The Company's home office complex consists of a leased office building of approximately 407,800 square feet in downtown Indianapolis, Indiana, a nearby leased parking garage and a printing and supply building of approximately 52,400 square feet, which is owned by the Company. The lease covering the office building and parking garage (the "Lease") will expire on August 31, 2009. Semi-annual lease payments under the Lease total approximately $3.2 million ($6.4 million per year) until August, 1999. From September, 1999, until August, 2004, the semi-annual lease payments will total approximately $4.9 million ($9.8 million per year), and from September, 2004, until August, 2009, the semi-annual lease payments will approximate $5.2 million ($10.4 million per year).
________________ (1) Represents an allowance for losses on the contemplated sale of operating properties used for division offices, resulting from the Realignment. See Note 14 to the Consolidated Financial Statements on page 56.
(5) Company statutory data have been derived from the financial statements of the Company's insurance subsidiaries prepared in accordance with SAP and filed with insurance regulatory authorities. The loss, loss adjustment expense, underwriting expense, policyholder dividend and Company combined ratios are not materially different than such ratios computed pursuant to GAAP.
(6) The ratios presented are after policyholder dividends. Industry averages for 1992 through 1995 are from A.M. Best Company, Inc. ("A.M. Best") Aggregates & Averages Property-Casualty (1996 edition). The industry combined ratio for 1996 is a published estimate from A.M. Best.
The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying audited consolidated financial statements, including the notes.
The SAP loss ratio was adversely affected by an increase of $43.5 million in natural peril losses resulting from widespread severe winter storm activity and frequent wind and hail storms across the Midwest, as well as a severe Pacific Northwest winter storm in late December. Natural peril losses were $165.6 million and $122.1 million for 1996 and 1995, respectively.
Net Investment Income Net investment income increased $2.9 million, or 1.2%, to $233.8 million for 1995, from $230.9 million in 1994. This increase was due primarily to an increase in higher yielding securities, a reduction in unaffiliated common stock holdings and subsequent reinvestment of proceeds in an unconsolidated subsidiary, EMPHESYS Financial Group, Inc. The pre-tax yield on invested assets (excluding realized and unrealized gains) was 6.3% for 1995, compared with 6.2% in 1994.
The Company also sponsors an unfunded, nonqualified, supplemental defined benefit pension plan for certain employees.
The Company has estimated the fair value of its investment in mortgage loans on real estate to be $33,943 and $35,591 at December 31, 1996 and 1995, respectively. This estimate was established using a discounted cash flow method based on rating, maturity and future income when compared to the expected yield for mortgages having similar characteristics.
On May 29, 1996, the Company entered into a revolving credit agreement with third party financial institutions in which the Company may borrow and repay amounts up to a maximum of $200,000 (the "Line of Credit"). Borrowings using the Line of Credit will bear interest generally at variable rates tied to LIBOR, an adjusted certificate of deposit rate or other short-term indices. No debt was outstanding using the Line of Credit at December 31, 1996.
Federal income taxes paid in 1996, 1995 and 1994 were $29,952, $30,045, and $28,556, respectively.
The effective tax rate on pre-tax income is lower than the prevailing corporate federal income tax rate. A reconciliation of this difference is as follows: