Note: Data includes Beacon Insurance Company of America through February 19, 1993. - - -------- 1) Industry data is from Best's Aggregates and Averages for the Property Casualty Industry-Stock Companies. 2) Per share amounts are adjusted for stock splits for the five year period presented.
Policy acquisition expenses increased $13.5 million, or 3.3%, to $422.6 million and other underwriting expenses increased $2.0 million, or 1.1% to $192.0 million in 1996. Hanover's policy acquisition expenses increased $9.0 million, or 3.6%, to $258.5 million, primarily attributable to higher acquisition costs assessed by voluntary and involuntary pools, as well as the overall increase in net earned premium at Hanover. Other underwriting expenses at Hanover increased $2.2 million as a result of an increase of approximately $7.0 million in expenses associated with an ongoing policy administration technology project that is intended to redesign information systems used to serve customers, underwriting and claims. This was partially offset by a decrease in assessment expenses from the withdrawal of a large voluntary pool. Policy acquisition expenses at Citizens increased $4.5 million, or 2.8%, to $164.1 million, reflecting growth in net premiums earned. Citizens' other underwriting expenses decreased $0.2 million to $66.3 million in 1996, resulting from reductions in employee related expenses and commissions, partially offset by expenses associated with the aforementioned policy administration technology project. Management anticipates an increase in its expense levels due to further planned investments in technology consolidation and enhancement.
The personal segment represented 61.2%, 59.8% and 58.3% of total net premiums earned in 1996, 1995 and 1994 respectively.
Personal segment net premiums earned increased $48.6 million, or 4.4%, to $1,161.9 million in 1996, compared to $1,113.3 million in 1995. Hanover's personal segment net premiums earned increased $30.2 million, or 5.2%, to $607.3 million during 1996. This increase is primarily attributable to an increase in the personal automobile line associated with the accounting effects of restructuring a reinsurance contract, increasing net premiums earned by $19.0 million. A 2.0% increase in policies in force in Hanover's homeowners line as well as moderate price increases in this line also contributed to the increase in net premiums earned. These increases were partially offset by a mandated 4.5% decrease in Massachusetts personal automobile rates which became effective January 1, 1996. Effective January 1, 1997, Massachusetts personal automobile rates were decreased an additional 6.2% as mandated by the Massachusetts Insurance Commissioner. In addition, in response to increasing price competition in Massachusetts, Hanover, in February 1997, requested the Massachusetts Division of Insurance to approve a plan to offer a safe driver's discount of 10% on automobile insurance premiums. Management believes these rate decreases may unfavorably impact premium growth in Massachusetts. Approximately 39% of Hanover's personal automobile business is currently written in Massachusetts.
The personal segment underwriting loss in 1996 increased $45.5 million, to a loss of $48.5 million. Hanover's underwriting results deteriorated $70.8 million to a loss of $47.2 million, while Citizens' underwriting loss improved $25.3 million to a loss of $1.3 million.
Hanover's personal segment losses and LAE increased $83.4 million, or 22.6%, to $452.0 million in 1996. This increase is partially attributable to a $28.8 million increase in losses and LAE in the homeowners line, resulting from increased catastrophes and severe weather. Catastrophe losses in Hanover's personal segment increased $17.2 million, to $30.6 million in 1996 from $13.4 million in 1995. Losses and LAE in the personal automobile line increased $49.6 million, or 17.8%, to $328.0 million, primarily reflecting the accounting effects of restructuring a reinsurance contract, increasing losses by $19.0 million, in addition to a moderate increase in claims frequency and a $4.7 million reduction in favorable reserve development.
decline in Citizens' other underwriting expenses is primarily attributable to reductions in employee related expenses and commissions, partially offset by expenses associated with a policy administration technology project. Management anticipates an increase in its expense levels due to further planned investments in technology.
Citizens' personal segment net premiums earned increased $40.1 million, or 8.1%, to $536.2 million in 1995. This increase reflects price increases in the personal automobile and homeowners lines, and was partially offset by a 5.8% decrease in personal automobile policies in force. This decrease is attributable to the Company's selective reduction of writings in Michigan when rates were viewed as inadequate and to increased competition in affinity group franchise sales as a result of the January 1995 order by the Michigan Insurance Commissioner which has permitted competitors to offer similar products.
The personal segment underwriting loss decreased $23.0 million, from $26.0 million in 1994, to $3.0 million in 1995. Hanover's underwriting results improved $17.3 million, from a profit of $6.3 million in 1994, to a profit of $23.6 million in 1995. Citizens' underwriting loss improved $5.7 million, or 17.6%, from $32.3 million in 1994, to $26.6 million in 1995.
Citizens' underwriting profit decreased primarily due to an increase in loss severity and frequency in the commercial multiple peril line. Commercial multiple peril losses and LAE increased $16.9 million, or 42.4%, to $56.8 million in 1996, partially offset by a $5.1 million, or 9.4% increase to $59.1 million in net premiums earned. Workers' compensation net premiums earned decreased $17.6 million, or 11.9%, to $130.7 million in 1996 while losses and LAE increased $9.6 million, or 15.0%, to $73.4 million in this line, primarily due to reduced favorable development of prior year reserves. Catastrophe losses in this segment were $1.9 million in 1996 compared to $0.8 million during 1995.
Citizens' commercial segment net premiums earned increased $15.0 million, or 5.6%, to $281.6 million in 1995. This increase primarily reflects growth of 8.1% in total commercial policies in force. The overall growth includes increases in policies in force in the commercial automobile and commercial multiple peril lines of 12.5% and 11.6%, respectively, along with a decrease in workers' compensation policies in force of 4.6% and rate decreases of 15.5% in the workers' compensation line in 1995. The decrease in workers' compensation premiums was more than offset by increased workforce coverage due to full employment in Michigan. Price increases in the commercial automobile line also contributed to the increase in net premiums earned.
The commercial segment underwriting loss improved $51.8 million to $22.6 million in 1995. Hanover's underwriting loss improved to a loss of $62.6 million, from $76.0 million, and Citizens' underwriting profit increased from $1.6 million in 1994, to $40.0 million in 1995.
The improvement in Citizens' underwriting results in 1995 reflects favorable claims activity in both current and prior accident years in the workers' compensation line attributable to improvements in severity and frequency, and to severe weather and large claims in the first half of 1994 which had an adverse impact on the commercial multiple peril and commercial automobile lines.
The Company maintains reserves to provide for its estimated ultimate liability for losses and loss adjustment expenses with respect to reported and unreported claims incurred as of the end of each accounting period. These reserves are estimates, involving actuarial projections at a given point in time, of what management expects the ultimate settlement and administration of claims will cost based on facts and circumstances then known, predictions of future events, estimates of future trends in claim severity and judicial theories of liability and other factors. The inherent uncertainty of estimating insurance reserves is greater for certain types of property and casualty insurance lines, particularly workers' compensation and other liability lines, where a longer period of time may elapse before a definitive determination of ultimate liability may be made and where the technological, judicial and political climates involving these types of claims are changing.
