The combined loss and expense ratio for the Company's property and casualty insurance operations was 92.4% in 1998 compared to 91.0% in 1997 and 98.7% in 1996. The underwriting profit from these operations was $33 million in 1998, $38.6 million in 1997 and $5.5 million in 1996. The Company believes that its emphasis on rate adequacy, disciplined underwriting, catastrophe exposure management and strategic expense management programs have contributed significantly to the Company's positive underwriting results over the last several years.
The impact of catastrophe losses on property and casualty results increased in 1998 to, net of reinsurance, $40.3 million, compared to $36.9 million in 1997 and the record level of $69.7 million in 1996. The property and casualty insurance industry recorded catastrophe losses for 1998 at an estimated $10.1 billion, making 1998 the third worst year for catastrophe losses in the last 10 years and quadruple the amount recorded in 1997. Despite the industry experience, the Company posted only a small increase in catastrophe losses in 1998, which reflects the success of the Company's catastrophe exposure management efforts. The only major storms of 1997 occurred in the Northwest during the first quarter of the year. The record catastrophe losses of 1996 resulted from significant storms in the Northwest and Northeast portions of the country during the first and fourth quarters. These storms created massive damage in Oregon, Washington, Pennsylvania and New York. Hurricane Fran also struck North Carolina in the third quarter of 1996. Industry catastrophe loss data was reported by the Property Claims Services Unit of the Insurance Services Office, Inc.
In conjunction with the new direct marketing of auto and homeowners insurance, the Company has invested in a new policy processing system that was operational beginning in 1999. The $4.1 million and $8.0 million costs incurred on this system during 1997 and 1998, respectively, were capitalized and will be expensed over the life of the system starting in 1999.
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 satisfied with the experience in the run-off of this business. The reserve was not adjusted in 1998, but was reduced by $650,000 in both 1997 and 1996. 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. The majority of these policies will run-off in 1999. Management believes that the aggregate reserves for this discontinued product are adequate at December 31, 1998, but will continue to review and adjust them as needed.
On May 5, 1998, the Company prepaid the $30.8 million mortgage on its corporate headquarters and incurred a $3.3 million after-tax prepayment penalty to extinguish this debt. This cost was classified as an extraordinary item in the financial statements for the second quarter of 1998 and reduced earnings by $.12 per share. The Company prepaid the mortgage to eliminate the restrictive operating covenants attached to this debt, which hindered the Company's ability to manage its capital base and leverage ratios through stock repurchases. The cost of this prepayment penalty will be recouped over time by the Company's ability to borrow funds at lower interest rates. The interest savings equal approximately $.03 per share annually to the Company's operating results.
In 1989 and 1990, Foremost Life Insurance Company assumed credit life premium under various reinsurance treaties. In the fourth quarter of 1990, the ceding companies were declared insolvent and placed into liquidation. In accordance with the sales document, in June of 1996 the amount reserved to cover these reinsurance treaties was transferred to an escrow account. On July 11, 1997, the Company and the Liquidator settled all outstanding reinsurance and legal issues regarding these treaties. The escrow account was closed with the Company recording an after tax gain of $110,000, which is included in discontinued operations.
In the years 1996 through 1998, the Company and its subsidiaries generated positive cash flow of $95.7 million from operations, and paid back $9.1 million on long-term borrowings. During the same period, the Company paid $30.6 million in dividends, repurchased $61.5 million of its common stock, and purchased $28.5 of real estate and equipment, which includes a new policy processing system. In 1996, the Company received $17.4 million in proceeds for the sale of its life insurance subsidiary. For year to year comparisons of cash flow items, see the "Consolidated Statements of Cash Flows" on page 27 of this Form 10-K.
The Company's insurance subsidiaries are subject to certain restrictions on their ability to transfer funds to the Company in the form of cash dividends, loans or advances without regulatory approval. These restrictions are not expected to impair the ability of the Company to meet its cash obligations.
