-----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, BR5QGKEP1x6HMDbjR6m+AQjin1g9TaJJvv9AQGB2GrpxLKpa991ZLnj/k4rQRdxc HgF9o6VGfE0pkuV6zg/W5A== 0001047469-98-031753.txt : 19980817 0001047469-98-031753.hdr.sgml : 19980817 ACCESSION NUMBER: 0001047469-98-031753 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED FIRE & CASUALTY CO CENTRAL INDEX KEY: 0000101199 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [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: 98691237 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 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 June 30, 1998 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 August 6, 1998, 10,091,721 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 June 30, 1998 (unaudited) and December 31, 1997 2 Unaudited Consolidated Statements of Operations for the three month periods ended June 30, 1998 and 1997 3 Unaudited Consolidated Statements of Operations for the six month periods ended June 30, 1998 and 1997 4 Unaudited Consolidated Statements of Cash Flows for the six month periods ended June 30, 1998 and 1997 5 Notes to Unaudited Consolidated Financial Statements 6 Report of Independent Public Accountants 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Part II. Other Information 14
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (In thousands)
- ------------------------------------------------------------------------------ ASSETS JUNE 30, December 31, 1998 1997 UNAUDITED Audited - ------------------------------------------------------------------------------ INVESTMENTS Fixed maturities Held-to-maturity, at amortized cost (market value $675,342 in 1998 and $709,867 in 1997) $ 640,823 $ 677,360 Available-for-sale, at market (amortized cost $231,083 in 1998 and $145,019 in 1997) 235,094 146,932 Equity securities (cost $22,955 in 1998 and $26,296 in 1997) 105,421 128,698 Mortgage loans 2,814 2,862 Policy loans 8,443 8,405 Other long-term investments, at market (cost $10,930 in 1998 and $9,000 in 1997) 15,120 12,448 Short-term investments 19,130 19,195 - ------------------------------------------------------------------------------ $1,026,845 $ 995,900 CASH AND CASH EQUIVALENTS - 2,378 ACCRUED INVESTMENT INCOME 15,247 14,159 ACCOUNTS RECEIVABLE 51,300 44,060 DEFERRED POLICY ACQUISITION COSTS 68,673 60,215 PROPERTY AND EQUIPMENT 13,314 14,443 REINSURANCE RECEIVABLES 14,964 14,430 PREPAID REINSURANCE PREMIUMS 3,460 4,064 INTANGIBLES 955 1,082 OTHER ASSETS 4,164 7,191 - ------------------------------------------------------------------------------ TOTAL ASSETS $1,198,922 $1,157,922 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Future policy benefits and losses, claims and settlement expenses Property and casualty insurance $ 244,049 $ 231,768 Life insurance 519,806 482,437 Unearned premiums 117,867 108,296 Accrued expenses and other liabilities 26,898 18,373 Employee benefit obligations 9,634 8,665 Income taxes payable 1,099 3,307 Deferred income taxes 23,233 27,868 - ------------------------------------------------------------------------------ TOTAL LIABILITIES $ 942,586 $ 880,714 - ------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY Common stock $ 35,639 $ 35,758 Additional paid-in capital 7,927 9,331 Retained earnings 179,867 161,906 Net unrealized appreciation, net of applicable income taxes of $31,542 in 1998 and $37,549 in 1997 59,153 70,213 Less: treasury stock 26,250 - - ------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY $ 256,336 $ 277,208 - ------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,198,922 $1,157,922 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------
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 OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------- Three months ended June 30, 1998 1997 - --------------------------------------------------------------------------------- Revenues Net premiums earned $ 59,941 $ 60,403 Investment income, net 16,796 15,137 Realized investment gains and other income 17,220 52 Commission and policy fee income 491 517 - ------------------------------------------------------------------------------- 94,448 76,109 - ------------------------------------------------------------------------------- Benefits, Losses and Expenses Losses and settlement expenses 48,012 40,793 Increase in liability for future policy benefits 984 1,339 Amortization of deferred policy acquisition costs 12,154 13,292 Other underwriting expenses 9,092 7,973 Interest on policyholders' accounts 6,679 6,154 - ------------------------------------------------------------------------------- 76,921 69,551 - ------------------------------------------------------------------------------- Income before income taxes 17,527 6,558 Federal income taxes 4,917 1,440 - ------------------------------------------------------------------------------- Net income $ 12,610 $ 5,118 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Earnings per common share $ 1.18 $ 0.48 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Weighted average common shares outstanding 10,685,374 10,727,408 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Cash dividends declared per common share $ 0.17 $ 0.16 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