The Company regularly updates its reserve estimates as new information becomes available and further events occur which may impact the resolution of unsettled claims. Changes in prior reserve estimates are reflected in results of operations in the year such changes are determined to be needed and recorded. The table below provides a reconciliation of the beginning and ending reserve for unpaid losses and LAE as follows:
As part of an ongoing process, the reserves have been re-estimated for all prior accident years and were decreased by $141.4 million, $137.6 million and $128.1 million in 1996, 1995, and 1994, respectively. The increase in favorable development on prior years' reserves of $3.8 million in 1996 results primarily from an $11.4 million increase in favorable development at Citizens. The increase in Citizens' favorable development of $11.4 million in 1996 reflects improved severity in the personal automobile line, where favorable development
The increase in favorable development on prior years' reserves of $9.5 million in 1995 results primarily from a $34.6 million increase in favorable development at Citizens. Favorable development in Citizens' personal automobile and workers' compensation lines increased $16.6 million and $15.5 million, to favorable development of $4.4 million and $32.7 million, respectively, due to the aforementioned change in claims cost management and the Michigan Supreme Court ruling. Hanover's favorable development, not including the effect of voluntary and involuntary pools, was relatively unchanged at $90.2 million in 1995 compared to $91.7 million in 1994. Favorable development in Hanover's workers' compensation line increased $27.7 million to $31.0 million during 1995. This was offset by decreases of $14.6 million and $12.6 million, to $45.5 million and $0.1 million, in the personal automobile and commercial multiple peril lines, respectively. Favorable development in Hanover's voluntary and involuntary pools decreased $23.6 million to $0.4 million during 1995.
Due to the nature of the business written by the Company, the exposure to environmental liabilities is relatively small and therefore its reserves are relatively small compared to other types of liabilities. Loss and LAE reserves related to environmental damage and toxic tort liability, included in the reserve for losses and LAE were $50.8 million and $43.2 million, net of reinsurance of $20.2 million and $8.4 million in 1996 and 1995, respectively. During 1995, the Company redefined its environmental liabilities in conformity with new guidelines issued by the NAIC. This had no impact on results of operations. The Company does not specifically underwrite policies that include this coverage, but as case law expands policy provisions and insurers' liability beyond the intended coverage, the Company may be required to defend such claims. During 1995, Hanover performed an actuarial review of its environmental reserves. This resulted in Hanover's providing additional reserves for "IBNR" (incurred but not reported) claims, in addition to existing reserves for reported claims. Although these claims are not material, their existence gives rise to uncertainty and is discussed because of the possibility, however remote, that they may become material. The Company believes that, notwithstanding the evolution of case law expanding liability in environmental claims, recorded reserves related to these claims are adequate. In addition, the Company is not aware of any litigation or pending claims that may result in additional material liabilities in excess of recorded reserves. The environmental liability could be revised in the near term if the estimates used in determining the liability are revised.
losses and LAE, and the extent to which inflation may affect such expenses, are known. Consequently, the Company attempts, in establishing rates, to anticipate the potential impact of inflation in the projection of ultimate costs. The impact of inflation has been relatively insignificant in recent years. However, inflation could contribute to increased losses and LAE in the future.
Effective January 1, 1997, the Company modified its reinsurance program. The 1997 modifications include the purchase of additional casualty reinsurance and higher retention under the Company's catastrophe reinsurance program. Under the 1997 casualty reinsurance program, the Company added a layer which reinsured 100% of each loss in excess of $.5 million up to $1.0 million per occurrence. Under the 1997 catastrophe reinsurance program, Hanover and Citizens retain the first $25.0 million of loss per occurrence and all amounts in excess of $180.0 million per occurrence, 55% of all aggregate loss amounts in excess of $25.0 million up to $45.0 million, and 10% of all aggregate loss amounts in excess of $45.0 million up to $180.0 million. In addition, Citizens retains 5% of losses in excess of $10.0 million, up to $25 million.
The Company cedes to reinsurers a portion of its risk and pays a fee based upon premiums received on all policies subject to such reinsurance. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company determines the appropriate amount of reinsurance based on evaluation of the risks accepted and analyses prepared by consultants and reinsurers and on market conditions (including the availability and pricing of reinsurance). The Company also believes that the terms of its reinsurance contracts are consistent with industry practice in that they contain standard terms with respect to lines of business covered, limit and retention, arbitration and occurrence. Based on its review of its reinsurers' financial statements and reputations in the reinsurance marketplace, the Company believes that its reinsurers are financially sound.
