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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, 1998
Commission File Number: 0-6478
FOREMOST CORPORATION OF AMERICA
(Exact Name of Registrant as Specified in Its Charter)
Michigan 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)
Post Office Box 2450, Grand Rapids, Michigan 49501
(Mailing Address) (Zip Code)
Registrant's telephone number, including area code: (616) 942-3000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $1 Par Value New York Stock Exchange
(Title of Class) (Name of Each Exchange on
Which Registered)
Indicate by check mark whether the registrant (1) 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 or information
statements 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 and non-voting common equity
held by non-affiliates of the registrant. The aggregate market value shall
be computed by reference to the price at which the common equity was sold,
or the average bid and asked prices of such common equity, as of a
specified date within 60 days prior to the filing.
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Aggregate Market Value as of March 1, 1999: $395,162,328
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common stock outstanding at March 1, 1999: 26,861,910 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for its April 29, 1999, annual
meeting of shareholders are incorporated by reference in Part III.
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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 1998 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. 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. On June 30, 1998, the
Company changed its state of domicile to Michigan. The Company's principal
executive offices are located at 5600 Beech Tree Lane, Caledonia, Michigan
49316. The Company's mailing address is Post Office Box 2450, Grand
Rapids, Michigan 49501, and its telephone number is (616) 942-3000. As
used herein the "Company" means Foremost Corporation of America and its
subsidiaries unless the context indicates otherwise.
The Company's insurance subsidiaries are rated A+ (Superior) by A.M.
Best & Co. which is the second highest of the 15 rating categories in the
A.M. Best rating system. In September 1998, the Company's insurance
subsidiaries received an A (strong) financial strength rating from Standard
& Poors. In addition, in 1998 the Company was, for the fourth consecutive
year, rated among the top 50 insurance companies in the United States with
respect to safety, consistency and performance by Ward's Financial Group
("Ward's"), a management consulting and investment banking firm
specializing in the insurance industry. Ward's measures the results of
approximately 2,600 property and casualty insurance companies over a five-
year period and from those results chooses the top 50 companies.
During 1998, the Company's business was concentrated in the property
and casualty insurance market.
All statements other than statements of historical fact contained in
the Form 10-K, including statements in "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
are forward-looking statements. Forward-looking statements in the Form 10-
K generally are accompanied by words such as "anticipate," "believe,"
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"estimate," "project," "expect" or similar statements. Such forward-
looking information involves important known and unknown risks and
uncertainties and other factors that may cause the actual results,
performance or achievements of the Company to be materially different from
any future results, performance or achievements expressed or implied by
such forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable,
no assurance can be given that such expectations will prove correct.
Factors that could cause the Company's results to differ materially from
the results discussed in such forward-looking statements include
competition from other insurance companies, the uncertainty of reserve
estimates, general economic conditions, the effects of governmental
regulation, the effect of the Year 2000 on the Company's business, and the
effects of weather-related catastrophes. All forward-looking statements in
the Form 10-K are expressly qualified in their entirety by the cautionary
statements in this paragraph and current and potential shareholders are
cautioned not to place undue reliance on the forward-looking statements
made in this 10-K.
PROPERTY AND CASUALTY INSURANCE
The Company's property and casualty insurance business is primarily
concentrated 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. The Company also
writes dwelling fire, homeowners and automobile insurance. Foremost
Property and Casualty Insurance Company 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"). See "Marketing -- Direct Response Channel." In addition, the
Company writes automobile and homeowners property and casualty insurance
based upon endorsements by third parties on a direct basis.
The Company's property and casualty insurance operations cover all 50
states and the District of Columbia, although not all lines of insurance
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 1998:
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<TABLE>
<CAPTION>
STATE DOLLARS % OF TOTAL PREMIUM
- ------------------------ ----------------------- ------------------------
<S> <C> <C>
Texas $ 76,142,414 17.4%
California 38,375,680 8.8
Florida 35,905,701 8.2
Michigan 24,368,918 5.6
South Carolina 17,389,513 4.0
Washington 16,966,273 3.9
North Carolina 16,349,296 3.7
Georgia 15,875,308 3.6
Pennsylvania 14,650,088 3.3
Alabama 12,661,712 2.9
- ------------------------ ------------------------ -------------------------
TOTAL $268,684,903 61.4%
</TABLE>
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" in the notes to the Consolidated Financial Statements).
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."
OTHER OPERATIONS
Secondary Market Financial Services-
In August of 1982, Foremost Financial Services Corporation ("FFSC")
developed a Manufactured Housing Pass-Through program. Under this program
FFSC issued certificates which are privately placed with institutional
investors. The certificates evidence undivided interests in pools of
manufactured housing retail installment obligations ("Contracts"). FFSC is
contractually 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
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market programs, FFSC is currently the Master Servicer of approximately
2,400 contracts with principal balances aggregating approximately $8.8
million. The Company discontinued writing private credit insurance in 1985
and the entire Manufactured Housing Pass-Through program is in a run-off
mode.
Insurance Agencies-
The Company owns several 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 three distribution channels: general and independent
insurance agents (agency); mobile home and recreational vehicle dealer
agents (point-of-sale); 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 form of agency
agreement, each agent is authorized to sell and bind insurance policies in
accordance with procedures specified in the agency agreement. The
Company's marketing personnel focus 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
primarily sell only 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 and
recreational vehicle dealers. The Company's marketing personnel develop
and maintain relationships with mobile home and recreational vehicle dealer
agents.
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Direct Response Channel-
The Company utilizes its direct response operation for the offering of
mobile home, recreational vehicle, automobile and homeowners insurance to
insureds through third party endorsements and through direct advertising by
the Company. In December of 1989, the Company entered into a ten-year
agreement with AARP (the "AARP Agreement") pursuant to which AARP has
granted the Company the exclusive right to offer the Company's mobile home
insurance to AARP members. The AARP Agreement was amended in 1997
extending the term through the year 2004. The AARP Agreement also provides
for early termination under certain circumstances, including the unilateral
right of 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.
During 1997, the Company entered into a multi-year agreement with an
agent that represents the Amway Distributors Benefits Association and
markets personal lines insurance to approximately 1.2 million independent
distributors of Amway Corporation in the United States. In January of
1998, the Company also entered into a multi-year agreement with Old Kent
Bank to market personal lines insurance to customers and employees of Old
Kent Bank and its affiliates. The Company also 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. In January 1999, the Company and First USA Bank agreed to a
termination of their agreement pursuant to which First USA had granted the
Company exclusive right to offer automobile and homeowners insurance to
First USA's credit card customers (see Item 7 - 1999 Event on page 22 of
this Form 10-K).
TRADEMARKS
The Company holds a number of registered and common law trademarks
that identify the Company's products and services. The trademarks that are
most widely used by the Company include "Foremost" and the "interlocking
F." 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 currently are available under federal trademark
laws.
The Company believes that consumers identify its products and services
by its trademarks and that its trademarks are valuable assets. The Company
is not aware of any infringing uses or any prior claims of ownership of its
trademarks that could materially affect its current business. It is the
policy of the Company to pursue registration of its primary marks whenever
possible and to vigorously defend its trademarks against infringement or
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other threats to the greatest extent practicable under the laws of the
United States. The Company is also the holder of several other proprietary
rights. The Company protects all of its proprietary rights to the greatest
extent practicable under applicable law.
UNDERWRITING
The objectives 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 a number 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 the type of
property 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 also has 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. During 1997, the
Company took action against another catastrophic risk by starting the
process of eliminating flood from the Company's policy coverages. As of
December 31, 1998, flood coverage was removed in 47 states. The policies in
these states account for approximately 50% of the Company's policies
without flood coverage. This percentage is estimated to grow to
approximately 70% by the end of 1999. The removal of coverage related to
floods will significantly reduce the Company's exposure of loss due to
flooding. The removal of flood coverage will be delayed by the guaranteed
renewability of the AARP and some American Federation policies, which
account for 15% of the total policies. Also, the bureau states of Texas
and North Carolina refuse to modify the bureau forms to eliminate flood
coverage, which account for 18% of the total policies.
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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. The Company
intends to follow the same approach in its automobile and homeowners
business by training its own adjusters as justified by the volume of
business in geographic areas.
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.
Neither generally accepted accounting principles nor statutory reserves
represent an exact calculation of future benefit liabilities but are
instead estimates made by the Company using actuarial and statistical
methods. Ultimate liability may be greater or lower than reserves, and
there can be no assurance that any such reserves would be sufficient to
fund future liabilities in all circumstances. Reserves are monitored
closely and are reviewed quarterly by the Company using new information on
reported claims. The Company obtains a certification of the adequacy of
its reserves as of each December 31st by an independent actuarial firm.
The Company does not discount to 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.
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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
vary by state, with the highest limit being $125,000 for the states of
Arizona, California, Oregon and Washington, with the countrywide average
mobile home insured at approximately $24,000. The Company's published
limits of liability for its homeowners physical damage is typically
$700,000. The Company maintains an excess of loss reinsurance policy for
its homeowners programs, ceding 95% of each individual property loss in
excess of $250,000. Personal effects coverage is written at a percentage of
the dwelling amount, usually 20% to 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 loss
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 only would assume liability in those situations where the
reinsurer is unable to meet the obligations assumed under the reinsurance
agreements.
During 1998, the Company's P&C subsidiaries maintained reinsurance
protection for catastrophes which indemnified the Company for aggregate
catastrophe loss in excess of the Company's retention up to the reinsurance
treaty limits. This aggregate catastrophe loss treaty was not renewed. For
1999 the Company's P&C subsidiaries maintain single occurrence catastrophe
reinsurance for hurricane loss in the state of Florida and earthquake and
fire following losses for the states of California, Oregon and Washington,
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. Since 1997, the Company's P&C subsidiaries obtained single
occurrence excess catastrophe reinsurance to cover their exposure to flood
losses in certain states. For 1999, this flood cover only includes the
states of North Carolina and Texas and is on an aggregate basis. This
reinsurance contract indemnifies the Company for the major part of flood
losses in excess of the Company's retention up to the reinsurance treaty
limit. The Company reviews its catastrophe retention and reinsurance
coverage limits annually and adjusts such limits as appropriate.
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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.
The severity of weather-related and similar catastrophes in recent
years has demonstrated to insurers, including the Company's P&C
subsidiaries, that most assumptions on the damage potential of catastrophes
were too optimistic. The Company's P&C subsidiaries maintain records
showing concentrations of risks in catastrophe prone areas of the United
States. The Company's P&C subsidiaries regularly assess their
concentration of underwriting exposures in catastrophe prone areas and
develop strategies to manage their exposure to catastrophic events, subject
to regulatory constraints.
GOVERNMENT REGULATION
The Company's P&C subsidiaries are subject to regulation and super-
vision 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
shareholders, 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. These
regulations are intended primarily to protect policyholders rather than
shareholders. Such subsidiaries also are required to file detailed annual
and other reports with the regulatory agencies in each of the states in
which the subsidiaries do business and the subsidiaries 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 ("NAIC"), the Company's P&C 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 P&C 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 1998 for the
period from January 1, 1996 through December 31, 1997; Foremost Lloyds of
Texas which was examined in 1998 for the period July 1, 1994 through
December 31, 1997; American Federation Insurance Company which was examined
in 1998 for the three-year period ending December 31, 1997, and Foremost
Property and Casualty Insurance Company which was examined in 1996 for the
period January 1, 1989 through December 31, 1995.
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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 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 that is assessed. The
Company's share of these assessments is not expected to have a material
impact on the business of the Company's P&C 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
automobile, workers' compensation, FAIR (Fair Access to Insurance
Requirements) 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
the residual market 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 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
experienced growth 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 also has imposed a non-renewal moratorium which
places annual limits on the amount of business an insurer may non-renew in
that state.
Unprecedented catastrophe losses in recent years have prompted
insurers to more aggressively limit their exposures to catastrophes. Such
actions have in turn created insurance availability problems in certain
areas. In response to this environment, activity at the state regulatory
level has occurred. During 1995, the California legislature authorized the
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establishment of the California Earthquake Authority, which provides an
alternative facility to California consumers for obtaining insurance to
cover earthquakes. A similar situation exists in Florida where a state-
sponsored insurance facility has accepted a significant number of insureds
as a response to insurance companies continuing to limit the amount of
their Florida business.
Insurers also are required by the states to provide coverage to
insureds who would not otherwise be considered eligible by the insurers.
Each state dictates the types of insurance and the level of coverage which
must be provided to such involuntary risks. The Company's P&C
subsidiaries' share of these involuntary risks is mandatory and generally a
function of their respective share of the voluntary market by line of
insurance in each state.
In recent years, increased scrutiny of state-regulated insurer
solvency requirements by certain members of the United States Congress
resulted in the NAIC developing industry minimum risk based capital ("RBC")
requirements, and establishing a formal state accreditation process
designed to more closely regulate solvency, minimize the diversity of
approved statutory accounting and actuarial practices and increase the
annual statutory statement disclosure requirements. RBC formulas are
designed to identify an insurer's minimum capital requirements based upon
the inherent risks (e.g., asset default, credit and underwriting) of its
operations. In addition to the minimum capital requirements, the RBC
formula and related regulations identify various levels of the capital
adequacy and corresponding actions that the state insurance departments
should initiate. As of December 31, 1998, all of the Company's P&C
subsidiaries had adjusted capital amounts in excess of company action
levels as defined by NAIC.
As the Company has implemented steps to reduce its exposure to
catastrophes in catastrophe prone areas, it has encountered resistance to
such actions from state insurance regulators. 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
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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 insurance
business if 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. Although Congress has not issued
laws regarding the regulation of insurance, fair housing activists,
including private advocacy groups, the United States Department of Housing
and Urban Development's ("HUD") Office of Fair Housing and Equal
Opportunity and the United States Department of Justice, have taken steps
to limit or attack the use of certain risk-based methods for underwriting
and pricing homeowners insurance under the Federal Fair Housing Act, even
though the act does not apply to insurers by its terms. Such activity has
increased over the past several years. Although regulation of insurance is
reserved to the states, these fair housing activists have had success both
in the courts and through private settlements in regulating certain insurance
practices which they claim deprive people of housing through unfair and
discriminatory "redlining." Recent efforts to challenge risk-based insurance
practices have been facilitated through the legal concept of "disparate
impact," the legal concept that a policy or practice based on race-neutral
criteria may nevertheless constitute illegal discrimination if it has a
disproportionate adverse impact on minorities. If fair housing activists
and the executive branch of the federal government succeed in challenging
certain underwriting and pricing practices, insurers may have to abandon
certain practices that, while based on risk-based criteria, may yield a
disparate racial impact. This could result in less variation in rates
according to individual risks and a higher average premium for most risks
to subsidize high loss groups of customers.
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. Such national competitors
are larger and have greater resources available to them than the Company.
In addition to large national companies that compete in the Company's
markets, other companies specialize in the same types of insurance
coverages and compete directly with the Company, primarily in limited
geographical areas. The Company competes primarily on the basis of value
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although some of the Company's competitors use price competition with
respect to both premium rates and commission rates offered to agents.
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 1998, 1997 and 1996 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.
ENVIRONMENTAL REGULATIONS
Compliance with federal, state or local provisions regulating the dis-
charge of materials into the environment, or otherwise relating to the
protection of the environment, have not had a material adverse affect on
the Company's expenditures or earnings.
