-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IKB36EIso8A/X/DLSUf6Q5w1pSUGQ+91dG/mkVHhpoMAWxqZzzd3JTtyMpTIUP5z nXvaJvs1rRtt8awLxGTsqw== 0000018508-97-000003.txt : 19970329 0000018508-97-000003.hdr.sgml : 19970329 ACCESSION NUMBER: 0000018508-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOREMOST CORP OF AMERICA CENTRAL INDEX KEY: 0000018508 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 381863522 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11687 FILM NUMBER: 97566838 BUSINESS ADDRESS: STREET 1: 5600 BEECH TREE LN CITY: GRAND RAPIDS STATE: MI ZIP: 49501 BUSINESS PHONE: 6169423000 MAIL ADDRESS: STREET 1: P O BOX 2450 CITY: GRAND RAPIDS STATE: MI ZIP: 49501 FORMER COMPANY: FORMER CONFORMED NAME: CENTENNIAL CORP DATE OF NAME CHANGE: 19790320 10-K 1 ANNUAL REPORT ON FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended DECEMBER 31, 1996 Commission File No. 0-6478 FOREMOST CORPORATION OF AMERICA (Exact name of registrant as specified in its charter) Delaware 38-1863522 (State of Incorporation) (I.R.S. Employer Identification No.) 5600 BEECH TREE LANE, CALEDONIA, MICHIGAN 49316 (Address of principal executive offices) (Zip Code) Mailing Address: P.O. Box 2450, Grand Rapids, Michigan 49501 Registrant's telephone number including area code: (616) 942-3000 Securities Registered Pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered: Common Stock, $1.00 par value New York Stock Exchange Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to filing. Aggregate market value as of March 17, 1997: $453,452,694. Indicate the number of shares outstanding of each of the registrant's classes of common stock. Common stock, $1.00 par value outstanding as of March 17, 1997: 9,332,043 shares DOCUMENTS INCORPORATED BY REFERENCE Part III Proxy Statement for Annual Meeting of Stockholders to be held May 8, 1997 FOREMOST CORPORATION OF AMERICA TABLE OF CONTENTS PAGE NO. Part I Item 1. Business 1 Item 2. Properties 8 Item 3. Legal Proceedings 9 Item 4. Submission of Matters to a Vote of Security Holders 10 Supplemental Item Executive Officers of the Registrant 11 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 13 Item 6. Selected Financial Data 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 8. Financial Statements and Supplementary Data 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Condition 50 Part III Item 10. Directors and Executive Officers of the Registrant 51 Item 11. Executive Compensation 51 Item 12. Security Ownership of Certain Beneficial Owners and Management 51 Item 13. Certain Relationships and Related Transactions 51 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 52 Signature Page Signatures of Registrant's Directors 55 PART I ITEM 1. BUSINESS Foremost Corporation of America (the "Company") is a holding company which, through its subsidiaries, provides property and casualty insurance primarily for mobile homes and recreational vehicles. The Company believes that in 1996 it was the leading writer of mobile home property and casualty insurance in the United States. The Company also writes private passenger automobile and homeowners insurance. The Company sells its property and casualty insurance to mobile home and recreational vehicle owners through independent agents and general agents, as well as through dealer agents and agents affiliated with lending institutions. The Company also writes its property and casualty insurance on a direct response basis. The Company's principal subsidiary, Foremost Insurance Company, Grand Rapids, Michigan ("Foremost Insurance"), was founded in 1952. The Company was incorporated in Delaware in 1967 and acquired all the outstanding capital stock of Foremost Insurance in that year. The Company's principal executive offices are located at 5600 Beech Tree Lane, Caledonia, Michigan 49316. The mailing address is P.O. Box 2450, Grand Rapids, Michigan 49501, and the telephone number is (616) 942-3000. As used herein the "Company" means Foremost Corporation of America and its subsidiaries unless the context indicates otherwise. During 1996, the Company's business was divided into two principal business segments: property and casualty insurance and life insurance. PROPERTY AND CASUALTY INSURANCE The Company's largest business segment is property and casualty insurance concentrated primarily in the mobile home and recreational vehicle markets. The Company's property and casualty insurance is written by Foremost Insurance, Foremost Signature Insurance Company, American Federation Insurance Company and Foremost Property and Casualty Insurance Company (all four insurers may be referred to herein collectively as "P&C subsidiaries"). Through its P&C subsidiaries, the Company writes mobile home and recreational vehicle property and casualty insurance which may include, among other things, coverages for (i) comprehensive physical damage, including wind, flood and earthquake, (ii) fire and other stated physical damage to personal effects, (iii) theft of personal effects, (iv) comprehensive personal liability (similar to that provided under typical homeowners' policies), (v) physical damage to adjacent structures, (vi) vendor's single interest, which insures the lienholder in finance transactions against conversion, embezzlement or secretion of the mobile home by the retail purchaser and against an otherwise uninsured collision involving the mobile home, and (vii) collision coverage either on full term or "trip" (30-day) basis. The Company also writes dwelling fire, homeowners and automobile insurance. Foremost Insurance historically wrote commercial property and casualty insurance for mobile home dealers and parks. However, the Company curtailed its writings of these commercial coverages since 1990. The Company plans to further limit commercial insurance products during 1997, except it will continue to write only open lot coverages for mobile home dealers. During 1996, the Company discontinued writing collateral protection insurance, which assists a lender by tracking insurance coverage on mobile home loans and ensuring continuity of such coverage. Foremost Property and Casualty Insurance Company primarily writes mobile home property and casualty insurance on a direct response basis pursuant to the Company's exclusive endorsement by the American Association of Retired Persons ("AARP"). In addition, the Company writes automobile and homeowners' property and casualty insurance in limited markets. The Company's American Federation Insurance Company subsidiary writes automobile, recreational vehicle and 1 mobile home property and casualty insurance generally for members of mobile home and recreational vehicle owners associations based upon endorsements by such associations. The term of the Company's property and casualty policies ranges from one to seven years. However, most of the Company's policies are annual policies. The Company's property and casualty insurance operations cover all states and the District of Columbia, although not all forms of recreational vehicle coverages are sold in all jurisdictions. The following table presents the amounts and percentages of premium written by the Company's property and casualty insurance operations in the ten leading states during 1996:
STATE DOLLARS % OF TOTAL PREMIUM - ----------------------- ----------------------- ----------------------- Texas 72,623,424 17.4 Florida 43,575,216 10.4 California 41,297,686 9.9 Michigan 17,561,869 4.2 Washington 15,601,636 3.7 Georgia 14,719,133 3.5 South Carolina 14,613,431 3.5 Pennsylvania 12,874,800 3.1 North Carolina 12,869,953 3.1 Alabama 11,451,503 2.7 ----------------------- ----------------------- TOTAL 257,188,651 61.5
A substantial portion of premium written in Texas is written by Foremost County Mutual Insurance Company, a Texas county mutual insurance company, and reinsured by the Company (included in "premium written and assumed"). The Company's insurance subsidiaries are subject to statutory restrictions and to supervision by state insurance regulatory agencies in all jurisdictions in which such subsidiaries transact insurance business. For information concerning such restrictions and supervision, including rate regulations, see "Business--Government Regulation". LIFE INSURANCE The Company had historically written group life and health insurance for employee groups in select markets. The Company wrote this business through its life insurance subsidiary, Foremost Life Insurance Company. As part of the Company's strategy to divest operations outside property and casualty insurance lines, on June 11, 1996, the Company sold its wholly owned subsidiary Foremost Life Insurance Company ("Foremost Life") to Woodmen Accident and Life Company of Lincoln, Nebraska ("Woodmen"). Under the terms of the transaction, Woodmen acquired all of the issued and outstanding capital stock of Foremost Life. A Form 8-K Current Report was filed with the Securities and Exchange Commission on June 11, 1996 reporting this transaction. OTHER OPERATIONS Secondary Market Financial Services- In August of 1982, Foremost Financial Services Corporation ("FFSC") developed a Manufactured Housing Pass-Through program. FFSC issued certificates which are privately placed with institutional investors, evidencing undivided interests in pools of manufactured housing retail installment obligations ("Contracts"). FFSC is contractually 2 obligated to the certificate holders for servicing of the Contracts. The certificates do not represent an interest in or obligation of FFSC, however, FFSC is obligated, in the event of delinquencies or deficiencies in payments on the Contracts, to advance cash obligations to the extent such advances are reimbursable under the primary insurance policies or the pool insurance policy. Each Contract is covered by a primary policy of private credit insurance written by Foremost Insurance, which also wrote the pool credit insurance policies. Under these secondary market programs, FFSC is currently the Master Servicer of approximately 4,900 contracts with principal balances aggregating approximately $32 million. Insurance Agencies- The Company has several Company-owned insurance agencies: Foremost Affiliated Insurance Services, Inc., Foremost Home Brokers, Inc., Foremost Express Agency, Inc., Western Star Underwriters, Inc., Pacific Way Insurance Agency, Inc., Frontier Insurance Agency, Inc., Corvette General Agency, Inc., Sunrise Insurance Agency, Inc., Sunrise Insurance Agency of Arizona, Inc., Sunrise Insurance Agency of Texas, Inc., and Knight Agency, Inc. These agencies generate commission income by selling the Company's specialty insurance products to selected markets. MARKETING The Company's primary marketing strategy has been to provide insurance products through four distribution channels: general and independent insurance agents (agency); mobile home and recreational vehicle dealer agents (point-of-sale); agents affiliated with lenders to the mobile home and recreational vehicle markets (lender); and direct contact with insureds (direct response). Agency Channel- The Company writes insurance through numerous independent and a select group of general agents. These agents, many of whom also represent one or more competing insurance companies, are independent contractors selected and appointed by the Company. Under the Company's agency agreement, each agent is authorized to sell and bind insurance policies in accordance with procedures specified in the agency agreement and to collect and remit premiums. The Company's marketing force focuses on developing and maintaining relationships in this channel. The Company also owns a number of captive agencies which operate like an independent agency, except that they generally only sell the Company's insurance products. Point-of-Sale Channel- The Company sells its insurance through mobile home and recreational vehicle dealer agents. The primary product sold through mobile home dealer agents is mobile home property and casualty insurance. The primary product sold through recreational vehicle dealer agents is recreational vehicle property and casualty insurance. The Company provides open lot commercial insurance products for certain property risk exposure of mobile home dealers. The Company's marketing force develops and maintains relationships with mobile home and recreational vehicle dealer agents. Lender Channel- The Company markets its products and services through a number of agencies affiliated with financial institutions which participate in the mobile home and recreational vehicle markets. These financial institutions include commercial banks, thrift institutions, general agents producing through sub-agent lenders, finance companies and mortgage bankers. 3 Direct Response Channel- The Company utilizes a direct response mail and telemarketing operation to sell its property and casualty policies to insureds in cases where the Company owns the renewal rights to policy expirations. The Company also utilizes its direct response operation for the offering of mobile home, recreational vehicle, auto and homeowners insurance to other insureds. In December of 1989, the Company entered into a multi-year agreement with the AARP (the "AARP Agreement") pursuant to which the AARP has granted the Company the exclusive right to offer its mobile home insurance to AARP members. The AARP Agreement runs for a term of ten years and provides for early termination under certain circumstances, including the unilateral right of the AARP to terminate the AARP Agreement in the event of a change in control of the Company (as defined in the AARP Agreement). The Company markets its AARP mobile home policies exclusively on a direct response basis and the Company owns the renewal rights to the AARP policies. On June 7, 1996, the Company entered into a multi-year agreement with First USA Federal Savings Bank ("FUSA") pursuant to which FUSA has granted the Company the exclusive right to offer automobile and homeowners insurance to FUSA customers, including its credit card customers. FUSA is the nations fourth largest issuer of credit cards. The agreement with FUSA runs for a term of seven years. The Company markets the policies to FUSA customers on a direct response basis and, at year end 1996, the insurance was available to FUSA customers in Michigan and Nevada. The Company intends to add other states and expects that such insurance eventually will be available in most states. TRADEMARKS The Company owns several trademarks, including "Foremost", and the "interlocking F" which it believes are important in marketing its products and services. Although the registration of "Foremost" will expire on July 29, 2006, and the "interlocking F" on October 13, 2007, further renewals for periods of 20 years are available under Federal trademark laws. UNDERWRITING The objective of the Company's underwriting and ratemaking strategy is to achieve underwriting profits as well as to generate investable assets. Each of the Company's P&C subsidiaries designs its own coverages and sets its own rates for its policies; however, the Company's P&C subsidiaries incorporate some of the standard coverages and rates developed by ratemaking bureaus. Each prospective policy is underwritten and rated based upon a combination of factors which include, in the case of mobile homes, type of mobile home, location and other risk characteristics. Through this practice the Company seeks to write policies only for those risks which meet its underwriting criteria. The Company believes that a key factor in its underwriting process is the use of its extensive historical mobile home data base, which includes a computerized data base of over 15 million earned policy years of experience with mobile home insurance policies. This data base enables the Company to better identify and quantify the loss experience associated with numerous risk characteristics and is employed in the design of the coverage and rating used to classify insurance risks. The significant increase in catastrophe events since 1989 requires that the Company manage its risk concentrations, especially in areas prone to hurricane, flood and earthquake. Over the last several years the Company has implemented various restrictions on new business writings in some areas and has also implemented non-renewals of policies in certain coastal areas running from Maine to Texas on the Atlantic Ocean and the Gulf of Mexico (including Florida) and California on the West Coast, to limit the Company's exposure to these catastrophes. 4 CLAIMS Approximately 97% of the Company's claims are handled by its own staff of claim adjusters and the remainder by independent adjusters. Independent claim adjusters are primarily used by the Company to assist in handling claims in areas where insurance volume does not warrant the maintenance of a staff adjuster and for certain non-mobile home related claims. If a claim or loss cannot be settled and results in litigation, the Company retains outside counsel to represent the Company. In view of the Company's commitment to mobile home and recreational vehicle property and casualty insurance, the Company conducts training programs for its adjusters on mobile home and recreational vehicle construction and the settlement of mobile home and recreational vehicle claims. The Company believes that the extensive use of its own trained claims adjustment staff as opposed to independent adjusters permits it to more expeditiously settle claims and limit underwriting losses and loss adjustment expenses. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES The Company maintains reserves for the payment of losses and loss adjustment expenses for both reported and unreported claims. Loss reserves are estimated at a given point in time at what the insurer expects to pay in incurred losses based on facts and circumstances then known. Loss adjustment expense reserves are intended to cover the ultimate cost of settling all losses and defending lawsuits resulting from such losses. The amount of loss reserves and loss adjustment expense reserves for reported claims is primarily based upon a case-by-case evaluation of the type of claim involved, the circumstances surrounding each claim and the policy provisions relating to the type of loss. The amount of loss reserves and loss adjustment expense reserves for incurred but not reported claims is determined on the basis of historical information by line of insurance. Ultimate liability may be greater or lower than reserves. Reserves are closely monitored and are reviewed by the Company quarterly using new information on reported claims. The Company obtains a certification of the adequacy of its reserves as of each December 31st by independent actuaries. The Company does not discount to a present value that portion of its loss reserves expected to be paid in future periods. Inflation is reflected in the reserving process through analysis of cost trends and reviews of historical reserving results. LIMITS OF INSURANCE COVERAGE AND REINSURANCE The Company offers property coverage based on the actual cash value, or replacement cost, of the risk, depending on the coverage form written. The Company's published limits of liability for mobile home physical damage varies by state, with the highest limit being $150,000 for the state of California, with the countrywide average mobile home insured at approximately $20,000. Personal effects coverage is written at a percentage of the dwelling amount, usually 20-75%, depending on the coverage form written. The Company's published limits on liability coverage range from $25,000 to $500,000 per liability occurrence for mobile homes, and vary with other products depending on the needs and qualification of the policyholders. The Company reinsures 100% of any single liability which exceeds $500,000. A reinsurance transaction occurs when an insurance company transfers (cedes) a portion of its exposure on business written by it to a reinsurer which assumes that risk for a premium. Although the ceding of the insurance risk does not discharge the original insurer from its primary liability to its policyholder, it is the practice of insurers for accounting purposes to treat the reinsured risks, to the extent of the insurance ceded, as though they were risks for which the original insurer is not liable since the original insurer would only assume liability in those situations where the reinsurer is unable to meet the obligations assumed under the reinsurance agreements. 