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 OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------- Six months ended June 30, 1998 1997 - -------------------------------------------------------------------------------- Revenues Net premiums earned $ 119,277 $ 119,659 Investment income, net 33,022 30,174 Realized investment gains and other income 21,423 748 Commission and policy fee income 955 958 - ------------------------------------------------------------------------------ 174,677 151,539 - ------------------------------------------------------------------------------ Benefits, Losses and Expenses Losses and settlement expenses 89,118 77,758 Increase in liability for future policy benefits 2,357 2,602 Amortization of deferred policy acquisition costs 23,083 25,015 Other underwriting expenses 17,848 17,780 Interest on policyholders' accounts 12,866 11,653 - ------------------------------------------------------------------------------ 145,272 134,808 - ------------------------------------------------------------------------------ Income before income taxes 29,405 16,731 Federal income taxes 7,913 4,210 - ------------------------------------------------------------------------------ Net Income $ 21,492 $ 12,521 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Earnings per common share $ 2.01 $ 1.17 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Weighted average common shares outstanding 10,702,805 10,727,559 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Cash dividends declared per common share $ 0.33 $ 0.31 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------
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, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------- Six months ended June 30, 1998 1997 - -------------------------------------------------------------------------------- Cash Flows From Operating Activities Net income $ 21,492 $ 12,521 - -------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities Net bond discount accretion (171) (9) Depreciation and amortization 198 1,425 Realized investment gains (21,423) (748) Changes in: Accrued investment income (1,088) (955) Accounts receivable (7,240) (8,626) Deferred policy acquisition costs (8,458) (3,310) Reinsurance receivables (534) 1,526 Prepaid reinsurance premiums 604 (34) Income taxes receivable - (1,066) Other assets 3,027 469 Future policy benefits and losses, claims and settlement expenses 14,748 5,701 Unearned premiums 9,571 7,577 Accrued expenses and other liabilities 10,241 (1,233) Employee benefit obligations 969 959 Income taxes payable (2,208) - Deferred income taxes 1,320 480 Other, net (61) - - -------------------------------------------------------------------------------- Total adjustments $ (505) $ 2,156 - -------------------------------------------------------------------------------- Net cash provided by operating activities $ 20,987 $ 14,677 - -------------------------------------------------------------------------------- Cash Flows From Investing Activities Proceeds from sale of available-for-sale investments $ 41,734 $ 617 Proceeds from call and maturity of held-to-maturity investments 43,364 27,657 Proceeds from call and maturity of available-for-sale investments 13,687 2,196 Proceeds from sale of other investments 25,346 28,046 Purchase of investments held-to-maturity (7,364) (67,380) Purchase of investments available-for-sale (116,164) (10,578) Purchase of other investments (26,907) (12,185) Proceeds from sale of property and equipment 1,480 - Purchase of property and equipment (422) (999) - -------------------------------------------------------------------------------- Net cash used in investing activities $(25,246) $(32,626) - -------------------------------------------------------------------------------- Cash Flows From Financing Activities Policyholders' account balances Deposits to investment and universal life type contracts $ 70,378 $ 59,657 Withdrawals from investment and universal life type contracts (35,476) (44,324) Purchase and retirement of common stock (1,523) (12) Payment of cash dividends (5,248) (4,934) Purchase of common stock (26,250) - - -------------------------------------------------------------------------------- Net cash provided by financing activities $ 1,881 $ 10,387 - -------------------------------------------------------------------------------- Net Decrease in Cash and Cash Equivalents $ (2,378) $ (7,562) Cash and Cash Equivalents at Beginning of Year 2,378 14,389 - -------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ - $ 6,827 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
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, 1997. 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 June 30, 1998. 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. Income taxes paid, net of refunds for the six month periods ended June 30, 1998 and 1997 were $8,800,000 and $4,794,000, respectively. There were no significant payments of interest through June 30, 1998 and 1997, other than interest credited to policyholders' accounts. 6 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 2. INVESTMENTS A reconciliation of the amortized cost 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 June 30, 1998 is as follows.
