-----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, EVr1JAsIclVLaYTTiop9dN1qNGzo59EFqG580mLVTBIjRJnY6o7VbZKPpkt2TqKG 3UqqOlwUMtvegkDtzOL/Ag== 0001047469-99-032032.txt : 19990816 0001047469-99-032032.hdr.sgml : 19990816 ACCESSION NUMBER: 0001047469-99-032032 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED FIRE & CASUALTY CO CENTRAL INDEX KEY: 0000101199 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 420644327 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 002-39621 FILM NUMBER: 99689783 BUSINESS ADDRESS: STREET 1: 118 SECOND AVE SE CITY: CEDAR RAPIDS STATE: IA ZIP: 52407 BUSINESS PHONE: 3193995700 MAIL ADDRESS: STREET 1: P O BOX 73909 CITY: CEDAR RAPIDS STATE: IA ZIP: 52407 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 1999 Commission File Number 2-39621 UNITED FIRE & CASUALTY COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Iowa 42-0644327 - ------------------------ --------------------------------- (State of Incorporation) (IRS Employer Identification No.) 118 Second Avenue, S.E. Cedar Rapids, Iowa 52407 - ----------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (319) 399-5700 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- As of July 30, 1999, 10,078,539 shares of common stock were outstanding. UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES INDEX Part 1. Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 1999 (unaudited) and December 31, 1998 2 Unaudited Consolidated Statements of Operations for the three month periods ended June 30, 1999 and 1998 3 Unaudited Consolidated Statements of Operations for the six month periods ended June 30, 1999 and 1998 4 Unaudited Consolidated Statements of Cash Flows for the six month periods ended June 30, 1999 and 1998 5 Notes to Unaudited Consolidated Financial Statements 6 Report of Independent Public Accountants 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures about Market Risk 16 Part II. Other Information 17
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------- ASSETS JUNE 30, December 31, 1999 1998 UNAUDITED Audited - ---------------------------------------------------------------------------------------------------------------------------- INVESTMENTS Fixed maturities Held-to-maturity, at amortized cost (market value $337,165 in 1999 and $626,180 in 1998) $ 325,646 $ 591,237 Available-for-sale, at market (amortized cost $650,473 in 1999 and $320,171 in 1998) 640,476 321,966 Equity securities (cost $25,606 in 1999 and $23,450 in 1998) 112,130 111,076 Mortgage loans 2,736 2,777 Policy loans 8,694 8,707 Other long-term investments, at market (cost $11,770 in 1999 and $11,517 in 1998) 13,368 14,368 Short-term investments 26,123 33,985 - ---------------------------------------------------------------------------------------------------------------------------- $1,129,173 $1,084,116 CASH AND CASH EQUIVALENTS 15,274 - ACCRUED INVESTMENT INCOME 16,955 16,130 ACCOUNTS RECEIVABLE 51,315 44,868 DEFERRED POLICY ACQUISITION COSTS 76,071 67,592 PROPERTY AND EQUIPMENT 12,388 13,334 REINSURANCE RECEIVABLES 14,282 12,910 PREPAID REINSURANCE PREMIUMS 2,078 2,923 INTANGIBLES 692 817 INCOME TAXES RECEIVABLE 3,589 3,757 OTHER ASSETS 3,887 4,147 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,325,704 $1,250,594 ============================================================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Future policy benefits and losses, claims and settlement expenses Property and casualty insurance $ 267,505 $ 251,117 Life insurance 630,724 575,189 Unearned premiums 125,729 116,418 Accrued expenses and other liabilities 21,153 18,922 Employee benefit obligations 10,921 9,813 Deferred income taxes 18,878 22,853 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES $1,074,910 $ 994,312 - ---------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock $ 33,595 $ 33,639 Additional paid-in capital 7,606 7,927 Retained earnings 155,497 155,421 Accumulated other comprehensive income, net of tax 54,096 59,295 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $ 250,794 $ 256,282 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,325,704 $1,250,594 ============================================================================================================================
The Notes to Unaudited Consolidated Financial Statements are an integral part of these statements. 2 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF SHARES)
- ---------------------------------------------------------------------------------------------------------------------------- Three months ended June 30, 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- Revenues Net premiums earned $ 60,648 $ 59,941 Investment income, net 18,339 16,796 Realized investment gains and other income 296 17,220 Commission and policy fee income 545 491 - ---------------------------------------------------------------------------------------------------------------------------- 79,828 94,448 - ---------------------------------------------------------------------------------------------------------------------------- Benefits, Losses and Expenses Losses and settlement expenses 47,959 48,012 Increase in liability for future policy benefits 1,491 984 Amortization of deferred policy acquisition costs 12,197 12,154 Other underwriting expenses 12,067 9,092 Interest on policyholders' accounts 7,061 6,679 - ---------------------------------------------------------------------------------------------------------------------------- 80,775 76,921 - ---------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (947) 17,527 Federal income taxes (benefit) (1,488) 4,917 - ---------------------------------------------------------------------------------------------------------------------------- Net income $ 541 $ 12,610 ============================================================================================================================ Earnings per common share $ .05 $ 1.18 ============================================================================================================================ Weighted average common shares outstanding 10,081,320 10,685,374 ============================================================================================================================ Cash dividends declared per common share $ 0.17 $ 0.17 ============================================================================================================================