5 The Company's property and casualty subsidiaries maintain reinsurance protection for catastrophes which indemnify the Company for aggregate catastrophe loss in excess of the Company's retention up to the reinsurance treaty limits. The aggregate reinsurance treaty is also subject to certain deductibles. The Company's property and casualty subsidiaries also maintain single occurrence catastrophe reinsurance for certain counties in the state of Florida and the entire state of New Jersey, which indemnifies the Company for the major part of each single incurred loss in excess of the Company's retention up to the reinsurance treaty limits. The Company reviews its catastrophe retention and reinsurance coverage limits annually. The Company monitors the financial condition of the reinsurers and attempts to place its coverage only with substantial, financially sound carriers. Due to fluctuations in capacity in the reinsurance market, there can be no assurance that the Company's reinsurance agreements will be continued on current terms. GOVERNMENT REGULATION The Company's insurance subsidiaries are subject to regulation and supervision by state insurance regulatory agencies in all jurisdictions in which such subsidiaries are licensed to transact insurance business. Such regulation and supervision relates to, among other things, capital and surplus requirements, solvency standards, payments of dividends to stockholders, licensing to permit the transaction of business, licensing of agents, policy form and rate regulation, deposits of securities, methods of computing reserves and investment standards and diversification. Such subsidiaries are also required to file detailed annual and other reports with the regulatory agencies in each of the states in which they do business and their business and accounts are subject to examination at any time by such agencies. Under insurance statutes and procedures established by the National Association of Insurance Commissioners, the Company's insurance subsidiaries are examined periodically by one or more of the supervisory agencies on behalf of states in which these subsidiaries do business for both financial condition and market conduct practices. The last financial examination of the Company's property and casualty, and life insurance subsidiaries was completed in 1996 which examination covered the period from January 1, 1993 through December 31, 1995, except Foremost County Mutual Insurance Company which was examined in 1996 for the period from July 1, 1994 through December 31, 1995; American Federation Insurance Company which was examined in 1996 for the three-year period ending December 31, 1994 and Foremost Property and Casualty Insurance Company which was examined in 1996 for the period January 1, 1989 through December 31, 1995. The insurance laws of most states generally provide that all property and casualty insurance companies which do business in their state must belong to a statutory property and casualty guaranty association. The purpose of these guaranty associations is to protect policyholders by requiring solvent property and casualty insurance companies to pay certain insurance claims of insolvent insurers. The rules of such guaranty associations assess insurers in order to pay these claims proportionately to such insurer's share of voluntary premiums written in the given state. While most guaranty associations do provide a procedure for recoupment of assessments through rate increases, rate surcharges or premium tax credits, there is no assurance that insurers recover these assessments and the time value of money becomes a cost to the insurer assessed. The Company's share of these assessments are not expected to have a material impact on the business of the Company's property and casualty insurance subsidiaries. Many states have formed statutory residual market associations or plans to write certain higher risk property and casualty insurance, which risks are not eligible for the private market. These associations cover such risks as wind and water in coastal areas, assigned risk for auto, worker's compensation, FAIR plans for homeowners and various other joint underwriting associations due to capacity shortfalls in the private market. By statute, each private insurer writing voluntary business of the type written under 6 these plans in the state must be a member of these associations and, depending on the plan, may be required to accept certain of these risks and is also required to participate in the profit or loss of the association or plan. Exposures under these plans are higher than voluntary writings because the plans accept higher risk business and rates charged for this business are often lower than actuarially required due to political influence of the governmental agency operating these plans. In recent years, the Florida Residential Property and Casualty Joint Underwriting Association and the Florida Windstorm Underwriting Association have grown in the amount of exposures assumed due to the growth of wind and water exposure in Florida with continued real estate development. The shortage of private capacity after Hurricane Andrew in 1992, compounded by the inability of private insurers and such Florida associations to secure regulatory approval of adequate rates for business written in the coastal areas, has caused further growth of exposures in these Florida associations. Florida has also imposed a non-renewal moratorium which limits the amount of business an insurer may non-renew in that state. As the Company has implemented steps to reduce its exposure to catastrophes in catastrophe prone areas, it has encountered some resistance to non-renewal actions from insurance regulators of the states of Florida and New Jersey. However, the Company currently believes that it will be able to continue its efforts to manage catastrophe exposures, but with some delays and compromises imposed by state insurance regulators. Various states have enacted laws which require registration and periodic reporting by insurance companies which are members of holding company systems. The Company's insurance subsidiaries are subject to such legislation and are registered under such statutes where required. Typically this legislation requires (i) disclosure of all material members of the holding company system; (ii) approval by the appropriate insurance commissioner of certain acquisitions and mergers; (iii) disclosure and regulation of certain intra-system transactions which are subject to certain standards; and (iv) advance notice of proposed extraordinary dividends or other large distributions which are subject to disapproval by the appropriate insurance commissioner. Under the terms of applicable state insurance statutes, any person or entity desiring to purchase more than a specified percentage (commonly 10%) of the Company's outstanding voting securities would be required to obtain regulatory approval of the purchase. The federal government also has the power to regulate the business of insurance in the event the various states fail to regulate such business. Except in a few limited areas, the federal government has not exercised its power. The United States Congress has considered the issue of federal regulation of certain aspects of the insurance industry and it is possible that it may adopt federal legislation in the future. COMPETITION All lines of business in which the Company engages are competitive. Large national companies account for much of the competition, although the types of insurance coverages sold by the Company are usually a relatively small portion of those companies' businesses. Other companies specialize in these types of insurance coverages and compete directly with the Company, primarily in limited geographical areas. The Company's competition also includes other stock and mutual companies, many of which are larger and have greater resources than the Company, but which do not specialize in the Company's principal lines of business. The Company competes primarily on the basis of value although some of the Company's competitors use price competition with respect to both premium rates and commission rates offered to producers. RAW MATERIALS No raw materials are essential to the business of the Company. 7 SEASONALITY Seasonality does not have a material effect upon the Company's business. WORKING CAPITAL The Company maintains liquid assets in excess of an amount needed to pay its current operating expenses and claims. DEPENDENCY UPON SINGLE CUSTOMER No single customer of the Company accounted for 10% or more of the Company's consolidated revenues in 1996, 1995 and 1994 and no material part of the business is dependent upon a single customer or a few customers, the loss of any one or more of whom would have a materially adverse effect on the business of the Company. BACKLOG Backlog is not applicable to the business of the Company. GOVERNMENT CONTRACTS The Company does not have any material contracts with the Government. RESEARCH ACTIVITIES Research and development costs did not represent a material portion of the Company's operating expenses during 1996, 1995 and 1994. ENVIRONMENTAL REGULATIONS Compliance with federal, state or local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, will not have a material adverse affect on the Company's expenditures or earnings. EMPLOYEES The Company and its subsidiaries employed approximately 1,077 persons as of December 31, 1996. The Company presently considers its employee relations to be good. FINANCIAL INFORMATION BY BUSINESS SEGMENT Financial information by business segment for the five years ended December 31, 1996 appears in Note 13 to the Consolidated Financial Statements included in Item 8. below. ITEM 2. PROPERTIES During 1988, the Company purchased a 587 acre parcel of land in Caledonia Township (southeast of Grand Rapids, Michigan) and constructed a 260,000 square foot corporate headquarters building on part of this property. Approximately 36 acres of this parcel currently is used for the corporate headquarters and the balance of the parcel is held as investment property. The Company also leases several facilities in Cascade Township near Grand Rapids, Michigan for an additional 75,000 square feet of office, distribution, printing and warehouse space. The Company has other short-term leasehold interests in real property used for its claim service offices and captive agencies throughout the country. 8 ITEM 3. LEGAL PROCEEDINGS 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 of these proceedings, as well as the proceedings described below, are not expected to have a material adverse effect on the Company's consolidated financial position, cash flows or operating results. The aggregate ultimate liability, if any, of the Company and its subsidiaries for the following claims is not determinable at December 31, 1996, except as discussed below. The Company has been named as a defendant in a number of similar individual lawsuits and several related class actions filed in Alabama state and federal courts (the "Alabama Litigation"). The cases in the Alabama Litigation allege both compensatory and punitive damages. In general, the complaints allege that the Company or its Alabama agents failed to disclose information about insurance coverages and premium structure, misinformed policyholders about coverages or policy provisions, and in other ways misrepresented the nature and extent of insurance sold in Alabama. The Company denies all allegations and is vigorously defending each suit. The compensatory damages, if any, are likely to be nominal for each individual claimant. The primary risk exposure facing the Company involves the plaintiffs' claims for punitive damages. In June 1995, a Bullock County, Alabama jury in connection with the Alabama Litigation, awarded two policyholders $12,500 in compensatory damages and $15 million in punitive damages against the Company. In March 1997, the Supreme Court of Alabama reduced the punitive damage element of this award to $348,000, and the compensatory damages were reduced to approximately $3,300. The Company has made provision for the satisfaction of this reduced jury award in its 1996 financial statements. In February 1996, a Lowndes County, Alabama jury in connection with the Alabama Litigation, awarded two policyholders $26,000 in compensatory damages and $3.25 million in punitive damages. The punitive damage element of the Lowndes County jury award was reduced by the trial court judge to $1.5 million. In July 1996, a second Bullock County, Alabama jury awarded a policyholder $100,000 in compensatory damages and $6.623 million in punitive damages. The second Bullock County case had been remanded by the Alabama Supreme Court to the new Bullock County Circuit Judge to conduct a post-trial hearing on the excessiveness of the damage award. The Company believes that each of the Alabama Litigation awards, including the amount of the trial court's remittitur, are erroneous and is vigorously pursuing appeals of the judgments to the Alabama Supreme Court. Although the outcome of the appeals is uncertain, for each appeal the Company seeks to have a judgment entered in its favor notwithstanding the jury verdict, a new trial, or, at a minimum, a reduction of all or part of the punitive damages. The Company believes, due to its understanding of Alabama law and the facts and circumstances of each case, and recent decisions by the United States Supreme Court overturning Alabama punitive damages awards on federal constitutional grounds, that all appeals will result, at a minimum, in a reduction in the punitive damages awards entered by the trial courts. In February 1997, the Company agreed to a settlement of more than 30 of the individual cases in the Alabama Litigation, including the Bullock County jury award of July 1996 and the Lowndes County jury award of February 1996, for $2 million. The settlement is subject to the entry of orders from the Alabama Circuit Courts providing that, with respect to all claims or theories alleged in the cases settled, the portion of the settlement amount allocated to punitive damages is sufficient to both fully punish the Company and to deter others from engaging in similar activities. The Company believes that such orders will be granted and has made provision for this settlement in its 1996 financial statements. 9 Last year, the Company sought a settlement of consolidated Alabama state class actions against the Company and other defendants that had been removed to the United States District Court for the Northern District of Alabama. The Company had proposed to contribute approximately $3.65 million into a settlement fund. The Company did not conclude that settlement and withdrew its proposal when the federal court was unwilling to approve the conditions of the settlement requested by the Company. In February 1997, the Company reached a settlement in principle in an Alabama class action related to the Alabama Litigation filed in Bullock County, Alabama. The settlement agreement is subject to court approval. The Company believes this settlement will be approved by the court and estimates the cost will be $1.8 million. The Company is pursuing this settlement to resolve further claims against the Company except for claims by persons who affirmatively "opt out" of the settlement class. The Company is not seeking specific allocation of the settlement between punitive and compensatory damages in this case. The Company has made provision for this proposed settlement in its 1996 financial statements. In November 1995, an Iowa jury returned a verdict of $688,000 in compensatory damages and $8 million in punitive damages against the Company for alleged fraud, breach of contract and misappropriation of trade secrets in the termination of an agent's contracts. The Company believes the verdict was erroneous and is currently pursuing post-judgment motions in the trial court for judgment notwithstanding the jury verdict, a new trial, and remittitur. The Company believes that both the compensatory and punitive awards are excessive and that if appeal becomes necessary, the appeal will result, at a minimum, in reduction of such awards. The Company has not accounted for the damages in its financial statements because the amount of the loss cannot be reasonably estimated. In April 1996, national class actions were filed by the same group of plaintiffs' attorneys in Wisconsin, Illinois and Florida state courts against the Company and certain other defendants alleging misrepresentations in connection with the sale of force-placed collateral protection insurance. The complaints seek unspecified compensatory and punitive damages. The Wisconsin case was conditionally class certified by the Wisconsin state court, before service of the complaint. The Company joined with the other defendants in removing this case to the United States District Court for the Eastern District of Wisconsin, where motions are pending to dismiss all claims and decertify the conditional class. The Company believes that the EX PARTE conditional certification of the class by the Wisconsin state court was erroneous and that the plaintiffs' claims lack merit. The Illinois case has been dismissed by the trial court judge, and plaintiffs are now pursuing motions for reconsideration. The Florida action has been stayed. The Company is vigorously defending all of these cases and believes that none has merit. The Company has not established a specific reserve for these related actions, because the amount of the Company's liability exposure, if any, cannot be reasonably estimated. In August 1996, a plaintiff brought a state class action in Texas state court against the Company alleging misrepresentations in connection with the sale of the Company's recreational vehicle and mobile home insurance products in Texas. The complaint seeks unspecified compensatory and punitive damages. The Company is vigorously defending the case both as to the plaintiff's demand for class certification and on the merits of the claims. The Company has not established a specific reserve for this action, because the amount of the Company's liability exposure, if any, cannot be reasonably estimated. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. 10 SUPPLEMENTAL ITEM. - EXECUTIVE OFFICERS OF THE REGISTRANT The following table shows the names and ages of all executive officers of the Company, the positions and offices held by such person and the period during which each person served as an officer. The term of office of each person is generally not fixed since each person serves at the discretion of the Board of Directors of the Company. The information concerning executive officers who are not directors has been omitted from the registrant's Proxy Statement for the May 8, 1997 Annual Meeting of Stockholders pursuant to Instruction 3 of Regulation S-K Item 401(b). Richard L. Antonini Age: 54 Officer Since: 1972 Mr. Antonini became Chairman of the Board on December 17, 1991, President on May 8, 1986 and Chief Executive Officer on July 24, 1986. Before that he was Executive Vice President and Chief Financial Officer since June 29, 1983. From January 1, 1980 to June 28, 1983, he served as Executive Vice President and Treasurer. Prior to that, he served as Senior Vice President and Treasurer. Mr. Antonini has been a Director of the Company since 1973. Kenneth C. Haines Age: 37 Officer Since: 1994 Mr. Haines was elected to the office of Controller of the Company on September 1, 1994 from the position of Assistant Controller. Mr. Haines has been employed by Foremost Insurance Company, a subsidiary of the Company, since September 1986. John J. Hannigan Age: 49 Officer Since: 1987 Mr. Hannigan was elected to the office of Executive Vice President of the Company on March 1, 1987. Mr. Hannigan joined Foremost Insurance Company, a subsidiary of the Company, as Vice President in 1983 and was elected to the position of Executive Vice President of that Company in 1986. David A. Heatherly Age: 46 Officer Since: 1987 Mr. Heatherly was elected to the office of Executive Vice President of the Company on March 1, 1987. Mr. Heatherly joined Foremost Insurance Company, a subsidiary of the Company, as Vice President in 1984 and was elected to the position of Executive Vice President of that Company in 1986. 11 Larry J. Orange Age: 55 Officer Since: 1987 Mr. Orange was elected to the office of Executive Vice President of the Company on March 1, 1987. Mr. Orange has been employed by Foremost Insurance Company, a subsidiary of the Company, since 1969 and as a Vice President since 1980. Mr. Orange is also President of Foremost Financial Service Corporation. Mr. Orange was elected Director of the Company in 1993. F. Robert Woudstra Age: 51 Officer Since: 1983 Mr. Woudstra was elected to the office of Executive Vice President of the Company on March 1, 1987 and has been Treasurer since June 29, 1983. Mr. Woudstra has been treasurer of Foremost Insurance Company, a subsidiary of the Company for more than the past five years. Mr. Woudstra was elected Director of the Company in 1988. Paul D. Yared Age: 47 Officer Since: 1982 Mr. Yared was elected to the office of Senior Vice President of the Company on December 10, 1992 and has been the Company's Secretary and General Counsel since January 1, 1986. Mr. Yared has been employed as a Corporate Attorney for the Company and its subsidiaries since 1974. On December 28, 1984 Mr. Yared was elected Secretary of the Company. 12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The Company's common stock has been listed on the New York Stock Exchange since April 17, 1996 under the symbol "FOM". Prior to April 17, 1996, the Company's common stock was traded on the Nasdaq Stock Market under the symbol "FCOA". The following table sets forth the high and low sale prices for the Company's Common Stock for the periods indicated, all as reported by the New York Stock Exchange or the Nasdaq Stock Market, as applicable.