- --------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - --------------------------------------------------------------------------------------------------------------- JUNE 30, 1998 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 $ 26,122 $ 724 $ - $ 26,846 Mortgage-backed securities 16,570 1,460 1 18,029 All others 3,399 360 1 3,758 States, municipalities and political subdivisions 224,638 14,007 94 238,551 Foreign 6,488 388 - 6,876 Public utilities 74,464 2,016 32 76,448 Corporate bonds Collateralized mortgage obligations 90,295 4,809 335 94,769 All other corporate bonds 198,847 11,421 203 210,065 - --------------------------------------------------------------------------------------------------------------- Total held-to-maturity $640,823 $35,185 $ 666 $675,342 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE Fixed Maturities Bonds United States Government, government agencies and authorities Collateralized mortgage obligations $ 44,060 $ 2,124 $ 14 $ 46,170 Mortgage-backed securities 48 4 - 52 All others 7,660 157 - 7,817 States, municipalities & political subdivisions 46,687 803 64 47,426 Foreign 7,632 15 53 7,594 Public utilities 5,424 57 10 5,471 Corporate bonds Collateralized mortgage obligations 9,726 369 92 10,003 All other corporate bonds 109,846 1,390 675 110,561 - --------------------------------------------------------------------------------------------------------------- Total available-for-sale fixed maturities $231,083 $ 4,919 $ 908 $235,094 - --------------------------------------------------------------------------------------------------------------- Equity securities Common stocks Public utilities $ 3,525 $ 7,435 $ - $ 10,960 Banks, trust and insurance companies 8,976 50,970 - 59,946 All other common stocks 9,609 24,022 187 33,444 Nonredeemable preferred stocks 845 226 - 1,071 - --------------------------------------------------------------------------------------------------------------- Total equity securities $ 22,955 $82,653 $ 187 $105,421 - --------------------------------------------------------------------------------------------------------------- Total available-for-sale $254,038 $87,572 $1,095 $340,515 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Other long-term investments $ 10,930 $ 4,221 $31 $ 15,120 - --------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------
7 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The amortized cost and fair value of held-to-maturity and available-for-sale fixed maturities at June 30, 1998 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.
- ------------------------------------------------------------------------------ (Dollars in Thousands) - ------------------------------------------------------------------------------ JUNE 30, 1998 Held-to-maturity Available-for-sale - ------------------------------------------------------------------------------ Amortized Fair Amortized Fair Cost Value Cost Value - ------------------------------------------------------------------------------ Due in one year or less $ 8,521 $ 8,692 $ 241 $ 242 Due after one year through five years 131,377 137,760 14,659 14,468 Due after five years through ten years 151,678 161,128 79,832 80,153 Due after ten years 216,260 228,118 82,517 84,006 Mortgage-backed securities 16,570 18,029 48 52 Collateralized mortgage obligations 116,417 121,615 53,786 56,173 - ------------------------------------------------------------------------------ $640,823 $675,342 $231,083 $235,094 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------
NOTE 3. NEW ACCOUNTING STANDARDS The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" effective December 31, 1997. This standard supersedes APB Opinion No. 15 " Earnings Per Share" and simplifies the standards for computing and presenting earning per share ("EPS"). Under the new standard, the presentation of primary EPS has been replaced with a presentation of basic EPS. Basic EPS is computed excluding dilution caused by common stock equivalents such as stock options. The Company does not currently issue stock options or other stock-based awards, and therefore, basic and diluted EPS are equal. In February, 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 129, "Disclosure of Information about Capital Structure." SFAS No. 129, adopted by the Company effective December 31, 1997, contains disclosure requirements including liquidation preferences of preferred stock, rights and privileges of outstanding equity securities and the redemption amounts for all issues of capital stocks that are redeemable. As the Company does not issue these types of securities, SFAS No. 129 does not have a material effect on the Company's Consolidated Financial Statements. Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income", governing the reporting and presentation of comprehensive income and its components which includes traditional net income and items previously recorded directly in equity, such as the change in unrealized gains or losses on securities available-for-sale. In accordance with the interim reporting guidelines of SFAS No. 130, comprehensive income was $10,432,000 and $22,799,000 for the six months ended June 30, 1998 and 1997, respectively. Comprehensive income was $1,069,000 and $14,654,000 for the three months ended June 30, 1998 and 1997, respectively. In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" requiring that public businesses report financial and descriptive information about its reportable operating segments. SFAS No. 131 is effective for annual periods beginning after December 15, 1997 for the initial year of adoption and interim periods thereafter. The impact of adopting SFAS No. 131 will require additional disclosure in the Consolidated Financial Statements and is not expected to have a material effect on the Company's Consolidated Financial Statements or Notes to Consolidated Financial Statements. 