The Notes to Unaudited Consolidated Financial Statements are an integral part of these statements. 3 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF SHARES)
- --------------------------------------------------------------------------------------------------------------------------- Six months ended June 30, 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- Revenues Net premiums earned $ 120,798 $ 119,277 Investment income, net 35,775 33,022 Realized investment gains and other income 1,334 21,423 Commission and policy fee income 978 955 - --------------------------------------------------------------------------------------------------------------------------- 158,885 174,677 - --------------------------------------------------------------------------------------------------------------------------- Benefits, Losses and Expenses Losses and settlement expenses 93,220 89,118 Increase in liability for future policy benefits 2,599 2,357 Amortization of deferred policy acquisition costs 23,113 23,083 Other underwriting expenses 23,009 17,848 Interest on policyholders' accounts 15,141 12,866 - --------------------------------------------------------------------------------------------------------------------------- 157,082 145,272 - --------------------------------------------------------------------------------------------------------------------------- Income before income taxes 1,803 29,405 Federal income taxes (benefit) (1,702) 7,913 - --------------------------------------------------------------------------------------------------------------------------- Net Income $ 3,505 $ 21,492 =========================================================================================================================== Earnings per common share $ .35 $ 2.01 =========================================================================================================================== Weighted average common shares outstanding 10,086,492 10,702,805 =========================================================================================================================== Cash dividends declared per common share $ 0.34 $ 0.33 ===========================================================================================================================
The Notes to Unaudited Consolidated Financial Statements are an integral part of these statements. 4 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------ Six months ended June 30, 1999 1998 - ------------------------------------------------------------------------------------------------------------------------ Cash Flows From Operating Activities Net income $ 3,505 $ 21,492 - ------------------------------------------------------------------------------------------------------------------------ Adjustments to reconcile net income to net cash provided by Operating activities Net bond discount accretion (176) (171) Depreciation and amortization 925 198 Realized investment gains (1,334) (21,423) Changes in: Accrued investment income (825) (1,088) Accounts receivable (6,447) (7,240) Deferred policy acquisition costs (8,479) (8,458) Reinsurance receivables (1,372) (534) Prepaid reinsurance premiums 845 604 Income taxes receivable/payable 168 (2,208) Other assets 260 3,027 Future policy benefits and losses, claims and settlement expenses 19,662 14,748 Unearned premiums 9,311 9,571 Accrued expenses and other liabilities 3,946 10,241 Employee benefit obligations 1,108 969 Deferred income taxes (1,175) 1,320 Other, net 6,192 (61) - ------------------------------------------------------------------------------------------------------------------------ Total adjustments $ 22,609 $ (505) - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities $ 26,114 $ 20,987 - ------------------------------------------------------------------------------------------------------------------------ Cash Flows From Investing Activities Proceeds from sale of available-for-sale investments $ 15,226 $ 41,734 Proceeds from call and maturity of held-to-maturity investments 19,667 43,364 Proceeds from call and maturity of available-for-sale investments 39,474 13,687 Proceeds from sale of other investments 49,369 25,346 Purchase of investments held-to-maturity (502) (7,364) Purchase of investments available-for-sale (138,948) (116,164) Purchase of other investments (42,024) (26,907) Proceeds from sale of property and equipment 789 1,480 Purchase of property and equipment (643) (422) - ------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities $(57,592) $(25,246) - ------------------------------------------------------------------------------------------------------------------------ Cash Flows From Financing Activities Policyholders' account balances Deposits to investment and universal life type contracts $ 81,705 $ 70,378 Withdrawals from investment and universal life type contracts (29,444) (35,476) Purchase and retirement of common stock (365) (1,523) Payment of cash dividends (5,144) (5,248) Purchase of common stock - (26,250) - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities $ 46,752 $ 1,881 - ------------------------------------------------------------------------------------------------------------------------ Net Increase (Decrease) in Cash and Cash Equivalents $ 15,274 $ (2,378) Cash and Cash Equivalents at Beginning of Year - 2,378 - ------------------------------------------------------------------------------------------------------------------------ Cash and Cash Equivalents at End of Period $ 15,274 $ - ========================================================================================================================
