<PAGE>
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, 1997
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 2, 1998, 10,711,222 shares of common stock were outstanding. The
aggregate market value of voting stock held by non-affiliates of the registrant
as of March 2, 1998, was approximately $179,624,933.
<PAGE>
FORM 10-K TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I:
<S> <C>
Item 1. Business 1
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II:
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 39
PART III:
Item 10. Directors and Executive Officers of the Registrant 39
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial Owners and Management 44
Item 13. Certain Relationships and Related Transactions 44
PART IV:
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 45
Signatures 46
</TABLE>
<PAGE>
PART I.
ITEM 1. BUSINESS
GENERAL
United Fire & Casualty Company and its subsidiaries (the "Company") are
engaged in the business of writing property and casualty insurance and life
insurance. The Company is an Iowa corporation incorporated in January, 1946. Its
principal executive office is located at:
118 Second Avenue S.E.
P.O. Box 73909
Cedar Rapids, Iowa 52407-3909
(319-399-5700).
The Company's subsidiaries are:
A) Addison Insurance Company, a wholly owned property and casualty insurer.
1)Addison Insurance Agency, a wholly owned general agency of Addison
Insurance Company.
2)Crabtree Premium Finance Company, a wholly owned premium finance company
of Addison Insurance Company.
B) Lafayette Insurance Company, a wholly owned property and casualty insurer.
Insurance Brokers & Managers Inc., a wholly owned general agency of Lafayette
Insurance Company
C) United Life Insurance Company, a wholly owned life insurance company.
As of December 31, 1997, the Company and its subsidiaries employed 583
full-time employees.
The Company with its property and casualty subsidiaries market most forms of
property and casualty insurance products, including fidelity and surety bonds
and reinsurance, through independent agencies and brokers. The Company and its
property and casualty subsidiaries also underwrite and broker a limited amount
of excess and surplus lines insurance.
The Company, through its life subsidiary, underwrites and markets ordinary
life (primarily universal life), annuities (primarily single premium) and credit
life products to individuals and groups through independent agencies.
A table reflecting premiums, operating results and assets attributable to the
property and casualty and life segments is included in Note 10 of the Notes to
Consolidated Financial Statements.
The following table shows the consolidated net premiums written and annuity
deposits during the last three years by major category.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fire and allied lines (1) $ 70,917 $ 66,081 $ 57,049
Automobile 53,566 52,325 44,457
Other liability 32,261 32,182 31,025
Workers' compensation 21,659 23,526 24,807
Fidelity and surety 17,542 16,586 16,215
Reinsurance 30,430 30,648 23,259
Other 540 586 734
Life and accident and health 25,705 23,598 25,181
Annuities 93,062 64,277 54,515
- -------------------------------------------------------------------------------------------------------
$345,682 $309,809 $277,242
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) "Fire and allied lines" includes farmowners, homeowners, commercial multiple
peril and inland marine.
MARKETING
The Company markets its products principally through five branch locations.
The branches are:
1) Cedar Rapids - 118 Second Avenue, S.E., P.O. Box 3909, Cedar Rapids, IA
52407-3909
2) Lombard - 2500 Highland Avenue, Suite 210, Lombard, IL 60148-5398
3) Westminster -7301 N. Federal, Suite 302, P.O. Box 850, Westminster, CO
80030-4919
4) Lincoln - 1314 O Street, Suite 500, P.O. Box 82540, Lincoln, NE 68501
5) New Orleans - 2626 Canal Street, P.O. Box 53265, New Orleans, LA
70153-3265
1
<PAGE>
The Company is licensed as a property and casualty insurer in 35 states,
primarily in the Midwest and West. Approximately 1,700 independent agencies
represent the Company's property and casualty segment. The life insurance
subsidiary is licensed in 24 states, primarily Midwestern and Western, and is
represented by approximately 1,200 independent agencies. The branch 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 branch offices as well as to
independent agencies. The Company's Home Office also monitors subsidiary and
branch offices for overall results and conformity to Company policy through the
use of management reports.
