-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FQCbTLI3TB72bMayRXBoxE/s/BWGXGf9m5GRQclN3rieDUKj5jUXbNrYy+EzX2rJ WC7/kqOcyj9r5OwFUN7FOA== /in/edgar/work/0000950131-00-006415/0000950131-00-006415.txt : 20001115 0000950131-00-006415.hdr.sgml : 20001115 ACCESSION NUMBER: 0000950131-00-006415 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED FIRE & CASUALTY CO CENTRAL INDEX KEY: 0000101199 STANDARD INDUSTRIAL CLASSIFICATION: [6331 ] IRS NUMBER: 420644327 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 002-39621 FILM NUMBER: 765690 BUSINESS ADDRESS: STREET 1: 118 SECOND AVE SE CITY: CEDAR RAPIDS STATE: IA ZIP: 52407 BUSINESS PHONE: 3193995700 MAIL ADDRESS: STREET 1: P O BOX 73909 CITY: CEDAR RAPIDS STATE: IA ZIP: 52407 10-Q 1 0001.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2000 Commission File Number 2-39621 UNITED FIRE & CASUALTY COMPANY (Exact name of registrant as specified in its charter) Iowa 42-0644327 - ------------------------ --------------------------------- (State of Incorporation) (IRS Employer Identification No.) 118 Second Avenue, S.E. Cedar Rapids, Iowa 52407 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (319) 399-5700 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- As of November 3, 2000, 10,035,819 shares of common stock were outstanding. UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES INDEX Part 1. Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2000 (unaudited) and December 31, 1999 2 Unaudited Consolidated Statements of Income for the three month periods ended September 30, 2000 and 1999 3 Unaudited Consolidated Statements of Income for the nine month periods ended September 30, 2000 and 1999 4 Unaudited Consolidated Statements of Cash Flows for the nine month period sended September 30, 2000 and 1999 5 Notes to Unaudited Consolidated Financial Statements 6 Report of Independent Public Accountants 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures about Market Risk 16 Part II. Other Information 17 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES PART I: FINANCIAL INFORMATION Item 1. Financial Statements CONSOLIDATED BALANCE SHEETS (In thousands)
- ------------------------------------------------------------------------------------------------------- ASSETS September 30, December 31, 2000 1999 Unaudited Audited - ------------------------------------------------------------------------------------------------------- Investments Fixed maturities Held-to-maturity, at amortized cost (market value $295,773 in 2000 and $314,168 in 1999) $ 291,026 $ 311,152 Available-for-sale, at market (amortized cost 908,763 in 2000 and $800,467 in 1999) 877,439 $ 768,307 Equity securities (cost $40,438 in 2000 and $38,755 in 1999) 116,594 109,148 Policy loans 8,404 8,645 Other long-term investments, at market (cost $12,491 in 2000 and $12,841 in 1999) 11,312 13,328 Short-term investments 19,072 20,131 - ------------------------------------------------------------------------------------------------------- $1,323,847 $1,230,711 Cash and Cash Equivalents 18,948 9,749 Accrued Investment Income 20,839 19,857 Accounts Receivable 71,857 51,304 Deferred Policy Acquisition Costs 96,960 90,074 Property and Equipment 15,943 16,863 Reinsurance Receivables 42,520 29,715 Prepaid Reinsurance Premiums 2,598 3,019 Intangibles 6,733 8,044 Income Taxes Receivable - 1,169 Other Assets 6,174 7,211 - ------------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,606,419 $1,467,716 ======================================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Future policy benefits and losses, claims and settlement expenses Property and casualty insurance $ 355,368 $ 338,243 Life insurance 788,287 701,350 Unearned premiums 168,814 148,472 Accrued expenses and other liabilities 25,128 22,043 Employee benefit obligations 12,668 12,385 Income taxes payable 680 - Deferred income taxes 8,066 7,430 - ------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES $1,359,011 $1,229,923 - ------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock $ 33,453 $ 33,534 Additional paid-in capital 6,912 7,252 Retained earnings 170,050 163,953 Accumulated other comprehensive income, net of tax 36,993 33,054 - ------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $ 247,408 $ 237,793 - ------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,606,419 $1,467,716 =======================================================================================================
The Notes to Unaudited Consolidated Financial Statements are an integral part of these statements. 2 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data and number of shares)
=================================================================== Three months ended September 30, 2000 1999 - ------------------------------------------------------------------- Revenues Net premiums earned $ 86,071 $ 70,501 Investment income, net 22,089 19,272 Realized investment gains (losses) and other income (1,057) 593 Commission and policy fee income 568 502 - ------------------------------------------------------------------- 107,671 90,868 - ------------------------------------------------------------------- Benefits, Losses and Expenses Losses and settlement expenses 58,192 47,900 Increase in liability for future policy benefits 520 1,527 Amortization of deferred policy acquisition costs 14,931 14,334 Other underwriting expenses 13,303 9,367 Interest on policyholders' accounts 11,619 9,655 - ------------------------------------------------------------------- 98,565 82,783 - ------------------------------------------------------------------- Income before income taxes 9,106 8,085 Federal income tax 2,012 1,687 - ------------------------------------------------------------------- Net income $ 7,094 $ 6,398 =================================================================== Earnings available to common shareholders $ 7,094 $ 6,398 =================================================================== Weighted average common shares outstanding 10,036,853 10,078,294 =================================================================== Basic and diluted earnings per common share $ 0.71 $ 0.63 =================================================================== Cash dividends declared per common share $ 0.18 $ 0.17 ===================================================================