The Notes to Unaudited Consolidated Financial Statements are an integral part of these statements. 5 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES In the opinion of the management of United Fire & Casualty Company and Subsidiaries (the "Company"), the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, the results of operations, and cash flows for the periods presented. The results for the interim periods are not necessarily indicative of the results of operations that may be expected for the year. The financial statements contained herein should be read in conjunction with the Company's annual report on Form 10-K for the year ended December 31, 1998. The review report of Arthur Andersen LLP accompanies the unaudited consolidated financial statements included in Item 1 of Part I. The Company maintains its records in conformity with the accounting practices prescribed or permitted by the Insurance Department of the State of Iowa. To the extent that certain of these practices differ from generally accepted accounting principles ("GAAP"), adjustments have been made in order to present the accompanying financial statements on the basis of GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts included in the financial statements for the previous year have been reclassified to conform with the financial statement presentation at June 30, 1999. For purposes of reporting cash flows, cash and cash equivalents include cash and non-negotiable certificates of deposit with original maturities of three months or less. Income taxes paid, net of refunds for the six month periods ended June 30, 1999 and 1998 were $(695,000) and $8,800,000, respectively. There were no significant payments of interest through June 30, 1999 and 1998, other than interest credited to policyholders' accounts. 6 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 2. INVESTMENTS A reconciliation of the amortized cost (cost for equity securities) to fair values of investments in held-to-maturity and available-for-sale fixed maturities, marketable equity securities and other long-term investments as of June 30, 1999 is as follows.
- ---------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ---------------------------------------------------------------------------------------------------------------------------- JUNE 30, 1999 Gross Gross Amortized Unrealized Unrealized Fair TYPE OF INVESTMENT Cost Appreciation Depreciation Value - ---------------------------------------------------------------------------------------------------------------------------- HELD-TO-MATURITY Fixed Maturities Bonds United States Government, Government agencies and authorities Collateralized mortgage obligations $ 15,073 $ 50 $ 214 $ 14,909 Mortgage-backed securities 10,975 867 3 11,839 All others 1,788 282 - 2,070 States, municipalities and political subdivisions 183,734 8,046 84 191,696 Foreign 3,040 70 - 3,110 Public utilities 19,945 360 20 20,285 Corporate bonds Collateralized mortgage obligations 17,775 375 140 18,010 All other corporate bonds 73,316 2,141 211 75,246 - ---------------------------------------------------------------------------------------------------------------------------- Total held-to-maturity $325,646 $ 12,191 $ 672 $337,165 ============================================================================================================================ AVAILABLE-FOR-SALE Fixed Maturities Bonds United States Government, Government agencies and authorities Collateralized mortgage obligations $ 32,928 $ 312 $ 206 $ 33,034 Mortgage-backed securities 38 3 - 41 All others 7,411 2 210 7,203 States, municipalities and political subdivisions 85,870 1,045 1,973 84,942 Foreign 23,329 74 1,027 22,376 Public utilities 83,959 486 1,773 82,672 Corporate bonds Collateralized mortgage obligations 68,123 2,346 1,158 69,311 All other corporate bonds 348,815 3,025 10,943 340,897 - ---------------------------------------------------------------------------------------------------------------------------- Total available-for-sale fixed maturities $650,473 $ 7,293 $17,290 $640,476 - ---------------------------------------------------------------------------------------------------------------------------- Equity securities Common stocks Public utilities $2,200 $3,497 $ - $5,697 Banks, trust and insurance companies 8,986 50,454 - 59,440 All other common stocks 14,420 32,685 112 46,993 - ---------------------------------------------------------------------------------------------------------------------------- Total equity securities $ 25,606 $ 86,636 $ 112 $112,130 - ---------------------------------------------------------------------------------------------------------------------------- Total available-for-sale $676,079 $ 93,929 $17,402 $752,606 ============================================================================================================================ Other long-term investments $ 11,770 $ 1,822 $ 224 $ 13,368 ============================================================================================================================
7 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The amortized cost and fair value of held-to-maturity and available-for-sale fixed maturities at June 30, 1999 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
- --------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - --------------------------------------------------------------------------------------------------------------------------- JUNE 30, 1999 Held-to-maturity Available-for-sale - --------------------------------------------------------------------------------------------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value - --------------------------------------------------------------------------------------------------------------------------- Due in one year or less $ 8,435 $ 8,561 $ 6,694 $ 6,788 Due after one year through five years 66,611 68,874 119,152 120,106 Due after five years through ten years 75,021 78,107 243,270 235,447 Due after ten years 131,756 136,865 180,268 175,749 Mortgage-backed securities 10,975 11,839 38 41 Collateralized mortgage obligations 32,848 32,919 101,051 102,345 - --------------------------------------------------------------------------------------------------------------------------- $325,646 $337,165 $650,473 $640,476 ===========================================================================================================================