EMPLOYEES
The Company and its subsidiaries employed approximately 1,215 persons
as of December 31, 1998. 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, 1998 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 50 acres of this parcel currently is used for the
corporate headquarters and the balance of the parcel is held as investment
property. During 1998, the Company completed construction of a 98,000
square foot office facility on part of its Caledonia Township property to
house its direct response channel. The Company also leases several facilities
in Cascade Township near Grand Rapids, Michigan for an additional 60,000
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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.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries routinely are 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,
1998.
The Company was named as a defendant in a number of similar individual
lawsuits and several related class actions filed in various county Circuit
Courts in the state of Alabama and in the United States District Court for
both the Northern and Southern Districts of Alabama (the "Alabama
Litigation"). The cases in the Alabama Litigation have sought both
compensatory and punitive damages. In general, the complaints alleged 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, in the cases have been nominal for each individual
claimant. The primary risk exposure facing the Company involves the
plaintiffs' claims for punitive damages.
During 1997, the principal individual actions and the class actions
against the Company in the Alabama Litigation were settled or resolved. In
connection with the settlement of a group of the individual actions, three
Alabama circuit courts have entered orders 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.
In connection with the settlement of the principal Alabama class action,
the Company has obtained general releases from Alabama policyholders
resolving further claims against the Company, except for claims by persons
who affirmatively "opted out" of the settlement. The Company believes that
these individual and class action settlements have significantly reduced
the Company's risk exposure in the Alabama Litigation, and intends to
continue its vigorous defense of the remaining lawsuits.
In November 1995, an Iowa jury returned a verdict of $688,000 in
compensatory damages and $8 million in punitive damages against Foremost
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Insurance Company and other affiliated companies in a diversity action
filed in the United States District Court for the Northern District of
Iowa, Central Division, for alleged fraud, breach of contract and
misappropriation of trade secrets in the termination of an agent's
contract. The Company believes the verdict was erroneous and filed post-
judgment motions for a judgment notwithstanding the jury verdict, a new
trial and remittitur. On July 3, 1997, the trial court set aside the $8
million punitive damage verdict, but denied the Company's other post-trial
motions. In December of 1997, the court conducted a new trial to determine
whether punitive damages were warranted and, on January 21, 1998, the court
awarded $4 million in punitive damages. The Company strongly believes that
the punitive damage award is excessive and is not supported by the facts.
The Company has filed with the United States Court of Appeals for the 8th
Circuit an appeal of both the prior compensatory award and the $4 million
punitive damages assessed by the trial court. The Company has not
accounted for the damages in its financial statements, because the amount
of the ultimate 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 sought unspecified compensatory and
punitive damages. The Wisconsin case was conditionally class certified by
the Wisconsin state court, before service of the complaint. On June 22,
1998, the Circuit Court of Waupaca County, Wisconsin, issued an Order
vacating the class certification dismissing all claims against the Company
in the Wisconsin action, without prejudice. The case filed in the Circuit
Court of the Sixth Judicial Circuit, Champaign County, Illinois, initially
was dismissed by the trial court on the Company's motion. Plaintiffs then
filed amended pleadings, and the Company renewed its motion to dismiss,
which motion is pending before the trial court. The action filed in the
Circuit Court of the Eleventh Judicial Circuit in and for Dade County,
Florida, 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.
On January 19, 1999, the Company and First USA Bank agreed to resolve
the action filed in 1998 by the Company against First USA Bank and Banc One
in the United States District Court for the Western District of Michigan
arising out of a dispute concerning an Insurance Services Agreement made in
1996. Under the settlement, First USA Bank paid the Company $6,750,000 in
connection with the termination of the Insurance Services Agreement.
15
<PAGE>
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.
16
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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 April 29, 1999 Annual Meeting of
Shareholders pursuant to Instruction 3 of Regulation S-K Item 401(b).
Richard L. Antonini
Age: 56
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, Mr.
Antonini served as Executive Vice President and Treasurer. Prior to
1980, Mr. Antonini served as Senior Vice President and Treasurer. Mr.
Antonini has been a Director of the Company since 1973.
Kenneth C. Haines
Age: 39
Officer Since: 1994
Mr. Haines was elected to the office of Controller of the Company on
September 1, 1994. From July 1, 1988 to September 1, 1994, Mr. Haines
served as Assistant Controller. Mr. Haines has been employed by
Foremost Insurance Company, a subsidiary of the Company, since September
1986.
John J. Hannigan
Age: 51
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 as
Vice President in 1983 and was elected to the position of Executive Vice
President of that company in 1986.
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David A. Heatherly
Age: 48
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 as Vice President in 1984 and was elected to the position of
Executive Vice President of that company in 1986.
Larry J. Orange
Age: 56
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 since 1969 and has served as Vice President of that company
since 1980. Mr. Orange is also President of Foremost Financial Services
Corporation. Mr. Orange was elected Director of the Company in 1993.
Donald D. Welsh
Age: 59
Officer Since: 1985
Mr. Welsh was elected to the office of Treasurer of the Company on
February 25, 1999 and has been the Company's Assistant Treasurer since
May 9, 1985. Mr. Welsh has been employed in the financial
division of the Company and its subsidiaries since 1970.
F. Robert Woudstra
Age: 53
Officer Since: 1983
Mr. Woudstra was elected to the office of Chief Operating Officer and
Chief Financial Officer on February 25, 1999. Prior to that Mr.
Woudstra served as Executive Vice President of the Company since March
1, 1987 and served as Treasurer of the Company from June 29, 1983 until
February 25, 1999. Mr. Woudstra served as treasurer of Foremost
Insurance from 1976 until February 25, 1999. Mr. Woudstra was elected
Director of the Company in 1988.
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Paul D. Yared
Age: 49
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.
19
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER 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 Company declared a three-for-one stock split
for holders of record on January 5, 1998. The following table sets forth
the high and low sale prices for the Company's Common Stock for the periods
indicated, as reported by the New York Stock Exchange. The stock prices
shown below have been retroactively adjusted to reflect the three-for-one
stock split.
<TABLE>
<CAPTION>
1998 HIGH LOW
- ---- ------ ------
<S> <C> <C>
First Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25.00 $22.38
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.63 22.50
Third Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.31 17.88
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.00 15.81
<CAPTION>
1997 HIGH LOW
- ---- ------ ------
<S> <C> <C>
First Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20.20 $19.05
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.00 17.70
Third Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.31 18.50
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.56 19.19
</TABLE>
The number of shareholders of record of the common stock was approximately
1114 on March 1, 1999.
DIVIDENDS
The Company has paid regular cash dividends on its Common Stock each
year since 1978. In 1998 and 1997 the Company paid a regular quarterly
dividend of $.09 per share of Common Stock, an annualized rate of $.36 per
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share, as adjusted for the three-for-one stock split. On December 17,
1997, the Company announced a three-for-one stock split payable on January
20, 1998 to shareholders of record on January 5, 1998. On February 1,
1999, the Company declared its first quarter dividend of $.09 per share.
The Company expects to continue to pay dividends but its ability to pay
future dividends necessarily will 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. 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.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
FIVE YEAR SELECTED FINANCIAL DATA
<CAPTION>
CONSOLIDATED FINANCIAL INFORMATION 1998 1997 1996 1995 1994
- ----------------------------------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
(All dollar amounts, except share
data and ratios, in thousands)
Insurance premium written and
assumed - continuing operations $441,588 $434,964 $421,100 $426,988 $416,244
Net insurance premium earned -
continuing operations $436,230 $429,210 $427,565 $426,282 $409,929
Total income - continuing operations $470,396 $469,756 $461,126 $457,453 $440,126
Net income - continuing operations
before extraordinary loss $46,678 $50,756 $23,168 $43,238 $27,436
Net income $43,368 $50,866 $23,529 $45,325 $29,697
Earnings per share - continuing
operations before extraordinary
loss $1.71 $1.82 $0.79 $1.41 $0.86
Earnings per share $1.59 $1.82 $0.80 $1.48 $0.93
Total assets $753,196 $744,780 $721,578 $746,052 $703,751
Invested assets - continuing
operations - at cost $477,874 $481,300 $468,559 $472,745 $433,373
Invested assets - continuing
operations - at market $493,695 $513,460 $494,775 $494,346 $428,724
Short-term debt outstanding $7,204 $2,687 $2,434 $4,199 $9,981
Long-term debt outstanding $82,649 $89,514 $92,417 $95,048 $97,425
Shareholders' equity $264,155 $255,451 $231,422 $244,197 $206,626
Shareholders' equity per share $9.72 $9.22 $8.07 $8.11 $6.64
Return on beginning shareholders'
equity - continuing operations 18.3% 21.9% 9.5% 20.9% 14.8%
Return on beginning shareholders'
equity 17.0% 22.0% 9.6% 21.9% 16.1%
Average shares outstanding 27,336,587 27,891,076 29,593,929 30,665,397 31,810,752
Shares outstanding at year end 27,166,240 27,700,872 28,686,972 30,104,340 31,097,988
Dividends paid per share $0.36 $0.36 $0.36 $0.36 $0.36
Price range - high $25.63 $23.57 $20.17 $17.33 $12.50
Price range - low $15.81 $17.71 $16.92 $11.83 $10.08
Price/earnings ratio 10-16 10-13 21-25 8-12 11-13
Number of shareholders 1,114 1,147 1,202 1,272 1,338
Number of employees 1,215 1,156 1,077 1,015 1,008
Property and Casualty Information:
Statutory policyholders' surplus $203,846 $220,522 $201,320 $200,458 $181,269
Ratio of net premiums written to
statutory policyholders' surplus 2.1 1.9 2.0 2.1 2.1
22
<PAGE>
Ratio of loss and loss expense
reserves to statutory
policyholders' surplus 0.4 0.4 0.5 0.5 0.5
Combined loss and expense
ratio-GAAP basis 92.4% 91.0% 98.7% 91.1% 96.3%
</TABLE>
23
<PAGE>
The selected financial data shown on the prior page for the Company
for each of the five years in the period ended December 31, 1998, has been
derived from consolidated financial statements of the Company, which have
been audited by the Company's independent auditors, BDO Seidman, LLP. The
data should be read in conjunction with the consolidated financial
statements and related notes thereto, Supplementary Financial Data and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" presented in Items 7 and 8 of this Form 10-K. All share and
per share data have been restated in accordance with Financial Accounting
Standards Board No. 128 and retroactively adjusted for the increased
shares resulting from the three-for-one stock split distributed in January
1998.
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 operations and financial condition. The following
should be read in conjunction with the Company's Consolidated Financial
Statements and related notes thereto.
RESULTS OF OPERATIONS
WRITTEN PREMIUM
Written premium for the property and casualty insurance was
approximately $442 million in 1998, which represents an increase of 1.5%
over the approximately $435 million written in 1997. The 1997 writings
were 3.3% greater than the approximately $421 million written in 1996.
Within the property and casualty insurance business, combined written
premium for the Company's specialty line products of mobile home, motorhome
and travel trailer increased 1% in 1998 to $409.4 million following a
increase of 2% in 1997 ($405 million) and a decline of 1% ($397 million) in
1996. Over the past 3 years, the growth in these lines has been slowed by
the Company's catastrophe exposure management programs. Mobile home
written premium, which was flat the first six months of 1998, recovered in
the second half to post an increase of 1.5% for the year, offsetting the
effects of the Company's catastrophe management program. The Company's
BASIC product, a dwelling fire and ACV homeowners insurance program
distributed through independent agents, grew by 15% in 1998. This
specialty product had $8.5 million written in 1998 and $7.4 million written
in 1997. Management expects moderate growth in these specialty lines in
the future as the Company continues to pursue profitable opportunities.
The Company's standard lines of automobile and homeowners insurance
combined for total written premium of $20.3 million in 1998, an increase of
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<PAGE>
17% over the $17.3 million written in 1997, which was 27% more than the
$13.6 million written in 1996. The Company's direct response automobile
premium increased to $8.9 million in 1998 compared with $2.8 million in
1997. The Company believes that the direct automobile and homeowners
insurance program provides favorable growth opportunities in the future.
On October 13, 1997, the Company signed an extension of the exclusive
endorsement of the Company by AARP to offer mobile home insurance to its
members through the year 2004. The positive results of this program, since
its inception in 1989, encouraged both parties to extend their relationship
five years beyond the original agreement's expiration date.
UNDERWRITING RESULTS AND LOSS RESERVES
The combined loss and expense ratio for the Company's property and
casualty insurance operations was 92.4% in 1998 compared to 91.0% in 1997
and 98.7% in 1996. The underwriting profit from these operations was $33
million in 1998, $38.6 million in 1997 and $5.5 million in 1996. The
Company believes that its emphasis on rate adequacy, disciplined
underwriting, catastrophe exposure management and strategic expense
management programs have contributed significantly to the Company's
positive underwriting results over the last several years.
The impact of catastrophe losses on property and casualty results
increased in 1998 to, net of reinsurance, $40.3 million, compared to $36.9
million in 1997 and the record level of $69.7 million in 1996. The property
and casualty insurance industry recorded catastrophe losses for 1998 at an
estimated $10.1 billion, making 1998 the third worst year for catastrophe
losses in the last 10 years and quadruple the amount recorded in 1997.
Despite the industry experience, the Company posted only a small increase
in catastrophe losses in 1998, which reflects the success of the Company's
catastrophe exposure management efforts. The only major storms of 1997
occurred in the Northwest during the first quarter of the year. The record
catastrophe losses of 1996 resulted from significant storms in the
Northwest and Northeast portions of the country during the first and fourth
quarters. These storms created massive damage in Oregon, Washington,
Pennsylvania and New York. Hurricane Fran also struck North Carolina in
the third quarter of 1996. Industry catastrophe loss data was reported by
the Property Claims Services Unit of the Insurance Services Office, Inc.
Management 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. During 1997, the
Company took action against another catastrophic risk by starting the
process of eliminating flood from the Company's policy coverages. As of
December 31, 1998, flood coverage was removed in 47 states. The policies in
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<PAGE>
these states account for approximately 50% of the Company's policies
without flood coverage. This percentage is estimated to grow to
approximately 70% by the end of 1999. The removal of coverage related to
floods will significantly reduce the Company's exposure of loss due to
flooding. The removal of flood coverage will be delayed by the guaranteed
renewability of the AARP and some American Federation policies, which
account for 15% of the total policies. Also, the bureau states of Texas
and North Carolina refuse to modify the bureau forms to eliminate flood
coverage, which account for 18% of the total policies. To manage this risk
in 1999, management has secured aggregate catastrophe reinsurance to cover
its exposure to flood losses in the states of North Carolina and Texas. In
1995, the Company started a coastal strategy which eliminated approximately
24,000 policies in the coastal counties from Maine to Texas. This program
of coastal policy reduction was substantially completed by June 30, 1996.
The Company has further reduced its exposure to hurricane loss by not
writing a significant amount of new business in Florida since 1992.
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 since 1994. Attrition also has contributed to the
reduction of earthquake exposure, pushing the total policy decline in
California to approximately 50,000 since 1994. Since July 1, 1995, the
Company's policies only provide earthquake coverage on an optional basis,
which has reduced exposure to catastrophic loss due to earthquakes.