1996 High Low - ---- ------- ------- First Quarter........................................... $60.500 $50.750 Second Quarter ......................................... 58.125 52.000 Third Quarter .......................................... 57.125 54.125 Fourth Quarter ......................................... 60.000 54.000 1995 High Low - ---- ------- ------- First Quarter .......................................... $38.500 $35.250 Second Quarter ......................................... 42.000 36.750 Third Quarter........................................... 44.250 38.000 Fourth Quarter ......................................... 52.750 50.750
The number of stockholders of record of the common stock was approximately 1,192 on March 1, 1997. DIVIDENDS The Company has paid regular cash dividends on its common stock each year since 1978. During 1988, the Company paid its stockholders an extraordinary dividend of $6.50 per share from the proceeds of the sale of its private mortgage insurance subsidiaries. From 1988 through 1996 the Company paid a regular quarterly dividend of $.27 per share of common stock, an annualized rate of $1.08 per share. On February 1, 1997, the Company declared its First Quarter dividend of $.27 per share. The Company expects to continue to pay dividends but its ability to pay future dividends will necessarily depend upon its earnings and financial condition. The Company's principal source of funds for the payment of dividends on its common stock is dividend income from its insurance subsidiaries, including Foremost Insurance Company. The ability of these insurance subsidiaries to pay dividends to the Company is governed by applicable insurance laws. The information in Note 11 of the Consolidated Financial Statements, included at Item 8. below, explains the current state regulatory requirements that may restrict the ability of the Company's insurance subsidiaries to pay dividends to the Company. 13 ITEM 6. SELECTED FINANCIAL DATA FIVE YEAR SELECTED FINANCIAL DATA
Consolidated Financial Information 1996 1995 1994 1993 1992 - ------------------------------------ ----------- ----------- ----------- ----------- ----------- (All dollar amounts, except share data and ratios, in thousands) Insurance premium written and assumed - continuing operations .. $ 421,100 $ 426,988 $ 416,244 $ 397,750 $ 401,087 Net insurance premium earned - continuing operations ............ $ 427,565 $ 426,282 $ 409,929 $ 399,640 $ 388,542 Total income - continuing operations $ 461,126 $ 457,453 $ 440,126 $ 433,070 $ 436,812 Net income - continuing operations . $ 23,168 $ 43,238 $ 27,436 $ 30,048 $ 23,100 Net income ......................... $ 23,529 $ 45,325 $ 29,697 $ 32,240 $ 24,126 Net income per share - continuing operations ....................... $ 2.35 $ 4.23 $ 2.59 $ 2.80 $ 2.16 Net income per share ............... $ 2.39 $ 4.43 $ 2.80 $ 3.01 $ 2.25 Total assets ....................... $ 721,578 $ 746,052 $ 703,751 $ 725,253 $ 697,576 Invested assets - continuing operations - at cost ............. $ 470,324 $ 472,745 $ 433,373 $ 445,808 $ 424,309 Invested assets - continuing operations - at market ........... $ 494,775 $ 494,346 $ 428,724 $ 466,888 $ 411,573 Short-term debt outstanding ........ $ 2,434 $ 4,199 $ 9,981 $ 7,795 $ 7,627 Long-term debt outstanding ......... $ 92,417 $ 95,048 $ 97,425 $ 105,568 $ 113,509 Shareholders' equity ............... $ 231,422 $ 244,197 $ 206,626 $ 213,122 $ 185,007 Shareholders' equity per share ..... $ 24.20 $ 24.33 $ 19.93 $ 19.88 $ 17.26 Return on beginning shareholders' equity - continuing operations .... 9.5% 20.9% 12.9% 16.2% 14.2% Return on beginning shareholders' equity ............................ 9.6% 21.9% 13.9% 17.4% 14.8% Average shares outstanding ......... 9,864,643 10,221,799 10,603,584 10,719,851 10,716,827 Shares outstanding at year end ..... 9,562,324 10,034,780 10,365,996 10,721,143 10,717,083 Dividends paid per share ........... $ 1.08 $ 1.08 $ 1.08 $ 1.08 $ 1.08 Price range - high ................. $ 60 1/2 $ 52 3/4 $ 37 1/2 $ 37 3/4 $ 33 1/4 Price range - low .................. $ 50 3/4 $ 35 1/4 $ 30 1/4 $ 31 1/4 $ 19 3/4 Price/earnings ratio ............... 21-25 8-12 11-13 10-13 9-15 Number of shareholders ............. 1,202 1,272 1,338 1,381 1,490 Number of employees ................ 1,077 1,015 1,008 1,093 1,117 Property and Casualty Information: Statutory policyholders' surplus ... $ 201,320 $ 200,458 $ 181,269 $ 176,245 $ 162,458 Ratio of net premiums written to statutory policyholders' surplus .. 2.1 2.1 2.1 2.1 2.3 Ratio of loss and loss expense reserves to statutory policyholders' surplus ............ 0.5 0.5 0.5 0.6 0.7 Combined loss and expense ratio-GAAP basis .................. 98.7% 91.1% 96.3% 95.9% 98.0%
14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following section provides a narrative discussion about the Company's results of operation and financial condition. The following discussion should be read in conjunction with the Company's consolidated financial statements and related notes thereto presented in Item 8. of this Form 10-K. RESULTS OF OPERATIONS Written Premium Written premium for the property and casualty segment was $421.1 million in 1996, which represents a decrease of 1.4% over the $427 million written in 1995. The 1995 writings were 3% greater than the $416.2 million written in 1994, while 1994's total was up 5% from the previous year. Within the property and casualty segment, combined written premium for mobile home, motorhome, and travel trailer lines was down 1% in 1996 to $397.0 million following increases of 3% in 1995 and 6% in 1994 when written premium in these lines was $401.4 million and $391.2 million, respectively. The growth in the Company's core lines of mobile home and recreational vehicle insurance has been suppressed in 1996 by its catastrophe exposure management program, which has reduced the Company's coastal exposure to hurricanes from Maine to Texas and its earthquake exposure in California. The Company will continue to pursue profitable opportunities in the mobile home and recreational vehicle product lines. During the second quarter of 1996, the Company signed a long term agreement with a subsidiary of First USA, Inc. to offer primarily private passenger automobile and homeowners insurance on an exclusive basis directly to customers of First USA Federal Savings Bank. The Company believes that this agreement provides the Company favorable growth opportunities in the future. Also, the exclusive endorsement of the Company by the AARP to offer mobile home insurance on an exclusive basis to its members has continued to produce favorable results. Underwriting Results and Loss Reserves The combined loss and expense ratio for the Company's property and casualty insurance operations was 98.7% in 1996 compared to 91.1% in 1995 and 96.3% in 1994. The underwriting profit from these operations was $5.5 million in 1996, $38.2 million in 1995, and $15.4 million in 1994. The Company's continual emphasis on rate adequacy, disciplined underwriting, catastrophe exposure management, and strategic expense reduction programs, have contributed to 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, $69.7 million in 1996, $51.9 million in 1995, and $62.7 million in 1994. The record catastrophe losses in 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. During 1995, hurricanes Opal and Erin along with spring and winter storms in California, Oregon, and Washington, contributed to the third worst catastrophe year in the Company's history. The previous record level of catastrophe losses occurred in 1994 and was primarily due to the January Northridge earthquake in California, intense storms in Georgia and Texas, and the east coast winter storms in the first quarter. 15 Management continually monitors its exposure to catastrophic risk and has taken aggressive action in coastal areas and earthquake prone areas to reduce the Company's risk to hurricane and earthquake losses. In 1995, the Company implemented a coastal strategy which eliminated approximately 24,000 policies in the coastal counties from Maine to Texas. This coastal strategy plan was substantially completed by June 30, 1996. Management has pursued the reduction of the Company's earthquake exposure by non-renewing 21,000 policies in California with units greater than $50,000 in value. Attrition has also contributed to the reduction of earthquake exposure, pushing the total policy decline in California to approximately 50,000 fewer policies. Since July 1, 1995, the Company's California policies only provide earthquake coverage on an optional basis, which will continue to reduce exposure to catastrophic loss due to earthquakes. Expense reduction actions taken to control acquisition costs and general and administrative expenses have helped reduce the Company's expense ratio for the last eight years. Excluding the $4 million accrued in 1996 for contingent settlement agreements in the Alabama Litigation, the expense ratio has declined by 9.5 points from 1988 to 1996. Management is committed to controlling expenses by closely monitoring various expense categories and developing programs to continuously improve the results. As the Company is positioned for growth, the challenge for management will be to continue the disciplined spending practices it has developed. The Company considers that the effects of inflation are unlikely to be a significant factor in the results of operations given the relatively short term nature of premiums receivable and expected loss payments from reserves for losses and loss expenses. The anticipated effect of inflation is implicitly considered when estimating reserves for losses and loss expenses, product pricing and investment decisions. The Company engages an outside actuarial firm to attest to the adequacy of its carried property and casualty reserves. This actuarial firm has rendered their opinion for the year ended December 31, 1996, and they attest to the adequacy of the Company's held reserves. The Company is committed to maintaining adequate loss reserves and places a high priority on balance sheet integrity. The Company discontinued writing private credit insurance in 1985, and established a reserve to cover anticipated losses from the run-off of that product. The Company's experience with the run off of this business has been positive and the Company accordingly reduced the reserve by $650,000 in 1996, $2.7 million in 1995, and $2.4 million in 1994. 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, 1996, but will continue to review and adjust them as needed. Sale of Life Insurance Subsidiary As part of the Company's strategy to divest operations outside of the property and casualty insurance lines, on June 11, 1996, the Company completed the sale of its life insurance subsidiary, Foremost Life Insurance Company, to Woodmen Accident and Life Company of Lincoln, Nebraska. The sale yielded net after-tax proceeds of $17.4 million and the Company incurred an after-tax loss of $698,000 as a result of the sale. The majority of the net proceeds were utilized to repurchase the Company's stock under the previously announced stock buy-back program approved by the Board of Directors. The financial results of the life insurance segment and the sale are reflected in the consolidated financial statements as discontinued operations. 16 CAPITAL STRUCTURE At December 31, 1996, the Company's capital structure consisted of 9,562,324 common shares outstanding. In 1995, the Company negotiated and entered into a credit agreement under which its lenders committed to provide a seven year non-amortizing $50 million term loan and a five year $40 million revolving credit facility. At year end 1996, $50 million remained outstanding on the term loan, and $8 million was outstanding on the revolving credit facility. During 1995, the Company entered into interest rate swap agreements to effectively fix the interest rate at 7.15% on the $58 million outstanding under the new credit agreement. The swaps will expire on August 31, 2000. The interest rate swaps are non-amortizing. The Company's exposure to credit risk is limited to interest movements and is considered to be negligible. LIQUIDITY Cash Flow In the years 1994 through 1996, the Company and its subsidiaries generated positive cash flow of $110.9 million from operations, and paid back $18.5 million on long-term borrowings. The Company paid $33.2 million in dividends during the same period and repurchased $57.8 million of its common stock. The Company closely monitors its cash from operations, short-term investments and marketable securities to maintain adequate balances for the timely payments of claims and other operating expenses. 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 between five and six 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, which was raised to 2 million shares by subsequent Board approval of 500,000 share increments in March and December of 1996. Since the inception of this buy-back plan, the Company has purchased 1,281,980 shares at an average price of $45.09 per share. During 1996, buy-backs amounted to 582,373 shares at an average price of $55.14 per share. The Company will continue to evaluate the purchase of its common stock from excess cash flow generated from operations. The Company's insurance subsidiaries are subject to certain restrictions on their ability to transfer funds to the parent 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. 17 Investments After-tax investment income from continuing operations was $21.7 million in 1996, an increase of 1% over 1995. After-tax investment income in 1995 was $21.5 million, an increase of 7% over 1994 which was $20 million and represented a 1% decrease from 1993. The relatively flat results for 1996 were primarily due to the impact of catastrophe loss payments and common stock buy-backs on the Company's cash flow and investable asset base. The increase in 1995 is the product of positive cash flow generated from the strong underwriting performance during the year. The decline in 1994 was the result of the impact of lower interest rates on new investments made due to calls and maturities of higher yielding securities. Total invested assets on a cost basis decreased by 6% in 1996 after expanding by over 7% in 1995 and slightly declining in 1994. The major reason for the decline in 1996 was the sale of Foremost Life Insurance Company and subsequent use of the proceeds to repurchase the Company's common stock. The strong financial results over the last five years has given management the reassurance that the Company's surplus is adequately protected and provides them the confidence to take a longer term, total return view of investments. During 1996 and as opportunities become available in 1997, the Company has and intends 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. The Company intends to 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. At December 31, 1996 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 $32.2 million, with an aggregate market value of $34.6 million and none of them individually exceeded $5.3 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. The issuers of these securities usually have high levels of indebtedness and are more sensitive to adverse economic conditions, than are investment grade issuers. The remaining three real estate properties which were foreclosed upon in 1991 totaling $3.8 million have been sold or disposed of during 1996 without any adjustments to their carrying values. No significant adjustments were made to the carrying values of these foreclosed assets during 1996, 1995, and 1994. The Company has no further foreclosed real estate, nor are any of its real estate related securities in default at December 31, 1996. In accordance with the Financial Accounting Standards Board ("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 or loss on securities available for sale was an unrealized gain of $16.4 million at December 31, 1996, an unrealized gain of $13.8 million at December 31, 1995 and an unrealized loss of $3.4 million at December 31, 1994. 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, 18 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, 1996, the Company had $35.9 million of its consolidated assets in cash and other short-term investments compared to $47.9 million at December 31, 1995 and $16 million at December 31, 1994. INCOME TAXES 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 can 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, 1996. LITIGATION The Company and its subsidiaries are routinely engaged in litigation as plaintiff and defendant in the normal course of business. The 1996 financial statements include an accrual by the Company of $4 million in connection with two contingent settlement agreements reached in the Alabama Litigation. Further liability, if any, of the Company and its subsidiaries regarding these proceedings is not determinable at December 31, 1996. In the opinion of management, all of these proceedings are not expected to have a material adverse effect on the Company's consolidated financial position, cash flows or operating results. Specific discussion of the Company's litigation matters is included in Part I, Item 3. RECENT ACCOUNTING PRONOUNCEMENTS As required, the Company adopted and incorporated into its Consolidated Financial Statements for the year ended December 31, 1996, the following two FASB Statements: Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and Statement No. 123, "Accounting for Stock-Based Compensation". In connection with FASB Statement No. 123, the Company will continue to apply APB Opinion 25 and has included pro forma footnote disclosure of the impact of the new expense recognition standards in the notes to the financial statements. Neither of these pronouncements had a significant impact on the Company's financial statements for 1996. During 1996, the FASB issued Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which establishes standards based on a financial-components approach that focuses on control. This Statement is effective for fiscal years beginning after December 31, 1996 and is not anticipated to have a material impact on the Company upon adoption. 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA PAGE NO. Financial Statements: Consolidated Balance Sheets at December 31, 1996 and 1995 21 Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994 22 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 23 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 24 Property and Casualty Statements of Income for the years ended December 31, 1996, 1995 and 1994 25 Parent Company and Other Statements of Operations for the years ended December 31, 1996, 1995 and 1994 25 Notes to Consolidated Financial Statements 26-48 Independent Accountants' Report 49 Supplementary Data - Results by Quarter 50 20 FOREMOST CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, 1996 1995 --------- --------- (In thousands, except share data) Assets: Investments- Fixed maturities held to maturity .................... $ 2,342 $ 7,131 Securities available for sale: Fixed maturities .................................... 339,860 348,753 Equity securities ................................... 93,485 65,574 Mortgage loans and land contracts on real estate ..... 12,222 12,527 Investment real estate (net of $1,600 and $1,350 accumulated depreciation) ........................... 15,169 19,140 Short-term investments ............................... 30,746 39,955 --------- --------- Total investments ................................... 493,824 493,080 Cash .................................................. 5,141 4,975 Accrued investment income ............................. 5,565 5,875 Premiums receivable (net of $75 and $94 allowance for uncollectible accounts) .......................... 68,076 70,629 Due from reinsurance companies ........................ 21,416 23,341 Other receivables (net of $20 allowance for uncollectible accounts, respectively) ................ 5,125 7,360 Prepaid policy acquisition costs ...................... 70,231 72,560 Prepaid reinsurance premiums .......................... 1,056 62 Real estate and equipment ............................. 34,439 36,035 Other assets .......................................... 16,705 13,644 Net assets of discontinued operations ................. -- 18,491 --------- --------- Total assets ......................................... $ 721,578 $ 746,052 ========= ========= Liabilities: Unearned premium ...................................... $ 241,313 $ 248,953 Insurance losses and loss adjustment expenses ......... 93,420 93,771 Accounts payable and accrued expenses ................. 34,053 35,728 Notes and other obligations payable ................... 94,851 99,247 Income taxes .......................................... 11,456 11,260 Other liabilities ..................................... 15,063 12,896 --------- --------- Total liabilities .................................... 490,156 501,855 --------- --------- Shareholders' Equity: Common stock $1 par - shares authorized 35,000,000, issued 14,000,000 .................................... 14,000 14,000 Additional paid-in capital ............................ 138,852 139,344 Unrealized appreciation of securities available for sale, net of applicable taxes .................... 16,423 13,802 Retained earnings ..................................... 196,818 183,944 Restricted stock - deferred compensation .............. (4) (5) --------- --------- Total ................................................ 366,089 351,085 Treasury stock at cost, 4,437,676 and 3,965,220 shares (134,667) (106,888) --------- --------- Total shareholders' equity ........................... 231,422 244,197 --------- --------- Total liabilities and shareholders' equity ........... $ 721,578 $ 746,052 ========= ========= - ----------------- See accompanying notes to consolidated financial statements
21 FOREMOST CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, 1996 1995 1994 --------- --------- --------- (In thousands except per share data) Income: Property and casualty premium earned ........ $ 427,565 $ 426,282 $ 409,929 Net investment income ....................... 27,116 27,308 24,740 Realized gains .............................. 3,098 480 627 Other ....................................... 3,347 3,383 4,830 --------- --------- --------- Total income .............................. 461,126 457,453 440,126 --------- --------- --------- Expense: Insurance losses and loss expenses .......... 276,175 244,081 249,533 Amortization of prepaid policy acquisition costs ......................... 122,795 125,115 125,066 Operating ................................... 25,101 18,183 20,842 Interest .................................... 8,191 9,711 9,048 --------- --------- --------- Total expense ............................. 432,262 397,090 404,489 --------- --------- --------- Income before taxes ..................... 28,864 60,363 35,637 Income tax provision .......................... (5,696) (17,125) (8,201) --------- --------- --------- Net income - continuing operations .......... 23,168 43,238 27,436 Net income - discontinued operations .......... 361 2,087 2,261 --------- --------- --------- Net income .................................. $ 23,529 $ 45,325 $ 29,697 ========= ========= ========= Per share of common stock: Net income - continuing operations .......... $ 2.35 $ 4.23 $ 2.59 Net income - discontinued operations ........ 0.04 0.20 0.21 --------- --------- --------- Net income ................................ $ 2.39 $ 4.43 $ 2.80 ========= ========= ========= - ----------------- See accompanying notes to consolidated financial statements
22 FOREMOST CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Unrealized Restricted Additional Appreciation Stock- Total Common Paid-in (Depreciation) Retained Deferred Treasury Shareholders' Stock Capital of Securities Earnings Compensation Stock Equity --------- ---------- -------------- ---------- ------------ ----------- ------------- (In thousands except share data) Balances - January 1, 1994 $ 14,000 $ 139,381 $ 10,080 $ 131,434 $ (64) $ (81,709) $ 213,122 Net income ........................ 29,697 29,697 Unrealized depreciation of securities available for sale, net of tax ...................... (13,445) (13,445) Amortization of deferred compensation in connection with restricted stock plan ........... 52 52 Restricted stock issued for 135 shares from treasury ........ (1) (4) 5 - Purchase of 355,282 treasury shares ................. (11,340) (11,340) Cash dividends - $1.08 per share .. (11,460) (11,460) Balances- --------- ---------- -------------- ---------- ------------ ----------- ------------- December 31, 1994 ............... 14,000 139,380 (3,365) 149,671 (16) (93,044) 206,626 Net income ........................ 45,325 45,325 Unrealized appreciation of securities available for sale, net of tax ...................... 17,167 17,167 Amortization of deferred compensation in connection with restricted stock plan ........... 16 16 Issued 10,962 shares of common from treasury in connection with LTIP and Director's Stock Plan ...................... (26) 424 398 Stock options exercised for 2,000 shares from treasury ...... (10) 78 68 Restricted stock issued for 147 shares from treasury ........ (5) 5 - Purchase of 344,325 treasury shares ................. (14,351) (14,351) Cash dividends - $1.08 per share .. (11,052) (11,052) Balances- --------- ---------- -------------- ---------- ------------ ----------- ------------- December 31, 1995 ............... 14,000 139,344 13,802 183,944 (5) (106,888) 244,197 Net income ........................ 23,529 23,529 Unrealized appreciation of securities available for sale, net of tax ...................... 2,621 2,621 Amortization of deferred compensation in connection with restricted stock plan ........... 5 5 Issued 8,955 shares of common from treasury in connection with LTIP and Director's Stock Plan ...................... 102 325 427 Stock options exercised for 100,890 shares from treasury .... (595) 4,005 3,410 Restricted stock issued for 72 shares from treasury ......... 1 (4) 3 - Purchase of 582,373 treasury shares ................. (32,112) (32,112) Cash dividends - $1.08 per share .. (10,655) (10,655) Balances- --------- ---------- -------------- ---------- ------------ ----------- ------------- December 31, 1996 ............... $ 14,000 $ 138,852 $ 16,423 $ 196,818 $ (4) $ (134,667) $ 231,422 ========= ========== ============== ========== ============ =========== ============= - ----------------- See accompanying notes to consolidated financial statements.
