-----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, MSp1NsPiDSQlgzXODJ+X/8imRMiKENR7uYHMP0R+SuM24L9wkx32Qc68EToEojeJ zG4VkFud3jFGCzoeWNLKxw== 0001047469-98-041003.txt : 19981118 0001047469-98-041003.hdr.sgml : 19981118 ACCESSION NUMBER: 0001047469-98-041003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 98750219 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 September 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 November 5, 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 September 30, 1998 (unaudited) and 2 December 31, 1997 Unaudited Consolidated Statements of Operations for the three month periods ended September 30, 1998 and 1997 3 Unaudited Consolidated Statements of Operations for the nine month periods ended 4 September 30, 1998 and 1997 Unaudited Consolidated Statements of Cash Flows for the nine month periods ended September 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 15
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------- ASSETS SEPTEMBER 30, December 31, 1998 1997 UNAUDITED Audited - ----------------------------------------------------------------------------------------------------------- INVESTMENTS Fixed maturities Held-to-maturity, at amortized cost (market value $666,571 in 1998 and $709,867 in 1997) $ 623,157 $ 677,360 Available-for-sale, at market (amortized cost $269,356 in 1998 and $145,019 in 1997) 276,516 146,932 Equity securities (cost $23,312 in 1998 and $26,296 in 1997) 97,254 128,698 Mortgage loans 2,792 2,862 Policy loans 8,670 8,405 Other long-term investments, at market (cost $11,312 in 1998 and $9,000 in 1997) 15,107 12,448 Short-term investments 15,157 19,195 - --------------------------------------------------------------------------------------------------------- $1,038,653 $ 995,900 CASH AND CASH EQUIVALENTS - 2,378 ACCRUED INVESTMENT INCOME 15,012 14,159 ACCOUNTS RECEIVABLE 48,589 44,060 DEFERRED POLICY ACQUISITION COSTS 66,732 60,215 PROPERTY AND EQUIPMENT 13,497 14,443 REINSURANCE RECEIVABLES 15,699 14,430 PREPAID REINSURANCE PREMIUMS 3,186 4,064 INTANGIBLES 880 1,082 INCOME TAXES RECEIVABLE 3,967 - OTHER ASSETS 7,824 7,191 - --------------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,214,039 $ 1,157,922 - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Future policy benefits and losses, claims and settlement expenses Property and casualty insurance $ 250,761 $ 231,768 Life insurance 545,680 482,437 Unearned premiums 121,059 108,296 Accrued expenses and other liabilities 20,873 18,373 Employee benefit obligations 9,245 8,665 Income taxes payable - 3,307 Deferred income taxes 18,853 27,868 - --------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES $ 966,471 $ 880,714 - --------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock $33,639 $ 35,758 Additional paid-in capital 7,927 9,331 Retained earnings 152,988 161,906 Net unrealized appreciation, net of applicable income taxes of $28,482 in 1998 and $37,549 in 1997 53,014 70,213 - --------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $ 247,568 $ 277,208 - --------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,214,039 $ 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 September 30, 1998 1997 - --------------------------------------------------------------------------------------------------------- Revenues Net premiums earned $ 61,543 $ 61,971 Investment income, net 16,964 15,238 Realized investment gains and other income 318 283 Commission and policy fee income 487 485 - --------------------------------------------------------------------------------------------------- 79,312 77,977 - --------------------------------------------------------------------------------------------------- Benefits, Losses and Expenses Losses and settlement expenses 53,685 43,949 Increase (decrease) in liability for future policy benefits (263) 1,785 Amortization of deferred policy acquisition costs 12,168 11,780 Other underwriting expenses 13,103 10,583 Interest on policyholders' accounts 6,569 5,931 - --------------------------------------------------------------------------------------------------- 85,262 74,028 - --------------------------------------------------------------------------------------------------- Income (loss) before income taxes (5,950) 3,949 Federal income taxes (benefit) (3,987) 358 - --------------------------------------------------------------------------------------------------- Net income (loss) $ (1,963) $ 3,591 - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- Earnings (loss) per common share $ (0.19) $ 0.33 - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- Weighted average common shares outstanding 10,088,460 10,727,322 - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- 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)