The Notes to Unaudited Consolidated Financial Statements are an integral part of these statements. 3 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data and number of shares)
- --------------------------------------------------------------------------------- Nine months ended September 30, 2000 1999 - --------------------------------------------------------------------------------- Revenues Net premiums earned $ 244,397 $ 191,299 Investment income, net 64,365 55,047 Realized investment gains (losses) and other income (916) 1,927 Commission and policy fee income 1,668 1,480 - --------------------------------------------------------------------------------- 309,514 249,753 - --------------------------------------------------------------------------------- Benefits, Losses and Expenses Losses and settlement expenses 173,163 141,120 Increase in liability for future policy benefits 4,737 4,126 Amortization of deferred policy acquisition costs 45,101 37,447 Other underwriting expenses 42,337 32,376 Interest on policyholders' accounts 31,684 24,796 - --------------------------------------------------------------------------------- 297,022 239,865 - --------------------------------------------------------------------------------- Income before income taxes 12,492 9,888 Federal income tax (benefit) 1,067 (15) - --------------------------------------------------------------------------------- Net Income $ 11,425 $ 9,903 ================================================================================= Earnings available to common shareholders $ 11,425 $ 9,903 ================================================================================= Weighted average common shares outstanding 10,051,086 10,083,729 ================================================================================= Basic and diluted earnings per common share $ 1.14 $ 0.98 ================================================================================= Cash dividends declared per common share $ 0.53 $ 0.51 =================================================================================
The Notes to Unaudited Consolidated Financial Statements are an integral part of these statements. 4 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
======================================================================= Nine months ended September 30, 2000 1999 - ----------------------------------------------------------------------- Cash Flows From Operating Activities Net income $ 11,425 $ 9,903 - ----------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities Net bond discount accretion (269) (197) Depreciation and amortization 3,890 1,805 Realized investment losses (gains) 1,173 (1,927) Changes in: Accrued investment income (982) (791) Accounts receivable (20,553) (7,130) Deferred policy acquisition costs (6,886) (16,153) Reinsurance receivables (12,805) (847) Prepaid reinsurance premiums 421 3,048 Income taxes receivable 1,169 -- Other assets 1,037 (2,856) Future policy benefits and losses, claims and settlement expenses 22,042 18,390 Unearned premiums 20,342 10,277 Accrued expenses and other liabilities 3,085 (2,893) Employee benefit obligations 283 3,121 Income taxes payable 680 -- Deferred income taxes (1,277) 281 Other, net 444 10,343 - ----------------------------------------------------------------------- Total adjustments $ 11,793 $ 14,471 - ----------------------------------------------------------------------- Net cash provided by operating activities $ 23,218 $ 24,374 - ----------------------------------------------------------------------- Cash Flows From Investing Activities Proceeds from sale of available-for- sale investments $ 49,332 $ 25,327 Proceeds from call and maturity of held- to-maturity investments 23,663 25,429 Proceeds from call and maturity of available-for-sale investments 48,390 58,023 Proceeds from sale of other investments 69,995 93,419 Purchase of held-to-maturity investments (3,332) (1,662) Purchase of available-for-sale investments (208,509) (208,192) Purchase of other investments (68,170) (75,810) Proceeds from sale of property and equipment 165 937 Purchase of property and equipment (1,824) (795) Acquisition of property & casualty company, net of cash acquired -- (22,249) - ----------------------------------------------------------------------- Net cash used in investing activities $ (90,290) $(105,573) - ----------------------------------------------------------------------- Cash Flows From Financing Activities Policyholders' account balances Deposits to investment and universal- life-type contracts $ 158,703 $ 139,264 Withdrawals from investment and universal-life-type contracts (76,683) (49,614) Purchase and retirement of common stock (421) (481) Payment of cash dividends (5,328) (6,854) - ----------------------------------------------------------------------- Net cash provided by financing activities $ 76,271 $ 82,315 - ----------------------------------------------------------------------- Net Increase in Cash and Cash Equivalents $ 9,199 $ 1,116 Cash and Cash Equivalents at Beginning of Year 9,749 -- - ----------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 18,948 $ 1,116 =======================================================================