In 1997, direct premium writings on a statutory basis by state were as follows.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------
Life, Accident and
Property and Health Insurance,
Casualty Insurance Including Annuities
- -------------------------------------------------------------------------------------------------------
Percent Percent
Amount of Total Amount of Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arkansas $ 3,188 1.5% $ 2 0.0%
California 8,713 4.1 0 0.0
Colorado 13,063 6.1 4,258 3.5
Illinois 18,390 8.6 6,603 5.5
Iowa 41,365 19.5 63,303 52.6
Kansas 10,302 4.8 2,345 2.0
Louisiana 29,537 13.9 58 0.0
Minnesota 15,300 7.2 11,915 9.9
Mississippi 7,239 3.4 214 0.2
Missouri 20,634 9.7 4,757 4.0
Nebraska 14,329 6.7 7,109 5.9
North Dakota 3,236 1.5 1,335 1.1
South Dakota 9,325 4.4 2,733 2.3
Wisconsin 7,409 3.5 10,172 8.5
Wyoming 3,215 1.5 738 0.6
Other 7,648 3.6 4,669 3.9
- -------------------------------------------------------------------------------------------------------
$212,893 100.0% $120,211 100.0%
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
The insurance industry is highly competitive, and the Company competes not
only with other stock insurance companies, but also with mutual companies, the
underwriters at Lloyds of London and reinsurance reciprocals.
Since the Company relies heavily on independent agencies, it utilizes a
profit sharing contract with the agencies as an incentive to place high quality
business with the Company. For 1997, 324 agencies will receive profit sharing
commissions of an estimated $5,304,000.
INVESTMENTS
The management of the investment portfolio is primarily handled internally.
During 1997, an external investment advisor hired in 1996 was eliminated. A
chief investment officer was hired to manage the investment portfolio of the
Company.
The Company primarily invests in fixed income securities. The Company
considers itself to be a long-term investor, and generally intends, at the time
of purchase, to hold most of the fixed income securities that it buys to
maturity unless yield enhancement strategies provide excess returns. Most
acquisitions since July 1, 1997 have been identified as available-for-sale. This
is not a change in investment philosophy, but a move to enable the chief
investment officer to better manage the portfolio. See Notes 1 and 2 of the
Notes to Consolidated Financial Statements for discussion and information
concerning SFAS No. 115.
The 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 securities will continue.
2
<PAGE>
The life insurance segment has emphasized, and will continue to emphasize,
investing in high quality, taxable, fixed income securities (primarily bonds
issued by corporations and mortgage related securities including collateralized
mortgage obligations.)
The Company strives to maintain diversification among issues, issuers, and
industries, as well.
Investment results for the years indicated are summarized in the following
table.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(Dollars in Thousands)
- -------------------------------------------------------------------------------
Annualized Yield
Years Ended Average Investment on Average
December 31, Invested Assets (1) Income, Net (2) Invested Assets
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 $928,052 $61,686 6.6%
1996 825,319 56,936 6.9
1995 733,608 53,603 7.3
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
(1) Average of amounts at beginning and end of year.
(2) Investment income after deduction of investment expenses, but before
applicable income tax.
PROPERTY AND CASUALTY SEGMENT
Direct
The Company with its property and casualty subsidiaries underwrite both
commercial and personal lines of insurance. Homeowners and automobile insurance
comprise most of the personal lines of business. Business package policies,
workers' compensation, other liability and fidelity and surety bonds represent a
major part of the commercial business. Specialty policies written include the
Commercial Uni-Saver, a commercial package policy with a simplified rating plan,
blanket mortgage security, insurance on boats, outboard motors, recreational
vehicles, umbrella liability and some forms of errors and omissions insurance.
Reinsurance Assumed
The Company acts as a reinsurer assuming both property and casualty
reinsurance from approximately 340 companies. The bulk of the business assumed
is property reinsurance with the emphasis on catastrophe covers. The business
originates through approximately 40 brokers with the largest producer accounting
for approximately 21% of the reinsurance assumed.
Reinsurance Ceded
The Company follows the industry practice of reinsuring a portion of their
exposure and ceding 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 and to protect against catastrophic
losses such as hurricanes and tornadoes. Such catastrophe protection is
purchased on both direct and assumed business.