23 FOREMOST CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1996 1995 1994 (In thousands) --------- --------- --------- Operating Activities: Net income from continuing operations ........ $ 23,168 $ 43,238 $ 27,436 Adjustments to reconcile net income to net cash provided by operating activities: Change in: Unearned premium .......................... (7,640) (901) 5,446 Insurance losses and loss adjustment expenses ..................... (351) 3,049 (13,819) Prepaid policy acquisition costs .......... 2,329 (175) 3,219 Premiums receivable ....................... 2,553 (2,695) (1,812) Other receivables ......................... 3,166 24,049 (16,489) Accrued investment income ................. 310 134 584 Accounts payable and accrued expenses ..... (1,675) 1,567 5,288 Income tax liability ...................... 2,353 (486) 1,411 Provision for private credit insurance loss reserves .................. 193 (1,381) (169) Other - net ............................... (2,448) 4,589 (1,010) Provision for depreciation and amortization. 2,108 2,460 2,864 Amortization of fixed maturities ........... 1,061 1,725 3,392 Deferred income taxes ...................... (2,639) (364) 1,509 Net realized gains and losses .............. (3,098) (479) (627) --------- --------- --------- Net cash from operating activities ........ 19,390 74,330 17,223 --------- --------- --------- Investing Activities: Purchases of securities and loans made ....... (128,857) (170,811) (138,600) Purchases of real estate and equipment ....... (495) (189) (3,275) Sales of securities .......................... 77,882 106,010 99,663 Maturities of securities and receipts from repayments of loans .................... 46,761 54,022 49,097 Sales of real estate and equipment ........... 4,023 2,312 4,799 Net proceeds from sale of subsidiary ......... 17,437 -- -- (Increase) decrease in short-term investments. 9,022 (31,104) (1,263) --------- --------- --------- Net cash from (for) investing activities .... 25,773 (39,760) 10,421 --------- --------- --------- Financing Activities: Repayments of long-term debt ................. (2,396) (8,159) (7,957) Acquisition of treasury shares ............... (32,111) (14,351) (11,340) Dividends paid ............................... (10,655) (11,052) (11,460) Increase (decrease)in short-term debt ........ (2,000) -- 2,000 Receipts from exercise of stock options ...... 2,165 68 -- --------- --------- --------- Net cash for financing activities ........... (44,997) (33,494) (28,757) --------- --------- --------- Cash increase (decrease) ............ 166 1,076 (1,113) Cash at beginning of year ..................... 4,975 3,899 5,012 --------- --------- --------- Cash at end of year ................. $ 5,141 $ 4,975 $ 3,899 ========= ========= ========= - --------------------- See accompanying notes to consolidated financial statements.
24 PROPERTY AND CASUALTY INSURANCE STATEMENTS OF INCOME
Year Ended December 31, 1996 1995 1994 --------- --------- --------- (In thousands) Premium written and assumed ................. $ 421,100 $ 426,988 $ 416,244 Less reinsurance ceded ...................... 1,147 1,542 723 --------- --------- --------- Net premium written ....................... $ 419,953 $ 425,446 $ 415,521 ========= ========= ========= Premium earned .............................. $ 427,565 $ 426,282 $ 409,929 --------- --------- --------- Insurance losses and loss expenses .......... 276,175 244,081 249,533 Amortization of prepaid policy acquisition costs ......................... 122,860 125,266 125,241 Operating expenses .......................... 23,072 18,724 19,783 --------- --------- --------- Total losses and expenses ................. 422,107 388,071 394,557 --------- --------- --------- Underwriting income ..................... 5,458 38,211 15,372 Investment and other income, less expenses .. 26,838 27,472 24,545 Realized gains .............................. 3,198 480 572 --------- --------- --------- Income before taxes ....................... 35,494 66,163 40,489 Income tax provision ........................ (8,300) (19,315) (9,953) --------- --------- --------- Net income ................................ $ 27,194 $ 46,848 $ 30,536 ========= ========= ========= PARENT COMPANY AND OTHER STATEMENTS OF OPERATIONS (Excluding equity in income of consolidated subsidiaries) Year Ended December 31, 1996 1995 1994 --------- --------- --------- (In thousands) Income: Financial service fees and interest ....... $ 764 $ 2,061 $ 2,871 Commissions ............................... 587 503 2,197 Other income .............................. 9,013 7,626 7,385 Realized gains (losses) ................... (100) -- 55 --------- --------- --------- Total income .......................... 10,264 10,190 12,508 --------- --------- --------- Expense: Operating ................................. 9,025 6,616 8,661 Interest .................................. 7,869 9,374 8,699 --------- --------- --------- Total expense ......................... 16,894 15,990 17,360 --------- --------- --------- Loss before taxes ......................... (6,630) (5,800) (4,852) Income tax credit ........................... 2,604 2,190 1,752 --------- --------- --------- Net loss .................................. $ (4,026) $ (3,610) $ (3,100) ========= ========= ========= - ----------------- See accompanying notes to consolidated financial statements.
25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES Business 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. Principles of Consolidation The accounts of Foremost Corporation of America and its subsidiaries have been included in the accompanying financial statements. Intercompany investments and all significant intercompany balances and transactions have been eliminated in consolidation. In order to more clearly reflect the operations of the segments of the consolidated group, certain intercompany charges, consisting principally of rent, interest and commissions, have been included in the operating income and expenses of the segments, but are eliminated from consolidated revenues and expenses. Insurance Companies The Company's property and casualty insurance 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 terms 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. Use of Estimates in Preparation of Financial Statements The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant Estimates The most significant estimates in the Company's balance sheet are the determination of prepaid policy acquisition costs and the reserve for insurance losses and loss adjustment expenses. Management's best estimate of prepaid policy acquisition costs is based on historical studies and assumptions made regarding costs incurred. Management's best estimate of insurance losses and loss adjustment expenses is based on past loss experience and consideration of current claim trends as well as prevailing social, economic and legal conditions. Although management's estimates currently are not expected to change in the foreseeable future, the costs the Company will ultimately incur could differ from the amounts assumed will be incurred based on the assumptions made. 26 Investments In accordance with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company has classified its investments in fixed maturities and equity securities into two categories, "fixed maturities held to maturity" and "securities available for sale." Fixed maturities held to maturity and mortgage loans and land contracts are reported at amortized cost. The Company expects that the investments in these categories will be held to maturity and, therefore, no unrealized gains or losses are recognized on such investments. Securities available for sale are reported at market value. The unrealized gains and losses of the investments in this category are credited or charged directly to shareholders' equity, net of applicable taxes. Although the Company has the general intent and ability to hold securities segregated as securities available for sale to maturity, sales from this category may be undertaken due to changes in market conditions, relative yields available, tax planning and asset/liability management considerations. The Company's debt securities investment portfolio is predominantly comprised of investment grade securities. Investment real estate consists primarily of land and buildings held for development and sale. Investment real estate is carried at cost less applicable accumulated depreciation. Investment real estate acquired through foreclosure is carried at the lower of cost or market. Depreciation expense on investment real estate was $249,000, $232,000 and $319,000 for 1996, 1995 and 1994, respectively. Short-term investments are reported at cost, which approximates market. Realized investment gains and losses, based on specific identification of securities sold, are reported separately, on a pretax basis, as part of total income. Reinsurance 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. Reinsurance contracts do not relieve the Company from its primary obligation to the policyholder; consequently, a contingent liability exists to the extent that losses recoverable under reinsurance treaties are not paid to the Company by reinsurers. The Company performs due diligence to ensure that reinsurers with whom the Company has reinsurance contracts are financially able to perform under the terms of the contract. In accordance with the adoption of SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" in 1994, the Company's reinsurance receivables and prepaid reinsurance premiums are reported as assets and no longer netted against unearned premiums and the liability for losses and loss adjustment expenses. 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 and loss expenses 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. 27 Fair Value of Financial Instruments The following methods and assumptions were used to estimate market or fair value: Assets- 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. Short-Term Investments The recorded book value is presumed to be a reasonable estimate of market value. Liabilities- Mortgage Note The present value of future cash flows and the prepayment penalty are used to determine estimated fair value. The rate used was based on quoted market prices for similar issues. Variable Rate Notes For financial instruments bearing variable interest rates, it is presumed that recorded book values are reasonable estimates of 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 fair values for all other assets and liabilities are reported at their carrying amounts which represents market value. Real Estate and Equipment Real estate and equipment owned by the Company is carried at cost less accumulated depreciation. Depreciation is computed over the estimated useful lives of the assets, primarily by the straight-line method for financial reporting and accelerated methods for income tax purposes. Income Taxes The Company accounts for certain income and expenses in different periods for financial reporting and income tax purposes. Deferred income taxes are provided in the accompanying financial statements for the temporary differences between taxes currently payable and taxes based on financial income. The Company utilizes the liability method to account for deferred income taxes by applying statutory tax rates in effect at the balance sheet date to differences between the book cost and tax basis of assets and liabilities. The resulting deferred tax liabilities or assets are adjusted to reflect changes in tax laws or rates by means of charges or credits to income tax expense. Advertising The Company expenses the costs of advertising as incurred. Advertising expense was $3,375,000 in 1996, $2,021,000 in 1995 and $1,617,000 in 1994. 28 Supplemental Cash Flow Information The Company does not consider any of its assets cash equivalents for the purposes of the Consolidated Statements of Cash Flows. Interest paid was $8,177,000 in 1996, $9,089,000 in 1995 and $8,499,000 in 1994. Income taxes paid were $12,900,000, $21,557,000 and $7,650,000 for 1996, 1995, and 1994, respectively. In 1994, the Company sold three buildings for $6.8 million for which the Company provided mortgage financing on approximately 56% of the purchase price, at an interest rate of 8%. Income Per Share 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 9,865,000 in 1996, 10,222,000 in 1995 and 10,604,000 in 1994. Credit Risk The Company performs ongoing risk and credit evaluations of its agents and insureds. Insurance is written throughout the United States with concentration in the southern and southwestern states. The Company primarily utilizes the services of one banking institution for its cash depository accounts. The Company performs risk and credit evaluations of this institution on a routine basis. Reclassifications Certain reclassifications have been made in the 1995 and 1994 financial statements to conform to those classifications used in 1996. 29 NOTE 2 - INVESTMENTS The amortized cost and estimated market values of investments in financial instruments held by the Company are as follows:
Gross Gross Amortized Unrealized Unrealized Market December 31, 1996 Cost Gains Losses Value ---------- ---------- ---------- --------- (In thousands) Fixed maturities held to maturity: Bonds: Obligations of states and political subdivisions ......... $ 2,342 $ 59 $ (60) $ 2,341 --------- --------- --------- --------- Total fixed maturities held to maturity .................. 2,342 59 (60) 2,341 --------- --------- --------- --------- Securities available for sale: Fixed maturities: Bonds: U.S. Treasury Securities and obligations of U.S. ....... government agencies ........... 68,148 1,695 (33) 69,810 Obligations of states and political subdivisions ........ 229,375 8,311 (259) 237,427 Foreign governments ............ -- -- -- -- Corporate securities ........... 29,612 927 (95) 30,444 Mortgage-backed securities ..... -- -- -- -- --------- --------- --------- --------- Total bonds ................... 327,135 10,933 (387) 337,681 Redeemable preferred stocks ..... 2,187 13 (21) 2,179 --------- --------- --------- --------- Total fixed maturities available for sale ............ 329,322 10,946 (408) 339,860 --------- --------- --------- --------- Equity securities: Common stocks ................... 49,357 14,998 (1,813) 62,542 Preferred stocks ................ 29,401 2,096 (554) 30,943 --------- --------- --------- --------- Total equity securities available for sale ............ 78,758 17,094 (2,367) 93,485 --------- --------- --------- --------- Mortgage loans and land contracts . 12,222 952 -- 13,174 Short-term investments ............ 30,746 -- -- 30,746 --------- --------- --------- --------- Total financial assets ........... $ 453,390 $ 29,051 $ (2,835) $ 479,606 ========= ========= ========= ========= 30 Gross Gross Amortized Unrealized Unrealized Market December 31, 1995 Cost Gains Losses Value --------- --------- --------- --------- (In thousands) Fixed maturities held to maturity: Bonds: Obligations of states and political subdivisions ......... $ 7,131 $ 163 $ (83) $ 7,211 --------- --------- --------- --------- Total fixed maturities held to maturity .................. 7,131 163 (83) 7,211 --------- --------- --------- --------- Securities available for sale: Fixed maturities: Bonds: U.S. Treasury Securities and obligations of U.S. ....... government agencies ........... 115,999 5,292 -- 121,291 Obligations of states and political subdivisions ........ 178,723 9,271 (36) 187,958 Foreign governments ............ 860 4 -- 864 Corporate securities ........... 27,415 565 (88) 27,892 Mortgage-backed securities ..... 5,681 134 -- 5,815 --------- --------- --------- --------- Total bonds ................... 328,678 15,266 (124) 343,820 Redeemable preferred stocks ..... 4,842 91 -- 4,933 --------- --------- --------- --------- Total fixed maturities available for sale ............ 333,520 15,357 (124) 348,753 --------- --------- --------- --------- Equity securities: Common stocks ................... 45,811 6,409 (1,416) 50,804 Preferred stocks ................ 14,661 528 (419) 14,770 --------- --------- --------- --------- Total equity securities available for sale ............ 60,472 6,937 (1,835) 65,574 --------- --------- --------- --------- Mortgage loans and land contracts . 12,527 1,186 -- 13,713 Short-term investments ............ 39,955 -- -- 39,955 --------- --------- --------- --------- Total financial assets ........... $ 453,605 $ 23,643 $ (2,042) $ 475,206 ========= ========= ========= =========
31 The amortized cost and market values of fixed maturities are shown below by contractual maturity. Actual maturities will differ from contractual maturities because securities may be called or prepaid with or without prepayment penalties.