The Notes to Unaudited Consolidated Financial Statements are an integral part of these statements. 5 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies In the opinion of the management of United Fire & Casualty Company and Subsidiaries (the "Company"), the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, the results of operations, and cash flows for the periods presented. The results for the interim periods are not necessarily indicative of the results of operations that may be expected for the year. The financial statements contained herein should be read in conjunction with the Company's annual report on Form 10-K for the year ended December 31, 1999. The review report of Arthur Andersen LLP accompanies the unaudited consolidated financial statements included in Item 1 of Part I. The Company maintains its records in conformity with the accounting practices prescribed or permitted by the Insurance Department of the State of Iowa. To the extent that certain of these practices differ from generally accepted accounting principles ("GAAP"), adjustments have been made in order to present the accompanying financial statements on the basis of GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts included in the financial statements for the previous year have been reclassified to conform with the financial statement presentation at September 30, 2000. For purposes of reporting cash flows, cash and cash equivalents include cash and non-negotiable certificates of deposit with original maturities of three months or less. Net income taxes received for the nine-month periods ended September 30, 2000 and 1999 were $215,000 and $295,000, respectively. Through September 30, 2000, tax and interest payments received in connection with the settlement of a Federal income tax Revenue Agent Review were $1,160,000 and $889,000, respectively. Interest payments received in connection with the Revenue Agent Review are $257,000 in excess of the related amount accrued at December 31, 1999. There were no significant payments of interest through September 30, 2000 and 1999, other than interest credited to policyholders' accounts. Note 2. Investments A reconciliation of the amortized cost (cost for equity securities) to fair values of investments in held-to-maturity and available-for-sale fixed maturities, marketable equity securities and other long-term investments as of September 30, 2000 is as follows. 6 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ----------------------------------------------------------------------------------------------------------------------- September 30, 2000 Gross Gross Amortized Unrealized Unrealized Fair Type of Investment Cost Appreciation Depreciation Value - ----------------------------------------------------------------------------------------------------------------------- Held-to-maturity Fixed Maturities Bonds United States Government, Government agencies and authorities Collateralized mortgage obligations $ 15,094 $ 13 $ 452 $ 14,655 Mortgage-backed securities 8,152 459 2 8,609 All others 1,830 234 - 2,064 States, municipalities and political subdivisions 169,778 5,380 864 174,294 Foreign 3,026 8 8 3,026 Public utilities 19,456 114 183 19,387 Corporate bonds Collateralized mortgage obligations 13,340 161 213 13,288 All other corporate bonds 60,350 679 579 60,450 - ----------------------------------------------------------------------------------------------------------------------- Total held-to-maturity $291,026 $ 7,048 $ 2,301 $295,773 ======================================================================================================================= Available-for-sale Fixed Maturities Bonds United States Government, Government agencies and authorities Collateralized mortgage obligations $ 29,872 $ 50 $ 564 $ 29,358 Mortgage-backed securities 5,743 36 162 5,617 All others 39,381 235 451 39,165 States, municipalities & political subdivisions 78,297 323 2,535 76,085 Foreign 35,571 92 2,220 33,443 Public utilities 145,837 1,531 3,270 144,098 Corporate bonds Collateralized mortgage obligations 50,092 969 575 50,486 All other corporate bonds 523,970 3,070 27,853 499,187 - ----------------------------------------------------------------------------------------------------------------------- Total available-for-sale fixed maturities $908,763 $ 6,306 $37,630 $877,439 - ----------------------------------------------------------------------------------------------------------------------- Equity securities Common stocks Public utilities $ 8,867 $10,533 $ 144 $ 19,256 Banks, trust and insurance companies 11,101 38,677 298 49,480 All other common stocks 19,536 29,697 2,159 47,074 Nonredeemable preferred stocks 934 - 150 784 - ----------------------------------------------------------------------------------------------------------------------- Total equity securities $ 40,438 $78,907 $ 2,751 $116,594 - ----------------------------------------------------------------------------------------------------------------------- Total available-for-sale $949,201 $85,213 $40,381 $994,033 ======================================================================================================================= Other long-term investments $ 2,491 $ - $ 1,179 $ 11,312 =======================================================================================================================
The amortized cost and fair value of held-to-maturity and available-for- sale fixed maturities at September 30, 2000 by contractual maturity are shown below. 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. 7 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