- --------------------------------------------------------------------------------------------- Nine months ended September 30, 1998 1997 - --------------------------------------------------------------------------------------------- Revenues Net premiums earned $ 180,820 $ 181,630 Investment income, net 49,986 45,412 Realized investment gains and other income 21,741 1,031 Commission and policy fee income 1,442 1,443 - --------------------------------------------------------------------------------------------- 253,989 229,516 - --------------------------------------------------------------------------------------------- Benefits, Losses and Expenses Losses and settlement expenses 142,803 121,707 Increase in liability for future policy benefits 2,094 4,387 Amortization of deferred policy acquisition costs 35,251 36,795 Other underwriting expenses 30,951 28,363 Interest on policyholders' accounts 19,435 17,584 - --------------------------------------------------------------------------------------------- 230,534 208,836 - --------------------------------------------------------------------------------------------- Income before income taxes 23,455 20,680 Federal income taxes 3,926 4,568 - --------------------------------------------------------------------------------------------- Net Income $ 19,529 $ 16,112 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- Earnings per common share $ 1.86 $ 1.50 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- Weighted average common shares outstanding 10,495,773 10,727,479 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- Cash dividends declared per common share $ 0.50 $ 0.47 - --------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------
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)
- ------------------------------------------------------------------------------------------------------------- Nine months ended September 30, 1998 1997 - ------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Net income $ 19,529 $ 16,112 - ------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities Net bond discount accretion (429) (18) Depreciation and amortization 264 2,138 Realized investment gains (21,741) (1,031) Changes in: Accrued investment income (853) (1,111) Accounts receivable (4,529) (5,445) Deferred policy acquisition costs (6,517) (3,692) Reinsurance receivables (1,269) (2,211) Prepaid reinsurance premiums 878 (306) Income taxes receivable (3,967) (746) Other assets (633) 658 Future policy benefits and losses, claims and settlement expenses 20,764 15,285 Unearned premiums 12,763 8,994 Accrued expenses and other liabilities 4,217 (310) Employee benefit obligations 580 1,438 Income taxes payable (3,307) - Deferred income taxes - 518 Other, net (3,400) - - ------------------------------------------------------------------------------------------------------------- Total adjustments $ (7,179) $ 14,161 - ------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities $ 12,350 $ 30,273 - ------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities Proceeds from sale of available-for-sale investments $ 53,117 $ 19,638 Proceeds from call and maturity of held-to-maturity investments 64,627 45,775 Proceeds from call and maturity of available-for-sale investments 19,778 3,717 Proceeds from sale of other investments 31,464 40,458 Purchase of investments held-to-maturity (10,877) (90,547) Purchase of investments available-for-sale (172,817) (48,108) Purchase of other investments (28,690) (27,264) Proceeds from sale of property and equipment 2,275 - Purchase of property and equipment (1,391) (2,929) - ------------------------------------------------------------------------------------------------------------- Net cash used in investing activities $ (42,514) $(59,260) - ------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities Policyholders' account balances Deposits to investment and universal life type contracts $ 113,320 $ 91,496 Withdrawals from investment and universal life type contracts (51,848) (66,373) Purchase and retirement of common stock (26,723) (12) Payment of cash dividends (6,963) (6,651) - ------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities $ 27,786 $ 18,460 - ------------------------------------------------------------------------------------------------------------- Net Decrease in Cash and Cash Equivalents $ (2,378) $(10,527) Cash and Cash Equivalents at Beginning of Year 2,378 14,389 - ------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ - $ 3,862 - ------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------
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 September 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 nine month periods ended September 30, 1998 and 1997 were $11,200,000 and $5,589,000, respectively. There were no significant payments of interest through September 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 September 30, 1998 is as follows.