At December 31, 1998, the Company's capital structure consisted of 27,166,240 common shares outstanding, which reflects the Company's three- for-one stock split in January 1998. In April 1998, the shareholders approved an amendment to the Company's Articles of Incorporation increasing the Company's authorized common stock from 35 million to 70 million shares and authorizing a class of up to 10 million shares of preferred stock. The increased authorization will allow management to consider equity offerings to manage the Company's total capitalization and insurance subsidiary leverage positions. Management believes that it is advisable to have additional authorized shares available for possible future stock splits and dividends, public or private offerings of common stock or securities convertible into common stock, employee benefit plans, equity-based acquisitions and other corporate purposes that might be proposed. The shareholders also adopted an Agreement and Plan of merger which changed the Company's state of incorporation from Delaware to Michigan effective June 30, 1998.
In June 1998, the Company negotiated and entered into a credit agreement under which its lenders committed to provide a five-year, $40 million revolving credit facility and a seven-year term loan of $80 million, of which $30 million of the term loan is amortizing over six years at $1.25 million per quarter. At December 31, 1998, $77.5 million remained outstanding on the term loan, and $10 million was outstanding on the revolving credit facility. In addition to the remaining $30 million available under the revolving credit facility, the Company also has available an uncommitted line of credit facility which may not exceed $20 million at any one time. The uncommitted line of credit expires on June 30, 1999.
During 1995, the Company entered into a interest rate swap agreement to effectively fix the interest rate at 6.545% plus credit spread on the $58 million then outstanding under the credit agreement. The swap will expire on August 31, 2000. In November 1997, the swap agreement was amended with the following changes: the interest rate was dropped to 6.47%
After-tax investment income contributed $.74 per share on a diluted basis in both 1998 and 1997, compared to $.72 per share in 1996. The relatively flat results over this period of time were primarily due to the impact of declining interest rates which offset the positive cash flow generated from the strong underwriting performance. The record catastrophe losses in 1996 also impacted the investment results of that year.
The Company's unrealized capital gains, net of tax, were $10.3 million at December 31, 1998 compared to $20.9 million at December 31, 1997 and $25 million at December 31, 1996. The Company also realized gains after taxes of $4.7 million in 1998 compared to $7.9 million in 1997 and $2.0 million in 1996.
The Company's financial results over the last several years allow management to take a longer term, total return view of investments. As opportunities become available, the Company has and expects to continue the strategy of increasing its asset allocation to total return investments. These investments consist of common and preferred stock as well as lower- rated bonds and other assets that achieve equity-like returns over a market cycle.
At December 31, 1998 the Company held securities in its investment portfolio which were either unrated or less than investment grade, high- yield corporate debt securities, including certain preferred stocks, and limited partnerships. These securities had a cost basis of $39.6 million, with an aggregate market value of $36.6 million and none of them individually exceeded $6.2 million. These securities have different risks than other investment grade securities. Risk of loss upon default by the borrower is greater with these investments than with other corporate or governmental debt securities because these securities are generally unsecured and are often subordinated to other creditors of the issuer. These issuers usually have high levels of indebtedness and are more
The remaining three real estate properties which the Company foreclosed upon in 1991 totaling $3.8 million were sold or disposed of during 1996 without any adjustments to their carrying values. The Company has no further foreclosed real estate, nor are any of its real estate related securities in default at December 31, 1998.
In accordance with FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company has classified a portion of its fixed maturity investments and its equity securities into a category entitled "securities available for sale" which are adjusted to reflect market value. Due to the restrictive definition of assets qualifying to be categorized as held to maturity, most of the Company's fixed investment securities are considered to be available for sale, and are therefore adjusted to reflect market values. Unrealized investment gains and losses on securities available for sale are credited or charged directly to shareholders' equity net of applicable tax provisions or credits. The net unrealized gain on securities available for sale was $10.3 million at December 31, 1998 and $20.9 million at December 31, 1997. Although the Company has the general intent and ability to hold most of its fixed maturities to maturity, sales may be made from this category due to changes in market conditions, relative yields available, tax planning and asset/liability management considerations. Since the Company does not purchase fixed maturity investments with a view to resale, the "available for sale" classification does not denote a trading account.