The Company is subject to concentration of risk with respect to reinsurance ceded to various residual market mechanisms. As a condition to the ability to conduct certain business in various states, the Company is required
The Company ceded to MCCA premiums earned and losses and loss adjustment expenses in 1996, 1995 and 1994 of $50.5 million and $(52.9) million, $66.8 million and $62.9 million, and $80.0 million and $24.2 million, respectively. Because the MCCA is supported by assessments permitted by statute and all amounts billed by the Company to CAR, MWCRP and MCCA have been paid when due, the Company believes that it has no significant exposure to uncollectible reinsurance balances.
The Company's investment policy is structured with emphasis on maximizing after tax income while providing liquidity and preserving asset quality. The portfolio is dominated by fixed income securities. The fixed income portfolio maintains a laddered maturity structure with a duration of 5.6 years. The Company continually evaluates credit quality throughout the investment holding period. Approximately 89.0% of the portfolio was invested in debt securities at December 31, 1996, compared to 87.9% at December 31, 1995. At December 31, 1996, $3,110.2 million, or 88.2%, of the debt securities held by the Company were rated by the National Association of Insurance Commissioners ("NAIC") as investment grade (1 or 2). In 1995, $3,179.5 million, or 94.7% of debt securities were rated investment grade. At December 31, 1996, 64.1% of debt securities were tax-exempt investments compared to 64.0% at December 31, 1995. The Company may continue to make adjustments to its taxable and tax-exempt positions in the future to seek to maximize after tax income.
The Company's investment portfolio increased $142.8 million, to $3,962.4 million at December 31, 1996 from $3,819.6 million at December 31, 1995. Hanover's investment portfolio increased $28.4 million, to $2,357.2 million, and Citizens' investment portfolio increased $114.4 million, to $1,605.2 million. These
At December 31, 1996, $402.9 million, or 10.2% of the investment portfolio was invested in equity securities compared to $438.1 million, or 11.5% at December 31, 1995. Dividend income from equity securities was $9.6 million, or 4.1% of investment income in 1996 as compared to $12.5 million, or 6.0% in 1995.
Sources of cash for the Company's insurance subsidiaries are from premiums collected, investment income and maturing investments. Primary cash outflows are paid losses and loss adjustment expenses, policy acquisition expenses, other underwriting expenses, and investment purchases. Cash outflows related to claim losses and loss adjustment expenses can be variable because of uncertainties surrounding settlement dates for liabilities for unpaid losses and because of the potential for large losses either individually or in the aggregate. The Company periodically adjusts its investment policy to respond to changes in short-term and long-term cash requirements.
Net cash provided by operating activities for the Company was $110.2 million, $182.1 million and $205.2 million in 1996, 1995 and 1994 respectively. The decrease in net cash provided by operating activities in 1996 is attributable primarily to an increase in underwriting losses during 1996 which resulted in an increase in claims payments. The decrease in net cash provided by operating activities in 1995 is attributable primarily to the timing of cash receipts and payments relating to reinsurance and other accrued expenses.
Shareholders' equity was $1,608.5 million, or $26.99 per share, at December 31, 1996 compared to $1,509.3 million, or $24.82 per share, at December 31, 1995. Shareholders' equity reflects net income for the year, the
Based on current trends, the Company expects to continue to generate sufficient positive operating cash to meet all short-term and long-term cash requirements. The Company maintains a high degree of liquidity within the investment portfolio in fixed maturities, common stock and short-term investments. The Company also has unsecured lines of credit with certain banks to support its commercial paper borrowings. At December 31, 1996, these lines totaled $40.0 million and are subject to annual renewal. There were no borrowings under these lines of credit during 1996. In addition, the holding company's financial structure provides the flexibility to obtain funds externally through debt or equity financing, if needed.
