OF&C (which includes Wilshire on a
statutory equity basis) reported to insurance regulatory authorities net income
of $2.0 million in 1995, $578,000 in 1994 and $830,000 in 1993 and combined
capital and surplus of $19.2 million and $16.5 million at December 31, 1995 and
1994, respectively.
53
24
McM's insurance subsidiaries are subject to regulation and supervision
by regulatory authorities in the states in which they operate. The regulatory
bodies have broad administrative powers relating to standards of solvency,
minimum capital and surplus requirements, maintenance of required reserves,
payments of dividends, statutory accounting and reporting practices, and other
financial and operational matters. Generally, the net assets of the insurance
subsidiaries available for transfer to the parent company are limited to the
amounts by which the insurance subsidiaries' net assets, as determined in
accordance with statutory accounting practices, exceed the minimum statutory
capital requirement of $2,250,000. Also, by statute, dividends exceeding the
lesser of 10% of statutory-basis capital and surplus or the previous year's net
income, excluding net realized capital gains, require the prior approval of the
Commissioner of the North Carolina Department of Insurance.
OF&C and Wilshire are domiciled in the State of North Carolina and
prepare their statutory-basis financial statements in accordance with
accounting practices and procedures prescribed or permitted by the North
Carolina Department of Insurance. "Prescribed" statutory accounting practices
include state laws, regulations, and general administrative rules, as well as a
variety of publications of the National Association of Insurance Commissioners
("NAIC"). "Permitted" statutory accounting practices may differ from state to
state, may differ from company to company within a state, and may change in the
future. The NAIC currently is in the process of codifying statutory accounting
practices, the result of which is expected to constitute the only source of
"prescribed" statutory accounting practices. Accordingly, that project, which
is expected to be completed in 1997, will likely change, to some extent,
prescribed statutory accounting practices, and may result in changes to the
accounting that insurance enterprises use to prepare their statutory financial
statements.
The North Carolina Department of Insurance imposes minimum risk-based
capital requirements on insurance enterprises that were developed by the NAIC.
The formulas for determining the amount of risk-based capital ("RBC") specify
various weighting factors that are applied to financial balances or various
levels of activity based on the perceived degree of risk. Regulatory
compliance is determined by a ratio ("the Ratio") of the enterprise's
regulatory total adjusted capital, as defined by the NAIC, to its authorized
control level RBC as defined by the NAIC. Enterprises below specific trigger
points or ratios are classified within certain levels, each of which requires
corrective action. Each of McM's insurance subsidiaries' Ratios exceed any
minimum RBC requirement.
54
25
NOTE C REINSURANCE
The property and casualty insurance subsidiaries have entered into
reinsurance agreements with various reinsurers in order to reduce their
ultimate claim risk. Current reinsurance agreements provide for premium rates
based on the amount of coverage in excess of the defined retention level.
Generally, the Company's retention level for all accident years was
$100,000 with the exception of the 1991 accident year which was $250,000.
These retentions levels are effected under the Company's casualty excess of
loss reinsurance treaties.
The Company is also party to quota share reinsurance arrangements on
its private passenger automobile and commercial auto liability coverages. A
40% quota share reinsurance treaty is maintained on the Company's private
passenger automobile business which became effective in April 1993. This
treaty was placed to help control the Company's statutory net writings to
surplus ratios as well as future premium growth in that market. A portion of
the Company's retained commercial auto liability business was included in this
arrangement. A 5% quota share reinsurance treaty is also maintained by the
Company to help control future growth in this line of business.
Prior to 1990, the major reinsurance agreements provided for a
minimum, maximum and provisional premium rate. The actual premium which will
ultimately be paid is determined based upon the Company's ultimate claims
experience, subject to the minimum and maximum rates. Until the actual premium
is determined, the Company estimates the amount of premium which will
ultimately be paid on each contract year. This estimate of ultimate
reinsurance premiums is continually reviewed and changes to this estimate are
recognized in current operations. Based upon the statistical data and
calculations used in estimating the liability for losses, as described in Note
A, management currently believes the estimate of ultimate reinsurance premiums
is adequate.