- --------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - --------------------------------------------------------------------------------------------------------------------------- SEPTEMBER 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 $ 25,617 $ 1,594 $- $ 27,211 Mortgage-backed securities 15,356 1,361 - 16,717 All others 2,261 480 - 2,741 States, municipalities and political subdivisions 219,350 16,763 23 236,090 Foreign 6,484 536 - 7,020 Public utilities 69,356 2,979 - 72,335 Corporate bonds Collateralized mortgage obligations 87,423 5,954 581 92,796 All other corporate bonds 197,310 14,688 337 211,661 - --------------------------------------------------------------------------------------------------------------------------- Total held-to-maturity $623,157 $ 44,355 $941 $666,571 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE Fixed Maturities Bonds United States Government, government agencies and authorities Collateralized mortgage obligations $ 850 $ 43 $- $ 893 Mortgage-backed securities 48 4 - 52 All others 7,665 244 - 7,909 States, municipalities & political subdivisions 49,634 1,828 - 51,462 Foreign 7,627 28 1,053 6,602 Public utilities 11,238 362 34 11,566 Corporate bonds Collateralized mortgage obligations 52,856 3,434 - 56,290 All other corporate bonds 139,438 3,820 1,516 141,742 - ---------------------------------------------------------------------------------------------------------------------------- Total available-for-sale fixed maturities $269,356 $ 9,763 $ 2,603 $276,516 - ---------------------------------------------------------------------------------------------------------------------------- Equity securities Common stocks Public utilities $ 3,525 $ 8,230 $- $ 11,755 Banks, trust and insurance companies 8,949 45,544 - 54,493 All other common stocks 9,993 20,612 620 29,985 Nonredeemable preferred stocks 845 177 1 1,021 - ---------------------------------------------------------------------------------------------------------------------------- Total equity securities $ 23,312 $ 74,563 $621 $ 97,254 - ---------------------------------------------------------------------------------------------------------------------------- Total available-for-sale $292,668 $ 84,326 $ 3,224 $373,770 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Other long-term investments $ 11,312 $ 3,817 $ 22 $ 15,107 - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
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 September 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) - -------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, 1998 Held-to-maturity Available-for-sale - -------------------------------------------------------------------------------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value - -------------------------------------------------------------------------------------------------------------- Due in one year or less $ 8,154 $ 8,311 $ 192 $ 192 Due after one year through five years 135,508 143,731 17,665 17,448 Due after five years through ten years 148,186 160,967 98,329 99,207 Due after ten years 202,913 216,839 99,416 102,434 Mortgage-backed securities 15,356 16,716 48 52 Collateralized mortgage obligations 113,040 120,007 53,706 57,183 - -------------------------------------------------------------------------------------------------------------- $623,157 $666,571 $269,356 $276,516 - -------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------
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 earnings 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 adopted a Nonqualified Employee Stock Option Plan on September 9, 1998. The Plan will permit the Company to grant options to purchase shares of its common stock. As of September 30, 1998, the Company has not issued options 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 $2,330,000 and $34,352,000 for the nine months ended September 30, 1998 and 1997, respectively. Comprehensive income (loss) was $(8,102,000) and $11,553,000 for the three months ended September 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. As part of the implementation, the Company expects to reclass a portion of its fixed income securities from the held-to-maturity category to the available-for-sale category. Depending on market conditions, this could effect the Company's asset balance, as well as unrealized appreciation and deferred income taxes. 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 September 30, 1998, and the related consolidated statements of operations for the three-month and nine-month periods ended September 30, 1998 and 1997, and the consolidated statements of cash flows for the nine-month periods ended September 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. /s/ Arthur Andersen LLP ------------------------ Chicago, Illinois November 5, 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 grew 5% through the third quarter of 1998, compared to December 31, 1997, with invested assets providing a majority of the growth. The fixed income portfolio, comprised primarily of high-quality securities, increased $75,381,000, or 9%. The maturity structure of the Company's fixed income securities is laddered to attain a matching of assets with liabilities. The Company's mix of fixed income securities between available-for-sale and held-to-maturity has changed since December 31, 1997. Substantially all 1998 fixed income security purchases have been classified as available-for-sale. Management expects to continue classifying most fixed income security purchases as available-for-sale during the fourth quarter of 1998. There were no securities classified as trading in 1997, nor through September 30, 1998. Collateralized mortgage obligation (CMO) holdings account for 19% of the fixed income portfolio at September 30, 1998 compared to 22% as of December 31, 1997. The Company sold CMOs in 1998 and replaced the securities with corporate bonds. The Company's equity portfolio decreased $31,444,000 through September 30, 1998 partially due to a downturn in general market conditions. In addition, in the second quarter of 1998, the Company rebalanced its equity portfolio, thereby generating realized gains on sales. Proceeds were used to repurchase 625,000 shares of the Company's common stock from General Accident Insurance Company of America. The purchased shares represented approximately 