SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.
20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993 Commission File No. 0-9649
INDEPENDENT INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-2027555
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
One Independent Drive, Jacksonville, Florida 32276
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 904-358-5151
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
NONE
Securities registered pursuant to Section 12(g) of the Act:
Nonvoting Common Stock, $1.00 Par Value
(Title of class)
Registrant has filed all reports required to be filed by Sections 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 has been subject to the filing requirements for
the past 90 days. YES X NO
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.
YES X NO
The aggregate market value of 2,200,718 shares of voting stock held by
nonaffiliates of the Registrant at February 8, 1994 was $33,010,770 and
is based on the closing price of the nonvoting stock on that same date.
The voting stock is closely held and there is no public market.
The number of shares outstanding of each of the issuer's classes of
common stock, as of the date indicated:
Class Outstanding at February 8, 1994
Voting Common Stock, $1.00 Par Value 6,100,025
Nonvoting Common Stock, $1.00 Par Value 7,064,475
Documents Incorporated by Reference
Portions of the Annual Report to Shareholders for the year ended December
31, 1993 are incorporated into Part I and Part II of Form 10-K.
PART I
Item 1. Description of Business
Incorporated by reference, Annual Report to Shareholders for the year ended
December 31, 1993, pages 17, 29, 55 and 56.
Insurance Regulation. Like other insurance companies, the Registrant's
subsidiaries are subject to regulation and supervision by the Florida Insurance
Department, as well as other insurance departments of each jurisdiction in which
they are licensed to do business. These supervisory agencies have broad
administrative powers relating to the granting and revocation of licenses to
transact business, the licensing of agents, the approval of policy forms,
reserve requirements and the form and content of required financial statements.
As to its investments, each of the Registrant's insurance subsidiaries must meet
the standards and tests established by the National Association of Insurance
Commissioners (NAIC) and, in particular, the investment laws and regulations
of the Florida Insurance Department. The insurance companies are also subject
to laws in most states that require solvent insurance companies to pay
guaranty fund assessments to protect the interests of policyholders of
insolvent insurance companies.
In December, 1991, the NAIC adopted two new reserve requirements (the Asset
Valuation Reserve or "AVR" and the Interest Maintenance Reserve or "IMR") to
replace the former Mandatory Securities Valuation Reserve or "MSVR." These
reserves are generally required by state insurance regulatory authorities to be
established as a liability on a life insurer's statutory financial statements
beginning with the 1992 annual statement, but do not affect financial statements
of the Registrant prepared in accordance with generally accepted accounting
principles. AVR establishes a statutory reserve for mortgage loans and
investments in real estate, as well as for the types of investments (i.e., fixed
maturities and common and preferred stock) that have been subject to the MSVR.
AVR generally captures all realized and unrealized gains and losses on such
assets, other than those resulting from changes in interest rates. IMR captures
the net gains that are realized upon the sale of fixed income securities (bonds,
preferred stocks, mortgage-backed securities and mortgage loans) and that
result from changes in the overall level of interest rates, and amortizes these
net realized gains into income over the remaining life of each investment sold,
thus limiting the ability of an insurer to enhance statutory surplus by taking
gains on fixed income securities. The implementation of the IMR and AVR has not
had a material impact on the Registrant's life insurance subsidiary's surplus
nor on its ability to pay dividends to the Registrant.
In recent years, the NAIC has approved several regulatory initiatives designed
to decrease the risk of insolvency of insurance companies in general. These
initiatives include the implementation of a risk-based capital formula for
determining adequate levels of capital and surplus and further restrictions on
an insurance company's ability to pay dividends to its shareholders. Florida
has adopted the risk-based capital requirements and has recently revised its
dividend limitation policy.
Under NAIC's risk-based capital (RBC)initiatives, life insurance companies must
calculate and report information under a risk-based capital formula, beginning
with their year-end 1993 statutory financial statements. (Property/Casualty
companies must implement a different risk-based capital formula in their 1994
year-end statutory filings). This RBC information is intended to permit
insurance regulators to identify and require remedial action for inadequately
capitalized insurance companies. The NAIC initiatives provide for four levels
of potential involvement by state regulators for inadequately capitalized
insurance companies, ranging from regulatory control of the insurance company
to a requirement for the insurance company to submit a plan to improve its
capital. The life insurance subsidiary's surplus exceeds the authorized
control level risk-based capital by approximately $80 million. Holdings in
common stock require considerably more risk-based capital similar monies been
invested in bonds. However, investment decisions are driven principally by
long-term economic considerations and not altered to produce more attractive
risk-based capital results. The subsidiary believes that over the long-term,
the total return on equities outperforms that on debt security investments.
It sells options against select holdings in the equity portfolio to generate
realized investment gains and further enhance current yield and total return.
Such net gains totaled $1.8 million in 1993.
Another NAIC Model Act provision limits dividends that may be paid in any
calendar year without regulatory approval to the lesser of (i) 10% of the
insurer's statutory surplus at the prior year-end, or (ii) the statutory net
gain from operations of the insurer (excluding realized capital gains and
losses) for the prior calendar year. The NAIC has determined that it will not
grant accreditation to any state insurance regulatory authority in a state that
has not enacted statutes "substantially similar" to the NAIC Model Act
regulating the payment of dividends by insurers. Under current Florida law,
without prior approval from the Florida Commissioner of Insurance and
conditional that insurers maintain at least 115 percent of required risk-
based capital after the payment of dividends, the maximum allowable dividend
in 1994 is $16 million.
In accordance with the rules and practices of the NAIC and in accordance with
state law, every insurance company is examined generally once each three years
by examiners from its state of domicile and from several of the other states
where it is licensed to do business. The most recent examinations for all the
Registrant's insurance subsidiaries were for the year ending December 31, 1992.
Item 2. Properties
Incorporated by reference, Annual Report to Shareholders for the year
ended December 31, 1993, page 17.
Item 3. Legal Proceedings
Incorporated by reference, Annual Report to Shareholders for the year
ended December 31, 1993, page 54.
Item 4. Submission of Matters to a Vote of Security Holders
No reportable events
PART II
Item 5. Market for the Registrant's Common Stock and Related Security
Holder Matters
Incorporated by reference, Annual Report to Shareholders for the year
ended December 31, 1993, page 18.
The Registrant has been informed that holders of more than 90% of the
voting stock of the Registrant have entered into an Agreement (the "No
Transfer Agreement") prohibiting the parties thereto from transferring
shares of voting stock held by them except under certain circumstances.
The excepted transfers include: (i) transfers pursuant to an offer which
has been approved or recommended by the Board of Directors of the
Registrant, (ii) transfers pursuant to the written consent of holders of
a majority of the shares of voting stock subject to the No Transfer
Agreement and, (iii) transfers to the Registrant pursuant to the
Exchange Agreement referred to in Item 12. The No Transfer Agreement
has an initial term ending on November 10, 1996, renewable for two
additional five-year terms by vote of the holders of a majority of the
voting stock subject thereto prior to the expiration of each successive
term.
The restrictions on transfer of voting stock imposed by the No Transfer
Agreement are in addition to, and not in lieu of, restrictions on such
transfers imposed by the Articles of Incorporation of the Registrant.
Item 6. Selected Financial Data
Incorporated by reference, Annual Report to Shareholders for the year
ended December 31, 1993, pages 23-24.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Incorporated by reference, Annual Report to Shareholders for the year
ended December 31, 1993, pages 25-33.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference, Annual Report to Shareholders for the year
ended December 31, 1993, pages 35-57.
Item 9. Changes in and Disagreements on Accounting and Financial
Disclosure
No reportable events
PART III
Item 10. Directors and Executive Officers of the Registrant
The directors of the Registrant and the year originally elected are:
Wilford C. Lyon, Jr.* 1980 Kendall G. Bryan* 1982
Jacob F. Bryan, IV* 1980 Carter B. Bryan 1984
Boyd E. Lyon, Sr.* 1980 William G. Howard 1993
G. Howard Bryan 1980 George M. Baldwin 1980
Patricia H. Doane 1992 Lucy B. Gooding 1980
Michael C. Lyon 1991
*Executive officer of the Registrant
The annual terms of all directors will expire April 13, 1994. Carter B.
Bryan, age 49, is employed by the Registrant's subsidiary as a
territorial manager. G. Howard Bryan and Patrica H. Doane, ages 79 and
58, respectively, are retired vice presidents of the Registrant's
principal subsidiary and are not otherwise employed. George M. Baldwin,
and Lucy B. Gooding, ages 78 and 91, respectively, are not otherwise employed.
Michael C. Lyon and William G. Howard are 43 and 42, and are vice presidents
of the principal subsidiary of the Registrant. See below for information
regarding the positions and offices of directors who are executive officers
of the Registrant and for family relationships between such directors and
officers.
The names, ages and positions of the executive officers of the
Registrant as of February 8, 1994, are listed below. The principal
business experience during the past five years for each person listed
has been as an officer of the Registrant.
Name Age Position and Business Experience
Wilford C. Lyon,Jr. 58 Chairman of the Board of Directors and Chief
Executive Officer - 1984
Jacob F. Bryan, IV 50 President - 1984
Boyd E. Lyon, Sr. 54 Vice President, Treasurer and Chief
Financial Officer - 1984
Kendall G. Bryan 47 Vice President and Chief Operating
Officer - 1984
Guy Marvin III 53 Assistant Secretary and General
Counsel - 1980
David A. Skup 41 Vice President and Internal Auditor
- 1984
Each officer of the Registrant is elected at the annual meeting of the
Board of Directors and holds office until the next annual meeting (to be
held in 1994 on April 13).
Wilford C. Lyon, Jr. and Boyd E. Lyon, Sr. are brothers, and are also
cousins of Michael C. Lyon. Jacob F. Bryan, IV, Kendall G. Bryan and
Carter B. Bryan are brothers, and nephews of G. Howard Bryan. Patricia
Howard Doane and William G. Howard are cousins.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Registrant's directors and executive officers, and persons who own more
than 10% of a registered class of the Registrant's equity securities, to
file with the Securities and Exchange Commission initial reports of
ownership and reports of changes in ownership of Common Stock and other
equity securities of the Registrant. Officers, directors and greater
than 10% shareholders are required by SEC regulation to furnish the
Registrant with copies of all Section 16(a) forms they file.
To the Registrant's knowledge, based solely on review of the copies of
reports furnished to the Registrant and written representations that no
other reports were required, during the year ended December 31, 1993 all
Section 16(a) filing requirements applicable to its officers, directors
and greater than 10% beneficial owners were complied with.
Item 11. Executive Compensation
(a)
(b)(2)(i)(ii)(iii) The following table provides information concerning
the annual compensation for the Registrant's Chief Executive Officer
(CEO) and the four most highly compensated executive officers other than
the CEO as of Decemeber 31, 1993. G. Howard Bryan who retired in October,
1993, as an executive officer also is included.
SUMMARY COMPENSATION TABLE
|--------- ANNUAL COMPENSATION -------|
Other
Name and Principal Annual
Position Year Salary Bonus Compensation
Wilford C. Lyon, Jr. 1993 345,748 0 0
Chairman of the Board & 1992 364,922 0 0
Chief Executive Officer 1991 339,170 20,239 0
Jacob F. Bryan IV 1993 297,151 0 0
President 1992 309,481 0 0
Director 1991 272,037 14,712 0
Boyd E. Lyon, Sr. 1993 240,977 0 0
Vice President 1992 249,668 0 0
Treasurer & Director 1991 225,106 13,476 0
Kendall G. Bryan 1993 229,054 0 0
Vice President 1992 244,959 0 0
Secretary & Director 1991 223,836 12,163 0
Guy Marvin, III 1993 162,906 0 0
Assistant Secretary & 1992 176,298 0 0
General Counsel 1991 175,077 8,260 0
G. Howard Bryan 1993 162,649 0 0
Vice President 1992 175,644 0 0
Secretary & Director 1991 165,914 15,563 0
|-- Long-Term Compensation --|
|----- Awards ----| Payouts
Restricted All
Name and Principal Stock Options LTIP Other
Position Year Awards SAR's Payouts Compensation
Wilford C. Lyon, Jr. 1993 0 0 0 27,535
Chairman of the Board & 1992 0 0 0 27,134
Chief Executive Officer 1991 0 0 0 26,483
Jacob F. Bryan IV 1993 0 0 0 19,365
President 1992 0 0 0 19,137
Director 1991 0 0 0 18,752
Boyd E. Lyon, Sr. 1993 0 0 0 29,991
Vice President 1992 0 0 0 29,541
Treasurer & Director 1991 0 0 0 28,708
Kendall G. Bryan 1993 0 0 0 15,872
Vice President 1992 0 0 0 15,754
Secretary & Director 1991 0 0 0 15,652
Guy Marvin, III 1993 0 0 0 9,736
Assistant Secretary & 1992 0 0 0 9,655
General Counsel 1991 0 0 0 9,519
G. Howard Bryan 1993 0 0 0 91,944
Vice President 1992 0 0 0 90,661
Secretary & Director 1991 0 0 0 84,734
Amounts reported as All Other Compensation represent premiums paid by the
Registrant for insurance policies issued in connection with a Deferred Death
Benefit Plan for Key Personnel.
(f)(1)(i) The following table shows estimated annual benefits payable pursuant
to the Registrant's defined benefit plan, under which benefits are determined
primarily by final compensation and years of service.
Pension Plan Table
Years of Service
Remuneration 15 20 25 30 35
$125,000 $41,498 $55,330 $ 69,162 $ 82,995 $ 96,828
150,000 50,310 67,080 83,850 100,620 115,641(2)
175,000 59,122 78,830 98,538 115,641(2) 115,641
200,000 67,935 90,580 113,225 115,641 115,641
225,000 74,711(1) 99,615(1) 115,641(2) 115,641 115,641
250,000 74,711 99,615 115,641 115,641 115,641
300,000 74,711 99,615 115,641 115,641 115,641
400,000 74,711 99,615 115,641 115,641 115,641
450,000 74,711 99,615 115,641 115,641 115,641
500,000 74,711 99,615 115,641 115,641 115,641
(1) Limited by maximum five year average
(2) Limited by maximum annual benefit limit
(ii)(A)The Plan uses the average of an individual highest consecutive five years
of earnings as a basis upon which to calculate benefits. Since earnings which
can be credited under a defined benefit plan are limited, there is an effective
limit on what this five year average can be. Tax limits have been as follows:
1989 200,000
1990 209,200
1991 222,220
1992 228,860
1993 235,840
This provides a maximum five year average of $219,224. Each year a maximum
limitation is placed on the benefits which can be received from a plan. For
1993 this limit was $115,641. For purposes of tax calculations, an individual is
assumed to have retired on December 31, 1993 at age 65. Amounts are annual
income, straight life basis.