NOTE 3. NEW ACCOUNTING STANDARDS Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", governing the reporting and presentation of comprehensive income and its components which includes traditional net income and items previously recorded directly in equity, such as the change in unrealized gains or losses on securities available-for-sale. In accordance with the interim reporting guidelines of SFAS No. 130, comprehensive income (loss) was $(1,694,000) and $10,432,000 for the six months ended June 30, 1999 and 1998, respectively. Comprehensive income (loss) was $(2,106,000) and $1,069,000 for the three months ended June 30,1999 and 1998, respectively. 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. SFAS No. 131 did not have a material effect on the Company's Consolidated Financial Statements or Notes to Consolidated Financial Statements. Refer to Note 4 for interim disclosure. 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 and did not have a material effect on the Company's Consolidated Financial Statements or Notes to Consolidated Financial Statements. In June, 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", effective for all fiscal quarters of fiscal years beginning after June 15,1999. The new statement requires all derivatives (including certain derivative instruments embedded in other contracts) to be recorded on the balance sheet at fair value and establishes special accounting for certain types of hedges. The Company adopted SFAS No. 133 effective January 1, 1999. As part of the implementation, the Company reclassed a portion of its fixed income securities from the held-to-maturity category to the available-for-sale category, as of January 1, 1999. Refer to Note 5 for further disclosure. The Company adopted Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments," effective January 1, 1999. 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 8 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS assets representing 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. In accordance with SOP 97-3, the Company estimates its liabilities for insurance-related assessments, as opposed to recording the liability and expense when notified by insurance regulators. This change in timing did not 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 adopted by the Company effective January 1, 1999. 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 changed the timing of the recognition of the Company's software development expenses and did not 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. 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. NOTE 4. SEGMENT INFORMATION The Company has two reportable business segments in its operations; property and casualty insurance and life insurance. The property and casualty segment has 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 two segments are evaluated by management based on both a statutory and a GAAP basis. Results are analyzed based on profitability, expenses and return on equity. The basis for determining and analyzing segments and the measurement of segment profit has not changed from that reported in the Company's 1998 Form 10K. The Company's selling location is used in allocating revenues between foreign and domestic, and as such, the Company has no revenues allocated to foreign countries. The following analysis is reported on a GAAP basis and is reconciled to the Company's Consolidated Financial Statements.
- ----------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) PROPERTY AND LIFE CASUALTY INSURANCE INSURANCE TOTAL - ----------------------------------------------------------------------------------------------------------------------------- JUNE 30, 1999 - ----------------------------------------------------------------------------------------------------------------------------- Revenues $121,638 $ 37,366 $ 159,004 - ----------------------------------------------------------------------------------------------------------------------------- Intersegment eliminations (68) (51) (119) - ----------------------------------------------------------------------------------------------------------------------------- Total revenues $121,570 $ 37,315 $ 158,885 ============================================================================================================================= Net income (loss) $ (933) $ 4,438 $ 3,505 ============================================================================================================================= Assets $556,480 $769,224 $1,325,704 ============================================================================================================================= JUNE 30, 1998 - ----------------------------------------------------------------------------------------------------------------------------- Revenues $141,329 $ 33,484 $ 174,813 - ----------------------------------------------------------------------------------------------------------------------------- Intersegment eliminations (79) (57) (136) - ----------------------------------------------------------------------------------------------------------------------------- Total revenues $141,250 $ 33,427 $ 174,677 ============================================================================================================================= Net income $ 17,116 $ 4,376 $ 21,492 ============================================================================================================================= Assets $464,846 $734,076 $1,198,922 =============================================================================================================================