Held to Maturity Available for Sale ------------------- ------------------- Amortized Market Amortized Market December 31, 1996 Cost Value Cost Value --------- --------- --------- --------- (In thousands) Due to mature (years): One or less ......................... $ 200 $ 208 $ 32,947 $ 33,292 After one through five .............. 254 254 106,802 109,267 After five through ten .............. 501 535 144,832 151,947 After ten ........................... 1,387 1,344 42,554 43,175 --------- --------- --------- --------- Total .............................. 2,342 2,341 327,135 337,681 Mortgage-backed securities ........... -- -- -- -- Redeemable preferred stocks .......... -- -- 2,187 2,179 --------- --------- --------- --------- Total fixed maturities .............. $ 2,342 $ 2,341 $ 329,322 $ 339,860 ========= ========= ========= =========
The change in unrealized gains and losses on fixed maturity and equity security investments is summarized as follows:
Year Ended December 31, 1996 1995 1994 --------- --------- --------- (In thousands) Fixed maturities ............................ $ (4,776) $ 18,289 $ (17,786) Equity securities ........................... 9,625 6,712 (2,262) --------- --------- --------- Combined ................................... $ 4,849 $ 25,001 $ (20,048) ========= ========= =========
To conform with statutory requirements, bonds and certificates of deposit in principal amounts totaling $12,950,000 were on deposit with various regulatory agencies at December 31, 1996. 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, 1996, 99% of the mortgage loans and land contracts were categorized as commercial, and 1% 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 $.5 million. The majority of mortgage loans, land contracts and investment real estate is concentrated in Michigan. 32 Pretax investment income by source is summarized as follows:
Year Ended December 31, 1996 1995 1994 --------- --------- --------- (In thousands) Fixed maturities ............................ $ 22,914 $ 23,437 $ 21,115 Equity securities ........................... 4,059 2,908 3,033 Mortgage loans and real estate .............. 552 36 683 Short-term investments ...................... 1,630 2,282 912 --------- --------- --------- Total ...................................... 29,155 28,663 25,743 Investment expense .......................... 2,039 1,355 1,003 --------- --------- --------- Net investment income ...................... $ 27,116 $ 27,308 $ 24,740 ========= ========= =========
Realized gains and losses are summarized as follows:
Year Ended December 31, 1996 1995 1994 --------- --------- --------- (In thousands) Fixed maturities ............................ $ 256 $ (1,475) $ (759) Equity securities ........................... 2,765 2,013 1,464 Real estate ................................. 77 (58) (78) --------- --------- --------- Net gain .................................. $ 3,098 $ 480 $ 627 ========= ========= =========
Proceeds from sales of investments in fixed maturities totaled $49,488,000 in 1996, $66,544,000 in 1995 and $42,417,000 in 1994. Gross gains of $893,000, $708,000 and $947,000 and gross losses of $499,000, $1,209,000 and $1,405,000 were realized on those sales in 1996, 1995 and 1994, respectively. 33 NOTE 3 - PREPAID POLICY ACQUISITION COSTS Acquisition costs are recognized on all premium written by the Company. Such costs are amortized over policy terms which are principally annual, but which range up to seven years. Policy acquisition costs deferred and amortized are as follows:
1996 1995 --------- --------- (In thousands) Balance at January 1, .................................. $ 72,560 $ 72,385 --------- --------- Policy acquisition costs incurred: Commission and brokerage .............................. 73,766 75,552 General and administrative ............................ 36,397 35,823 Taxes, licenses and fees .............................. 10,310 10,849 Reinsurance cost (recoveries) ......................... (7) 3,066 --------- --------- Total ................................................ 120,466 125,290 --------- --------- Charged to expense ..................................... (122,795) (125,115) --------- --------- Balance at December 31, ............................... $ 70,231 $ 72,560 ========= =========
NOTE 4 - REAL ESTATE AND EQUIPMENT Real estate and equipment utilized by the Company is summarized as follows:
December 31, 1996 1995 --------- --------- (In thousands) Owned land and buildings ............................... $ 43,733 $ 43,475 Equipment and other .................................... 3,016 3,016 --------- --------- Total cost ............................................ 46,749 46,491 Less accumulated depreciation .......................... 12,310 10,456 --------- --------- Real estate and equipment - net ....................... $ 34,439 $ 36,035 ========= =========
Depreciation expense on real estate and equipment utilized by the Company was $1,854,000 in 1996, $2,212,000 in 1995 and $2,493,000 in 1994. 34 NOTE 5 - LIABILITY FOR INSURANCE LOSSES AND LOSS ADJUSTMENT EXPENSES The incurred and paid activity in the liability for insurance losses and loss adjustment expenses is as follows:
1996 1995 --------- --------- (In thousands) Balance at January 1, .................................. $ 93,771 $ 90,722 Less reinsurance recoverables ......................... 2,409 3,158 --------- --------- Net balance January 1, ............................... 91,362 87,564 --------- --------- Incurred related to: Current year .......................................... 277,298 241,323 Prior years ........................................... (1,123) 2,758 --------- --------- Total incurred ....................................... 276,175 244,081 --------- --------- Paid related to: Current year .......................................... 223,518 189,736 Prior years ........................................... 51,349 50,547 --------- --------- Total paid ........................................... 274,867 240,283 --------- --------- Net balance at December 31, ......................... 92,670 91,362 Plus reinsurance recoverables .......................... 750 2,409 --------- --------- Balance at December 31, ............................... $ 93,420 $ 93,771 ========= =========
NOTE 6 - NOTES AND OTHER OBLIGATIONS PAYABLE Notes and other obligations payable consist of the following:
December 31, 1996 1995 --------- --------- (In thousands) Current portion of long-term notes payable ............. $ 2,272 $ 4,061 Current portion of capital lease obligations ........... 162 138 --------- --------- Total short-term debt ................................. 2,434 4,199 --------- --------- Long-term notes payable ................................ 89,882 92,351 Obligations under capitalized leases ................... 2,535 2,697 --------- --------- Total long-term debt .................................. 92,417 95,048 --------- --------- Total ................................................ $ 94,851 $ 99,247 ========= =========
35 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. An unsecured credit agreement was entered into in April 1995 which 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, 1996, 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 $34.2 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. The credit agreement and mortgage loan agreement subject 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. The mortgage loan contains a covenant limiting the amount of stock repurchases. The Company has exceeded the limit and has requested a waiver of that covenant. The Company expects the waiver to be granted, however, should the waiver not be granted, the lender could declare the loan in default, at which time the Company would refinance the loan. 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 interest rate swap agreements with a financial institution. The notional principal amount of the swaps is $46 million and $12 million, with both maturing August 31, 2000. These agreements effectively fixed the interest rate on the entire $58 million outstanding under the credit agreement to 7.15%. The interest rate swaps are non-amortizing. The Company's exposure to credit risk is limited to interest movements and is considered to be negligible. The borrowing rate on the mortgage loan is fixed at 9.8%. The Company does not hold or issue any other forms of derivative financial instruments. Maturities of long-term debt for each of the five years succeeding December 31, 1996 are as follows:
Year Ending December 31: (In thousands) 1997 ................................................... $ 2,434 1998 ................................................... 2,903 1999 ................................................... 3,205 2000 ................................................... 11,537 2001 ................................................... 3,917 Thereafter ............................................. 70,855 ------- Total ................................................. $94,851 =======
36 The fair value of financial liabilities and off-balance-sheet financial instruments are as follows:
December 31, 1996 1995 ------------------- ------------------- Net Book Fair Net Book Fair Value Value Value Value ---------- -------- --------- --------- (In thousands) Financial liabilities: Mortgage note ....................... $ 34,154 $ 39,266 $ 36,412 $ 43,582 Variable notes ...................... 58,000 58,000 60,000 60,000 --------- --------- --------- --------- Total financial liabilities ........ $ 92,154 $ 97,266 $ 96,412 $ 103,582 ========= ========= ========= ========= Off-balance sheet financial instruments: Interest rate swap agreements .... $- $ (626) $- $ (2,371) ========= ========= ========= =========
NOTE 7 - INCOME TAXES The Company files a consolidated tax return with its subsidiaries, including its life insurance subsidiary, which was sold in 1996. For tax purposes, $10.5 million had been accumulated over the years by the life insurance subsidiary in a memorandum policyholders' surplus account and became 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. The provisions (credits) for income taxes in the Consolidated Statements of Income are made up of the following components:
Year Ended December 31, 1996 1995 1994 --------- --------- --------- (In thousands) Current federal income tax expense .......... $ 8,335 $ 17,489 $ 6,692 Deferred federal income tax expense ......... (2,639) (364) 1,509 --------- --------- --------- Income tax provision ....................... $ 5,696 $ 17,125 $ 8,201 ========= ========= =========
37 Deferred tax liabilities (assets) are composed of the following:
December 31, 1996 1995 --------- --------- (In thousands) Policy acquisition costs related to unearned premium ...................................... $ 26,730 $ 27,470 Unrealized gains on securities ......................... 8,843 7,117 Excess tax over book basis of fixed assets ............. 1,911 1,605 Windstorm pool recovery ................................ 680 1,327 Other .................................................. 793 1,105 --------- --------- Gross deferred tax liabilities ........................ 38,957 38,624 --------- --------- Unearned premium adjustments ........................... (16,867) (17,496) Difference between book and tax reserves ............... (4,078) (4,491) Deferred compensation .................................. (2,740) (2,601) Post-retirement benefit accruals ....................... (811) (629) Alabama litigation accrual ............................. (1,452) (595) Other .................................................. (2,187) (1,076) --------- --------- Gross deferred tax assets ............................. (28,135) (26,888) --------- --------- Net deferred tax liability ........................... $ 10,822 $ 11,736 ========= =========
In addition to the Company's net deferred tax liability, the liability for income taxes includes a current tax liability (recovery) of $634,000 and $(476,000) at December 31, 1996 and 1995, respectively. A reconciliation of the federal statutory tax rate to the Company's effective tax rate is as follows:
% of Pre-tax Income --------------------------------- Year Ended December 31, 1996 1995 1994 --------- --------- --------- Federal statutory tax rate .................. 35.0% 35.0% 35.0% Increase (reduction) in income taxes relating to: Tax-exempt municipal bond interest ........ -11.7% -5.5% -9.6% Dividends received deduction .............. -2.4% -0.7% -1.6% Tax credits and other ..................... -1.2% -0.4% -0.8% --------- --------- --------- Effective tax rate ....................... 19.7% 28.4% 23.0% ========= ========= =========
NOTE 8 - REINSURANCE The Company was party to both proportional and non-proportional reinsurance agreements in 1996. Due from reinsurance companies balances are primarily premium amounts due from unconsolidated insurance affiliates for business assumed, and loss recoverables from a major U.S. reinsurance company. Assumed reinsurance is predominantly from unconsolidated affiliates. 38 The following amounts summarize the effect of reinsurance on the Company's financial statements:
Year Ended December 31, 1996 1995 1994 --------- --------- --------- (In thousands) Direct: Written premiums ........................... $ 353,421 $ 358,933 $ 351,449 Earned premiums ............................ 361,004 360,750 347,996 Insurance losses and loss expenses ......... 234,115 201,453 224,303 Assumed: Written premiums ........................... 67,678 68,055 64,795 Earned premiums ............................ 67,741 67,119 62,733 Insurance losses and loss expenses ......... 25,911 27,348 33,449 Ceded - Catastrophe: Written premiums ........................... 17,198 6,075 38,047 Earned premiums ............................ 16,171 16,149 32,720 Insurance losses and loss expenses ......... 98 84 38,035 Ceded - Non-Catastrophe: Written premiums ........................... 1,147 1,542 723 Earned premiums ............................ 1,180 1,587 800 Insurance losses and loss expenses ......... 664 1,348 (629)
NOTE 9- EMPLOYEE BENEFIT PLANS Money Purchase Pension Plan The Company provides a Money Purchase Pension Plan for all employees with one or more years of service. Under the Money Purchase Pension Plan, the Company is required to make annual contributions equal to 6% of the eligible compensation of all eligible plan participants. Profit-Sharing Retirement and Savings Plan 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 1996 and 1995, 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. Retirement Supplement Plan 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 $4,431,000 and are being amortized over the participants' anticipated employment with the Company, which range from 4 to 15 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, 1996 relating to the change in control provision is approximately $6,035,000. 39 Deferred Compensation Plan 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. Long-Term Incentive 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 for 70% of the awards to be paid in the Company's common stock. The awards are fully vested upon issuance; however, the stock is restricted to resale for three years from the date of the award. There were 8,413 shares and 9,804 shares issued under the plan for 1996 and 1995, respectively. Stock Option Plan 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, with a maximum term of 10 years. The Company accounts for its stock option plans in accordance with APB Opinion 25, Accounting for Stock Issued to Employees. Since the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation cost is recognized under APB Opinion 25. In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the Company is required to provide pro forma information regarding net income and earnings per share as if compensation costs for the Company's stock option plan had been determined using a fair value based estimate. The Company uses the Black-Scholes option-pricing model to determine the fair value of each option at the grant date with the following weighted average assumptions:
1996 1995 ---------- ---------- Dividend / Share $1.08 $1.08 Expected Volatility 26.9% 27.4% Risk-free Interest Rate 6.5% 6.9% Expected Lives 8 yrs. 8 yrs.
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:
1996 1995 ----------- ----------- Net Income As reported $23,529,000 $45,325,000 Pro forma $23,065,000 $45,036,000 Earnings per share As reported $2.39 $4.43 Pro forma $2.34 $4.41
40 The following is a summary of the Company's stock option transactions during 1996 and 1995:
1996 1995 -------------------- -------------------- Weighted- Weighted- Average Average Exercise Exercise Shares Price Shares Price --------- --------- --------- --------- Outstanding at January 1, .......... 800,086 $ 28 628,586 $ 26 Granted .......................... 39,100 $ 55 173,500 $ 38 Exercised ........................ 100,890 $ 21 2,000 $ 34 Forfeited ........................ 125 $ 33 -- $- --------- --------- --------- --------- Outstanding at December 31, .... 738,171 $ 31 800,086 $ 28 ========= ========= ========= ========= Options exercisable at December 31,. 578,238 $ 28 582,899 $ 26 ========= ========= ========= ========= Weighted-average fair value of options granted during the year ............... $ 20.11 $ 12.62 ======= =======
The following table summarizes information about the Company's stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable - ------------------------------------------------------ ------------------------ Weighted Average Weighted Weighted Range of Number Remaining Average Number Average Exercise Outstanding Contractual Exercise Outstanding Exercise Price at 12/31/96 Life Price at 12/31/96 Price - --------------- ------------ ------------ ---------- ------------ --------- $18.25 - $21.00 255,475 4.6 years $ 20 255,475 $ 20 $30.25 - $33.25 116,596 1.8 years $ 32 114,221 $ 32 $34.24 - $38.00 327,000 5.4 years $ 36 208,542 $ 35 $55.00 39,100 9.8 years $ 55 -- $ -- ------------ ------------ ---------- ------------ --------- $18.25 - $55.00 738,171 4.8 years $ 31 578,238 $ 28 ============ ============ ========== ============ =========
Restricted Stock Plan 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, 1996, 63,126 were vested, 72 shares were issued and non-vested and 1,616 shares remained unissued from forfeitures. 41 In 1995, the Company adopted and the shareholders' approved a restricted stock plan for the Company's Directors. Under the plan, the Company's 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 they vest. Vesting occurs upon the completion of the Director's term. Up to 20,000 shares may be issued under the plan. In 1996 and 1995, 542 shares and 1,158 shares were issued, respectively. The cost of the aforementioned benefit plans, excluding post-retirement benefits, for 1996, 1995 and 1994 was $3,696,000, $4,339,000 and $4,307,000, respectively. Post-Retirement Benefit Plan 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. SFAS No. 106, "Employers' Accounting for Post-Retirement Benefits Other Than Pensions," requires companies to accrue post-retirement benefits during the employees' working years rather than expensing on a cash basis. The Company does not prefund its post-retirement benefit plan and has elected to amortize the transition obligation over a 20 year period. The plan's funded status reconciled with the amounts included in other liabilities in the Company's Consolidated Balance Sheets is as follows:
December 31, 1996 1995 --------- --------- (In thousands) Accumulated post-retirement benefit obligation: Retirees .............................................. $ 1,283 $ 1,559 Fully eligible active plan participants ............... 1,049 773 Other active plan participants ........................ 3,128 2,842 --------- --------- Total ................................................ 5,460 5,174 Plan assets ............................................ -- -- --------- --------- Accumulated post-retirement benefit obligation in excess of plan assets .............................. 5,460 5,174 Unrecognized: Transition obligation ................................. 4,332 4,602 Actuarial (gain) loss ................................. (1,188) (1,226) --------- --------- Accrued post-retirement benefit liability ............ $ 2,316 $ 1,798 ========= =========
42 Net periodic post-retirement benefit costs included the following components:
Year Ended December 31, 1996 1995 1994 --------- --------- --------- (In thousands) Service cost ................................ $ 341 $ 274 $ 259 Interest on accumulated post-retirement obligation ................................. 405 391 438 Amortization of: Transition obligation ..................... 271 271 271 Actuarial (gain)/loss ..................... (42) (48) -- --------- --------- --------- Total costs ................................ $ 975 $ 888 $ 968 ========= ========= =========
The health care trend rate assumed was 7.5% for 1996, decreasing .25% per year to 6% in 2002 and thereafter. The dental trend rate was 6% per year. The rate of compensation increase regarding life insurance benefits was 5%. A 1% increase in the health care trend rate would increase the accumulated post-retirement benefit obligation as of December 31, 1996 by $157,000 and the net periodic benefit cost for the year then ended by $22,000. The weighted average discount rate used in determining the accumulated post-retirement benefit obligation was 8%. NOTE 10 - LEASE COMMITMENTS 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 noncancelable operating leases for each of the five years succeeding December 31, 1996 and thereafter, excluding renewal options:
Year Ending December 31: (In thousands) 1997 .................................................... $3,172 1998 .................................................... 2,655 1999 .................................................... 1,973 2000 .................................................... 894 2001 .................................................... 364 Thereafter .............................................. 2
43 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, 1996:
Year Ending December 31: (In thousands) 1997 ............................................................ $ 468 1998 ............................................................ 468 1999 ............................................................ 468 2000 ............................................................ 468 2001 ............................................................ 480 Thereafter ...................................................... 2,107 ------ Total minimum lease payments ................................... 4,459 Less amount representing interest ............................... 1,762 ------ Present value of net minimum lease payments .................... $2,697 ======
Rental expense charged to operations in 1996, 1995 and 1994 amounted to $5,109,000, $4,693,000 and $4,856,000, respectively, including amounts paid under short-term cancelable leases. NOTE 11 - STATUTORY INFORMATION As a holding company, the principal source of the parent company's cash available for debt service and payment of dividends (other than through the use of borrowed funds or the employment of other assets) is dividends received from its principal property and casualty insurance subsidiary, Foremost Insurance Company. State regulatory requirements limit the amount of annual dividends Foremost Insurance Company can pay to the holding company without obtaining prior insurance department approval. These restrictions are not expected to significantly affect the holding company's ability to meet its foreseeable cash requirements. The amount of dividends which Foremost Insurance Company can pay to the holding company in 1997 without obtaining prior insurance department approval under the current statute is $29.7 million. In 1996 Foremost Insurance Company paid dividends in cash and other assets to the parent company totaling $31.6 million. At December 31, 1996, $76.9 million of consolidated shareholders' equity represents net assets of the Company's insurance subsidiary that cannot be transferred in the form of dividends, loans or advances to the parent company. Policyholders' surplus for the combined property and casualty insurance companies at December 31, 1996 and 1995 was $201.3 million and $200.5 million, respectively. Statutory net income for the combined property and casualty insurance companies for the years ended December 31, 1996, 1995 and 1994 was $34.1 million, $49.3 million and $44.2 million, respectively. NOTE 12 - COMMITMENTS AND CONTINGENCIES Agreements and Contracts 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 $1.8 million at December 31, 1996. 44 The Company is a party to a long-term agreement with a service company which provides data processing services and equipment. Under the agreement the Company is required to pay minimum service charges and resource charges or credits depending on the volume of transactions processed. The minimum service charges are approximately $15.1 million per year and are subject to annual cost of living increases. The agreement expires on December 31, 2001. 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. On June 11, 1996, with the sale of Foremost Life Insurance Company, the amount reserved to cover these reinsurance treaties was transferred to an escrow account. The Company believes that the amount in the escrow account is sufficient to cover all costs associated with these reinsurance treaties. 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. Stock Purchase Rights In 1989 the Company's Board of Directors declared a dividend of one common stock purchase right for each share of the Company's outstanding common stock. Each right may be exercised at any time to purchase one one-hundredth of a share of the Company's common stock at a purchase price of $110 per right. 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 stockholder 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 rights expire on December 14, 1999 and may be redeemed by the Company for $.01 per right at any time until the 10th day following the public announcement that a person or group, other than the existing stockholder group, has acquired 20% or more of the Company's common stock. The Company has reserved 200,000 shares of its common stock for issuance upon exercise of the rights. Litigation The Company and its subsidiaries are routinely engaged in litigation in the normal course of business. The 1996 financial statements include an accrual of $4 million in connection with two contingent settlements in the Alabama Litigation. In the opinion of management, these proceedings, as well as the litigation described in Part I, Item 3. 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, 1996. 45 NOTE 13 - INFORMATION BY BUSINESS SEGMENTS The Company's operations are principally in the property and casualty segment of the insurance industry. Its property and casualty insurance 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 Company performs ongoing evaluations of its insurance exposures, utilizes reinsurance when appropriate and performs credit and risk evaluations of its agents and insureds. Detailed operating information for the property and casualty segment is presented herein. There are no significant intercompany transactions among the segments.
1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Net Insurance Premium Written and Assumed (In millions) Property and casualty: Mobile home ................ $ 349.2 $ 352.3 $ 341.5 $ 324.3 $ 312.2 Recreational vehicle ....... 47.9 49.1 49.7 46.5 46.0 Automobile ................. 10.3 12.4 14.1 16.8 22.1 Homeowners ................. 7.7 6.9 5.5 4.7 4.2 Commercial products ........ 1.2 1.5 0.8 2.4 13.3 Collateral protection ...... 0.7 1.0 0.7 0.5 0.4 Other ...................... 4.1 3.8 3.9 2.5 2.8 -------- -------- -------- -------- -------- Total ...................... 421.1 427.0 416.2 397.7 401.0 Less reinsurance ceded ...... 1.1 1.5 0.7 2.9 8.0 -------- -------- -------- -------- -------- Total ...................... $ 420.0 $ 425.5 $ 415.5 $ 394.8 $ 393.0 ======== ======== ======== ======== ======== Net Insurance Premium Earned (In millions) Property and casualty: Mobile home ................ $ 354.1 $ 353.2 $ 335.7 $ 325.4 $ 302.4 Recreational vehicle ....... 49.1 49.3 47.8 45.2 43.4 Automobile ................. 11.0 12.9 15.7 17.4 21.0 Homeowners ................. 6.9 6.1 5.0 4.2 4.3 Commercial products ........ 1.2 1.0 0.9 2.9 12.9 Collateral protection ...... 1.1 0.8 0.6 0.6 0.5 Other ...................... 4.2 3.0 4.2 4.0 4.0 -------- -------- -------- -------- -------- Total ...................... $ 427.6 $ 426.3 $ 409.9 $ 399.7 $ 388.5 ======== ======== ======== ======== ======== 46 1996 1995 1994 1993 1992 (In thousands) -------- -------- -------- -------- -------- Income Before Taxes - Continuing Operations Property and casualty: Underwriting income ......... $ 5,458 $ 38,211 $ 15,372 $ 16,571 $ 7,866 Investment and other income (including realized gains and losses): ............... 30,036 27,952 25,117 27,513 31,453 -------- -------- -------- -------- -------- Total property and casualty 35,494 66,163 40,489 44,084 39,319 Other-net (parent company & non-insurance operations)(1). (6,630) (5,800) (4,852) (4,125) (8,878) -------- -------- -------- -------- -------- Income before taxes - continuing operations ..... $ 28,864 $ 60,363 $ 35,637 $ 39,959 $ 30,441 ======== ======== ======== ======== ======== Identifiable Assets (In millions) Property and casualty ....... $ 662.2 $ 669.8 $ 625.1 $ 640.4 $ 612.6 Parent company and other (2). 59.4 57.8 61.0 66.0 66.8 -------- -------- -------- -------- -------- Total ...................... $ 721.6 $ 727.6 $ 686.1 $ 706.4 $ 679.4 ======== ======== ======== ======== ======== - -------- (1) General Corporate expenses were $1,604,000, $1,945,000 and $2,236,000 and interest expense was $4,401,000, $5,696,000 and $4,739,000 in 1996, 1995 and 1994, respectively. (2) Identifiable corporate assets were $18.3 million, $11.8 million and $10.9 million in 1996, 1995 and 1994, respectively.