(B) The years of service for named executive officers are: Wilford C. Lyon, Jr.,
35; Jacob F. Bryan IV, 27; Boyd E. Lyon, Sr., 32; Kendall G. Bryan, 24;
Guy Marvin, III, 14 and G. Howard Bryan, 60.
(C) Under the plan, eligible employees are entitled to annual pension benefits
beginning at normal retirement age (65 to 67 depending on participants' year of
birth) equal to the sum of: (1) 1.6% of average earnings of the highest five
years multiplied by number of years of service not to exceed 35 years; and (2)
.75% of average earnings in excess of Social Security wages multiplied by number
of years of service, not to exceed 35 years.
(g) All directors who are not employees of the Registrant or one of its
subsidiaries receive $1,000 for each board meeting that the director attends,
$250 for each telephone meeting the director participates in and $250 for each
committee meeting of the Board that the non-employee director attends.
(j)(2)The Registrant uses the Hay point-factor job evaluation system which
applies to all employees, including the Chief Executive Officer and executive
officers. Each year the CEO selects members of the Board of Directors to
evaluate his performance. During the last fiscal year, these members were Jacob
F. Bryan, IV, Boyd E. Lyon, Sr. and Kendall G. Bryan. Overall increases, which
are tied to performance evaluations and the evaluation system, are approved by
the full Board. The CEO evaluates all other named executive officers. For the
year 1993, the salaries of the CEO and the other named executive officers were
reduced 5%-7%.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a)The principal holders of voting securities (Voting Common Stock, Par Value
$1.00) of the Registrant as of February 8, 1994 are:
Name and Address of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
George M. Baldwin 1,033,288(1) 16.9%
2929 Murray Road
Orange Park, Florida
James L. Baldwin 1,033,088(1) 16.9
2753 Haver Hill Ct.
Clearwater, FL
Frederick E. Williams 1,032,888(1) 16.9
109 North Street
Neptune Beach, Florida
and
John G. Grimsley
50 North Laura Street
Jacksonville, FL
Lucy B. Gooding 981,612 16.1
2970 St. Johns Avenue
Jacksonville, Florida
Jacob F. Bryan IV 865,598(2) 14.2
5249 Yacht Club Road
Jacksonville, Florida
Julia Olive Craig Brooke 834,516(2) 13.7
467 Ortega Blvd.
Jacksonville, Florida
G. Howard Bryan 829,612(2) 13.6
1596 Lancaster Terrace
Jacksonville, Florida
Boyd E. Lyon, Sr. 349,922(4) 5.7
129 Middleton Place
Ponte Vedra Beach, Florida
Catherine H. Stanley 344,446 5.6
7650 Hollyridge Road
Jacksonville, Florida
(b)The following table shows as to each class of equity securities of the
Registrant, the number of shares owned beneficially, directly or indirectly, by
each director and named executive offices, and by all directors and officers
of the Registrant as a group as of February 8, 1994. In some instances more
than one beneficial owner is listed for the same securities. Shares held
beneficially by spouses or relatives of such officers and directors may be
included.
Amount and Nature of
Beneficial Ownership and
Title of Class Percent of Class
Name of Common Common
Beneficial Owner Voting Nonvoting Voting Nonvoting
George M. Baldwin 1,033,288(1) 16.9%
Lucy B. Gooding 981,612 1,222,340 16.1 17.3
Jacob F. Bryan IV 865,598(2) 1,075,594(3) 14.2 15.2
G. Howard Bryan 829,612(2) 1,032,396(3) 13.6 14.6
Boyd E. Lyon, Sr. 349,922(4) 5.7
Wilford C. Lyon, Jr. 176,357(5) 2.9
Patricia H. Doane 92,102 620 1.5
Michael C. Lyon 49,531 100 .8
Carter B. Bryan 36,400 32,642 .6 .5
Kendall G. Bryan 35,200 13,877 .6 .2
William G. Howard 2,474
David A. Skup 420
All directors and
officers as a group 3,526,084 2,371,373 57.8 33.6
(1) Includes 1,032,888 shares held of record by a trust under the will of Grace
D. Coburn,deceased. Frederick E. Williams and John G. Grimsley are trustees.
George M. Baldwin and James L. Baldwin are beneficiaries of the trust.
(2) Includes all the shares of three trusts aggregating 812,412 shares of voting
common stock of which Jacob F. Bryan IV, G. Howard Bryan and Julia Olive Craig
Brooke are beneficiaries and/or trustees.
(3) Includes all the shares of three trusts aggregating 1,006,616 shares of
nonvoting common stock of which Jacob F. Bryan IV, G. Howard Bryan and Julia
Olive Craig Brooke are beneficiaries and/or trustees.
(4) Includes all the shares of three trusts aggregating 113,600 shares of voting
common stock of which Boyd E. Lyon, Sr. is a trustee, and two trusts
aggregating 101,760 shares of voting common stock held by the Registrant's
retirement plans of which Boyd E. Lyon, Sr. is a trustee.
(5) Includes all the shares of three trusts aggregating 113,600 shares of voting
common stock of which Wilford C. Lyon, Jr. is a trustee.
The Registrant has entered into "Exchange Agreements" with holders of more than
90% of the outstanding shares of voting common stock of the Registrant ("Voting
Stock") pursuant to which such holders may, at any time on or prior to December
31, 2006, exchange shares of voting stock for an equal number of shares of
nonvoting common stock of the Registrant without payment of any additional
consideration. All of the principal shareholders, officers and directors listed
above are parties to these agreements.
Item 13. Certain Relationships and Related Transactions
(a)The Registrant's subsidiary, The Independent Life and Accident Insurance
Company ("Independent Life"), employs Carter B. Bryan as a manager of its
general agency insurance operations, and in 1993 compensated Mr. Bryan $40,715
in salaries associated with his position. In addition, Mr. Bryan received
commissions on personal insurance sales and overwrites from the sales of other
agents he manages. Much of these operations involved the sale of Independent
Life's small employer group insurance products, a line of business Independent
Life has taken steps to withdraw from effective June 30, 1994. Independent
Marketing Group, Inc. and Independent Life have worked closely to find
replacement coverage for all terminated policyholders with another insurance
carrier.
(b)The commissions and overwrites described above are paid to Independent
Marketing Group, Inc., an entity owned by Mr. Bryan and his wife. The Registrant
believes that $263,329 paid to this entity in 1993 by the Registrant exceeds
five percent of the entity's gross revenues for the year. Independent Marketing
Group, Inc., markets products of Independent Life and other insurance companies.
Independent Life supplies office space to Mr. Bryan, which is used both by Mr.
Bryan in his employment as manager of its general agency insurance operations
and by Independent Marketing Group, Inc.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
Consolidated Balance Sheets, December 31, 1993 and 1992, incorporated by
reference, Annual Report to Shareholders for the year ended December 31, 1993,
pages 35-36.
Consolidated Statements of Operations for years ended December 31, 1993, 1992
and 1991, incorporated by reference, Annual Report to Shareholders for the year
ended December 31, 1993, page 37.
Consolidated Statements of Cash Flows for years ended December 31, 1993, 1992
and 1991, incorporated by reference, Annual Report to Shareholders for year
ended December 31, 1993, page 38.
Consolidated Statements of Shareholders' Equity for years ended December 31,
1993, 1992 and 1991, incorporated by reference, Annual Report to Shareholders
for the year ended December 31, 1993, page 39.
Notes to Consolidated Financial Statements for the three years ended
December 31, 1993, incorporated by reference, Annual Report to
Shareholders for year ended December 31, 1993, pages 40-56.
(2) Financial Statement Schedules
Consolidated Summary of Investments - Other Than Investments in Affiliates
(Schedule I), incorporated by reference, Annual Report to Shareholders for the
year ended December 31, 1993, page 45.
Condensed Financial Information of the Registrant (Schedule III)
Supplementary Insurance Information (Schedule V)
Reinsurance (Schedule VI)
All other financial statements and schedules are omitted because of the absence
of conditions under which they are required or because the required information
is included elsewhere herein.
(3) Exhibits
(3) Articles of incorporation currently in effect incorporated by reference as
filed as an exhibit with the Registrants 1989 Form 10-K under Item 14(3)(c) and
by-laws of the Registrant currently in effect incorporated by reference as filed
December 20, 1990, with report Form 8-K.
(4) Instruments defining rights of security holders incorporated by reference as
filed as an exhibit with the Registrant's Registration Statement No. 2-69530 on
Form S-14 which became effective November 20, 1980, and as included or amended
in articles of incorporation.
(10)Material contracts -
(1) Deferred Death Benefit Plan for Key Personnel of the Registrant and
its subsidiaries incorporated by reference as previously filed as
an exhibit with the Registrant's Form 10-K, December 31, 1981.
(2) Medical Reimbursement Plan covering benefits of certain employees of the
Registrant or its affiliates incorporated by reference as previously filed as an
exhibit with the Registrant's Form 10-K, December 31, 1990.
(3) Independent Life Invest Plan - 401(K) incorporated by reference as
previously filed with the Registrant's Form S-8, Registration No.
33-35785.
(5) The Registrant's Exchange Agreement incorporated by reference as
previously filed as an exhibit with the Registrant's Form 10-K, December 31,
1990.
(13) Portions of the Annual Report to Shareholders for the year ended December
31, 1993.
(22)The Registrant's subsidiaries include the following companies and their
wholly owned subsidiaries,all of which are incorporated under the laws of the
state of Florida:
(A)The Independent Life and Accident Insurance Company
(B)Independent Fire Insurance Company
(C)Herald Fire Insurance Company
(D)Thomas Jefferson Insurance Company
(E)Independent Investment Advisory Services, Inc
(F)Independent Real Estate Management Corporation
(G)Independent Property & Casualty Insurance Company
(24)Consent of Independent Certified Public Accountants
(b) There were no reports on Form 8-K filed for the three months ended
December 31, 1993.
(c) The Registrant previously filed exhibits listed above in Item 14
(a)(3)-(3),(4) and (10).
(d) The following pages include the Financial Statement Schedules of the
Registrant required by Regulation S-X which are excluded from the Annual
Report to Shareholders.
INDEPENDENT INSURANCE GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
BALANCE SHEETS
DECEMBER 31, 1993 AND 1992
(000 OMITTED)
ASSETS
1993 1992
Cash $ 556 $ 199
Short-term investments 2,497 10
Investment in subsidiaries
- continuing operations 307,196 331,056
Investment in subsidiaries
- discontinued operations - 11,671
Real estate - net 6,899 7,237
Income taxes receivable 11,052 12,003
Other assets 4,053 257
Total $332,253 $362,433
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $ 6,800 $ 8,000
Due to subsidiaries
- federal income taxes 9,522 12,310
Other liabilities 8 417
Total liabilities 16,330 20,727
Shareholders' equity:
Voting common stock 6,100 6,267
Nonvoting common stock 8,606 8,439
Additional paid-in capital 6,378 6,378
Net unrealized gain on equity securities
held by subsidiaries 25,393 11,756
Retained earnings 293,997 333,417
Treasury stock - at cost - nonvoting
common stock, 1,542 shares (24,551) (24,551)
Total shareholders'equity 315,923 341,706
Total $332,253 $362,433
See notes to consolidated financial statements
SCHEDULE III
INDEPENDENT INSURANCE GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(000 OMITTED)
1993 1992 1991
Revenues:
Interest income $ 352 $ 94 $ 418
Other income 1,435 2,185 1,848
Total 1,787 2,279 2,266
Costs and Expenses:
Interest expense 330 1,019 2,241
Professional services 293 133 377
Real estate expenses 350 381 389
Taxes, licenses and fees (51) 183 (1,366)
Other expenses 422 568 167
Total 1,344 2,284 1,808
Income (loss) before income taxes
and equity in income of
consolidated subsidiaries 443 (5) 458
Provision (credit) for income taxes 123 (1) 156
Income (loss) before equity in
income of consolidated
subsidiaries 320 (4) 302
Equity in income (loss) of
consolidated subsidiaries-
continuing operations
(including $2,150, $7,600 and
$17,450 of dividends received
from subsidiaries) (43,885) (16,990) 26,670
Equity in income of subsidiaries
discontinued operations
(including $173, $600 and
$369 of dividends received) 465 1,906 1,670
Gain on disposition of
discontinued operations 6,904 - -
Cumulative effect of change in
accounting principles (66) - -
Net income (loss) (36,262) (15,088) 28,642
Retained Earnings, Beginning of Year 333,417 360,089 342,900
Less: Dividends to shareholders
($.24,$.88 and $.87 per share) 3,159 11,584 11,453
Retained earnings, end of year $ 293,996 $ 333,417 $ 360,089
SCHEDULE III
INDEPENDENT INSURANCE GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(000 OMITTED)
1993 1992 1991
Operating Activities:
Net income (loss) $(36,262) $(15,088) $ 28,642
Adjustments to reconcile net
income to net cash provided
by operating activities:
Change in - Accounts receivable (2,545) 20,852 8,803
Other assets and other liabilities (4,446) 305 (34)
Liability for income taxes (3,260) (10,662) (4,154)
Equity in (income) of consolidated
subsidiaries- continuing operations 43,885 16,990 (26,670)
Equity in (income) of consolidated
subsidiaries- discontinued
operations (465) (1,906) (1,670)
Gain from discontinued operations
(net of taxes) (6,904) - -
Dividends received from consolidated
subsidiaries- continuing operations 2,150 7,600 17,450
Dividends received from subsidiaries
- discontinued operations 173 600 369
Depreciation of property and equipment 378 340 359
Cumulative effect of changes in
accounting principles 66 - -
Net cash provided (used)
by operating activities (7,230) 19,031 23,095
Investing Activities:
Sales, maturities or payments from
investments and loans - - 84
Purchases of investments and loans
granted (2,127) (9) -
Cash from sale of discontinued
operations 22,573 - -
Investment in subsidiary (8,500) (2,150) (800)
Net cash provided (used)
by investing activites 11,946 (2,159) (716)
Financing Activities:
Reductions in mortgage loans payable - (8,135) (162)
Additions to notes payable 4,000 13,092
Reductions in notes payable (5,200) (10,018) (10,849)
Dividends to shareholders (3,159) (11,584) (11,453)
Net cash used by financing activities (4,359) (16,645) (22,464)
Increase (Decrease) in Cash 357 227 (85)
Cash, Beginning of Year 199 (28) 57
Cash, End of Year $ 556 $ 199 $ (28)
See notes to condensed financial statements.