The effect of reinsurance on premiums written and earned in 1995, 1994
and 1993 was as follows:
For the Year Ended December 31
--------------------------------------------------------------------
1995 1994 1993
Premiums Premiums Premiums
Written Earned Written Earned Written Earned
------- ------ ------- ------ ------- ------
(Thousands of dollars)
Direct $64,099 $63,731 $62,558 $65,572 $72,010 $78,475
Assumed 7,926 5,871 2,989 1,274 724 943
Ceded (25,362) (23,901) (27,527) (25,720) (29,518) (28,375)
------- ------- ------- ------- ------- -------
Net $46,663 $45,701 $38,020 $41,126 $43,216 $51,043
======= ======= ======= ======= ======= =======
55
26
The Company has provided amounts for losses arising from
uncollectible balances due from various property and casualty reinsurers.
These provisions are based on the overall trends experienced in the reinsurance
industry and an evaluation and analysis of individual balances due the Company.
To minimize its exposure to significant losses from reinsurance insolvencies,
OF&C and Wilshire evaluate the financial condition of their reinsurers and
monitor concentration of credit risk arising from similar geographic regions,
activities or economic characteristics of the reinsurers. At December 31,
1995, reinsurance recoverables of $11.7 million were associated with a single
reinsurer. The remaining reinsurance recoverables were associated primarily
with eight reinsurers. OF&C and Wilshire's policy is to hold collateral under
related reinsurance agreements in the form of letters of credit for all
reinsurers not licensed to do business in North Carolina.
To the extent that reinsuring companies may later be unable to meet
obligations under the reinsurance agreements, the insurance subsidiaries would
remain liable.
NOTE D INCOME TAXES
The Revenue Reconciliation Act of 1993 increased the U.S. Federal
income tax rate to 35% for taxable income in excess of $10 million. Because of
the large tax return net operating loss carryforwards of the Company and
Company estimates that annual taxable income in the near future, before
utilization of the carryforwards, will not exceed $10 million, a U.S. Federal
income tax rate of 34% has been used to compute deferred tax assets and
liabilities for the Company.
There was no income tax expense attributable to income from continuing
operations for the years ended December 31, 1995, 1994 and 1993. These amounts
differed from the amounts computed by applying the U.S. federal income tax rate
of 34 percent to pretax income from continuing operations as follows:
56
27
Year Ended December 31
1995 1994 1993
----------------------------------
(Thousands of dollars)
Pretax income (loss) from
continuing operations $2,210 $1,354 $ (295)
- --------------------------------------------------------------------
Computed "expected" tax
expense (benefit) 751 460 $ (100)
Increase (decrease) in
taxes resulting from:
Change in valuation
allowance (2,768) (281) -
Other 33 (179) 10
Net operating and
capital losses not utilized 1,984 - 90
- --------------------------------------------------------------------
Income Tax Expense $ 0 $ 0 $ 0
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of December
31, 1995 and December 31, 1994, are presented below.
December 31
---------------------
1995 1994
(Thousands of dollars)
---------------------
Deferred tax asset:
Unearned premium reserves $ 836 $ 770
Claim reserves 1,095 2,011
Tax return net operating
and capital loss
carryforwards 30,804 32,788
Other 263 308
-------- -------
Total gross deferred tax
assets 32,998 35,877
Less: Valuation allowance (31,367) (34,135)
-------- -------
Net deferred tax assets $ 1,631 $ 1,742
Deferred tax liabilities:
Deferred policy acquisition
costs $ 1,137 $ 1,100
Agent balances 180 430
Unrealized gains on fixed
maturity securities 158 -
Other 156 212
-------- -------
Total liabilities $ 1,631 $ 1,742
-------- -------
Net deferred tax account $ 0 $ 0
======== =======
57
28
The valuation allowance for deferred tax assets as of January 1, 1995,
was $34,135,000. The net change in the total valuation allowance for the year
ended December 31, 1995, was a decrease of $2,768,000. The reduction in the
valuation allowance is primarily due to the expiration of net operating and
capital loss carryforwards.
McM and its subsidiaries file a consolidated income tax return.