NOTE 14 - RELATED PARTY TRANSACTIONS A director and major shareholder has investment advisory agreements with the Company and currently manages approximately 16% of the Company's investment portfolio. During 1996 and 1995, $745,000 and $424,000 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 $1,178,000 and $397,000 were paid to this law firm in 1996 and 1995, respectively. NOTE 15 - DISCONTINUED OPERATIONS On June 11, 1996, the Company completed the sale of its life insurance subsidiary, Foremost Life Insurance Company, to Woodmen Accident and Life Company. The sale yield net after-tax proceeds of $17.4 million and the Company incurred an after-tax loss of $698,000 as a result of the sale. The loss was due primarily to the effects of taxes related to policyholders' surplus, discussed in Note 7. The majority of the net proceeds was used to purchase the Company's common stock under the approved stock buy-back program. The financial results of the life insurance segment and the sale are reflected in the financial statements as discontinued operations for all years presented. 47 Summarized results of operations and financial position for discontinued operations were as follows: LIFE INSURANCE STATEMENTS OF INCOME
Year Ended December 31, 1996 1995 1994 (In thousands) ------- -------- -------- Premium written and assumed .................... $ 8,988 $ 22,048 $ 22,156 Less reinsurance ceded ......................... 80 251 239 ------- -------- -------- Net premium written .......................... $ 8,908 $ 21,797 $ 21,917 ======= ======== ======== Premium earned ................................. $ 8,908 $ 21,797 $ 21,917 ------- -------- -------- Death and other benefits ....................... 6,227 15,052 14,468 Amortization of prepaid policy acquisition cost. 2,167 5,342 5,570 Operating expenses ............................. 41 147 620 ------- -------- -------- Total losses and expenses .................... 8,435 20,541 20,658 ------- -------- -------- Underwriting income ........................ 473 1,256 1,259 Investment and other income, less expenses ..... 747 2,040 2,183 Realized gains (losses) ........................ 10 (111) (36) ------- -------- -------- Income before taxes .......................... 1,230 3,185 3,406 Income tax provision ........................... (171) (1,098) (1,145) ------- -------- -------- Net income ................................... 1,059 2,087 2,261 Net loss resulting from sale ................... (698) -- -- ------- -------- -------- Net income from discontinued operations ...... $ 361 $ 2,087 $ 2,261 ======= ======== ======== LIFE INSURANCE FINANCIAL POSITION December 31, 1995 -------- (In thousands) Assets: Cash and invested assets ...................................... $27,290 Receivables ................................................... 2,373 Prepaid policy acquisition .................................... 1,492 Other ......................................................... 371 Liabilities: Unearned premium .............................................. 2,677 Insurance losses and loss adjustment expenses ................. 3,733 Accounts payable and accrued expenses ......................... 1,309 Deferred income taxes ......................................... 1,757 Other ......................................................... 3,559 ------- Net assets of discontinued operations ....................... $18,491 =======
48 INDEPENDENT ACCOUNTANTS' REPORT To the Shareholders and Board of Directors Foremost Corporation of America Grand Rapids, Michigan We have audited the accompanying consolidated balance sheets of Foremost Corporation of America as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Foremost Corporation of America at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. 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 page 25 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 14, 1997, except for Note 12 which is as of March 26, 1997 Grand Rapids, Michigan 49 SUPPLEMENTARY DATA RESULTS BY QUARTER
1st 1st 2nd 2nd 3rd 3rd 4th 4th Consolidated Statements Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter of Income 1996 1995 1996 1995 1996 1995 1996 1995 -------- -------- -------- -------- -------- -------- -------- -------- (In thousands except per share data) Total income from continuing operations $115,051 $113,501 $115,687 $113,377 $115,057 $115,946 $115,331 $114,629 ======== ======== ======== ======== ======== ======== ======== ======== Income (loss): Property & casualty insurance $ 42 $ 9,397 $ 11,179 $ 10,432 $ 9,027 $ 14,463 $ 6,946 $ 12,556 Parent company and other .... (1,095) (986) (1,298) (1,230) (1,145) (777) (488) (617) -------- -------- -------- -------- -------- -------- -------- -------- Total continuing operations (1,053) 8,411 9,881 9,202 7,882 13,686 6,458 11,939 Discontinued operations ..... 969 557 (586) 472 -- 503 (22) 555 -------- -------- -------- -------- -------- -------- -------- -------- Net income ................. $ (84) $ 8,968 $ 9,295 $ 9,674 $ 7,882 $ 14,189 $ 6,436 $ 12,494 ======== ======== ======== ======== ======== ======== ======== ======== Change in unrealized appreciation (depreciation) of securities available for sale, net of tax ....... $ (2,477) $ 7,397 $ (1,783) $ 6,018 $ 2,637 $ 3,611 $ 4,244 $ 141 ======== ======== ======== ======== ======== ======== ======== ======== Per share of common stock: Net income: Continuing operations ..... $ (0.10) $ 0.82 $ 0.99 $ 0.90 $ 0.80 $ 1.34 $ 0.67 $ 1.18 Discontinued operations ... 0.09 0.05 (0.06) 0.04 -- 0.05 -- 0.06 -------- -------- -------- -------- -------- -------- -------- -------- Net income .............. $ (0.01) $ 0.87 $ 0.93 $ 0.94 $ 0.80 $ 1.39 $ 0.67 $ 1.24 ======== ======== ======== ======== ======== ======== ======== ======== Average shares outstanding ... 10,045 10,349 9,961 10,253 9,888 10,204 9,567 10,085 ======== ======== ======== ======== ======== ======== ======== ======== Dividends per share .......... $ 0.27 $ 0.27 $ 0.27 $ 0.27 $ 0.27 $ 0.27 $ 0.27 $ 0.27 ======== ======== ======== ======== ======== ======== ======== ======== Price range of common stock: High ....................... $ 60 1/2 $ 38 1/2 $ 58 1/8 $ 42 $ 57 1/8 $ 44 1/4 $ 60 $ 52 3/4 ======== ======== ======== ======== ======== ======== ======== ======== Low ........................ $ 50 3/4 $ 35 1/4 $ 52 $ 36 3/4 $ 54 1/8 $ 38 $ 54 $ 50 3/4 ======== ======== ======== ======== ======== ======== ======== ========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 50 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding directors of the Company contained in the definitive Proxy Statement of the Company relating to its May 8, 1997 Annual Meeting of Stockholders under the captions "Nominees for Election as Directors," "Board of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" are incorporated herein by reference. The information regarding Executive Officers is provided in the Supplemental Item following Item 4. of Part I above. ITEM 11. EXECUTIVE COMPENSATION The information regarding Executive Compensation contained in the definitive Proxy Statement of the Company relating to its May 8, 1997 Annual Meeting of Stockholders under the captions "Executive Compensation" and "Compensation Committee Interlocks and Insider Participation" is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information regarding security ownership of certain beneficial owners and management contained in the definitive Proxy Statement of the Company relating to its May 8, 1997 Annual Meeting of Stockholders under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information regarding relationships and related transactions contained in the definitive Proxy Statement of the Company relating to its May 8, 1997 Annual Meeting of Stockholders under the captions "Executive Compensation," "Compensation Committee Interlocks and Insider Participation" and "Certain Relationships and Related Transactions" is incorporated herein by reference. 51 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K ITEM 14(A)1. LIST OF FINANCIAL STATEMENTS The following Financial Statements are filed as part of this Form 10-K Report: Page No. Consolidated Balance Sheets at December 31, 1996 and 1995 21 Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994 22 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 23 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 24 Property and Casualty Statements of Income for the years ended December 31, 1996, 1995 and 1994 25 Parent Company and Other Statements of Operations for the years ended December 31, 1996, 1995 and 1994 25 Notes to Consolidated Financial Statements 26-48 Independent Accountants' Report 49 Supplementary Data - Results by Quarter 50 ITEM 14(A)2. FINANCIAL STATEMENT SCHEDULES The following Financial Statement Schedules are filed as part of this Form 10-K report: Page No. Independent Accountants' Report on Schedules 56 Schedule II - Condensed Financial Information of Registrant 57-59 Schedule III - Supplementary Insurance Information 60 All other schedules have been omitted as not applicable or the required information is given in the financial statements, including the notes thereto. 52 ITEM 14(A)3. LIST OF EXHIBITS EXHIBIT NUMBER DESCRIPTION OF EXHIBIT 3(a) Restated Certificate of Incorporation. (Incorporated by reference to Company's Annual Report on Form 10-K for the year ended December 31, 1985 dated February 27, 1986) 3(b) Certificate of Amendment of Restated Certificate of Incorporation dated May 8, 1987. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1987, dated February 29, 1988) 3(c) Certificate of Amendment of Restated Certificate of Incorporation dated May 6, 1988. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ending December 31, 1988, dated February 28, 1989) 3(d) Bylaws of the Company, as amended. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ending December 31, 1988, dated February 28, 1989) 4(a) Specimen Certificate of Common Stock of registrant. 4(b) Rights Agreement. (Incorporated by reference to Exhibit 2.1 of the Company's Registration Statement on Form 8-A, effective January 8, 1990) 10(a) Company's Annual Incentive Plan, restated January 1, 1996.* 10(b) Company's Long-Term Incentive Plan dated December 8, 1994, as amended December 5, 1996.* 10(c) Company's Retirement Supplement Plan, as amended effective January 1, 1994.* (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, dated February 24, 1994) 10(d) Company's Non-Qualified Stock Option Plan, dated February 23, 1995.* (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ending December 31, 1994, dated February 23, 1995) - ------------- * Management Contract or compensatory plan or arrangement. 53 10(e) Agreement made as of the 7th day of December, 1989 between the Company and the American Association of Retired Persons. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, dated February 22, 1990) 10(f) Director's Deferred Compensation Plan, as amended effective January 1, 1994.* (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, dated February 24, 1994) 10(g) Executive Deferred Compensation Plan, as amended effective January 1, 1994.* (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, dated February 24, 1994) 10(h) Employment Agreements dated as of January 1, 1990 between the Company and certain of its employees.* (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, dated February 22, 1990) 10(i) Directors' Restricted Stock Plan, dated December 8, 1994.* (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ending December 31, 1994, dated February 23, 1995) 12 Statement Re Computation of Ratios. 21 Subsidiaries of the Registrant. 23 Consent of Independent Public Accountants. 27 Financial Data Schedule. 28 Information from Reports Furnished to State Insurance Regulatory Authorities. - ------------- * Management Contract or compensatory plan or arrangement. The Company will furnish a copy of any exhibit listed above to any stockholder without charge upon written request to Mr. Paul D. Yared, Senior Vice President, Secretary and General Counsel, P.O. Box 2450, Grand Rapids, Michigan 49501. ITEM 14(B). REPORTS ON FORM 8-K No reports on Form 8-K were filed in the fourth quarter of the fiscal year ended December 31, 1996. 54 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FOREMOST CORPORATION OF AMERICA Date: March 26, 1997 By s/R. L. Antonini ----------------------------- R. L. Antonini Chairman of the Board, President & Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: SIGNATURE TITLE DATE s/R. L. Antonini Chairman of the Board, March 26, 1997 - ------------------------- President and Chief R. L. Antonini Executive Officer (Principal Executive Officer) s/John C. Canepa Director March 26, 1997 - ------------------------- John C. Canepa s/Arthur E. Hall Director March 26, 1997 - ------------------------- Arthur E. Hall s/Richard A. Kayne Director March 26, 1997 - ------------------------- Richard A. Kayne s/Larry J. Orange Executive Vice President March 26, 1997 - ------------------------- and Director Larry J. Orange s/Joseph A. Parini Director March 26, 1997 - ------------------------- Joseph A. Parini s/Robert M. Raives Director March 26, 1997 - ------------------------- Robert M. Raives s/F. Robert Woudstra Executive Vice President, March 26, 1997 - ------------------------- Treasurer and Director F. Robert Woudstra (Principal Accounting and Financial Officer) 55 INDEPENDENT ACCOUNTANTS' REPORT REGARDING SCHEDULES Foremost Corporation of America Grand Rapids, Michigan The audits referred to in our report dated February 14, 1997 relating to the Consolidated Financial Statements of Foremost Corporation of America and Subsidiaries which is contained in Item 8. of this Form 10-K, included the audit of financial statement schedules listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based upon our audits. In our opinion, the financial statement schedules, present fairly, in all material respects, the information set forth therein. BDO SEIDMAN, LLP - ---------------- BDO SEIDMAN, LLP March 26, 1997 Grand Rapids, Michigan 56 SCHEDULE II FOREMOST CORPORATION OF AMERICA (PARENT ONLY) CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CONDENSED BALANCE SHEETS
DECEMBER 31, 1996 1995 --------- --------- (In thousands) Assets: Investment in unconsolidated subsidiaries ........... $ 285,485 $ 306,478 Other invested assets ............................... 6,100 450 Cash ................................................ 28 43 Due from affiliates ................................. 631 726 Real estate and equipment (net of accumulated depreciation) ......................... 34,179 35,998 Other assets ........................................ 12,688 11,728 --------- --------- Total assets ..................................... $ 339,111 $ 355,423 ========= ========= Liabilities: Notes payable ....................................... $ 92,154 $ 96,412 Due to affiliates ................................... 3,293 2,651 Other liabilities ................................... 12,242 12,163 --------- --------- Total liabilities ................................ 107,689 111,226 --------- --------- Shareholders' Equity: Common stock ......................................... 14,000 14,000 Other shareholders' equity ........................... 217,422 230,197 --------- --------- Total shareholders' equity ......................... 231,422 244,197 --------- --------- Total liabilities and shareholders' equity ......... $ 339,111 $ 355,423 ========= ========= - ---------- See Notes to Consolidated Financial Statements in Item 8.
57 SCHEDULE II (CONT.) FOREMOST CORPORATION OF AMERICA (PARENT ONLY) CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CONDENSED STATEMENTS OF INCOME
Years Ended December 31, 1996 1995 1994 --------- --------- --------- (In thousands) Income: Intercompany income ....................... $ 6,635 $ 6,726 $ 7,090 Investment and other ...................... 1,222 505 317 Realized gains on investments ............. 10,042 -- 55 --------- --------- --------- Total income ............................ 17,899 7,231 7,462 --------- --------- --------- Expense: Operating ................................. 4,255 4,963 5,613 Interest .................................. 7,869 9,374 8,699 --------- --------- --------- Total expense ........................... 12,124 14,337 14,312 --------- --------- --------- Income (loss) before tax and income of unconsolidated subsidiaries ...... 5,775 (7,106) (6,850) Income tax (provision) credit ............... (4,375) 2,648 2,451 --------- --------- --------- Income (loss) before income of of unconsolidated subsidiaries .......... 1,400 (4,458) (4,399) Income of unconsolidated subsidiaries * ..... 22,129 49,783 34,096 --------- --------- --------- Net income ................................ $ 23,529 $ 45,325 $ 29,697 ========= ========= ========= * Includes dividends to parent company of: .. $ 32,600 $ 37,240 $ 38,700 ========= ========= ========= - ---------- See Notes to Consolidated Financial Statements in Item 8.
58 SCHEDULE II (CONT.) FOREMOST CORPORATION OF AMERICA (PARENT ONLY) CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1996 1995 1994 --------- --------- --------- (In thousands) Net cash for operating activities ............. $ (5,581) $ (2,734) $ (277) Investing Activities: Maturities of invested assets ............... -- 34 38 Net proceeds from sale of subsidiary ........ 23,604 -- -- Purchases of real estate and equipment ...... (29) (42) (3,148) Distributions from subsidiaries - net ....... 32,600 36,540 30,800 (Increase) decrease in short-term investments (5,750) (400) 1,050 -------- -------- -------- Net cash from investing activities ........ 50,425 36,132 28,740 -------- -------- -------- Financing Activities: Repayment of long-term debt ................. (2,258) (8,047) (7,857) Increase (decrease) in short-term debt ...... (2,000) -- 2,000 Acquisition of treasury shares .............. (32,111) (14,351) (11,340) Dividends paid .............................. (10,655) (11,052) (11,460) Receipts from exercise of stock options ..... 2,165 68 -- -------- -------- -------- Net cash for financing activities ......... (44,859) (33,382) (28,657) -------- -------- -------- Cash increase (decrease) ................ (15) 16 (194) Cash at beginning of year ..................... 43 27 221 -------- -------- -------- Cash at end of year ......................... $ 28 $ 43 $ 27 ======== ======== ======== - ---------- See Notes to Consolidated Financial Statements in Item 8.