Schedule III
INDEPENDENT INSURANCE GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of Independent
Insurance Group, Inc. and its wholly owned subsidiaries.
Notes payable at December 31 consists of the following (000 omitted):
1993 1992
4.00% 180-day note $ 3,000 -
4.02% 90-day note - $ 8,000
6.25% Bank term loan 3,800 -
The Company also has available another $24,000,000 short-term line of credit
with two banks which can be terminated at any time by the banks. As of
December 31, 1993, none of this line of credit was utilized.
SCHEDULE V
INDEPENDENT INSURANCE GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(000 OMITTED)
COLUMN B COLUMN C COLUMN D COLUMN E
Other Policy
Deferred Reserves Claims and
Policy Losses, Claims Unearned Benefits
Segment Acq. Costs & Loss Expenses Premiums Payable
Year Ended December 31, 1993
Life $159,842 $754,960 $ 2,457
Property and casualty 3,491 40,478 39,387
Accident and health 33,387 64,524
Other
Total $196,720 $859,962 $41,844 -
Year Ended December 31, 1992
Life $157,616 $752,875 $ 4,236
Property and casualty 16,062 72,129 75,369
Accident and health 33,750 71,994
Other
Total $207,428 $896,998 $79,605 -
Year Ended December 31, 1991
Life $153,011 $743,105 $ 1,736
Property and casualty 21,579 34,014 67,280
Accident and health 33,423 71,789
Other
Total $208,013 $848,908 $69,016 -
COLUMN F COLUMN G COLUMN H
Benefits,
Net Claims, Losses
Premium Investment & Settlement
Segment Revenue Income* Expenses
Year Ended December 31, 1993
Life $177,102 $62,063 $ 99,385
Property and casualty 100,136 6,422 77,282
Accident and health 94,441 5,142 37,161
Other 79
Total $371,679 $73,706 $213,828
Year Ended December 31, 1992
Life $174,100 $64,108 $102,014
Property and casualty 151,482 12,380 150,962
Accident and health 101,426 5,550 45,469
Other 30
Total $427,008 $82,068 $298,445
Year Ended December 31, 1991
Life $175,800 $69,396 $103,952
Property and casualty 164,085 13,459 95,686
Accident and health 103,950 6,029 51,788
Other 49
Total $443,835 $88,933 $251,426
COLUMN I COLUMN J COLUMN K
Amortization of
Deferred Pol Other
Acquisition Operating Premiums
Segment Costs Expenses# Written
Year Ended December 31, 1993
Life $24,831 $105,724
Property and casualty 19,724 53,338 $52,764
Accident and health 5,926 49,030 94,441
Other 2,609
Total $50,481 $210,701
Year Ended December 31, 1992
Life $23,235 $104,027
Property and casualty 20,944 52,548 $132,370
Accident and health 5,864 56,390 101,426
Other 1,735
Total $50,043 $214,700
Year Ended December 31, 1991
Life $21,421 $102,338
Property and casualty 19,800 58,825 $164,639
Accident and health 5,980 48,965 103,950
Other 1,998
Total $47,201 $212,126
*The allocation of net investment income to life and accident and health is
based on the raio of the mean liabilities (primarily, policy reserves and
claims payable) attributed to life and to accident and health to total mean
liabilities. Property and casualty net investment income is directly
allocated. Other net investment income is that of noninsurance subsidiaries.
#Expenses not directly identifiable to any line of business are allocated on
bases considered reasonable under the circumstances.
SCHEDULE VI
INDEPENDENT INSURANCE GROUP, INC. AND SUBSIDIARIES
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(OOO OMITTED)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
Percentage
Ceded to Assumed of Amount
Gross Other From Other Net Assumed
Year Ended December 31, 1993
Life insurance in force* $ 7,733 $ 237 $ 2 $ 7,498 .03 %
Insurance Premiums:
Life $179,921 $ 2,841 $ 22 $177,102 (.01)%
Property and casualty 182,279 85,629 3,486 100,136 3.48 %
Accident and health 95,533 1,101 9 94,441 (.01)%
Total $457,733 $89,571 $ 3,517 $371,679 .95 %
Year Ended December 31, 1992
Life insurance in force* $ 7,719 $ 247 $ 4 $ 7,476 .05 %
Insurance Premiums:
Life $176,418 $ 2,318 $ $174,100 (.02)%
Property and casualty 211,994 61,627 1,115 151,482 .74 %
Accident and health 102,187 761 101,426 (.01)%
Total $490,599 $64,706 $ 1,115 $427,008 .25 %
Year Ended December 31, 1991
Life insurance in force* $ 7,387 $ 261 $ 10 $ 7,136 .14%
Insurance Premiums:
Life 177,948 $ 2,302 $ 154 $175,800 .09 %
Property and casualty 179,245 16,269 1,109 164,085 .68 %
Accident and health 104,356 427 21 103,950 .02 %
Total $461,549 $ 18,998 $ 1,284 $443,835 .29%
EXHIBIT 24
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Independent Insurance Group, Inc. of our report dated March 11, 1994,
included in the 1993 Annual Report to Shareholders of Independent Insurance
Group, Inc.
Our audits also included the financial statement schedules of Independent
Insurance Group, Inc. listed in Item 14(a). These schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion the financial statement schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-35785) pertaining to the Independent Life Invest Plan of our
report dated March 11, 1994, with respect to the consolidated financial
statements incorporated herein by reference and our report included in the
preceding paragraph with respect to the financial statement schedules included
in the Annual Report (Form 10-K) of Independent Insurance Group, Inc.
Ernst & Young
Jacksonville, Florida
March 29, 1994
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.
(Registrant) INDEPENDENT INSURANCE GROUP, INC.
Wilford C. Lyon, Jr. March 29, 1994
BY
Wilford C. Lyon, Jr., Chairman of the Board and Chief Executive Officer
Jacob F. Bryan, IV March 29, 1994
BY
Jacob F. Bryan, IV, President and Director
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.
Boyd E. Lyon, Sr. March 29, 1994
BY
Boyd E. Lyon, Sr., Director, Treasurer (Chief Financial and Accounting
Officer)
Kendall G. Bryan March 29, 1994
BY
Kendall G. Bryan, Director
William G. Howard March 29, 1994
BY
William G. Howard, Director
Michael C. Lyon March 29, 1994
BY
Michael C. Lyon, Director
ANNUAL REPORT TO SHAREHOLDERS PAGE 17
Business Profile
Headquartered in Jacksonville, Florida, the Independent Insurance Group, Inc.,
provides an extensive range of insurance and related services to its clients.
Representing approximately 88% of Independent Insurance Group's total assets.
The Independent Life and Accident Insurance Company is recognized as a leader in
the Home Service insurance industry. It offers life, accident and health
products to individuals, while property and casualty operations are handled
primarily through the Independent Fire Insurance Company and subsidiaries. In
corporate, financial and tax planning areas, the functions provided through
subsidiary companies include investment management and advisory services.
The insurance coverages offered are typical of those of the industry in general.
Life, accident and health, and property and casualty insurance products are
marketed by the Company, through its Home Service career agents. Life insurance
premiums comprised 48% of total premium income for 1993 while property and
casualty, and accident and health contributed 27% and 25%. The primary
marketing area for insurance operations is in the Southeast United States with
approximately 64% of premium income being derived from the states of Florida,
Georgia, South Carolina and Alabama.
Insurance is a highly competitive industry. The life company and the property
and casualty companies compete with a significant number of other companies,
some of which are larger and have a wider distribution of sales agencies. At
the end of 1992, there were over 2,500 insurance companies qualified in the
United States and Canada and, at that time, the Company was ranked 163rd in
total premium income. The Company does not believe that its competitive
position in the industry has changed significantly during 1993.
The Company owns and occupies a 37-story home office building, 26% of which is
leased to outside tenants, located on three acres in Jacksonville, Florida, and
conducts field operations from 38 district offices, 42 of which are Company
owned. Approximately 2,450 agents, 580 sales managers and 1,300 persons in
supervisory, administrative and other positions are employed in both the
district offices and the Company's home office.
ANNUAL REPORT TO SHAREHOLDERS PAGE 18
CORPORATE MISSION
Our corporate mission is to conduct Independent's affairs in such a way as to
insure its financial stability and controlled growth while generating acceptable
returns to its shareholders. It is our intent to provide a variety of insurance
products and related services to meet the security needs of our selected
marketplace and to maintain a positive relationship without customers.
Recognizing our employees as the Company's most valuable resource, we shall
continue to provide the meaningful employment, career opportunities, competitive
benefits and a superior working environment. Independent will continue to
demonstrate the highest level of integrity and fairness to our customers,
employees and community, in every aspect of corporate activity.
DIVIDEND AND MARKET PRICE OF STOCK
The following table shows the quarterly dividends to shareholders of the
Company's voting and nonvoting common stock and the market range of bid prices
of the nonvoting common stock during the last two years. The nonvoting common
stock is traded in the NASDAQ Stock Market and is part of the NASDAQ National
Market System. The bid prices were obtained from the National Quotation Bureau,
Incorporated. The voting common Stock is closely held and there is no public
market.
Market Price Range Dividends
1993 High Low Paid
First Quarter $18 $15 1/4 $.06
Second Quarter 18 1/4 13 3/4 .06
Third Quarter 17 1/2 13 3/4 .06
Fourth Quarter 17 14 .06
1992
First Quarter $23 3/4 $18 1/2 $.22
Second Quarter 22 1/4 18 .22
Third Quarter 20 3/4 14 1/2 .22
Fourth Quarter 16 13 1/2 .22
There are no known restriction on the Company's ability to pay dividends other
than as described in Notes 6 and 7 of Notes to Consolidated Financial
Statements. The Company also expects to continue paying dividends in the future.
There were approximately 1,200 registered shareholders of the Company's
nonvoting common stock and approximately 100 registered shareholders of the
Company's voting common stock based on the number of record holders as of
December 31, 1993.
ANNUAL REPORT TO SHAREHOLDERS PAGE 23
SELECTED FINANCIAL DATA
(000 Omitted Except Per Share Amounts)
1993 1992 1991 1990
Revenue and Earnings
Life Premiums (1) $177,102 $ 174,100 $175,800 $171,800
Property and
casualty premiums 100,136 151,482 164,085 159,563
Accident and
health premiums 94,441 101,426 103,950 107,648
Premium income 371,679 427,008 443,835 439,011
Realized investment
gains (losses) (2) 14,819 14,431 5,444 480
Net investment income 73,706 82,068 88,933 87,302
Total revenue 471,567 533,466 548,697 540,212
Costs and expenses (1)(4) 475,010 563,188 510,753 498,228
Income (loss) from
continuing operations (860) (16,994) 26,972 29,658
Income (loss) from
discontinued operations 465 1,906 1,670 1,369
Gain on disposition of
discontinued operations 6,904 - - -
Income (loss) before
cumulative effect of
change in accounting
principles 6,509 (15,088) 28,642 31,027
Cumulative effect of change
in accounting principles (42,771) - - -
Net income (loss)(1)(2)(3)(4) (36,262) (15,088) 28,642 31,027
Financial Position
Assets $1,468,874 $1,517,877 $1,450,491 $1,399,383
Investments 1,091,767 1,118,446 1,096,097 1,050,323
Accounts and notes receivable 11,833 12,842 13,727 12,418
Short-term notes payable 3,000 8,000 2,162 7,862
Long-term notes payable 3,800 - 185 2,347
Shareholders' equity 315,922 341,706 367,984 341,646
Unrealized gains (losses) on
debt securities - gross 38,910 11,224 28,127 9,894
Unrealized gains (losses) on
equity securities - gross 12,246 17,611 17,226 3,407
Per Share Data
Income (loss) from
continuing operations $ (.07) $ (1.29) $ 2.05 $ 2.24
Income (loss) from
discontinued operations .56 .14 .13 .10
Income (loss) before cumulative
effect of change in accounting
principles (.49) (1.15) 2.18 2.34
Cumulative effect of change
in accounting principles (3.24) - - -
Net income (loss) (1)(2)(3)(4) (2.75) (1.15) 2.18 2.34
Realized investment gains
(losses), net of tax .73 .75 .25 .02
Book value 24.00 25.96 27.95 25.95
Dividends .24 .88 .87 .83
Other Data
Life insurance in force $7,735,483 $7,723,334 $7,397,418 $7,256,896
Average shares outstanding 13,165 13,165 13,165 13,281
Property and casualty
combined ratio 168.6% 147.5% 105.9% 102.9%
(1) Data presented for years prior to 1989 have not been restated as a result of
the adoption of SFAS No. 97 in 1989.
(2) Year 1985 includes unusual realized capital losses of $(12,118) or $(.83)
per share.
(3) Year 1984 includes nonrecurring deferred tax adjustment of $19,218 or $1.30
per share.
(4) Year 1993 includes restructuring charge of $23,000.
ANNUAL REPORT TO SHAREHOLDERS PAGE 24
1989 1988 1987 1986 1985 1984 1983
$ 164,157 $ 178,584 $ 176,968 $ 167,324 $ 168,280 $ 165,627 $ 162,157
159,265 146,589 110,576 99,057 81,543 71,116 64,838
89,718 89,536 83,790 85,968 96,080 109,603 102,121
413,140 414,709 371,334 352,349 345,903 346,346 329,116
(1,480) (20) 155 2,750 (12,586) 218 (1,354)
78,692 72,727 70,758 71,650 68,956 63,539 57,839
499,621 487,876 443,522 427,509 415,665 409,920 381,084
463,044 453,484 402 094 386,379 377,235 363,246 344,077
28,018 26,454 28,902 30,694 15,973 32,072 25,715
1,288 (159) 409 392 (244) 640 343
- - - - - - -
29,306 26,295 29,311 31,086 15,729 32,712 26,058
- - - - - - -
30,419 26,295 29,311 31,086 15,729 51,930 26,058
$1,309,760 $1,223,717 $1,170,816 $1,157,516 $1,109,158 $1,020,514 $958,847
982,714 923,126 862,553 844,268 812,090 746,950 690,646
19,492 8,812 10,165 14,998 16,846 10,559 8,244
2,162 2,162 2,162 2,162 2,162 - 1,575
6,609 10,870 15,132 22,176 31,338 - 67
330,425 302,312 284,958 295,225 267,578 249,875 206,829
11,887 (3,029) 10,776 31,581 (693) (50,796) (55,793)
12,730 315 (2,993) 9,564 (1,167) (13,285) (14,152)
$2.10 $1.97 $2.02 $2.09 $1.09 $2.18 $1.75
.10 (.01) .03 .03 (.02) .05 .02
2.20 1.96 2.05 2.12 1.07 2.23 1.77
- - - - - - -
2.28 1.96 2.05 2.12 1.07 3.53 1.77
(.05) - .01 .19 (.85) .01 (.09)
24.82 22.71 21.19 20.21 18.20 17.00 14.07
.79 .76 .75 .71 .69 .66 .66
$6,700,887 $6,290,166 $6,157,497 $5,966,870 $5,882,599 $5,889,926 $6,015,155
13,316 13,383 14,316 14,678 14,702 14,704 14,706
109.4% 99.7% 96.8% 102.6% 106.0% 99.7% 102.5%
ANNUAL REPORT TO SHAREHOLDERS PAGE 25
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources
The capital resources of Independent Insurance Group, Inc. (the "Company") are
dependent upon the ability of its subsidiaries to pay dividends to the Company
and upon payments received in accordance with income tax consolidation
agreements with its subsidiaries. Restrictions on the Company's subsidiaries to
pay dividends (see Notes 7 and 8 of Notes to Consolidated Financial Statements)
have not affected the ability of the Company to meet its financial obligations
in the past, nor do we expect them to in the future. Other than profitability
of operations and the sale of the consumer finance subsidiary, there are no
significant variations or trends in the Company's capital resources. In 1993,
the Company's life insurance subsidiary's statutory earnings increased to
$16,300,000 from $2,100,000.