The Company had cumulative tax operating loss carryforwards of
approximately $87 million as of December 31, 1995, with expiration dates of
1997 through 2009. In addition, the Company had tax capital loss carryforwards
of $3,336,080. The tax capital loss carryforwards expire in 1996 and 1997.
No income taxes were paid in 1995, 1994, or 1993.
NOTE E PENSION PLAN
McM and its subsidiaries have a non-contributory defined benefit
pension plan covering substantially all their employees. The plan provides for
payments to qualified employees based on compensation and years of service.
The Company and its subsidiaries make contributions to the plan, if necessary,
equal to the amounts required by ERISA.
58
29
The following table sets forth the plan's funded status and amounts
recognized in the Company's balance sheets at December 31:
December 31
---------------------------
1995 1994
---------------------------
(Thousands of dollars)
Actuarial present value
of benefit obligations:
Accumulated benefit
obligation, including
vested benefits of
$1,707 in 1995 and
$1,269 in 1994 $ 1,813 $ (1,316)
================================================================================
Projected benefit
obligation for service
rendered to date $ (2,591) $ (1,796)
Plan assets at fair
value, primarily listed
stocks, U.S. bonds,
and money market accounts 1,161 821
- --------------------------------------------------------------------------------
Projected benefit obligation
in excess of plan assets (1,430) (975)
Unrecognized net loss 566 113
Deferred asset gain (51) -
Unrecognized prior service cost (56) (60)
Unrecognized net transition asset (94) (110)
- --------------------------------------------------------------------------------
Net pension liability $ (1,065) $ (1,032)
================================================================================
Net periodic pension expense included the following components:
Year Ended December 31
1995 1994 1993
- --------------------------------------------------------------------------------
(Thousands of dollars)
Service cost-benefits earned
during the period $ 208 $ 190 $ 171
Interest cost on projected
benefit obligation 176 143 148
Actual return on plan assets (135) 64 20
Net amortization and deferral 40 (151) (85)
- --------------------------------------------------------------------------------
Net periodic pension cost $ 289 $ 246 $ 254
================================================================================
59
30
The weighted average discount rate used to determine the actuarial
present value of the projected benefit obligation was 7.25% and 8% at December
31, 1995, and 1994, respectively. The rate of increase in future compensation
levels used to determine the actuarial present value of the projected benefit
obligation was 4.75% at December 31, 1995, and 5% at December 31, 1994. The
expected long-term rate of return on plan assets was 9% for the years ended
December 31, 1995, and 1994 and 8.5% for the year ended December 31, 1993. The
unrecognized prior service cost and the cumulative net recognized gains and
losses in excess of the greater of the market value of plan assets and the
projected benefit obligation are being amortized using the optional
straight-line method over the average expected future service of active
participants.
NOTE F Investment Operations
The sources of investment income are summarized as follows:
Year Ended December 31
------------------------------
1995 1994 1993
------------------------------
(Thousands of dollars)
------------------------------
Fixed maturities $3,155 $3,229 $5,227
Other long-term investments 36 38 9
Short-term investments 780 876 659
------------------------------
3,971 4,143 5,895
Investment expenses 474 459 597
------------------------------
NET INVESTMENT INCOME $3,497 $3,684 $5,298
==============================
The amortized cost and estimated market values of investments in fixed
maturities at December 31, 1995 and 1994, are as follows:
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------
(Thousands of dollars)
Fixed Maturity Securities Available-for-Sale:
December 31, 1995:
U.S. Treasury
securities
and obligations of
U.S. governmental
corporations and
agencies $25,998 $ 329 $ - $26,327
Public utilities 758 3 (7) 754
Mortgage-backed
securities 4,445 294 (48) 4,691
U.S. corporate
securities 276 - (106) 170
- ---------------------------------------------------------------------
Total $31,477 $ 626 (161) $31,942
=====================================================================
60
31
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------
(Thousands of dollars)
Fixed Maturity Securities Held-to-Maturity:
December 31, 1995:
U.S. Treasury securities
and obligations of
U.S. governmental
corporations and
agencies $16,037 $ 166 $ - $16,203
Obligations of states
and political
subdivisions 193 33 - 226
------- ------- ------ -------
Total $16,230 $ 199 $ - $16,429
===========================================================================================
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------
(Thousands of dollars)
Fixed Maturity Securities Available-for-Sale:
December 31, 1994:
Obligations of states
and political
subdivisions $ 194 $ 19 $ - $ 213
Public utilities 915 17 (63) 869
Mortgage-backed
securities 8,907 271 (295) 8,883
U.S. corporate
securities 275 - (107) 168
- -------------------------------------------------------------------------------------------
Total $10,291 $ 307 $(465) $10,133
===========================================================================================
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------
(Thousands of dollars)
Fixed Maturity Securities Held-to-Maturity:
December 31, 1994:
U.S. Treasury securities
and obligations of
U.S. governmental
corporations and
agencies $39,352 $ - $(1,982) $37,370
- -------------------------------------------------------------------------------------------
Total $39,352 $ - $(1,982) $37,370
61
32
The amortized cost and estimated market value of fixed maturities at
December 31, 1995, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities as certain borrowers have the
right to call or prepay obligations without penalty.