==================================================================== (Dollars in Thousands) - -------------------------------------------------------------------- September 30, 2000 Held-to-maturity Available-for-sale - -------------------------------------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value - -------------------------------------------------------------------- Due in one year or less $ 13,867 $ 13,958 $ 16,171 $ 16,224 Due after one year through five years 55,434 56,017 309,826 303,278 Due after five years through ten years 69,748 71,608 324,598 310,001 Due after ten years 115,391 117,639 172,462 162,474 Mortgage-backed securities 8,152 8,609 5,743 5,617 Collateralized mortgage obligations 28,434 27,942 79,963 79,845 - -------------------------------------------------------------------- $291,026 $295,773 $908,763 $877,439 ====================================================================
Note 3. New Accounting Standards In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June 1999, SFAS No. 133 was amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB No. 133 - an amendment of FASB Statement No. 133". SFAS No. 133 is now effective for all fiscal quarters of fiscal years beginning after June 15, 2000. A company may also implement SFAS No. 133 as of the beginning of any fiscal quarter after issuance. SFAS No. 133 cannot be applied retroactively. The new statement requires all derivatives (including certain derivative instruments embedded in other contracts) to be recorded on the balance sheet as either an asset or a liability at fair value and establishes special accounting for certain types of hedges. The Company has had limited involvement with derivative financial instruments, and does not engage in the derivative market for hedging purposes. Effective January 1, 1999, the Company early adopted SFAS No. 133. As part of the implementation of SFAS No. 133, the Company was allowed to reassess its held-to-maturity portfolio without "tainting" the remaining securities classified as held-to-maturity. The impact on the Company's Consolidated Financial Statements due to the reclassification from held-to-maturity to available-for-sale, effective January 1, 1999, increased the carrying value of available-for-sale fixed-income securities by approximately $9,250,000 and other comprehensive income by approximately $6,013,000, net of deferred income taxes. There was no other material effect on the Company's Consolidated Financial Statements. Refer to Note 5 for further discussion. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133," which is effective for all fiscal quarters beginning after June 15, 2000 due to the Company's early adoption of SFAS No. 133. This statement amends the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and certain hedging activities. Because the Company has limited involvement with derivative financial instruments, and does not engage in the derivative market for hedging purposes, the impact of adopting SFAS No. 138 did not have a material effect on the Company's Consolidated Financial Statements. Effective January 1, 2000, the Company adopted Statement of Position ("SOP") 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk". The SOP provides guidance on accounting for insurance and reinsurance contracts that do not transfer insurance risk. All of the Company's reinsurance agreements are risk-transferring arrangements, accounted for according to SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." The impact of adopting SOP 98-7 did not have any effect on the Company's Consolidated Financial Statements. 8 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Effective for the fiscal year ending December 31, 2000, the Company is required to adopt Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition". Management assessed the impact that adoption of SAB No. 101 will have on the Company's Consolidated Financial Statements as of September 30, 2000 and has concluded that the adoption of SAB No. 101 will not have any effect on the Company's Consolidated Financial Statements. Effective July 1, 2000, the Company adopted FASB Interpretation ("FIN") No. 44, "Accounting for Certain Transactions Including Stock Compensation (an Interpretation of Accounting Principles Board ("APB") Opinion No. 25)". FIN No. 44 clarifies the application of APB Opinion No. 25 for only certain issues, such as (a) the definition of employee for purposes of applying APB Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. The adoption of FIN No. 44 had no impact on the Company's Consolidated Financial Statements. Note 4. Segment Information The Company has two reportable business segments in its operations, property and casualty insurance and life insurance. The property and casualty segment has five locations from which it conducts its business. All offices target a similar customer base and market the same products using the same marketing strategies and are therefore aggregated. The life insurance segment operates from the Company's home office. The two segments are evaluated by management based on both a statutory and a GAAP basis. Results are analyzed based on profitability, expenses and return on equity. The basis for determining and analyzing segments and the measurement of segment profit has not changed from that reported in the Company's 1999 Form 10-K. The Company's selling location is used in allocating revenues between foreign and domestic, and as such, the Company has no revenues allocated to foreign countries. The following analysis is reported on a GAAP basis and is reconciled to the Company's Consolidated Financial Statements.