59 SCHEDULE III FOREMOST CORPORATION OF AMERICA AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION
Future policy Benefits, benefits, claims, Amortization Prepaid losses, losses prepaid policy claims Net and policy Other Net acquisition and loss Unearned Premium investment settlement acquisition operating premium Segment cost expenses premiums revenue income expenses costs expenses * written - ---------------------------- ---------- ---------- -------- -------- ---------- ---------- ---------- ---------- -------- (In thousands) Year Ended December 31, 1996 Property and casualty ... $ 70,231 $ 93,420 $241,313 $427,565 $ 26,686 $ 276,175 $ 122,795 $ 16,123 $419,953 Parent and Other ........ -- -- -- -- 430 -- -- 8,978 -- ---------- ---------- -------- -------- ---------- ---------- ---------- ---------- -------- Total ................. $ 70,231 $ 93,420 $241,313 $427,565 $ 27,116 $ 276,175 $ 122,795 $ 25,101 $419,953 ========== ========== ======== ======== ========== ========== ========== ========== ======== Discontinued Operations .. -- -- -- 8,908 745 6,227 2,167 41 8,908 ========== ========== ======== ======== ========== ========== ========== ========== ======== Year Ended December 31, 1995 Property and casualty ... $ 72,560 $ 93,771 $248,953 $426,282 $ 27,212 $ 244,081 $ 125,115 $ 11,835 $425,446 Parent and Other ........ -- -- -- -- 96 -- -- 6,347 -- ---------- ---------- -------- -------- ---------- ---------- ---------- ---------- -------- Total ................. $ 72,560 $ 93,771 $248,953 $426,282 $ 27,308 $ 244,081 $ 125,115 $ 18,182 $425,446 ========== ========== ======== ======== ========== ========== ========== ========== ======== Discontinued Operations .. 1,492 3,733 2,677 21,797 2,036 15,052 5,342 147 21,797 ========== ========== ======== ======== ========== ========== ========== ========== ======== Year Ended December 31, 1994 Property and casualty ... $ 72,385 $ 90,722 $249,855 $409,929 $ 24,610 $ 249,533 $ 125,067 $ 12,342 $415,521 Parent and Other ........ -- -- -- -- 130 -- -- 8,500 -- ---------- ---------- -------- -------- ---------- ---------- ---------- ---------- -------- Total ................. $ 72,385 $ 90,722 $249,855 $409,929 $ 24,740 $ 249,533 $ 125,067 $ 20,842 $415,521 ========== ========== ======== ======== ========== ========== ========== ========== ======== Discontinued Operations .. 2,697 4,774 4,798 21,917 2,183 14,468 5,570 620 21,917 ========== ========== ======== ======== ========== ========== ========== ========== ======== - ---------- * Allocations of other operating expenses are based on a number of assumptions and estimates and results would change if different methods were applied. See Notes to Consolidated Financial Statements in Item 8.
60 EX-4 2 SPECIMEN CERTIFICATE OF COMMON STOCK EXHIBIT 4(A) SPECIMEN CERTIFICATE OF COMMON STOCK OF REGISTRANT Front: - ------------------------------------------------------------------------------ | | | NUMBER SHARES | | ----------- ----------- | | | FC | | | | | ----------- ----------- | | Incorporated under the laws COMMON STOCK | | of the state of Delaware | | | | FOREMOST CORPORATION OF AMERICA | | This certificate is transferable in | | Cleveland or in the city of New York | | | | CUSIP 345469 10 0 | | ------------------------------------------------------------ | | | reverse side for certain definitions | | | | | | | | THIS CERTIFIES THAT IS THE OWNER OF | | | | | | | | SPECIMEN | | | | | | | | | | | ------------------------------------------------------------ | | FULL PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, | | PAR VALUE $1 PER SHARE, OF | | | | FOREMOST CORPORATION OF AMERICA, TRANSFERABLE UPON THE BOOKS OF THE | | CORPORATION BY THE HOLDER HEREOF IN PERSON OR BY DULY AUTHORIZED ATTORNEY | | UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED. THIS CERTIFICATE | | IS NOT VALID UNLESS COUNTERSIGNED AND REGISTERED BY THE TRANSFER AGENT AND | | REGISTRAR. WITNESS THE FACSIMILE SEAL OF THE CORPORATION AND THE FACSIMILE | | SIGNATURES OF ITS DULY AUTHORIZED OFFICERS. | | DATED: | | | | Paul D. Yared Richard L. Antonini | | ---------------------- ----------------------- | | Senior Vice President, Chairman of the Board, | | Secretary and President and | | General Counsel Chief Executive Officer | | | | ------------- | | | Corporate | | | | Seal | | | ------------- | - ------------------------------------------------------------------------------ Keycorp Shareholder Services, Inc. (Cleveland, Ohio) Transfer Agent and Registrar By: - --------------------------------- Authorized Signature EXHIBIT 4(A) (CONTINUED) SPECIMEN CERTIFICATE OF COMMON STOCK OF REGISTRANT (CONTINUED) Back: - ------------------------------------------------------------------------------ The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applications or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT Custodian TEN ENT - as tenants by entireties ------- ------ JT TEN - as joint tenants with right (Cust) (Minor) of survivorship and not as under Uniform Gifts to tenants in common Minors Act ------------- (state) Additional abbreviations may also be used though not in above list. FOR VALUE RECEIVED, HEREBY SELL, ASSIGN AND TRANSFER UNTO --------------- Please insert social security number or other identifying number of assignee - ------------------------------ | | - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ (Please print or type name and address, including zip code, of assignee) - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------SHARES OF THE CAPITAL STOCK REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT - ----------------------------------------------------------------------ATTORNEY TO TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN-NAMED CORPORATION WITH FULL POWER OF THE SUBSTITUTION IN THE PREMISES. DATED --------------------------- ------------------------------------------------------------------ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the certificate in every particular, without alteration or enlargement or any change whatever. EX-10 3 ANNUAL & LONG-TERM INCENTIVE PLANS EXHIBIT 10(A) FOREMOST CORPORATION OF AMERICA ANNUAL INCENTIVE PLAN Restated January 1, 1996 PURPOSE: Annual cash incentive based upon performance against calendar year goals. ELIGIBILITY: 1. Person must be in an exempt job position with a Foremost Job Size rating of 220 Foremost Points or more. 2. Must be employed at least 20 hours per week by Foremost Insurance Company Grand Rapids, Michigan or its property and casualty affiliates. 3. Participants in this plan may not receive any other annual incentive payment or sales bonus, unless pro-rated among plans due to a change in jobs during the year. 4. As a general rule, the participant must be employed by a participating company from the 1st working day of July through December 31 of the plan year. a. The exception to the 1st working day of July employment requirement is for persons on approved leave of absence; b. Exceptions to the December 31 employment requirement are: (1) Persons on approved leave of absence; (2) Retirement at age 55 or more; or (3) Permanent disability or death. In the event that an eligible plan participant was not actively employed in an eligible job for the entire year or in the event of an exception, as provided in subparagraphs (a) or (b) above, bonus payment will be prorated based upon the number of full calendar months the person was actively employed in an eligible position during the calendar year if actual goals are ultimately met as of December 31 of the plan year. Any person who is terminated, for reasons other than those set forth above, or who resigns from employment during a plan year will not be eligible for payment for the year of termination or resignation. BASIS OF AWARD: 1. The Committee on Executive Management and Compensation of the Board of Directors of Foremost Corporation of America ("Compensation Committee") shall establish the following performance goals by December 31st of each year prior to the year of performance measurement, subject to ratification by the Board of Directors: a. EARNINGS PER SHARE ("EPS") OF FOREMOST CORPORATION OF AMERICA ("FCOA") - Threshold (Minimum), On-Plan (Target) and Outstanding (Maximum) Goals for the applicable performance year. EPS Goals shall remain confidential and shall not be disclosed to the plan participants until after the end of the performance year. b. COMBINED LOSS AND EXPENSE RATIO ("COMBINED RATIO") OF THE FCOA PROPERTY AND CASUALTY INSURANCE GROUP - Threshold (Minimum), On-Plan (Target) and Outstanding (Maximum) Goals for the applicable performance year. c. WRITTEN PREMIUM OF THE FCOA PROPERTY AND CASUALTY INSURANCE GROUP - Threshold (Minimum), On-Plan (Target), and Outstanding (Maximum) for the applicable year. 2. SENIOR EXECUTIVE OFFICERS - For the Chief Executive Officer, President, Executive Vice Presidents and the Senior Vice President, Secretary and General Counsel of FCOA, the awards under this plan shall be based 50% on the EPS, 30% on the Combined Ratio and 20% on Written Premium results. 3. OTHER PARTICIPANTS - For most other participants, the awards under this plan shall be based 50% on the Combined Ratio, 30% on the EPS and 20% on Written Premium or other divisional goals approved by the CEO. The CEO shall also have authority to establish different bonus goals or objectives for employee groups or for employees involved in special initiatives. COMPUTATION OF PAYMENT: 1. The measurement of performance against the goals will be on a GAAP basis as calculated by the Treasurer of FCOA. The Earnings Per Share calculation shall take into account the change (increase or decrease) in unrealized gain (after tax) on the "Total Return" investment portfolio of the FCOA consolidated group at year end compared to prior year end. 2. Payment, if any, will be a percent of a participant's average annual base salary for the plan year. 3. The opportunity percent will be established from time to time for each job based upon Foremost Job Size ratings. However, the Compensation Committee shall establish the opportunity percentages of the Senior Executive Officers. 4. Within each Foremost Job Size Range there will be a range of opportunity levels providing: a. A maximum percent (defined as 150% of target percent) if performance meets or exceeds the "Outstanding Performance" goal; b. A target percent if performance meets the "On-Plan" goal; c. A minimum percent (defined as 50% of target percent) if performance meets the "Threshold" goal, but is less than the "On-Plan" goal; and d. No bonus (0%) if the "Threshold" goal is not met. 5. If results fall within the Opportunity Levels, percentages will be pro-rated at least to the nearest 1/10th of a percentage point. 6. Persons whose jobs change from one Foremost Job Size Range to another during a calendar year will be subject to pro-rated payment based upon the number of months in each range (partial months shall be credited to the previous position). 7. The Compensation Committee shall certify in writing that the EPS, Combined Ratio and Written Premium performance goals were achieved prior to payment of the awards under this plan. PAYMENT: Will be made in cash after certificate of results by the Compensation Committee. EXHIBIT 10(B) FIRST AMENDMENT TO FOREMOST CORPORATION OF AMERICA LONG TERM INCENTIVE PLAN The First Amendment was made this 5th day of December, 1996, to be effective as set forth below: WHEREAS, Foremost Corporation of America ("Company") adopted a Long Term Incentive Plan, dated December 8, 1994, and effective January 1, 1995 ("Plan"); and WHEREAS, the Board of Directors of the Company approved the following amendments to said Plan effective as stated below; NOW, THEREFORE, the Plan is amended as follows: 1. The definition of "Committee" as contained at Section 2.(c) of the Plan is amended, effective November 1, 1996, by substituting the word "two" for the word "three" as contained in the seventh line of said definition. 2. Section 6.(a) is amended, effective January 1, 1996, by adding the following between the first and second sentences thereof: "ROE calculation for each year, beginning with 1996, shall take into account the change (increase or decrease) in the unrealized gain (after tax) on the "Total Return" investment portfolio of the Company and its consolidated subsidiaries as of December 31st of each applicable year compared to the prior December 31st." 3. All other terms and conditions of the Plan, as amended, shall continue in force and effect as written, except as expressly amended above. IN WITNESS WHEREOF, the Company has caused this First Amendment to be executed by a proper officer as of the day and year first above written. FOREMOST CORPORATION OF AMERICA By --------------------------------- R. L. Antonini Its: President and Chief Executive Officer EXHIBIT 10(B) (CONTINUED) LONG-TERM INCENTIVE PLAN DECEMBER 8, 1994 1. PURPOSE. The purpose of the Foremost Corporation of America Long-Term Incentive Plan (the "Plan") is to promote the growth and profitability of the Company by providing the incentive of long-term equity rewards to those key employees who have had, and who are expected to continue to have, a significant impact on the performance of the Company, to encourage such employees to remain with the Company and to further identify their interest with those of the Company's stockholders. 2. DEFINITIONS. For the purpose of the Plan, the following terms shall have the meanings indicated: (a) "Board of Directors" or "Board" shall mean the Board of Directors of Foremost. (b) "Change in Control" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not Foremost is then subject to such reporting requirement, other than an acquisition of control by the Company or an employee benefit plan maintained by the Company; PROVIDED, THAT, without limitation, a Change in Control shall be deemed to have occurred if (i) any "person" (as such term is used in Section 13(d) or 14(d)(2) of the Exchange Act) other than Foremost or an employee benefit plan maintained by the Company becomes the "beneficial owner" (as defined in Rule 13d-3 of the General Rules and Regulations under the Exchange Act), directly or indirectly, of securities of Foremost representing twenty percent (20%) or more of the combined voting power of Foremost's then outstanding securities entitled to vote in the election of directors of Foremost; or (ii) during any period of two (2) consecutive years, individuals who at the beginning of such period constituted the Board of Directors cease for any reason to constitute a majority thereof (unless the election or nomination for election by Foremost's stockholders of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period) or (iii) Foremost enters into an agreement, the consummation of which would result in the occurrence of a Change in Control as described above. (c) "Committee" shall mean either (i) the Board of Directors, PROVIDED, that, any action by the Board of Directors with respect to the Plan complies with the requirements of paragraph (b) of Rule 16b-3 promulgated under the Securities Exchange Action of 1934 ("Rule 16b-3") or (ii) the Committee on Executive Management and Compensation of the Board of Directors, or its functional successor, unless some other committee of the Board of Directors has been designated by the Board of Directors to administer the Plan, PROVIDED, that any such committee shall consist of three or more members of the Board of Directors who are not officers, or in the employ, of the Company and who are not eligible, and for a period of one year prior to the commencement of their service on the Committee have not been eligible, to participate in the Plan and who are disinterested persons within the terms of Rule 16b-3. Committee members shall serve at the pleasure of the Board of Directors. (d) "Common Stock" shall mean the common stock of Foremost, par value $1.00 per share. (e) "Company" shall mean Foremost and shall include each of its present or future subsidiaries, which are defined to include any corporation, partnership, or other organization in which Foremost has a proprietary interest by reason of stock ownership or otherwise, but only if Foremost owns or controls, directly or indirectly, stock or other interest possessing not less than 50% of the total combined voting power of all classes of stock or other equity interests in such corporation, partnership, or organization. (f) "Fair Market Value" of the Common Stock on any given date(s) shall mean: (i) the mean of the high and low sales prices on the date(s) in question of the Common Stock on the New York Stock Exchange or, if the Common Stock shall not have been traded on such exchange on any such date(s), the mean of the high and low sales process on Common Stock so traded; (ii) if the Common Stock is not traded on the New York Stock Exchange but is the subject of any published market quotations, the last sales price of the Common Stock on the date(s) in question as quoted on the NASDAQ National Market System, or if such price is not available on any such date(s) it shall be the mean between the high and low sales or between the bid and asked prices whether or not reported on NASDAQ on the date next preceding during which such stock was traded; and (iii) if no published market quotations for the Common Stock are available, Fair Market Value shall be determined in good faith by the Company. (g) "Foremost" means the Foremost Corporation of America, a Delaware corporation. (h) "Participant" shall mean an employee of the Company who has met the eligibility requirements set forth in Section 5 hereof and to whom a grant has been made and is outstanding under the Plan. (i) "Permanent Disability" shall mean a physical or mental condition of a Participant that, in the judgment of the Company, based on a certification by a licensed physician, prevents such Participant from being able to perform his normal duties and such condition has continued for a period of at least six months and is expected to continue. (j) "Restricted Shares" means shares of Common Stock awarded and transferred to a Participant subject to the conditions and restrictions specified in Section 7 of the Plan. (k) "Retirement" shall mean the cessation of employment, after the Participant has attained at least age 55 and completed at least 10 years of service with the Company, including service prior to the adoption of this Plan or at an earlier age or with fewer years of service with the consent of the Committee. 3. ADMINISTRATION. (a) The Plan shall be administered by the Committee. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to: (i) select Participants after receiving the recommendations of the Chief Executive Officer of Foremost; (ii) determine the number of Restricted Shares subject to each grant; (iii) determine the time or times when grants are to be made; and (iv) prescribe the form or forms of the instruments evidencing any grants made hereunder, provided that such forms are consistent with the Plan. The Committee may (i) adopt, amend, and rescind such rules and regulations as, in its opinion, may be advisable for the administration of the Plan; (ii) construe and interpret the Plan and any related documents such as the Restricted Share Agreement (as defined in Section 7(b); and (iii) make all other determinations necessary for the administration of the Plan. All determinations by the Committee shall be final and binding. (b) The Committee shall hold meetings at such times and places as it may determine or may act by telephonic conference or by written consent. The Committee may request advice or assistance or employ such other persons as are necessary for the proper administration of the Plan, and may delegate ministerial and clerical duties to management personnel of the Company, as it deems necessary. 4. SHARES OF COMMON STOCK SUBJECT TO THE PLAN. No more than 75,000 shares of Common Stock shall be issued as Restricted Shares under the Plan, subject to adjustment as provided in Section 9 hereof. All Shares of Common Stock granted as Restricted Shares hereunder shall either be newly authorized or treasury shares. 