-----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, InX6aWcAeAM31WbdaEPQkFOthmuoJad4LtbJkK2Br16BHcSceSXXU/qLDDAGf0AF 3ATOHjZVvKmt1GjEHfL1MQ== 0001047469-99-012994.txt : 19990402 0001047469-99-012994.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-012994 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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-K405 SEC ACT: SEC FILE NUMBER: 002-39621 FILM NUMBER: 99583048 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-K405 1 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange - --- Act of 1934 for the fiscal year ended DECEMBER 31, 1998 ----------------- Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to ------------ ------------ 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 52407-3909 - ---------------------------------------- --------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (319) 399-5700 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: None 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. X --- As of March 1, 1999, 10,091,721 shares of common stock were outstanding. The aggregate market value of voting stock held by non-affiliates of the registrant as of March 1, 1999, was approximately $142,111,759. FORM 10-K TABLE OF CONTENTS
PAGE ---- PART I: Item 1. Business 1 Item 2. Properties 7 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 7 PART II: Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 7 Item 6. Selected Financial Data 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 16 Item 8. Financial Statements and Supplementary Data 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 40 PART III: Item 10. Directors and Executive Officers of the Registrant 40 Item 11. Executive Compensation 42 Item 12. Security Ownership of Certain Beneficial Owners and Management 45 Item 13. Certain Relationships and Related Transactions 45 PART IV: Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 46 Signatures 47
PART I. ITEM 1. BUSINESS ORGANIZATION United Fire & Casualty Company and its subsidiaries (the "Company") are engaged in the business of writing property, casualty and life insurance. The Company is an Iowa corporation incorporated in January 1946. Its principal executive office is located at: 118 Second Avenue SE, P.O. Box 73909, Cedar Rapids, Iowa 52407-3909. Phone: 319-399-5700. The Company has two reportable business segments in its operations; property and casualty insurance and life insurance. The Company's property and casualty segment includes the following subsidiaries: Addison Insurance Company, a wholly owned property and casualty insurer; Addison Insurance Agency, a wholly owned general agency of Addison Insurance Company; Lafayette Insurance Company, a wholly owned property and casualty insurer and Insurance Brokers & Managers Inc., a wholly owned general agency of Lafayette Insurance Company. The Company's life insurance segment subsidiary is United Life Insurance Company, a wholly owned life insurance company. A table reflecting premiums, operating results and assets attributable to the Company's segments is included in Note 10 of the Notes to Consolidated Financial Statements. As of December 31, 1998, the Company and its subsidiaries employed 559 full-time employees. MARKETING The Company markets its products principally through the following four regional locations: 1) Cedar Rapids, Iowa--118 Second Avenue, SE, P.O. Box 73909, Cedar Rapids, IA 52407-3909 (which also serves as the Company's home office) 2) Westminster, Colorado--7301 N. Federal, Suite 302, P.O. Box 850, Westminster, CO 80030-4919 3) Lincoln, Nebraska--1314 O Street, Suite 500, P.O. Box 82540, Lincoln, NE 68501 4) New Orleans, Louisiana--2626 Canal Street, P.O. Box 53265, New Orleans, LA 70153-3265 The Company is licensed as a property and casualty insurer in 36 states, primarily in the Midwest and West. Approximately 1,660 independent agencies represent the Company and its property and casualty subsidiaries. The life insurance subsidiary is licensed in 24 states, primarily Midwestern and Western, and is represented by approximately 1,200 independent agencies. The regional offices of the Company are staffed with underwriting, claims and marketing representatives and administrative technicians, all of whom provide support and assistance to the independent agencies. In addition, home office staff technicians and specialists provide support to the subsidiaries and regional offices as well as to independent agencies. The Company uses management reports to monitor subsidiary and regional offices for overall results and conformity to Company policy. In 1998, direct premium writings on a statutory basis by state were as follows.
- ------------------------------------------------------------------------------------------------ (Dollars in Thousands) - ------------------------------------------------------------------------------------------------ Life, Accident and Property and Health Insurance Segment, Casualty Insurance Segment Including Annuities - ------------------------------------------------------------------------------------------------ Percent Percent Amount of Total Amount of Total - ------------------------------------------------------------------------------------------------ Arkansas $ 3,520 1.7% $ 8 0.0% California 5,288 2.5 0 0.0 Colorado 14,542 7.0 4,147 2.7 Illinois 17,584 8.4 11,437 7.3 Iowa 39,229 18.8 75,744 48.5 Kansas 10,808 5.2 2,922 1.9 Louisiana 30,776 14.8 80 0.0 Minnesota 13,508 6.5 11,955 7.7 Mississippi 8,133 3.9 71 0.0 Missouri 20,285 9.7 11,015 7.1 Montana 113 0.1 3,360 2.2 Nebraska 14,064 6.7 12,347 7.9 North Dakota 3,133 1.5 2,576 1.6 South Dakota 8,877 4.3 3,376 2.2 Wisconsin 7,376 3.5 10,385 6.6 Wyoming 3,127 1.5 604 0.4 Other 8,092 3.9 6,038 3.9 - ------------------------------------------------------------------------------------------------ $208,455 100.0% $156,065 100.0% - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------
1 The insurance industry is highly competitive, and the Company competes with other stock insurance companies, the underwriters at Lloyds of London and reinsurance reciprocals. Because the Company relies heavily on independent agencies, it utilizes a profit sharing contract with the agencies as an incentive to place high quality property and casualty business with the Company. For 1998, 304 property and casualty agencies will receive profit sharing commissions of an estimated $4,744,000. PRODUCTS PROPERTY AND CASUALTY INSURANCE SEGMENT The company writes both personal and commercial lines of insurance. Personal lines are comprised mostly of automobile and homeowners, but also include recreational vehicles and umbrella policies. The majority of commercial insurance consists of business packages, inland marine, commercial automobile, workers' compensation, umbrella, fidelity and surety bonds. Specialty policies written include the Commercial Uni-Saver; TRADE-PRO; GARAGE-PRO; Blanket Mortgage and some forms of Errors and Omissions insurance. The following table sets forth statutory property and casualty net premiums earned, net losses incurred (excluding net loss adjustment expenses) and the loss ratio (ratio of net losses incurred to net premiums earned), by lines of insurance written, for the three years ended December 31, 1998, 1997 and 1996.
- ---------------------------------------------------------------------------- (Dollars in Thousands) - ---------------------------------------------------------------------------- Years Ended December 31, 1998 1997 1996 - ---------------------------------------------------------------------------- Fire and allied lines (1) Net premiums earned $ 69,997 $ 69,693 $ 62,806 Net losses incurred 51,418 41,472 41,487 Loss ratio 73.5% 59.5% 66.1% - ---------------------------------------------------------------------------- Automobile Net premiums earned $ 54,042 $ 53,207 $ 50,513 Net losses incurred 37,828 35,492 42,292 Loss ratio 70.0% 66.7% 83.7% - ---------------------------------------------------------------------------- Other liability Net premiums earned $ 31,804 $ 32,394 $ 31,953 Net losses incurred 12,400 9,418 10,682 Loss ratio 39.0% 29.1% 33.4% - ---------------------------------------------------------------------------- Workers' compensation Net premiums earned $ 20,797 $ 22,324 $ 24,207 Net losses incurred 16,275 15,492 12,155 Loss ratio 78.3% 69.4% 50.2% - ---------------------------------------------------------------------------- Fidelity and surety Net premiums earned $ 17,669 $ 16,893 $ 17,321 Net losses incurred 1,748 2,086 2,195 Loss ratio 9.9% 12.3% 12.7% - ---------------------------------------------------------------------------- Reinsurance Net premiums earned $ 25,708 $ 30,478 $ 28,390 Net losses incurred 24,647 18,268 20,768 Loss ratio 95.9% 59.9% 73.2% - ---------------------------------------------------------------------------- Other Net premiums earned $ 533 $ 521 $ 591 Net losses incurred 8 105 114 Loss ratio 1.5% 20.2% 19.3% - ---------------------------------------------------------------------------- Total property and casualty Net premiums earned $220,550 $225,510 $215,781 Net losses incurred 144,324 122,333 129,693 Loss ratio 65.4% 54.2% 60.1% - ---------------------------------------------------------------------------- - ----------------------------------------------------------------------------
(1) "Fire and allied lines" includes farmowners, homeowners, commercial multiple peril and inland marine. 2 The combined ratios below, which relate to property and casualty insurance, are the sum of the following: the loss ratio, calculated by dividing net losses and net loss adjustment expenses incurred by net premiums earned; and the expense ratio, calculated by dividing underwriting expenses incurred by net premiums written. The ratios in the table have been prepared on the basis of statutory financial information and on the basis of generally accepted accounting principles ("GAAP"). Generally, if the combined ratio is below 100 percent, there is an underwriting profit; if it is above 100 percent, there is an underwriting loss. [A bar graph displaying statutory combined ratios for the company as compared with the Insurance Industry from 1994 to 1998 appears here.] Statutory Combined Ratios
Company Industry 1994 97.6 108.5 1995 95.8 106.5 1996 104.4 105.8 1997 98.4 101.8 1998 114.8 105.0
- ------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------------------- Statutory GAAP - ------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1998 1997 1996 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- Net premiums written $ 221,002 $ 226,915 $ 221,934 $ 221,002 $ 226,915 $ 221,934 Net premiums earned 220,550 225,510 215,781 220,550 225,822 215,470 - ------------------------------------------------------------------------------------------------------------------------------- Losses and loss adjustment expenses 81.9 % 66.6% 72.7 % 81.2 % 66.2% 72.3 % Underwriting expenses 32.9 31.8 31.7 34.0 33.0 33.0 - ------------------------------------------------------------------------------------------------------------------------------- Combined ratios 114.8 98.4 104.4 115.2 99.2 105.3 - ------------------------------------------------------------------------------------------------------------------------------- Underwriting margin (14.8)% 1.6% (4.4)% (15.2)% 0.8% (5.3)% - ------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------
LIFE AND ACCIDENT AND HEALTH INSURANCE SEGMENT United Life Insurance Company underwrites and markets single-premium whole life insurance, term life and universal life insurance, annuities, credit insurance and individual disability income products. While United Life Insurance Company's lead annuity product is a single premium deferred annuity, it also offers flexible premium annuities. The credit business involves the sale of credit life and credit accident and health products, working in conjunction to satisfy the need for debt protection in the event of disability and/or death. United Life Insurance Company also offers an individual disability income rider that is attached to the ordinary life insurance products. Total life insurance in force, before reinsurance, is $3,672,130,000 as of December 31, 1998. Universal life represents 51 percent of insurance in force at December 31, 1998, compared to 55 percent at December 31, 1997. The following table presents net premium earned information for the last three years on a GAAP basis.
- ------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------- Years Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------- Universal life $10,524 $ 7,495 $ 7,381 Ordinary life (other than universal) 4,917 5,605 6,760 Accident and health 4,398 2,821 2,191 Annuities 1,613 1,151 1,434 Credit life 3,694 1,977 1,528 Group accident and health 149 182 141 - ------------------------------------------------------------------------------------------------- Total net premiums earned $25,295 $19,231 $19,435 - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
3 CONSOLIDATED NET PREMIUMS WRITTEN The following table shows the statutory consolidated net premiums written and annuity deposits during the last three years by major category.
- -------------------------------------------------------------------------------------------- (Dollars in Thousands) - -------------------------------------------------------------------------------------------- Years Ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------------------- Fire and allied lines (1) $ 69,606 $ 70,917 $ 66,081 Automobile 54,902 53,566 52,325 Other liability 31,738 32,261 32,182 Workers' compensation 20,332 21,659 23,526 Fidelity and surety 17,839 17,542 16,586 Reinsurance 26,052 30,430 30,648 Other 533 540 586 Life and accident and health 34,961 25,705 23,598 Annuities 119,717 93,062 64,277 - -------------------------------------------------------------------------------------------- $375,680 $345,682 $309,809 - -------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------
(1) "Fire and allied lines" includes farmowners, homeowners, commercial multiple peril and inland marine. REINSURANCE PROPERTY AND CASUALTY INSURANCE SEGMENT The Company acts as a reinsurer, assuming both property and casualty reinsurance from approximately 370 companies. The bulk of the business assumed is property reinsurance with the emphasis on catastrophe covers. The business originates through approximately 50 brokers, with the largest producer accounting for approximately 29 percent of the reinsurance assumed. The Company follows the industry practice of reinsuring a portion of its direct and assumed reinsurance exposure and ceding to reinsurers a portion of the premium received. Reinsurance is purchased to reduce the net liability on individual risks to predetermined limits and to protect against catastrophic losses such as hurricanes and tornadoes. Such catastrophe protection is purchased on both direct and assumed business. The Company uses many reinsurers, both domestic and foreign. There are no concentrations of credit risk associated with reinsurance. Principal reinsurers include Swiss Re of America, American Reinsurance Company, Employers Reinsurance Corporation, AXA Reassurance and Continental Casualty. The limits on risks retained by the Company's property and casualty segment vary by line of business, and risks in excess of the retention limits are reinsured. For the property lines of business, the retention is $1,000,000. The following table presents the casualty business retention levels.