Company cash requirements in 1994 for anticipated dividends to shareholders,
capital contributions to our property and casualty subsidiary, debt service, and
all other operating expenses are expected to be $8,400,000. Anticipated
dividends from the life insurance subsidiary combined with parent company
investment income and non-insurance subsidiary funding are adequate to meet
these obligations.
In April, 1993 the Company sold its consumer finance subsidiary to an unrelated
third party. Proceeds from the sale were primarily used to further capitalize
the Home Service property and casualty subsidiary, Independent Property and
Casualty Insurance Company (IP & C), and to extinguish debt.
If the parent company needs additional funding for any reason, it will be
dependent upon external financing or the ability of its life insurance
subsidiary to distribute dividends. Under current Florida statutes, the life
insurance subsidiary could dividend approximately $16,300,000 to its parent in
1994.
During 1992, $10,000,000 was invested by our life insurance subsidiary in our
property and casualty companies as a result of Hurricane Andrew. To foster
0growth of IP & C, in 1993 the Company contributed $8,500,000 in capital to IP &
C and plans to contribute $3,000,000 in 1994. Unless regulatory, rating or
licensing requirements make it necessary, management does not anticipate any
other contributions of capital to subsidiaries during 1994.
Parent company cash requirements in 1994 will decline compared to 1993, as
reflected in the table presented below. Total debt outstanding at December 31,
1993 consists of a $3,000,000 short-term note and a $3,800,000 term loan. The
Company has committed $1,300,000 for debt service on these loans in 1994.
Parent Company Cash Requirements
(Exclusive of Income Tax and Expense Allocations)
(000 Omitted)
Actual Actual Projected
1992 1993 1994
Dividends to shareholders $11,600 $ 3,200 $3,200
Debt service 5,800 1,200 1,300
Subsidiary capital contribution 2,150 8,500 3,000
Other expenses 900 750 900
Total $20,450 $13,650 $8,400
ANNUAL REPORT TO SHAREHOLDERS PAGE 26
The Company's cash requirements have been funded generally from the following
sources:
Parent Company Funding Sources
(Exclusive of Income Tax and Expense Allocations)
(000 Omitted)
Actual Actual Projected
1992 1993 1994
Cash on hand $ - $ - $ 3,100
Life subsidiary dividends 4,500 - 3,200
Non-life subsidiary dividends 3,700 2,300 1,900
Proceeds from sale of consumer
finance subsidiary - *14,400 -
Other sources 2,500 2,600 2,450
Total $10,700 $19,300 $10,650
* Net of Federal Income Tax
Bank credit lines were available at December 31, 1993 as follows (000 omitted):
Independent Insurance Group, Inc. $12,000
The Independent Life and Accident Insurance Company 10,000
Independent Fire Insurance Company 2,000
Total $24,000
These lines of credit are used primarily to assist in cash flow planning but are
available at all times for any corporate purpose. The Company anticipates that
it will continue to maintain total lines of credit of approximately $20,000,000
into the future.
In recent years, the Company invested primarily in short-term and intermediate-
term investments due to the volatility of interest rates, tax law changes,
regulatory requirements and to assure a proper matching of assets and
liabilities. In 1993, approximately 23% of all new debt security investments
were invested in mortgage-backed securities. The remainder was invested
primarily in corporate issues and, to a lesser extent, in municipal bonds and
U.S. Treasury obligations. At December 31, 1993, more than 98% of the Company's
bond portfolio was rated 1, Highest Quality, by the National Association of
Insurance Commissioners (NAIC). An NAIC rating of 1 is comparable to an A- or
better rating by the Standard and Poor's Corporation.
The mortgage loan portfolio is composed primarily of commercial mortgages
concentrated in small office buildings, office/warehouse buildings, and retail
buildings throughout the Southeastern United States. Mortgage loans in Florida,
our largest state, exceed $61,000,000 or approximately 41% of our entire
portfolio. The table below shows the year-end portfolio, losses, and
delinquency rates since 1991 (000 omitted):
1993 1992 1991
Mortgage loans $166,000 $206,000 $252,000
Losses from foreclosures
and write-downs 2,300 2,100 5,100
Delinquency rate (over 90 days) 2.30% 3.24% 3.29%
ANNUAL REPORT TO SHAREHOLDERS PAGE 27
The Company does not anticipate any material losses on mortgages or real estate
in 1994.
Investments in high-yield, high-risk securities (comparable to being rated below
BBB- by Standard and Poor's Corporation) of approximately $3,651,000 represent
less than one percent of the Company's bond portfolio. At year end, none of
these investments were in default as to principal or interest.
The Company's life insurance subsidiary is able to accumulate substantial funds
as a result of the receipt and investment of premium revenues prior to the
settlement of insurance policy obligations. Investments with varying maturities
are selected to meet these obligations. Long-term investments, selected
primarily to satisfy long-term policy obligations, are generally held to
maturity so interim market fluctuations present no liquidity concerns. However,
in recent years, securities have been sold on a regular basis to offset
accumulated capital gains and losses, to realize a gain that was expected to
erode in the future or to vary the average maturity of our bond portfolio.
During late 1992 and early 1993, our property and casualty insurance
subsidiaries sold approximately $80,000,000 of securities, mostly to provide
cash to pay Hurricane Andrew claims.
In accordance with newly issued SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", the debt securities portfolios have
been segregated between available for sale and held to maturity on this year's
financial statements. The available for sale category is reported at fair value
in 1993, with unrealized gains and losses reported as a separate component of
shareholders' equity. The held to maturity category comprises U.S. Treasury and
Government Securities and private placements and represents 7% of the investment
portfolio. If interest rates vary by 1%, the unrealized gains in the debt
securities portfolio would increase or decrease by $35,000,000 to $40,000,000.
(For further information on SFAS No. 115, see Note 1 of Notes to Consolidated
Financial Statements.)
The most recent insurance inforce acquisition was made in 1990.
Although we have adopted a program to repurchase our nonvoting shares when
certain parameters are met, we have not purchased any shares since 1990. Any
purchases in 1994 will depend on the availability of funds and market
conditions.
A commonly used source to provide additional statutory surplus needs is
reinsurance, and the property and casualty subsidiaries have generated
approximately $13,000,000 of statutory surplus by utilizing reinsurance, mostly
during 1992.
As previously announced, the Company began winding down its non-Home Service
property and casualty subsidiaries during 1993.
Effective December 31, 1993, the life insurance subsidiary ceased issuing
multiple employer trust group health and life insurance lines of business. We
have arranged for another insurance carrier to write and service this business.
Effective January 1, 1994 all credit life, health and property lines were 100%
reinsured into an unaffiliated company.
Management believes that funds generated from operations will be adequate to
enable its companies to meet all anticipated cash requirements. However, the
property and casualty subsidiaries could be subject to an assessment by the
Florida Residential Property and Casualty Joint Underwriting Association
(FRPCJUA) in 1994 based on 1993 premiums. In the unlikely event of a major
hurricane equivalent to Andrew striking South Florida, Independent Fire
Insurance Company could be assessed a maximum of $16,000,000.
ANNUAL REPORT TO SHAREHOLDERS PAGE 28
Inflation
Prolonged inflation can have adverse effects on the Company's insurance
operations as a result of expenses and certain benefits tending to increase
while premiums are generally fixed for the life of the policy. Although
inflation has slowed in recent years, it is still a factor in our economy and
management continues to seek ways to mitigate its impact. Such efforts include
controlling expenses and investing primarily in short-term and intermediate-term
investments.
Results of Operations
Between 1989 and 1993, life insurance premiums collected grew $17,000,000 from
$157,000,000, a compound growth rate of approximately 2%. Between 1990 and 1993
life insurance premiums collected have grown at a compound rate of 1%. Accident
and health premiums collected decreased $4,000,000 from 1990 to 1991 and
decreased an additional $2,000,000 from 1991 to 1992. During 1993, accident and
health premiums collected declined an additional $7,000,000.
Property and casualty premiums earned decreased $13,000,000 in 1992 compared to
1991 but would have increased $4,000,000 if we had not entered into reinsurance
treaties for automobile and credit property. They also decreased an additional
$51,000,000 in 1993 as a result of the decision to wind-down non-Home Service
operations.
The following table depicts the product mix of insurance premiums for 1989
through 1993:
1993 1992 1991 1990 1989
Life 47.7% 40.8% 39.6% 39.2% 39.7%
Property and casualty 26.9 35.5 37.0 36.3 38.6
Accident and health 25.4 23.7 23.4 24.5 21.7
Individual weekly life premium, which includes purchased weekly premium business
in 1989 and 1990, has consistently remained flat throughout the period. Total
individual life premiums increased 2% from 1991 to 1992 and 1% from 1992 to
1993. Management expects this trend to improve in subsequent years. Group and
credit life premiums doubled in 1992 as a result of increased credit life sales.
At December 31, 1993, the Company ceased issuing any group life business and
expects that our existing policyholders will place their business with other
insurance carriers. Effective January 1, 1994 the Company is reinsuring all new
credit life business with another company. Accordingly, management expects all
life premium other than individual life to decline rapidly in 1994. The chart
below reflects life premiums collected by major lines since 1988:
Life Premiums Collected
(000 Omitted)
1993 1992 1991 1990 1989
Individual life $164,013 $162,631 $160,131 $164,031 $152,929
Group and credit life 9,715 9,397 4,785 4,018 3,604
Total $173,728 $172,028 $164,916 $168,049 $156,533
ANNUAL REPORT TO SHAREHOLDERS PAGE 29
Individual accident and health premiums have steadily declined except for 1990
when we had a very successful special sales campaign. In late 1992 and in 1993,
we offered a limited-issue cancer policy that helped curb the decrease in
individual accident and health premiums. Management expects non-cancer accident
and health premiums to continue to decrease and cancer premiums to continue to
increase as additional offerings are made from time to time. Management cannot
adequately assess what effect National health care reform will have on this line
of business if it is enacted. Group accident and health sales were halted at
the end of 1993 and consequently, premiums should decline rapidly in 1994.
Credit accident and health insurance, for all new issues in 1994, will be 100%
reinsured into a non-affiliated company. The only accident and health policies
that will be issued in the future are primarily our hospital confinement and
cancer coverage policies, all serviced by Home Service agents.
Accident and Health Premiums Collected
(000 Omitted)
1993 1992 1991 1990 1989
Individual accident
and health $61,197 $61,966 $66,720 $73,674 $67,032
Group accident and health 26,588 32,655 33,314 30,742 19,831
Credit accident and health 6,873 7,315 3,979 3,292 2,950
Total $94,658 $101,936 $104,013 $107,708 $89,813
As a result of management's decision to exit all non-Home Service lines of
business in our property and casualty subsidiaries, homeowners insurance
premiums declined sharply in 1993. Florida, our largest state in homeowner
premium, would not allow us to exit this line until late December, 1993, when we
successfully negotiated a reinsurance treaty whereby FRPCJUA would assume all
premiums and losses on Florida residential property business as of December 31,
1993. Management anticipates being completely out of non-Home Service
homeowners lines before the end of 1994. All non-Home Service automobile
business has been discontinued and will earn no premium after mid-1994. All
credit property insurance that is issued in 1994 will be 100% reinsured into a
non-affiliated insurance company. Future property and casualty premiums will be
derived exclusively from our Home Service agents except for a small amount of
Federally supported flood insurance. Home Service property and casualty
premiums earned for 1993 were $34,000,000. Management expects this line to grow
by approximately 10% in 1994. Catastrophe reinsurance is in place for 1994 for
the Home Service lines of business. The historical growth trends for property
and casualty earned premiums net of reinsurance are shown below:
Property and Casualty Earned Premiums
(000 Omitted)
1993 1992 1991 1990 1989
Homeowners $ 25,569 $ 50,654 $ 52,634 $ 51,294 $ 52,033
Credit Property 6,328 23,836 28,164 32,458 32,964
Automobile 10,385 21,962 29,486 24,243 23,334
Home Service 34,093 29,517 26,471 23,303 21,118
Other 23,761 25,513 27,330 28,265 29,816
Total $100,136 $151,482 $164,085 $159,563 $159,265
ANNUAL REPORT TO SHAREHOLDERS PAGE 30
The following table presents the ratio for net benefits to premiums for the
period 1989 through 1993:
1993 1992 1991 1990 1989
Life 51.3% 52.7% 52.8% 55.2% 50.1%
Property and casualty 77.2 99.7 58.3 56.0 62.6
Accident and health 39.5 39.5 47.7 41.8 38.2
Life benefits have remained fairly uniform throughout the period. Accident and
health benefit variations are due primarily to the group lines. Property and
casualty benefits fluctuate primarily with catastrophe losses. The substantial
increase in property and casualty benefits in 1992 were caused by Hurricane
Andrew and the 1993 ratio was caused by additional adverse development from
Hurricane Andrew and losses from the 100 year storm labelled the "White
Hurricane" in the Spring of 1993. There was also some increase in the claim to
premium ratio as a result of our wind-down of the above mentioned lines of
business. The combined ratios for the property and casualty business for 1989
through 1993 are as follows:
1993 1992 1991 1990 1989
168.3% 147.5% 105.9% 102.9% 109.4%
Variations in net investment income growth have been caused by wide fluctuations
in interest rates, purchases and sales of business, and the repurchase of the
Company's own nonvoting common stock. Approximately 80% of all gross investment
income is derived from interest bearing investments with an overall average
maturity of less than 10 years. The table below presents a five year history of
net investment income and realized investment gains and losses (000 omitted):
1993 1992 1991 1990 1989
Net investment income $73,706 $82,068 $88,933 $87,302 $78,692
Realized gains (losses) 14,418 14,431 5,444 480 (1,480)
Total $88,124 $96,499 $94,377 $87,782 $77,212
As interest rates have declined, proceeds from significant sales of securities
and from prepayments on mortgage loans, mortgage-backed securities and corporate
bonds have been reinvested at lower rates. Consequently, net investment income
for 1993 is $8,000,000 below that of 1992. Significant security sales in our
property and casualty subsidiaries to pay claims and operating expenses also
contributed to the decrease in investment income.
