Written premium for the property and casualty segment was $427 million in 1995, which represents an increase of 3% over the $416.2 million written in 1994. The 1994 writings were 5% greater than the $397.8 million written in 1993, while 1993's total was down 1% from the previous year. Within the property and casualty segment, combined written premium for mobile home, motor home and travel trailer lines was up 3% in 1995 to $401.4 million, following increases of 6% in 1994 and 4% in 1993 when written premium in these lines was $391.2 million and $370.8 million, respectively. The growth in the Company's core lines of mobile home and recreational vehicle insurance was slowed in 1995 by its catastrophe exposure management program, which has aggressively reduced the Company's coastal exposure to hurricanes from Maine to Texas, and its earthquake exposure in California.
The combined loss and expense ratio for the Company's property and casualty insurance operations was 91.1% in 1995 compared to 96.3% in 1994 and 95.9% in 1993. The underwriting profit from these operations was $38.2 million in 1995, $15.4 million in 1994 and $16.6 million in 1993. The continued emphasis on rate adequacy, disciplined underwriting, catastrophe exposure management, and strategic expense reduction programs, are the reasons for the Company's positive underwriting results over the last three years.
The property and casualty results were impacted by record levels of catastrophe losses, which amounted to, net of reinsurance, $51.9 million in 1995, $62.7 million in 1994 and $39.7 million in 1993. During 1995, hurricanes Opal and Erin along with spring and winter storms on the west coast, which produced wind and flood damage, contributed to the second-worst catastrophe year in the Company's history. The record level of catastrophe losses in 1994 was primarily due to the January Northridge earthquake in California, intense storms with flooding in Georgia and Texas, and the east coast winter storms in the first quarter. The spring storm Joshua, along with the flooding due to the severe weather in the Midwest, were the significant catastrophe losses of 1993.
In 1992 the Company established a $2.1 million reserve to cover future underwriting losses from the run-off of discontinued credit life products. During 1995, 1994 and 1993, $90,000, $300,000 and $500,000, respectively, were added to the reserve due to adverse experience.
The Company discontinued writing private credit insurance in 1985, and established a reserve to cover anticipated losses from the run-off of the product. Management continues to be pleased with the experience in the run-off of this business, and accordingly, reduced the reserve by $1.9 million in 1995, $2.7 million in 1994 and $2.4 million in 1993. These reductions are not reflected in the underwriting results of the insurance operations, but are a component of the parent company and other operational results. Management believes that the aggregate reserves for this discontinued product are adequate at December 31, 1995, but will continue to review and adjust them as needed.
At December 31, 1995, the Company's capital structure consisted of 10,034,780 common shares outstanding.
The Company expects continuing positive cash flow from operations. Additionally, the investment portfolios of the Company's insurance operations have been structured to provide liquidity for operations. The portfolios are structured so that $30 to $40 million of investments mature every year, and are available for reinvestment or use in operations as required. The insurance products written by the Company's insurance subsidiaries are primarily property coverages which result in rapid claims payments. For proper asset/liability matching, the average maturity of investments is approximately five years. The Company believes that its liquid assets plus cash flow from operations will be adequate to meet foreseeable cash requirements.
In February 1994, the Company's Board of Directors approved a stock buy-back program of up to 1 million shares, of which, 699,607 shares were purchased as of December 31, 1995 at an average price of $36.72 per share. On February 21, 1996, the Company's Board of Directors authorized an additional 500,000 shares for the stock repurchase program. The Company will continue to evaluate the purchase of its common stock from excess cash flow generated from operations.
Since the concern over a federal flat tax has affected the municipal bond market, the Company has invested the majority of its cash flow and maturities in taxable bonds and equity securities to capitalize on opportunities to improve after-tax investment performance. Purchases made by the Company in the municipal bond market will tend to be shorter duration bonds. The Company will continue its program of investing the proceeds from the sale and/or payoffs of real estate and mortgage loans in equity securities as opportunities arise.