- --------------------------- ----------------------- Accident Years Casualty Retention - --------------------------- ----------------------- 1983 and prior $ 225,000 1984 through 1986 300,000 1987 through 1991 500,000 1992 through 1994 750,000 1995 and later 1,000,000 =========================== =======================
The ceding of reinsurance does not legally discharge the Company from primary liability under its policies, and the ceding company must pay the loss if the reinsurer fails to meet its obligation. The Company monitors the financial condition of its reinsurers. At December 31, 1998 and 1997, there are no uncollectible reinsurance balances that would result in a material impact on the Company's financial statements. The Company follows the industry practice of accounting for insurance written and losses incurred net of reinsurance ceded. The table on the following page sets forth the statutory aggregate direct and assumed premiums written, ceded reinsurance and net premiums written for the three years ended December 31, 1998, 1997 and 1996. 4
- ------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------------------ PERCENT Percent Percent Years Ended December 31, 1998 OF TOTAL 1997 of Total 1996 of Total - ------------------------------------------------------------------------------------------------------------------------------ Fire and allied lines (1) $ 81,229 37% $ 86,200 38% $ 83,704 38% Automobile 56,452 26 55,269 24 54,234 24 Other liability 35,010 16 35,645 16 35,272 16 Workers' compensation 20,736 9 22,075 10 23,834 11 Fidelity and surety 19,000 9 18,599 8 17,610 8 Reinsurance assumed 28,979 13 33,882 15 33,943 15 Other 800 0 799 0 808 0 - ------------------------------------------------------------------------------------------------------------------------------ Aggregate direct and assumed premiums written 242,206 110 252,469 111 249,405 112 Reinsurance ceded 21,204 10 25,554 11 27,471 12 - ------------------------------------------------------------------------------------------------------------------------------ Net premiums written $221,002 100% $226,915 100% $221,934 100% - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------
(1) "Fire and allied lines"" includes farmowners, homeowners, commercial multiple peril and inland marine. LIFE AND ACCIDENT AND HEALTH INSURANCE SEGMENT United Life Insurance Company reinsures a portion of its exposure and cedes to reinsurers a portion of the premium received on the policies reinsured. Reinsurance is purchased to reduce the net liability on individual risks to predetermined limits. United Life Insurance Company retains $200,000 per insured and reinsures the excess. The ceding of reinsurance does not legally discharge United Life Insurance Company from primary liability under its policies. The ceding company must pay the loss if the reinsurer fails to meet its obligation. The Company monitors the financial condition of its reinsurers. At December 31, 1998 and 1997, there are no uncollectible reinsurance balances that would result in a material impact on the Company's financial statements. United Life Insurance Company follows the industry practice of accounting for insurance written and losses incurred net of reinsurance ceded. United Life Insurance Company's primary reinsurance companies are ERC Reinsurance Company, Minnesota Mutual Life Insurance Company and Business Men's Assurance Company of America. These companies insure both life and disability risks. RESERVES PROPERTY AND CASUALTY INSURANCE SEGMENT Applicable insurance laws require the Company's property and casualty segment to maintain reserves for losses and loss adjustment expenses with respect to both reported and unreported losses. The Company's property and casualty segment establishes reserves for reported losses one of two ways. Factor or average reserves are set on losses under $5,000. These factors are determined by averaging claims paid over a 13-month period. Case reserves are set on all other reported losses. These reserves are based upon policy provisions, audit facts, injury or damage exposure, trends in the legal system and other factors. The amount of reserves for unreported losses is determined for each line of insurance by using the probable number and nature of losses arising from occurrences on the basis of historical and statistical information. Established reserves are closely monitored and adjusted as needed. Loss reserves are estimates at a given time of the ultimate amount expected to be paid on incurred losses. Estimates are based on facts and circumstances known when the estimates are made. Reserves are not discounted for the time value of money. The loss settlement period on insurance losses may be many years, and as additional facts regarding individual losses become known, it often becomes necessary to refine and adjust the estimates of liability on a loss. Inflation is implicitly provided for in the reserving function through review of cost trends, historical reserving results and projections of future economic conditions. Reserves for loss adjustment expenses are intended to cover the actual cost of investigating losses and defending lawsuits arising from losses. These reserves are continuously revised based on historical analysis and management's expectations. The table on the following page shows the calendar year development of the unpaid losses and loss adjustment expenses of the property and casualty segment for 1989 through 1998. The top line of the table shows the estimated liability for unpaid losses and loss adjustment expenses recorded at December 31 for each of the indicated years. This liability represents the estimated amount of losses and loss adjustment expenses for losses arising in all prior years that are unpaid at December 31 including losses that had been incurred but not yet reported, net of applicable ceded reinsurance. The upper portion of the table shows the reestimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known. The second half of the table displays cumulative losses paid and loss adjustment expenses paid for each of the years indicated on a GAAP basis. 5
- ----------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31 - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ----------------------------------------------------------------------------------------------------------------------------------- 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Liability for Unpaid Losses and LAE $103,607 $113,572 $ 123,219 $ 158,825 $170,798 $180,653 $188,700 $209,876 $218,912 $243,006 Liability re- estimated as of: One year later 96,487 111,804 128,042 154,572 153,691 160,776 159,571 176,332 192,297 Two years later 96,976 112,390 125,888 148,507 142,572 172,546 145,486 169,348 Three years later 97,295 111,276 124,428 144,159 158,312 164,133 142,877 Four years later 95,752 113,898 122,384 134,309 155,313 161,961 Five years later 96,345 113,703 118,568 132,075 154,849 Six years later 97,159 103,303 117,648 132,747 Seven years later 79,024 102,318 119,123 Eight years later 78,624 103,418 Nine years later 79,517 - ----------------------------------------------------------------------------------------------------------------------------------- Redundancy (Deficiency) $ 24,090 $ 10,154 $ 4,096 $ 26,078 $ 15,949 $ 18,692 $ 45,823 $ 40,528 $ 26,615 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Cumulative amount of liability paid through: One year later $ 37,598 $ 39,497 $ 44,694 $ 54,291 $ 51,550 $ 80,246 $ 56,618 $ 61,694 $ 62,988 Two years later 56,574 63,589 69,296 84,074 102,637 109,281 83,071 93,599 Three years later 69,767 77,141 87,052 96,976 119,349 123,469 97,763 Four years later 76,443 87,627 95,059 107,420 127,333 132,414 Five years later 82,013 85,379 99,483 112,360 133,531 Six years later 67,021 88,558 102,677 116,929 Seven years later 69,314 90,575 105,907 Eight years later 70,315 92,967 Nine years later 72,107 - ----------------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------------
LIFE AND ACCIDENT AND HEALTH INSURANCE SEGMENT United Life Insurance Company's reserves meet, or exceed, the minimum statutory Iowa Insurance Law requirements. These reserves are developed and analyzed by independent consulting actuaries. Their presentation in this report differs from the statutory basis and is described in Note 1 of the Notes to Consolidated Financial Statements. INVESTMENTS Management of the investment portfolio is handled internally by the Company's chief investment officer. This function involves complying with state insurance department investment regulations and maintaining adequate assets to pay Company obligations, while achieving competitive yields. The Company considers itself to be a long-term investor, and generally intends, at the time of purchase, to hold most of the available-for-sale fixed-income securities that it buys to maturity unless yield enhancement strategies provide excess returns. The Company reevaluated the classification of its current invested assets as of January 1, 1999, and has moved some fixed-income securities from held-to-maturity to available-for-sale, pursuant to its adoption of Statement of Financial Accounting Standards ("SFAS") No. 133. See Note 1 of the Notes to Consolidated Financial Statements for additional discussion. 6 The Company's property and casualty segment has historically emphasized investments in tax-exempt fixed-income securities. At the same time, an attempt is made to maintain a balanced portfolio that reflects the Company's changing tax situation, as well as changes in the tax law. Based on the Company's underwriting philosophy and goals for this segment, the emphasis toward tax-exempt fixed-income securities will continue. However, recent yields in the taxable fixed-income markets are relatively attractive, so additional purchases in this asset class are planned. The life insurance segment has emphasized, and will continue to emphasize, investing in taxable fixed-income securities (primarily bonds issued by corporations and utilities) that are high quality with an allocation to medium-grade securities and mortgage-related securities, including collateralized mortgage obligations. The Company strives to maintain diversification in its portfolio among issues, issuers and industries. Investment results for the years indicated are summarized in the following table.
- ---------------------------------------------------------------------------------------- (Dollars in Thousands) - ---------------------------------------------------------------------------------------- Annualized Yield Years Ended Average Investment on Average December 31, Invested Assets (1) Income, Net (2) Invested Assets - ---------------------------------------------------------------------------------------- 1998 $1,040,008 $67,928 6.5% 1997 928,052 61,686 6.6 1996 825,319 56,936 6.9 - ---------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------
(1) Average of amounts at beginning and end of year. (2) Investment income after deduction of investment expenses, but before applicable income tax. ITEM 2. PROPERTIES The Company owns two buildings in Cedar Rapids, Iowa, which it occupies as its home office. One building is a five-story building occupied entirely by the Company. The other is an eight-story office building in which the first floor is leased to tenants. The Company occupies the second through eighth floors of this building. The two buildings are connected with a skywalk. The Company owns a small parking lot adjacent to the eight-story building and a parking lot adjacent to the five-story building. Lafayette Insurance Company owns one building in New Orleans, Louisiana which serves as its home office. The building consists of two floors of office space and a floor of parking, as well as a parking lot located adjacent to the building. ITEM 3. LEGAL PROCEEDINGS The registrant has no pending legal proceedings other than ordinary routine litigation incidental to the business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on NASDAQ under the symbol UFCS. On March 1, 1999, there were 948 holders of record of the Company's common stock. The table on the following page sets forth, for the calendar periods indicated, the high and low bid quotations for the common stock and cash dividends declared. These quotations reflect inter-dealer prices without retail markups, markdowns or commissions and may not necessarily represent actual transactions. The Company's policy has been to pay quarterly cash dividends, and the Company intends to continue that policy. Payments of any future dividends and the amounts of such dividends, however, will depend upon factors such as net income, financial condition, capital requirements and general business conditions. The Company has paid dividends every quarter since March 1968. 7 State law permits the payment of dividends only from statutory accumulated earned profits arising from business. The Company's subsidiaries are also subject to state law restrictions on dividends. See Note 7 in the Notes to Consolidated Financial Statements.
- ----------------------------------------------------------------------- Cash Share Price Dividends High Low Declared - ----------------------------------------------------------------------- 1998 QUARTER ENDED MARCH 31 $45 3/4 $40 1/2 $ 0.16 JUNE 30 44 37 7/8 0.17 SEPTEMBER 30 41 3/4 32 1/8 0.17 DECEMBER 31 38 1/2 32 0.17 1997 Quarter Ended March 31 $37 $29 3/4 $ 0.15 June 30 40 30 0.16 September 30 41 1/2 37 0.16 December 31 47 38 1/2 0.16 - ----------------------------------------------------------------------- - -----------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data) - ---------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------- Total assets $1,250,594 $1,157,922 $1,024,835 $937,594 $828,126 Operating revenues Net premiums earned 245,727 244,939 234,797 207,528 184,748 Investment income, net 67,928 61,686 56,936 53,603 46,420 Realized investment gains and other income 22,796 2,676 6,726 1,698 796 Commission and policy fee income 1,815 1,829 1,815 1,761 1,881 Net income 23,677 28,732 21,960 28,803 22,521 Earnings per common share 2.28 2.68 2.04 2.66 2.08 Cash dividends declared per common share 0.67 0.63 0.60 0.55 0.49 - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
Earnings per common share and cash dividends declared per common share have been retroactively restated for additional shares issued as a result of a three for two stock split to stockholders of record as of December 18, 1995. The selected financial data herein has been derived from the financial statements of the Company and its subsidiaries. The data should be read in conjunction with "The Chairman's Report," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related Notes. [A bar graph displaying earnings per common share and dividends declared for the five years ended December 31, 1998 appears here.] Earnings Per Common Share
Earnings Per Common Share Dividends Declared 1994 2.08 0.49 1995 2.66 0.55 1996 2.04 0.60 1997 2.68 0.63 1998 2.28 0.67
8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The 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. All references to the Company include all of its subsidiaries; United Life Insurance Company, Addison Insurance Company and Lafayette Insurance Company. The Company operates in two segments; property and casualty insurance and life insurance. The following discussion is presented by segment, and should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998, COMPARED TO THE YEAR ENDED DECEMBER 31, 1997 PROPERTY AND CASUALTY INSURANCE SEGMENT A majority of the property and casualty insurance segment's revenue is generated from personal and commercial insurance premiums. During the last several years, this industry has faced fierce competition, which has limited premium growth and squeezed underwriting profits. Under these conditions, the Company has worked hard to maintain its market share without compromising its underwriting standards. The Company's property and casualty segment had a slight decrease in premiums earned of 2 percent in 1998. The reinsurance line of business had the largest change in net premiums earned, decreasing by $4,770,000, or 16 percent, between 1998 and 1997. All other lines of business have increased or decreased slightly between years. Looking to the future, management does not expect significant relief from the intense competition and will continue to respond to market pressures by seeking out profitable business at adequate rates. The property and casualty segment's largest expenditures are for losses and loss adjustment expenses. According to the Insurance Services Office, a supplier of property and casualty statistical information, U.S. property and casualty insurers will report catastrophe losses (excluding expenses) of approximately $10 billion for events occurring in 1998, making 1998 the third-worst year for catastrophe losses in the last 10 years. The Company's exposure to 23 of these catastrophes negatively impacted net income by $19,188,000 or $1.85 per share, net of tax. This amount includes losses and expenses, net of ceded reinsurance. The largest storms affecting the Company occurred between May 30 and June 1, in Iowa, Minnesota, South Dakota and Wisconsin. These storms, although individually not large enough to penetrate our catastrophe reinsurance cover of $5,000,000, generated net incurred losses of $4,711,000. Other storms in Iowa and Minnesota, on May 15 and 16, resulted in net incurred losses in excess of $3,647,000. Severe storms occurring in several midwestern states between June 24 and 30, resulted in additional catastrophe net incurred losses of $3,620,000. Hurricane Georges hit Louisiana and Mississippi September 21 through September 28, causing over $4,000,000 in net incurred losses for the Company. Finally, storms occurring November 9 through November 11 in several midwestern states resulted in over $1,200,000 in net incurred losses. Experience in the Company's property lines of business deteriorated in 1998, as measured by the loss ratio (net losses incurred divided by net premiums earned). The fire and allied lines loss ratio increased to 73.5 percent, compared to 59.5 percent in 1997 and 66.1 percent in 1996. These are the lines of business most affected by catastrophe losses and include personal and commercial property coverage for homeowners and commercial businesses. Catastrophe activity negatively impacted the Company's reinsurance business as well. The loss ratio for net assumed reinsurance, which constitutes business assumed from other insurance companies, deteriorated to 95.9 percent in 1998, from 59.9 percent in 1997 and 73.2 percent in 1996. The Company's workers' compensation business is also experiencing decreasing underwriting profit. Reserve strengthening in the fourth quarter due to adverse legal decisions contributed to deteriorating workers' compensation experience. In addition, tough competition to retain market share also contributed to the unfavorable results. The Company's corporate workers' compensation claims manager resigned in January 1999, and a search for his replacement is underway. The Company's fidelity and surety business continues to be very profitable, with a loss ratio of 9.9 percent, down from 12.3 percent in 1997 and 12.7 percent in 1996. As a profitability measure, the property and casualty industry uses the statutory combined ratio, which is calculated by dividing net losses and net loss adjustment expenses incurred by net premiums earned, plus expenses incurred divided by net premiums written. Generally, if the combined ratio is below 100 percent, the Company experiences an underwriting profit; if it is above 100 percent an underwriting loss exists. In 1998, the segment's combined ratio was 115 percent, compared to 98 percent in 1997 and 104 percent in 1996. The catastrophes discussed above added 11 percent to the 1998 combined ratio. 9 LIFE INSURANCE SEGMENT The Company's life insurance segment had record earnings in 1998. The segment reported net income after consolidating eliminations of $10,614,000, compared to $6,060,000 in 1997. Growth in net premiums earned of $6,064,000, or 32 percent, was a major factor in the favorable results. Much of the premium growth came from the segment's single premium credit life and accident and health products. Management anticipates smaller growth in the life insurance segment's premium income in 1999. The life segment's largest expenditure is interest credited to annuities and universal life policies. As new premiums and existing account balances increase, the interest credited to policies will grow proportionately. Losses incurred, resulting primarily from death claims, is the second largest cost incurred by the life insurance segment. In 1998, there were a higher number of death claims and larger benefits were paid out on these claims, as compared with prior years. In addition, an increase in retention from $100,000 to $200,000 per insured, effective January 1, 1995, has increased both premium revenue and losses incurred. INVESTMENT RESULTS Federal Reserve Chairman Dr. Alan Greenspan, described the United States economy as an "oasis of prosperity" in reference to other international economies that slumped in 1998 and experienced financial turmoil, defaults and currency devaluations. The United States experienced moderate economic growth of 3.9 percent, combined with low inflation of 1.6 percent, as declining commodity prices and increased labor productivity led the Dow Jones Industrial Average to a record high of 9374 and lower interest rates. During 1998, interest rates declined over 1 percent for various intermediate and longer-term bond maturities that the Company typically seeks to invest in. For perspective, the 30-year U.S. Treasury bond yield declined to its lowest level ever during the 21 years that it has been offered. This generally lower level of interest rates was partially offset by widening corporate bond spreads over U.S. treasury bonds. Fixed-income purchases in these corporate bonds, which included additional purchases of private placements and higher-yielding medium grade obligations (substantially all United States corporations), minimized the decline in yields added to the investment portfolio. For 1999, we are more conservative with our forecast on economic growth. Concerns of deflation, Year 2000 problems, competitiveness of the new Euro currency/members, and international financial instability are expected to slow United States earnings and economic growth (mostly in the second half) and pose further volatility to the financial markets. The Company reported net investment income of $67,928,000, compared to $61,686,000 in 1997. More than 90 percent of the income originates from interest on fixed maturities. The remaining investment revenue is derived from dividends on equity securities, interest on other long-term investments, interest on mortgage loans, interest on policy loans and rent earned from tenants in the Company's home office. The Company's investment yield has remained fairly stable over the three-year period ending in 1998. The yield was 6.5 percent in 1998, 6.6 percent in 1997 and 6.9 percent in 1996. Realized gains reported by the Company increased significantly in 1998, growing to $22,796,000 from $2,676,000 in 1997. During the second quarter of the year, the Company took advantage of market conditions and sold some of its equity securities. The proceeds were used to purchase 625,000 shares of its common stock. The sales generated realized gains of $16,858,000, which contributed to the 1998 results. During the third quarter of 1998, 600,000 of the treasury shares were retired and 25,000 shares were contributed to the Company's Employee Stock Ownership Plan. RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997, COMPARED TO THE YEAR ENDED DECEMBER 31, 1996 PROPERTY AND CASUALTY INSURANCE SEGMENT The property and casualty segment had modest premium growth of 2 percent in 1997. Due to a lack of significant catastrophe exposure during 1997 and due to improvements in several lines of business, the segment reported favorable underwriting results. The statutory combined ratio (net losses and net loss adjustment expenses incurred to net premiums earned, plus expenses incurred to premiums written) was 98 percent for the year ended 1997, compared to 104 percent for 1996. The loss ratio (net losses incurred divided by net premiums earned) for the Company's automobile lines improved to 66.7 percent in 1997, compared to 83.7 percent in 1996. The other liability line had a loss ratio of 29.1 percent in 1997, compared to 33.4 percent in 1996. The reinsurance line also showed substantial improvement, decreasing to 59.9 percent in 1997 from 73.2 percent in 1996. Workers' compensation results deteriorated in 1997, compared to 1996. Net premiums earned decreased $1,883,000, or 8 percent, and the loss ratio rose to 69.4 percent from 50.2 percent in 1996. An increase in claims severity in 1997, as well as continuing rate reductions due to competition contributed to those results. 