8 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS In February, 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits", effective for fiscal years beginning after December 15, 1997. The new statement standardizes the disclosure requirements for these benefit plans and the impact is not expected to have a material effect on the Company's Consolidated Financial Statements or Notes to Consolidated Financial Statements. In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", effective for all fiscal quarters of fiscal years beginning after June 15,1999. The new statement requires all derivatives to be recorded on the balance sheet at fair value and establishes special accounting for certain types of hedges. The impact of adopting SFAS No. 133 is not expected to have a material effect on the Company's Consolidated Financial Statements or Notes to Consolidated Financial Statements. 9 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 June 30, 1998, and the related consolidated statements of operations for the three-month and six-month periods ended June 30, 1998 and 1997, and the consolidated statements of cash flows for the six-month periods ended June 30, 1998 and 1997. 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 generally accepted auditing standards, 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 for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of United Fire & Casualty Company and Subsidiaries as of December 31, 1997, and, in our report dated February 19, 1998, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1997, 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 August 6, 1998 10 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ASSETS The Company's assets have grown to $1,198,922,000 as of June 30, 1998 compared to $1,157,922,000 at December 31, 1997. The fixed income portfolio, comprised primarily of long-term, high-quality securities, generated a majority of the growth. Available-for-sale fixed income securities accounted for 27% of the total fixed income portfolio at June 30, 1998, compared to 18% at December 31, 1997. All fixed income security purchases in 1998 have been classified as available-for-sale and management expects all fixed income security purchases to continue to be classified as available-for-sale throughout the second half of 1998. Trading securities were not held during 1998 or 1997. Net unrealized gains of $4,011,000 and $1,913,000, respectively, were recorded on available-for-sale fixed income securities through June 30, 1998 and December 31, 1997. Collateralized mortgage obligation (CMO) holdings accounted for 20% of the fixed income portfolio at June 30, 1998 compared to 22% as of December 31, 1997. The Company sold CMOs in 1998 and replaced the securities with higher yield generating investments. In the second quarter of 1998, the Company realized gains from equity sales and rebalanced the equity portfolio. Proceeds were used to repurchase 625,000 shares of the Company's common stock from General Accident Insurance Company of America. The purchased shares represent approximately 5.9% of the Company's outstanding stock. The transaction was negotiated privately. The Company paid $42 per share. Management believes the purchase was an excellent use of capital as the Company's stock represents good value at current price levels. During the last half of 1997, and continuing into 1998, the Company began writing covered call options to generate additional portfolio income. At June 30, 1998, options were written on 5% of the equity portfolio, compared to 1% at December 31, 1997. Second quarter property and casualty premium writings increased over the last quarter of 1997. As a result, accounts receivable from property and casualty insurance agents and brokers increased $7,240,000 or 16% between June 30, 1998 and December 31, 1997. When comparing six-month periods, premiums earned decreased between 1998 and 1997 by $2,217,000 or 2%. Stiff competition within the industry has had the effect of lowering prices and the Company's philosophy is to avoid pursuing business which is inadequately priced. The Company's deferred policy acquisition costs (DAC) include expenses such as commissions, premium taxes and other costs associated with underwriting insurance policies. The Company establishes an asset for these expenses and amortizes the asset over the duration of the policy periods. The DAC asset increased $8,458,000 or 14%, with much of the increase attributable to the life segment, whose premium writings are increasing. Reinsurance receivables include losses, expenses and reserves that are due to the Company from reinsurance brokers. This balance increased by $534,000 or 4% through June 30, 1998. The Company has not experienced significant collection problems with regard to reinsurance receivables and has no information indicating that any of its current reinsurance balances are uncollectible. 