5.9% of the Company's outstanding stock. The transaction was negotiated privately and the Company paid $42 per share for the stock. Management believes the purchase was an excellent use of capital as the Company's stock represents good value at then prevailing price levels. In July, the Company contributed 25,000 shares of the treasury stock to its Employee Stock Ownership Plan. The remaining 600,000 shares were retired on July 13, 1998. During the last half of 1997, and continuing into 1998, the Company began writing covered call options to generate additional portfolio income. At September 30, 1998, options were written on 3% of the equity portfolio, compared to 1% at December 31, 1997. Typically, property and casualty premium writings are higher in each of the first ten months of the year when compared to November and December. This results in increased accounts receivable from insurance agents and brokers at the end of each of the first three quarters, when compared with annual receivable balances. Between September 30, 1998 and December 31, 1997 accounts receivable grew by $4,529,000 or 10%. On a nine-month basis, the property and casualty segment's premium writings have decreased slightly between years. 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. In addition, the DAC asset generated on nontraditional policies (i.e., annuities and universal life) is adjusted by way of a valuation allowance for unrealized holding gains and losses from securities classified as available-for-sale with a corresponding credit or charge to stockholders' equity. The DAC asset increased $6,517,000 or 11%, with much of the increase attributable to the life segment, whose premium writings are increasing. This increase was offset in the third quarter by a reduction in the life segment DAC asset on nontraditonal policies with a corresponding decrease in unrealized appreciation of $3,286,000 (before tax) for unrealized holding gains and losses. Reinsurance receivables include losses, expenses and reserves that are due to the Company from reinsurance brokers. This balance increased by $1,269,000 or 9% through September 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. Other assets increased by $633,000 or 9%. An increase in the life segment's receivable from investment brokers was partially offset by the sale of most of the assets of Crabtree Premium Finance Company, a small subsidiary on February 27, 1998. Under the provisions of the sale, no material gain or loss was recognized. 11 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 $12,350,000 through the first nine months of 1998, compared to $30,273,000 through September 30, 1997. This is due, principally, to the realized gains on the sale of equity securities discussed above. Operating cash flows continue to be ample to meet policyholders obligations. Short-term investments, composed of money market accounts and fixed income securities with maturities of one year or less, are available for the Company's short-term cash needs. In addition, a $15,000,000 line of credit is maintained with a bank. The Company borrowed funds against this line of credit during the second and third quarters. The balance of the borrowing at September 30, 1998 is $1,100,000. No funds were borrowed during 1997. LIABILITIES The property and casualty segment's gross liability before reinsurance for losses and settlement expenses increased $18,993,000 or 8% between September 30, 1998 and December 31,1997. Storm activity in the third quarter contributed to this increase. In addition, some of the Company's liability lines of business are experiencing an increase in reserves for loss adjustment expenses. The Company's exposure to environmental pollution and asbestos claims is viewed as not material. Underwriters are aware of these exposures and use riders or endorsements to limit their exposure. Due to strong growth, the liability for future policy benefits and interest on policyholders' accounts increased $63,243,000 or 13% through the first three quarters 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 $64,482,000 in non internal rollovers on annuity products and $10,207,000 on universal life products. These same two product lines had $19,435,000 of interest credited and $30,355,000 in decreases for surrenders, risk charges and mortality experience during 1998. Fluctuations in the other life segment products lines account for the remainder of the change. The life segment's unearned premiums increased $8,091,000 or 108% due to growth in the single premiums credit life/A&H products. These products have a policy duration of a few months to a maximum of ten years, and therefore, any significant increase in new writings will cause an increase in this liability. Accrued expenses and other liabilities increased $2,500,000 or 14% through September 30, 1998. Contributing to this growth was a balance of $1,100,000 owed against the Company's $15,000,000 line of credit and a negative cash balance for book purposes of $5,874,000 due to outstanding checks. Offsetting this was a decrease in general operating expense accruals, a decrease in stockholders dividends payable and a decrease in amounts payable for securities. As of September 30, 1998, the Company has federal income taxes receivable of $3,967,000. At December 31, 1997, the Company had a liability for federal income taxes of $3,307,000. This represents a net decrease of $7,274,000. The Company made federal income tax payments of $11,200,000 through September 30, 1998, compared to $5,789,000 through December 31, 1997. 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 115% for the first nine months of 1998, compared to 102% for the same period of 1997. For the third quarter, the combined ratios were 126% and 107%, respectively. 