10 Gross direct catastrophe losses were approximately $6,780,000 in 1997. The heaviest storm activity occurred in the states of Iowa, Illinois, Kansas, Wisconsin and Nebraska during the spring, where hail and wind caused approximately $4,106,000 in incurred property damage. The remaining catastrophe activity occurred throughout the year in Louisiana, Arkansas, North Dakota, Colorado and Mississippi. Gross losses incurred on all catastrophes for the years ending 1997, 1996 and 1995 were $8,926,000, $13,350,000 and $13,936,000, respectively. Losses and loss adjustment expenses recovered or recoverable from reinsurers on all catastrophes for the years ending 1997, 1996 and 1995 were $1,313,000, $2,839,000 and $3,119,000, respectively. Underwriting and acquisition expenses incurred by the property and casualty segment increased 2 percent to $74,992,000 in 1997, compared to 1996. The 2 percent growth in premium writings produced corresponding moderate increases in expenses such as commissions and other policy-related expenses. LIFE INSURANCE SEGMENT The life segment's earnings decreased $2,071,000 or 26 percent in 1997 compared to 1996. Much of this was attributable to an adjustment to deferred acquisition costs, which resulted in additional amortization of approximately $2,057,000. This adjustment was a result of an acceleration of amortization of prior years' amounts deferred. Life insurance losses incurred increased $4,190,000 over 1996, due primarily to an increase in claim activity during the fourth quarter. An increase in retention from $100,000 to $200,000 per insured, effective January 1, 1995, contributed to the increase in losses. In addition, claims activity had grown due to significant increases in the credit life and credit accident and health blocks of business. The amount of insurance in force in these lines increased by $37,201,000, or 25 percent, in 1997 compared to 1996. INVESTMENT RESULTS Growth in the Company's portfolio of fixed-income securities contributed to the 8 percent increase in investment income in 1997. The 1996 realized gains and other income results included $2,074,000 of interest received in connection with the settlement of a Federal Income Tax Revenue Agent Review for previous tax years. Realized gains reported by the life segment decreased by $1,141,000 in 1997 compared to 1996. The larger gains recorded in 1996 were a result of the Company taking advantage of market conditions and selling some of its available-for-sale fixed-income securities. 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 long-term, high-quality securities. As of December 31, 1998, 90 percent of the fixed maturity securities were investment grade (as defined by the National Association of Insurance Commissioners "NAIC" -Securities Valuation Office and having NAIC ratings of Class 1 or Class 2), compared to 93 percent at December 31, 1997. The below-investment-grade holdings present opportunities for much higher returns than with other available debt securities. The below-investment-grade holdings purchased are securities that have the potential for upgrade in the near future. Also, the Company minimizes its risk associated with below-investment-grade securities by monitoring credit risk of the issuers and by spreading the exposure amongst several issuers. Fixed maturities that the Company has the ability and intent to hold to maturity are classified as held-to-maturity. The remaining fixed maturities and all of the Company's equity securities are classified as available-for-sale. The Company does not currently have any securities classified as trading. At December 31, 1998, 65 percent of the fixed maturity portfolio was classified as held-to-maturity compared to 82 percent at December 31, 1997. The held-to- maturity securities are reported at amortized cost, while available-for-sale securities are reported at market value. Unrealized appreciation or depreciation of available-for-sale investments is reflected in a separate component of stockholders' equity. Effective January 1, 1999, the Company reclassified a portion of its held-to-maturity investment portfolio to available-for-sale in conjunction with the adoption of Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." Generally, reclassifications are allowed only in rare circumstances. However, given the new restrictions that SFAS No. 133 has on hedging interest rate risk for held-to-maturity securities, all companies adopting SFAS No. 133 will be allowed to reassess their held-to-maturity portfolios 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, 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. 11 The Company has had limited involvement with derivative financial instruments and does not engage in the derivative market for hedging or speculative purposes. During 1998, the Company wrote covered-call options to generate additional portfolio income. At December 31, 1998, options were written on approximately 4 percent of the equity portfolio, compared to nearly 1 percent at December 31, 1997. The Company also has investments in collateralized mortgage obligations (CMO). These securities account for 16 percent of the fixed-income portfolio at December 31, 1998, compared to 22 percent as of December 31, 1997. The decrease was the result of sales and prepayments of CMOs in 1998, which were subsequently replaced with corporate bonds. OTHER ASSETS Deferred acquisition costs constitute the Company's second largest asset, after investments. The total of $67,592,000 represents deferred underwriting and acquisition expenses associated with writing insurance policies. Deferred acquisition costs are amortized over the life of the policies written to attain a matching of revenue to expenses. The Company's life segment generated an increase in deferred acquisition costs of $9,272,000 due to its growth in premium volume. The property and casualty segment's deferred acquisition costs decreased in 1998 by $1,895,000, due to the decrease in premiums written. Accounts receivable, all of which pertain to the property and casualty segment, are amounts due from insurance agents and brokers for premiums written, less commissions paid. The balance at December 31, 1998, of $44,868,000 has increased slightly from December 31, 1997. This change in receivables is due to the segment's flat premium growth. The Company has not experienced difficulties in collecting balances from its agents. An allowance for doubtful accounts of $731,000 has been established at December 31, 1998, compared to $1,030,000 at December 31, 1997. 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 $92,752,000, or 19 percent, between December 31, 1997 and December 31, 1998. Future policy benefits are increased immediately by the full premiums paid by policyholders for annuity products and most universal life products. As these product lines have grown, the future policy benefits have grown proportionately. Claims and settlement expenses which relate to the property and casualty segment also increased in 1998. Direct and assumed reserves established for losses and expenses have increased $19,349,000 to $251,117,000, when compared to December 31, 1997. Of this increase, $4,603,000 relates to the 1998 catastrophe activity. Ceded recoverables on these losses are reflected in assets as reinsurance receivables of $12,910,000. STOCKHOLDERS' EQUITY The Company's stockholders' equity decreased by $20,926,000 to $256,282,000 at December 31, 1998 compared to $277,208,000 at December 31, 1997. Decreases to stockholders' equity include $25,200,000 due to the retirement of 600,000 shares of treasury stock, $6,964,000 of declared dividends and net unrealized depreciation of $10,918,000. Net income increased the Company's stockholders' equity by $23,677,000. 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 obligations to pay policy benefits, claims and claim adjusting expenses. Net cash provided by the Company's operating activities was $18,061,000 in 1998, compared to $43,211,000 in 1997. 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 $15 million line of credit with a local bank. During 1998, the Company borrowed funds against the line of credit, with a maximum outstanding balance of $3,450,000. Under the terms of the agreement, interest on outstanding notes is payable at the lender's prevailing prime rate. There is no loan balance outstanding as of December 31, 1998. Interest expense in connection with the line of credit borrowing was $11,000 in 1998. During 1997, the Company borrowed $1,000,000 against the line of credit for four days. REGULATION The insurance industry is governed by the NAIC, as well as individual state insurance departments. These governing agencies are working on a project to codify insurance statutory accounting practices. Currently, these practices are prescribed in a variety of publications, as well as state laws, regulations, and general administrative rules. The Company expects the State of Iowa to adopt codification by January 1, 2001, and the Company expects the new rules to 12 have a financial effect upon application. The Company has not yet determined this impact. The changes would not affect the accompanying financial statements, which are based on GAAP. Prior to implementation of the codified rules, permitted statutory accounting practices are used when prescribed statutory practices do not address the accounting for transactions. The Company does not use permitted practices that individually or in the aggregate materially affect statutory surplus or risk- based capital. As part of the NAIC and state insurance department's solvency regulations, the Company is required to calculate a minimum capital requirement based on insurance risk factors. The risk-based capital results are used to identify companies that merit regulatory attention or the initiation of regulatory action. At December 31, 1998 and 1997, both the property and casualty and the life segments had capital well in excess of their required levels. The Company is not aware of any other current recommendations by the NAIC or other regulatory authorities in the states in which the Company conducts business that, if or when implemented, would have a material effect on the Company's liquidity, capital resources or operations. IMPACT OF 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 the early 1990s, the Company initiated an informal plan requiring the programming of four-digit date fields in anticipation of the new century. Both the testing phase and third-party vendor contact phase have been conducted through a formal project plan. Testing of the Company's "mission critical systems" was completed by December 31, 1998 and all systems tested were found to be compliant. All other systems will have been tested by the end of 1999. The Company is also reviewing its third-party vendors for Year 2000 compliance and is requiring written acknowledgment of testing and readiness. Third-party institutions providing banking services, including lockbox processing, checking and investment processing have all certified to the Company that their systems are or will be compliant by the end of 1999. The Company will continue to monitor this situation for compliance. In addition to systems that the Company uses to conduct its business, the potential problems with the Year 2000 could also affect other aspects of the Company's operations. Such non-information systems include, but are not limited to, purchased worksheet programs, heating and air conditioning units, and building elevators. The Company has addressed all of the secondary systems in its Year 2000 project. Failure of these secondary systems would not have a material impact on the Company's operations. Expenses incurred in connection with programming and testing have been expensed as incurred and absorbed into normal operating expenses. The Company estimates that the costs incurred during 1998 in connection with the Year 2000 project have totaled approximately $175,000. The Company believes the remaining costs for Year 2000 compliance will include salaries and overhead for existing company personnel of approximately $175,000 and replacement of hardware of approximately $150,000. Costs incurred prior to 1998 for the Year 2000 effort were salaries of approximately $900,000. No computer hardware or software was purchased specifically to replace non-compliant systems. Since the mid 1990s, any purchases of new hardware or software replacing obsolete systems were required to be Year 2000 compliant. The failure of the Company's systems or the systems of its vendors to be compliant with the Year 2000 could result in the incorrect processing of critical financial and operational information. The Company is analyzing its processing in an effort to identify the nature and magnitude of problems that could result from such programming errors. The Company is preparing a contingency plan that will detail alternative processing methods in the event that systems, including secondary systems, fail. The Year 2000 contingency plan is expected to be completed by July 1, 1999. SUBSEQUENT EVENTS The Company and American Indemnity Financial Corporation ("American Indemnity") signed a definitive agreement on March 4, 1999, whereby the Company will purchase all outstanding stock of American Indemnity for approximately $30,600,000 in cash. Common stockholders of American Indemnity would receive approximately $14.60 per share at the closing of the transaction and deferred consideration of $1.00 per share in two years, subject to adjustments relating to indemnities. The acquisition is conditioned upon approval by American Indemnity's common shareholders, approvals from insurance regulators in Texas, Colorado and Iowa, where the insurance companies are domiciled, compliance with all applicable provisions of the Hart-Scott-Rodino Antitrust 13 Improvement Act of 1976 and the expiration of all applicable waiting periods thereunder and certain other customary conditions. It is anticipated that the acquisition will be complete by June 30, 1999. CHAIRMAN'S REPORT Last year, your Company's earnings were down 18 percent to $23,677,000 or $2.28 per share, compared to $28,732,000 or $2.68 per share for 1997. Poor underwriting results in your Company's property and casualty business were partially offset by an outstanding year for United Life Insurance Company and gains realized on the sale of securities. Neither Mother Nature nor the god who controls casualty claims was very kind to us. Direct catastrophe losses in 1998 amounted to $21,000,000 compared with less than $7,000,000 in 1997. In four of those storms, your Company's losses exceeded $3,000,000. The two most noteworthy were the tornado that destroyed the small town of Spencer, South Dakota, on May 30 and September's Hurricane Georges. In Spencer, we estimate we had insured at least one of every four buildings destroyed. It's too bad we don't have that kind of market penetration in Cedar Rapids, Kansas City or Lincoln. That storm cost your Company more than $4,500,000. Hurricane Georges made landfall near Pascagoula, Mississippi, on September 27, and cost your Company over $4,000,000 in both direct and reinsurance losses. Just as in 1992 when Mother Nature decided to teach the insurance business a lesson with Hurricane Andrew, our casualty experience was not very good, particularly workers' compensation, which had a 78.3 percent loss ratio. Apparently, the God of Casualty Claims decided we needed a dose of humility. The deterioration in our workers' compensation experience was the result of a combination of reckless competition, renewed inflation in health care costs and management shortcomings. The management problems have been addressed, the other problems may take a little longer. Workers' Compensation is too important a line to walk away from. The result was a statutory combined ratio on our property and casualty operations of 115 percent, 17 points worse than the preceding year and our worst underwriting results since 1992. For once, we did not do better than the industry whose combined ratio is estimated by A.M. Best at 105 percent, although it is our impression that most companies with a heavy Midwest exposure did not do nearly that well. Written premiums actually declined 3 percent to $221,000,000 and what is even more disturbing, written premiums were down 5 percent in Iowa to only $39,000,000. As stockholders, your natural question should be, "Is 1999 going to be any better?" I certainly hope so, but maybe I should answer that question by quoting those immortal words mumbled by our illustrious President: "That depends on what your definition of "is" is." Fortunately, a lousy year in property and casualty insurance was offset by an outstanding year for United Life Insurance Company, which had record earnings of $10,614,000. Statutory premiums increased 30 percent to $155,000,000 and United Life added over $100,000,000 in assets. It earned a 13-percent return on equity, which is just about in line with the big boys. Of the $155,000,000 in statutory premiums, $120,000,000 were annuities. Among the Iowa-based companies including companies like Aegon, the Principal and the Equitable - your Company was the second largest annuity writer in Iowa in 1997, the latest year for which figures are available. We are confident we maintained that position in 1998. We now have over $400,000,000 in annuity reserves on which we have been able to maintain our spreads, even in an environment of declining interest rates. Last year, we earned a 7.7-percent return on the average invested assets in United Life, only ten basis points less than the year before. A couple years ago, an analyst for one of the omniscient rating agencies scolded us for becoming an "asset accumulator" We were dumbfounded. We never realized having an extra half-billion dollars lying around and the earnings off that money was such a bad thing! Bottom line, in 1998, your Company earned $23,677,000 or $2.28 per share, compared to $28,732,000 or $2.68 per share the year before (approximately 636,000 or 6 percent of the shares outstanding were retired during 1998). Last year's earnings included $22,796,000 in realized investment gains, which amounted to 96 percent of our total earnings, compared to only $2,676,000, or less than 10 percent of earnings the year before. We recall hearing something about "irrational exuberance" and thought it might be prudent to take some of the profits we had in our stock portfolio. Unfortunately, that means our operations contributed very little to our bottom line as the good earnings of our life insurance business were offset by the losses in our property and casualty business. Thanks to the hard work of Spike Hulit and his team at the Addison Insurance Company, we completed, in August, a month ahead of schedule, the transfer of our Lombard, Illinois operation to Cedar Rapids and the reorganization of our Midwest operations, with Lincoln assuming responsibility for North and South Dakota. As a result, we were able to reduce our payroll by approximately 20 employees. Not only is it gratifying to be able to report we were 14 able to realize substantial savings by this move, we were pleased with the number of our Lombard staff who decided to stay with us and move to Cedar Rapids. Spike did an outstanding job of selling Cedar Rapids. Maybe that is one of the advantages of not being from here. Of course, a good salesman can sell anything and Spike is a very good salesman. To those who have visited our Web Site at "www.unitedfiregroup.com," the cover for this year's report should look familiar. We used the graphics from our Internet Home Page. Technologically, we believe our Internet project, which went live October 1, is one of the most innovative and exciting things we have ever done. It is an interactive site through which more than 400 agents can secure quotations for commercial insurance and current claim and account information. Colleen Sova and her team did an outstanding job. In retrospect, maybe we should have changed the name of the Company to "unitedfiregroup.com." If we had, perhaps our price/earnings ratio would be 400 instead of 11 and no one would care whether we made any money or not. During its development, I stayed as far away from the project and the people working on it for as long as I could. I didn't want to screw it up. But, as the project neared completion, my curiosity got the better of me. One day, I saw a sign directing the Beta Test Agents to our computer lab. I couldn't resist the temptation. Later, I went downstairs and quietly slipped into a chair in the back of the room. The minute I sat down, the whole system froze up and it took our people the rest of the day to get it operating again. It works much better now. The property and casualty business is notoriously cyclical. Many investment gurus counsel their clients to play that cycle and buy insurance stocks when the underwriting cycle reaches its nadir or, better yet, before it turns. One problem I have with that approach is that after more than 50 years in the business, I know less about that cycle now than I did when I started. However, it might be interesting to look at what some savvy insurance investors are doing. Last June, Warren Buffett announced he would increase his interest in the insurance business by buying General Reinsurance. He was so interested in doing the deal, he broke one of his own rules and used something, if you believe everything he says, that he thinks is better than cash - Berkshire-Hathaway stock - to pay for it. Another transaction that caught our attention was CIGNA's decision to exit the property and casualty business and sell it to ACE Ltd., a smart, aggressive insurance company with global ambitions. While we are not personally familiar with ACE, based in Bermuda, we understand it's run by some very capable refugees from the AIG. It's been our observation that anytime you can bet against CIGNA, it's usually a good way to make some money. Also, W.R. Berkley, an insurance holding company, put its 10 regional property and casualty companies up for sale. This bothered us; we know Bill Berkley, we compete against a number of his companies and he's a good operator. We thought, for a while, that maybe he knew something we didn't. We were relieved when a couple months ago he announced he was taking them off the market and reorganizing them, something we could never understand why he hadn't done years ago. With property and casualty premiums increasing at only 1 to 2 percent and underwriting results continuing to deteriorate, consolidation in the property and casualty business continues to accelerate. Last year, we commented on some of the mergers which were of particular interest to us. This year, there have been so many that we've lost track. Unfortunately, many of the deals are being done for stock so the capacity in the industry is not being reduced. No commentary on the year before the year that ends the millennium (although we all know the millennium won't really end until December 31, 2000) would be complete without a few words about those three little symbols "Y2K." Because of the long-term nature of some of the surety bonds we write and our life products, our programmers started working on upgrading our systems in the early 1990s and have tested our systems again and again. The latest test of critical systems was completed in December 1998 and all systems tested passed with flying colors. Rather than our systems, my concern is about all those people who have made a career of sending out stupid questionnaires about "Y2K" and then harassing people when they don't answer their stupid questions. I must admit, I'm looking forward to January 1, 2000, when, hopefully, they will all be unemployed. Alas, I know I'll be disappointed. Given the bureaucratic nature of our society, I'm confident they will find something equally unproductive to do. At its August 21, 1998, meeting, your Board of Directors adopted a non-qualified stock option plan. Normally, this would not be good news to stockholders, as such plans are often used by management to enrich itself at the expense of stockholders. This is not why we adopted our plan. It is my hope that this plan will be primarily used as a reward and incentive for our good insurance technicians and middle management - underwriters, claims people, programmers, etc. - who may not be adequately compensated under conventional salary administration plans, the people upon whom the Company depends for its future success. This year, for the first time, we applied for a Standard & Poor's rating and were pleased when 15 they rated all our insurance companies A+. This was particularly gratifying for we had always believed there was a size bias in S&P's approach to rating insurance companies. For the sixth consecutive year, Ward Financial Group, a highly recognized firm of insurance consultants, named your Company one of the 50 outstanding property and casualty companies in the United States, based on performance and security. On May 19, your Board of Directors increased the dividend on your stock 6 percent to $.68 per share. ITEM 7A. 