On January 2, 1997, Hanover declared an extraordinary dividend in the amount of $120.0 million, payable on or after January 21, 1997 to Allmerica P&C. The dividend which was approved by the New Hampshire Insurance Department on January 9, 1997, is to be paid in a lump sum or in such installments as Allmerica P&C, in its discretion, may determine.
treatment of insurance products; (v) changes in interest rates causing a reduction of investment income or in the market value of interest rate sensitive investments; (vi) failure to obtain new customers, retain existing customers or reductions in policies in force by existing customers; (vii) higher service, administrative or general expense due to the need for additional advertising, marketing, administrative or management information systems expenditures; (viii) loss or retirement of key executives; (ix) increases in medical costs, including increases in utilization, costs of medical services, pharmaceuticals, durable medical equipment and other covered items; (x) termination of provider contracts or renegotiation at less cost- effective rates or terms of payment; (xi) changes in the Company's liquidity due to changes in asset and liability matching; (xii) restrictions on insurance underwriting, based on certain criteria; (xiii) adverse changes in the ratings obtained by independent rating agencies such as Moody's, Standard & Poor's and A.M. Best.
To the Board of Directors and Shareholders of Allmerica Property & Casualty Companies, Inc.
The management of Allmerica Property & Casualty Companies, Inc. has the responsibility for preparing the accompanying consolidated financial statements and for their integrity and objectivity. The statements were prepared in conformity with generally accepted accounting principles and include amounts based on management's informed estimates and judgments. We believe that these statements present fairly the Company's financial position and results of operations and that the other information contained in the annual report is accurate and consistent with the financial statements.
Allmerica Property & Casualty Companies, Inc.'s Board of Directors annually appoints independent accountants to perform an audit of its consolidated financial statements. The financial statements have been audited by Price Waterhouse LLP, independent accountants, in accordance with generally accepted auditing standards. Their audit included consideration of the Company's system of internal control in order to determine the audit procedures required to express their opinion on the consolidated financial statements.
Premiums are recognized as earned using the daily pro rata method over the term of the policy. Unearned premiums represent the portion of premiums written that relate to the unexpired terms of the policies in force.
In November 1995, the Financial Accounting Standards Board issued a Special Report, A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities, which permitted companies to reclassify securities, where appropriate, based on the new guidance. As a result, the Company transferred all of its held-to-maturity category securities, with amortized cost and fair value of $110.3 million and $116.3 million, respectively, to the available-for-sale category, which resulted in a net increase in shareholders' equity of $3.7 million.
Fair values for debt and equity securities are primarily based on quoted market prices. For securities not actively traded, fair values are estimated using values obtained from independent pricing services.
Realized gains or losses on the sale of investments, which are included in the determination of net income, are determined on the specific-identification basis using amortized cost for debt securities and cost for equity securities and other investments. Investments with other than temporary declines in fair value are written down to estimated fair value resulting in losses which are recognized as realized losses.
Deferred policy acquisition expenses consist of commissions, premium taxes, and other costs that vary with and are primarily related to the production of new and renewal business. The deferral is subject to ultimate recoverability and charged to expense over the period in which the related premiums are earned. Deferred policy acquisition expenses are reviewed to determine that they do not exceed recoverable amounts after considering anticipated investment income. The Company evaluates recoverability of premium deficiencies separately for Hanover and Citizens on a product line basis, considering expected investment income applied separately for Hanover and Citizens on a product line basis.
The reserve for losses and loss adjustment expenses (LAE) represents the accumulation of individual case estimates for reported losses and actuarial estimates for incurred but not reported losses and LAE. Assumed reserves are recorded as reported by the ceding organization. The reserve for losses and LAE is intended to cover the ultimate net cost of all losses and LAE incurred through the balance sheet date. In establishing these reserves, consideration is given to both current conditions and trends as well as past Company and industry experience. The reserve is stated gross of reinsurance ceded and net of anticipated salvage and subrogation recoverable. The reserve estimates are continually reviewed and updated. The ultimate liability of claims may vary from the current estimate. The effects of changes in the estimated reserve are included in the results of operations in the period in which the estimates are revised.