12 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Losses incurred by the property and casualty segment increased $9,264,000 or 9% between the first nine months of 1998 and 1997. Involvement in sixteen catastrophe storms during the second and third quarters negatively impacted the Company's current year results. The heaviest losses resulted from storms occurring May 30, 1998 through June 1, 1998 in Iowa, Minnesota, South Dakota and Wisconsin and resulted in net incurred losses of $4,633,000. Severe storms occurring in several midwestern states between June 24, 1998, and June 30, 1998, also contributed over $3 million in incurred losses. The Company had approximately $259,000 in net loss reserves in connection with Hurricane Georges as of September 30, 1998. Ultimately, on a direct basis, the Company expects this particular hurricane exposure to total approximately $2 million. The Company will have some assumed losses in connection with Hurricane Georges, but it has been unable to estimate the exposure at this time. Incurred losses on all 1998 catastrophes, on a net basis, was $16,313,000 through September 30, 1998. Loss adjustment expenses increased $7,324,000 or 38 percent between years due to increasing costs of litigation, particularly in the products liability line of business. The property and casualty segment's other underwriting expenses and amortization of deferred policy acquisition costs have increased by $1,048,000 or 2% between the first nine months 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 $3,108,000 or 44% through the first nine months of 1998, compared to the same period in 1997. Premium writings have grown from $16,125,000 at September 30, 1997 to $24,942,000 at September 30, 1998. The increase is primarily attributable to the segment's single premium credit life/A&H products. Net premiums earned increased $2,403,000 or 16% and net investment income increased by $3,800,000 or 13%. Losses incurred by the life segment are up between September 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 $4,574,000 or 10% between September 30, 1998 and 1997. Realized gains increased from $1,031,000 through September 30, 1997 to $21,741,000 through the first nine months of 1998. The sale of equity securities during the second quarter, 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. The Company has been aware for several years of the technological issues associated with the approaching Year 2000. Beginning in 1984, the Company initiated the programming of four-digit date fields in anticipation of the new century. Throughout this year all in-house systems have been undergoing testing which is scheduled to be completed by the end of 1998. The Company is also reviewing its third-party vendors for Year 2000 compliance and is requiring written acknowledgment of testing and readiness. 13 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Expenses incurred in connection with programming and testing have been expensed as incurred and absorbed into normal operating expenses. The remaining costs for Year 2000 compliance include salaries and overhead for existing company personnel and are not expected to be material to operations. In the event that the company's systems or those of their vendors are not compliant with the Year 2000, the situation could result in the incorrect processing of critical financial and operational information. The Company is testing its systems in an effort to identify the nature and magnitude of these potential errors. Should any of the mission critical systems fail, the Company will have a plan in place detailing alternative processing methods. This formal, documented contingency plan is scheduled for completion by July 1, 1999. OTHER Effective September 1, 1998, the Company moved 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 terminated 18 employees, 4 of which were management positions. As of September 30, 1998, the Company has accrued $71,000 in remaining termination benefits which is included in other underwriting expenses. Termination benefits of $238,000 were paid through September 30, 1998. In connection with the move, the Company has accrued $98,000 for a lease obligation which will terminate in February, 1999. There are no other significant costs related to the closing of the Addison office. FORWARD LOOKING STATEMENTS This information contained in the Form 10-Q for the quarterly period ended September 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. 14 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 5, 1998 - ------------------------------------------------------------------------------- (DATE) /s/ JOHN A. RIFE - ------------------------------------------------------------------------------- JOHN A. RIFE PRESIDENT /s/ K.G. BAKER - ------------------------------------------------------------------------------- K.G. BAKER VICE PRESIDENT , CHIEF FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER 15 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 Net Three-Month Periods Ended Number of Shares Income Earnings Per September 30, Outstanding (Loss) Common Share - -------------------------------------------------------------------------------------------------------- 1998 10,088,460 $ (1,963) $ (0.19) 1997 10,727,322 3,591 0.33 - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- (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 - -------------------------------------------------------------------------------------------------------- 1998 10,495,773 $ 19,529 $ 1.86 1997 10,727,479 16,112 1.50 - --------------------------------------------------------------------------------------------------------
Computation of weighted average number of common and common equivalent shares:
- ------------------------------------------------------------------------------------------- Three-Month Periods Ended September 30, 1998 1997 - ------------------------------------------------------------------------------------------- Common shares outstanding beginning of the period 10,066,721 10,727,322 Weighted average of the common shares purchased and retired or reissued 21,739 - - ------------------------------------------------------------------------------------------- Weighted average number of common shares 10,088,460 10,727,322 - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- Nine-Month Periods Ended September 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 (231,549) (233) - ------------------------------------------------------------------------------------------- Weighted average number of common shares 10,495,773 10,727,479 - ------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------
16 EX-27 3 EX-27
7 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 276,516 623,157 666,571 97,254 2,792 0 1,038,653 0 15,699 66,732 1,214,039 796,441 121,059 0 0 0 0 0 33,639 213,929 247,568 180,820 49,986 21,741 1,442 144,897 35,251 50,386 23,455 3,926 19,529 0 0 0 19,529 1.86 1.86 0 0 0 0 0 0 0
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