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. The Company's interest rate risk is the price sensitivity of a fixed-income security to changes in interest rates. One of the measures that the Company uses to quantify this exposure is duration, which relates primarily to the life insurance segment and measures the sensitivity of the fair value of assets and liabilities to changes in interest rates. The Company's life segment had $401,000,000 in deferred annuity liabilities that are specifically allocated to fixed-income securities. The management of these investments concentrates mostly upon the proper matching of the duration of the deferred annuity obligations and that of the assets supporting these obligations. This is done by projecting asset and liability cash flows under a variety of market interest-rate scenarios. Duration is calculated by revaluing these cash flows at alternative levels of interest rates, and determining the change in discounted value from that developed using current market interest rates. The projections include assumptions regarding asset prepayment and extension risk, and the effect of varying market interest rate conditions on lapse and partial withdrawal activity. Based upon these projections, at current levels of interest rates, the duration of the assets supporting deferred annuity liabilities is 0.18 years longer than the projected duration of the liabilities. If interest rates increase by 100 basis points, this difference would be expected to widen to 1.06 years. Based upon the information and assumptions in effect at December 31, 1998, management estimates that an immediate increase of 100 basis points in interest rates for all of its interest-sensitive financial instruments would result in a net hypothetical loss in fair value of $20,092,000, net of tax. The Company has included corresponding changes in certain deferred annuity liabilities in this sensitivity analysis. The selection of a 100 basis point immediate parallel increase in interest rates should not be construed as a prediction by the Company's management of future market events; but rather, to illustrate the potential impact of such an event. To the extent that actual results differ from the assumptions utilized, the Company's duration and rate increase measures could be significantly impacted. Additionally, the Company's calculation assumes that the current relationship between short-term and long-term interest rates (the term structure of interest rates) will remain constant over time. As a result, these calculations may not fully capture the impact of non-parallel changes in the term structure of interest rates and/or large changes in interest rates. Foreign currency exchange rate risk arises from the possibility that changes in foreign currency exchange rates will affect the fair value of financial instruments. The Company has limited foreign currency exchange rate risk in its transactions with foreign reinsurers. This activity relates to the settlement of amounts due to/from foreign reinsurers in the normal course of business. Management considers this risk to be immaterial to the Company's operations. Equity price risk is the potential loss arising from changes in the fair value of equity securities. Assuming an immediate decrease in market prices of 10 percent for equity securities, the hypothetical loss in fair value is estimated to be $11,108,000. 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------------ ASSETS 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ INVESTMENTS (Notes 2 and 3) Fixed maturities Held-to-maturity, at amortized cost (market value $626,180 in 1998 and $709,867 in 1997) $ 591,237 $ 677,360 Available-for-sale, at market (amortized cost $320,171 in 1998 and $145,019 in 1997) 321,966 146,932 Equity securities (cost $23,450 in 1998 and $26,296 in 1997) 111,076 128,698 Mortgage loans 2,777 2,862 Policy loans 8,707 8,405 Other long-term investments, at market (cost $11,517 in 1998 and $9,000 in 1997) 14,368 12,448 Short-term investments 33,985 19,195 - ------------------------------------------------------------------------------------------------------------------------ $1,084,116 $ 995,900 CASH AND CASH EQUIVALENTS - 2,378 ACCRUED INVESTMENT INCOME (Note 3) 16,130 14,159 ACCOUNTS RECEIVABLE, (net of allowance for doubtful accounts of $731 in 1998 and $1,030 in 1997) 44,868 44,060 DEFERRED POLICY ACQUISITION COSTS 67,592 60,215 PROPERTY AND EQUIPMENT, primarily land and buildings, at cost, less accumulated depreciation of $15,984 in 1998 and $15,781 in 1997 13,334 14,443 REINSURANCE RECEIVABLES (Note 5) 12,910 14,430 PREPAID REINSURANCE PREMIUMS 2,923 4,064 INTANGIBLES 817 1,082 INCOME TAXES RECEIVABLE (Note 8) 3,757 - OTHER ASSETS 4,147 7,191 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $1,250,594 $1,157,922 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Future policy benefits and losses, claims and settlement expenses (Notes 5 and 6) Property and casualty insurance $251,117 $231,768 Life insurance (Note 3) 575,189 482,437 Unearned premiums 116,418 108,296 Accrued expenses and other liabilities 18,922 18,373 Employee benefit obligations (Note 9) 9,813 8,665 Income taxes payable (Note 8) - 3,307 Deferred income taxes (Note 8) 22,853 27,868 - ------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES $994,312 $880,714 - ------------------------------------------------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY Common stock, $3.33 1/3 par value; authorized 20,000,000 shares; (Note 12) 10,091,721 shares issued and outstanding in 1998 10,727,322 shares issued and outstanding in 1997 $ 33,639 $ 35,758 Additional paid-in capital 7,927 9,331 Retained earnings (Note 7) 155,421 161,906 Accumulated other comprehensive income, net of tax 59,295 70,213 - ------------------------------------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY $256,282 $277,208 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,250,594 $1,157,922 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these statements. 17 CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- ---------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data and Number of Shares) - ---------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- REVENUES Net premiums earned (Note 5) $ 245,727 $ 244,939 $ 234,797 Investment income, net (Note 2) 67,928 61,686 56,936 Realized investment gains and other income (Note 2) 22,796 2,676 6,726 Commission and policy fee income 1,815 1,829 1,815 - ---------------------------------------------------------------------------------------------------------------------------- $ 338,266 $ 311,130 $ 300,274 - ---------------------------------------------------------------------------------------------------------------------------- BENEFITS, LOSSES AND EXPENSES Losses and settlement expenses $ 191,388 $ 159,199 $ 161,293 Increase in liability for future policy benefits 3,707 5,016 8,817 Amortization of deferred policy acquisition costs 47,892 50,269 48,364 Other underwriting expenses 40,315 35,968 33,722 Interest on policyholders' accounts 26,568 22,510 20,701 - ---------------------------------------------------------------------------------------------------------------------------- $ 309,870 $ 272,962 $ 272,897 - ---------------------------------------------------------------------------------------------------------------------------- Income before income taxes $ 28,396 $ 38,168 $ 27,377 Federal Income Taxes (Note 8) 4,719 9,436 5,417 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 23,677 $ 28,732 $ 21,960 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Earnings per common share (Note 12) $ 2.28 $ 2.68 $ 2.04 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding (Note 12) 10,393,930 10,727,440 10,773,591 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Cash dividends declared per common share (Note 12) $ 0.67 $ 0.63 $ 0.60 - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these statements. 18 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data and Number of Shares) - ----------------------------------------------------------------------------------------------------------------------------------- Accumulated Other Additional Comprehensive Common Paid-In Retained Income, Net of Stock Capital Earnings Tax (1) Total - ----------------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1995 $36,098 $12,031 $124,430 $ 36,194 $208,753 - ----------------------------------------------------------------------------------------------------------------------------------- Net income - - 21,960 - 21,960 Change in net unrealized appreciation, net of applicable income taxes - - - 6,631 6,631 - ----------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income 28,591 Cash dividend declared on common stock $.60 per share - - (6,457) - (6,457) Purchase and retirement of 101,958 shares of common stock (339) (2,689) - - (3,028) - ----------------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1996 $35,759 $ 9,342 $139,933 $ 42,825 $227,859 - ----------------------------------------------------------------------------------------------------------------------------------- Net income - - 28,732 - 28,732 Change in net unrealized appreciation, net of applicable income taxes - - - 27,388 27,388 - ----------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income 56,120 Cash dividend declared on common stock $.63 per share - - (6,759) - (6,759) Purchase and retirement of 390 shares of common stock (1) (11) - - (12) - ----------------------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1997 $35,758 $ 9,331 $161,906 $ 70,213 $277,208 - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME - - 23,677 - 23,677 CHANGE IN NET UNREALIZED APPRECIATION, NET OF APPLICABLE INCOME TAXES - - - (10,918) (10,918) - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL COMPREHENSIVE INCOME $12,759 CASH DIVIDEND DECLARED ON COMMON STOCK $.67 PER SHARE - - (6,964) - (6,964) PURCHASE AND RETIREMENT OF 635,601 SHARES OF COMMON STOCK (2,119) (1,404) (23,198) - (26,721) - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1998 $33,639 $ 7,927 $155,421 $ 59,295 $256,282 - ----------------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------------
(1) At December 31, 1998, 1997 and 1996, items in the accumulated other comprehensive income column include cumulative adjustments for unrealized appreciation (depreciation) net of tax on available-for-sale securities and other long-term investments of $19,008,000, $2,014,000 and $5,395,000, respectively. The gross change in net unrealized appreciation (depreciation) on available-for-sale securities and other long-term investments at December 31, 1998, 1997 and 1996 of $(16,217,000), $42,187,000 and $10,149,000, respectively, is recorded net of income taxes (benefit) of $(5,299,000), $14,799,000 and $3,518,000, respectively. The Notes to Consolidated Financial Statements are an integral part of these statements. 19 CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ----------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Net Income $ 23,677 $ 28,732 $ 21,960 - ----------------------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities Net bond discount accretion (1,428) (307) (489) Depreciation and amortization 468 1,117 2,104 Realized investment gains (22,793) (2,610) (4,651) Realized gain on sale of property (3) - (2) Changes in: Accrued investment income (1,971) (1,964) (678) Accounts receivable (808) (627) (4,813) Deferred policy acquisition costs (7,377) (4,132) (3,413) Reinsurance receivables 1,520 (1,940) (1,793) Prepaid reinsurance premiums 1,141 165 (577) Income taxes receivable/payable (7,064) 4,016 296 Other assets 3,044 (53) 23 Future policy benefits and losses, claims and settlement 20,258 16,652 32,105 expenses Unearned premiums 8,122 3,288 8,196 Accrued expenses and other liabilities 549 (1,454) (3,640) Employee benefit obligations 1,148 1,901 1,071 Deferred income taxes 609 427 (1,778) Other, net (1,031) - - - ----------------------------------------------------------------------------------------------------------------------------------- Total adjustments $ (5,616) $ 14,479 $ 21,961 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities $ 18,061 $ 43,211 $ 43,921 - ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities Proceeds from sale of available-for-sale investments $ 78,471 $ 27,390 $ 35,251 Proceeds from call and maturity of held-to-maturity investments 101,180 62,834 67,696 Proceeds from call and maturity of available-for-sale 31,084 5,298 10,562 investments Proceeds from sale of other investments 38,956 62,189 19,012 Purchase of investments held-to-maturity (14,461) (89,519) (127,982) Purchase of investments available-for-sale (258,744) (105,408) (30,872) Purchase of other investments (55,972) (53,429) (28,149) Proceeds from sale of property and equipment 3,009 1,942 735 Purchase of property and equipment (2,120) (4,619) (1,961) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities $(78,597) $(93,322) $(55,708) - ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities Policyholders' account balances Deposits to investment and universal life type contracts $158,491 $127,644 $ 96,890 Withdrawals from investment and universal life type (66,648) (82,881) (68,212) contracts Purchase and retirement of common stock (26,721) (12) (3,028) Payment of cash dividends (6,964) (6,651) (6,472) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities $ 58,158 $ 38,100 $ 19,178 - ----------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents $ (2,378) $(12,011) $7,391 Cash and Cash Equivalents at Beginning of Year 2,378 14,389 6,998 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ - $2,378 $ 14,389 - ----------------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these statements. 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS, PRINCIPLES OF CONSOLIDATION AND BASIS OF REPORTING The Consolidated Financial Statements have been prepared on the basis of generally accepted accounting principles ("GAAP") which differ in some respects from those followed in reports to insurance regulatory authorities. United Fire & Casualty Company and its insurance subsidiaries (the "Company") are engaged in the business of property and casualty insurance and life insurance. The accompanying Consolidated Financial Statements include United Fire & Casualty Company and its wholly owned subsidiaries, United Life Insurance Company, Lafayette Insurance Company, Insurance Brokers & Managers, Inc., Addison Insurance Company, Addison Insurance Agency and UFC Premium Finance Company. All material intercompany items have been eliminated in consolidation. 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 Consolidated Financial Statements for prior years have been reclassified to conform with the 1998 financial statement presentation. PROPERTY AND CASUALTY OPERATIONS Premiums are reflected in income on a daily pro rata basis over the terms of the respective policies. Unearned premium reserves are established for the portion of premiums written applicable to the unexpired term of policies in force. Certain costs of underwriting new business, principally commissions, premium taxes and variable underwriting and policy issue expenses, have been deferred. Such costs are being amortized as premium revenue is recognized. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, losses and expenses, and certain other costs expected to be incurred as the premium is earned. Unpaid losses and settlement expenses are based on estimates of reported and unreported claims and related settlement expenses. While management believes the reserve for claims and settlement expenses is adequate, the reserve is continually reviewed and, as adjustments become necessary, they are reflected in current operations. Changes in assumptions used in estimating reserves could cause the reserves to change in the near term. LIFE OPERATIONS On traditional business, premiums are reported as earned when due, and benefits and expenses are associated with premium income so as to result in the recognition of profits over the lives of the related contracts. On universal life and annuity (nontraditional) business, income and expenses are reported as charged and credited to policyholder account balances through the use of the retrospective deposit method. This method results in the recognition of profits over the lives of the related contracts. These associations are accomplished by means of the provision for future policy benefits and the deferral and subsequent amortization of life policy acquisition costs. The costs of acquiring new life business, principally commissions and certain variable underwriting, agency and policy issue expenses, have been deferred and are being amortized to income over the premium paying period of the related traditional policies in proportion to the ratio of the expected annual premium revenue to the expected total premium revenue, and over the anticipated lives of nontraditional policies in proportion to the ratio of the expected annual gross margins to the expected total gross margins. The expected premium revenue and gross margins are based upon the same mortality and withdrawal assumptions used in determining future policy benefits. For nontraditional policies, changes in the amount or timing of expected gross margins will result in adjustment to the cumulative amortization of these costs. If the unrealized gains or losses on fixed-income securities carried at fair value would result in an adjustment to deferred policy acquisition costs had those gains or losses actually been realized, the related unamortized deferred policy acquisition costs are recorded as a reduction of the unrealized gains or losses included in stockholders' equity. As of December 31, 1998, an adjustment to reduce deferred policy acquisition costs of $726,000 was made with a corresponding decrease to accumulated other comprehensive income. There was no adjustment in 1997. Liabilities for future policy benefits are computed by the net level premium method using interest assumptions ranging from 4.5 percent to 8.0 percent and withdrawal, mortality and morbidity assumptions appropriate at the time the policies 21 were issued. Health reserves are stated at amounts determined by estimates on individual cases and estimates of unreported claims based on past experience. Liabilities for universal-life-type and investment contracts are stated at policyholder account values before surrender charges. Liabilities for traditional immediate annuities are based primarily upon statutory reserves. Policy claim liabilities are determined using actuarial estimates. These estimates are based on historical information along with certain assumptions about future events. Changes in assumptions for such things as medical costs, environmental hazards, and legal actions, as well as changes in actual experience could cause these estimates to change in the near term. The Company expects to realize a spread of approximately 1.6 percent to 2.0 percent between interest earned and interest credited on its Universal Life Plans and deferred annuities, for which the liability is equal to total policy account values plus deferred front-end loads. INVESTMENTS Investments in held-to-maturity fixed-income securities are recorded at amortized cost. The Company has the ability and intent to hold these investments until maturity. If, however, a permanent impairment occurs in a security, the Company writes the security down to the new value. Available-for-sale fixed-income securities, equity securities and other long-term investments are recorded at fair value. Mortgage loans are recorded at the unpaid balance amount. Policy loans and short-term investments are recorded at cost. Included in investments at December 31, 1998 and 1997, are securities on deposit with various regulatory authorities as required by law with carrying values of $651,173,000 and $543,801,000, respectively. Realized gains or losses on disposition of investments are included in the computation of net income. Cost of investments sold is determined by the specific identification method. Changes in unrealized appreciation and depreciation, resulting from available-for-sale fixed-income securities, equity securities, other long-term investments and certain life deferred policy acquisition costs are reported as direct increases or decreases in stockholders' equity, less applicable income taxes. CASH AND CASH EQUIVALENTS 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. Negative cash balances are included in accrued expenses and other liabilities. Income taxes paid during 1998, 1997 and 1996 were $11,201,000, $5,789,000 and $8,201,000, respectively. The Company received $2,074,000 in interest on Federal Income Taxes in 1996. There were no other significant payments of interest other than interest credited on policyholders' accounts in 1998, 1997 or 1996. PROPERTY, EQUIPMENT AND DEPRECIATION Property and equipment is carried at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the underlying assets. AMORTIZATION OF INTANGIBLES Intangibles, including goodwill and agency relationships, are being amortized by the straight-line method over periods of up to 28 years. INCOME TAXES The Company files a consolidated Federal Income Tax return. Deferred tax assets and liabilities are determined at the end of each period, based on differences between the financial statement bases of assets and liabilities and the tax bases of those same assets and liabilities, using the currently enacted statutory tax rates. Deferred income tax expense is measured by the change in the net deferred income tax asset or liability during the year. ACCOUNTING CHANGES The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" effective December 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 presentation of fully diluted EPS has been replaced with a presentation of diluted EPS, which is calculated in a similar fashion to how fully diluted EPS had been computed. This standard did not have a material effect on the Company's Consolidated Financial Statements or Notes to Consolidated Financial Statements. The Company adopted SFAS No. 129, "Disclosure of Information about Capital Structure," effective December 31, 1997. SFAS No. 129 contains disclosure requirements including liquidation preferences of preferred stock, rights and privileges of the outstanding equity securities and the redemption amounts for all issues of capital stocks that are redeemable. SFAS No. 129 did not have a material effect on the Company's Consolidated Financial Statements or Notes to 22 Consolidated Financial Statements. Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income" governing the reporting and display of comprehensive income and its components, which includes items previously recorded directly in equity, such as unrealized gains or losses on available-for-sale securities. The impact of adopting SFAS No. 130 requires additional disclosure in the Consolidated Financial Statements and does not result in a material effect on the Company's Consolidated Financial Statements. See Consolidated Statement of Stockholders' Equity. The Company adopted 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 effective December 31, 1998. See Note 10 of the Notes to Consolidated Financial Statements. Effective January 1, 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The new statement standardizes the disclosure requirements for these benefit plans. See Note 9 of the 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 for fiscal years beginning after June 15, 1999. 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 imbedded 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 or speculative purposes. However, 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. In December 1997, the AICPA Accounting Standards Executive Committee issued Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments," effective for fiscal years beginning after December 15, 1998. The accounting guidance of this SOP focuses on the timing of recognition and measurement of liabilities for insurance-related assessments. Guidance is also provided on recording assets presenting future recoveries of assessments through premium tax offsets or policy surcharges. The SOP was issued to reduce diversity in practice and to improve comparability and disclosure. Under SOP 97-3, the Company will estimate its liabilities for insurance-related assessments, as opposed to recording the liability and expense when notified by insurance regulators. This change in timing is not expected to have a material effect on the Company's Consolidated Financial Statements or Notes to Consolidated Financial Statements. SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," was issued in March 1998 and is effective for fiscal years beginning after December 15, 1998. This SOP requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. The SOP also requires that costs related to the preliminary project stage and the post-implementation and operations stage of an internal-use computer software development project be expensed as incurred. The SOP will change the timing of the Company's software development expenses and the impact is not expected to have a material effect on the Company's Consolidated Financial Statements or Notes to Consolidated Financial Statements. SOP 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk," is effective for financial statements for fiscal years beginning after June 15, 1999. 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 is not expected to have a material effect on the Company's Consolidated Financial Statements or Notes to Consolidated Financial Statements. 23 NOTE 2. SUMMARY OF 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, equity securities and other long-term investments as of December 31, 1998 and 1997 is as follows.