Included in investment real estate at December 31, 1995 are three properties which were foreclosed upon in 1991 totaling $3.8 million. Of the original properties foreclosed on in 1991, the Company has successfully sold four of the properties at their carrying values, which includes a twelve-acre parcel sold during 1995. Included in the remaining three properties is a forty-acre parcel valued at $3.1 million that the Company has agreed to terms with a developer and has signed an Offer to Purchase. The sale was finalized in March 1996, with no adjustment to the carrying value required. The Company has current appraisals for all of its foreclosed real estate, and has valued it in accordance with provisions of the AICPA Statement of Position 92-3, "Accounting for Foreclosed Assets." No adjustments were made to the carrying values of these assets during 1995, 1994 and 1993. The Company expects no further reductions in these values. At year-end 1994, two real estate related securities totaling $1.2 million were in default. The Company foreclosed and subsequently sold both of these properties in 1995 at their respective book values.
At December 31, 1995, the Company had $47.9 million of its consolidated assets in cash and other short-term investments.
In June 1995, a Bullock County, Alabama jury awarded $15 million in punitive damages against the Company, despite the fact that the amount of the compensatory damage award in the case was $12,500. The punitive damages have since been reduced by the trial court judge to $6.5 million and the compensatory damage award has been reduced to approximately $3,300. In February 1996, a Lowndes County, Alabama jury awarded two policyholders $26,000 in compensatory damages and $3.25 million in punitive damages. The Company believes that both awards, including the amount of the trial court's remittitur in the Bullock County case, are erroneous and not supported by the law or the facts of either case. The Company is vigorously pursuing all post-trial remedies. Since the amount of loss cannot be reasonably estimated, no damages have been provided for in the financial statements.
The Company is in the process of seeking a settlement of consolidated state class actions against the Company and other defendants pending in the United States District Court for the Northern District of Alabama. The Company has proposed to contribute approximately $3.65 million into a settlement fund that, if approved by the federal court, will foreclose further claims against the Company except for claims by persons who affirmatively "opt out" of the settlement class. Although the Company has not established a specific reserve for this proposed settlement, sufficient reserves are available to cover the amount of the proposed settlement without affecting income or the adequacy of remaining held reserves.
FOREMOST CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PARENT COMPANY AND OTHER STATEMENTS OF OPERATIONS (Excluding equity in income of consolidated subsidiaries)
The Company is a holding company which, through its subsidiaries, provides property and casualty, and other insurance products to those who buy, sell or finance mobile homes and recreational vehicles. The Company also writes automobile and homeowners property and casualty insurance. The Company's life insurance subsidiary writes accident and health, and credit life insurance. See Note 15, Subsequent Events.
Income per share amounts are computed based on the weighted average number of common shares outstanding during each year, including equivalents. There were average shares outstanding of 10,222,000 in 1995, 10,604,000 in 1994 and 10,720,000 in 1993.
Certain reclassifications have been made in the 1994 and 1993 financial statements to conform to those classifications used in 1995.
The change in unrealized gains and losses on fixed maturity and equity security investments is summarized as follows:
The following methods and assumptions were used to estimate market value:
Investment Securities Quoted market prices for specific instruments owned, or for similar securities, are used to determine market value.
Mortgage Loans and Land Contracts The present value of future cash flows is used to determine market value. The rates used are the current rates at which loans with similar terms would be made to borrowers with similar credit ratings.
To conform with statutory requirements, bonds and certificates of deposit in principal amounts totaling $14,195,000 were on deposit with various regulatory agencies at December 31, 1995.
The mortgage loans and land contracts are primarily the result of financing sales associated with the development of an office park, an industrial park and a condominium development by the Company. At December 31, 1995, 98% of the mortgage loans and land contracts were categorized as commercial, and 2% as residential. Investment real estate consists primarily of vacant land for a future office park and real estate acquired through foreclosure on mortgage loans totaling $3.8 million. The majority of mortgage loans, land contracts and investment real estate is concentrated in Michigan.
Proceeds from sales of investments in fixed maturities totaled $69,716,000 in 1995, $42,417,000 in 1994 and $37,276,000 in 1993. Gross gains of $711,000, $970,000 and $3,267,000 and gross losses of $1,322,000, $1,464,000 and $781,000 were realized on those sales in 1995, 1994 and 1993, respectively.