Depreciation expense and property and equipment acquisitions are reflected in the property and casualty insurance segment. 9 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 5. DERIVATIVE INSTRUMENTS The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective January 1, 1999. SFAS No. 133 cannot be applied retroactively. The new statement requires all derivatives (including certain derivative instruments embedded in other contracts) to be recorded on the balance sheet as either an asset or a liability at fair value and establishes special accounting for certain types of hedges. The Company has had limited involvement with derivative financial instruments, and does not engage in the derivative market for hedging purposes. The Company has written covered call options on its equity portfolio to generate additional portfolio income and does not use these instruments for hedging purposes. Covered call options are recorded at fair value and included in accrued expenses and other liabilities. Any income or gains or losses, including the change in the fair value of the covered call options is recognized currently in earnings and included in realized investment gains and other income. At June 30, 1999, there were no covered call options outstanding, compared to covered call options written on approximately four percent of the equity portfolio at December 31, 1998. In assessing the impact of any embedded derivative instruments, the Company has elected to apply SFAS No. 133 only to those instruments or contracts with embedded derivative instruments issued, acquired, or substantively modified by the Company after December 31, 1997. The Company has analyzed its financial instruments and contracts in accordance with SFAS No. 133 and determined there is no material effect on the Company's Consolidated Financial Statements. As part of the implementation of SFAS No. 133, the Company was allowed to reassess its held-to-maturity portfolio without "tainting" the remaining securities classified as held-to-maturity. The cumulative effect of the impact on the Company's Consolidated Financial Statements due to the reclassification of $246,623,000 of fixed-income securities from held-to-maturity to available-for-sale, as of January 1, 1999, increased the carrying value of available-for-sale fixed-income securities by approximately $9,250,000 and other comprehensive income by approximately $6,013,000, net of deferred income taxes. NOTE 6. ACQUISITION On August 10, 1999 the Company finalized the purchase of American Indemnity Financial Corporation ("American Indemnity"), whereby the Company acquired American Indemnity as a wholly owned subsidiary for approximately $30,205,000 in cash. Common stockholders of American Indemnity received approximately $14.35 per share at the closing of the transaction and deferred consideration of up to $1.00 per share in two years, subject to adjustments relating to indemnities. American Indemnity is a Galveston, Texas, based holding company that is made up of a group of regional property and casualty insurance companies that offer personal and commercial lines of insurance through independent agents. As of December 31, 1998, total assets of American Indemnity were $152,608,000, and for the year ended December 31, 1998, total revenues of $69,289,000 and a net loss of $5,846,000 were reported. 10 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of United Fire & Casualty Company: We have reviewed the accompanying consolidated balance sheet of UNITED FIRE & CASUALTY COMPANY (an Iowa corporation) AND SUBSIDIARIES as of June 30, 1999, and the related consolidated statements of operations for the three-month and six-month periods ended June 30, 1999 and 1998, and the consolidated statements of cash flows for the six-month periods ended June 30, 1999 and 1998. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above in order for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of United Fire & Casualty Company and Subsidiaries as of December 31, 1998, and, in our report dated February 17, 1999, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1998, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Arthur Andersen LLP Arthur Andersen LLP Chicago, Illinois July 30, 1999 (Except with respect to the matter discussed in Note 6, as to which the date is August 10, 1999) 11 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis contains forward-looking information as defined in the Private Securities Litigation Reform Act of 1995 and is therefore subject to certain risks and uncertainties. Actual results could differ materially from information within the forward-looking statements as a result of many factors, including, but not limited to, market conditions, competition, and natural disasters. RESULTS OF OPERATIONS For the six months ended June 30, 1999, total net income, including realized capital gains, decreased to $3,505,000 or 35 cents per share, from $21,492,000 or $2.01 per share through the first half of 1998. The 1998 results included $21,423,000 of realized capital gains that resulted primarily from the sale of equity securities. The decrease in realized capital gains was the contributing factor in the decrease in revenues from $174,677,000 for the first half of 1998 to $158,885,000 for the first half of 1999. Premiums earned increased by $1,521,000 between years and investment income grew by eight percent, or $2,753,000. The six-month earnings included a 67 cents per share after-tax charge for catastrophe losses, which totaled $6,776,000, compared to a charge of 66 cents per share, or $7,027,000, for the first half of 1998. Six-month catastrophe losses contributed ten points to the consolidated property and casualty combined ratio (claims and expenses as a