Management will continue to take appropriate actions to reduce or eliminate
certain exposures in the future where deemed necessary.
Management is committed to controlling expenses and has aggressively
managed the Company's acquisition costs and general and administrative
expenses. All expense categories are closely monitored and employees are
constantly challenged to develop ideas and programs to continually improve
results. These actions have helped reduce the Company's expense ratio from
a high of 42.7 in 1988 to its current level of 35.1 in 1998. Expenses
increased by 1.1 points in 1998 compared to last year because of the costs
associated with the start up of the new direct automobile and homeowners
program. As this standard business grows, these costs as a percentage of
premiums earned will decline.
In conjunction with the new direct marketing of auto and homeowners
insurance, the Company has invested in a new policy processing system that
was operational beginning in 1999. The $4.1 million and $8.0 million costs
incurred on this system during 1997 and 1998, respectively, were
capitalized and will be expensed over the life of the system starting in
1999.
The Company 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
26
<PAGE>
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 firm has
rendered their opinion for the year ended December 31, 1998, 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 the
product. Management continues to be satisfied with the experience in the
run-off of this business. The reserve was not adjusted in 1998, but was
reduced by $650,000 in both 1997 and 1996. These reductions are not
reflected in the underwriting results of the insurance operations, but are
a component of the parent company and other operational results. The
majority of these policies will run-off in 1999. Management believes that
the aggregate reserves for this discontinued product are adequate at
December 31, 1998, but will continue to review and adjust them as needed.
EXTRAORDINARY ITEM
On May 5, 1998, the Company prepaid the $30.8 million mortgage on its
corporate headquarters and incurred a $3.3 million after-tax prepayment
penalty to extinguish this debt. This cost was classified as an
extraordinary item in the financial statements for the second quarter of
1998 and reduced earnings by $.12 per share. The Company prepaid the
mortgage to eliminate the restrictive operating covenants attached to this
debt, which hindered the Company's ability to manage its capital base and
leverage ratios through stock repurchases. The cost of this prepayment
penalty will be recouped over time by the Company's ability to borrow funds
at lower interest rates. The interest savings equal approximately $.03 per
share annually to the Company's operating results.
SALE OF LIFE INSURANCE SUBSIDIARY
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 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 financial statements as discontinued
operations.
27
<PAGE>
In 1989 and 1990, Foremost Life Insurance Company assumed credit life
premium under various reinsurance treaties. In the fourth quarter of 1990,
the ceding companies were declared insolvent and placed into liquidation.
In accordance with the sales document, in June of 1996 the amount reserved
to cover these reinsurance treaties was transferred to an escrow account.
On July 11, 1997, the Company and the Liquidator settled all outstanding
reinsurance and legal issues regarding these treaties. The escrow account
was closed with the Company recording an after tax gain of $110,000, which
is included in discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
In the years 1996 through 1998, the Company and its subsidiaries
generated positive cash flow of $95.7 million from operations, and paid
back $9.1 million on long-term borrowings. During the same period, the
Company paid $30.6 million in dividends, repurchased $61.5 million of its
common stock, and purchased $28.5 of real estate and equipment, which
includes a new policy processing system. In 1996, the Company received
$17.4 million in proceeds for the sale of its life insurance subsidiary.
For year to year comparisons of cash flow items, see the "Consolidated
Statements of Cash Flows" on page 27 of this Form 10-K.
The Company 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 on average, approximately $26.7 million
of investments mature every year over the next ten years, 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. The average maturity of
investments is between five and six years, which provides adequate
asset/liability matching. The Company believes that its liquid assets plus
cash flow from operations will be adequate to meet all foreseeable cash
requirements.
In February 1994, the Company's Board of Directors approved a stock
buy-back program of up to 3 million shares, which was raised to 6 million
shares by subsequent Board approval of 1.5 million share increments in
March and December of 1996. In December 1997, the Board of Directors
raised the program to 9 million shares by authorizing the repurchase of an
additional 3 million shares. Since the inception of this buy-back program,
the Company has purchased 6,064,372 shares. During 1998, the Company
purchased 777,658 of its shares. The total shares available under the
authorization for the repurchase program is 2,935,628 shares. All of the
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<PAGE>
above stock repurchase authorizations and purchases have been adjusted for
the January 1998 three-for-one stock split. The Company will continue to
evaluate the purchase of its common stock from excess capital.
The Company's insurance subsidiaries are subject to certain
restrictions on their ability to transfer funds to the Company in the form
of cash dividends, loans or advances without regulatory approval. These
restrictions are not expected to impair the ability of the Company to meet
its cash obligations.
CAPITAL STRUCTURE
At December 31, 1998, the Company's capital structure consisted of
27,166,240 common shares outstanding, which reflects the Company's three-
for-one stock split in January 1998. In April 1998, the shareholders
approved an amendment to the Company's Articles of Incorporation increasing
the Company's authorized common stock from 35 million to 70 million shares
and authorizing a class of up to 10 million shares of preferred stock. The
increased authorization will allow management to consider equity offerings
to manage the Company's total capitalization and insurance subsidiary
leverage positions. Management believes that it is advisable to have
additional authorized shares available for possible future stock splits and
dividends, public or private offerings of common stock or securities
convertible into common stock, employee benefit plans, equity-based
acquisitions and other corporate purposes that might be proposed. The
shareholders also adopted an Agreement and Plan of merger which changed the
Company's state of incorporation from Delaware to Michigan effective June
30, 1998.
In June 1998, the Company negotiated and entered into a credit
agreement under which its lenders committed to provide a five-year, $40
million revolving credit facility and a seven-year term loan of $80
million, of which $30 million of the term loan is amortizing over six years
at $1.25 million per quarter. At December 31, 1998, $77.5 million remained
outstanding on the term loan, and $10 million was outstanding on the
revolving credit facility. In addition to the remaining $30 million
available under the revolving credit facility, the Company also has
available an uncommitted line of credit facility which may not exceed $20
million at any one time. The uncommitted line of credit expires on June
30, 1999.
During 1995, the Company entered into a interest rate swap agreement
to effectively fix the interest rate at 6.545% plus credit spread on the
$58 million then outstanding under the credit agreement. The swap will
expire on August 31, 2000. In November 1997, the swap agreement was
amended with the following changes: the interest rate was dropped to 6.47%
29
<PAGE>
plus credit spread; the maturity was extended to August 31, 2002 and the
notional amount will be decreased from $58 million to $50 million on August
31, 2000. The interest rate swap is non-amortizing. In August 1998, the
Company entered into an interest rate swap agreement in the notional
principle amount equal to the $30 million of the term loan that is
amortizing. This agreement effectively fixes the interest rate at 5.705%
plus credit spread until May 31, 2004. The Company's exposure to credit
risk is limited to interest movements and is considered to be negligible.
The Company does not hold or issue any other material amounts of derivative
financial instruments.
INVESTMENTS
After-tax investment income contributed $.74 per share on a diluted
basis in both 1998 and 1997, compared to $.72 per share in 1996. The
relatively flat results over this period of time were primarily due to the
impact of declining interest rates which offset the positive cash flow
generated from the strong underwriting performance. The record catastrophe
losses in 1996 also impacted the investment results of that year.
The Company's unrealized capital gains, net of tax, were $10.3 million
at December 31, 1998 compared to $20.9 million at December 31, 1997 and $25
million at December 31, 1996. The Company also realized gains after taxes
of $4.7 million in 1998 compared to $7.9 million in 1997 and $2.0 million
in 1996.
The Company's financial results over the last several years allow
management to take a longer term, total return view of investments. As
opportunities become available, the Company has and expects to continue the
strategy of increasing its asset allocation to total return investments.
These investments consist of common and preferred stock as well as lower-
rated bonds and other assets that achieve equity-like returns over a market
cycle.
At December 31, 1998 the Company held securities in its investment
portfolio which were either unrated or less than investment grade, high-
yield corporate debt securities, including certain preferred stocks, and
limited partnerships. These securities had a cost basis of $39.6 million,
with an aggregate market value of $36.6 million and none of them
individually exceeded $6.2 million. These securities have different risks
than other investment grade securities. Risk of loss upon default by the
borrower is greater with these investments than with other corporate or
governmental debt securities because these securities are generally
unsecured and are often subordinated to other creditors of the issuer.
These issuers usually have high levels of indebtedness and are more
30
<PAGE>
sensitive to adverse economic conditions, than are investment grade
issuers. Management believes the unrealized loss in these securities will
be temporary.
The remaining three real estate properties which the Company
foreclosed upon in 1991 totaling $3.8 million were sold or disposed of
during 1996 without any adjustments to their carrying values. The Company
has no further foreclosed real estate, nor are any of its real estate
related securities in default at December 31, 1998.
In accordance with FASB Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," the Company has classified a
portion of its fixed maturity investments and its equity securities into a
category entitled "securities available for sale" which are adjusted to
reflect market value. Due to the restrictive definition of assets
qualifying to be categorized as held to maturity, most of the Company's
fixed investment securities are considered to be available for sale, and
are therefore adjusted to reflect market values. Unrealized investment
gains and losses on securities available for sale are credited or charged
directly to shareholders' equity net of applicable tax provisions or
credits. The net unrealized gain on securities available for sale was
$10.3 million at December 31, 1998 and $20.9 million at December 31, 1997.
Although the Company has the general intent and ability to hold most of
its fixed maturities to maturity, sales may be made from this category due
to changes in market conditions, relative yields available, tax planning
and asset/liability management considerations. Since the Company does not
purchase fixed maturity investments with a view to resale, the "available
for sale" classification does not denote a trading account.
At December 31, 1998, the Company had $39.1 million of its
consolidated assets in cash and other short-term investments.
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 will realize these tax assets through the generation of future taxable
income and other tax planning strategies. There are no tax credit or
capital loss carryforwards as of December 31, 1998.
LITIGATION
The Company and its subsidiaries are routinely engaged in litigation
as plaintiff and defendant in the normal course of business. In the
opinion of management, all litigation matters are not expected to have a
material adverse effect on the Company's consolidated financial position,
31
<PAGE>
operating results, or cash flows. The aggregate ultimate liability,
if any, of the Company and its subsidiaries for the matters described in
Part 1, Item 3 of this Form 10-K is not determinable at December 31, 1998.
For further discussion of the Company's litigation matters, please refer
to Part 1, Item 3 of this Form 10-K.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue is the result of computer programs,
microcontrollers and other systems being designed using two digits instead
of four to define the applicable year. The problem exists when date-
sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. By nature, the insurance industry is highly dependent
upon computer systems because of significant transaction volumes and date
dependencies for many of its applications. The Company has completed a
detailed review of its computer programs to identify the systems that could
be affected by the Year 2000 problem. The Company has a detailed written
plan, which is regularly updated and monitored by technical personnel.
Plan status is regularly reviewed by management of the Company. The
Company also has hired an outside consulting firm to assist in the process
of identifying, assessing, remediating and testing Year 2000 problems. The
procedures used by these consultants for the Year 2000 conversion effort
have been certified by Information Technology Association of America
"ITAA." The ITAA 2000 Certification Program evaluates the consultant's
processes and methods used to develop new software or convert existing
software to meet the date related needs of the next century.
The Company is in the process of evaluating the Year 2000 readiness of
third parties. Significant third parties with which the Company interfaces
with regard to the Year 2000 problem include, among others, agents,
technology vendors, financial institutions and service providers and
companies that provide utility infrastructure (power, delivery services,
telecommunications). Unreadiness by these third parties would expose the
Company to the potential for loss and impairment of business processes and
activities. The Company is assessing these risks through bilateral efforts
and is considering the need for contingency plans intended to address
perceived risks. The Company cannot predict what effect the failure of
such a third party to address, in a timely manner, the Year 2000 problem
would have on the Company.
As of December 31, 1998, the Company has completed approximately 75%-
80% of the Year 2000 modifications of its mainframe computer applications.
The Company has identified the non-IT systems that have Year 2000 issues
and has a plan to assess, remediate and test, if necessary, these systems.
The Company will continue to assess the impact of the Year 2000 issue on
the remainder of its systems and applications throughout 1999. The Company
32
<PAGE>
has performed tests of its systems and applications during 1998 and will
continue to do so in 1999. The Company's goal is to have systems and
applications Year 2000 ready by the middle of 1999, allowing the remaining
time to be used for further validation and testing.
In connection with Year 2000 issues, the Company spent approximately
$1.8 million before 1997, $3.8 million in 1997 and $4.3 million in 1998.
The Company expects that it will spend approximately $2.8 million in 1999.
These costs will primarily consist of professional fees paid to third
party providers of remediation services. It is the Company's policy to
expense all costs associated with these systems changes. The Company may
also invest in new or upgraded technology which has definable value lasting
beyond 2000. In these instances, where Year 2000 compliance is merely
ancillary, the Company may capitalize and depreciate such an asset over its
estimated useful life.
Based on currently available information, management does not
presently anticipate that the costs to address the Year 2000 issues will
have a material adverse impact on the Company's financial conditions,
results of operations or liquidity. However, the extent to which the
computer operations and other systems of the Company's important third
parties are adversely affected could, in turn, affect the Company's ability
to communicate with such third parties and could materially affect the
Company's results of operations in any period or periods.
The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates. There can be no guarantee that these estimates will be achieved
and actual results could differ from those anticipated. Specific factors
that might cause differences include, but are not limited to, the ability of
other companies on which the Company's systems rely to modify or convert
their systems to be Year 2000 ready, the ability to locate and correct all
relevant computer codes and microprocessors, the ability of all third parties
who have business relationships with the Company to continue their businesses
without interruption and similar uncertainties. As a result, the Company is in
the process of evaluating possible internal and external scenarios that might
have an adverse effect on the Company, as well as the need for contingency
plans to address these scenarios. The Company anticipates that all
necessary contingency plans will be completed during 1999.
This Year 2000 Readiness Disclosure is based upon and partially
repeats information provided by the Company's outside consultants and
others regarding the Year 2000 readiness of the Company and its customers,
suppliers, financial institutions and other parties. Although the Company
believes this information to be accurate, it has not independently verified
such information.
33
<PAGE>
STOCK OPTION PLAN OF 1998
In April 1998, the shareholders approved the Company's Stock Option
Plan of 1998, which granted the Company's Chairman and CEO, an option to
purchase 750,000 shares of the Company's common stock at a purchase price
of $24 per share. Except in the case of a change in control or certain
events of termination, the options only vest if the closing price of the
Company's common stock on the New York Stock Exchange is equal to or
greater than $48 per share on at least 10 trading days on or before
February 23, 2003.
RISK BASED CAPITAL
NAIC requires property and casualty insurance companies to calculate
and report information under an RBC formula in their statutory annual
statements. The RBC requirements are intended to assist regulators in
identifying inadequately capitalized companies. The RBC calculation is
based on the type and mix of risks inherent in the Company's business and
includes components for underwriting, asset, interest rate and other risks.
The Company's insurance subsidiaries exceeded their RBC statutory surplus
standards as of December 31, 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
As required, the Company adopted and incorporated into its
Consolidated Financial Statements for the year ended December 31, 1998, the
following Financial Accounting Standards Board (FASB) Statements; Statement
No. 130, "Reporting Comprehensive Income," Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information" and Statement No.