The majority of the reduction in prior years incurred of $14.8 million in 1994 was the result of lower than anticipated losses and loss adjustment expenses in the run-off of the Company's discontinued commercial lines business.
Notes payable consist primarily of an unsecured credit agreement with a group of banks and a loan secured by a mortgage on the Company's corporate headquarters building. A new unsecured credit agreement was entered into in April 1995, replacing an existing agreement. The new credit agreement provides for a revolving credit facility not to exceed $40 million and a term loan of $56 million, which reduced to $50 million on August 31, 1995. The credit agreement expires in April 2002. At December 31, 1995, the term loan had a balance of $50 million, the revolving credit facility had a balance of $8 million and the building mortgage had a balance of $36.4 million. In addition to the remaining $32 million available under the revolving credit facility, the Company has several uncommitted money market lines of credit with various banks, all of which may not exceed $10 million at any one time. At December 31, 1995, the Company had borrowed $2 million under these credit lines.
The borrowing rate on the mortgage loan is fixed at 9.8%. The interest rate on the money market credit line was 6.29% at December 31, 1995.
Maturities of long-term debt for each of the five years succeeding December 31, 1995 are as follows:
The following methods and assumptions were used to estimate fair value:
Interest Rate Swap Agreements The fair value of interest rate swaps is the estimated amount the Company would pay or receive to terminate the agreement at the reporting date, taking into account current interest rates.
The Company considers its catastrophe reinsurance costs to be an additional loss cost. Ceded reinsurance premiums, losses and commissions for these coverages are combined and presented in the insurance losses, death and other benefits line. All non-catastrophe reinsurance amounts are reflected in their respective line items in the accompanying Consolidated Statements of Income. References to reinsurance ceded in the segment Statements of Income are for non-catastrophe reinsurance only.
In 1990 and 1989, the Company assumed credit life premium under various reinsurance treaties. Under the terms of these treaties, the Company is obligated to reimburse the ceding companies only if the overall incurred loss ratio exceeds a certain percentage. In the fourth quarter of 1990, the ceding companies were declared insolvent and placed into liquidation. The Company believes that its obligations under these treaties are such that it is not responsible to pay claims unless the prescribed loss ratios are exceeded. Regarding any obligation the Company may have to indemnify the ceding companies for claims arising under the treaties should the ceding companies be unable to pay, it is the opinion of management and its outside legal counsel that the Company has the right to net any liabilities associated with these treaties against the premium owed to it, in which case there would be no material adverse impact to the Company. To date, no claims have been made against the Company for payment of claims.
The Company also provides a Profit-Sharing Retirement and Savings Plan for all employees with one or more years of service. Under this plan the Company can make discretionary profit-sharing contributions as a percentage of eligible compensation. In 1995 and 1994, contributions equal to 5% of eligible compensation of all eligible employees were made by the Company. The savings feature of the plan is a 401(k) plan that allows for voluntary contributions by employees and provides a 50% Company-paid match of the employee's contribution, limited to 2% of the employee's eligible income.
The Company provides a Retirement Supplement Plan for certain key employees which provides monthly lifetime payments or lump sum payments upon retirement or disability, and lump sum payments to beneficiaries upon death. The retirement benefit is based on a percentage of the participant's final average earnings, less the participant's Money Purchase Pension Plan and Profit Sharing Plan benefits (excluding 401(k) plan benefits). The retirement benefits expected to be paid total $4,261,000 and are being amortized over the participants' anticipated employment with the Company, which range from 1 to 16 years. Life insurance contracts have been purchased to fund the retirement benefits. Key employees would receive their entire retirement benefit in the event of a change in control of the Company and their subsequent termination. The maximum contingent liability as of December 31, 1995 relating to the change in control provision is approximately $6,762,000.