percentage of premiums) of 114 percent. For the same period last year, catastrophes also contributed ten points to the consolidated property and casualty combined ratio of 110 percent. Total net income for the three months ended June 30, 1999, including realized capital gains, were $541,000 or five cents per share, versus $12,610,000 or $1.18 per share for the second quarter of 1998. Included in the 1998 results were $17,220,000 of realized capital gains resulting primarily from the sale of equity securities. Comparatively, for the second quarter of 1999, realized capital gains were $296,000. Revenues for the second quarter of 1999 were $79,828,000 compared to $94,448,000 for the second quarter of 1998. The decrease was primarily attributable to the 1998 equity sales. Premiums earned increased by $707,000 between quarters, and investment income grew by nine percent, or $1,543,000. Current year second quarter earnings included an after-tax charge of approximately 46 cents per share for catastrophe losses, which totaled approximately $4,643,000, compared to an after-tax charge of approximately 66 cents per share, or approximately $7,027,000, for the second quarter of 1998. PROPERTY AND CASUALTY INSURANCE SEGMENT The property and casualty segment had a net loss of $933,000 for the first six months of 1999, compared to net income of $17,116,000 for the same period in 1998. The prior year figures included realized capital gains of $20,309,000, primarily due to the sale of equity securities. Premiums earned decreased just $32,000 between years. Written premiums have increased $5,086,000 or four percent. Losses and settlement expenses incurred have increased $4,951,000 over the first half of 1998, with a majority of the increase coming from reinsurance assumed from other companies. Other underwriting expenses increased $5,732,000 for the first six months of 1999 compared to the first six months of 1998, with $4,628,000 due to a reduction of the deferral of acquisition costs. Higher loss ratios by line of business reduced the deferral of expenses in 1999 when compared to 1998, causing a larger immediate recognition of underwriting expenses. 12 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the three months ended June 30, 1999, the property and casualty segment had a net loss of $1,061,000, compared to net income of $10,189,000 for the second quarter of 1998. Premiums earned for the quarter increased $166,000. Losses and settlement expenses decreased by $718,000 between the three months ended June 30, 1999 and June 30, 1998. Other underwriting expenses increased $3,343,000 due to a reduction of the deferral of acquisition costs. Higher loss ratios by line of business reduced the deferral of acquisition costs during the second quarter of 1999, when compared to the second quarter of 1998, causing a larger immediate recognition of underwriting expenses. LIFE INSURANCE SEGMENT Offsetting the property and casualty results was net income of $4,438,000 for the six months ended June 30, 1999 reported by the Company's life insurance segment, compared to $4,376,000 for the six months ended June 30, 1998. Premiums earned increased by $1,546,000, or 14 percent, over the same period in 1998, primarily due to the earnings on a large block of credit life and accident and health insurance. Losses incurred decreased by $849,000 or 13 percent due to an improvement in experience. Amortization of deferred acquisition costs increased $2,706,000 or 111 percent over the first half of 1998, due primarily to amortization of deferred expenses on the significant volume of credit life and accident and health business written during 1998 and 1997. Other underwriting expenses decreased $571,000, or 23 percent, when compared to the first six months of 1998. The improvement is due to the mix of premiums written in 1999 versus 1998. This year, a majority of growth has been in annuity products, which have a commission rate of five percent. The credit life and accident and health premiums, with a commission and other compensation rate of 60 percent, were $4,127,000, compared to $8,003,000 in 1998. Interest on policyholders' accounts increased $2,274,000 for the six months ended June 30, 1999, compared to June 30, 1998. As the balances in the annuity and universal life accounts increase by new premiums, the interest credited to these accounts also increases. INVESTMENT RESULTS Net investment income increased $2,753,000, or eight percent, through the first six months of 1999, compared to the first six months of 1998. Realized investment gains decreased by $20,089,000. A majority of the gains recognized through the first half of 1998 resulted from sales of equity securities. Proceeds from the sales in 1998 were used to repurchase 625,000 shares of the Company's common stock and to rebalance its equity portfolio. TAX BENEFIT The tax benefit of $1,702,000 for the six-month period ended June 30, 1999, was due primarily to the deduction of municipal interest. As a result of this deduction, the Company had a net operating loss for tax purposes, which was carried back to 1997 and applied against income for that year, generating a tax refund. STOCK OPTIONS In February and April 1999, the Company granted options under a Nonqualified Employee Stock Option Plan to purchase an aggregate of 500 and 5,521 shares of common stock, respectively, at an exercise price of $29.25 and $26.12 per share, to officers and other employees. At the date of grant (measurement date), the market value of the Company's common stock was equal to or less than the exercise price on all options. At June 30, 1999, the market value of the Company's common stock was below the exercise price on all options. 