132, "Employer's Disclosures about Pensions and Other Postretirement
Benefits." None of these pronouncements had a significant impact on the
Company's financial results.
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is required to be
adopted in years beginning after June 15, 1999. The statement requires
companies to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through
income. If a derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of the derivative will either be offset against
the change in fair value of the hedged asset, liability or firm commitment
through earnings, or recognized in other comprehensive income until the
hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in
earnings. Since the Company's only material derivative transactions are
interest rate swaps on its debt, which effectively fix the interest rate on
34
<PAGE>
the debt, the Company does not anticipate that the adoption of this
statement will have a significant effect on its results of operations or
financial position.
The American Institute of Certified Public Accountants (AICPA)
Statement of Position 98-5, requires costs of start-up activities and
organizational costs to be expensed as incurred. This statement is
effective in 1999. Since the Company already expenses these costs as
incurred, adoption of this statement will have no effect on its results of
operations or financial positions. The (AICPA) Statement of Position 97-3,
"Accounting by Insurance and Other Enterprises for Guaranty-Fund and
Certain Other Insurance-Related Assessments", will be adopted in 1999 as
required by the statement.
1999 EVENT
On January 19, 1999, the Company and First USA Bank agreed to resolve
the action filed in 1998 by the Company against First USA Bank and Banc One
in the United States District Court for the Western District of Michigan
arising out of a dispute concerning an Insurance Services Agreement made in
1996. The settlement provides that First USA Bank will pay the Company
$6.75 million in connection with the termination of the insurance agreement
which had provided the Company the exclusive right to offer certain
insurance products to First USA Bank's credit card customers. The
settlement proceeds will be recorded in the Company's financial results for
the first quarter of 1999.
Item 7(a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The investment portfolios of the Company are managed with the
objective of maximizing after-tax investment income and total return, while
minimizing credit and market risks in order to provide support for the
insurance operations and overall results of the Company. When developing
the investment strategies for the Company, management considers many
factors including underwriting results, tax impacts, regulatory
requirements, fluctuations in interest rates and other market risks.
Investment decisions are managed by investment professionals based on
guidelines established by management and approved by the board of
directors.
Market risk represents the potential for loss due to changes in the
fair value of financial instruments caused primarily by fluctuations in
interest rates and equity prices. The Company mitigates these risks by
managing the maturity of their financial instruments to provide adequate
funding for the payout of their property and casualty reserves.
35
<PAGE>
The following table provides information on the Company's fixed
maturity investments as of December 31, 1998 that are sensitive to changes
in interest rates. It presents the expected cash flows of principle (par
value) amounts and related average after-tax yield by expected maturity
dates. The table also presents the maturities of long-term debt with the
corresponding interest rate swaps on this debt. Since the interest rate
swaps effectively fix the interest rate on the notional amount of debt,
changes in interest rates have no current effect on the interest expense
recorded by the Company.
<TABLE>
<CAPTION>
ASSETS
(In thousands) 1999 2000 2001 2002 2003 THEREAFTER FAIR VALUE
---- ---- ---- ---- ---- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed maturities $36,884 $23,218 $15,469 $22,108 $20,159 $227,708 $356,800
Average after-tax yield 4.96% 4.57% 5.32% 5.16% 5.25% 5.22%
LIABILITIES
Long-term debt $ 7,000 $ 5,000 $ 5,000 $ 5,000 $13,000 $ 52,500 $ 87,500
Average interest rate - Ranges from 5.25% to 5.875% in 1998
plus weighted average credit spread of 0.574%
INTEREST RATE SWAPS
Notional Amount $ 5,000 $13,000 $ 5,000 $55,000 $ 5,000 $ 2,500 $ (2,273)
Pay Variable/Receive Fixed:
Average Receive Fixed Interest Rate - 6.22% plus weighted average credit
spread of 0.579%
</TABLE>
Duration is used by management to estimate the value change in the
Company's fixed income securities. Price volatility and duration are
directly related. Duration is the present value of all future cash flows
to be received. The duration of the Company's fixed income portfolio at
year end 1998 was four years and the market value was $356.8 million.
Therefore, a 1% increase in interest rates would equate to a decrease in
market value of approximately $14 million or 4%. Conversely, a 1% decline
in interest rates would equate to an increase in market value of
approximately $14 million. Other factors such as spread changes, call
features, special redemption features and prepayment changes will all
affect the duration of the portfolio. While duration is expressed in
years, it is regarded as a percent change.
Equity price risk is the potential loss due to changes in the value
of equity securities. Equities have more price variability than fixed
securities. Historically, equities have provided higher returns over a
long period of time. As of December 31, 1998, the Company's investment in
36
<PAGE>
equity securities had a market value of $79.9 million. A 10% change in the
portfolios equity prices would impact their value by approximately $7.99
million. All equity securities are marketable.
All of the above risks are monitored on an ongoing basis.
Management's need to react to significant changes in interest rates and
equity prices is minimized by the fact that the annual maturities of
investments and cash flow from insurance operations are sufficient to meet
the cash flow requirements of the business. Therefore, management has the
ability to wait out these changes.
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, 1998 and 1997 24
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 25
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996 26
Consolidated Statements of Comprehensive Income for the years
ended December 31, 1998, 1997 and 1996 26
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 27
Property and Casualty Statements of Income for the years ended
December 31, 1998, 1997 and 1996 28
Parent Company and Other Statements of Operations for the
years ended December 31, 1998, 1997 and 1996 28
Notes to Consolidated Financial Statements 29
Management's Responsibility for Financial Reporting 54
Independent Accountants' Report 55
Supplementary Data - Results by Quarter 56
37
<PAGE>
<TABLE>
FOREMOST CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, 1998 1997
---------- ----------
<S> <C> <C>
(In thousands, except share data)
Assets:
Investments-
Fixed maturities held to maturity $947 $1,974
Securities available for sale:
Fixed maturities 356,776 376,868
Equity securities 79,936 83,677
Mortgage loans and land contracts on real estate 5,867 12,350
Investment real estate (net of $1,696 and $1,412
accumulated depreciation) 13,228 11,920
Short-term investments 36,907 26,656
---------- ----------
Total investments 493,661 513,445
Cash 2,227 2,409
Accrued investment income 5,966 6,293
Premiums receivable (net of $75 allowance for
uncollectible accounts, respectively) 76,808 71,541
Due from reinsurance companies 23,914 20,645
Other receivables (net of $20 allowance for
uncollectible accounts, respectively) 1,573 2,568
Prepaid policy acquisition costs 75,689 74,179
Prepaid reinsurance premiums 977 979
Real estate and equipment 54,565 38,341
Other assets 17,816 14,380
---------- ----------
Total assets $753,196 $744,780
========== ==========
Liabilities:
Unearned premium $250,959 $246,429
Insurance losses and loss adjustment expenses 84,128 82,722
Accounts payable and accrued expenses 34,045 33,022
Notes and other obligations payable 89,853 92,201
Income taxes 16,274 20,853
Other liabilities 13,782 14,102
---------- ----------
Total liabilities 489,041 489,329
---------- ----------
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<PAGE>
Shareholders' Equity:
Preferred stock, no par value - 10,000,000
shares authorized, no shares issued - -
Common stock, $1 par - 70,000,000 and 35,000,000
shares authorized in 1998 and 1997 respectively;
27,166,240 and 27,700,872 shares issued and
outstanding in 1998 and 1997 respectively 27,166 32,467
Additional paid-in capital 83,205 120,536
Unrealized appreciation of securities available
for sale, net of applicable taxes 10,262 20,894
Retained earnings 143,527 237,621
Restricted stock - deferred compensation (5) (4)
Treasury stock at cost - (156,063)
---------- ----------
Total shareholders' equity 264,155 255,451
---------- ----------
Total liabilities and shareholders' equity $753,196 $744,780
========== ==========
</TABLE>
39
<PAGE>
<TABLE>
FOREMOST CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Year Ended December 31, 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
(In thousands except per share data)
Income:
Property and casualty premium earned $436,230 $429,210 $427,565
Net investment income 24,568 25,813 27,116
Realized gains 7,287 12,181 3,098
Other 2,311 2,552 3,347
---------- ---------- ----------
Total income 470,396 469,756 461,126
---------- ---------- ----------
Expense:
Insurance losses and loss expenses 249,786 244,608 276,175
Amortization of prepaid policy
acquisition costs 130,800 125,760 122,795
Operating 19,687 20,188 25,101
Interest 6,835 8,307 8,191
---------- ---------- ----------
Total expense 407,108 398,863 432,262
---------- ---------- ----------
Income before taxes 63,288 70,893 28,864
Income tax provision (16,610) (20,137) (5,696)
---------- ---------- ----------
Net income - continuing operations 46,678 50,756 23,168
Net income - discontinued operations - 110 361
---------- ---------- ----------
Net income before extraordinary item $46,678 $50,866 $23,529
Extraordinary loss--net of tax benefit (3,310) - -
---------- ---------- ----------
Net income 43,368 50,866 23,529
========== ========== ==========
Earnings per share of common stock:
Net income - continuing operations $1.71 $1.82 $0.79
Net income - discontinued operations - - 0.01
Extraordinary loss-net of tax benefit (0.12) - -
---------- ---------- ----------
Net income $1.59 $1.82 $0.80
========== ========== ==========
40
<PAGE>
Earnings per share of common stock - diluted
Net income - continuing operations $1.68 $1.79 $0.77
Net income - discontinued operations - - 0.01
Extraordinary loss-net of tax benefit (0.12) - -
---------- ---------- ----------
Net income $1.56 $1.79 $0.78
========== ========== ==========
</TABLE>
- -----------------
See accompanying notes to consolidated financial statements
41
<PAGE>
<TABLE>
<CAPTION>
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
-------- ---------- -------------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(In thousands except share data)
Balances - January 1, 1996 $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
Stock Options Exercised
Shares Issued (954) 2,310 1,356
Shares Repurchased (3,256) (3,256)
Cash dividends - $.36 per share (10,655) (10,655)
Purchase of treasury stock (28,856) (28,856)
Other 462 1 2,023 2,486
-------- ---------- -------------- ---------- ------------ ----------- -------------
Balances December 31, 1996 $14,000 $138,852 $16,423 $196,818 $(4) $(134,667) $231,422
Net income 50,866 50,866
Unrealized appreciation of
securities available for sale,
net of tax 4,471 4,471
Stock Options Exercised
Shares Issued (1,283) 5,836 4,553
Shares Repurchased (8,209) (8,209)
Tax effect 1,280 1,280
Three-for-one stock split 18,467 (18,467)
Cash dividends - $.36 per share (10,063) (10,063)
Purchase of treasury stock (19,369) (19,369)
Other 154 346 500
-------- ---------- -------------- ---------- ------------ ----------- -------------
Balances December 31, 1997 $32,467 $120,536 $20,894 $237,621 $(4) $(156,063) $255,451
Treasury stock adjustment (4,766) (38,725) (112,572) 156,063
Net income 43,368 43,368
Unrealized depreciation of
securities available for sale,
net of tax (10,632) (10,632)
Stock Options Exercised
Shares Issued 204 1,896 2,100
Shares Repurchased (204) (615) (4,060) (4,879)
Tax effect 973 973
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<PAGE>
Stock issued for incentive plan 38 848 886
Cash dividends - $.36 per share (9,836) (9,836)
Purchase of common stock (573) (1,738) (10,993) (13,304)
Other - 30 (1) (1) 28
-------- ---------- -------------- ---------- ------------ ----------- -------------
Balances December 31, 1998 $27,166 $83,205 $10,262 $143,527 $(5) $- $264,155
======== ========== ============== ========== ============ =========== =============
</TABLE>
- -----------------
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
FOREMOST CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEAR ENDED DECEMBER 31,
1998 1997 1996
(In Thousands) -------- -------- --------
<S> <C> <C> <C>
Net Income $ 43,368 $ 50,866 $ 23,529
Other comprehensive income, net of taxes:
Change in unrealized appreciation (depreciation) of investments (10,632) 4,471 2,621
-------- -------- --------
Comprehensive Income $ 32,736 $ 55,337 $ 26,150
======== ======== ========
</TABLE>
- -----------------
See accompanying notes to consolidated financial statements.
43
<PAGE>
<TABLE>
FOREMOST CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended December 31, 1998 1997 1996
(In thousands) ---------- ---------- ----------
<S> <C> <C> <C>
Operating Activities:
Net income from continuing operations $46,678 $50,756 $23,168
Adjustments to reconcile net income to net
cash provided by operating activities:
Change in:
Unearned premium 4,530 5,116 (7,640)
Insurance losses and loss adjustment expenses 1,406 (10,698) (351)
Prepaid policy acquisition costs (1,510) (3,948) 2,329
Premiums receivable (5,267) (3,465) 2,553
Other receivables (2,272) 3,152 3,166
Accrued investment income 327 (728) 310
Accounts payable and accrued expenses 1,023 (1,031) (1,675)
Income tax liability (1,613) 3,262 2,353
Provision for private credit
insurance loss reserves (625) (714) 193
Other - net (1,234) 4,041 (1,639)
Provision for depreciation and amortization 1,440 2,087 2,108
Amortization of fixed maturities 1,027 744 1,061
Deferred income taxes 2,759 3,664 (2,639)
Net realized gains and losses (7,287) (12,181) (3,098)
---------- ---------- ----------
Net cash from operating activities 39,382 40,057 20,199
---------- ---------- ----------
Investing Activities:
Purchases of securities and loans made (115,055) (155,606) (128,857)
Purchases of real estate and equipment (21,470) (6,549) (495)
Sales of securities 114,063 97,984 77,882
Maturities of securities and receipts
from repayments of loans 22,170 47,719 46,761
Sales of real estate and equipment 2,556 5,312 4,023
Net proceeds from sale of subsidiary - - 17,437
(Increase) decrease in short-term investments (10,251) 4,090 9,022
---------- ---------- ----------
Net cash from (for) investing activities (7,987) (7,050) 25,773
---------- ---------- ----------
Financing Activities:
Prepayment of mortgage (30,781) - -
Extraordinary item on early extingishment
of debt -- net of taxes (3,310) - -
Repayments of long-term debt (9,067) (2,650) (2,396)
44
<PAGE>
Proceeds from borrowings 37,500 - -
Reacquisition of common stock (13,304) (19,369) (28,855)
Dividends paid (9,836) (10,063) (10,655)
Increase (decrease)in short-term debt - - (2,000)
Exercise of stock options: Receipts 2,100 4,553 1,356
Exercise of stock options: Repurchases (4,879) (8,210) (3,256)
---------- ---------- ----------
Net cash for financing activities (31,577) (35,739) (45,806)
---------- ---------- ----------
Cash increase (decrease) (182) (2,732) 166
Cash at beginning of year 2,409 5,141 4,975
---------- ---------- ----------
Cash at end of year $2,227 $2,409 $5,141
========== ========== ==========
</TABLE>
- ---------------------
See accompanying notes to consolidated financial statements.