- ----------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1998 (Dollars in Thousands) - ----------------------------------------------------------------------------------------------------------------------------------- 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 $ 22,152 $ 489 $ - $ 22,641 Mortgage-backed securities 13,923 1,211 - 15,134 All others 1,773 427 - 2,200 States, municipalities and political subdivisions 218,465 15,495 21 233,939 Foreign 6,480 449 - 6,929 Public utilities 51,466 2,323 - 53,789 Corporate bonds Collateralized mortgage obligations 86,382 4,109 753 89,738 All other corporate bonds 190,596 11,548 334 201,810 - ----------------------------------------------------------------------------------------------------------------------------------- Total held-to-maturity $591,237 $36,051 $1,108 $626,180 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE Fixed maturities Bonds United States Government, government agencies and authorities Collateralized mortgage obligations $ 31,054 $ 1,347 $ - $ 32,401 Mortgage-backed securities 45 3 - 48 All others 9,814 155 37 9,932 States, municipalities and political subdivisions 53,645 1,286 69 54,862 All foreign bonds 11,734 - 937 10,797 Public utilities 26,198 295 88 26,405 Corporate bonds Collateralized mortgage obligations 6,162 296 - 6,458 All other corporate bonds 181,519 2,865 3,321 181,063 - ----------------------------------------------------------------------------------------------------------------------------------- Total available-for-sale fixed maturities $320,171 $ 6,247 $4,452 $321,966 - ----------------------------------------------------------------------------------------------------------------------------------- Equity securities Common stocks Public utilities $3,525 $ 9,408 $ - $ 12,933 Banks, trust and insurance companies 9,092 53,628 - 62,720 All other common stocks 9,992 24,631 324 34,299 Nonredeemable preferred stocks 841 289 6 1,124 - ----------------------------------------------------------------------------------------------------------------------------------- Total available-for-sale equity securities $ 23,450 $87,956 $ 330 $111,076 - ----------------------------------------------------------------------------------------------------------------------------------- Total available-for-sale $343,621 $94,203 $4,782 $433,042 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Other long-term investments $ 11,517 $ 2,894 $ 43 $ 14,368 - ----------------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------------
24
- ----------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1997 (Dollars in Thousands) - ----------------------------------------------------------------------------------------------------------------------------------- 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 $ 27,058 $ 528 $ 48 $ 27,538 Mortgage-backed securities 19,270 1,826 1 21,095 All others 3,382 347 7 3,722 States, municipalities and political subdivisions 230,959 13,787 230 244,516 Foreign 6,827 370 - 7,197 Public utilities 84,192 1,690 24 85,858 Corporate bonds Collateralized mortgage obligations 92,864 4,065 365 96,564 All other corporate bonds 212,808 10,994 425 223,377 - ----------------------------------------------------------------------------------------------------------------------------------- Total held-to-maturity $677,360 $ 33,607 $1,100 $709,867 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Available-for-sale Fixed maturities Bonds United States Government, government agencies and authorities Collateralized mortgage obligations $ 48,256 $1,666 $ 86 $ 49,836 Mortgage-backed securities 56 5 - 61 All others 9,642 168 - 9,810 States, municipalities and political subdivisions 26,360 536 1 26,895 All foreign bonds 4,046 - 116 3,930 Public utilities 1,206 5 7 1,204 Corporate bonds Collateralized mortgage obligations 13,953 273 785 13,441 All other corporate bonds 41,500 706 451 41,755 - ----------------------------------------------------------------------------------------------------------------------------------- Total available-for-sale fixed maturities $145,019 $3,359 $1,446 $146,932 - ----------------------------------------------------------------------------------------------------------------------------------- Equity securities Common stocks Public utilities $3,525 $6,958 $ - $ 10,483 Banks, trust and insurance companies 12,005 71,734 - 83,739 All other common stocks 9,921 23,783 219 33,485 Nonredeemable preferred stocks 845 153 7 991 - ----------------------------------------------------------------------------------------------------------------------------------- Total available-for-sale equity securities $ 26,296 $102,628 $ 226 $128,698 - ----------------------------------------------------------------------------------------------------------------------------------- Total available-for-sale $171,315 $105,987 $1,672 $275,630 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Other long-term investments $9,000 $3,454 $ 6 $ 12,448 - ----------------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------------
25 The amortized cost and fair value of held-to-maturity and available-for- sale fixed maturities at December 31, 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) - ------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1998 Held-to-maturity Available-for-sale - ------------------------------------------------------------------------------------------------------------------------- Amortized Cost Fair Value Amortized Cost Fair Value - ------------------------------------------------------------------------------------------------------------------------- Due in one year or less $ 9,191 $ 9,346 $ 119 $ 119 Due after one year through five years 142,424 150,372 32,827 32,188 Due after five years through ten years 132,865 142,668 135,855 134,818 Due after ten years 184,300 196,281 114,109 115,934 Mortgage-backed securities 13,923 15,134 45 48 Collateralized mortgage obligations 108,534 112,379 37,216 38,859 - ------------------------------------------------------------------------------------------------------------------------- $591,237 $626,180 $320,171 $321,966 - ------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------
Proceeds from sales of available-for-sale investments during 1998, 1997 and 1996 were $78,471,000, $27,390,000, and $35,251,000, respectively. Gross gains of $23,208,000, $3,242,000, and $3,499,000, respectively, were realized on those sales. Gross losses of $385,000, $15,000 and $342,000, respectively, were realized on those sales in 1998, 1997 and 1996. A summary of realized investment gains (losses) resulting from sales, calls and maturities and net changes in unrealized investment appreciation (depreciation), less applicable income taxes, is as follows.
- ------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ Realized investment gains (losses) Fixed maturities $ (145) $ (401) $ 2,966 Equity securities 22,448 3,011 1,843 Other investments 493 - (158) - ------------------------------------------------------------------------------------------------------------------------------ $ 22,796 $ 2,610 $4,651 - ------------------------------------------------------------------------------------------------------------------------------ Net changes in unrealized investment appreciation Available-for-sale fixed maturities, equity securities and other long-term investments $(15,491) $ 42,187 $ 10,149 Other (726) - - Income taxes 5,299 (14,799) (3,518) - ------------------------------------------------------------------------------------------------------------------------------ $(10,918) $ 27,388 $6,631 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ Net changes in unrealized investment appreciation (depreciation), fixed maturities $ 2,318 $ 18,432 $(16,483) - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------
The net investment income for the years ended December 31, 1998, 1997 and 1996 is composed of the following.
- ------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ Investment income Interest on fixed maturities $ 63,748 $ 56,837 $ 53,459 Dividends on equity securities 2,571 2,526 2,352 Interest on other long-term investments 2,867 3,228 1,819 Interest on mortgage loans 218 226 232 Interest on policy loans 666 616 571 Other 2,480 1,832 1,653 - ------------------------------------------------------------------------------------------------------------------------------ Total investment income $ 72,550 $ 65,265 $ 60,086 Less investment expenses 4,622 3,579 3,150 - ------------------------------------------------------------------------------------------------------------------------------ Investment income, net $ 67,928 $ 61,686 $ 56,936 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------
26 NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company estimated the fair value of its financial instruments based on relevant market information or by discounting estimated future cash flows at estimated current market discount rates appropriate to the particular asset or liability shown. In most cases, quoted market prices were used in determining the fair value of fixed maturities, equity securities and short-term investments. Where quoted market prices were unavailable, the estimate was based on recent trading. Market values for collateralized mortgage obligations were provided by various data vendors. Other long-term investments, consisting primarily of holdings in limited partnership funds, are valued by the various fund managers. In management's opinion, these values reflect fair value at December 31, 1998 and 1997. The estimated fair value of mortgage loans was based on the estimated discounted future cash flows using 6.25 percent at December 31, 1998, and 1997. The book value of policy loans is considered to be fair value as the interest rate is fixed and, in management's opinion, the interest rates in the existing portfolio are comparable to current policy loan interest rates. For accrued investment income, carrying value is a reasonable estimate of fair value, due to its short-term nature. The fair value of the liabilities for annuity products, which are in a benefit payment phase, guaranteed investment contracts and structured settlements are based on a discount rate of 6.25 percent at December 31, 1998 and 1997. The fair value of annuities currently in an accumulation phase is based on the net cash surrender value. A summary of the carrying value and estimated fair value of assets and liabilities meeting the definition of financial instruments at December 31, 1998 and 1997 is as follows.
- ---------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ---------------------------------------------------------------------------------------------------------------------------- At December 31, 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- FAIR CARRYING Fair Carrying Assets VALUE VALUE Value Value - ---------------------------------------------------------------------------------------------------------------------------- Investments Held-to-maturity fixed maturities $626,180 $591,237 $709,867 $677,360 Available-for-sale fixed maturities 321,966 321,966 146,932 146,932 Equity securities 111,076 111,076 128,698 128,698 Mortgage loans 2,857 2,777 3,126 2,862 Policy loans 8,707 8,707 8,405 8,405 Other long-term investments 14,368 14,368 12,448 12,448 Short-term investments 33,985 33,985 19,195 19,195 Other Assets Accrued investment income 16,130 16,130 14,159 14,159 - ---------------------------------------------------------------------------------------------------------------------------- Liabilities - ---------------------------------------------------------------------------------------------------------------------------- Policy Reserves Annuity (Accumulations) $382,741 $400,869 $300,035 $313,118 Annuity (On-Benefits) 2,998 2,905 2,955 2,702 Structured settlements 443 738 450 702 Guaranteed investment contracts 2,129 2,150 1,914 1,920 - ----------------------------------------------------------------------------------------------------------------------------
NOTE 4. SHORT-TERM BORROWINGS The Company maintains a $15 million line of credit with a local bank. During 1998, the Company borrowed funds against the line of credit, with a maximum outstanding balance of $3,450,000. Under the terms of the agreement, interest on outstanding notes is payable at the lender's prevailing prime rate. There is no loan balance outstanding as of December 31, 1998. Interest expense in connection with the line of credit borrowing was $11,000 in 1998. During 1997, the Company borrowed $1,000,000 against the line of credit for four days. 27 NOTE 5. REINSURANCE PROPERTY AND CASUALTY SEGMENT The property and casualty insurance companies cede portions of their insurance business to other insurance companies on both a pro rata and excess of loss basis. Insurance ceded by the property and casualty insurance companies does not relieve their primary liability as the originating insurers. Earned premiums ceded were $22,349,000, $25,716,000 and $27,106,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The Company believes all amounts are collectible with regard to reinsurance receivables. There are no concentrations of credit risk associated with reinsurance. The property and casualty insurance companies also assume portions of their insurance business from other insurance companies. Assumed premiums earned for the years ended December 31, 1998, 1997 and 1996 were $33,571,000, $40,198,000 and $38,545,000, respectively. LIFE SEGMENT United Life Insurance Company follows the policy of reinsuring that portion of the risk in excess of $200,000 on the life of any individual. Policy benefit reserves and claims are stated after deduction of reserves and claims applicable to reinsurance ceded to other companies; however, United Life Insurance Company is contingently liable for these amounts in the event such companies are unable to pay their portion of the claims and is contingently liable for ceded insurance in force of $358,022,000 and $339,430,000 at December 31, 1998 and 1997, respectively. Approximately 54 percent of ceded life insurance in force has been ceded to two reinsurers. The Company believes all amounts are collectible with regard to reinsurance receivables. NOTE 6. LIABILITY FOR PROPERTY AND CASUALTY LOSSES AND SETTLEMENT EXPENSES The table below provides an analysis of changes in losses and LAE reserves for 1998, 1997 and 1996 (net of reinsurance amounts). Changes in the reserves are reflected in the income statement for the year when the changes are made. Loss and LAE development on claims occurring in prior years benefited underwriting profit (before tax) by $26,615,000 in 1998 and $33,544,000 in 1997. These gains are due in part to the effects of settling reported (case) and unreported (IBNR) reserves from claims established in prior years for less than expected.