11 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Other assets decreased by $3,027,000 or 42%. On February 27, 1998, the Company sold most of the assets of Crabtree Premium Finance Company, a small subsidiary. Under the provisions of the sale, no material gain or loss was recognized. Almost all of the decrease in other assets was attributable to this sale. CASH FLOW AND LIQUIDITY Most of the cash that the Company receives is generated from insurance premiums paid by policyholders. The premiums are invested in assets maturing at regular intervals in order to meet the Company's obligations to pay policy benefits, claims and claim adjusting expenses and operating expenses. Net cash provided by the Company's operating activities was $20,987,000 in the first half of 1998, compared to $14,677,000 in the first half of 1997. Operating cash flows continue to be ample to meet policyholders obligations. Short-term investments, composed of money market accounts and fixed income securities are available for the Company's short-term cash needs. In addition, a $6,000,000 line of credit is maintained with a local bank. The Company borrowed funds against this line of credit during the second quarter. The balance of the borrowing at June 30, 1998 is $3,000,000. No funds were borrowed during 1997. LIABILITIES The property and casualty segment's gross liability before reinsurance for losses and settlement expenses increased $12,281,000 or 5% between June 30, 1998 and December 31,1997. The Company has limited exposure to environmental pollution and asbestos claims. The Company's underwriters are aware of these exposures and use riders or endorsements to limit their exposure. The liability for future policy benefits and interest on policyholders' accounts increased $37,136,000 or 8% during the six months of 1998. This liability is increased immediately by the full premiums paid by policyholders for annuity products and most universal life products. In 1998, the Company received premiums of $38,651,000 in non internal rollovers on annuity products and $6,837,000 on universal life products. These same two product lines had $12,866,000 of interest credited and $21,558,000 in decreases for surrenders, risk charges and deaths during 1998. Fluctuations in the other life segment products lines account for the remainder of the change. Accrued expenses and other liabilities increased $8,525,000 or 46% through June 30, 1998. Contributing to this growth was a balance of $3,000,000 owed against the Company's $6,000,000 line of credit and a negative cash balance for book purposes of $6,148,000 due to outstanding checks. In July, 1998, the line of credit was increased to $15,000,000. Income taxes payable decreased by $2,208,000 or 67% compared to December 31, 1997. The Company made federal income tax payments of $8,800,000 in the first half of 1998. MATERIAL CHANGES IN RESULTS OF OPERATIONS PROPERTY AND CASUALTY OPERATIONS The property and casualty segment had a statutory combined ratio (net losses incurred and net loss adjustment expenses incurred to net premiums earned, plus expenses incurred to premiums written) of 110% for the first half of 1998, compared to 100% for the same period of 1997. For the second quarter, the combined ratios were 118% and 101%, respectively. 12 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES MATERIAL CHANGES IN RESULTS OF OPERATIONS Losses incurred by the property and casualty segment increased $3,520,000 or 6% between the first six months of 1998 and 1997, while loss expenses incurred increased $4,744,000 or 39%. Of the sixteen storms in the United States classified as catastrophes by the Property Claims Services during the second quarter, ten of those directly impacted business insured by the Company's property and casualty segment. The heaviest losses resulted from storms occurring May 30 through June 1 in Iowa, Minnesota, South Dakota and Wisconsin. The 1998 catastrophes added 20% to the Company's combined ratio for the three months ended June 30, 1998. Incurred losses on all 1998 catastrophes, on a net basis, was $10,810,000 through June 30, 1998. The property and casualty segment's other underwriting expenses and amortization of deferred policy acquisition costs have decreased by $1,476,000 or 4% between the first half of 1998 and 1997. The decrease in premium volume has reduced many of the expenses incurred in connection with the writing of insurance policies. LIFE OPERATIONS The life segment's earnings before taxes increased $1,923,000 or 40% through the first half of 1998, compared to the first half of 1997. Premium writings have grown from $10,093,000 at June 30, 1997 to $15,829,000 at June 30, 1998. The increase is attributable to the segment's single premium credit life/A&H products. Premiums earned increased $1,835,000 or 20% and net investment income increased by $2,409,000 or 13%. Losses incurred by the life segment are up between June 30, 1998 and 1997 due to both a higher frequency and larger amounts of death claims than experienced in prior years. INVESTMENT RESULTS Net investment income increased $2,848,000 or 9% between June 30, 1998 and 1997. Realized gains increased from $52,000 for the second quarter of 1997 to $17,220,000 for the second quarter of 1998. Realized gains for the six-month periods were $21,423,000 and $748,000, respectively. The sale of equity securities, discussed above under ASSETS, was the primary reason for the large