45
<PAGE>
<TABLE>
PROPERTY AND CASUALTY INSURANCE
STATEMENTS OF INCOME
<CAPTION>
Year Ended December 31, 1998 1997 1996
(In thousands) ---------- ---------- ----------
<S> <C> <C> <C>
Premium written and assumed $ 441,588 $ 434,964 $ 421,100
Less reinsurance ceded 804 647 1,147
---------- ---------- ----------
Net premium written $ 440,784 $ 434,317 $ 419,953
========== ========== ==========
Premium earned $ 436,230 $ 429,210 $ 427,565
---------- ---------- ----------
Insurance losses and loss expenses 249,786 244,608 276,175
Amortization of prepaid policy acquisition costs 130,810 125,772 122,860
Operating expenses 22,654 20,220 23,072
---------- ---------- ----------
Total losses and expenses 403,250 390,600 422,107
---------- ---------- ----------
Underwriting income 32,980 38,610 5,458
Investment and other income, less expenses 24,577 25,880 26,838
Realized gains 7,362 12,181 3,198
---------- ---------- ----------
Income before taxes 64,919 76,671 35,494
Income tax provision (17,772) (22,453) (8,300)
---------- ---------- ----------
Net income $47,147 $54,218 $27,194
========== ========== ==========
</TABLE>
46
<PAGE>
<TABLE>
PARENT COMPANY AND OTHER
STATEMENTS OF OPERATIONS
(Excluding equity in income of
consolidated subsidiaries)
<CAPTION>
Year Ended December 31, 1998 1997 1996
(In thousands) ---------- ---------- ----------
<S> <C> <C> <C>
Income:
Financial service fees and interest $44 $ 730 $ 764
Commissions 449 514 587
Other income 8,353 7,513 9,013
Realized losses (75) - (100)
---------- ---------- ----------
Total income 8,771 8,757 10,264
---------- ---------- ----------
Expense:
Operating 3,850 6,532 9,025
Interest 6,552 8,003 7,869
---------- ---------- ----------
Total expense 10,402 14,535 16,894
---------- ---------- ----------
Loss before taxes (1,631) (5,778) (6,630)
Income tax credit 1,162 2,316 2,604
---------- ---------- ----------
Net loss before extraordinary item (469) (3,462) (4,026)
Extraordinary loss - net of tax benefit (3,310) - -
---------- ---------- ----------
Net loss $(3,779) $(3,462) $(4,026)
========== ========== ==========
</TABLE>
- ---------------------
See accompanying notes to consolidated financial statements.
47
<PAGE>
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 insurance 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 the Company 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. 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 P&C subsidiaries are included in the accompanying
financial statements in accordance with generally accepted accounting
principles for insurance companies. These principles are summarized as
follows:
a. Insurance premium is recognized as income over the term of the
policies.
b. Commissions, premium taxes and other costs of acquiring new business
have been deferred and are being amortized by charges to income as the
related premium is earned.
c. The liability for insurance losses and loss adjustment expenses is
based upon (1) accumulation of case estimates for losses reported
prior to the close of the accounting period, (2) estimates of incurred
but unreported losses based upon past experience, and (3) estimates of
expenses for investigating and adjusting claims. The liability for
such losses is stated after estimated recoveries for salvage and
subrogation.
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
48
<PAGE>
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 that are
assumed to be incurred based on the assumptions made.
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, the Company may sell such securities 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. Depreciation expense on investment
real estate was $284,000, $251,000 and $249,000 for 1998, 1997 and 1996,
respectively.
Short-term investments are reported at cost, which approximates market
value.
49
<PAGE>
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 SFAS No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts," the Company's
reinsurance receivables and prepaid reinsurance premiums are reported as
assets and are not 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.
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.
50
<PAGE>
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 financial instruments are reported at
their carrying amounts which approximates 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.
The Company capitalizes certain costs associated with software
developed for its own use. Such costs are amortized over the expected
useful lives of the software. These capitalized costs are included in
equipment and other.
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.
51
<PAGE>
Advertising
The Company expenses the costs of advertising as incurred.
Advertising expense was $2,343,000 in 1998, $1,836,000 in 1997 and
$3,375,000 in 1996.
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 $6,628,000 in 1998, $8,278,000 in 1997 and
$8,177,000 in 1996.
Income taxes paid were $12,719,000, $11,950,000 and $12,900,000 for
1998, 1997, and 1996, respectively.
Earnings Per Share
Earnings per share (EPS) amounts are computed based on the weighted
average number of common shares outstanding during each year.
<TABLE>
Earnings per Share Calculation
<CAPTION>
NET OUTSTANDING PER-SHARE
INCOME SHARES AMOUNT
---------- ---------- ----------
<S> <C> <C> <C>
For the Year Ended 1996:
Basic EPS $ 23,529 29,594 $ 0.80
Outstanding Stock Options 644
---------- ---------- ----------
Diluted EPS $ 23,529 30,238 $ 0.78
========== ========== ==========
For the Year Ended 1997:
Basic EPS $ 50,866 27,891 $ 1.82
Outstanding Stock Options 555
---------- ---------- ----------
Diluted EPS $ 50,866 28,446 $ 1.79
========== ========== ==========
For the Year Ended 1998
Basic EPS $ 43,368 27,337 $ 1.59
Outstanding Stock Options 544
---------- ---------- ----------
Diluted EPS $ 43,368 27,881 $ 1.56
========== ========== ==========
</TABLE>
52
<PAGE>
All outstanding common share amounts, additional paid-in capital and
related earnings per share calculations have been retroactively adjusted to
reflect the three-for-one stock split distributed in January 1998, except
for treasury shares.
Credit Risk
The Company performs ongoing risk and credit evaluations of its agents
and insureds. The Company's P&C subsidiaries write insurance throughout
the United States with concentration in the southern and southwestern
states.
The 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.
Treasury Stock Adjustment
In 1998, the Company changed its state of incorporation from Delaware
to Michigan. Since the State of Michigan does not recognize treasury
stock, a cumulative adjustment was made to reflect treasury stock purchases
as a reduction of common stock, additional paid-in capital and retained
earnings.
Reclassifications
Certain reclassifications have been made in the 1997 and 1996
financial statements to conform to those classifications used in 1998.
53
<PAGE>
NOTE 2 - INVESTMENTS
The amortized cost and estimated market values of investments in
financial instruments held by the Company are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
December 31, 1998 COST GAINS LOSSES VALUE
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
(In thousands)
Fixed maturities held to maturity:
Bonds:
Obligations of states and
political subdivisions $947 $34 $- $981
---------- ---------- --------- ----------
Total fixed maturities held
to maturity 947 34 - 981
---------- ---------- --------- ----------
Securities available for sale:
Fixed maturities:
Bonds:
U.S. Treasury Securities
and obligations of U.S.
government agencies 51,687 1,688 - 53,375
Obligations of states and
political subdivisions 260,674 12,430 (218) 272,886
Corporate securities 27,570 482 (2,032) 26,020
Mortgage-backed securities 4,181 - (189) 3,992
---------- ---------- --------- ----------
Total bonds 344,112 14,600 (2,439) 356,273
Redeemable preferred stocks 487 16 - 503
---------- ---------- --------- ----------
Total fixed maturities
available for sale 344,599 14,616 (2,439) 356,776
---------- ---------- --------- ----------
Equity securities:
Common stocks 56,929 11,324 (6,730) 61,523
Preferred stocks 19,397 899 (1,883) 18,413
---------- ---------- --------- ----------
Total equity securities
available for sale 76,326 12,223 (8,613) 79,936
---------- ---------- --------- ----------
Mortgage loans and land contracts 5,867 459 - 6,326
Short-term investments 36,907 - - 36,907
---------- ---------- --------- ----------
54
<PAGE>
Total financial assets $464,646 $27,332 $(11,052) $480,926
========== ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
December 31, 1997 COST GAINS LOSSES VALUE
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
(In thousands)
Fixed maturities held to maturity:
Bonds:
Obligations of states and
political subdivisions $1,974 $50 $(35) $1,989
---------- ---------- --------- ----------
Total fixed maturities held
to maturity 1,974 50 (35) 1,989
---------- ---------- --------- ----------
Securities available for sale:
Fixed maturities:
Bonds:
U.S. Treasury Securities
and obligations of U.S.
government agencies 72,468 1,941 (8) 74,401
Obligations of states and
political subdivisions 257,885 10,742 (182) 268,445
Corporate securities 26,347 969 (15) 27,301
Mortgage-backed securities 5,980 115 (37) 6,058
---------- ---------- --------- ----------
Total bonds 362,680 13,767 (242) 376,205
Redeemable preferred stocks 649 14 - 663
---------- ---------- --------- ----------
Total fixed maturities
available for sale 363,329 13,781 (242) 376,868
---------- ---------- --------- ----------
Equity securities:
Common stocks 49,986 20,175 (3,330) 66,831
Preferred stocks 15,085 1,843 (82) 16,846
---------- ---------- --------- ----------
Total equity securities
available for sale 65,071 22,018 (3,412) 83,677
---------- ---------- --------- ----------
Mortgage loans and land contracts 12,350 995 - 13,345
Short-term investments 26,656 - - 26,656
---------- ---------- --------- ----------
55
<PAGE>
Total financial assets $469,380 $36,844 $(3,689) $502,535
========== ========== ========== ==========
</TABLE>
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.
<TABLE>
<CAPTION>
HELD TO MATURITY AVAILABLE FOR SALE
-------------------------- ---------------------------
AMORTIZED MARKET AMORTIZED MARKET
December 31, 1998 COST VALUE COST VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(In thousands)
Due to mature (years):
One or less $ 46 $ 46 $ 36,351 $ 36,891
After one through five 501 535 80,453 82,932
After five through ten 400 400 149,218 156,015
After ten - - 73,909 76,443
---------- ---------- ---------- ----------
Total 947 981 339,931 352,281
Mortgage-backed securities - - 4,181 3,992
Redeemable preferred stocks - - 487 503
---------- ---------- ---------- ----------
Total fixed maturities $947 $981 $344,599 $356,776
========== ========== ========== ==========
</TABLE>
The change in unrealized gains and losses on fixed maturity and equity
security investments is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
(In thousands)
Fixed maturities $ (1,343) $ 3,017 $(4,776)
Equity securities (14,996) 3,879 9,625
--------- --------- ---------
Combined $(16,339) $ 6,896 $ 4,849
========= ========= =========
</TABLE>
56
<PAGE>
To conform with statutory requirements, bonds and certificates of
deposit in principal amounts totaling $13,335,000 were on deposit with
various regulatory agencies at December 31, 1998.
The mortgage loans and land contracts are primarily the result of
financing sales associated with the development of an office park, an
industrial park and a condominium development by the Company. At December
31, 1998, 99.9% of the mortgage loans and land contracts were categorized
as commercial, and 0.1% as residential. Investment real estate consists of
vacant land for a future office park. The majority of mortgage loans, land
contracts and investment real estate is concentrated in Michigan.
Pretax investment income by source is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
(In thousands)
Fixed maturities $21,851 $22,209 $22,914
Equity securities 3,193 3,593 4,059
Mortgage loans and real estate 386 596 552
Short-term investments 1,596 1,706 1,630
---------- ---------- ----------
Total 27,026 28,104 29,155
Investment expense 2,458 2,291 2,039
---------- ---------- ----------
Net investment income $24,568 $25,813 $27,116
========== ========== ==========
</TABLE>
Realized gains and losses are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
(In thousands)
Fixed maturities $230 $377 $256
Equity securities 6,990 10,264 2,765
Real estate 67 1,540 77
---------- ---------- ----------
Net gain $7,287 $12,181 $3,098
========== ========== ==========
</TABLE>
57
<PAGE>
Proceeds from sales of investments in fixed maturities totaled
$70,251,000 in 1998, $40,642,000 in 1997 and $49,488,000 in 1996. Gross
gains of $456,000, $617,000 and $893,000 and gross losses of $226,000,
$240,000 and $499,000 were realized on those sales in 1998, 1997 and 1996,
respectively.
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:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
(In thousands)
Balance at January 1, $74,179 $70,231
--------- ---------
Policy acquisition costs incurred:
Commission and brokerage 73,206 76,253
General and administrative 47,861 43,581
Taxes, licenses and fees 11,250 9,881
Reinsurance cost (recoveries) (7) (7)
--------- ---------
Total 132,310 129,708
--------- ---------
Charged to expense (130,800) (125,760)
--------- ---------
Balance at December 31, $75,689 $74,179
========= =========
</TABLE>
NOTE 4 - REAL ESTATE AND EQUIPMENT
Real estate and equipment utilized by the Company is summarized as
follows:
58
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998 1997
--------- ---------
<S> <C> <C>
(In thousands)
Owned land and buildings $54,673 $45,433
Equipment and other 15,198 7,069
--------- ---------
Total cost 69,871 52,502
Less accumulated depreciation 15,306 14,161
--------- ---------
Real estate and equipment - net $54,565 $38,341
========== =========
</TABLE>
Depreciation expense on real estate and equipment utilized by the
Company was $1,156,000 in 1998, $1,860,000 in 1997 and $1,854,000 in 1996.
Included in equipment and other in 1998 is $12.2 million and in 1997,
$4.1 million of capitalized software.
NOTE 5 - LIABILITY FOR INSURANCE LOSSES AND LOSS ADJUSTMENT EXPENSES
The incurred and paid activity in the liability for insurance losses
and loss adjustment expenses is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
(In thousands)
Balance at January 1, $82,722 $93,420 $93,771
Less reinsurance recoverables 324 750 2,409
---------- ---------- ----------
Net balance January 1, 82,398 92,670 91,362
---------- ---------- ----------
Incurred related to:
Current year 254,507 239,724 277,298
Prior years (4,721) 4,884 (12,123)
---------- ---------- ----------
Total incurred 249,786 244,608 265,175
---------- ---------- ----------
59
<PAGE>
Paid related to:
Current year 205,631 193,582 223,518
Prior years 43,168 61,298 51,349
---------- ---------- ----------
Total paid 248,799 254,880 274,867
---------- ---------- ----------
Net balance at December 31, 83,385 82,398 92,670
Plus reinsurance recoverables 743 324 750
---------- ---------- ----------
Balance at December 31, $84,128 $82,722 $93,420
========== ========== ==========
</TABLE>
The prior year reserve development in 1997 resulted from catastrophe
losses occurring in late 1996 and early 1997. As this development resulted
from property claims, it is not expected to increase in future years.
NOTE 6 - NOTES AND OTHER OBLIGATIONS PAYABLE
Notes and other obligations payable consist of the following:
<TABLE>
<CAPTION>
December 31, 1998 1997
--------- ---------
<S> <C> <C>
(In thousands)
Current portion of long-term notes payable $7,000 $2,505
Current portion of capital lease obligations 204 182
--------- ---------
Total short-term debt 7,204 2,687
--------- ---------
Long-term notes payable 80,500 87,161
Obligations under capitalized leases 2,149 2,353
--------- ---------
Total long-term debt 82,649 89,514
--------- ---------
Total $89,853 $92,201
========= =========
</TABLE>
Notes payable consist primarily of an unsecured credit agreement with
a group of banks, which was entered into in June 1998 and replaced a prior
unsecured credit agreement and the building mortgage loan that was paid off
on May 5, 1998. The new agreement provides for a five-year revolving
credit facility not to exceed $40 million and a seven-year term loan of $80
million, of which $30 million of the term loan is amortizing over six years
60
<PAGE>
at $1.25 million per quarter. The term loan expires on June 29, 2005 and
the revolver loan expires on June 29, 2003. At December 31, 1998, the term
loan had a balance of $77.5 million and the revolving credit facility had a
balance of $10 million. In addition to the remaining $30 million available
under the revolving credit facility, the Company has an uncommitted line of
credit facility which may not exceed $20 million at any one time. This
unsecured credit agreement expires on June 30, 1999.