13 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. Fixed maturities, which 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. Effective January 1, 1999, the Company reevaluated its investment classifications and transferred $246,623,000 of fixed-income securities from held-to-maturity to available-for-sale. This transfer was made in conjunction with the implementation of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which allowed a one-time adjustment in its classifications without the possibility of "tainting" the remaining securities classified as held-to-maturity. The impact on the Company's Consolidated Financial Statements as of January 1, 1999, 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, increased other comprehensive income by approximately $6,013,000 and increased deferred income taxes by approximately $3,237,000. The Company has had limited involvement with derivative financial instruments, and does not engage in the derivative market for hedging purposes. The Company has investments in collateralized mortgage obligations. These securities account for 14 percent of the fixed-income portfolio at June 30, 1999, compared to 16 percent as of December 31, 1998. OTHER ASSETS Deferred acquisition costs total $76,071,000 at June 30, 1999 and represent 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. For the six months ended June 30, 1999, the Company's life segment has generated a $7,993,000 increase in deferred acquisition costs due to growth during the second quarter of 1999 in credit life and accident and health statutory premiums collected. The property and casualty segment had a small increase of $486,000 in deferred acquisition costs. The flat growth was due to unfavorable loss experience in some lines of business, particularly workers' compensation and reinsurance assumed. Accounts receivable, which pertains to the property and casualty segment, are amounts due from insurance agents and brokers for premiums written, less commissions paid. The balance at June 30, 1999, of $51,315,000 has increased 14 percent from December 31, 1998. The Company has not experienced difficulties in collecting balances from its agents. 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 $55,535,000 or ten percent between December 31, 1998, and June 30, 1999. 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 grow, the future policy benefits grow proportionately. Claims and settlement expenses, which relate primarily to the property and casualty segment, also increased from December 31, 1998. Direct and assumed 14 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS reserves established for losses and expenses have increased $16,388,000, or seven percent. Of this increase, $741,000 relates to 1998 and 1999 catastrophe activity. Ceded recoverables for direct and assumed loss and loss adjustment expense reserves of $12,410,000 are reflected in the reinsurance receivables asset account. At June 30, 1999, the Company had no covered call options outstanding, compared to covered call options written on approximately four percent of the equity portfolio at December 31, 1998. STOCKHOLDERS' EQUITY The Company's stockholders' equity decreased by $5,488,000 to $250,794,000 at June 30, 1999, compared to December 31, 1998. Net income of $3,505,000 increased equity, while net unrealized depreciation on the Company's available-for-sale securities and other long-term investments decreased equity by $5,199,000. The Company declared $3,429,000 in stockholders' dividends through June 30, 1999, and the Company purchased 13,182 shares of its common stock at a cost of $365,000 during the first half of 1999. 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 $26,114,000 through the first half of 1999, compared to $20,987,000 through the first half of 1998. Operating cash flows continue to be ample to meet obligations to policyholders. Short-term investments, composed of money market accounts and fixed-income securities, are available for the Company's short-term cash needs. In addition, the Company maintains a $20 million line of credit with a local bank. Under the terms of the agreement, interest on outstanding notes is payable at the lender's prevailing prime rate less one percent. There is no loan balance outstanding as of June 30, 1999. IMPACT OF YEAR 2000 The insurance industry is data intensive and utilizes computer technology extensively. The Year 2000 problem is, simply stated, the inability to correctly process dates after December 31, 1999. The Company recognizes that the Year 2000 problem is a major business issue in addition to a technical problem. In 1989, the Company issued a ten-year term bond policy. It was recognized then that the commonly used two digit year was going to be inadequate for processing beyond 1999. A plan was developed that would allow the information services department, through routine program and system maintenance, to gradually migrate to a four-digit year. By the mid-1990s the Company had progressed beyond the awareness phase and was well into the formal planning and execution/testing phases. Testing of the Company's "mission critical systems" was completed by December 31, 1998. Testing included present and future date testing which simulated critical dates in the Year 2000. The Company has successfully completed the move of all tested internal systems into production. The Company is currently reviewing its significant vendors, suppliers and agents to ensure that written statements of their readiness and commitment to a date for their Year 2000 compliance are received. The Company will continue to monitor the Year 2000 status of these entities and develop contingency plans to reduce the possible disruption in business operations that may result from the failure of third parties with which the Company has business relationships to address their Year 2000 issues. Should a third party with whom the Company transacts business have a system failure due to not 15 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS being Year 2000 compliant, the Company believes this could result in a delay in processing or reporting transactions of the Company, or a potential disruption in service to our customers. 