At December 31, 1998, the Company had $39.1 million of its consolidated assets in cash and other short-term investments.
In accordance with FASB Statement No. 109, "Accounting for Income Taxes," the Company has recognized certain tax assets whose realization depends upon generating future taxable income. The Company believes that it will realize these tax assets through the generation of future taxable income and other tax planning strategies. There are no tax credit or capital loss carryforwards as of December 31, 1998.
The Year 2000 issue is the result of computer programs, microcontrollers and other systems being designed using two digits instead of four to define the applicable year. The problem exists when date- sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. By nature, the insurance industry is highly dependent upon computer systems because of significant transaction volumes and date dependencies for many of its applications. The Company has completed a detailed review of its computer programs to identify the systems that could be affected by the Year 2000 problem. The Company has a detailed written plan, which is regularly updated and monitored by technical personnel. Plan status is regularly reviewed by management of the Company. The Company also has hired an outside consulting firm to assist in the process of identifying, assessing, remediating and testing Year 2000 problems. The procedures used by these consultants for the Year 2000 conversion effort have been certified by Information Technology Association of America "ITAA." The ITAA 2000 Certification Program evaluates the consultant's processes and methods used to develop new software or convert existing software to meet the date related needs of the next century.
In connection with Year 2000 issues, the Company spent approximately $1.8 million before 1997, $3.8 million in 1997 and $4.3 million in 1998. The Company expects that it will spend approximately $2.8 million in 1999. These costs will primarily consist of professional fees paid to third party providers of remediation services. It is the Company's policy to expense all costs associated with these systems changes. The Company may also invest in new or upgraded technology which has definable value lasting beyond 2000. In these instances, where Year 2000 compliance is merely ancillary, the Company may capitalize and depreciate such an asset over its estimated useful life.
The costs of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates. There can be no guarantee that these estimates will be achieved and actual results could differ from those anticipated. Specific factors that might cause differences include, but are not limited to, the ability of other companies on which the Company's systems rely to modify or convert their systems to be Year 2000 ready, the ability to locate and correct all relevant computer codes and microprocessors, the ability of all third parties who have business relationships with the Company to continue their businesses without interruption and similar uncertainties. As a result, the Company is in the process of evaluating possible internal and external scenarios that might have an adverse effect on the Company, as well as the need for contingency plans to address these scenarios. The Company anticipates that all necessary contingency plans will be completed during 1999.
In April 1998, the shareholders approved the Company's Stock Option Plan of 1998, which granted the Company's Chairman and CEO, an option to purchase 750,000 shares of the Company's common stock at a purchase price of $24 per share. Except in the case of a change in control or certain events of termination, the options only vest if the closing price of the Company's common stock on the New York Stock Exchange is equal to or greater than $48 per share on at least 10 trading days on or before February 23, 2003.
NAIC requires property and casualty insurance companies to calculate and report information under an RBC formula in their statutory annual statements. The RBC requirements are intended to assist regulators in identifying inadequately capitalized companies. The RBC calculation is based on the type and mix of risks inherent in the Company's business and includes components for underwriting, asset, interest rate and other risks. The Company's insurance subsidiaries exceeded their RBC statutory surplus standards as of December 31, 1998.
As required, the Company adopted and incorporated into its Consolidated Financial Statements for the year ended December 31, 1998, the following Financial Accounting Standards Board (FASB) Statements; Statement No. 130, "Reporting Comprehensive Income," Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" and Statement No. 132, "Employer's Disclosures about Pensions and Other Postretirement Benefits." None of these pronouncements had a significant impact on the Company's financial results.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in years beginning after June 15, 1999. The statement requires companies to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Since the Company's only material derivative transactions are interest rate swaps on its debt, which effectively fix the interest rate on
equity securities had a market value of $79.9 million. A 10% change in the portfolios equity prices would impact their value by approximately $7.99 million. All equity securities are marketable.
All of the above risks are monitored on an ongoing basis. Management's need to react to significant changes in interest rates and equity prices is minimized by the fact that the annual maturities of investments and cash flow from insurance operations are sufficient to meet the cash flow requirements of the business. Therefore, management has the ability to wait out these changes.