5. ELIGIBILITY AND PARTICIPATION. (a) Participation is limited to Executives as recommended by the Chief Executive Officer and further subject to approval by the Committee. (b) The Participant must be employed full time by the Company from January 1 through December 31 of each three year plan period. The first such plan commencing on January 1, 1992 and ending on December 31, 1994. An exception to the January 1 employment requirement would apply for persons who become eligible for participation not later than January 1 of the second year of the applicable three year plan. 6. AWARDS. The award shall be based on Foremost's average annual return on beginning shareholders' equity (ROE) over three year periods. The Committee shall establish ROE performance goals by December 31st of the year prior to the start of each three year plan including a Threshold (minimum), On-Plan (target) and Outstanding (Maximum) goal for each three year plan. A three year goal, and plan will be started each year and will overlap and be independent of the plans initiated in the prior years. All awards paid after December 31, 1994 (including awards for the 1992-1994, 1993-1995 and 1994-1996 plans) shall be paid approximately 70% in Common Stock (rounded to nearest full shares) and the balance in cash. The award will be calculated as follows: (a) The measurement of results against the goals will be calculated at the end of each three year plan by the Treasurer of the Company based on GAAP results. Unrealized gains and losses as a result of the "mark-to-market" requirements for the fixed income investment portfolio will be excluded for purposes of the measurement. (b) The award, if any, will be a percent of the Participant's average annual base salary over the applicable three year period. (c) Opportunity percentages will be established for each Participant by the Committee at the following opportunity levels: i. A maximum percent if Foremost's ROE meets or exceeds the "Outstanding Performance" goal; ii. A target percent if Foremost's ROE meets the "On-Plan" goal; iii. A minimum percent if Foremost's ROE meets the "Threshold" goal but is less than the "On-Plan" goal; and iv. No award will be made if the Threshold goal is not met for the applicable three-year period. (d) If results fall within the Opportunity Levels, award percentages will be pro-rated at least to the nearest 1/10th of a percentage point. (e) If a Participant's opportunity percentage is changed by the Committee during a three year plan the Participant will be subject to a pro-rated award based on the effective date of the change. (f) The Committee shall certify in writing that the performance goal was achieved prior to issuance of the awards under this Plan. (g) Awards will be made on or before February 15 of the year following the applicable three year plan after certification of results by the Committee. 7. PROVISIONS APPLICABLE TO RESTRICTED SHARES. (a) RESTRICTED PERIOD. With respect to any grant of Restricted Shares, such grant shall be fully vested on December 31st of the third year of the applicable three year plan, but are subject to a three (3) year resale restriction provided in Section 7(c) while the Participant is employed by the Company. The resale restriction shall lapse upon termination (voluntary or involuntary) or in the event of a Change in Control. The three (3) year restricted period shall be measured from January 1 of the year in which the grant was made as specified in the Restricted Share Agreement (as defined in Section 7(b)) executed by Foremost and such Participant in connection with a grant under this Plan. (b) GRANTS OF RESTRICTED SHARES. The number of shares of Common Stock will be determined by multiplying the award calculated as set forth in Section 6 above by 0.70(70%) and dividing that product by the Fair Market Value of the Common Stock on December 31st of the third year of the applicable three year period, or the next preceding trading day if the Common Stock was not traded on December 31st. The number of shares shall be rounded to the nearest whole share and the balance of the award (approximately 30%) will be paid in cash. Each grant shall be evidenced by a written agreement, signed by the Participant (the "Restricted Share Agreement"), which shall state the number of Restricted Shares granted, and any other terms, conditions and rights with respect to such grant. (c) RESTRICTION. When Restricted Shares are granted, share certificates representing the appropriate number of Restricted Shares granted to a Participant shall be registered in the name of the Participant but held by the Corporate Secretary of Foremost for the account of the Participant. Such certificates may bear a legend restricting their transferability as provided herein. Except as provided in Section 21, during the Restricted Period, the Participant shall have the right to receive all dividends payable with respect to such Restricted Shares and to vote such Restricted Shares. The Restricted Shares may not be sold, transferred, assigned, pledged, or otherwise encumbered or disposed of by the Participant during the applicable Restricted Period, except as provided in the Plan and by operation of law. (d) DISABILITY OR TERMINATION OF EMPLOYMENT. In the event of Permanent Disability or if a Participant ceases to be an employee of the Company prior to the end of a Restricted Period by reason of death, Retirement, or termination (voluntary or involuntary), all restrictions contained in the applicable Restricted Share Agreement and in the Plan shall terminate as to the Restricted Shares granted to such Participant, and certificates for the appropriate number of shares of Common Stock free of the restrictions of the Plan and the Restricted Share Agreement shall be delivered to the Participant as set forth in Section 7(e) hereof. (e) DELIVERY OF SHARES FREE OF RESTRICTIONS. At the end of the applicable Restricted Period or at such earlier time as provided for in Section 7(d) hereof, all restrictions contained in the Plan and the applicable Restricted Share Agreement shall terminate as to the Restricted Shares and certificates for the appropriate number of shares of Common Stock free of the restrictions of this Plan and the Restricted Share Agreement, registered in the name of the Participant, shall be delivered to the Participant or his beneficiary or estate, as the case may be; PROVIDED, HOWEVER, that the Committee shall have the option, in its sole discretion, to make a cash payment to the Participant, in lieu of the delivery of such shares of Common Stock, in an amount equal to the Fair Market Value of the Common Stock on the date of payment but, in no event shall any such cash payment be made which would not satisfy the requirements of paragraph (e) of Rule 16b-3. 8. CHANGE IN CONTROL. Any other provision of the Plan to the contrary notwithstanding, in the event a Change in Control shall occur, all restrictions continued in the applicable Restricted Share Agreement and in the Plan shall terminate as to the Restricted Shares granted to such Participant, and certificates for the appropriate number of shares of Common Stock, free of the restrictions of the Plan and the Restricted Share Agreement, shall be delivered to the Participant as set forth in Section 7(e) hereof. In the event of a Change in Control, no changes in the Plan, or in any documents evidencing grants of Restricted Shares, and no adjustments, determinations or other exercises of discretion by the Committee or the Board of Directors, that were made subsequent to the Change in Control and that would have the effect of diminishing a Participant's rights under the Plan shall be effective. 9. CHANGES IN CAPITALIZATION. Except as provided in Section 8, if any change shall occur in or affect the Common Stock on account of a merger, consolidation, reorganization, dividend, split or combination, reclassification, recapitalization, or distribution to holders of the Common Stock (other than regular dividends) or, if in the opinion of the Board of Directors, after consultation with the Company's independent public accountants, changes in the Company's accounting policies, acquisitions, divestitures, distributions, or other unusual or extraordinary items have disproportionately and materially affected the value of the Restricted Shares, the Board of Directors shall make such adjustments, if any, that it may deem, in its sole discretion, necessary or equitable in (a) the maximum number of shares of Common Stock available for issuance under the Plan and (b) the number of shares of Common Stock subject to or reserved for issuance under outstanding Restricted Share grants. In the event of any other change affecting the Common Stock, such adjustment shall be made as may be deemed equitable by the Board of Directors to give proper effect to such event including, without limitation, the acceleration of the end of the Restricted Periods. 10. DESIGNATION OF BENEFICIARY. A Participant may designate a person or persons to receive, in the event of his death, any rights to which he would be entitled under the Plan. Such a designation shall be made in writing and filed with the Company. A beneficiary designation may be changed or revoked by a Participant at any time by filing a written statement of such change or revocation with the Company. If a Participant fails to designate a beneficiary, then his estate shall be deemed to be his beneficiary. 11. RIGHTS AS AN EMPLOYEE. Neither the Plan nor any action taken hereunder shall be construed as giving any employee of the Company the right to become a Participant, and a grant under the Plan shall not be construed as giving any Participant any right to be retained in the employ or service of the Company. 12. NONTRANSFERABILITY. A Participant's rights under the Plan, including the right to any amounts or Common Stock payable, may not be assigned, pledged, or otherwise transferred except, in the event of a Participant's death, to his designated beneficiary or, in the absence of such a designation, by will or the laws of descent and distribution. 13. WITHHOLDING. The employer of a Participant shall have the right, before any payment is made or a certificate of any Common Stock is delivered, to deduct or withhold from any payment under the Plan to satisfy any Federal, state, or local taxes, including transfer taxes, required by law to be withheld or to require the Participant or his beneficiary or estate, as the case may be, to pay any amount, or the balance of any amount, required to be withheld. 14. NO TRUST OR FUND CREATED. Neither the Plan nor any grant made hereunder shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company and a Participant or any other person. To the extent that any person acquires a right to receive payments from the Company pursuant to a grant under the Plan, such right shall be no greater than the right of any unsecured general creditor of the Company. 15. EXPENSES. The expenses of administering the Plan shall be borne by the Company. 16. INDEMNIFICATION. Service on the Committee shall constitute service as a member of the Board of Directors so that members of the Committee shall be entitled to indemnification and reimbursement as directors of the Company pursuant to its Certificate of Incorporation, By-Laws, or resolutions of its Board of Directors or stockholders. 17. TAX LITIGATION. The Company shall have the right to contest, at its expense, any tax ruling or decision, administrative or judicial, on any issue that is related to the Plan and that the Company believes to be important to Participants in the Plan and to conduct any such contest or any litigation arising therefrom to a final decision. 18. AMENDMENT OR TERMINATION. The Board of Directors may modify, amend, or terminate the Plan at any time; PROVIDED, HOWEVER, that no modification, amendment, or termination of the Plan shall adversely affect the rights of a Participant under a grant previously made to him without the consent of such Participant. 19. GOVERNMENTAL AND OTHER REGULATIONS. The Plan and any grant hereunder shall be subject to all applicable Federal and state laws, rules, and regulations and to such approvals by any regulatory or governmental agency that, in the opinion of the counsel for the Company, may be required. 20. GOVERNING LAW. The Plan shall be construed and its provisions enforced and administered in accordance with the laws of the State of Michigan. 21. EFFECTIVE DATE. The Plan shall be effective as of January 1, 1995; PROVIDED, HOWEVER, that it shall be a condition to the effectiveness of the Plan, and any grant hereunder, that the stockholders of Foremost shall approve the adoption of the Plan at the 1995 annual meeting. If the stockholders fail to approve the Plan, then any grants of Common Stock hereunder shall be null and void ab initio. A Participant's right to vote the Restricted Shares or receive dividends with respect thereto shall not be effective until such stockholder approval, PROVIDED, that, dividends payable on the Restricted Shares prior to such stockholder approval shall be held by the Treasurer of Foremost and be paid in arrears following stockholder approval of the Plan. 22. PRIOR PLAN. This Plan replaces and supersedes the Company's Long-Term Incentive Plan which was adopted effective January, 1, 1987. If this plan is not approved by the stockholders the prior plan adopted January 1, 1987, as amended, shall be reinstated as of January 1, 1995 and all awards will be paid in cash. 23. NOTICES. All notices under this Plan shall be in writing, and if to the Company, shall be personally delivered to the Secretary of the Company or mailed to its principal office, 5600 Beech Tree Lane, P.O. Box 2450, Grand Rapids, Michigan 49501, addressed to the attention of the Secretary; and if to the Participant, shall be delivered personally or mailed to the Participant at the address appearing in the payroll records of the Company. Such addresses may be changed at any time by written notice to the other party. IN WITNESS WHEREOF, this Plan has been adopted and ratified this 8th day of December, 1994. FOREMOST CORPORATION OF AMERICA By -------------------------------------- Richard L. Antonini Its: President & Chief Executive Officer By -------------------------------------- Paul D. Yared Its: Senior Vice President & Secretary EXHIBIT 10(B) (CONTINUED) FOREMOST CORPORATION OF AMERICA LONG-TERM INCENTIVE PLAN RESTRICTED SHARE AGREEMENT Agreement made as of the day of , 19 , by and ------ ------------- -- between Foremost Corporation of America, a Delaware corporation (the "Company"), having its principal place of business at 5600 Beech Tree Lane, Caledonia, Michigan 49316, and ------------------------------------------------------------- residing at ------------------------------------------------------------- , (the "Participant"). - -------------------------------------------------------- WHEREAS, pursuant to the terms of the Foremost Corporation of America Long-Term Incentive Plan (the "Plan"), by action of the Committee, the Participant has been granted Restricted Shares which shall be subject -------- to restrictions until January 1, 20 ; -- WHEREAS, the Participant wishes to satisfy a condition of the grant by entering into this Agreement, NOW, THEREFORE, the Company and the Participant hereby agree as follows: 1. The terms used in this Agreement shall have the same meaning as in the Plan, unless the context requires otherwise, except: (a) "Restricted Shares" shall refer only to the Restricted Shares that are the subject of this Agreement; and (b) "Restricted Period" shall refer to the following period of time with respect to the following number of Restricted Shares: Number of Restricted Shares Restricted Period ----------------- ----------------- 2. A certificate for the Restricted Shares will be registered in the name of the Participant but held by the Secretary of the Company during the Restricted Period. The Participant will not sell, transfer, assign, pledge or otherwise encumber or dispose of the Restricted Shares during the Restricted Period, except as permitted in Section 7 of the Plan. 3. Upon the issuance of the Restricted Shares, the Company may require the Participant to pay any taxes or other amounts required by law to be withheld and will not be required to deliver a certificate for shares of Common Stock, free of the restrictions of the Plan and this Agreement, representing the Restricted Shares until such required amounts have been paid. 4. The Participant has received a copy of the Plan and agrees to be bound by the terms and conditions set forth therein whether or not specifically incorporated into this Agreement, and further agrees that, if any conflict arises between this Agreement and the Plan, the terms and conditions of the Plan will prevail. 5. The grant of Restricted Shares is conditional upon (a) receipt by the Company of a copy of this Agreement signed by the Participant and (b) the approval of the Plan by the stockholders of the Company at the 1995 Annual Meeting and will be null and void AB INITIO if such shareholder approval is not obtained at such meeting. 6. All the terms and conditions set forth herein are binding upon the Participant's beneficiaries, heirs, distributees, executors, administrators, and estate. 7. This Agreement may not be amended, modified, or waived except by a writing signed by the parties. 8. This Agreement shall be governed by the laws of the State of Michigan. IN WITNESS WHEREOF, the parties have executed this agreement the day and year first above written. FOREMOST CORPORATION OF AMERICA By --------------------------------- R. L. Antonini Its: President & Chief Executive Officer ----------------------------------- , Participant EX-12 4 COMPUTATION OF RATIOS EXHIBIT 12 STATEMENT RE: COMPUTATION OF RATIOS FOREMOST CORPORATION OF AMERICA AND SUBSIDIARIES DECEMBER 31, 1996
($ in thousands except per share data) Return on Beginning Shareholders' Equity: Net Income ........................................... $ 23,529 -------- Beginning Shareholder's Equity ....................... $244,197 9.6% Price Earnings Ratio: Price Range Per Share of FCOA Common Stock - Low ..... $ 50.75 -------- Earnings Per Share ................................... $ 2.39 21 Price Range Per Share of FCOA Common Stock - High .... $ 60.50 -------- Earnings Per Share ................................... $ 2.39 25 Ratio of Net Written Premiums to Statutory Policyholders' Surplus: Net Premiums Written .............................. $421,100 -------- Statutory Policyholders' Surplus .................. $201,320 2.1 Ratio of Loss and Loss Expense Reserves to Statutory Policyholders' Surplus: Loss and Loss Expense Reserves .................... $ 92,670 -------- Statutory Policyholders' Surplus .................. $201,320 0.5 Combined Loss and Expense Ratio - GAAP: Total Losses and Expenses ............................ $422,107 -------- Premium Earned ....................................... $427,565 98.7%
EX-21 5 CORPORATE ORGANIZATIONAL CHART EXHIBIT 21 CORPORATE ORGANIZATIONAL CHART OF SUBSIDIARIES OF REGISTRANT FOREMOST CORPORATION OF AMERICA DECEMBER 31, 1996 Foremost Corporation of America (Delaware) FEIN: 38-1863522, NAIC Grp: 238 ------------------------------------------- Foremost Insurance Company Grand Rapids, Michigan (Michigan) 100% FEIN: 38-1470533, NAIC: 11185 ------------------------------------------------------------- American Federation Insurance Company (Florida) 100% FEIN: 59-2326047, NAIC: 43699 Foremost Property and Casualty Insurance Company (Indiana) 100% FEIN: 35-1604635, NAIC: 11800 Foremost Signature Insurance Company (Michigan) 100% FEIN: 38-2430150, NAIC: 41513 Federated Insurance Services of California (California) 100% Foremost Financial Services Corporation (Delaware) 100% FEIN: 73-0462770 Foremost Home Services Corporation (Michigan) 100% FEIN: 38-2260224 Foremost Home Brokers, Inc. (Michigan) 100% FEIN: 38-2197432 Foremost Express Insurance Agency, Inc. (Michigan) 100% FEIN: 38-2505922 Foremost Affinity Services, Inc. (Michigan) 100% FEIN: 382234183 Western Star Underwriters, Inc. (Texas) 100% FEIN: 74-1593853 Foremost Real Estate Company (Michigan) 100% FEIN: 38-2429614 Foremost Affiliated Insurance Services, Inc. (Michigan) 100% FEIN: 38-2336672 ---------------------------------------------------------- Pacific Way Insurance Agency, Inc. (Washington) 100% FEIN: 38-2987359 Knight Agency, Inc. (Kentucky) 100% FEIN: 61-1281764 Sunrise Insurance Agency, Inc. (Nevada) 100% FEIN: 88-0266963 Sunrise Insurance Agency of Arizona, Inc. (Arizona) 100% FEIN: 31-1360491 Corvette General Agency, Inc. (Georgia) 100% FEIN: 31-1368858 Frontier Insurance Agency, Inc. (Oregon) 100% FEIN: 38-2987361 Foremost Lloyds of Texas (Texas) FEIN: 75-1779175, NAIC: 41688 Foremost County Mutual Insurance Company (Texas) FEIN: 38-1721730, NAIC: 29254 ---------------------------------------------- Sunrise Insurance Agency of Texas, Inc. (Texas) 100% FEIN: 38-2987749 EX-23 6 CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Foremost Corporation of America Grand Rapids, Michigan We hereby consent to the incorporation by reference of our reports dated February 14, 1997, relating to the consolidated financial statements and schedules of Foremost Corporation of America appearing in the Company's annual report on Form 10-K for the year ended December 31, 1996, in that Corporation's previously filed Form S-8 Registration Statements File No. 33-96692 and 33-96694. BDO SEIDMAN, LLP - ---------------- BDO SEIDMAN, LLP March 26, 1997 Grand Rapids, Michigan EX-27 7 FINANCIAL DATA SCHEDULE
7 0000018508 Foremost Corporation of America 1,000 US Dollars Year Dec-31-1996 Jan-1-1996 Dec-31-1996 1 339,860 2,342 2,341 93,485 12,222 15,169 493,824 5,141 21,416 70,231 721,578 93,420 241,313 0 0 94,851 0 0 14,000 217,422 721,578 427,565 27,116 3,098 3,347 276,175 122,795 0 28,864 5,696 23,168 361 0 0 23,529 2.39 2.39 93,771 277,298 (1,123) 223,518 51,349 93,420 0
EX-28 8 RESERVE RECONCILIATION EXHIBIT 28 INFORMATION FROM REPORTS FURNISHED TO STATE INSURANCE REGULATORY AUTHORITIES FOREMOST CORPORATION OF AMERICA AND SUBSIDIARIES DECEMBER 31, 1996 PROPERTY AND CASUALTY INSURANCE RECONCILIATION OF LOSS RESERVES, STATUTORY SCHEDULE P TO GAAP
(In thousands) Property & casualty consolidated Schedule P reserves ............ $ 92,639 -------- Adjustments for property and casualty GAAP reserves: FHSC warranty reserves ........................................ 33 Rounding differences from Schedule P detail to totals ......... (2) Financial Accounting Standards Board Statement No. 113 adjustment for losses ceded to reinsurance companies ........ 750 -------- Total property and casualty GAAP adjustments ................ 781 -------- Consolidated property and casualty loss reserves - GAAP - December 31, 1996 ................ $ 93,420 ========
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