- ------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------------------- At December 31, 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- Gross liability for losses and LAE at beginning of year $ 231,768 $ 221,207 Less reinsurance receivables 12,856 11,331 - ------------------------------------------------------------------------------------------------------------------------------- Net liability for losses and LAE at beginning of year $ 218,912 $ 209,876 Provision for losses and LAE for claims occurring in the current year 206,603 183,723 Decrease in estimated losses and LAE for claims occurring in prior years (26,615) (33,544) - ------------------------------------------------------------------------------------------------------------------------------- $ 398,900 $ 360,055 - ------------------------------------------------------------------------------------------------------------------------------- Losses and LAE payments for claims occurring during Current year $92,906 $79,449 Prior years 62,988 61,694 - ------------------------------------------------------------------------------------------------------------------------------- $ 155,894 $ 141,143 - ------------------------------------------------------------------------------------------------------------------------------- Net liability for losses and LAE at end of year $ 243,006 $ 218,912 Plus reinsurance receivables 8,111 12,856 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- Gross liability for losses and LAE at end of year $ 251,117 $ 231,768 - ------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------
The Company is not aware of any significant contingent liabilities as far as environmental issues are concerned. Because of the type of property coverage the Company writes, there exists the potential for exposure to environmental pollution and asbestos claims. The Company's underwriters are aware of these exposures and use limited riders or endorsements to limit exposure. 28 NOTE 7. STATUTORY REPORTING, CAPITAL REQUIREMENTS AND DIVIDEND AND RETAINED EARNINGS RESTRICTIONS Statutory stockholders' surplus and net income at December 31, 1998, 1997 and 1996 and for the years then ended are as follows.
- ------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------------------ Statutory Stockholders' Statutory Surplus Net Income - ------------------------------------------------------------------------------------------------------------------------------ 1998 PROPERTY AND CASUALTY $202,342 $ 9,990 LIFE, ACCIDENT AND HEALTH 53,038 2,052 - ------------------------------------------------------------------------------------------------------------------------------ 1997 Property and casualty $231,326 $23,627 Life, accident and health 53,095 2,331 - ------------------------------------------------------------------------------------------------------------------------------ 1996 Property and casualty $177,263 $ 9,202 Life, accident and health 49,491 3,812 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------
The Company and its insurance subsidiaries prepare their statutory financial statements in conformity with practices prescribed or permitted by their state of domicile. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations and general administrative rules. The NAIC is currently working on a project to codify insurance statutory accounting practices. The Company expects the State of Iowa to adopt codification by January 1, 2001, and the Company expects the new rules to have a financial effect upon application. The Company has not yet determined this impact. The changes would not affect the accompanying financial statements, which are based on GAAP. Prior to implementation of the codified rules, permitted statutory accounting practices are used when prescribed statutory practices do not address the accounting for transactions. The Company does not use permitted practices that individually or in the aggregate materially affect statutory surplus or risk-based capital. As part of the NAIC and state insurance department's solvency regulations, the Company is required to calculate a minimum capital requirement based on insurance risk factors. The risk-based capital results are used by the NAIC and state insurance departments to identify companies that merit regulatory attention or the initiation of regulatory action. At December 31, 1998 and 1997, the life and property and casualty segments had adjusted capital well in excess of the required capital levels. The State of Iowa Insurance Department governs the amount of dividends that may be paid to stockholders without prior approval by the Insurance Department. Based on these restrictions, the Company could make a maximum of $155,395,000 in dividend distributions to stockholders in 1999. Dividend payments by the insurance subsidiaries to the Company are subject to similar restrictions in the states in which they are domiciled. The Company received no dividends from its subsidiaries in 1998 or 1997. 29 NOTE 8. FEDERAL INCOME TAXES Federal income tax expense is composed of the following.
- ------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ Current $4,110 $9,009 $ 7,195 Deferred 609 427 (1,778) - ------------------------------------------------------------------------------------------------------------------------------ Total $4,719 $9,436 $ 5,417 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------
A reconciliation of income tax expense computed at the applicable Federal tax rate of 34% in 1998 and 35% in 1997 and 1996 to the amount recorded in the Consolidated Financial Statements is as follows.
- ------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ Computed expected rate $9,655 $13,359 $9,489 Reduction for tax-exempt municipal bond interest income (5,023) (4,686) (4,227) Reduction of nontaxable dividend income (557) (581) (534) Other, net 644 1,344 689 - ------------------------------------------------------------------------------------------------------------------------------ Federal Income Taxes, as provided $4,719 $9,436 $5,417 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------
The significant components of the net deferred tax liability at December 31, 1998 and 1997 are as follows.
- ------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------------------ At December 31, 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ Deferred tax assets Financial statement reserves in excess of income tax reserves $19,376 $19,301 Unearned premium adjustment 6,800 6,769 Postretirement benefits other than pensions 1,935 1,579 Salvage and subrogation 676 671 Pension 958 1,240 Alternative minimum tax (AMT) credit carryforwards 778 - Other 3,409 2,940 - ------------------------------------------------------------------------------------------------------------------------------ Gross deferred tax assets $33,932 $32,500 - ------------------------------------------------------------------------------------------------------------------------------ Deferred tax liabilities Deferred acquisition costs $21,046 $18,669 Net unrealized appreciation on investment securities 32,248 37,549 Depreciation on assets 948 1,139 Net bond discount accretion and premium amortization 1,452 1,595 Other 1,091 1,416 - ------------------------------------------------------------------------------------------------------------------------------ Gross deferred tax liability $56,785 $60,368 - ------------------------------------------------------------------------------------------------------------------------------ Net deferred tax liability $22,853 $27,868 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------
NOTE 9. EMPLOYEE BENEFIT OBLIGATIONS The Company has a defined benefit pension plan covering substantially all employees. Under the plan, retirement benefits are primarily a function of the number of years of service and the level of compensation. It is the Company's policy to fund the plan on a current basis to the extent deductible under existing tax regulations. As permitted by SFAS No. 87, "Employers" Accounting for Pensions," the Company uses September 30 as the date for measuring plan assets and liabilities in order to obtain information necessary for the preparation of the financial statements on a timely basis. 30 Effective November 1, 1996, the pension plan was amended and the changes resulted in an increase to the Company's pension liability. The normal retirement benefit was changed from 1.25 percent of average monthly compensation times years of benefit service to 1.25 percent of average monthly compensation plus 0.5 percent of average monthly compensation in excess of the covered compensation limit all multiplied by years of benefit service. Years of benefit service was changed from a cap of 32 years to 35 years. Early retirement eligibility was changed from age 591/2 to age 55 with five years of service. Early retirement benefits were previously reduced actuarially for all retirees. Now, early retirement benefits have a subsidized reduction if the employee retires with 20 years of service. The Company has a defined benefit postretirement health care plan that covers substantially all full-time employees. The plan pays stated percentages of most necessary medical and dental expenses incurred by retirees, after subtracting payments by Medicare or other providers and after the stated deductible has been met. Participants become eligible for the benefits if they retire from the Company after reaching age 55 with 10 or more years of service in the plan. The plan is contributory, with retiree contributions adjusted annually. The following table provides a reconciliation of the changes in the plans' benefit obligations and fair value of plan assets and a statement of the funded status for 1998 and 1997.
- --------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - --------------------------------------------------------------------------------------------------------------------------- Pension benefits Other benefits - --------------------------------------------------------------------------------------------------------------------------- At December 31, 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- RECONCILIATION OF BENEFIT OBLIGATION Obligation at January 1 $20,901 $18,299 $ 6,047 $ 5,631 Service Cost 935 805 424 338 Interest cost 1,425 1,410 523 421 Participant contributions - - 57 54 Actuarial (gain) loss 693 1,003 1,176 (307) Benefit payments (677) (616) (234) (90) - --------------------------------------------------------------------------------------------------------------------------- Obligation at December 31 $23,277 $20,901 $ 7,993 $ 6,047 =========================================================================================================================== RECONCILIATION OF FAIR VALUE OF PLAN ASSETS Fair value of plan assets at January 1 $16,565 $15,045 $ - $ - Actual return on plan assets 283 2,136 - - Employer contributions 1,125 - 177 36 Participant contribution - - 57 54 Benefits payments (677) (616) (234) (90) - --------------------------------------------------------------------------------------------------------------------------- Fair value of plan assets at December 31 $17,296 $16,565 $ - $ - - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- FUNDED STATUS Funded status at December 31 $(5,981) $(4,337) $(7,993) $(6,047) Unrecognized transition (asset) obligation (42) (90) - - Unrecognized prior service cost 1,035 1,132 1,234 166 Unrecognized (gain) loss 876 (858) 1,058 1,369 - --------------------------------------------------------------------------------------------------------------------------- Accrued benefit cost $(4,112) $(4,153) $(5,701) $(4,512) - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
The following table provides the components of net periodic benefit cost for the plans for 1998, 1997 and 1996.
- --------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - --------------------------------------------------------------------------------------------------------------------------- Pension benefits Other benefits - --------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1998 1997 1996 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- PLAN COSTS Service cost $ 935 $ 805 $ 655 $ 424 $ 338 $ 356 Interest cost 1,425 1,410 1,051 523 421 342 Expected return on plan assets (1,324) (1,184) (1,066) - - - Amortization of transition (asset) (48) (48) (48) - - - obligation Amortization of prior service cost 97 97 1 173 40 40 Amortization of net loss - - - 68 58 132 - --------------------------------------------------------------------------------------------------------------------------- Net periodic benefit cost $ 1,085 $ 1,080 $ 593 $ 1,188 $ 857 $ 870 - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
31 The unrecognized prior service cost and actuarial loss are being amortized on a straight-line basis over an average period of eight years. This period represents the average remaining employee service period until the date of full eligibility. The assumptions used in the measurement of the Company's benefit obligations are shown in the following table.
- --------------------------------------------------------------------------------------------------------------------------- Weighted-average assumptions as of Pension benefits Other benefits - --------------------------------------------------------------------------------------------------------------------------- December 31, 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Discount rate 6.75% 7.00% 6.75% 7.00% Expected return on plan assets 8.00% 8.00% N/A N/A Rate of compensation increase 4.00% 4.00% N/A N/A - ---------------------------------------------------------------------------------------------------------------------------
For measurement purposes, a 9.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1998. The rate was assumed to decrease gradually each year to a rate of 5.5% for 2005 and remain at that level thereafter. For dental claims, a 6.5% annual rate of increase was assumed for 1998, decreasing gradually to 5.0% for 2004 and thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1.0 percent change in assumed health care cost trend rates would have the following effects.
- --------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) - --------------------------------------------------------------------------------------------------------------------------- 1.0 Percent Increase 1.0 Percent Decrease - --------------------------------------------------------------------------------------------------------------------------- Effect on total of service and interest cost components of net periodic postretirement health care benefit cost $ 205 $ 154 Effect on the heath care component of the accumulated postretirement benefit obligation 1,495 1,174 - ---------------------------------------------------------------------------------------------------------------------------
The Company has a profit sharing plan in which employees who meet service requirements are eligible to participate. The amount of the Company's contribution is discretionary and is determined annually but cannot exceed the amount deductible for Federal Income Tax purposes. The Company's contribution to the plan for the years ended December 31, 1998, 1997 and 1996, was $883,000, $936,000 and $717,000, respectively. The Company also has an Employee Stock Ownership Plan for the benefit of eligible employees and their beneficiaries. All employees are eligible to participate in the plan upon completion of one year of service and attaining age 21. Contributions to this plan are made at the discretion of the Board of Directors. These contributions are based upon a percentage of total payroll and are allocated to participants on the basis of compensation. Contributions are made in stock or cash, which is used by the Trustee to acquire shares of the Company stock to allocate to participants' accounts. As of December 31, 1998, 1997 and 1996, the Trustee owned 120,333, 93,127 and 92,806 shares of Company stock, respectively. The Company made contributions to the plan of $1,050,000, zero and $142,000 in 1998, 1997 and 1996 respectively. On August 21, 1998, the Company adopted a nonqualified employee stock option plan. The granting of the options will help to attract and retain the best available persons for positions of substantial responsibility and will provide certain employees with an additional incentive to contribute to the success of the Company and its subsidiaries. As of December 31, 1998, no options had been granted under the plan. NOTE 10. 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 four 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 accounting policies of the segments are the same as those described in Significant Accounting Policies in Note 1. 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 Company's selling location is used in allocating revenues between foreign and 32 domestic, and as such, the Company has no revenues allocated to foreign countries. The analysis on the following page is reported on a GAAP basis and is reconciled to the Company's Consolidated Financial Statements. The property and casualty segment markets most forms of commercial and personal property and casualty insurance products, including fidelity and surety bonds and reinsurance. The business is generated through approximately 1,660 independent agencies and brokers in 36 states, with 65 percent of the Company's direct premiums originating in nine Midwestern states in 1998. United Life Insurance Company underwrites and markets ordinary life (primarily universal life), annuities (primarily single premium) and credit life products to individuals and groups through approximately 1,200 independent agencies in 24 states. Total revenue by segment includes sales to both outside customers and intersegment sales that are eliminated to arrive at the total revenues as reported in the Company's Consolidated Statements of Operations. Intersegment sales are accounted for on the same basis as sales to outside customers. The following tables set forth certain data for each of the Company's business segments.
- ------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------------------- PROPERTY AND LIFE CASUALTY INSURANCE INSURANCE TOTAL - ------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1998 1998 1998 - ------------------------------------------------------------------------------------------------------------------------------- REVENUES Net premiums earned $220,550 $ 25,295 $245,845 Net investment income 23,297 44,771 68,068 Realized investment gains 20,981 1,815 22,796 Other income 1,815 - 1,815 - ------------------------------------------------------------------------------------------------------------------------------- Total reportable segments $266,643 $ 71,881 $338,524 - ------------------------------------------------------------------------------------------------------------------------------- Intersegment eliminations (140) (118) (258) - ------------------------------------------------------------------------------------------------------------------------------- Total revenues $266,503 $ 71,763 $338,266 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME BEFORE INCOME TAXES Revenues $266,643 $ 71,881 $338,524 Benefits, losses and expenses 254,306 55,822 310,128 - ------------------------------------------------------------------------------------------------------------------------------- Total reportable segments $ 12,337 $ 16,059 $ 28,396 - ------------------------------------------------------------------------------------------------------------------------------- Intersegment eliminations (10) 10 - - ------------------------------------------------------------------------------------------------------------------------------- Total net income before income taxes $ 12,327 $ 16,069 $ 28,396 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- INCOME TAX (BENEFIT) EXPENSE (736) 5,455 4,719 - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 13,063 $ 10,614 $ 23,677 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- ASSETS Total reportable segments $675,361 $709,460 $1,384,821 Intersegment eliminations (134,227) - (134,227) - ------------------------------------------------------------------------------------------------------------------------------- Total assets $541,134 $709,460 $1,250,594 - ------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) PROPERTY AND LIFE CASUALTY INSURANCE INSURANCE TOTAL - ------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1997 1997 1997 - ------------------------------------------------------------------------------------------------------------------------------- REVENUES Net premiums earned $225,822 $19,231 $245,053 Net investment income 23,007 38,823 61,830 Realized investment gains 2,456 220 2,676 Other income 1,829 - 1,829 - ------------------------------------------------------------------------------------------------------------------------------- Total reportable segments $253,114 $58,274 $311,388 - ------------------------------------------------------------------------------------------------------------------------------- Intersegment eliminations (145) (113) (258) - ------------------------------------------------------------------------------------------------------------------------------- Total revenues $252,969 $58,161 $311,130 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME BEFORE INCOME TAXES Revenues $253,114 $58,274 $311,388 Benefits, losses and expenses 224,480 48,740 273,220 - ------------------------------------------------------------------------------------------------------------------------------- Total reportable segments $ 28,634 $ 9,534 $ 38,168 - ------------------------------------------------------------------------------------------------------------------------------- Intersegment eliminations (18) 18 - - ------------------------------------------------------------------------------------------------------------------------------- Total net income before income taxes $ 28,616 $ 9,552 $ 38,168 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- INCOME TAX EXPENSE 5,944 3,492 9,436 - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 22,672 $ 6,060 $ 28,732 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- ASSETS Total reportable segments $682,177 $ 596,323 $1,278,500 Intersegment eliminations (120,578) - (120,578) - ------------------------------------------------------------------------------------------------------------------------------- Total assets $561,599 $ 596,323 $1,157,922 - ------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------
33
- ------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------------------- PROPERTY AND LIFE CASUALTY INSURANCE INSURANCE TOTAL - ------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1996 1996 1996 - ------------------------------------------------------------------------------------------------------------------------------- REVENUES Net premiums earned $215,470 $19,435 $234,905 Net investment income 21,349 35,720 57,069 Realized investment gains 5,365 1,361 6,726 Other income 1,815 - 1,815 - ------------------------------------------------------------------------------------------------------------------------------- Total reportable segments $243,999 $56,516 $300,515 - ------------------------------------------------------------------------------------------------------------------------------- Intersegment eliminations (134) (107) (241) - ------------------------------------------------------------------------------------------------------------------------------- Total revenues $243,865 $56,409 $300,274 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME BEFORE INCOME TAXES Revenues $243,999 $56,516 $300,515 Benefits, losses and expenses 229,102 44,036 273,138 - ------------------------------------------------------------------------------------------------------------------------------- Total reportable segments $ 14,897 $12,480 $ 27,377 - ------------------------------------------------------------------------------------------------------------------------------- Intersegment eliminations (12) 12 - - ------------------------------------------------------------------------------------------------------------------------------- Total net income before income taxes $ 14,885 $12,492 $ 27,377 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- INCOME TAX EXPENSE 1,057 4,360 5,417 - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 13,828 $ 8,132 $ 21,960 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- ASSETS Total reportable segments $609,631 $ 528,027 $1,137,658 Intersegment eliminations (112,823) - (112,823) - ------------------------------------------------------------------------------------------------------------------------------- Total assets $496,808 $ 528,027 $1,024,835 - ------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------
Depreciation expense and property and equipment acquisitions for the years ended December 31, 1998, 1997 and 1996, are reflected in the property and casualty insurance segment. NOTE 11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following table sets forth selected quarterly financial information of the Company.