Consolidated Statements of Comprehensive Income for the years ended December 31, 1998, 1997 and 1996 26
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 27
Parent Company and Other Statements of Operations for the years ended December 31, 1998, 1997 and 1996 28
The Company's P&C subsidiaries are included in the accompanying financial statements in accordance with generally accepted accounting principles for insurance companies. These principles are summarized as follows: a. Insurance premium is recognized as income over the term of the policies. b. Commissions, premium taxes and other costs of acquiring new business have been deferred and are being amortized by charges to income as the related premium is earned. c. The liability for insurance losses and loss adjustment expenses is based upon (1) accumulation of case estimates for losses reported prior to the close of the accounting period, (2) estimates of incurred but unreported losses based upon past experience, and (3) estimates of expenses for investigating and adjusting claims. The liability for such losses is stated after estimated recoveries for salvage and subrogation.
financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Company's debt securities investment portfolio is predominantly comprised of investment grade securities.
The Company carries reinsurance coverages primarily to protect itself against catastrophic losses, but also to limit losses on individual claims for benefit payments and certain other risks.
The fair values for all other financial instruments are reported at their carrying amounts which approximates market value.
The Company expenses the costs of advertising as incurred. Advertising expense was $2,343,000 in 1998, $1,836,000 in 1997 and $3,375,000 in 1996.
Interest paid was $6,628,000 in 1998, $8,278,000 in 1997 and $8,177,000 in 1996.
Earnings per share (EPS) amounts are computed based on the weighted average number of common shares outstanding during each year.
The Company performs ongoing risk and credit evaluations of its agents and insureds. The Company's P&C subsidiaries write insurance throughout the United States with concentration in the southern and southwestern states.
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, 1998, 99.9% of the mortgage loans and land contracts were categorized as commercial, and 0.1% as residential. Investment real estate consists of vacant land for a future office park. The majority of mortgage loans, land contracts and investment real estate is concentrated in Michigan.
Proceeds from sales of investments in fixed maturities totaled $70,251,000 in 1998, $40,642,000 in 1997 and $49,488,000 in 1996. Gross gains of $456,000, $617,000 and $893,000 and gross losses of $226,000, $240,000 and $499,000 were realized on those sales in 1998, 1997 and 1996, respectively.
Included in equipment and other in 1998 is $12.2 million and in 1997, $4.1 million of capitalized software.
NOTE 5 - LIABILITY FOR INSURANCE LOSSES AND LOSS ADJUSTMENT EXPENSES
The prior year reserve development in 1997 resulted from catastrophe losses occurring in late 1996 and early 1997. As this development resulted from property claims, it is not expected to increase in future years.
Notes payable consist primarily of an unsecured credit agreement with a group of banks, which was entered into in June 1998 and replaced a prior unsecured credit agreement and the building mortgage loan that was paid off on May 5, 1998. The new agreement provides for a five-year revolving credit facility not to exceed $40 million and a seven-year term loan of $80 million, of which $30 million of the term loan is amortizing over six years
at $1.25 million per quarter. The term loan expires on June 29, 2005 and the revolver loan expires on June 29, 2003. At December 31, 1998, the term loan had a balance of $77.5 million and the revolving credit facility had a balance of $10 million. In addition to the remaining $30 million available under the revolving credit facility, the Company has an uncommitted line of credit facility which may not exceed $20 million at any one time. This unsecured credit agreement expires on June 30, 1999.
The credit agreement subjects the Company to certain restrictions and covenants related to, among others: the payment of dividends; minimum net worth levels; the sale, lease, transfer or other disposal of properties and assets other than in the ordinary course of business; new indebtedness; the assumption or creation of liens; and maintenance of certain ratios.