==================================================================== (Dollars in Thousands) - -------------------------------------------------------------------- Property and Casualty Life Insurance Insurance Total - --------------------------------------------------------------------- September 30, 2000 - --------------------------------------------------------------------- Revenues $248,461 $ 61,314 $ 309,775 Intersegment eliminations (103) (158) (261) Total revenues $248,358 $ 61,156 $ 309,514 Net income $ 8,027 $ 3,398 $ 11,425 Assets $690,815 $915,604 $1,606,419 September 30, 1999 - --------------------------------------------------------------------- Revenues $191,708 $ 58,225 $ 249,933 Intersegment eliminations (103) (77) (180) Total revenues $191,605 $ 58,148 $ 249,753 Net income $ 3,152 $ 6,751 $ 9,903 Assets $667,145 $801,699 $1,468,844 =====================================================================
Depreciation expense and property and equipment acquisitions are reflected in the property and casualty insurance segment. 9 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 5. Derivative Instruments The Company writes covered call options on its equity portfolio to generate additional portfolio income and does not use these instruments for hedging purposes. Covered call options are recorded at fair value and included in accrued expenses and other liabilities. Any income or gains or losses, including the change in the fair value of the covered call options, is recognized currently in earnings and included in realized investment gains and other income. At September 30, 2000 the Company had $40,000 of open covered call options. In assessing the impact of any embedded derivative instruments, the Company has elected to apply SFAS No. 133 only to those instruments or contracts with embedded derivative instruments issued, acquired, or substantively modified by the Company after December 31, 1997. The Company has analyzed its financial instruments and contracts in accordance with SFAS No. 133 and determined there is no material effect on the Company's Consolidated Financial Statements. As part of the implementation of SFAS No. 133, the Company was allowed to reassess its held-to-maturity portfolio without "tainting" the remaining securities classified as held-to-maturity. The cumulative effect of the impact on the Company's Consolidated Financial Statements due to the reclassification of $246,623,000 of fixed-income securities from held-to-maturity to available-for- sale, effective January 1, 1999, increased the carrying value of available-for- sale fixed-income securities by approximately $9,250,000 and other comprehensive income by approximately $6,013,000, net of deferred income taxes. Note 6. Comprehensive Income (Loss) Comprehensive income (loss) was $15,367,000 and $(4,632,000) for the nine months ended September 30, 2000 and 1999, respectively. Comprehensive income (loss) was $15,575,000 and $(2,938,000) for the three months ended September 30, 2000 and 1999, respectively. Note 7. Leases Beginning July 31, 2000, the Company began leasing mainframe equipment and software, which is located solely at its Cedar Rapids location. This is a three- year noncancellable operating lease with monthly rental expense of approximately $100,000. Note 8. Acquisition In August 1999, the Company acquired American Indemnity Financial Corporation as a wholly owned subsidiary. American Indemnity Financial Corporation is a Galveston, Texas, based holding company that is made up of the following regional property and casualty insurance companies: American Indemnity Company, American Fire and Indemnity Company, Texas General Indemnity Company, and American Indemnity Lloyds. The nine-month and three-month amounts for the period ended September 30, 2000 include the results of American Indemnity Financial Corporation. The nine-month and three-month amounts for the period ended September 30, 1999 include two months of results of American Indemnity Financial Corporation. The following table presents the unaudited pro forma results of operations for the three-month and nine-month periods ended September 30, 1999, had the acquisition occurred on January 1, 1999. 10 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------ (Dollars in Thousands Except Per Share Data) ------------------------------------------------------------ Three months ended Nine months ended September 30, 1999 September 30, 1999 Unaudited Unaudited ------------------------------------------------------------ Revenues $95,916 $287,111 Net income 4,930 6,267 Earnings per share 0.49 0.62 ------------------------------------------------------------
The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the acquisitions been consummated as of the above date, nor are such operating results necessarily indicative of future operating results. 11 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - ---------------------------------------- To the Stockholders and Board of Directors of United Fire & Casualty Company: We have reviewed the accompanying consolidated balance sheet of UNITED FIRE & CASUALTY COMPANY (an Iowa corporation) AND SUBSIDIARIES as of September 30, 2000, and the related consolidated statements of income for the three-month and nine-month periods ended September 30, 2000 and 1999, and the consolidated statements of cash flows for the nine-month periods ended September 30, 2000 and 1999. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above in order for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of United Fire & Casualty Company and Subsidiaries as of December 31, 1999 and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended (not presented separately herein) and, in our report dated February 17, 2000, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1999, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Arthur Andersen LLP Chicago, Illinois November 3, 2000 12 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This information contained in the following Management's Discussion and Analysis contains forward looking information as defined in the Private Securities Litigation Reform Act of 1995 and is therefore subject to certain risks and uncertainties. Actual results could differ materially from information within the forward looking statements as a result of many factors, including, but not limited to, market conditions, competition, and natural disasters. RESULTS OF OPERATIONS For the nine months ended September 30, 2000, net income, including realized investment losses and other income, was $11,425,000 or $1.14 per share, compared to $9,903,000 or $.98 per share for the first nine months of 1999. The largest catastrophe in 2000 was a hailstorm in the New Orleans area occurring January 22 - 24. Through September 30, this storm caused approximately $3,737,000 in net incurred losses (after tax) and resulted in a reduction to net income of $.37 per share. For the three months ended September 30, 2000, net income, including realized investment losses and other income, was $7,094,000 or $.71 per share compared to $6,398,000 or $.63 per share for the same period in 1999. The nine-month and three-month 2000 amounts include the results of American Indemnity Financial Corporation, which the Company purchased in August 1999. The nine-month and three-month 1999 amounts include two months of results of American Indemnity Financial Corporation. Property and casualty insurance segment The Company has two reportable business segments in its operations; property and casualty insurance and life insurance. For the nine months ended September 30, 2000, the property and casualty segment recorded net income of $8,027,000, compared to net income of $3,152,000 through September 30, 1999. Contributing to the improved results was an increase in premiums earned of $53,341,000 or 31 percent. A portion of this premium growth has been the result of the purchase of the American Indemnity companies, which occurred during August 1999. Losses and loss adjustment expenses incurred increased $31,781,000 or 24 percent. Losses and expenses relating to catastrophes totaled $12,854,000 or $1.28 per share (after tax) for the first nine months of 2000, compared to $8,267,000, or $.82 per share (after tax) for the first nine months of 1999. The combined ratio (net losses and net loss adjustment expenses incurred divided by net premiums earned, plus other underwriting expenses incurred divided by net premiums written) through September, 2000 improved to 104 percent compared to 110 percent through September, 1999. The combined ratio, calculated without the effect of the catastrophes, was 95 percent and 102 percent for the first nine months of 2000, and 1999, respectively. For the three months ended September 30, 2000 and 1999, the property and casualty segment recorded net income of $7,138,000 and $4,085,000, respectively. Premiums earned increased by $16,277,000 or 26 percent. The after-tax net incurred losses and expenses for catastrophes was $1,545,000, or $.15 per share for the third quarter of 2000, compared to $2,083,000, or $.21 per share for the third quarter of 1999. The combined ratio for the quarter improved to 98 percent compared to 102 percent for the third quarter of 1999. The combined ratio, calculated without the effect of the catastrophes, was 95 percent, and 97 percent, for the three months ended September 30, 2000 and 1999, respectively. 13 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS During the second quarter of 2000, the Company made the decision to not renew many of its assumed reinsurance property and casualty contracts, effective after June 30, 2000. A small portion of this business expired on July 1, 2000, and the bulk of it will not be renewed on January 1, 2001. Agreements will continue with a very limited number of brokers. The Company intends to provide an orderly run- off of those contracts not renewed. Life insurance segment The life insurance segment reported net income of $3,398,000 through the first nine months of 2000, compared to $6,751,000 for the same period of 1999. Premiums earned were flat between the two years. Though the life segment is writing an increasing amount of annuity business, reported premium revenue does not reflect annuity deposits. Revenues for annuities consist of policy surrender charges and investment income earned. Expenses incurred by the life segment increased by $8,296,000, or 17 percent when comparing the first nine months of 2000 and 1999. Of that increase, $6,888,000 is attributable to expenses related to interest credited to policyholder account balances. In addition, death claims were higher through the third quarter of 2000, when compared to the same period in 1999. Death claims, below expectations in 1999, are returning to normal levels. During the third quarter of 2000, the Company recorded a permanent write-down on two fixed maturity securities, which contributed to the life segment's realized investment losses of $2,301,000 (net of tax). This write-down was largely responsible for the net loss of $44,000 recorded by the life segment for the three months ended September 30, 2000. For the third quarter of 1999, the net income was $2,313,000. Investment results Investment results are included in the net income figures reported above in the property and casualty and life insurance segments. Through September 