-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, nPx1OxMnZR4PgE/M/XpVH3LFL7UTP+8YaTtOV37qiiiyJPbZLHtRpB76K/xsHF2N cy7t5bk1tEKcp5SSDKTBJQ== 0000319735-94-000005.txt : 19940404 0000319735-94-000005.hdr.sgml : 19940404 ACCESSION NUMBER: 0000319735-94-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INDEPENDENT INSURANCE GROUP INC CENTRAL INDEX KEY: 0000319735 STANDARD INDUSTRIAL CLASSIFICATION: 6311 IRS NUMBER: 592027555 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 000-09649 FILM NUMBER: 94519728 BUSINESS ADDRESS: STREET 1: ONE INDEPENDENT DR CITY: JACKSONVILLE STATE: FL ZIP: 32276 BUSINESS PHONE: 9043585151 10-K 1 FORM 10-K 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 EX-13 2 PORTION OF AN. RPT. INCORP BY REF 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 -----END PRIVACY-ENHANCED MESSAGE-----