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 system errors. The Company is preparing a contingency plan that will detail alternative processing methods in the event that systems, including secondary systems, fail. Significant progress has been made in the development of the contingency plan. The contingency plan should be final and in place by September 1, 1999. The Company is also addressing areas other than Information Technology to ensure Year 2000 compliance. An assessment has identified the non-IT assets that may be impacted by the Year 2000 problem. Although there are a few items that will be impacted, none were deemed critical and all will be compliant by the end of the third quarter of 1999.Expenses incurred in connection with programming and testing have been expensed as incurred and absorbed into normal operating expenses. Costs incurred through June 30, 1999, were approximately $1,183,000. The Company believes the remaining costs for the Year 2000 compliance will include salaries and overhead for existing personnel of approximately $127,000 and replacement of hardware of approximately $90,000. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has exposure to market risk arising from potential losses due to adverse changes in interest rates and market prices. The Company's primary market risk exposure is changes in interest rates, although the Company has some exposure to changes in equity prices and limited exposure to foreign currency exchange rates. The active management of market risk is integral to the Company's operations. Investment guidelines are in place that define the overall framework for managing the Company's market and other investment risks, including accountability and controls. In addition, the Company has specific investment policies for each of its subsidiaries that delineate the investment limits and strategies that are appropriate given each entity's liquidity, surplus, product and regulatory requirements. In response to market risk, the Company may respond by rebalancing its existing asset portfolio, or by changing the character of future investment purchases. There have been no material changes in the Company's market risk or market risk factors from that reported in the Company's 1998 Form 10K. 16 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) 11 - Computation of Earnings Per Common Share 27 - Financial Data Schedule SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED FIRE & CASUALTY COMPANY - ------------------------------------------------------------------------------- (REGISTRANT) AUGUST 10, 1999 - ------------------------------------------------------------------------------- (DATE) /s/ JOHN A. RIFE - ------------------------------------------------------------------------------- JOHN A. RIFE PRESIDENT /s/ K.G. BAKER - ------------------------------------------------------------------------------- K.G. BAKER VICE PRESIDENT , CHIEF FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER 17 EX-11 2 EX-11 EXHIBIT 11. COMPUTATION OF EARNINGS PER COMMON SHARE
- ------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands Except Per Share Data and Number of Shares) - ------------------------------------------------------------------------------------------------------------------------ Weighted Average Three-Month Periods Ended Number of Shares Net Earnings Per June 30, Outstanding Income Common Share - ------------------------------------------------------------------------------------------------------------------------ 1999 10,081,320 $ 541 $ .05 1998 10,685,374 12,610 1.18 - ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands Except Per Share Data and Number of Shares) - ------------------------------------------------------------------------------------------------------------------------ Weighted Average Six-Month Periods Ended Number of Shares Net Earnings Per June 30, Outstanding Income Common Share - ------------------------------------------------------------------------------------------------------------------------ 1999 10,086,492 $ 3,505 $ .35 1998 10,702,805 21,492 2.01 - ------------------------------------------------------------------------------------------------------------------------
Computation of weighted average number of common and common equivalent shares:
- ------------------------------------------------------------------------------------------------------------------------ Three-Month Periods Ended June 30, 1999 1998 - ------------------------------------------------------------------------------------------------------------------------ Common shares outstanding beginning of the period 10,091,721 10,709,222 Weighted average of the common shares purchased and retired or reissued (10,401) (23,848) - ------------------------------------------------------------------------------------------------------------------------ Weighted average number of common shares 10,081,320 10,685,374 ========================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------ Six-Month Periods Ended June 30, 1999 1998 - ------------------------------------------------------------------------------------------------------------------------ Common shares outstanding beginning of the period 10,091,721 10,727,322 Weighted average of the common shares purchased and retired or reissued (5,229) (24,517) - ------------------------------------------------------------------------------------------------------------------------ Weighted average number of common shares 10,086,492 10,702,805 ========================================================================================================================
EX-27 3 EXHIBIT 27
7 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 640,476 325,646 337,165 112,130 2,736 0 1,129,173 15,274 14,282 76,071 1,325,704 898,229 125,729 0 0 0 0 0 33,595 217,199 1,325,704 120,798 35,775 1,334 978 95,819 23,113 38,150 1,803 (1,702) 3,505 0 0 0 3,505 .35 .35 0 0 0 0 0 0 0
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