Through 1990, it had been the Company's practice to offset realized investment
gains and losses during the course of the year. For the last three years, gains
appreciably exceeded losses. Losses and write downs on foreclosed mortgage
loans and subsequent real estate sales were $2,300,000 in 1993, $2,100,000 in
1992, $5,100,000 in 1991 and $2,500,000 in 1990. In 1990, almost all of these
losses were on properties located in Texas. In other years, the losses were
spread across our entire portfolio which is almost exclusively in the
Southeastern United States and Texas. No new mortgage loans have been made
since the middle of 1990 except for restructurings or on sales of foreclosed
properties. Management is seriously considering a program of originating
mortgage loans on higher value residences ($200,000 - $500,000) and smaller
commercial loans ($300,000 - $1,200,000) in 1994 but has not yet finalized a
decision.
ANNUAL REPORT TO SHAREHOLDERS PAGE 31
Commissions increased in 1993 as a result of increased production and a highly
successful life insurance promotional campaign. Property and casualty
commissions decreased substantially as we wound down our non-Home Service
business.
Total general expenses in 1993 declined to $115,000,000 from $119,000,000 in
1992 compared with expenses of $120,000,000 in 1991. Salary and employee
benefits account for approximately 47% of total general expenses in each of the
past five years. 1993 salary expense decreased by $3,300,000 or 8% from the
1992 level, due to an active rightsizing campaign entailing layoffs, wage
freezes and attrition. The reduced salary reflects approximately $900,000 of
associated severance payments and accelerated payment of earned compensated
absences. 1993 employee benefits increased $2,100,000 or 14% over the 1992
level primarily as a result of implementing SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other than Pensions", during the year. In responding
to the required new accounting, the Company has curtailed postretirement
benefits in recent years. SFAS No. 106 is discussed in detail in Note 9 of Notes
to the Consolidated Financial Statements. Expenses also decreased in 1993 by
approximately $1,000,000 from a lower advertising budget adopted as part of the
Company's capital conservation program, and from $1,000,000 less equipment
maintenance and depreciation expense.
In 1994, salary expense should continue to decrease from the phased staff
reductions begun in 1993, even though the wage freeze will no longer be in
effect. The Company expects an insignificant increase in the cost for pensions
and postretirement benefits as a result of lowering the discount rates used to
calculate related benefits. Advertising and equipment maintenance and
depreciation should increase slightly. Loss adjustment and other expense
associated with the non-Home Service lines of business should also move lower,
though not necessarily as a percent of premiums. Corporatewide general expenses
as a percent of premium remained constant from 1989 to 1992, and increased to
30.6% in 1993. This increase stems from the marked decline in non-Home Service
property/casualty premiums. In the life insurance subsidiary, general expenses
remained constant as a percent of premiums.
During 1993, the Company implemented SFAS No. 109, "Accounting for Income
Taxes". As permitted under the new rule, prior years' financial statements were
not restated and the cumulative impact of the adoption was charged to 1993
earnings. This charge, exclusive of the deferred tax benefit recognized as the
result of also adopting SFAS No. 106 was approximately $5,300,000. The deferred
tax benefit recognized for the adoption of SFAS No. 106 was $18,000,000. As
required by SFAS No. 109, changes in applicable tax rates are required to be
recognized when enacted. The new corporate tax rate increase from 34% to 35%
had an insignificant impact on the 1993 results of operations.
Primarily as a result of Hurricane Andrew in 1992, the Company's property and
casualty subsidiaries sustained significant taxable losses for both 1992 as well
as 1993. In accordance with applicable income tax law regulations, the 1992
taxable losses were carried back to earlier taxable years with approximately
$10,000,000 in income tax refunds being received in January of 1994. Portions
of the remaining 1992 losses as well as the 1993 losses were able to be utilized
in our 1993 consolidated return calculations. Management anticipates that we
will be able to fully utilize the remaining losses of $19,600,000 in our
consolidated return within the allowable carry forward periods.
At December 31, 1993, the Company and subsidiaries have a net deferred tax asset
of $1,692,000. This amount represents net deferred tax assets related to
operations of $15,365,000 and deferred tax liabilities related to unrealized
investment gains of $13,673,000. The operations related net deferred tax assets
are expected to be realized against future taxable income of Independent Life -
accordingly a valuation allowance has not been established. Independent Life
has historically generated substantial amounts of taxable income; continuation
of the present level of reported earnings are expected to generate taxable
income amounts that are more than sufficient for the realization of the deferred
tax assets.
ANNUAL REPORT TO SHAREHOLDERS PAGE 32
As stated in last year's report, the Internal Revenue Service has examined our
previously filed Federal income tax returns through 1990 with all resulting
deficiencies and refunds being settled. The Company believes that its accruals
for income taxes continue to be adequate and that the result of any examination
will not have a materially adverse effect.
In 1990, the Financial Accounting Standards Board issued SFAS No. 106, that
requires the projected future costs of providing postretirement benefits, such
as health care and life insurance, to be recognized as an expense as employees
render service instead of when the benefits are paid. The Company adopted SFAS
No. 106 in the first quarter of 1993. The cumulative pretax effect of this
change was $53,000,000.
In November 1992, the Financial Accounting Standards Board issued SFAS No. 112,
"Employers' Accounting for Postemployment Benefits". This new rule requires
projecting the cost of providing future benefits, principally salary
continuation and disability-related benefits, to former or inactive employees
after employment but prior to retirement. The Company has certain benefits,
primarily health care, that would be subject to the Statement's guidelines, but
the impact on our financial statements has been minimal.
In 1993, the Company changed its method of accounting for retrospectively rated
reinsurance contracts based upon the Emerging Issues Task Force Issue 93-6. The
cumulative pretax effect of adopting the change in the third quarter of 1993 was
a charge of $3,800,000.
The adoption of SFAS No. 106, SFAS No. 109, SFAS No. 112 and SFAS No. 113 did
not affect the Company's liquidity or cash flows.
The Company began to focus on its core Home Service operations in early 1992,
discussing the possible disposition of its non-Home Service lines of business.
As a result of recent catastrophe losses incurred, dramatically increased
reinsurance costs, and pessimism concerning future profitability of
property/casualty operations, in 1993 management decided to withdraw from all
non-Home Service property/casualty lines of business. Home Service products are
considered to be less vulnerable to cyclical forces and catastrophe exposures
than are other segments of the property/casualty business.
The strategy was implemented in 1993 by terminating the issuance of new non-Home
Service property/casualty business and not reissuing renewal policies. In
Florida, the Company transferred the residential property lines of business to
the FRPCJUA. A $23,000,000 pretax restructuring charge was recorded in 1993 to
provide for the costs of withdrawal from the non-Home Service lines. The
restructuring charge is comprised of the following (000 omitted):
Write-down of nonrecoverable deferred policy acquisition costs $ 7,700
Costs incurred related to transfer of Florida homeowners
business to FRPCJUA 4,800
Guaranty Association costs 4,100
Increased claims due to antiselection 3,400
Employee severance program 1,200
Credit insurance termination costs 1,800
Total $23,000
ANNUAL REPORT TO SHAREHOLDERS PAGE 33
During 1993, $10,000,000 of the restructuring charges was reported in the
quarter ended June 30, 1993, and an additional $13,000,000 was provided during
the quarter ended December 31, 1993. The additional provision recorded in the
fourth quarter includes the unanticipated costs of the Florida residential lines
transfer to the Joint Underwriting Association, reflects the impact of updated
assessments of antiselection related losses during the wind-down period and the
write-down of nonrecoverable deferred policy acquisition costs.
Of the $23,000,000 of restructuring charges recorded in 1993, approximately
$8,000,000 involved noncash charges, approximately $6,000,000 required cash
expenditures in 1993 and approximately $9,000,000 will require future cash
expenditures, most of which will be incurred in 1994 and 1995. The future cash
expenditures are expected to be funded by sales of investment assets of the
property/casualty insurance subsidiaries. None of the restructuring charges
would have been recognized in 1993 had the restructuring plan not been
implemented.
The lines of business from which the Company has decided to withdraw have
historically represented approximately 80% of the Company's property/casualty
premiums. As a result of the restructuring decision, approximately 130 home-
office employees were terminated in 1993, and approximately 70 additional
employees are expected to be terminated in 1994.
Management believes that its claim accruals for the withdrawn lines are adequate
and that no further losses will be recognized in 1994. Management anticipates a
modest profit on its remaining property and casualty business in 1994.
There has been a burst of regulatory changes at both the State and NAIC level
whereby risk-based capital requirements are in place for life companies and soon
to be in effect for property and casualty companies, a significant increase in
guaranty fund assessments, and more recently, regulatory emphasis on marketing
practices.
We have also had adverse policy related lawsuits and, like most companies have,
curtailed postretirement benefits in light of SFAS No. 106 accruals. We have
lowered the discount rate assumption for our retirement plans and our
postretirement benefits plans to 7 1/4% because of the decrease in market
interest rates. We have marked a substantial amount of our assets to market but
are not allowed to adjust our matched liabilities even though interest rate
assumptions are considerably below market. We have eliminated over 100 employee
positions in our life insurance subsidiary in 1993 to save additional expenses,
but the long term solution to increasing net income is increasing revenue.
The past year has required us to scrutinize our future and significant progress
has been made in meeting our strategic goals. Some of the major accomplishments
are as follows:
. the sale of our finance company subsidiary
. exiting residential property lines except for Home Service
. exiting automobile lines except for Home Service
. exiting credit property lines
. exiting group and credit accident and health lines
. exiting group and credit life lines
. adopting five new accounting standards during 1993
Management believes that we are focused and that the Company is currently better
positioned for future long-term success.
ANNUAL REPORT TO SHAREHOLDERS PAGE 35
Consolidated Balance Sheets
December 31
1993 1992
(000 Omitted)
Assets
Investments:
Debt securities-available for sale $ 676,754 $ 135,669
Debt securities-held to maturity 53,289 567,487
Equity securities 139,491 123,561
Mortgage loans 165,652 206,208
Real estate 17,589 16,033
Policy loans 33,065 31,945
Short-term investments 5,927 37,543
Cash 13,451 7,996
Accrued Investment Income 13,079 12,571
Accounts and Notes Receivable 11,833 12,842
Reinsurance Recoverable 58,405 61,366
Property and Equipment, Net:
Land and buildings 40,798 42,488
Furniture and equipment 8,522 10,750
Deferred Policy Acquisition Costs 196,720 207,428
Other Assets 34,299 32,319
Net Assets of Discontinued Operations - 11,671
Total $1,468,874 $1,517,877
See Notes to Consolidated Financial Statements.
ANNUAL REPORT TO SHAREHOLDERS PAGE 36
December 31
1993 1992
(000 Omitted)
Liabilities and Shareholders' Equity
Policy Reserves:
Life $ 736,103 $ 733,716
Accident and health 53,329 58,829
Policyholders' Funds 99,849 91,999
Claims Payable 70,530 104,453
Unearned Premiums 41,844 79,605
Income Taxes:
Current (7,439) (8,693)
Deferred (1,692) 10,243
Accrued Expenses and Other Liabilities 153,628 98,019
Notes Payable 6,800 8,000
Total liabilities 1,152,952 1,176,171
Shareholders' Equity:
Voting common stock, $1.00 par value -
7,500 shares authorized 6,100 and
6,267 shares issued 6,100 6,267
Nonvoting common stock, $1.00 par value -
15,000 shares authorized;
8,606 and 8,439 shares issued 8,606 8,439
Additional paid-in capital 6,378 6,378
Net unrealized gain on debt securities
available for sale and equity securities 25,393 11,756
Retained earnings 293,996 333,417
Treasury stock:
Nonvoting common stock, 1,542 shares (24,551) (24,551)
Total shareholders' equity 315,922 341,706
Total $1,468,874 $1,517,877
See Notes to Consolidated Financial Statements.
ANNUAL REPORT TO SHAREHOLDERS PAGE 37
Consolidated Statements of Operations
Years ended December 31
1993 1992 1991
(000 Omitted Except Per Share Amounts)
Revenues:
Insurance premiums:
Life $177,102 $174,100 $175,800
Property and casualty 100,136 151,482 164,085
Accident and health 94,441 101,426 103,950
Net investment income 73,706 82,068 88,933
Realized investment gains 14,819 14,431 5,444
Other income 11,363 9,959 10,485
Total 471,567 533,466 548,697
Costs and Expenses:
Policy benefits:
Life 90,787 91,788 92,852
Property and casualty 77,282 150,962 95,686
Accident and health 37,327 40,091 49,552
Policy reserve increase 8,432 15,604 13,336
Amortization of deferred
policy acquisition costs 50,481 50,043 47,201
Deferral of policy
acquisition costs (50,446) (58,338) (46,194)
Commissions 95,431 120,773 112,245
General expenses 114,570 118,893 120,386
Taxes, licenses and fees 24,513 25,169 23,406
Other operating expenses 3,633 8,203 2,283
Restructuring charge 23,000 - -
Total 475,010 563,188 510,753
Income (Loss) from Continuing
Operations Before Income Taxes (3,443) (29,722) 37,944
Provision (Credit) for Income Taxes:
Current 3,174 (1,379) 18,468
Deferred (5,757) (11,349) (7,496)
Total (2,583) (12,728) 10,972
Income (Loss) from Continuing Operations (860) (16,994) 26,972
Income from Discontinued
Operations (Net of Taxes) 465 1,906 1,670
Gain on Disposition of Discontinued
Operations (Net of Taxes) 6,904 - -
Income (Loss) Before Cumulative Effect
of Change in Accounting Principles 6,509 (15,088) 28,642
Cumulative Effect of Change
in Accounting Principles (42,771) - -
Net Income (Loss) $(36,262) $(15,088) $ 28,642
Net Income (Loss) Per Share:
Income (loss) from
continuing operations $ ( .07) $(1.29) $2.05
Income and gain from
discontinued operations .56 .14 .13
Income (loss) before cumulative
effect of change in
accounting principles .49 (1.15) 2.18
Cumulative effect of change
in accounting principles (3.24) - -
Net income (loss) $(2.75) $(1.15) $2.18
See Notes to Consolidated Financial Statements.