The Company has a non-qualified stock option plan which authorizes the granting of options on 650,000 shares of the Company's common stock to certain key employees. During 1995, the Company's Board of Directors authorized, and the shareholders' approved, an additional 400,000 shares of the Company's common stock for future grants under the plan, making the total authorized under the plan 1,050,000. The options, granted at market value, vest at either 33.3% or 25% per year over a three or four year period. There were 623,586 options fully vested as of February 1996.
The Company also has a restricted stock plan under which certain key employees were issued 64,814 shares of the Company's common stock in 1988, representing all of the shares available under the plan. The shares are registered in the name of the participant, who has all the rights of a shareholder, subject to restrictions as to transfer until they vest. Compensation expense is recorded over the periods in which they vest. The unamortized market value of the shares awarded is shown separately in shareholders' equity. As of December 31, 1995, 62,979 were vested, 147 shares were issued and non-vested and 1,688 shares remained unissued from forfeitures.
The following is a schedule of future minimum lease payments under cancelable and noncancelable operating leases for each of the five years succeeding December 31, 1995 and thereafter, excluding renewal options:
The following is a schedule of future minimum lease payments under the Company's capitalized finance leases together with the present value of the net minimum lease payments as of December 31, 1995:
In the event any person or group becomes the beneficial owner of 20% or more of the Company's common stock, or if a holder of 20% or more of the Company's common stock engages in self-dealing transactions, or if the Company becomes involved in a merger transaction, or sells 50% or more of its assets or earning power to another person, then each right not owned by the acquiring person or group will entitle its holder to purchase, at the right's then current exercise price, shares of the Company's common stock, or the common stock of the acquiring or surviving entity (or in certain circumstances, cash, property or securities of the Company) having a market value equal to twice the exercise price. While a shareholder group owns in excess of 20% of the Company's outstanding common stock, any increase of more than 2% in their aggregate ownership would also make the rights exercisable.
The Company and its subsidiaries are routinely engaged in litigation as plaintiff and defendant in the normal course of business. In the opinion of management, all litigation matters, as well as the litigation described below are not expected to have a material adverse effect on the Company's consolidated financial position, operating results and cash flows. The aggregate ultimate liability, if any, of the Company and its subsidiaries for the following claims is not determinable at December 31, 1995.
The Company intends to seek an order from the federal court declaring that 90% of the Company's settlement contribution would be allocated to compensate the settlement class for alleged punitive damages, that the amount allocated to punitive damages is sufficient to satisfy the Company's punitive damages obligation as a result of the alleged pattern and practice of wrongdoing in Alabama, and that an award of any further punitive damages in other Alabama Litigation cases would be unjust. The Company intends to use this federal class action order to argue that additional punitive damages awards in Alabama Litigation would be duplicative and unjust, would violate the Company's substantive due process rights, and are barred by the provisions of the federal class action settlement order. While it is anticipated that a number of claimants will opt out of the settlement class, the Company believes that the settlement order being sought from the federal court, if entered, will significantly delimit the Company's punitive damages exposure on the remaining Alabama Litigation claims.
A Director and Major Shareholder has investment advisory agreements with the Company and currently manages approximately 12% of the Company's investment portfolio. During 1995, $424,365 of fees and commissions were earned under these agreements. This Director has also been advised by another Director in regards to the management of certain investments for the Company.
The Company has retained the law firm of which a Director is a partner thereof and plans to continue to do so in the future for certain legal matters. Fees in the amount of $396,840 were paid to this law firm in 1995.
On January 31, 1996, the Company signed a Letter of Intent to sell its life insurance subsidiary, Foremost Life Insurance Company. The sale is subject to certain conditions including the negotiation and execution of a definitive purchase agreement, completion of the buyer's due diligence review and obtaining all regulatory approvals and authorizations.
Our audits of the consolidated financial statements were performed for the purpose of forming an opinion on those financial statements taken as a whole. The supplemental statements on pages 25 and 26 are presented for additional analysis and are not a required part of the consolidated financial statements. Such information has been subjected to the auditing procedures applied in the audits of the consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole.
BDO SEIDMAN, LLP - ---------------- BDO SEIDMAN, LLP February 15, 1996 Grand Rapids, Michigan