Estimated
Amortized Market
Cost Value
------------------------
(Thousands of dollars)
Fixed Maturity Securities Available-for-Sale:
Due in one year or less $ 4,860 $ 4,765
Due after one year through
five years 15,856 16,082
Due after five years through
ten years 6,171 6,262
Due after ten years 145 142
- ------------------------------------------------------------------------
27,032 27,251
Mortgage backed securities 4,445 4,691
- ------------------------------------------------------------------------
$ 31,477 $31,942
========================================================================
Fixed Maturity Securities Held-to-Maturity:
Due in one year or less $11,438 $11,498
Due after one year through
five years 4,692 4,805
Due after five years through
ten years - -
Due after ten years 100 126
- -----------------------------------------------------------------------
$16,230 $16,429
=======================================================================
Realized gains and losses from sales of investments in fixed
maturities were as follows:
Year Ended December 31
1995 1994 1993
-------------------------
(Thousands of dollars)
Realized gains and losses:
Fixed maturity securities
available-for-sale:
Gross realized gains $ 123 $ 122 $1,903
Gross realized losses - - 106
62
33
At December 31, 1995, the carrying value of investments that were
non-income producing for the preceding twelve months was $95,000 in fixed
maturities.
The carrying value of investments in persons (other than the U.S.
Government or a Government Agency or Authority, State, Municipality, or
Political Subdivision) exceeding 10% of total shareholders' equity is as
follows:
December 31
----------------------
1995 1994
----------------------
(Thousands of dollars)
Southern Capital Corporation $ 6,231 -
General Electric Capital Corporation $ 8,617 $ 4,732
NOTE G RESERVES FOR LOSSES AND SETTLEMENT EXPENSES
The consolidated financial statements include the estimated reserve
for losses and settlement expenses of the property and casualty insurance
subsidiaries. The subsidiaries primarily write commercial auto liability,
physical damage and cargo coverages and non-standard private passenger
automobile coverages. The liabilities for losses and settlement expenses are
determined using case basis evaluations and statistical projections and
represent estimates of the ultimate net cost of all unpaid losses and
settlement expenses 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.
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The following table provides a reconciliation of the beginning and
ending reserve balances for losses and settlement expenses, on a
gross-of-reinsurance basis, for 1995, 1994 and 1993, to the gross amounts
reported in McM's balance sheet.