The credit agreement subjects the Company to certain restrictions and
covenants related to, among others: the payment of dividends; minimum net
worth levels; the sale, lease, transfer or other disposal of properties and
assets other than in the ordinary course of business; new indebtedness; the
assumption or creation of liens; and maintenance of certain ratios.
Borrowing rates on the term loan and revolving credit facility of the
credit agreement are based on eurodollar and negotiated rates. During
1995, the Company entered into an interest rate swap agreement with a
financial institution. The notional principle amount of the swap is $58
million and it matures on August 31, 2000. This agreement effectively fixed
the interest rate on the entire $58 million outstanding under the credit
agreement to 6.45% plus credit spread. In November 1997, the agreement was
amended with the following changes: the interest rate was dropped to 6.47%
plus credit spread; the maturity was extended to August 31, 2002 and the
notional amount will be stepping down from $58 million to $50 million on
August 31, 2000. The interest rate swap is non-amortizing. In August
1998, the Company entered into an interest rate swap agreement with a
financial institution in the notional principle amount equal to the $30
million of the term loan that is amortizing. This agreement effectively
fixes the interest rate at 5.705% plus credit spread until May 31, 2004.
Net receipts or payments under the swap agreements are recognized as an
adjustment to interest expense. The Company's exposure to credit risk is
limited to interest movements and is considered to be negligible.
Maturities of long-term debt for each of the five years succeeding
December 31, 1998 are as follows:
61
<PAGE>
<TABLE>
<CAPTION>
Year Ending December 31:
(In thousands)
<S> <C>
1999 $7,204
2000 5,229
2001 5,270
2002 5,310
2003 13,349
Thereafter 53,491
---------
Total $89,853
=========
</TABLE>
The fair value of financial liabilities and off-balance-sheet
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1998 1997
---------------------------- ---------------------------
NET BOOK FAIR NET BOOK FAIR
VALUE VALUE VALUE VALUE
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
(In thousands)
Financial liabilities:
Mortgage note $- $- $31,666 $36,931
Variable notes 87,500 87,500 58,000 58,000
---------- --------- ---------- ----------
Total financial liabilities $87,500 $87,500 $89,666 $94,931
========== ========= ========== ==========
Off-balance sheet
financial instruments:
Interest rate swap agreements $- $(2,273) $- $1,069
========== ========= ========== ==========
</TABLE>
NOTE 7 - INCOME TAXES
The Company files a consolidated tax return with its subsidiaries,
including its life insurance subsidiary, until it was sold in 1996. For tax
purposes, $10.5 million had been accumulated by the life insurance
subsidiary in a memorandum policyholders' surplus account and became
62
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
(In thousands)
Current federal income tax expense $13,851 $16,473 $8,335
Deferred federal income tax expense 2,759 3,664 (2,639)
---------- ---------- ----------
Income tax provision $16,610 $20,137 $5,696
========== ========== ==========
</TABLE>
Deferred tax liabilities (assets) are composed of the following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
(In thousands)
Policy acquisition costs related to
unearned premium $27,321 $27,402
Unrealized gains on securities 5,525 11,251
Excess tax over book basis of fixed assets 2,382 2,202
System Development Cost 4,487 1,524
Other 1,490 1,023
--------- ---------
Gross deferred tax liabilities 41,205 43,402
--------- ---------
Unearned premium adjustments (17,499) (17,182)
Difference between book and tax reserves (2,811) (3,098)
Deferred compensation (2,757) (2,777)
Post-retirement benefit accruals (1,315) (1,019)
Other (2,894) (2,431)
--------- ---------
Gross deferred tax assets (27,276) (26,507)
--------- ---------
Net deferred tax liability $13,929 $16,895
========= =========
</TABLE>
63
<PAGE>
In addition to the Company's net deferred tax liability, the liability
for income taxes includes a current tax liability of $2,345,000 and
$3,958,000 at December 31, 1998 and 1997, respectively.
A reconciliation of the federal statutory tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
% OF PRE-TAX INCOME
--------------------------------------------
Year Ended December 31, 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Federal statutory tax rate 35.0% 35.0% 35.0%
Increase (reduction) in income taxes
relating to:
Tax-exempt municipal bond interest -6.5% -5.1% -11.7%
Dividends received deduction -0.6% -0.9% -2.4%
Tax credits and other -1.7% -0.6% -1.2%
---------- ---------- ----------
Effective tax rate 26.2% 28.4% 19.7%
========== ========== ==========
</TABLE>
NOTE 8 - REINSURANCE
The Company was party to both proportional and non-proportional
reinsurance agreements in 1998.
Amounts 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.
The following amounts summarize the effect of reinsurance on the
Company's financial statements:
64
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
(In thousands)
Direct:
Written premiums $367,873 $363,933 $353,421
Earned premiums 365,836 360,646 361,004
Insurance losses and loss expenses 206,218 205,508 234,115
Assumed:
Written premiums 73,715 71,032 67,678
Earned premiums 71,205 69,189 67,741
Insurance losses and loss expenses 37,354 28,652 25,911
Ceded - Catastrophe:
Written premiums 7,666 9,446 17,198
Earned premiums 7,661 9,546 16,171
Insurance losses and loss expenses 1,566 (9) 98
Ceded - Non-Catastrophe:
Written premiums 804 647 1,147
Earned premiums 811 625 1,180
Insurance losses and loss expenses 363 (35) 664
</TABLE>
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. The Company contributed 3% in 1998 and 5% in
1997 of eligible compensation of all eligible employees. In 1998 the
savings feature of the plan is a 401(k) plan that allows for voluntary
contributions by employees and provides a dollar-for-dollar Company-paid
match for the employee's contribution, limited to 3% of the employee's
eligible income and an additional 50% for each dollar on the next 2%. In
1997 the saving feature of the plan was a 401(k) plan that allowed for
65
<PAGE>
voluntary contributions by employees and provided a 50% Company-paid match
of the employee's contribution, limited to 2% of the employee's eligible
income.
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). As of December 31, 1998, the projected retirement benefits to
be paid total $3,529,000. Life insurance contracts have been purchased to
fund the retirement benefits. Key employees would receive their entire
retirement benefit in the event of a change in control of the Company and
their subsequent termination. The maximum contingent liability as of
December 31, 1998 relating to the change in control provision is
approximately $5,233,000.
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 to provide that 70% of the
awards will be paid in the Company's common stock. The awards are fully
vested upon issuance; however, the stock is restricted for resale for three
years from the date of the award. There were 32,970 shares issued in
January 1999 for the three-year results ending December 31, 1998 and 37,692
shares issued in January 1998 for the three-year results ending December
31, 1997.
Stock Option Plans
The Company has a non-qualified stock option plan which authorizes the
granting of options to purchase 650,000 shares of the Company's common
stock to certain key employees. During 1995, the Company's Board of
Directors authorized, and the shareholders' approved, an additional 400,000
66
<PAGE>
shares of the Company's common stock for future grants under the plan,
making a total of 1,050,000 shares authorized under the plan. Adjusting
the authorized options for the three-for-one stock split distributed on
January 20, 1998, provides a total of 3,150,000 shares authorized under the
plan. The options, granted at market value, vest at either a three or four
year period, with a maximum term of 10 years.
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:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Dividend / Share $.36 $.36
Expected Volatility 18.9% 27.6%
Risk-free Interest Rate 5.6% 5.9%
Expected Lives 5-8 years 8 years
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net Income
As reported $43,368,000 $50,866,000 $23,529,000
Pro forma $42,739,000 $50,291,000 $23,065,000
Earnings per share
As reported $1.59 $1.82 $.80
Pro forma $1.56 $1.80 $.78
</TABLE>
67
<PAGE>
The following is a summary of the Company's stock option transactions
during 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------------------------- ---------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1,896,825 $11 2,214,513 $10
Granted 844,000 $24 115,500 $21
Exercised 203,900 $10 430,938 $11
Forfeited 44,125 $18 2,250 $16
---------- ---------- ---------- ----------
Outstanding at December 31, 2,492,800 $15 1,896,825 $11
========== ========== ========== ==========
Options exercisable at December 31, 1,547,492 $10 1,627,640 $10
========== ========== ========== ==========
Weighted-average fair value of
options granted during the year $1.99 $7.72
========== ==========
</TABLE>
The following table summarizes information about the Company's stock
options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------- -------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE OUTSTANDING EXERCISE
PRICE AT 12/31/98 LIFE PRICE AT 12/31/98 PRICE
- --------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
$6.08 - $7.00 683,800 2.8 years $7 683,800 $7
$10.42 - $12.67 775,200 4.6 years $12 768,575 $12
$18.33 - $24.25 1,033,800 5.6 years $23 95,117 $20
------------ ------------ ------------ ------------ ------------
$6.08 - $24.25 2,492,800 4.5 years $15 1,547,492 $10
============ ============ ============ ============ ============
</TABLE>
68
<PAGE>
In April 1998, the shareholders approved the Company's Stock Option
Plan of 1998, which granted the Company's Chairman and Chief Executive
Officer, an option to purchase 750,000 shares of the Company's common stock
at a purchase price of $24 per share. Except in the case of a change in
control or certain events of termination, the options only vest if the
closing per share price of the Company's common stock on the New York Stock
Exchange is equal to or greater than $48 per share on at least 10 trading
days on or before February 23, 2003.
Restricted Stock Plan
The Company also has a restricted stock plan under which certain key
employees were issued 194,442 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 participants, who has all the rights of a
shareholder, subject to restrictions as to transfer until the shares vest.
Compensation expense is recorded over the periods in which the shares
vest. The unamortized market value of the shares awarded is shown
separately in shareholders' equity. As of December 31, 1998, 189,798 were
vested, 198 shares were issued and non-vested and 4,446 shares remained
unissued from forfeitures.
In 1995, the Company adopted and the shareholders' approved a
restricted stock plan for the Company's non-employee directors. Under the
plan, the Company's non-employee directors may elect to receive shares of
the Company's common stock in lieu of their annual retainer fees. The
shares are issued at market value and are registered in the name of the
participant, who has all the rights of a shareholder, subject to
restrictions as to transfer until the shares vest. Vesting occurs upon the
completion of the director's term. A total of 60,000 shares may be issued
under the plan. In 1998 and 1997, 1,236 shares and 1,686 shares were
issued, respectively.
The cost of the aforementioned benefit plans, excluding post-
retirement benefits, for 1998, 1997 and 1996 was $3,733,000, $4,378,000 and
$3,696,000, 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. Post-
69
<PAGE>
retirement benefits accrue during the employees' working years rather than
being expensed 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, along with the
change in accumulated post retirement benefit obligation an plan assets, is
as follows:
<TABLE>
<CAPTION>
December 31, 1998 1997
--------- ---------
<S> <C> <C>
(In thousands)
Change in accumulated postretirement Benefit
obligation (APBO)
APBO, January 1 $6,542 $5,433
Service cost 361 312
Interest cost 508 425
Plan Amendments
Actuarial (Gain)/Loss 378 748
Benefits paid (292) (376)
--------- ---------
APBO, December 31, $7,497 $6,542
Plan assets ========= =========
Change in plan assets
Plan assets, January 1 $- $-
Actual return on assets
Company contributions 292 376
Benefits paid (292) (376)
--------- ---------
Plan assets, December 31 $- $-
========= =========
Reconciliation of funded status
Funded status $(7,497) $(6,542)
Unrecognized net (gain)/loss (44) (429)
Unrecognized prior service cost - -
Unrecognized transition obligation 3,790 4,061
--------- ---------
Accrued Postretirement benefit (liability)/asset $(3,751) $(2,910)
========= =========
</TABLE>
70
<PAGE>
Net periodic post-retirement benefit costs included the following
components:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
(In thousands)
Service cost $361 $312 $341
Interest on accumulated post-retirement
obligation 508 425 405
Amortization of:
Transition obligation 271 271 271
Actuarial gain - (38) (42)
---------- ---------- ----------
Total costs $1,140 $970 $975
========== ========== ==========
</TABLE>
The health care trend rate assumed was 7% for 1998, 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, 1998 by
$240,165 and the net periodic benefit cost for the year then ended by
$26,609. A 1% decrease in the health care trend rate would decrease the
accumulated post-retirement benefit obligation as of December 31, 1998 by
$223,290 and the net periodic benefit cost for the year then ended by
$25,027.
The weighted average discount rate used in determining the accumulated
post-retirement benefit obligation was 7.5%.
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 non-cancelable operating leases for each of the five years
succeeding December 31, 1998 and thereafter, excluding renewal options:
71
<PAGE>
<TABLE>
<CAPTION>
Year Ending December 31:
(In thousands)
<S> <C>
1999 5,262
2000 3,659
2001 2,683
2002 1,059
2003 381
Thereafter 468
</TABLE>
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, 1998:
<TABLE>
<CAPTION>
Year Ending December 31:
(In thousands)
<S> <C>
1999 $ 468
2000 468
2001 480
2002 486
2003 486
Thereafter 1,136
----------
Total minimum lease payments 3,524
Less amount representing interest 1,171
----------
Present value of net minimum lease payments $2,353
==========
</TABLE>
Rental expense charged to operations in 1998, 1997 and 1996 amounted
to $5,619,000, $5,354,000 and $5,109,000, respectively, including amounts
paid under short-term cancelable leases.
NOTE 11 - STATUTORY INFORMATION
As a holding company, the principal source of the 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. State regulatory requirements limit the amount of
72
<PAGE>
annual dividends Foremost Insurance can pay to the Company without
obtaining prior insurance department approval. These restrictions are not
expected to significantly affect the Company's ability to meet its
foreseeable cash requirements. The amount of dividends which Foremost
Insurance can pay to the Company in 1999 without obtaining prior insurance
department approval under the current statute is $38.1 million.
At December 31, 1998, $98.9 million of consolidated shareholders'
equity represents net assets of the Company's P&C subsidiaries that cannot
be transferred in the form of dividends, loans or advances to the Company.
Policyholders' surplus for the combined property and casualty
insurance companies at December 31, 1998 and 1997 was $203.8 million and
$220.5 million, respectively. Statutory net income for the combined
property and casualty insurance companies for the years ended December 31,
1998, 1997 and 1996 was $45.0 million, $49.8 million and $34.1 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 $1.4 million at December 31, 1998.
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.
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. As a result of the three-for-one stock split distributed on
January 20, 1998, each outstanding share of common stock presently
represents one-third of a right which may become exercisable in certain
circumstances to purchase three one-hundredths of a share of the Company's
common stock at a purchase price of $36.67 per right. The rights are not
currently exercisable.
73
<PAGE>
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.
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 has acquired 20% or more of the
Company's common stock. The Company has reserved 275,246 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. In the opinion of management, these
proceedings, as well as the litigation described in Part I, Item 3 of this
Form 10-K. are not expected to have a material adverse effect on the
Company's consolidated financial position, cash flows or operating results.