30, 2000, the Company reported net investment income of $64,365,000 ,compared to $55,047,000 for the first nine months of 1999. For the third quarters of 2000 and 1999, net investment income was $22,089,000 and $19,272,000, respectively. A majority of the Company's investment income originates from interest on fixed income securities. The remaining investment revenue is derived from dividends on equity securities, interest on other long-term investments, interest on policy loans and rent earned from tenants in the Company's home office. The Company recorded net realized investment losses of $916,000 through September 30, 2000, compared to net realized investment gains of $1,927,000 through September 30, 1999. Realized gains recorded on several bonds in the second quarter were more than offset by a permanent write-down on two fixed maturity securities which occurred in the third quarter. FINANCIAL CONDITION Investments The investment portfolio is comprised primarily of fixed maturity securities and equity securities. The Company's investment strategy is to invest principally in medium- to high-quality securities. Fixed income securities that the Company has the ability and intent to hold to maturity are classified as held-to-maturity. The remaining fixed income securities and all 14 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS of the Company's equity securities are classified as available-for-sale. The Company currently has no securities classified as trading. The held-to-maturity securities are reported at amortized cost, and available-for-sale securities are reported at market value. Unrealized appreciation or depreciation of available- for-sale investments is reflected in accumulated other comprehensive income, net of tax, within stockholders' equity. The Company has had limited involvement with derivative financial instruments and does not engage in the derivative market for hedging purposes. The Company has investments in collateralized mortgage obligations. These securities account for 9 percent of the fixed-income portfolio at September 30, 2000, compared to 12 percent as of December 31, 1999. Other assets Deferred acquisition costs ("DAC") constitute the Company's second largest asset, after investments, and represent underwriting and acquisition expenses associated with writing insurance policies. These expenses are capitalized and are amortized over the life of the policies written to attain a matching of revenue to expenses. The Company's life segment had an increase in deferred acquisition costs of $3,387,000 or 5 percent. Deferred acquisition costs of the property and casualty segment increased in 2000 by $3,499,000 or 17 percent. For both segments, the nine-month growth in premiums and annuity business, and the related expenses contributed to the growth in DAC. Accounts receivable consist of amounts due from property and casualty insurance agents and brokers for premiums written, less commissions paid. These receivables increased by 40 percent, or $20,553,000, over December 31, 1999. Growth in premiums written in the property and casualty segment has resulted in the increased accounts receivable balance. The Company's other assets are composed primarily of accrued investment income, property and equipment (primarily land and buildings), and reinsurance receivables (amounts due from the Company's reinsurers for losses and expenses). Liabilities The Company's largest liability is that of future policy benefits, which relates exclusively to the life segment. The liability increased by $86,937,000, or 12 percent, between September 30, 2000 and December 31, 1999. Future policy benefits are increased immediately by the full premiums paid by policyholders for annuity products and most universal life products. Because the annuity business is continuing to grow, the associated future policy benefits have grown proportionately. Direct and assumed loss and loss adjustment expense reserves established for property and casualty claims have increased by $17,125,000, or 5 percent from December 31, 1999. Covered call options, which the Company occasionally writes, are recorded as liabilities. The options, when written, are utilized to generate additional portfolio income. At September 30, 2000, the Company had $40,000 of open covered call options. At December 31, 1999, there were no open covered call options. Stockholders' equity The Company's stockholders' equity increased by $9,615,000, or 4 percent. Net income of $11,425,000 increased equity, as did net unrealized appreciation of $3,939,000. Significant decreases to equity included $5,328,000 of declared dividends and $421,000 due to the repurchase of 24,265 shares of the Company's common stock. Cash flow and liquidity Most of the cash the Company receives is generated from insurance premiums paid by policyholders and from investment income. Premiums are invested in assets maturing at regular intervals in order to meet the Company's 15 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS obligations to pay policy benefits, claims and claim adjusting expenses. Net cash provided by the Company's operating activities was $23,218,000 through September 30, 2000 compared to $24,374,000 through the third quarter of 1999. Operating cash flows continue to be ample to meet obligations to policyholders. Short-term investments, composed of money market accounts and fixed-income securities, are available for the Company's short-term cash needs. In addition, the Company maintains a $20 million line of credit. Under the terms of the agreement, interest on outstanding notes is payable at the lender's prevailing prime rate less one percent. There is no loan balance outstanding as of September 30, 2000. Impact of Year 2000 In 1999, the Company completed its final programming and testing of systems for Year 2000 compliance. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission-critical information technology and non-information technology systems. The Company believes that its systems successfully responded to the Year 2000 date change. The Company's transition into the Year 2000 has, to date, been considered uneventful and successful and did not result in any significant events with the Company or its suppliers. However, the potential for problems resulting from Year 2000 issues still exists. Accordingly, the Company will continue to monitor its systems, and will maintain contact with its vendors concerning the status of their Year 2000 transition. UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has exposure to market risk arising from potential losses due to adverse changes in interest rates and market prices. The Company's primary market risk exposure is changes in interest rates, although the Company has some exposure to changes in equity prices and limited exposure to foreign currency exchange rates. The active management of market risk is integral to the Company's operations. Investment guidelines are in place that define the overall framework for managing the Company's market and other investment risks, including accountability and controls. In addition, the Company has specific investment policies for each of its subsidiaries that delineate the investment limits and strategies that are appropriate given each entity's liquidity, surplus, product and regulatory requirements. In response to market risk, the Company may respond by rebalancing its existing asset portfolio, or by changing the character of future investment purchases. Covered call options are written from time to time on common stocks owned by the Company. Generally, the calls are written on stocks the Company views as over-priced relative to their market value. Writing of in-the-money calls at transaction date has not been done, but the Company is not restricted in any way from doing so. The practice of writing covered calls is considered a conservative equity strategy by market analysts. There have been no material changes in the Company's market risk or market risk factors from that reported in the Company's 1999 Form 10-K. 16 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) 11 - Computation of Earnings Per Common Share 27 - Financial Data Schedule SIGNATURES Pursuant to the requirements 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. UNITED FIRE & CASUALTY COMPANY - ---------------------------------------- (Registrant) November 3, 2000 - ---------------------------------------- (Date) John A. Rife - ---------------------------------------- John A. Rife President, Chief Executive Officer K.G. Baker - ---------------------------------------- K.G. Baker Vice President, Chief Financial Officer and Principal Accounting Officer 17 EX-11 2 0002.txt COMPUTATION OF EARNINGS PER COMMON SHARE Exhibit 11. Computation of Earnings Per Common Share
- -------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data and Number of Shares) - -------------------------------------------------------------------------------- Weighted Average Three-Month Periods Ended Number of Shares Net Earnings Per September 30, Outstanding Income Common Share - -------------------------------------------------------------------------------- 2000 10,036,853 $ 7,094 $ 0.71 1999 10,078,294 6,398 0.63 - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data and Number of Shares) - -------------------------------------------------------------------------------- Weighted Average Nine-Month Periods Ended Number of Shares Net Earnings Per September 30, Outstanding Income Common Share - -------------------------------------------------------------------------------- 2000 10,051,086 $11,425 $ 1.14 1999 10,083,729 9,903 0.98 - --------------------------------------------------------------------------------
Computation of weighted average number of common and common equivalent shares:
- -------------------------------------------------------------------------------- Three-Month Periods Ended September 30, 2000 1999 - -------------------------------------------------------------------------------- Common shares outstanding beginning of the period 10,056,499 10,078,539 Weighted average of the common shares purchased and retired or reissued (19,646) (245) - -------------------------------------------------------------------------------- Weighted average number of common shares 10,036,853 10,078,294 ================================================================================
- -------------------------------------------------------------------------------- Nine-Month Periods Ended September 30, 2000 1999 - -------------------------------------------------------------------------------- Common shares outstanding beginning of the period 10,060,084 10,091,721 Weighted average of the common shares purchased and retired or reissued (8,998) (7,992) - -------------------------------------------------------------------------------- Weighted average number of common shares 10,051,086 10,083,729 ================================================================================
18 EX-27 3 0003.txt FINANCIAL DATA SCHEDULE
7 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 877,439 291,026 295,773 116,594 0 0 1,323,847 18,948 42,520 96,960 1,606,419 1,143,655 168,814 0 0 0 0 0 33,453 213,955 1,606,419 244,397 64,365 (916) 1,668 177,900 45,101 74,021 12,492 1,067 11,425 0 0 0 11,425 1.14 1.14 0 0 0 0 0 0 0
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