ANNUAL REPORT TO SHAREHOLDERS PAGE 39
Consolidated Statements of
Shareholders' Equity
Years ended December 31
1993 1992 1991
(000 Omitted)
Voting Common Stock:
Balance, beginning of year $ 6,267 $ 6,303 $ 6,329
Retired during the year (167) (36) (26)
Balance, end of year 6,100 6,267 6,303
Nonvoting Common Stock:
Balance, beginning of year 8,439 8,403 8,377
Issued during the year 167 36 26
Balance, end of year 8,606 8,439 8,403
Additional Paid in Capital:
Balance, beginning and end of year 6,378 6,378 6,378
Net Unrealized Investment Gains:
Balance, beginning of year 11,756 11,362 2,213
Net unrealized appreciation on debt
securities available for sale and
equity securities 21,419 422 13,817
Deferred income taxes (7,782) (28) (4,668)
Balance, end of year 25,393 11,756 11,362
Retained Earnings:
Balance, beginning of year 333,417 360,089 342,900
Net income (loss) (36,262) (15,088) 28,642
Less: Dividends to shareholders
($.24, $.88 and $.87) 3,159 11,584 11,453
Balance, end of year 293,996 333,417 360,089
Treasury Stock-Nonvoting Common at Cost:
Balance, beginning and end of year
(1,542 shares) (24,551) (24,551) (24,551)
Total Shareholders' Equity $315,922 $341,706 $367,984
See Notes to Consolidated Financial Statements.
ANNUAL REPORT TO SHAREHOLDERS PAGE 40
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and Presentation: The accompanying consolidated financial
statements include the accounts, after intercompany eliminations, of Independent
Insurance Group, Inc., and its wholly owned subsidiaries (principally insurance
companies) and have been prepared in conformity with generally accepted
accounting principles.
Revenue and Expense Recognition: Traditional life and accident and health
premiums are reported as earned when due. Benefits, expenses and investment
income on future benefits for traditional products are associated with earned
premiums so as to result in recognition of profits over the life of the
contracts in proportion to premium earned. This association is accomplished by
means of the provision for policy reserves and the deferral and amortization of
policy acquisition costs. For universal life-type contracts premiums are
reported as deposits to policyholders' account balances, revenue represents
amounts assessed against policyholders, and benefits represent amounts in excess
of account balances returned to policyholders. Property and casualty premiums
are earned ratably over the life of such policies with a liability for unearned
premiums established for the unexpired portion of the premium applicable to
those policies.
Deferred Policy Acquisition Costs: The cost of acquiring business (principally
commissions and other issue expenses recoverable from future profit margins)
which varies with and is primarily related to the production of new business has
been deferred. These deferred policy acquisition costs are being amortized over
the premium paying period of the related life and accident and health policies
in proportion to the ratio of the annual premium revenue to the total premium
revenue anticipated except for universal life-type products where amortization
is based on estimated gross profits. Such anticipated premium revenue is
estimated using the same assumptions as used for computing policy reserves.
Deferred policy acquisition costs on property and casualty policies are
amortized over the period during which the related premiums are earned.
Included with deferred policy acquisition costs are the costs assigned to the
value of insurance inforce of acquired companies. The unamortized balance at
December 31, 1993 and 1992 of such amounts was $17,105,000 and $19,165,000.
These costs of insurance purchased are amortized in proportion to projected
future profits on the acquired insurance inforce using discount rates of 8.5% to
10%.
Policy Liabilities and Accruals: Policy reserves are based upon assumed future
investment yields, mortality rates and withdrawal rates giving effect to
possible risk of adverse deviations. The assumed mortality and withdrawal rates
are based upon company experience. Except for nontraditional plans where the
effect of current interest is reflected, the interest rates assumed are
generally: (a) 6 1/2% for the first 3 years graded to 5% for issues of
September, 1993 and later,(b) 8% for the first 3 years graded to 5 1/2% for
issues of September, 1988 through August, 1993, (c) 8% for the first 5 years
graded to 4 1/2% for issues of 1985 through August, 1988, (d) 7% for the first 5
years graded to 4 1/4% for 1980 through 1984 issues, (e) 6% graded to 3 1/2% for
1968 through 1979 issues, (f) 4 1/2% graded to 3 1/2% for 1963 through 1967
issues and (g) 3 1/2% for issues prior to 1963. The liability for unpaid claims
represents the estimated ultimate cost of all losses incurred through December
31 of each year. It includes estimates of claims incurred but not yet reported
and is determined using case basis evaluations and statistical analyses.
Related estimated adjustment expenses have been accrued.
Income Taxes: Income taxes have been provided using the liability method in
accordance with FASB Statement 109, "Accounting for Income Taxes". Under that
method, deferred tax assets and liabilities are determined based on the
differences between their financial reporting and their tax bases and are
measured using the enacted tax rates.
ANNUAL REPORT TO SHAREHOLDERS PAGE 41
Income Per Share: Net income per share is computed using 13,165,000 weighted
average number of shares outstanding during 1993, 1992 and 1991.
Property and Equipment: Property and equipment is carried at cost and
depreciation is provided generally under accelerated methods for items placed
in service after 1984. Improvements on behalf of tenants are amortized on the
straight-line basis over the terms of tenants' leases.
The accumulated depreciation on these assets was $72,382,000 and $67,570,000 as
of December 31, 1993 and 1992.
Investments: Historically, the Company has classified debt security investments
in accordance with existing accounting standards and, accordingly, carried such
investments at amortized cost since the Company had both the ability and intent
to hold those securities until maturity. In 1992, the Company segregated a
portion of its debt security portfolio as held for sale because management
believed that such investments were likely to be sold within a year, given their
characteristics and market environment.
In 1993, the Financial Accounting Standards Board (FASB) issued Statement 115
"Accounting for Certain Investments in Debt and Equity Securities". Statement
115 required that debt securities are to be classified as either held to
maturity (carried at amortized cost), available for sale (carried at market with
unrealized gains or losses reported in equity), or trading (carried at market
with unrealized gains or losses reported in net income).
The Company believes that it has the ability and intent to hold to maturity its
debt security investments that are classified as held to maturity. However, the
Company also recognizes that there may be circumstances where it may be
appropriate to sell a security prior to maturity in response to unforeseen
changes in circumstances. Recognizing the need for the ability to respond to
changes in tax position and in market conditions, the Company has designated a
portion of its investment portfolio as available for sale. As permitted by
Statement 115, the Company adopted the new accounting standard as of December
31, 1993 and adjusted the carrying value of its debt security investments that
are classified as investments available for sale to market value as of December
31, 1993. The effect of adopting Statement 115 at December 31, 1993 was to
increase the carrying amount of debt security investments that are classified as
available for sale investments by $28,900,000, decrease deferred policy
acquisition costs by $2,250,000 and increase shareholders' equity by $17,300,000
with no effect on income. At December 31, 1992, the debt securities available
for sale were valued at lower of cost or market which was amortized cost.
At December 31, 1993, the remainder of the Company's portfolio of debt security
investments is classified as held to maturity. Although the Company has the
ability and intent to hold those securities to maturity, infrequent and unusual
conditions could occur under which it would be appropriate to sell certain of
those securities. Those conditions could include, but are not limited to,
unforeseen changes in asset quality and significant changes in current tax law.
The Company has not classified any of its debt security investments as trading.
Investments are reported in the accompanying balance sheets on the following
basis:
Available for sale securities are reported at current market value. Changes
in market value of available for sale securities, after deferred income taxes
and after adjustment for the amortization of deferred policy acquisition
costs, are reported as unrealized appreciation or depreciation directly in
shareholders' equity and, accordingly, have no effect on net income. The
offsets to the unrealized appreciation or depreciation represent valuation
adjustments that represent the amounts of additional amortization of deferred
policy acquisition costs that would have been required as a charge or credit
to operations had such unrealized amounts been realized.
ANNUAL REPORT TO SHAREHOLDERS PAGE 42
Held to maturity securities are reported at amortized cost.
Equity security investments, principally common and nonredeemable preferred
stocks, are carried at current market value with changes in such value
reflected as unrealized gains or losses directly in shareholders' equity,
having no effect on net income.
Mortgage loans on real estate are reported at unpaid balances, adjusted for
amortization of premium or discount, less allowance for possible losses. The
geographic distribution of mortgage loans is in 15 states primarily in the
Southeastern United States, with 41% in Florida.
Real estate is reported at cost, less allowances for depreciation and possible
losses.
Policy loans are reported at unpaid balances.
Short-term investments are reported at cost.
The cost of securities sold is based on specific identification and the
resulting realized gains and losses are included in the determination of net
income.
In the normal course of business, the Company is party to financial instruments,
none of which have significant off-balance-sheet risk.
Fair Values of Financial Instruments: The following methods and assumptions were
used by the Company in estimating its fair value disclosures for financial
instruments:
Cash and cash equivalents, short-term investments: The carrying amounts
reported in the Balance Sheet for these instruments approximate fair values.
Investment securities: Fair values for debt security investments are based on
quoted market prices, where available. For debt security investments not
actively traded, fair values are estimated by discounting expected future cash
flows using a current market rate applicable to the yield, credit quality, and
maturity of the investments. The fair values for equity securities are based on
quoted market prices.
Mortgage loans and policy loans: The fair value for mortgage loans are estimated
using discounted cash flow analyses, using interest rates that would currently
be offered for similar loans to borrowers with
similar credit ratings. The fair values for policy loans are estimated using
discounted cash flow analyses, using interest rates associated with the carrying
value of policy reserves.
Accounts and notes receivable: The carrying amounts of the Company's
receivables approximate fair values.
Short and long-term notes payable: The carrying amounts of the Company's short-
term notes payable approximate fair values. The Company has $3,800,000 of
long-term notes payable at December 31, 1993.
Policyholders' Funds: The carrying value for policyholders' funds (e.g. premium
and other demand deposit funds) are equal to the amount payable on demand at the
reporting date, which approximates the fair value.
Accounting Changes: In 1993, the Company adopted the provisions of five newly
required Statements of Financial Accounting Standards.
ANNUAL REPORT TO SHAREHOLDERS PAGE 43
Statement of Financial Accounting Standards No. 106 (SFAS 106), "Employers'
Accounting for Postretirement Benefits Other Than Pensions", requires the
Company to accrue the cost of postretirement benefits other than pensions over
the active service periods of employees as opposed to the "pay-as-you-go
method" which recognizes the expense as benefits are paid. The effect of the
adoption of this statement was recorded as a one time cumulative effect of
change in accounting principles and reduced net income of the Company by
approximately $35,000,000 or $2.66 per share (net of an income tax benefit of
$18,000,000) in the first quarter of 1993. Note 8, Employee Benefit Plans,
further details SFAS 106.
Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for
Income Taxes", changes the way in which temporary differences between financial
statement and tax return bases are handled with regard to deferred federal
income taxes. The cumulative effect of adopting SFAS 109 was to decrease net
income by $5,300,000 or $.40 per share in the first quarter of 1993. See Note
7, Income Taxes, for additional details.
Statement of Financial Accounting Standards No. 112 (SFAS 112), "Employers'
Accounting for Postemployment Benefits", requires entities to use accrual
accounting to value the cost of benefits provided to former or inactive
employees who have not yet retired. As the Company had previously reserved
$7,200,000 for these compensated absences, the Standard was adopted with no
impact on profit.
Statement of Financial Accounting Standards No. 113 (SFAS 113), "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts",
affects the reporting of reinsurance transactions. In accordance with the
Statement's provisions, all reinsurance recoverables and reserve credits for
1993 and 1992 have been shown separately as an asset as opposed to being netted
against policy liabilities, with no impact on income. In 1993, the Company
changed its method of accounting for retrospectively rated reinsurance contracts
based upon a consensus reached by the Emerging Issues Task Force of the
Financial Accounting Standards Board. The Company recorded a cumulative effect
of adopting the change of $2,500,000 or $.18 per share (net of an income tax
benefit of $1,300,000) in the third quarter of 1993.
Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for
Certain Investments in Debt and Equity Securities", generally replaces the long-
standing historical cost accounting approach for debt securities with one based
on fair value as it applies to the Company. SFAS 115 requires classifying debt
security investments as held to maturity or available for sale. Investments
available for sale are now recorded at current fair market value rather than
cost. The difference between these two valuation methods increased
shareholders' equity $26,700,000. This amount was taxed as an unrealized gain
and the net amount increased book value by $1.32 per share in the fourth quarter
of 1993. Debt securities held to maturity continue to be reported at cost, while
equity securities continue to be reported at market value.
Proforma amounts for income (loss) from continuing operations and related
earnings per share amounts assuming the retroactive application of the accrual
method of accounting for postretirement benefits and the revised accounting for
retrospectively rated reinsurance contracts compared to reported income (loss)
from continuing operations and related earnings per share are shown below (000
omitted):
1993 1992 1991
As Reported
Income (loss) from continuing operations $(860) $(16,994) $26,972
Per share $(.07) $(1.29) $2.05
Proforma
Income (loss) from continuing operations $(860) $(21,434) $24,992
Per share $(.07) $(1.63) $1.90
ANNUAL REPORT TO SHAREHOLDERS PAGE 44
Retroactive application of the new standards related to accounting for income
taxes, postemployment benefits and reinsurance would not effect these proforma
amounts.
Reclassifications: Certain amounts in the 1992 and 1991 statements have been
reclassified to conform with the 1993 classifications.
2. RESTRUCTURING
The Company began to focus on its core Home Service operations in early 1992,
discussing the possible disposition of its non-Home Service lines of business.
As a result of recent catastrophe losses incurred, dramatically increased
reinsurance costs, and pessimism concerning future profitability of
property/casualty operations, in 1993 management decided to withdraw from all
non-Home Service property/casualty lines of business. Home Service products are
considered to be less vulnerable to cyclical forces and catastrophe exposures
than are other segments of the property/casualty business.