Further liability, if any, of the Company and its subsidiaries for
litigation is not determinable at December 31, 1998.
On January 19, 1999, the Company and First USA Bank agreed to
resolve the action filed in 1998 by the Company against First USA Bank and
Banc One in the United States District Court for the Western District of
Michigan arising out of a dispute concerning an Insurance Services Agreement
made in 1996. The settlement provides that First USA Bank will pay the
Company $6.75 million in connection with the termination of the insurance
agreement which had provided the Company the exclusive right to offer certain
insurance products to First USA Bank's credit card customers. The settlement
proceeds will be recorded in the Company's financial results for the first
quarter of 1999.
NOTE 13 - INFORMATION BY BUSINESS SEGMENTS
The Company considers itself to operate in one segment, the property &
casualty insurance industry generally evaluates it products in total. The
Company's P&C subsidiaries primarily furnish insurance to the mobile home
and recreational vehicle markets. Insurance is written throughout the
United States with concentrations in the southern and southwestern states.
The nature of the Company's insurance operations expose it to risk in the
case of numerous, severe catastrophic events. To minimize this risk, the
74
<PAGE>
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.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Insurance Premium Written
and Assumed (In millions)
Property and casualty:
Mobile home $362.0 $356.7 $349.2 $352.3 $341.5
Recreational vehicle 47.4 48.4 47.9 49.1 49.7
Automobile 17.7 14.1 10.3 12.4 14.1
Basics 8.5 7.4 4.4 3.3 2.0
Homeowners 2.6 3.1 3.3 3.6 3.5
Commercial products 1.0 1.1 1.2 1.5 0.8
Collateral protection 0.0 0.7 0.7 1.0 0.7
Other 2.4 3.5 4.1 3.8 3.9
--------- --------- --------- --------- ---------
Total 441.6 435.0 421.1 427.0 416.2
Less reinsurance ceded 0.8 0.7 1.1 1.5 0.7
--------- --------- --------- --------- ---------
Total $440.8 $434.3 $420.0 $425.5 $415.5
========= ========= ========= ========= =========
Net Insurance Premium Earned
(In millions)
Property and casualty:
Mobile home $359.4 $354.9 $354.1 $353.2 $335.7
Recreational vehicle 47.8 48.0 49.1 49.3 47.8
Automobile 15.3 12.3 11.0 12.9 15.7
Basics 7.6 5.7 3.4 2.5 1.4
Homeowners 2.7 3.1 3.5 3.6 3.6
Commercial products 0.9 1.4 1.2 1.0 0.9
Collateral protection 0.0 0.2 1.1 0.8 0.6
Other 2.5 3.6 4.2 3.0 4.2
--------- --------- --------- --------- ---------
Total $436.2 $429.2 $427.6 $426.3 $409.9
========= ========= ========= ========= =========
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(In thousands)
Income Before Taxes -
Continuing Operations
Property and casualty:
Underwriting income $32,980 $38,610 $5,458 $38,211 $15,372
Investment and other income
(including realized gains
and losses): 31,939 38,061 30,036 27,952 25,117
--------- --------- --------- --------- ---------
Total property and casualty 64,919 76,671 35,494 66,163 40,489
Other-net (parent company &
non-insurance operations)<F1> (1,631) (5,778) (6,630) (5,800) (4,852)
--------- --------- --------- --------- ---------
Income before taxes -
continuing operations $63,288 $70,893 $28,864 $60,363 $35,637
========= ========= ========= ========= =========
Identifiable Assets
(In millions)
Property and casualty $693.5 $693.1 $662.2 $669.8 $625.1
Parent company and other <F2> 59.7 51.7 59.4 57.8 61.0
--------- --------- --------- --------- ---------
Total $753.2 $744.8 $721.6 $727.6 $686.1
========= ========= ========= ========= =========
<FN>
- -------------
<F1> General corporate expenses were $1,813,000, $1,699,000 and $1,604,000
and interest expense was $4,565,000, $4,766,000 and $4,401,000 in 1998,
1997 and 1996, respectively.
<F2> Identifiable corporate assets were $15 million, $14.7 million and $18.3
million in 1998, 1997 and 1996, respectively. Corporate expenditures for
additions to long-lived assets were $9,485,000, $1,762,000 and $29,000 in
1998, 1997 and 1996 respectively.
</FN>
</TABLE>
Intercompany rental income and expense of $6.5 million has been
included in the operating income and expense of the segments, but is
eliminated from the consolidated revenues and expenses.
76
<PAGE>
NOTE 14 - RELATED PARTY TRANSACTIONS
A director and major shareholder of the Company has investment
advisory agreements with the Company and currently manages approximately
19% of the Company's investment portfolio. During 1998 and 1997, $1,077,000
and $1,045,000 of fees and commissions were earned under these agreements.
NOTE 15 - COMPREHENSIVE INCOME
Comprehensive income is defined as any change in equity from
transactions and other events originating from non-owner sources. The
following summarizes the components of comprehensive income, other than net
income, for the last three years.
<TABLE>
(In thousands)
<CAPTION>
Year ended December 31, 1998 PRETAX TAX EFFECT AFTER-TAX
------ ----------- ---------
<S> <C> <C> <C>
Unrealized depreciation on
investments during the year $(9,111) $3,189 $(5,922)
Less: Reclassification adjustment
for net realized gains included
in net income 7,287 (2,577) 4,710
-------- ----------- ---------
Net change in unrealized
appreciation of investments $(16,398) $5,768 $(10,632)
======== =========== =========
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1997 PRETAX TAX EFFECT AFTER-TAX
------ ----------- ---------
<S> <C> <C> <C>
Unrealized appreciation on
investments during the year $19,059 $(6,670) $12,389
Less: Reclassification adjustment
for net realized gains included
in net income 12,181 (4,263) 7,918
-------- ----------- ---------
Net change in unrealized
appreciation of investments $6,878 $(2,407) $4,471
======== =========== =========
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31, 1996 PRETAX TAX EFFECT AFTER-TAX
------ ----------- ---------
<S> <C> <C> <C>
Unrealized appreciation on
investments during the year $7,130 $(2,495) $4,635
Less: Reclassification adjustment
for net realized gains included
in net income 3,098 (1,084) 2,014
-------- ----------- ---------
Net change in unrealized
appreciation of investments $4,032 $(1,411) $2,621
======== =========== =========
</TABLE>
NOTE 16 - 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 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 loss was due primarily to the effects of taxes related to
policyholders' surplus. For tax purposes, $10.5 million had been
accumulated by the life insurance subsidiary in a memorandum policyholders'
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 majority of the net
proceeds was used to purchase the Company's common stock under the approved
stock buy-back program.
In 1990 and 1989, the Company assumed credit life premium under
various reinsurance treaties. Under the terms of these treaties, the
Company was obligated to reimburse the ceding companies only if the
overall incurred loss ratio exceeded a certain percentage. In the fourth
quarter of 1990, the ceding companies were declared insolvent and placed
into liquidation. 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. On July 31, 1997, the
Company and the liquidator settled all outstanding reinsurance and legal
issues regarding these treaties. The escrow account was closed with the
Company recording an after-tax gain of $110,000 for 1997. The financial
results of the life insurance segment and the sale are reflected in the
financial statements as discontinued operations for all years presented.
78
<PAGE>
<TABLE>
<CAPTION>
LIFE INSURANCE STATEMENTS OF INCOME
Year Ended December 31, 1998 1997
(In thousands) --------- ---------
<S> <C> <C>
Premium written and assumed $ - $ 8,988
Less reinsurance ceded - 80
--------- ---------
Net premium written $ - $ 8,908
========= =========
Premium earned $ - $ 8,908
--------- ---------
Death and other benefits - 6,227
Amortization of prepaid policy acquisition costs - 2,167
Operating expenses - 41
--------- ---------
Total losses and expenses - 8,435
--------- ---------
Underwriting income - 473
Investment and other income, less expenses 169 747
Realized gains (losses) - 10
--------- ---------
Income before taxes 169 1,230
Income tax provision (59) (171)
--------- ---------
Net income 110 1,059
Net loss resulting from sale - (698)
--------- ---------
Net income from discontinued operations $ 110 $ 361
========= =========
</TABLE>
79
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Foremost Corporation of America is responsible for
the preparation and integrity of the consolidated financial statements and
all other information contained in the Annual Report. The financial
statements were prepared in accordance with generally accepted accounting
principles and include amounts that are based on management's informed
estimates and judgments.
In fulfilling its responsibility for the integrity of financial
information, management has established a system of internal accounting
control which provides reasonable assurance that assets are properly
safeguarded and accounted for and that transactions are executed in
accordance with management's authorization and recorded and reported
properly.
The financial statements have been audited by the Company's
independent public accountants, BDO Seidman, LLP, whose unqualified report
is presented on the next page. The independent accountants provide an
objective assessment of the degree to which management meets its
responsibility for fairness of financial reporting. BDO Seidman, LLP
regularly evaluates the internal control structure and performs such tests
and other procedures as it deems necessary to reach and express an opinion
on the fairness of the financial statements.
The Audit committee of the Board of Directors, consisting solely of
outside directors, meets with the independent public accountants and
management to review and discuss the major audit findings, the adequacy of
the internal control structure and quality of financial reporting. The
independent accountants also have free access to the Audit Committee to
discuss auditing and financial reporting matters with or without management
present.
S/RICHARD L. ANTONINI
- --------------------------------------------------
Richard L. Antonini
Chairman of the Board, President and Chief Executive Officer
S/F. ROBERT WOUDSTRA
- --------------------------------------------------
F. Robert Woudstra
Chief Operating Officer, Chief Financial Officer and Director
80
<PAGE>
S/KENNETH C. HAINES
- --------------------------------------------------
Kenneth C. Haines
Controller
81
<PAGE>
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, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity,
comprehensive income, and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
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, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1998, 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 28 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 12, 1999
Grand Rapids, Michigan
82
<PAGE>
SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
RESULTS BY QUARTER
1ST 1ST 2ND 2ND 3RD 3RD 4TH 4TH
Consolidated Statements QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
of Income 1998 1997 1998 1997 1998 1997 1998 1997
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands except
per share data)
Total income from
continuing operations $116,990 $115,054 $117,306 $119,257 $118,133 $117,156 $117,967 $118,289
========= ========= ========= ========= ========= ========= ========= =========
Income (loss):
Property & casualty insurance $11,758 $5,702 $9,319 $14,801 $12,092 $15,067 $13,978 $18,648
Parent company and other (197) (893) (205) (1,341) (245) (644) $178 $(584)
--------- --------- --------- --------- --------- --------- --------- ---------
Total continuing operations 11,561 4,809 9,114 13,460 11,847 14,423 14,156 18,064
Discontinued operations - - - 90 - 20 - -
--------- --------- --------- --------- --------- --------- --------- ---------
Net income before
extraordinary item 11,561 4,809 9,114 13,550 11,847 14,443 14,156 18,064
Extraordinary loss - net of
tax benefit - - (3,310) - - - - -
--------- --------- --------- --------- --------- --------- --------- ---------
Net income 11,561 4,809 5,804 13,550 11,847 14,443 14,156 18,064
========= ========= ========= ========= ========= ========= ========= =========
Change in unrealized
appreciation (depreciation)
of securities available
for sale, net of tax $421 $(3,215) $(3,054) $2,465 $(6,169) $6,119 $(1,830) $(898)
========= ========= ========= ========= ========= ========= ========= =========
Earnings per share of common stock:
Net income:
Continuing operations $0.42 $0.17 $0.33 $0.49 $0.43 $0.52 $0.52 $0.65
Discontinued operations - - - - - - - -
Extraordinary loss - - (0.12) - - - - -
--------- --------- --------- --------- --------- --------- --------- ---------
Net income $0.42 $0.17 $0.21 $0.49 $0.43 $0.52 $0.52 $0.65
========= ========= ========= ========= ========= ========= ========= =========
Average shares outstanding 27,591 28,435 27,345 27,738 27,240 27,701 27,175 27,701
========= ========= ========= ========= ========= ========= ========= =========
83
<PAGE>
Earnings per share of common stock - Assuming Dilution:
Net income:
Continuing operations $0.41 $0.16 $0.33 $0.48 $0.43 $0.51 $0.51 $0.64
Discontinued operations - - - - - - - -
Extraordinary loss - - (0.12) - - - - -
--------- --------- --------- --------- --------- --------- --------- ---------
Net income $0.41 $0.16 $0.21 $0.48 $0.43 $0.51 $0.51 $0.64
========= ========= ========= ========= ========= ========= ========= =========
Average shares outstanding 28,215 29,149 27,961 28,386 27,753 28,318 27,630 28,281
========= ========= ========= ========= ========= ========= ========= =========
Dividends per share $0.09 $0.09 $0.09 $0.09 $0.09 $0.09 $0.09 $0.09
========= ========= ========= ========= ========= ========= ========= =========
Price range of common stock:
High $25.00 $20.20 $25.63 $20.00 $24.31 $20.31 $21.00 $23.56
========= ========= ========= ========= ========= ========= ========= =========
Low $22.38 $19.05 $22.50 $17.70 $17.88 $18.50 $15.81 $19.19
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
84
<PAGE>
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 April 29, 1999
Annual Meeting of Shareholders under the captions "Election of 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 April 29, 1999
Annual Meeting of Shareholders under the captions "Executive Compensation,"
"Compensation of Directors," "Employment Agreements" and "Report of the
Compensation Committee" 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 April 29, 1999 Annual Meeting of Shareholders under
the captions "Security Ownership of Certain Beneficial Owners" and
"Securities 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
April 29, 1999 Annual Meeting of Shareholders under the captions "Executive
Compensation," "Compensation of Directors" and "Certain Relationships and
Related Transactions" is incorporated herein by reference.
85
<PAGE>
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, 1998 and 1997 24
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 25
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996 26
Consolidated Statement of Comprehensive Income for the years
ended December 31, 1998, 1997 and 1996 26
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 27
Property and Casualty Statements of Income for the years ended
December 31, 1998, 1997 and 1996 28
Parent Company and Other Statements of Operations for the years
ended December 31, 1998, 1997 and 1996 28
Notes to Consolidated Financial Statements 29
Management's Responsibility for Financial Reporting 54
Independent Accountants' Report 55
Supplementary Data - Results by Quarter 56
86
<PAGE>
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 62
Schedule II - Condensed Financial Information of Registrant 63
Schedule III - Supplementary Insurance Information 66
All other schedules have been omitted as not applicable or the
required information is given in the financial statements, including the
notes thereto.
87
<PAGE>
ITEM 14(A)3. LIST OF EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
3.1 Articles of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.1 of the
Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998 dated
November 12, 1998).
3.2 Bylaws of the Company. (Incorporated by reference
to Exhibit 3.2 of the Company's Quarterly Report on
Form 10-Q for the quarter ending September 30, 1998,
dated November 12, 1998).
4.1 Specimen Stock Certificate Incorporated by
reference to Exhibit 4.3 to the Company's
Quarterly Report on Form 10-Q for the quarter
ending September 30, 1998, dated November 12,
1998).
4.2 Rights Agreement. (Incorporated by reference to
Exhibit 2.1 of the Company's Registration Statement
on Form 8-A, effective January 8, 1990).