- ------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data) - ------------------------------------------------------------------------------------------------------------------------------- Quarters First Second Third Fourth Total - ------------------------------------------------------------------------------------------------------------------------------- FISCAL YEAR ENDED DECEMBER 31, 1998 TOTAL REVENUES $80,229 $94,448 $79,312 $84,277 $338,266 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 8,882 $12,610 $(1,963) $ 4,148 $ 23,677 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- EARNINGS (LOSS) PER COMMON SHARE $0.83 $1.18 $(.19) $ .41 $2.28 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- Fiscal year ended December 31, 1997 Total revenues $75,430 $76,109 $77,977 $81,614 $311,130 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- Net income $ 7,403 $ 5,118 $ 3,591 $12,620 $ 28,732 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- Earnings per common share $ .69 $ .48 $ .33 $1.18 $ 2.68 - ------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------
NOTE 12. EARNINGS AND DIVIDENDS PER COMMON SHARE The Company declared a three-for-two stock split in the form of a 50-percent stock dividend to stockholders of record as of December 18, 1995. Earnings per common share, weighted average common shares outstanding and cash dividends declared per common share have been retroactively restated for all periods presented. Cash dividends per common share of $.67 and $.63 were declared in 1998 and 1997, respectively. 34 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF UNITED FIRE & CASUALTY COMPANY: We have audited the accompanying consolidated balance sheets of United Fire & Casualty Company (an Iowa corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These consolidated financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of United Fire & Casualty Company and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary data (Schedule III-Supplementary insurance information, Schedule IV-Reinsurance, and VI-Supplemental information concerning property and casualty insurance operations) are presented for purposes of additional analysis and are not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP - ----------------------------- Arthur Andersen LLP Chicago, Illinois February 17, 1999 35 INDEX TO SUPPLEMENTARY SCHEDULES
CONSOLIDATED SCHEDULES III -- Supplementary insurance information 37 IV -- Reinsurance 38 VI -- Supplemental information concerning property and casualty insurance operations 39
All other schedules have been omitted as not required, not applicable, not deemed material or because the information is included in the Consolidated Financial Statements. 36 SCHEDULE III. SUPPLEMENTARY INSURANCE INFORMATION
- ------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------- Future Policy Benefits, Deferred Losses, Policy Claims Earned Realized Net Acquisition and Loss Unearned Premium Investment Investment Costs Expenses Premiums Revenue Gains Income - ------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1998 PROPERTY AND CASUALTY $16,339 $251,117 $100,080 $220,550 $20,981 $23,157 LIFE, ACCIDENT AND HEALTH 51,253 575,189 16,338 25,177 1,815 44,771 - ------------------------------------------------------------------------------------------------- TOTAL $67,592 $826,306 $116,418 $245,727 $22,796 $67,928 - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------- Benefits, Amortization Claims, of Deferred Other Interest on Losses and Policy Under- Policy- Settlement Acquisition writing holders' Premiums Expenses Costs Expenses Accounts Written - ------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1998 PROPERTY AND CASUALTY $179,089 $39,001 $36,084 $ -- $221,002 LIFE, ACCIDENT AND HEALTH 16,006 8,891 4,231 26,568 31,927(1) - ------------------------------------------------------------------------------------------------- TOTAL $195,095 $47,892 $40,315 $26,568 $252,929 - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
(1) Accident and health insurance premiums written.
- ------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------- Future Policy Benefits, Deferred Losses, Policy Claims Earned Realized Net Acquisition and Loss Unearned Premium Investment Investment Costs Expenses Premiums Revenue Gains Income - ------------------------------------------------------------------------------------------------- Year Ended December 31, 1997 Property and casualty $18,235 $231,768 $100,769 $225,822 $ 2,456 $22,863 Life, accident and health 41,980 482,437 7,527 19,117 220 38,823 Total $60,215 $714,205 $108,296 $244,939 $ 2,676 $61,686
- ------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------- Benefits, Amortization Claims, of Deferred Other Interest on Losses and Policy Under- Policy- Settlement Acquisition writing holders' Premiums Expenses Costs Expenses Accounts Written - ------------------------------------------------------------------------------------------------- Year Ended December 31, 1997 Property and casualty $149,536 $43,060 $31,758 $ -- $226,915 Life, accident and health 14,679 7,209 4,210 22,510 21,841(1) - ------------------------------------------------------------------------------------------------- Total $164,215 $50,269 $35,968 $22,510 $248,756 - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
(1) Accident and health insurance premiums written.
- ------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------- Future Policy Benefits, Deferred Losses, Policy Claims Earned Realized Net Acquisition and Loss Unearned Premium Investment Investment Costs Expenses Premiums Revenue Gains Income - ------------------------------------------------------------------------------------------------- Year Ended December 31, 1996 Property and casualty $18,376 $221,207 $ 99,840 $215,470 $ 5,365 $21,216 Life, accident and health 37,707 431,582 5,168 19,327 1,361 35,720 - ------------------------------------------------------------------------------------------------- Total $56,083 $652,789 $105,008 $234,797 $ 6,726 $56,936
- ------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------- Benefits, Amortization Claims, of Deferred Other Interest on Losses and Policy Under- Policy- Settlement Acquisition writing holders' Premiums Expenses Costs Expenses Accounts Written - ------------------------------------------------------------------------------------------------- Year Ended December 31, 1996 Property and casualty $155,820 $43,912 $29,249 $ -- $221,934 Life, accident and health 14,290 4,452 4,473 20,701 20,305(1) - ------------------------------------------------------------------------------------------------- Total $170,110 $48,364 $33,722 $20,701 $242,239 - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
(1) Accident and health insurance premiums written. Certain amounts included in this schedule for earlier years have been reclassified to conform with the 1998 financial statement presentation. 37 SCHEDULE IV. REINSURANCE
- ------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------------- Percentage Gross Ceded to Assumed Net of Amount Amount Other From Other Amount Assumed to Earned Companies Companies Earned Net Earned - ------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1998 LIFE INSURANCE IN FORCE $3,672,130 $ 358,022 $ - $ 3,314,108 0.0% PREMIUMS: PROPERTY AND CASUALTY $209,328 $22,349 $33,571 $ 220,550 15.22 LIFE INSURANCE 21,856 959 - 20,897 0.00 ACCIDENT AND HEALTH INSURANCE 4,414 134 - 4,280 0.00 - ------------------------------------------------------------------------------------------------------------------------- TOTAL $235,598 $23,442 $33,571 $ 245,727 13.66% - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1997 Life insurance in force $3,403,207 $339,430 $ - $3,063,777 0.0% Premiums: Property and casualty $211,340 $ 25,716 $ 40,198 $225,822 17.80 Life insurance 17,399 950 - 16,449 0.00 Accident and health insurance 2,963 181 - 2,668 0.00 - ------------------------------------------------------------------------------------------------------------------------- Total $231,702 $ 26,847 $ 40,198 $244,939 16.40% - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1996 Life insurance in force $3,230,213 $432,836 $ - $2,797,377 0.0% Premiums: Property and casualty $204,031 $ 27,106 $ 38,545 $215,470 17.89 Life insurance 18,338 1,059 - 17,279 0.00 Accident and health insurance 2,237 189 - 2,048 0.00 - ------------------------------------------------------------------------------------------------------------------------- Total $224,606 $ 28,354 $ 38,545 $234,797 16.42% - ------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------
Certain amounts included in this schedule for earlier years have been reclassified to conform with the 1998 financial statement presentation. 38 SCHEDULE VI. SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
- -------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - -------------------------------------------------------------------------------------------------------------------- Reserves for Unpaid Affiliation with Registrant: Deferred claims and Company and Policy Claim Realized Net consolidated property and Acquisition Adjustment Unearned Earned Investment Investment casualty subsidiaries Costs Expenses Premiums Premiums Gains Income - -------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1998 $16,339 $251,117 $100,080 $220,550 $20,981 $23,157 - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------ (Dollars in Thousands) - ------------------------------------------------------------------------------------------------ Claims and Claim Adjustment Expenses Affiliation with Registrant: Incurred Related to Amortization Company and ------------------- of Deferred Paid Claims consolidated property and (1) (2) Policy and Claim casualty subsidiaries Current Prior Acquisition Adjustment Premiums Year Years Costs Expenses Written - ------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 1998 $206,603 $(26,615) $39,001 $155,894 $221,002 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - -------------------------------------------------------------------------------------------------------------------- Reserves for Unpaid Affiliation with Registrant: Deferred claims and Company and Policy Claim Realized Net consolidated property and Acquisition Adjustment Unearned Earned Investment Investment casualty subsidiaries Costs Expenses Premiums Premiums Gains Income - -------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1997 $18,235 $231,768 $100,769 $225,822 $ 2,456 $22,863 - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------ (Dollars in Thousands) - ------------------------------------------------------------------------------------------------ Claims and Claim Adjustment Expenses Affiliation with Registrant: Incurred Related to Amortization Company and ------------------- of Deferred Paid Claims consolidated property and (1) (2) Policy and Claim casualty subsidiaries Current Prior Acquisition Adjustment Premiums Year Years Costs Expenses Written - ------------------------------------------------------------------------------------------------ Year Ended December 31, 1997 $183,723 $(33,544) $43,060 $141,143 $226,915 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - -------------------------------------------------------------------------------------------------------------------- Reserves for Unpaid Affiliation with Registrant: Deferred claims and Company and Policy Claim Realized Net consolidated property and Acquisition Adjustment Unearned Earned Investment Investment casualty subsidiaries Costs Expenses Premiums Premiums Gains Income - -------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1996 $18,376 $221,207 $ 99,840 $215,470 $ 5,365 $21,216 - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------ (Dollars in Thousands) - ------------------------------------------------------------------------------------------------ Claims and Claim Adjustment Expenses Affiliation with Registrant: Incurred Related to Amortization Company and ------------------- of Deferred Paid Claims consolidated property and (1) (2) Policy and Claim casualty subsidiaries Current Prior Acquisition Adjustment Premiums Year Years Costs Expenses Written - ------------------------------------------------------------------------------------------------ Year Ended December 31, 1996 $186,132 $(29,129) $43,912 $135,827 $221,934 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------
Certain amounts included in this schedule for earlier years have been reclassified to conform with the 1998 financial statement presentation. 39 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE COMPANY (AGE), PRESENT POSITION, BUSINESS EXPERIENCE SERVED AS DIRECTOR SINCE - --------------------------------------------------------------------- ------------------------ Scott McIntyre Jr. (65), Chairman, United Fire & Casualty Company 1956 Mr. McIntyre has been employed by the Company since 1954. Mr. McIntyre's term as a director of the Company expires in May, 1999 James T. Brophy (71), Private Investor, February 1991/present 1988 Mr. Brophy's term as a director of the Company expires in May, 2000 Christopher R. Drahozal (37), Associate Professor University of Kansas Lawrence, Kansas 1997 Associate Professor of Law at the University of Kansas, where he has been teaching since 1994. Mr. Drahozal was in private practice in Washington, D.C., 10-91/4-94. Mr. Drahozal is the son-in-law of Scott McIntyre, Jr., Chairman, United Fire & Casualty Company. Mr. Drahozal's term as director of the Company expires in May, 2000 Jack B. Evans (50), President, Hall-Perrine Foundation, Cedar Rapids, Iowa 1995 Mr. Evans has been President of the Hall-Perrine Foundation, Cedar Rapids, Iowa, since January 1, 1996. Prior to that Mr. Evans was employed by SCI Financial Group, Cedar Rapids, Iowa, serving as its President from 1993 to 1996. Mr. Evans' term as director of the Company expires in May, 2000 Roy L. Ewen (76), Retired 1974 Mr. Ewen, who was employed by the Company since 1947, retired from the Company in January 1987. Mr. Ewen's term as a director of the Company expires in May, 2001 Casey D. Mahon (47), Adjunct Professor of Law, University of Iowa, Iowa City, Iowa 1993 Adjunct Professor of Law at the University of Iowa. Employed as Senior Vice President & General Counsel of McLeodUSA, Inc. from 6/93 until she retired 2/1/98. Ms. Mahon's term as a director of the Company expires in May, 1999 Leonard J. Marshall (69), Retired 1988 Mr. Marshall, who was employed by General Accident Insurance Company of Philadelphia, Pennsylvania, from 1-83/10-91, retired in October 1991. Mr. Marshall's term as a director of the Company expires in May, 1999 Thomas K. Marshall (65), Retired 1983 Mr. Marshall, who was Vice President-Development of Grinnell College, Grinnell, Iowa, from 1982 to August 31, 1992 is retired. Mr. Marshall's term as director of the Company expires in May, 2000 Mary K. Quass (48), President & CEO, Central Star Communications, Inc., Cedar Rapids, Iowa 1998 Ms. Quass held the position of President and CEO of Quass Broadcasting Company from 1988 to 1998. In January 1998, Quass Broadcasting Company merged with Capstar Broadcasting Partners to form Central Star Communications, Inc. Ms. Quass's term as a director of the Company expires in May, 2001 John A. Rife (56), President, United Fire & Casualty Company, United Life Insurance Company 1998 Mr. Rife started with United Fire & Casualty Company in September 1976. He became President of United Life Insurance Company in December 1984 and in May 1997 was also appointed President of United Fire & Casualty Company. Mr. Rife's term as director of the Company expires in May, 2001 Byron G. Riley (68), Attorney, Bradley & Riley, P.C., Cedar Rapids, Iowa 1983 Mr. Riley is an attorney with the law firm of Bradley & Riley, P.C., Cedar Rapids, Iowa, and has practiced law with that law firm since September, 1981. Mr. Riley's term as a director of the Company expires in May, 1999
40 EXECUTIVE OFFICERS OF THE COMPANY:
NAME (AGE) OFFICE HELD (TENURE IN YEARS) - ---------- ----------------------------- Scott McIntyre Jr. (65) Chairman of the Board since 1980, Director since 1956 John A. Rife (56) President of United Fire & Casualty Company since May 1997, President of United Life Insurance Company since 1984 Kent G. Baker (55) Vice President and Chief Financial Officer since 1984 John R.Cruise (57) Vice President, Reinsurance since 1986 E. Dean Fick (54) Vice President, Claims since 1991 Shona Frese (54) Corporate Secretary since December 1996, employed by the Company since 1966 David L. Hellen (46) Vice President, Denver regional office since 1987 Wilburn J. Hollis (58) Vice President, Human Resources since June 1996, Director of Human Resources at Norwest Financial in Des Moines, Iowa from 1989 to 1996 E. Addison Hulit (59) Vice President since May 1995, employed by the Company since 1993 Robert B. Kenward (56) Vice President, Information Services since 1992 Kevin L. Kubik (44) Vice President and Chief Investment Officer since June 1997, employed by Van Kampen American Capital Investment Advisory Inc. from 1989 to 1997 David A. Lange (41) Corporate Secretary since February 1997, Fidelity and Surety claim manager since 1987 Galen E. Underwood (58) Treasurer since 1979 Stanley A. Wiebold (54) Vice President, Underwriting since 1986 Michael T. Wilkins (35) Vice President since 1997, employed by the Company since 1985 - -------------------------------------------------------------------------------------------------------------------
DIRECTORS OF SUBSIDIARY COMPANIES - --------------------------------- UNITED LIFE Vice Presidents Vice Presidents INSURANCE COMPANY Kent G. Baker Ronald D. Brandt C. Richard Ekstrand John R. Cruise Rickey L. Pettyjohn Jack B. Evans E. Dean Fick Secretary Scott McIntyre Jr. David L. Hellen Jean N. Newlin Schnake John A. Rife Wilburn J. Hollis INSURANCE BROKERS & Byron G. Riley E. Addison Hulit MANAGERS, INC. INSURANCE BROKERS & Robert B. Kenward Chairman MANAGERS, INC. Kevin L. Kubik Scott McIntyre Jr. Kent G. Baker Stanley A. Wiebold President Carlyn K. Lewis Michael T. Wilkins Carlyn K. Lewis Scott McIntyre Jr. Assistant Vice Presidents Secretary John A. Rife John T. Anderson Jr. Betty S. Castro LAFAYETTE Jeffrey A. Chapin Treasurer INSURANCE COMPANY Robert J. DeCamp Kent G. Baker Carlyn K. Lewis Bruce K. Miller LAFAYETTE Scott McIntyre Jr. Allan J. Schons INSURANCE COMPANY Sarai K. Renken Allen R. Sorensen Chairman John A. Rife Douglas A. Walters Scott McIntyre Jr. Leo F. Wegmann Jr. Secretaries President ADDISON Shona Frese Carlyn K. Lewis INSURANCE COMPANY David A. Lange Secretary James T. Brophy Assistant Secretary Leo F. Wegmann Jr. E. Addison Hulit Donna M. Fugate Treasurer Scott McIntyre Jr. Treasurer Kent G. Baker Linda J. Pearson Galen E. Underwood ADDISON John A. Rife OFFICERS OF SUBSIDIARY COMPANIES INSURANCE COMPANY Russell P. Shulfer UNITED LIFE Chairman OFFICERS OF THE COMPANY INSURANCE COMPANY Scott McIntyre Jr. UNITED FIRE & Chairman President CASUALTY COMPANY Scott McIntyre Jr. E. Addison Hulit Chairman President Vice President Scott McIntyre Jr. John A. Rife Russell P. Shulfer President Executive Vice President Secretary John A. Rife and Treasurer Shona Frese Samuel E. Hague Treasurer Kent G. Baker
41 ITEM 11. EXECUTIVE COMPENSATION Executive Compensation includes the amount expensed for financial reporting purposes under the Company's qualified profit sharing (401(k)) plan. All employees of the Company are eligible to participate after they have completed six months of service with the Company and have attained twenty-one years of age. The plan is not integrated with social security, and provides for employer contributions in such amounts as the Board of Directors may annually determine. The benefit payable under the plan is equal to the vested account balance. Executive Compensation includes the amounts expensed for financial reporting purposes as contributions to the Company's pension plan for the named individuals. The pension plan is a noncontributory plan which is integrated with social security. All employees of the Company are eligible to participate after they have completed one year of service, attained twenty-one years of age and have met hourly requirements with the Company. In 1995 through October, 1996 the normal retirement pension payable under the plan was based on the employee's highest average monthly earnings for five (5) consecutive years of employment, and provided a benefit of 1.25% of average annual wages times years of service with a maximum of 32 years. Effective November 1, 1996, the pension plan was amended. The normal retirement benefit was changed from 1.25% of average monthly compensation times years of benefit service to 1.25% of average monthly compensation plus .5% of average monthly compensation in excess of the covered compensation limit all multiplied by years of benefit service. Years of benefit service was changed from a cap of 32 years to 35 years. Early retirement eligibility was changed from age 59 1/2 to age 55 with five years of service. Early retirement benefits were previously reduced actuarially for all retirees. Now, early retirement benefits have a subsidized reduction if the employee retires with 20 years of service. The pension plan owned 101,029 shares of the Company common stock as of December 31, 1998, and has made deposits with United Life Insurance Company to be used by the plan to purchase retirement annuities from that company. The annuity fund, maintained by United Life Insurance Company, is credited with compound interest on the average fund balance for the year. The interest rate will be equivalent to the ratio of net investment income to mean assets of United Life Insurance Company. In 1983, the Company adopted the United Lafayette Employee Stock Ownership Plan. Effective January 1, 1988, the Plan was amended to convert the Tax Credit Employee Stock Ownership Plan to an Employee Stock Ownership Plan. The Plan is for the benefit of eligible employees and their beneficiaries. All employees are eligible to participate in the Plan upon completion of one year of service, attaining age twenty-one and meeting hourly requirements with the Company. Contributions to this plan are made at the discretion of the Board of Directors. These contributions are based upon a percentage of total payroll and are allocated to participants on the basis of compensation. Contributions are made in cash, which is used by the Trustee to acquire shares of the Company stock to allocate to participants' accounts. As of December 31, 1998, 1997 and 1996, the Trustee owned 120,333, 93,127 and 92,806 shares of Company stock, respectively. The Company made contributions to the plan of $1,050,000, zero and $142,000 in 1998, 1997 and 1996 respectively. On August 21, 1998, the Company adopted a nonqualified employee stock option plan. The granting of the options will help to attract and retain the best available persons for positions of substantial responsibility and will provide certain employees with an additional incentive to contribute to the success of the Company and its subsidiaries. As of December 31, 1998, no options had been granted under the plan. 42 The following table summarizes the compensation of the Company's Chairman and the four most highly compensated executive officers for the last three years.