The strategy was implemented in 1993 by terminating the issuance of new non-Home
Service property/casualty business and not reissuing renewal policies. In
Florida, the Company transferred the residential property lines of business to
the Florida Residential Joint Underwriting Association. A $23,000,000 pretax
restructuring charge was recorded in 1993 to provide for the costs of withdrawal
from the non-Home Service lines. The restructuring charge is comprised of the
following (000 omitted):
Write-down of nonrecoverable deferred policy acquisition costs $ 7,700
Costs incurred related to transfer of Florida homeowners business
to Joint Underwriting Association 4,800
Guaranty Association costs 4,100
Increased claims due to antiselection 3,400
Employee severance program 1,200
Credit insurance termination costs 1,800
Total $ 23,000
3. DISCONTINUED OPERATIONS
In the first quarter of 1993, the Company completed the sale of its Louisiana-
based consumer finance subsidiary, Gulfco Investment Inc. (Gulfco). The
proceeds of $22,573,000 resulted in an after tax gain of $6,904,000 (net of
income taxes of $4,200,000) which is reported as "Gain on Disposition of
Discontinued Operations" in the Consolidated Statements of Operations.
During 1993, prior to completion of the divestiture, Gulfco earned net income of
$465,000. The former subsidiary earned net income of $1,906,000 and $1,670,000
in 1992 and 1991, respectively. These amounts have been segregated as "Income
from Discontinued Operations" in the Consolidated Statements of Operations. Net
assets of Gulfco of $11,671,000, as of December 31, 1992, have been separately
classified and stated at book value in the Consolidated Balance Sheets.
ANNUAL REPORT TO SHAREHOLDERS PAGE 45
4. INVESTMENTS
Presented below (000 omitted) is a summary of investments as of December 31,
1993:
Balance
Gross Gross Sheet
Amortized Unrealized Unrealized Fair Carrying
Investment Category Cost Gains Losses Value Value
Debt securities
available for sale:
Bonds and notes:
United States
Government $ 19,831 $ 1,085 $ (59) $ 20,857 $ 20,857
States,
municipalities
and political
subdivisions 75,214 4,089 (142) 79,161 79,161
Foreign
governments 43,336 1,327 (8) 44,655 44,655
Corporate
securities 267,179 16,030 (882) 282,327 282,327
Mortgage-backed
securities 232,955 7,333 (143) 240,145 240,145
Redeemable preferred
stocks 9,328 331 (50) 9,609 9,609
Total debt securities
available for sale 647,843 30,195 (1,284) 676,754 676,754
Debt securities
held to maturity:
Bonds and notes:
United States
Government 49,976 9,442 (1) 59,417 49,976
States,
municipalities
and political
subdivisions 301 3 - 304 301
Corporate
securities 3,012 555 - 3,567 3,012
Total debt securities
held to maturity 53,289 10,000 (1) 63,288 53,289
Equity securities:
Common stocks:
Public utilities 3,856 1,043 (94) 4,805 4,805
Banks, trusts and
insurance companies 28 16 (1) 43 43
Industrial,
miscellaneous
and all other 75,677 12,799 (4,633) 83,843 83,843
Nonredeemable
preferred stocks 41,380 3,395 (279) 44,496 44,496
Other 6,304 - - 6,304 6,304
Total equity
securities 127,245 17,253 (5,007) 139,491 139,491
Other investments:
Mortgage loans 165,652 20,662 - 186,314 165,652
Real estate 17,589 - - 17,589 17,589
Policy loans 33,065 2,940 - 36,005 33,065
Short-term
investments 5,927 - - 5,927 5,927
Total other
investments 222,233 23,602 - 245,835 222,233
Total investments $1,050,610 $81,050 $(6,292) $1,125,368 $1,091,767
ANNUAL REPORT TO SHAREHOLDERS PAGE 46
Presented below (000 omitted) is a summary of investments as of December 31,
1992:
Balance
Gross Gross Sheet
Amortized Unrealized Unrealized Fair Carrying
Investment Category Cost Gains Losses Value Value
Debt securities
available for sale:
Bonds and notes:
United States
Government $ 2,817 $ 240 $ - $ 3,057 $ 2,817
States,
municipalities
and political
subdivisions 10,088 156 (59) 10,185 10,088
Foreign
governments 133 11 - 144 133
Corporate
securities 23,831 397 (155) 24,073 23,831
Mortgage-backed
securities 98,800 2,071 (778) 100,093 98,800
Total debt securities
available for sale 135,669 2,875 (992) 137,552 135,669
Debt securities
held to maturity:
Bonds and notes:
United States
Government 73,428 6,090 (84) 79,434 73,428
States,
municipalities
and political
subdivisions 46,363 1,209 (10) 47,562 46,363
Foreign
governments 17,737 411 - 18,148 17,737
Corporate
securities 168,940 4,555 (513) 172,982 168,940
Mortgage-backed
securities 250,122 990 (3,724) 247,388 250,122
Redeembable
preferred 10,897 439 (22) 11,314 10,897
stocks
Total debt securities
held to maturity 567,487 13,694 (4,353) 576,828 567,487
Equity securities:
Common stocks:
Public utilities 15,015 5,349 (302) 20,062 20,062
Banks, trusts and
insurance companies 27 16 - 43 43
Industrial,
miscellaneous
and all other 49,943 13,163 (2,967) 60,139 60,139
Nonredeemable
preferred stocks 32,514 2,518 (166) 34,866 34,866
Other 8,451 - - 8,451 8,451
Total equity
securities 105,950 21,046 (3,435) 123,561 123,561
Other investments:
Mortgage loans 206,208 23,609 - 229,817 206,208
Real estate 16,033 - - 16,033 16,033
Policy loans 31,945 2,811 - 34,756 31,945
Short-term
investments 37,543 - - 37,543 37,543
Total other
investments 291,729 26,420 - 318,149 291,729
Total investments $1,100,835 $64,035 $(8,780) $1,156,090 $1,118,446
ANNUAL REPORT TO SHAREHOLDERS PAGE 47
The amortized cost and estimated fair value of debt securities at December 31,
1993, by contractual maturity, are shown below (000 omitted). Expected
maturities will differ from contractual maturities because borrowers may have
the
right to call or prepay obligations with or without call or prepayment
penalties.
Available for Sale Held to Maturity
Amortized Fair Amortized Fair
Contractual Maturity Cost Value Cost Value
Due in one year or less $ 1,985 $ 1,963 $ - $ -
Due after one year through five years 24,931 26,183 1,937 2,278
Due after five years through ten years 252,607 263,797 32,984 38,507
Due after ten years 135,365 144,666 18,368 22,503
Sub-total 414,888 436,609 53,289 63,288
Mortgage backed securities 232,955 240,145 - -
Total $647,843 $676,754 $53,289 $63,288
Proceeds from the sales of investments in debt securities during 1993 were
$262,943,000. Gross gains of $6,652,000 and gross losses of $112,000 were
realized on those sales. Proceeds from sales of investments in debt securities
during 1992 were $305,246,000. Gross gains of $13,731,000 and gross losses of
$947,000 were realized on those sales. Proceeds from sales of investments in
debt securities during 1991 were $280,324,000. Gross gains of $8,588,000 and
gross losses of $742,000 were realized on those sales.
Details of investment income by major categories are presented below (000
omitted) for the years ended December 31:
1993 1992 1991
Short-term investments $ 1,012 $ 1,991 $ 1,837
Debt securities 50,765 52,446 54,524
Equity securities 5,650 6,661 7,606
Mortgage loans 18,752 23,381 28,083
Other 3,406 3,679 2,763
Gross investment income 79,585 88,158 94,813
Investment expenses 5,879 6,090 5,880
Net investment income $73,706 $82,068 $88,933
Restructured mortgage loans aggregated $23,800,000 and $25,300,000 as of
December 31, 1993 and 1992. The expected gross interest income that would have
been recorded had the loans been current in accordance with the original loan
agreements and the actual interest income recorded for the years ended December
31 are as follows (000 omitted):
Mortgage Loans Restructured 1993 1992 1991
Expected gross interest income $2,615 $2,795 $2,377
Actual gross interest income 1,890 2,189 1,804
ANNUAL REPORT TO SHAREHOLDERS PAGE 48
A summary of investment gains (losses) for the years ended December 31 is as
follows (000 omitted):
Debt Equity Other Tax Net Gains(Losses)
Securities Securities Investments Effects On Investments
1993
Realized $ 6,613 $ 7,432 $ 774 $ 5,187 $ 9,632
Unrealized 27,686 (5,365) (2,818) 7,782 11,721
Total $34,299 $ 2,067 $(2,044) $12,969 $21,353
1992
Realized $13,495 $ 3,853 $(2,917) $ 4,572 $ 9,859
Unrealized (16,902) 422 - 28 (16,508)
Total $ (3,407) $ 4,275 $(2,917) $ 4,600 $(6,649)
1991
Realized $ 7,846 $ 3,115 $(5,517) $ 2,094 $ 3,350
Unrealized 18,301 13,817 - 4,669 27,449
Total $26,147 $16,932 $(5,517) $ 6,763 $30,799
5. ACCOUNTS AND NOTES RECEIVABLE
Consolidated accounts and notes receivable are primarily comprised of amounts
due from agents and policyholders attributable to the Company's insurance
subsidiaries. These assets are short-term in nature with no defined maturities,
and the fair values (amounts payable on demand) approximate the carrying values.
The carrying value and fair values of accounts and notes receivable as of
December 31, are as follows (000 omitted):
1993 1992
Agents' and brokers' receivables $ 5,016 $ 9,860
Uncollected premiums 2,694 2,914
Miscellaneous receivables 4,123 68
Total $11,833 $12,842
6. NOTES PAYABLE
Notes payable at December 31 are presented in the table below (000 omitted).
Due to the short-term nature of these instruments, fair values approximate the
carrying values.
1993 1992
4.00% 180-day note $3,000 -
4.02% 90-day note - $8,000
6.25% Bank term loan 3,800 -
$6,800 $8,000
The Company also has available another $24,000,000 short-term line of credit
with two banks which can be terminated at any time by the bank. As of December
31, 1993, none of this line of credit was utilized.
The approximate amount of interest paid in 1993, 1992 and 1991 totaled $572,000,
$450,000 and $900,000.
ANNUAL REPORT TO SHAREHOLDERS PAGE 49
7. SHAREHOLDERS' EQUITY
The Company's insurance subsidiaries have legal restrictions as to the transfer
of funds to the Company in the form of dividends, loans and advances. These
restrictions, determined in accordance with statutory reporting practices,
generally limit the payment of dividends to amounts based upon statutory surplus
or profits and limit the amount of certain investments to specified percentages
of statutory admitted assets. At December 31, 1993, approximately $100,000,000
of consolidated statutory net assets of $117,000,000 cannot be transferred from
the insurance subsidiaries to the Company without regulatory approval.
Net income and shareholders' equity as determined in accordance with statutory
accounting practices for the three years ended December 31 (000 omitted) are as
follows:
1993 1992 1991
Net income (loss):
Life insurance subsidiary $ 16,274 $ 2,106 $ 18,589
Property and casualty
insurance subsidiaries (15,435) (35,831) 4,017
Shareholders' equity:
Life insurance subsidiary 105,098 101,311 102,827
Property and casualty
insurance subsidiaries 30,556 40,709 64,703
The Company has authorization for 20,000,000 shares of preferred stock, none of
which has been issued.
8. INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by SFAS
109, "Accounting for Income Taxes". As permitted under the new rules, prior
years' financial statements have not been restated.
Exclusive of the deferred tax benefit of approximately $18,000,000 attributable
to the implementation of SFAS 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions", the cumulative effect of adopting SFAS 109 as of
January 1, 1993 was to decrease net income by $5,300,000.
At December 31, 1993, the Company had consolidated net operating loss
carryforwards available of $19,600,000. These losses are attributable to the
property & casualty subsidiaries and originated in 1992 and 1993 as a result of
catastrophic losses experienced. Unless otherwise utilized, $10,800,000 of
these losses will expire in 2007 and $8,800,000 in 2008.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. There was no change in
the valuation allowance for deferred tax assets during 1993. Significant
ANNUAL REPORT TO SHAREHOLDERS PAGE 50
components of the Company's deferred tax liabilities and assets as of December
31, 1993 as calculated in accordance with SFAS 109 are as follows (000 omitted):
Deferred tax liabilities:
Deferred policy acquisition costs $53,939
Unrealized gains 13,673
Other 88
Total deferred tax liabilities 67,700
Deferred tax assets:
Policy reserves & policyholder funds 36,149
Accrued expenses & other liabilities:
OPEB obligation 19,536
Deferred compensation & pension benefits 1,684
Restructuring liability 2,565
Other operating income & expense items 924
Investment assets - basis adjustments 1,657
Net operating loss carryforward 6,877
Sub-total deferred tax assets 69,392
Valuation allowance for deferred tax assets -
Total deferred tax assets 69,392
Net deferred tax assets $ 1,692
Prior to 1984, a portion of a life insurance company's gain from operations was
not taxed currently but was deferred and accumulated in a memorandum
Policyholders' Surplus Account. This accumulation generally become taxable to
the extent that the account exceeded certain prescribed maximums or when
distributed to shareholders. The Tax Reform Act of 1984 eliminated this
deferral of income for 1984 and later years. The 1984 legislation also provides
that companies will not be taxed on previously deferred amounts unless they are
distributed to shareholders or are subtracted from the Policyholders' Surplus
Account under rules similar to those provided under prior law. The accumulated
balance in this account at December 31, 1993 was approximately $124,000,000.
Deferred income taxes have not been provided on this Policyholders' Surplus
Account because the balance in the account does not exceed the prescribed
maximum and distributions to shareholders from this account are not presently
contemplated.