Borrowing rates on the term loan and revolving credit facility of the credit agreement are based on eurodollar and negotiated rates. During 1995, the Company entered into an interest rate swap agreement with a financial institution. The notional principle amount of the swap is $58 million and it matures on August 31, 2000. This agreement effectively fixed the interest rate on the entire $58 million outstanding under the credit agreement to 6.45% plus credit spread. In November 1997, the agreement was amended with the following changes: the interest rate was dropped to 6.47% plus credit spread; the maturity was extended to August 31, 2002 and the notional amount will be stepping down from $58 million to $50 million on August 31, 2000. The interest rate swap is non-amortizing. In August 1998, the Company entered into an interest rate swap agreement with a financial institution in the notional principle amount equal to the $30 million of the term loan that is amortizing. This agreement effectively fixes the interest rate at 5.705% plus credit spread until May 31, 2004. Net receipts or payments under the swap agreements are recognized as an adjustment to interest expense. The Company's exposure to credit risk is limited to interest movements and is considered to be negligible.
taxable upon its sale. The resulting $3.7 million of tax has been charged against the gain on the sale and included in net income from discontinued operations in 1996.
In addition to the Company's net deferred tax liability, the liability for income taxes includes a current tax liability of $2,345,000 and $3,958,000 at December 31, 1998 and 1997, respectively.
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. The Company contributed 3% in 1998 and 5% in 1997 of eligible compensation of all eligible employees. In 1998 the savings feature of the plan is a 401(k) plan that allows for voluntary contributions by employees and provides a dollar-for-dollar Company-paid match for the employee's contribution, limited to 3% of the employee's eligible income and an additional 50% for each dollar on the next 2%. In 1997 the saving feature of the plan was a 401(k) plan that allowed for
voluntary contributions by employees and provided 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). As of December 31, 1998, the projected retirement benefits to be paid total $3,529,000. 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, 1998 relating to the change in control provision is approximately $5,233,000.
The Company has a non-qualified Deferred Compensation Plan for the benefit of certain key employees. The plan allows for the participants to defer a percentage of their base salary and incentive payments, and provides a declared rate of return on an annual basis. The Company purchases life insurance contracts on plan participants to fund the plan.
The Company has a Long-Term Incentive Plan (LTIP) which provides awards to certain key employees based on the Company's return on shareholders' equity over three year periods. The LTIP was amended in December 1994 and approved by the shareholders to provide that 70% of the awards will be paid in the Company's common stock. The awards are fully vested upon issuance; however, the stock is restricted for resale for three years from the date of the award. There were 32,970 shares issued in January 1999 for the three-year results ending December 31, 1998 and 37,692 shares issued in January 1998 for the three-year results ending December 31, 1997.
The Company has a non-qualified stock option plan which authorizes the granting of options to purchase 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 a total of 1,050,000 shares authorized under the plan. Adjusting the authorized options for the three-for-one stock split distributed on January 20, 1998, provides a total of 3,150,000 shares authorized under the plan. The options, granted at market value, vest at either a three or four year period, with a maximum term of 10 years.
Under the accounting provisions of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
The following is a summary of the Company's stock option transactions during 1998 and 1997:
In April 1998, the shareholders approved the Company's Stock Option Plan of 1998, which granted the Company's Chairman and Chief Executive Officer, an option to purchase 750,000 shares of the Company's common stock at a purchase price of $24 per share. Except in the case of a change in control or certain events of termination, the options only vest if the closing per share price of the Company's common stock on the New York Stock Exchange is equal to or greater than $48 per share on at least 10 trading days on or before February 23, 2003.
In 1995, the Company adopted and the shareholders' approved a restricted stock plan for the Company's non-employee directors. Under the plan, the Company's non-employee directors may elect to receive shares of the Company's common stock in lieu of their annual retainer fees. The shares are issued at market value and are registered in the name of the participant, who has all the rights of a shareholder, subject to restrictions as to transfer until the shares vest. Vesting occurs upon the completion of the director's term. A total of 60,000 shares may be issued under the plan. In 1998 and 1997, 1,236 shares and 1,686 shares were issued, respectively.