Year Ended December 31
-------------------------------
1995 1994 1993
- ----------------------------------------------------------------------
(Thousands of dollars)
Reserves for losses
and settlement expenses,
net of reinsurance
recoverables, at
beginning of year $38,415 $51,625 $59,580
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
-------------------------------
Incurred losses and
settlement expenses
during current year, net
of reinsurance 31,034 29,124 38,465
Payments for:
Losses and settlement
expenses attributable to
insured events of the
current year 18,113 15,307 17,920
Losses and settlement
expenses attributable to
insured events of prior
years 21,339 27,027 28,500
-------------------------------
39,452 42,334 46,420
-------------------------------
Reserves for losses and
settlement expenses, net
of reinsurance recoverables,
at end of year 29,997 38,415 51,625
Reinsurance recoverable on
unpaid losses and settlement
expenses at end of current
year 36,155 42,471 48,752
-------------------------------
Gross reserves for losses and
settlement expenses at end
of year $66,152 $80,886 $100,377
===============================
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The reconciliation above shows that a $248,000 redundancy in the
December 31, 1994, reserve emerged in 1995. McM's reserves for losses and
settlement expenses, net of reinsurance recoverables, at December 31, 1993,
were increased in 1994 by $18,000 for claims that had occurred on or prior to
that balance sheet date. The table further shows that reserves for losses and
settlement expenses at December 31, 1992, were increased by $1,269,000 for
claims that had occurred on or prior to that balance sheet date. This claim
development related primarily to reserves for the commercial auto liability
line of business which experienced adverse development of approximately
$830,000, most of which was applicable 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 was 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.
The anticipated effect of inflation is implicitly considered when
estimating liabilities for losses and settlement expenses. 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.
NOTE H CONTINGENCIES
Litigation: In the normal course of operations, certain subsidiaries of the
Company have been named as parties to various pending and threatened
litigation. While the outcome of some of these matters cannot be estimated
with certainty, it is the opinion of management, that the resolution of these
matters will not have a material adverse affect on the Company's consolidated
financial position.
Guaranty Associations: The insurance subsidiaries are required to be members
of various state insurance guaranty associations in order to conduct business
in those states. These associations have the authority to assess member
companies in the event that an insurance company conducting business in that
state is unable to meet its policyholder obligations. The Company recognizes
the
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expense for these assessments in the year they are assessed. The Company
received a net refund of $12,000 in 1995 and incurred expenses of $76,000 and
$472,000 in 1994 and 1993, respectively, related to these assessments.
NOTE I STOCK OPTION PLAN AND EARNINGS PER SHARE
The Company has an Employee Incentive Stock Option Plan (Plan) which
provides that options be granted to selected key employees at exercise prices
equal to market value on the date the option is granted. Options are granted
for a period not to exceed ten years and are exercisable at a rate of 20% per
year starting one year from the date of grant. Depending upon the
circumstances of an optionee's termination of employment, the optionee's
options either a) remain exercisable for three months after termination to the
extent they were exercisable at termination unless vesting is accelerated by
the Compensation Committee, b) remain exercisable until a change in control of
the Company, as defined in the plan, c) remain exercisable for five years and
one day from the date of the optionee's termination or d) terminate as of the
termination of the optionee's employment.
The Company has reserved 250,000 shares of Common Stock for
distribution under the Plan. The following options to purchase the Company's
common shares were outstanding under the Plan as of December 31, 1995 and 1994:
NUMBER OF SHARES
UNDERLYING
OUTSTANDING
OPTIONS
OPTION
PRICE
DATE OF GRANT 1995 1994 PER SHARE
- ---------------------------------------------------------------
January 15, 1988 11,000 11,000 $ 8.50
October 6, 1988 2,000 2,000 $10.00
January 15, 1993 42,962 42,962 $ 1.38
July 25,1994 19,000 19,000 $ 2.25
August 17, 1994 81,000 81,000 $ 2.75
- -------------------------------------------------------------
155,962 155,962
=============================================================
At December 31, 1995, 50,185 options were exercisable. No options
have been exercised under the Plan. Earnings per common share are based on the
average number of shares of Common Stock outstanding during the year. The
effect of stock options is not dilutive in the computation of earnings per
share.
The Company has a phantom stock plan under which shares of "phantom
stock" may be awarded to certain employees. A maximum of 250,000 shares may be
awarded under the plan. Upon maturity
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of an award, shares of phantom stock are settled in cash equal to the market
value of common shares at the maturity date plus the amount of cash dividends
paid on an equal number of common shares over the life of the award. The
awards generally vest over a five year period beginning five years after the
award date and mature on the two year anniversary of the termination of the
employee. In 1995, 50,000 shares of phantom stock were granted under the plan
with related compensation expense of $26,000.