Significant components of the provision for income taxes for the years ending
December 31, attributable to continuing operations are as follows (000 omitted):
Liability
Method Deferred Method
1993 1992 1991
Current tax expense (benefit) $ 3,174 $ (1,380) $18,468
Deferred taxes exclusive
of net operating loss carryforward
benefit and effect of change in
enacted tax rates (1,856) (8,089) (7,496)
Net operating loss benefit (3,618) (3,259) -
Effect on deferred taxes of
enacted tax rate change (283) - -
Total income tax expense
(benefit) on income $(2,583) $(12,728) $10,972
ANNUAL REPORT TO SHAREHOLDERS PAGE 51
The components of the deferred income tax benefit for the years ending December
31, attributable to continuing operations are as follows (000 omitted):
Liability
Method Deferred Method
1993 1992 1991
Excess of policy acquisition costs
recognized for tax purposes over
that for financial accounting purposes $(6,106) $ (3,811) $(4,541)
Excess of policy reserves recognized
for tax purposes over that for
financial accounting purposes 6,093 1,264 838
Excess of premium revenue recognized
for tax purposes over that for
financial accounting purposes (3,131) (3,551) (2,724)
Excess of policy benefits recognized
for tax purposes over that for
financial accounting purposes 405 1,003 138
Excess of gains (losses) recognized
for financial accounting purposes
over that for tax purposes 383 405 (1,260)
Net operating loss carryforward
benefit recognized to eliminate
deferred taxes (3,618) (3,259) -
Contested litigation judgement 2,268 (2,118) -
Preferred compensation/pension plan costs (875) (380) 16
Restructuring charge (2,565) - -
Retrospectively rated reinsurance 1,314
Other 75 (902) 37
Total $(5,757) $(11,349) $(7,496)
The reconciliation of income tax expense (benefit) for the years ended December
31, attributable to continuing operations computed at the U. S. federal
statutory tax rate of 35% in 1993 and 34% in 1992 and 1991 to income tax expense
(benefit) is as follows (000 omitted):
Liability
Method Deferred Method
1993 1992 1991
Income tax (at 35% or 34% of
pretax income or loss) $(1,205) $(10,106) $12,901
Tax exempt investment income (1,491) (1,469) (2,431)
Non taxable/deductible (income) expenses 395 (1,153) 502
Effect of tax rate change (283) - -
Other items 1 - -
Provision (credit) for federal
income tax expense (benefit) $(2,583) $(12,728) $(10,972)
9. EMPLOYEE BENEFIT PLANS
The Company has retirement plans covering all employees and makes annual
contributions in compliance with legal funding requirements. A noncontributory
plan covers salaried employees and benefits are based on years of service and
compensation during the highest five years of employment. A noncontributory
plan covers employees whose incomes are derived wholly or partially from
commissions and benefits are based on earnings over the lifetime of
participation in the plan. Normal retirement age is 65, 66 or 67, depending on
year of birth, but early retirement with reduced benefits is permissible.
ANNUAL REPORT TO SHAREHOLDERS PAGE 52
These plans are administered through separate retirement trusts which, prior to
April 1, 1993, purchased annuity contracts issued by the Company's life
insurance subsidiary. The approximate amount of annual benefits covered by such
contracts totaled $8,256,000, $7,791,000 and $7,483,000 in 1993, 1992 and 1991.
Pension costs for 1993 were decreased approximately $320,000 primarily due to
changes made in actuarial assumptions for compensation. There were no
significant changes in 1992. Pension costs for 1991 were increased
approximately $560,000 due to a plan amendment adopting an increase in monthly
benefits for current retirees.
The following table sets forth the plans' funded status as well as prepaid
pension costs included in other assets in the Company's balance sheet at
December 31, 1993 and 1992 (000 omitted):
1993 1992
Accumulated benefit obligation, including
vested benefits of $(63,541) and $(49,637) $(69,660) $(55,273)
Projected benefit obligation $(80,044) $(72,829)
Plan assets at fair value, principally
fixed income obligations and common stocks 80,491 77,310
Plan assets in excess of projected benefit
obligation 447 4,481
Unrecognized net transition obligation being
recognized over 15 years 1,000 1,147
Unrecognized prior service cost 2,993 3,251
Unrecognized net gain (3,607) (7,506)
Prepaid pension costs $ 833 $ 1,373
Net pension costs include the following components for the years ended December
31, 1993, 1992 and 1991 (000 omitted):
1993 1992 1991
Service costs - benefits earned during the period $ 3,348 $ 3,550 $ 2,861
Interest cost on projected benefit obligation 4,834 4,961 5,357
Return on plan assets (6,806) (3,900) (11,706)
Net amortization and deferral 1,184 (1,864) 6,399
Net pension costs $ 2,560 $ 2,747 $ 2,911
In 1993 the projected benefit obligation was calculated using a 7.25% weighted
average discount rate. The rate of increase in compensation levels was graded
by age, ranging from 9% to 2%. For 1992 and 1991, the projected benefit
obligation was calculated using an 8.0% weighted average discount rate and a
7.0% rate of increase in compensation levels. The expected long-term rate of
return on plan assets was 8.0% for all years.
In addition to pension benefits, the Company's subsidiaries provide certain
health care and life insurance benefits to retired employees and eligible
dependents. Substantially all employees become eligible for these benefits upon
reaching retirement age while still employed with the Company. These benefits,
along with similar benefits for active employees, are provided under a group
insurance contract issued by the Company's principal subsidiary. The plan is
not funded and the cost is shared between the Company and employees and
retirees. In December, 1990, the Financial Accounting Standards Board (FASB),
issued Statement of Financial Accounting Standard Statement No. 106 (SFAS 106)
"Employers' Accounting for
ANNUAL REPORT TO SHAREHOLDERS PAGE 53
Postretirement Benefits Other than Pensions", which requires that the projected
future cost of providing postretirement benefits, such as health care and life
insurance, be recognized as an expense as employees render service rather than
when such benefits are paid. SFAS 106 allows for two methods of implementation,
companies can elect to record the cumulative effect of the accounting change as
a charge to income in the year the rule is adopted, or alternatively, on a
delayed basis as a part of future annual benefit cost. Effective January 1,
1993, the Company implemented, on the immediate recognition basis, SFAS 106.
The impact of adoption is the recognition of a $53,000,000 transition obligation
($35,000,000 or $2.66 per share after tax ) as a charge to earnings in the first
quarter of 1993. Components of the net periodic postretirement benefits cost
are detailed below (000 omitted):
1993
Service cost - benefits earned during the period $1,197
Interest cost 4,728
Net periodic postretirement benefits cost $5,925
Prior to adoption of SFAS 106, the cost of postretirement benefits was
recognized on a pay-as-you go basis by expensing the associated net premiums and
was approximately $4,100,000 and $3,400,000 for 1992 and 1991, respectively, and
have not been restated.
The unfunded accrued postretirement obligation for the approximately 4,400
active employees and 1,500 retirees as of December 31, 1993 which is included in
other liabilities of the accompanying balance sheet, is detailed in the table
below (000 omitted):
1993
Active employees fully eligible for benefits $ 4,501
Other active employees 18,100
Current retirees 44,839
Accumulated postretirement benefit obligation 67,440
Unrecognized net loss (7,425)
Accrued postretirement benefit obligation $60,015
At December 31, 1993, the accumulated postretirement benefit obligation was
calculated using a 7.25% weighted average discount rate and a 4.25% rate of
increase in compensation levels. A health care inflation rate of 10.3% is
assumed in 1994. The rate is expected to decrease over seven years, to an
ultimate constant level of 5.5% . This rate assumption has a significant impact
on the health care portion of benefits. For example, a 1% increase in this rate
would have increased the accumulated postretirement benefits obligation by
approximately $5,600,000 and the 1993 periodic benefits cost by $527,000.
In November, 1992, the FASB issued SFAS 112 "Employers' Accounting for
Postemployment Benefits". The new statement requires that the projected cost of
providing future benefits, principally salary continuation and disability
related benefits, to former or inactive employees after employment but before
retirement, be recognized as an expense currently instead of when paid, if the
obligation is attributable to employees' services already rendered. The
Statement was adopted in 1993 with no impact on profit, as $7,200,000 of
compensated absences had previously been reserved by the Company.
A deferred death benefit plan is provided for selected Company officers and
directors. The plan provides for specific amounts to be paid over a period of
five years after death and is presently funded through the use of keyman
insurance policies. The net cost to the Company was approximately $792,000,
$809,000 and $1,229,000 for 1993, 1992 and 1991.
ANNUAL REPORT TO SHAREHOLDERS PAGE 54
10. COMMITMENTS AND CONTINGENT LIABILITIES
In accordance with general practice in the insurance industry, the Company's
insurance subsidiaries are engaged in reinsurance transactions with other
companies. At December 31, 1993 life insurance in force of $237,253,000 has
been ceded to other companies. Reinsurance ceded contracts do not relieve the
Company's insurance subsidiaries from their obligation to policyholders as they
remain liable to their policyholders to the extent that any reinsurer does not
meet its obligations for reinsurance ceded to it under reinsurance contracts.
Generally, the maximum amount of insurance retained on any one life is $300,000
(lower for higher ages and special classes of risks). The largest net amount
insured on any one risk in the property and casualty subsidiaries is $100,000.
Automatic reinsurance agreements are in force with certain maximum limits, as
well as excess of loss reinsurance agreements providing coverage against losses
on any one catastrophe exceeding $4,500,000 to a maximum of $100,000,000.
Reinsurance recoverable on paid and unpaid losses of the subsidiaries totaled
$25,176,000, $23,682,000 and $5,645,000 for years 1993, 1992 and 1991. For the
same periods, ceded premiums were $86,887,000, $64,705,000 and $18,999,000,
while assumed premiums totaled $803,000, $1,115,000 and $1,284,000. For 1993,
1992 and 1991 ceded benefits, losses and expenses totaled $68,635,000,
$147,138,000 and $6,676,000, while assumed benefits, losses and expenses totaled
$601,000, $688,000 and $754,000.
At December 31, 1993, reinsurance recoverables on paid and unpaid losses of
$19,500,000 and prepaid reinsurance premiums of $13,800,000, were associated
with a single reinsurer.
A substantial portion of the companies' field operations are conducted in leased
premises, some of which require the companies to pay real estate taxes and other
expenses. These leases extend for varying periods of time up to 20 years
(including renewal options). Total property and equipment rentals paid for the
years ending December 31, 1993, 1992 and 1991 were $3,686,000, $3,997,000 and
$4,092,000.
The future maximum annual rentals under noncancellable leases are as follows:
1994, $3,653,000; 1995, $2,639,000; 1996; $2,146,000; 1997, $1,508,000; 1998,
$798,000; 1999-2003, $2,210,000.
At December 31, 1993, there are no outstanding investment commitments.
In late 1992, a jury returned a verdict in the amount of $6,200,000 in a policy-
related lawsuit against the Company's principal subsidiary, Independent Life.
This verdict was conservatively reserved for in the Company's 1992 financial
statements, and the Company has aggressively appealed the verdict, the final
outcome of which is still pending.
In addition to that which is provided for in the financial statements, various
litigation, claims and assessments have arisen, or may arise, against the
Company in its activities as an insurer and employer. In certain of these
matters, large and/or indeterminate amounts for punitive damages and other
similar types of relief are sought. In all instances, the Company vigorously
defends its position. While it is not feasible to predict or determine the
ultimate outcome of these matters, it is the opinion of management that their
outcome is not likely to have a material adverse effect on the Company's
financial position or results of operations.
ANNUAL REPORT TO SHAREHOLDERS PAGE 55
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data (000 omitted except per share amounts) is
presented below:
Three Months Ended
March 31 June 30 Sept. 30 Dec. 31
1993
Net premiums and other income $102,726 $ 95,973 $ 95,852 $ 88,491
Net investment income 19,240 18,602 17,869 17,995
Realized investment gains 7,705 3,516 2,515 1,083
Costs and expenses 133,716 118,506 108,231 114,557
Income (loss) from continuing
operations (2,366) 31 5,960 (4,485)
Discontinued operations 7,494 (22) - (103)
Cumulative effect of change
in accounting principles (42,815) 2,061 (2,460) 443
Net income (loss) (37,687) 2,070 3,500 (4,145)
Per share:
Income (loss) from
continuing operations $ (.18) $ - $ .45 $(.34)
Discontinued operations .57 - - (.01)
Cumulative effect of change
in accounting principles (3.25) .15 (.18) .04
Net income (loss) $(2.86) $.15 $ .27 $(.31)
1992
Net premiums and other income $113,749 $114,432 $112,731 $ 96,055
Net investment income 20,730 21,269 20,833 19,236
Realized investment gains 3,129 214 8,023 3,065
Costs and expenses 131,646 131,219 159,321 141,002
Income (loss) from
continuing operations 4,675 4,143 (11,112) (14,700)
Discontinued operations 486 595 488 337
Net income (loss) 5,161 4,738 (10,624) (14,363)
Per share:
Income (loss) from
continuing operations $ .35 $ .32 $(.84) $(1.12)
Discontinued operations .04 .04 .03 .03
Net income (loss) $ .39 $ .36 $(.81) $(1.09)
12. SEGMENT INFORMATION
Presented in the table which follows (000 omitted) is the allocation of
consolidated financial information to business segments as determined under the
provisions of Statement of Financial Accounting Standards No. 14.
Life revenue and accident and health revenue include premiums and policy charges
paid by policyholders and an allocation of net investment income. This
allocation is based on the ratio of mean life and accident and health
liabilities, principally policy reserves and claims payable, to total mean
liabilities.
Expenses not directly identifiable to either the life or accident and health
line of business are allocated on bases considered reasonable under the
circumstances. Income before taxes is total revenue less all expenses.
ANNUAL REPORT TO SHAREHOLDERS PAGE 56
Only a small portion of the total assets of the subsidiary writing life
insurance and accident and health insurance can be identified with the
respective lines of business; consequently, most of the assets, consisting
primarily of investments, are allocated on the same basis used to allocate net
investment income.
The Property and Casualty reportable segment is that of subsidiaries writing
property and casualty insurance, while financial information allocated to Other
is that of noninsurance subsidiaries providing investment management and
advisory services to the corporation. The net assets related to consumer
finance operations are reported as Discontinued Operations.
Property Accident
and and Discontinued
Life Casualty Health Other Operations Total
1993
Revenue $ 256,944 $111,374 $ 99,921 $ 3,328 $ 471,567
Income (loss)
from continuing
operations
before taxes 23,599 (39,016) 8,407 3,567 (3,443)
Identifiable
assets 1,191,124 146,957 114,281 16,512 1,468,874
Amortization
of deferred
policy
acquisition
costs 24,831 19,724 5,926 50,481
Depreciation 3,597 25 867 378 4,867
Capital
expenditures 2,804 152 224 3,180
1992
Revenue $ 253,939 $166,906 107,135 $ 5,486 $ 533,466
Income (loss)
from continuing
operations
before taxes 24,523 (57,336) (661) 3,752 (29,722)
Identifiable
assets 1,127,000 251,684 117,105 10,417 $11,671 1,517,877
Amortization
of deferred
policy
acquisition
costs 23,235 20,944 5,864 50,043
Depreciation 3,848 25 1,112 338 5,323
Capital
expenditures 3,057 152 259 3,468
1991
Revenue $ 256,297 $177,960 $109,735 $ 4,705 $ 548,697
Income (loss)
from continuing
operations
before taxes 27,259 3,816 4,150 2,719 37,944
Identifiable
assets 1,097,887 213,793 117,693 10,790 $10,328 1,450,491
Amortization
of deferred
policy
acquisition
costs 21,421 19,800 5,980 47,201
Depreciation 3,835 27 1,125 338 5,325
Capital
expenditures 7,855 152 683 8,690