increase. YEAR 2000 The insurance industry is data intensive and utilizes computer technology extensively. An important issue facing all computer users is the approaching Year 2000. Many computer systems and applications have been designed with two-digit date fields. With the turn of the century, these programs may recognize the Year 2000 as 1900 or not at all. If left unresolved, this could cause systems to process critical financial and operational information incorrectly. The Company is aware of this issue and is finalizing its systems for compliance for the Year 2000. Beginning in 1984, programming to accommodate four-digit date fields was initiated. Testing is currently being conducted on all systems and will be completed in 1998. Expenses incurred in connection with the conversions and testing have been expensed as incurred and absorbed into normal operating expenses. The remaining costs for Year 2000 compliance are not expected to be material to operations. The Company is also reviewing its third-party vendors for compliance with Year 2000 and has received many affirmative responses. While the Company is reviewing its third-party vendors' Year 2000 compliance, it cannot assure that the systems of these vendors that the Company relies on will be converted in a timely manner, or that their failure to convert would not have an adverse affect on the Company's systems. OTHER Effective September 1, 1998, the Company is moving the operations of Addison Insurance Company (a wholly owned subsidiary) to its home office in Cedar Rapids, from Lombard, Illinois. This move will result in a decrease in operating expenses. In connection with the relocation, the Company is planning to terminate 18 employees, 14 of which are management positions. The Company has accrued $235,000 in termination benefits which is included in other underwriting expenses. Termination benefits totaling $26,000 were paid through June 30, 1998. There are no other significant costs related to the closing of the Addison office. SUBSEQUENT EVENTS Subsequent to June 30, 1998, the Company contributed 25,000 shares of treasury stock to its Employee Stock Ownership Plan. The remaining 600,000 shares held in treasury stock were retired on July 13, 1998. FORWARD LOOKING STATEMENTS This information contained in the Form 10-Q for the quarterly period ended June 30, 1998 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. 13 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 (b) The Company filed one report on Form 8-K dated June 30, 1998 concerning the repurchase on June 29, 1998 of 625,000 shares of its common stock from General Accident Insurance Company of America. 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) AUGUST 6, 1998 - ------------------------------------------------------------------------------ (DATE) /s/ - ------------------------------------------------------------------------------ JOHN A. RIFE PRESIDENT /s/ - ------------------------------------------------------------------------------ K.G. BAKER VICE PRESIDENT , CHIEF FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER 14 EX-11 2 EX-11 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES 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 June 30, Outstanding Income Common Share - ------------------------------------------------------------------------------ 1998 10,685,374 $12,610 $1.18 1997 10,727,408 5,118 0.48 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ (Dollars in Thousands Except Per Share Data and Number of Shares) - ------------------------------------------------------------------------------ Weighted Average Six-Month Periods Ended Number of Shares Net Earnings Per June 30, Outstanding Income Common Share - ------------------------------------------------------------------------------ 1998 10,702,805 $21,492 $2.01 1997 10,727,559 12,521 1.17 - ------------------------------------------------------------------------------
Computation of weighted average number of common and common equivalent shares:
- ------------------------------------------------------------------------------ Three-Month Periods Ended June 30, 1998 1997 - ------------------------------------------------------------------------------ Common shares outstanding beginning of the period 10,709,222 10,727,712 Weighted average of the common shares purchased and retired or reissued (23,848) (304) - ------------------------------------------------------------------------------ Weighted average number of common shares 10,685,374 10,727,408 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Six-Month Periods Ended June 30, 1998 1997 - ------------------------------------------------------------------------------ Common shares outstanding beginning of the period 10,727,322 10,727,712 Weighted average of the common shares purchased and retired or reissued (24,517) (153) - ------------------------------------------------------------------------------ Weighted average number of common shares 10,702,805 10,727,559 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------
15 EX-27 3 EXHIBIT 27
7 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 235,094 640,823 675,342 105,421 2,814 0 1,026,845 0 14,964 68,673 1,198,922 763,855 117,867 0 0 0 0 0 35,639 220,697 256,336 119,277 33,022 21,423 955 91,475 23,083 30,714 29,405 7,913 21,492 0 0 0 21,492 2.01 2.01 0 0 0 0 0 0 0
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