The Company periodically purchases annuity contracts from various life insurance companies to settle claims currently. The present value of such annuities, where the Company remains primarily liable, is recorded in the accounts of the Company as both an other asset and other liability and amounted to $51.6 million and $49.7 million at December 31, 1996 and 1995, respectively.
Deferred income taxes are generally recognized when assets and liabilities have different values for financial statement and tax reporting purposes, and for other temporary taxable and deductible differences as defined by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). These differences result primarily from loss reserves, policy acquisition expenses, unearned premiums and unrealized appreciation or depreciation on investments.
Certain reclassifications have been made to the 1995 and 1994 consolidated financial statements in order to conform to the 1996 presentation.
Debt securities with an amortized cost of $82.8 million were on deposit with various states or governmental authorities at December 31, 1996.
Unrealized gains and losses on available-for-sale securities are summarized as follows:
- - -------- (1) Includes net (depreciation) appreciation on other investments, net of deferred federal income taxes and minority interest of $(1.4) million, $2.3 million and $1.0 million in 1996, 1995 and 1994, respectively.
The amortized cost and fair value of debt securities, by contractual maturity are as follows:
At December 31, 1996, fixed maturities with a carrying value of $1.9 million were non-income producing for the twelve months ended December 31, 1996. The Company had a concentration in U.S. treasuries at December 31, 1996 that exceeded 10% of shareholders' equity at December 31, 1996.
Proceeds from voluntary sales of debt securities in 1996, 1995 and 1994 were $1,252.7 million, $1,131.5 million and $612.5 million, respectively. Gross gains in 1996, 1995 and 1994 of $8.9 million, $13.7 million and $5.8 million were realized on those sales, respectively. Gross losses in 1996, 1995 and 1994 of $13.6 million, $16.5 million and $14.8 million were realized on those sales, respectively. Proceeds from voluntary sales of equity securities in 1996, 1995, and 1994 were $191.5 million, $112.7 million, and $105.1 million, respectively. Gross gains in 1996, 1995 and 1994 were $53.5 million, $22.7 million and $16.6 million, respectively. Gross losses in 1996, 1995 and 1994 were $1.0 million, $6.5 million and $4.3 million, respectively.
Commercial paper normally matures within 90 days and had a weighted average interest rate of 5.5% and 5.8% at December 31, 1996 and 1995, respectively. Interest expense was $1.3 million, $1.6 million and $1.6 million in 1996, 1995 and 1994, respectively.
The Company has unsecured lines of credit with certain banks. At December 31, 1996, these lines totaled $40.0 million, of which $12 million was available for borrowing. Under the terms of these agreements, the Company may borrow funds on a short-term basis at the prevailing prime interest rate. The Company is required to pay annual commitment fees of 0.07% on the unused portion of its lines of credit. These lines are subject to annual renewal in 1997.
Provision for federal income taxes have been calculated in accordance with the provision of SFAS No. 109. A summary of the federal expense (benefit) in the consolidated statements of income is as follows:
The Company's federal income tax returns are routinely audited by the IRS, and provisions are made in the financial statements in anticipation of the results of these audits. The IRS has examined the Company's federal income tax returns through 1991. The Company is currently considering its response to certain adjustments proposed by the IRS with respect to the Company's federal income tax returns for the years 1989 through 1991. If upheld, these adjustments would result in additional payments; however, the Company will vigorously defend its position with respect to these adjustments. In management's opinion, adequate tax liabilities have been established for all years. However, the amount of these tax liabilities could be revised in the near term if estimates of the Company's ultimate liability are revised.