The Company maintains a defined benefit post-retirement plan for substantially all employees which provides certain health care, dental and life insurance benefits. Eligibility and benefits are based on age and years of service for the health care and dental benefits, which also require contributions from retirees under certain circumstances. The life insurance benefits are non-contributory and are calculated as a percentage of the employee's base annual compensation in the year of retirement. The benefit is reduced at age 70 to an ultimate benefit of $5,000. Post-
The Company leases buildings and the majority of its furniture and equipment under capital and operating leases. Operating leases generally include renewal options for periods ranging from two to seven years and require the Company to pay utilities, taxes, insurance and maintenance expenses.
The following is a schedule of future minimum lease payments under cancelable and non-cancelable operating leases for each of the five years succeeding December 31, 1998 and thereafter, excluding renewal options:
Rental expense charged to operations in 1998, 1997 and 1996 amounted to $5,619,000, $5,354,000 and $5,109,000, respectively, including amounts paid under short-term cancelable leases.
annual dividends Foremost Insurance can pay to the Company without obtaining prior insurance department approval. These restrictions are not expected to significantly affect the Company's ability to meet its foreseeable cash requirements. The amount of dividends which Foremost Insurance can pay to the Company in 1999 without obtaining prior insurance department approval under the current statute is $38.1 million.
At December 31, 1998, $98.9 million of consolidated shareholders' equity represents net assets of the Company's P&C subsidiaries that cannot be transferred in the form of dividends, loans or advances to the Company.
The Company has assigned its interest as tenant in a capital lease obligation. In the event of default by the assignee, a contingent liability exists of approximately $1.4 million at December 31, 1998.
The Company and its subsidiaries are routinely engaged in litigation in the normal course of business. In the opinion of management, these proceedings, as well as the litigation described in Part I, Item 3 of this Form 10-K. are not expected to have a material adverse effect on the Company's consolidated financial position, cash flows or operating results. Further liability, if any, of the Company and its subsidiaries for litigation is not determinable at December 31, 1998.
On January 19, 1999, the Company and First USA Bank agreed to resolve the action filed in 1998 by the Company against First USA Bank and Banc One in the United States District Court for the Western District of Michigan arising out of a dispute concerning an Insurance Services Agreement made in 1996. The settlement provides that First USA Bank will pay the Company $6.75 million in connection with the termination of the insurance agreement which had provided the Company the exclusive right to offer certain insurance products to First USA Bank's credit card customers. The settlement proceeds will be recorded in the Company's financial results for the first quarter of 1999.
The Company considers itself to operate in one segment, the property & casualty insurance industry generally evaluates it products in total. The Company's P&C subsidiaries primarily furnish insurance to the mobile home and recreational vehicle markets. Insurance is written throughout the United States with concentrations in the southern and southwestern states. The nature of the Company's insurance operations expose it to risk in the case of numerous, severe catastrophic events. To minimize this risk, the
Intercompany rental income and expense of $6.5 million has been included in the operating income and expense of the segments, but is eliminated from the consolidated revenues and expenses.
A director and major shareholder of the Company has investment advisory agreements with the Company and currently manages approximately 19% of the Company's investment portfolio. During 1998 and 1997, $1,077,000 and $1,045,000 of fees and commissions were earned under these agreements.
In fulfilling its responsibility for the integrity of financial information, management has established a system of internal accounting control which provides reasonable assurance that assets are properly safeguarded and accounted for and that transactions are executed in accordance with management's authorization and recorded and reported properly.
The Audit committee of the Board of Directors, consisting solely of outside directors, meets with the independent public accountants and management to review and discuss the major audit findings, the adequacy of the internal control structure and quality of financial reporting. The independent accountants also have free access to the Audit Committee to discuss auditing and financial reporting matters with or without management present.
S/RICHARD L. ANTONINI - -------------------------------------------------- Richard L. Antonini Chairman of the Board, President and Chief Executive Officer
S/F. ROBERT WOUDSTRA - -------------------------------------------------- F. Robert Woudstra Chief Operating Officer, Chief Financial Officer and Director
We have audited the accompanying consolidated balance sheets of Foremost Corporation of America as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, comprehensive income, and cash flows for each of the three years in the period ended December 31, 1998. 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.