4.3 Articles of Incorporation. See Exhibit 3.1 above.
4.4 Bylaws. See Exhibit 3.2 above.
10.1 Company's Annual Incentive Plan, restated January
1, 1998.<F*>
10.2 Company's Long-Term Incentive Plan dated December
8, 1994, as amended December 5, 1996(Incorporated
by reference to the Company's Annual Report on
Form 10-K for the year ending December 31,1997,
dated March 17, 1997).<F*>
10.3 Company's Retirement Supplement Plan, as amended
effective January 1, 1994.<F*> (Incorporated
by reference to the Company's Annual Report on
Form 10-K for the year ended December 31,
1993, dated February 24, 1994).
- -------------
<F*> Management contract or compensatory plan or arrangement.
88
<PAGE>
10.4 Company's Non-Qualified Stock Option Plan, dated
February 23, 1995.<F*> (Incorporated by reference to
the Company's Annual Report on Form 10-K for the
year ending December 31, 1994, dated February 23,
1995).
10.5 Amended and Restated Agreement made as of the 1st
day of January 1998 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 ending December 31, 1997, dated
March 6, 1998).
10.6 Director's Deferred Compensation Plan, as amended
effective January 1, 1994.<F*> (Incorporated by
reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1993, date
February 24, 1994).
10.7 Executive Deferred Compensation Plan, as amended
effective January 1, 1994.<F*> (Incorporated by
reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1993, dated
February 24, 1994).
10.8 Employment Agreements dated as of January 1, 1990
between the Company and certain of its employees.<F*>
(Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31,
1989, dated February 22, 1990).
10.9 Directors' Restricted Stock Plan, dated December 8,
1994.<F*> (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year
ending December 31, 1994, dated February 23, 1995).
10.10 Stock Option Plan of 1998<F*>(Incorporated by
reference to the Company's Definitive Proxy
Statement filed on March 25, 1998).
10.11 Form of Indemnity Agreement for directors and
officers (Incorporated by reference to the Company's
Definitive Proxy Statement filed on March 25, 1998).
12 Statement Re Computation of Ratios.
- -------------
<F*> Management contract or compensatory plan or arrangement.
89
<PAGE>
21 Subsidiaries of the Registrant.
23 Consent of Independent Certified Public
Accountants.
27 Financial Data Schedule.
28 Information from Reports Furnished to State
Insurance Regulatory Authorities.
- -------------
<F*> Management contract or compensatory plan or arrangement.
The Company will furnish a copy of any exhibit listed above to any
shareholder 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, 1998.
90
<PAGE>
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 4, 1999 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 4, 1999
R. L. Antonini President and Chief
Executive Officer
(Principal Executive Officer)
_________________________ Director March _, 1999
Michael de Havenon
S/JOHN C. CANEPA Director March 4, 1999
John C. Canepa
S/ARTHUR E. HALL Director March 4, 1999
Arthur E. Hall
S/RICHARD A. KAYNE Director March 4, 1999
Richard A. Kayne
S/LARRY J. ORANGE Executive Vice President March 4, 1999
Larry J. Orange and Director
S/JOSEPH A. PARININ Director March 4, 1999
Joseph A. Parini
S/ROBERT M. RAIVES Director March 4, 1999
Robert M. Raives
S/MICHAEL B. TARGOFF Director March 4, 1999
Michael B. Targoff
91
<PAGE>
S/F. ROBERT WOUDSTRA Chief Operating Officer, Chief March 4, 1999
F. Robert Woudstra Financial Officer and Director
(Principle Accounting and
Financial Officer)
92
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT REGARDING SCHEDULES
Foremost Corporation of America
Grand Rapids, Michigan
The audits referred to in our report dated February 12, 1999 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
February 12, 1999
Grand Rapids, Michigan
93
<PAGE>
SCHEDULE II
<TABLE>
FOREMOST CORPORATION OF AMERICA (PARENT ONLY)
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED BALANCE SHEETS
<CAPTION>
December 31, 1998 1997
---------- ----------
<S> <C> <C>
(In thousands)
Assets:
Investment in unconsolidated subsidiaries $307,728 $308,314
Other invested assets 400 1,800
Cash 147 36
Due from affiliates 363 363
Real estate and equipment (net of accumulated depreciation) 42,147 34,044
Other assets 14,879 13,433
---------- ----------
Total assets $365,664 $357,990
========== ==========
Liabilities:
Notes payable $87,500 $89,666
Due to affiliates 113 908
Other liabilities 13,896 11,965
---------- ----------
Total liabilities 101,509 102,539
---------- ----------
Shareholders' Equity:
Common stock 27,166 27,701
Other shareholders' equity 236,989 227,750
---------- ----------
Total shareholders' equity 264,155 255,451
---------- ----------
Total liabilities and shareholders' equity $365,664 $357,990
========== ==========
</TABLE>
- ----------
See Notes to Consolidated Financial Statements in Item 8.
94
<PAGE>
SCHEDULE II (CONT.)
<TABLE>
FOREMOST CORPORATION OF AMERICA (PARENT ONLY)
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED STATEMENTS OF INCOME
<CAPTION>
Year Ended December 31, 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
(In thousands)
Income:
Intercompany income $6,531 $6,260 $6,635
Investment and other 1,794 950 1,222
Realized gains on investments (75) - 10,042
---------- ---------- ----------
Total income 8,250 7,210 17,899
---------- ---------- ----------
Expense:
Operating 3,292 3,910 4,255
Interest 6,551 8,003 7,869
---------- ---------- ----------
Total expense 9,843 11,913 12,124
---------- ---------- ----------
Income (loss) before extraordinary
item, tax and income of
unconsolidated subsidiaries (1,593) (4,703) 5,775
Income tax (provision) credit 1,149 1,939 (4,375)
---------- ---------- ----------
Income (loss) before extraordinary
item and income of unconsolidated
subsidiaries (444) (2,764) 1,400
Extraordinary loss - net of tax benefit (3,310) - -
---------- ---------- ----------
Income (loss) before income of
unconsolited subsidiaries (3,754) (2,764) 1,400
Income of unconsolidated subsidiaries<F*> 47,122 53,630 22,129
---------- ---------- ----------
Net income $43,368 $50,866 $23,529
========== ========== ==========
<F*> Includes dividends to parent company of: $37,000 $37,500 $32,600
========== ========== ==========
</TABLE>
- ----------
See Notes to Consolidated Financial Statements in Item 8.
95
<PAGE>
SCHEDULE II (CONT.)
<TABLE>
FOREMOST CORPORATION OF AMERICA (PARENT ONLY)
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended December 31, 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
(In thousands)
Net cash for operating activities $2,354 $(4,088) $(4,772)
Investing Activities:
Maturities of invested assets - - -
Net proceeds from sale of subsidiary - - 23,604
Purchases of real estate and equipment (9,247) (1,713) (29)
Distributions from subsidiaries - net 37,000 37,086 32,600
(Increase) decrease in short-term investments 1,400 4,300 (5,750)
---------- ---------- ----------
Net cash from investing activities 29,153 39,673 50,425
---------- ---------- ----------
Financing Activities:
Prepayment of mortgage (30,781) - -
Extraordinary item on early extingishment
of debt -- net of taxes (3,310) - -
Repayment of long-term debt (8,886) (2,488) (2,258)
Proceeds from borrowings 37,500
Increase (decrease) in short-term debt - - (2,000)
Reacquisition of common stock (13,304) (19,369) (28,855)
Dividends paid (9,836) (10,063) (10,655)
Exercise of stock options: Receipts 2,100 4,553 1,356
Exercise of stock options: Repurchases (4,879) (8,210) (3,256)
---------- ---------- ----------
Net cash for financing activities (31,396) (35,577) (45,668)
---------- ---------- ----------
Cash increase (decrease) 111 8 (15)
Cash at beginning of year 36 28 43
---------- ---------- ----------
Cash at end of year $ 147 $ 36 $ 28
========== ========== ==========
</TABLE>
- ----------
See Notes to Consolidated Financial Statements in Item 8.
96
<PAGE>
SCHEDULE III
<TABLE>
FOREMOST CORPORATION OF AMERICA AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
<CAPTION>
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<F*> WRITTEN
- -------------------- ----------- -------- -------- ------- ---------- ---------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Year Ended December 31,
1998
Property and casualty $75,689 $84,128 $250,959 $436,230 $24,545 $249,786 $130,800 $15,838 $440,784
Parent and Other - - - - 23 - - 3,849 -
------- ------- -------- -------- ------- -------- -------- ------- --------
Total $75,689 $84,128 $250,959 $436,230 $24,568 $249,786 $130,800 $19,687 $440,784
======= ======= ======== ======== ======= ======== ======== ======= ========
(In thousands)
Year Ended December 31,
1997
Property and casualty $74,179 $82,722 $246,429 $429,210 $25,721 $244,608 $125,760 $13,673 $434,317
Parent and Other - - - - 92 - - 6,515 -
------- ------- -------- -------- ------- -------- -------- ------- --------
Total $74,179 $82,722 $246,429 $429,210 $25,813 $244,608 $125,760 $20,188 $434,317
======= ======= ======== ======== ======= ======== ======== ======= ========
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
======= ======= ======== ======== ======= ======== ======== ======= ========
97
<PAGE>
<FN>
- ----------
<F*> Allocations of other operating expenses are based on a number of
assumptions and estimates and results would change if different method
were applied.
</FN>
</TABLE>
- ----------
See Notes to Consolidated Financial Statements in Item 8.
98
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DOCUMENT
10.1 Company's Annual Incentive Plan, restated January 1,
1998
12 Statement RE Computation of Ratios
21 Subsidiaries of Registrants
23 Consent of Independent Certified Public Accountants
27 Financial Data Schedule
28 Information from Reports Furnished to State Insurance
Regulatory Authorities
<PAGE>
EXHIBIT 10.1
FOREMOST CORPORATION OF AMERICA
ANNUAL INCENTIVE PLAN
RESTATED JANUARY 1, 1998
Purpose: Annual cash incentive based upon performance against calendar
year goals.
Eligibility:
1. Participants must be in an exempt job position with a Foremost
Job Size rating of 220 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.
<PAGE>
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 performance goals by
December 31st of each year prior to the year of performance
measurement, subject to ratification by the Board of Directors
such as:
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. 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 similar or modified goals established 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 average annual
change (increase or decrease) in unrealized gain (after tax) on
the "Total Return" investment portfolio of the FCOA consolidated
group over the most recent 4 calendar years as of each December
31st compared to prior year end. For purposes of this plan, the
Combined Loss and Expense Ratio shall be calculated with a cap so
catastrophe losses shall not exceed 12% of net earned premium.
-2-
<PAGE>
2. Payment, if any, will be a percent of a participant's base salary
for the plan year.
3. The opportunity percents will be established from time to time
for each job based upon Foremost Job Size ratings or as otherwise
approved by the CEO. However, the Compensation Committee shall
establish the opportunity percentages of the Executive Officers.
4. Each participant will have 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 form 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.
-3-
<PAGE>
EXHIBIT 12
<TABLE>
STATEMENT RE COMPUTATION OF RATIOS
FOREMOST CORPORATION OF AMERICA AND SUBSIDIARIES
DECEMBER 31, 1998
<CAPTION>
<S> <C> <C>
($ in thousands except per share data)
Return on Beginning Shareholders' Equity:
Net Income $43,368
-----------
Beginning Shareholder's Equity $255,451 17.0%
Price Earnings Ratio:
Price Range Per Share of FCOA Common Stock - Low $15.81
-----------
Earnings Per Share - diluted $1.56 10
Price Range Per Share of FCOA Common Stock - High $25.63
-----------
Earnings Per Share - diluted $1.56 16
Ratio of Net Written Premiums to Statutory
Policyholders' Surplus:
Net Premiums Written $433,173
-----------
Statutory Policyholders' Surplus $203,846 2.1
Ratio of Loss and Loss Expense Reserves to Statutory
Policyholders' Surplus:
Loss and Loss Expense Reserves $83,376
-----------
Statutory Policyholders' Surplus $203,846 0.4
Combined Loss and Expense Ratio - GAAP:
Total Losses and Expenses $403,250
-----------
Premium Earned $436,230 92.4%
</TABLE>
<PAGE>
EXHIBIT 21
CORPORATE ORGANIZATIONAL CHART OF SUBSIDIARIES OF REGISTRANT
FOREMOST CORPORATION OF AMERICA
DECEMBER 31, 1998
Foremost Corporation of America (Michigan)
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 (Michigan) 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
<PAGE>
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
<PAGE>
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 12, 1999, 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, 1998, 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 15, 1999
Grand Rapids, Michigan
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FINANCIAL STATEMENTS OF FOREMOST CORPORATION OF AMERICA FOR THE
PERIOD ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 356,776
<DEBT-CARRYING-VALUE> 947
<DEBT-MARKET-VALUE> 981
<EQUITIES> 79,936
<MORTGAGE> 5,867
<REAL-ESTATE> 13,228
<TOTAL-INVEST> 493,661
<CASH> 2,227
<RECOVER-REINSURE> 23,914
<DEFERRED-ACQUISITION> 75,689
<TOTAL-ASSETS> 753,196
<POLICY-LOSSES> 84,128
<UNEARNED-PREMIUMS> 250,959
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 89,853
0
0
<COMMON> 27,166
<OTHER-SE> 236,989
<TOTAL-LIABILITY-AND-EQUITY> 753,196
436,230
<INVESTMENT-INCOME> 24,568
<INVESTMENT-GAINS> 7,287
<OTHER-INCOME> 2,311
<BENEFITS> 249,786
<UNDERWRITING-AMORTIZATION> 130,800
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 63,288
<INCOME-TAX> (16,610)
<INCOME-CONTINUING> 46,678
<DISCONTINUED> 0
<EXTRAORDINARY> (3,310)
<CHANGES> 0
<NET-INCOME> 43,368
<EPS-PRIMARY> 1.59
<EPS-DILUTED> 1.56
<RESERVE-OPEN> 82,722
<PROVISION-CURRENT> 254,507
<PROVISION-PRIOR> (4,721)
<PAYMENTS-CURRENT> 205,631
<PAYMENTS-PRIOR> 43,168
<RESERVE-CLOSE> 84,128
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<PAGE>
EXHIBIT 28
INFORMATION FROM REPORTS FURNISHED TO STATE INSURANCE REGULATORY
AUTHORITIES
FOREMOST CORPORATION OF AMERICA AND SUBSIDIARIES
DECEMBER 31, 1998
PROPERTY AND CASUALTY INSURANCE
RECONCILIATION OF LOSS RESERVES, STATUTORY SCHEDULE P TO GAAP
<TABLE>
<CAPTION>
<S> <C>
(In thousands)
Property & casualty consolidated Schedule P reserves $83,377
-----------
Adjustments for property and casualty GAAP reserves:
FHSC warranty reserves 7
Rounding differences from Schedule P detail to totals 1
Financial Accounting Standards Board Statement No. 113
adjustment for losses ceded to reinsurance companies 743
-----------
Total property and casualty GAAP adjustments 751
-----------
Consolidated property and casualty
loss reserves - GAAP - December 31, 1997 $84,128
===========
</TABLE>