NOTE J SUMMARY OF FAIR VALUES
The method of determining fair values for investments in fixed
maturity securities is discussed in Note F. For all other financial
instruments, carrying value approximates fair value.
The following table summarizes the carrying value and fair value of
financial instruments:
December 31
1995 1994
---------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------------------------------------------
(Thousands of dollars)
Financial Assets:
Cash $ 1,637 $ 1,637 $ 1,497 $ 1,497
Short-term investments $14,848 $14,848 $17,678 $17,678
Fixed maturity securities
available-for-sale
(Note F) $31,942 $31,942 $10,133 $10,133
Fixed maturity securities
held-to-maturity
(Note F) $16,230 $16,429 $39,352 $37,370
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Report of Independent Auditors
ERNST & YOUNG LLP
Board of Directors and Shareholders
McM Corporation
We have audited the accompanying consolidated balance sheets of McM
Corporation and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, shareholders equity and
cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of McM Corporation and subsidiaries at December 31, 1995 and 1994, and
the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Raleigh, North Carolina
February 29, 1996
ERNST & YOUNG
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SUMMARY OF QUARTERLY RESULTS OF OPERATIONS
The following is a summary of quarterly results of operations for the years
ended December 31, 1995 and 1994
- ------------------------------------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
- ------------------------------------------------------------------------------------------------------
(Thousands of dollars, except per share data)
1995
Premiums $10,590 $10,778 $11,915 $12,418
Investment Income, Less Investment Expense 896 891 857 853
Realized Gains 0 0 0 123
Losses and Expenses 10,927 11,173 11,974 13,287
Net Income 594 540 852 224
Net Income Per Share $0.13 $0.12 $0.18 $0.05
1994
Premiums $10,335 $9,814 $10,202 $10,775
Investment Income, Less Investment Expense 914 966 890 914
Realized Gains 0 19 103 0
Losses and Expenses 11,041 10,485 10,910 11,514
Net Income (Loss) 414 430 312 198
Net Income (Loss) Per Share 0.09 0.09 0.07 0.04
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OFFICERS AND DIRECTORS
OFFICERS DIRECTORS
George E. King Michael A. DiGregorio
President, Chief Executive Vice President/Senior Trust Counsel
Officer Wilmington Trust Company
Wilmington, DE
Stephen L. Stephano
Executive Vice President & George E. King
Chief Operating Officer President
McM Corporation
Raleigh, NC
Michael D. Blinson
Senior Vice President Laurence F. Lee, Jr.
& Corporate Secretary Retired
Jacksonville, FL
Kevin J. Hamm
Vice President & Laurence F. Lee III
Chief Financial Officer President
Plan Analysts, Inc.
Harold A. Strube Jacksonville, FL
Vice President &
Assistant Corporate Secretary Claude G. Sanchez, Jr.
Private Investor
Veguita, NM
Stephen L. Stephano
Executive Vice President
McM Corporation
Raleigh, NC
R. Peyton Woodson
President
Enterprise Holdings Proprietary, Inc.
Raleigh, NC
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CORPORATE INFORMATION
McM CORPORATION CORPORATE OFFICE
702 Oberlin Road
P.O. Box 12317
Raleigh, North Carolina 27605
Telephone: (919)833-1600
REGISTRAR-TRANSFER AGENT
Wachovia Bank and Trust Company, N.A.
Winston-Salem, North Carolina
GENERAL COUNSEL
Ragsdale, Liggett & Foley, PLLC
Raleigh, North Carolina
INDEPENDENT AUDITORS
Ernst & Young LLP
Raleigh, North Carolina
FORM 10-K
Annual Report for the year ended December 31, 1995, has been
filed with the Securities and Exchange Commission. A copy
will be made available to shareholders without charge upon
request. Please write to Corporate Secretary at the
Corporation's Corporate Office.
ANNUAL MEETING
The Annual Shareholders' Meeting of McM Corporation will be
held at the corporate offices of McM Corporation, 702 Oberlin
Road, Raleigh, North Carolina, on May 23, 1996, at 10:00 a.m.
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