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION - ------------------------------------------------------------------------------------------------------------------------------- Name Principal Position Year Salary Bonus - ------------------------------------------------------------------------------------------------------------------------------- Scott McIntyre Jr. Chairman 1998 290,000 (1) 0 (2) Scott McIntyre Jr. Chairman 1997 290,000 (1) 58,000 (2) Scott McIntyre Jr. Chairman, CEO 1996 270,000 (1) 54,000 (2) - ------------------------------------------------------------------------------------------------------------------------------- John A. Rife President, United Fire & Casualty Company and 1998 190,000 (3) 3,032 (4)(6) President, United Life Insurance Company John A. Rife President, United Fire & Casualty Company and 1997 166,667 (3) 25,000 (4) President, United Life Insurance Company John A. Rife President, United Life Insurance Company 1996 145,000 (3) 21,750 (4) - ------------------------------------------------------------------------------------------------------------------------------- E. Dean Fick Vice President, Claims 1998 135,000 0 (4)(6) E. Dean Fick Vice President, Claims 1997 131,250 19,688 (4) E. Dean Fick Vice President, Claims 1996 120,000 9,000 (4) - ------------------------------------------------------------------------------------------------------------------------------- E. Addison Hulit Vice President 1998 110,000 0 (4)(6) E. Addison Hulit Vice President 1997 105,000 23,950 (4) E. Addison Hulit Vice President 1996 87,333 16,300 (5) - ------------------------------------------------------------------------------------------------------------------------------- Kent G. Baker Vice President and Chief Financial Officer 1998 100,000 6,500 (4)(6) Kent G. Baker Vice President and Chief Financial Officer 1997 95,000 14,250 (4) Kent G. Baker Vice President and Chief Financial Officer 1996 90,000 6,750 (4) - -------------------------------------------------------------------------------------------------------------------------------
Footnotes to summary compensation table: (1) Fixed by Compensation Committee in February of each year. (2) Bonus, if any, determined at the regular meeting of the Directors in February of each year based on prior year performance. (3) Determined by Chairman in December of each year and will be reviewed annually in December. (4) Determined by the bonus plan in effect for all salaried employees based on the performance for the preceding year. (5) One-time promotion bonus. (6) Calculated and paid on or about April 1, 1999. PENSION PLAN TABLE
- --------------------------------------------------------------------------------------------- Years of Service - --------------------------------------------------------------------------------------------- Salary 15 20 25 30 35 - --------------------------------------------------------------------------------------------- 100,000 23,915 31,887 39,859 47,831 55,802 110,000 26,540 35,387 44,234 53,081 61,927 135,000 33,103 44,137 55,171 66,206 77,240 150,000 37,040 49,387 61,734 74,081 86,427 160,000 39,665 52,887 66,109 79,331 92,552 - ---------------------------------------------------------------------------------------------
The pension plan provides a benefit of 1.25% of average annual wages, plus .5% of average annual wages in excess of covered compensation, all times years of service (maximum 35 years). Wages are limited by IRS code to $160,000 for pension plan purposes. Pension figures for Scott McIntyre, Jr., Chairman, and John A. Rife, President, are based on $160,000 annual salary. Bonuses paid to officers are not included in pensionable wages. DIRECTOR COMPENSATION Non-employee directors are paid a fee of $500 per meeting attended, plus direct expenses, for attendance at director's meetings. When there is a committee meeting, the director serving on that committee receives an additional $400. An annual retainer of $2,500 is paid to each non-employee director with the exception of the Vice Chairman who receives an annual retainer of $10,000. 43 The following graph compares the cumulative total stockholder return on Common Stock for the last five fiscal years with the cumulative total return of the S&P 500 Index and S&P Property-Casualty Insurance Index, assuming an investment of $100 in each of the above at their closing prices on December 31, 1993 and reinvestment of dividends. TOTAL SHAREHOLDER RETURNS [PERFORMANCE GRAPH APPEARS HERE]
ANNUAL RETURN PERCENTAGE YEARS ENDING Company/Index Dec94 Dec95 Dec96 Dec97 Dec98 UNITED FIRE & CAS CO 9.41 55.76 28.14 27.69 (22.61) S&P Property-Casualty Insurance 1.32 37.58 22.96 33.36 28.58 S&P 500 Index 4.90 35.40 21.51 45.47 (6.95)
ANNUAL RETURN PERCENTAGE YEARS ENDING BASE PERIOD Company/Index Dec93 Dec94 Dec95 Dec96 Dec97 Dec98 UNITED FIRE & CAS CO 100 109.41 170.42 218.38 278.85 215.79 S&P Property-Casualty Insurance 100 101.32 139.40 171.40 228.59 293.91 S&P 500 Index 100 104.90 142.02 172.58 251.04 233.59
44 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS. The following table sets forth information as of March 1, 1999, with respect to ownership of the Company's $3.33 1/3 par value common stock by principal security holders. Except as otherwise indicated, each of the persons named below has sole voting and investment powers with respect to the shares indicated.
- ---------------------------------------------------------------------------------------------------------------------------- Amount and Nature Percent of Beneficial of Name of Beneficial Owner Address of Beneficial Owner Ownership Class (1) - ---------------------------------------------------------------------------------------------------------------------------- Scott McIntyre, Jr. (1) Cedar Rapids, Iowa 1,551,273 15.37% Mildred R. McIntyre (1) Cedar Rapids, Iowa 1,159,541 11.49% General Accident Corporation of America Philadelphia, Pennsylvania 2,025,680 20.07% Susan M. Carlton (1) Orchard Park, New York 360,926 3.58% Margaret Pless (1) Durham, North Carolina 320,405 3.17% - ----------------------------------------------------------------------------------------------------------------------------
(1) Scott McIntyre Jr., Mildred R. McIntyre, Susan M. Carlton and Margaret Pless are all members of the same family. Included in the number of shares owned by Scott McIntyre, Jr. are 371,812 shares which he owns in his capacity as trustee of three trusts, one of which his children are the beneficiaries, one of which his wife is the beneficiary, and the other of which all of Mildred R. McIntyre's grandchildren are the beneficiaries. Included in the number of shares owned by Mildred R. McIntyre are 533,245 shares which she owns in her capacity as trustee of a trust in which she also has a life interest, and in which Scott McIntyre Jr., Susan M. Carlton and Margaret Pless each have an equal interest in the remainder. (b) SECURITY OWNERSHIP OF MANAGEMENT. The following table sets forth information as of March 1, 1999, with respect to ownership of the Company's $3.33 1/3 par value common stock by management. Except as otherwise indicated, each of the persons named below has sole voting and investment powers with respect to the shares indicated.
- ------------------------------------------------------------------------------------------------------------------------ Percent Amount and Nature of Name of Beneficial Owner Beneficial Ownership Class (1) - ------------------------------------------------------------------------------------------------------------------------ Scott McIntyre, Jr. (1) 1,551,273 15.37% Roy L. Ewen 78,101 0.77% Byron G. Riley, Jr. 3,106 0.03% James T. Brophy 11,500 0.11% Thomas K. Marshall 2,311 0.02% Leonard J. Marshall 1,000 0.01% Casey D. Mahon 2,000 0.02% Jack B. Evans 4,134 0.04% John A. Rife 1,631 0.02% Christopher R. Drahozal 107,719 1.07% Mary K. Quass 100 0.00% 32 officers and directors as a group 1,773,939 17.58% - ------------------------------------------------------------------------------------------------------------------------
(1) Included in the number of shares owned by Scott McIntyre Jr., are 121,500 shares held in the name of J. Scott McIntyre, Trustee of the Mildred Reynolds McIntyre Trust, 225,000 shares held in the name of Scott McIntyre Jr., or successor, Dee Ann McIntyre Trust, 25,312 shares held in the name of Scott McIntyre Jr., Irrevocable Trust and 16,750 shares held by the McIntyre Foundation. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None 45 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE (a) 1. and 2. Financial Statements and Supplementary Data 17 (a) 3. Exhibits 3.1 Articles of Incorporation of United Fire & Casualty Company, incorporated by reference from Registrant's form S-8 Registration Statement, filed with the Commission on December 19, 1997. 3.2 By Laws of United Fire & Casualty Company, as amended, incorporated by reference from the Registrant's form S-8 Registration Statement, filed with the Commission on December 19, 1997. 10.1 United Fire & Casualty Company Nonqualified Employee Stock Option Plan, incorporated by reference from Registrant's form S-8 Registration Statement, filed with the Commission on September 9, 1998. 10.2 United Fire & Casualty Company Employee Stock Purchase Plan, incorporated by reference from Registrant's form S-8 Registration Statement, filed with the Commission on December 22, 1997. 11 Statement re: computation of per share earnings 21 Subsidiaries of the registrant 27 Financial data schedule 28 Information from reports furnished to State Insurance Regulatory Authorities (filed by paper) (b) No reports on Form 8-K were filed during the last quarter of the period covered by this report
46 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNITED FIRE & CASUALTY COMPANY By /s/ John A. Rife ----------------------------------------------------------- John A. Rife, President, Director Date 3/30/99 --------------------------------------------------------- By /s/ Kent G. Baker ----------------------------------------------------------- Kent G. Baker, Vice-President, Principal Accounting Officer and Chief Financial Officer Date 3/30/99 --------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By /s/ Scott McIntyre Jr. By /s/ Roy L. Ewen -------------------------------------------- -------------------------------------------- Scott McIntyre Jr., Chairman and Director Roy L. Ewen, Director Date 3/30/99 Date 3/30/99 ------------------------------------------ ------------------------------------------ By /s/ James T. Brophy By /s/ Casey D. Mahon -------------------------------------------- -------------------------------------------- James T. Brophy, Director Casey D. Mahon, Director Date 3/30/99 Date 3/30/99 ------------------------------------------ ------------------------------------------ By /s/ Leonard J. Marshall By /s/ Christopher R. Drahozal -------------------------------------------- -------------------------------------------- Leonard J. Marshall, Director Christopher R. Drahozal, Director Date 3/30/99 Date 3/30/99 ------------------------------------------ ------------------------------------------ By /s/ Thomas K. Marshall By /s/ Jack B. Evans -------------------------------------------- -------------------------------------------- Thomas K. Marshall, Director Jack B. Evans, Vice Chairman and Director Date 3/30/99 Date 3/30/99 ------------------------------------------ ------------------------------------------
47 SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT (1) Four copies of the annual stockholders report for the year ended December 31, 1998 will be furnished to the Securities Exchange Commission by April 1, 1999. (2) Proxy statements will be furnished to security holders subsequent to the filing of the 10-K. Four copies of the proxy statement will be furnished to the Securities Exchange Commission when they are mailed to security holders. 48 EX-11 2 EXHIBIT 11 EXHIBIT 11 EXHIBIT 11. STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
- ------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands Except Per Share Data) - ------------------------------------------------------------------------------------------------------------------------------ Weighted Average Earnings Number of Shares Net Per Years Ended December 31 Outstanding Income Common Share - ------------------------------------------------------------------------------------------------------------------------------ 1998 10,393,930 $23,677 $2.28 1997 10,727,440 28,732 2.68 1996 10,773,591 21,960 2.04 - ------------------------------------------------------------------------------------------------------------------------------
Computation of weighted average number of common and common equivalent shares:
- ------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31 - ------------------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ Common shares outstanding beginning of the period 10,727,322 10,727,712 10,829,461 Weighted average of the common shares purchased and retired or reissued (333,392) (272) (55,870) - ------------------------------------------------------------------------------------------------------------------------------ Weighted average number of common shares 10,393,930 10,727,440 10,773,591 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------
Earnings per common share, common shares outstanding and weighted average common shares outstanding have been retroactively restated for additional shares issued as a result of a three for two stock split to stockholders of record as of December 18, 1995. EX-21 3 EXHIBIT 21 EXHIBIT 21 EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT United Life Insurance Company is an Iowa Corporation. Lafayette Insurance Company is a Louisiana Corporation. Addison Insurance Company is an Illinois Corporation. The Registrant owns 100% of the voting common stock of United Life Insurance Company, Lafayette Insurance Company and Addison Insurance Company. EX-27 4 EXHIBIT 27
7 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 321,966 591,237 626,180 111,076 2,777 0 1,084,116 0 12,910 67,592 1,250,594 826,306 116,418 0 0 0 0 0 33,639 222,643 1,250,594 245,727 67,928 22,796 1,815 195,095 47,892 66,883 28,396 4,719 23,677 0 0 0 23,677 2.28 2.28 218,912 206,603 (26,615) 92,906 62,988 243,006 (26,615)
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