The Company maintains a reinsurance program designed to protect against large or unusual losses and LAE activity. This includes both excess of loss reinsurance and catastrophe reinsurance. Catastrophe reinsurance serves to protect the ceding insurer from significant aggregate losses arising from a single event such as windstorm, hail, hurricane, tornado, riot or other extraordinary events. The Company determines the appropriate amount of reinsurance based on the Company's evaluation of the risks accepted and analysis prepared by consultants and reinsurers and on market conditions including the availability and pricing of reinsurance. The Company has reinsurance for casualty business. Under the 1996 casualty program, the reinsurers are responsible for 100% of the amount of each loss in excess of $1.0 million per occurrence up to $30.5 million for general liability and workers' compensation. Additionally, this reinsurance covers workers' compensation losses in excess of $30.5 million to $60.5 million per occurrence. Under the Company's 1996 catastrophe reinsurance program, Hanover and Citizens retain the first $25.0 million of loss per occurrence, all amounts in excess of $180.0 million per occurrence and 10% of all aggregate loss amounts in excess of $25.0 million up to $180.0 million. In addition, Citizens retains 5% of losses in excess of $10.0 million, up to $25.0 million. In 1996, Citizens purchased aggregate catastrophe coverage which reinsures 90% of $5.0 million for aggregated catastrophe losses in excess of $5.0 million which individually exceed $1.0 million. Under this aggregate catastrophe coverage, Citizens is expected to recover $4.5 million. In the years ended December 31, 1996, 1995 and 1994, the Company did not exceed the minimum catastrophe levels, either individually or in the aggregate, to obtain recovery under its reinsurance agreements, except as described above.
The Company is subject to concentration of risk with respect to reinsurance ceded to various residual market mechanisms. As a condition to the ability to conduct certain business in various states, the Company is required to participate in various residual market mechanisms and pooling arrangements which provide various insurance coverages to individuals or other entities that are otherwise unable to purchase such coverage voluntarily provided by private insurers. These market mechanisms and pooling arrangements include the Massachusetts Commonwealth Automobile Reinsurers ("CAR"), the Maine Workers' Compensation Residual Market Pool ("MWCRP") and the Michigan Catastrophic Claims Association ("MCCA"). At December 31, 1996, the MCCA and CAR were the only two reinsurers which represented 10% or more of the Company's reinsurance business. As a servicing carrier in Massachusetts, the Company cedes a significant portion of its private passenger and commercial automobile premiums to CAR. Net premiums earned and losses and loss adjustment expenses ceded to CAR for the years ended December 31, 1996, 1995 and 1994 were $38.0 million and $21.8 million, $49.1 million and $33.7 million, and $50.0 million and $29.8 million, respectively.
From 1988 through 1992, the Company was a servicing carrier in Maine, and ceded a significant portion of its workers' compensation premiums to the Maine Workers' Compensation Residual Market Pool, which is administered by The National Council on Compensation Insurance ("NCCI"). The Company is currently involved in legal proceedings regarding the MWCRP's deficit which through a legislated settlement issued on June 23, 1995 provided for an initial funding of $220.0 million, of which the insurance carriers were responsible for $65.0 million. Hanover paid its allocation of $4.2 million in December 1995. Some of the smaller carriers appealed this decision. The Company's right to recover reinsurance balances for claims properly paid is not at issue in any such proceedings. The Company expects to collect its reinsurance balance; however, funding of the cash flow needs of the MWCRP may in the future be affected by issues related to certain litigation, the outcome of which the Company cannot predict.
The Company ceded to MCCA premiums earned and losses and loss adjustment expenses for the years ended December 31, 1996, 1995 and 1994 of $50.5 million and $(52.9) million, $66.8 million and $62.9 million, and $80.0 million and $24.2 million, respectively. Because the MCCA is supported by assessments permitted by statute, and all amounts billed by the Company to CAR, MWCRP and MCCA have been paid when due, the Company believes that it has no significant exposure to uncollectible reinsurance balances.
The table below provides a reconciliation of the beginning and ending reserve for unpaid losses and LAE for the years ended December 31, as follows:
in 1994. Favorable development in Hanover's workers' compensation line increased $27.7 million to $31.0 million during 1995. This was offset by decreases of $14.6 million and $12.6 million, to $45.5 million and $0.1 million, in the personal automobile and commercial multiple peril lines, respectively. Favorable development in Hanover's voluntary and involuntary pools decreased $23.6 million to $0.4 million during 1995.
Determination of the projected benefit obligations was based on a weighted average discount rate of 7.0% at December 31, 1996 and 1995. The assumed long- term rate of return on plan assets was 9% for both years. The actuarial present value of the projected benefit obligations was determined using assumed rates of increase in future compensation levels of 5.5% to 6.5%. Plan assets are invested primarily in various separate accounts and the general account of FAFLIC. The plans also hold stock of AFC. At December 31, 1996 and 1995, each plan's projected benefit obligation exceeded its plans assets.
The plan changes effective January 1, 1996 resulted in a negative plan amendment (change in eligibility and medical benefits) of $18.5 million and curtailment (no future increases in life insurance) of $3.2 million. The negative plan amendment will be amortized as prior service cost over the average number of years to full eligibility (approximately 9 years or $2.0 million per year). Of the $3.2 million curtailment gain, $1.2 million
The plan's status and the amounts recognized in the Company's consolidated balance sheets were as follows:
For purposes of measuring the accumulated postretirement benefit obligation at December 31, 1996, health care costs were assumed to decrease 9.0% in 1997, declining thereafter until the ultimate rate of 5.5% is reached in 2001 and remaining at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by 1% in each year would increase the medical accumulated postretirement benefit obligation as of December 31, 1996 by $1.6 million, or 8.5%, and the aggregate of the service and interest cost components of annual net periodic postretirement benefit expense by $0.2 million or 9.6%.
The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.0% as of December 31, 1996 and 1995. The assumed rate of future annual salary increases was 5.5% at both valuation dates.
income taxes, and is reported as a cumulative effect of a change in accounting principle in the consolidated statement of income. The 1996, 1995 and the 1994 expenses after recognition of the cumulative effect, are not significant.
In October 1995, the FASB issued Statement of Financial Accounting Standards (SFAS No. 123) "Accounting for Stock-Based Compensation." The standard is effective for fiscal years beginning after December 15, 1995, and requires the Company either to apply a fair value measure to any stock-based compensation granted by the Company after December 31, 1994, or continue to apply the valuation provisions of existing accounting standards, but with pro-forma net income and earnings per share disclosures using a fair value methodology to value the stock-based compensation. Beginning for the year ended December 31, 1996, the Company has elected to continue to apply the valuation provisions of existing accounting standards (APB No. 25). The pro-forma effect of applying SFAS No. 123 is not material.
Excluding related party occupancy and lease costs, the Company has certain operating lease arrangements for property and equipment. As of December 31, 1996, future minimum rental payments under non-cancelable, long-term operating leases were approximately $44.9 million payable as follows: 1997--$14.7 million; 1998--$11.7 million; 1999--$8.5 million; 2000--$5.7 million; 2001-- $2.9 million; and $1.4 million thereafter. All leases expire prior to the year 2005.
On June 23, 1995, the governor of Maine approved a legislative settlement for the Maine Workers' Compensation Residual Market Pool deficit for the Years 1988 through 1992. The settlement provides for an initial funding of $220.0 million toward the deficit. The insurance carriers were liable for $65.0 million and employers would contribute $110.0 million payable through surcharges on premiums over the course of the next ten years. The major insurers are responsible for 90% of the $65.0 million. Hanover's allocated share of the settlement is approximately $4.2 million, which was paid in December 1995. The remainder of the deficit of $45.0 million will be paid by the Maine Guaranty Fund, payable in quarterly contributions over ten years. A group of smaller carriers filed litigation to appeal the settlement. The Company believes that adequate reserves have been established for any additional liability.
- - -------- Note: Due to the use of weighted average shares outstanding when calculating earnings per share, the sum of the quarterly per share data may not equal the per share data for the year.