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Accident Years Casualty Retention
- -----------------------------------------------------------------------------
<S> <C>
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
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
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 is not aware of any of its
reinsurers experiencing financial difficulties 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 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 (formerly Munich
American Reinsurance Company), Employers Reinsurance Corporation and AXA
Reassurance.
The following table sets forth the aggregate direct and assumed premiums
written, ceded reinsurance and net premiums written for the three years ended
December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------
Percent Percent Percent
Years Ended December 31, 1997 of Total 1996 of Total 1995 of Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fire and allied lines (1) $ 86,200 38% $ 83,704 38% $ 74,254 38%
Automobile 55,269 24 54,234 24 46,060 23
Other liability 35,645 16 35,272 16 34,101 17
Workers' compensation 22,075 10 23,834 11 25,246 13
Fidelity and surety 18,599 8 17,610 8 17,322 9
Reinsurance assumed 33,882 15 33,943 15 26,436 13
Other 799 0 808 0 1,011 1
- -------------------------------------------------------------------------------------------------------
Aggregate direct and assumed
premiums written $252,469 111% $249,405 112% $224,430 114%
Reinsurance ceded 25,554 11 27,471 12 26,884 14
- -------------------------------------------------------------------------------------------------------
Net premiums written $226,915 100% $221,934 100% $197,546 100%
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) "Fire and allied lines" includes farmowners, homeowners, commercial multiple
peril and inland marine.
Reserves
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 based upon historical experience and upon a case-basis evaluation of the
type of loss, knowledge of the circumstances surrounding each loss and the
policy provisions relating to the type of loss. The amount of reserves for
unreported losses is determined by estimating unreported losses on the basis of
historical and statistical information for each line of insurance with respect
to the probable number and nature of losses arising from occurrences which have
not yet been reported. Established reserves are closely monitored and are
adjusted as needed.
Loss reserves are estimates at a given time of the ultimate amount expected
to be paid on incurred losses based on facts and circumstances known when the
estimates are made. Reserves are not discounted. 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.
4
<PAGE>
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, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(Dollars in Thousands)
- -------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Fire and allied lines (1)
Net premiums earned $ 69,693 $ 62,806 $ 54,150
Net losses incurred 41,472 41,487 30,551
Loss ratio 59.5% 66.1% 56.4%
- -------------------------------------------------------------------------------
Automobile
Net premiums earned $ 53,207 $ 50,513 $ 42,026
Net losses incurred 35,492 42,292 30,682
Loss ratio 66.7% 83.7% 73.0%
- -------------------------------------------------------------------------------
Other liability
Net premiums earned $ 32,394 $ 31,953 $ 29,282
Net losses incurred 9,418 10,682 10,304
Loss ratio 29.1% 33.4% 35.2%
- -------------------------------------------------------------------------------
Workers' compensation
Net premiums earned $ 22,324 $ 24,207 $ 23,955
Net losses incurred 15,492 12,155 6,815
Loss ratio 69.4% 50.2% 28.4%
- -------------------------------------------------------------------------------
Fidelity and surety
Net premiums earned $ 16,893 $ 17,321 $ 14,592
Net losses incurred 2,086 2,195 1,269
Loss ratio 12.3% 12.7% 8.7%
- -------------------------------------------------------------------------------
Reinsurance
Net premiums earned $ 30,478 $ 28,390 $ 21,117
Net losses incurred 18,268 20,768 15,789
Loss ratio 59.9% 73.2% 74.8%
- -------------------------------------------------------------------------------
Other
Net premiums earned $ 521 $ 591 $ 872
Net losses incurred 105 114 334
Loss ratio 20.2% 19.3% 38.3%
- -------------------------------------------------------------------------------
Total property and casualty
Net premiums earned $225,510 $215,781 $185,994
Net losses incurred 122,333 129,693 95,744
Loss ratio 54.2% 60.1% 51.5%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
(1) "Fire and allied lines" includes farmowners, homeowners, commercial multiple
peril and inland marine.
The combined ratios on the following page, which relate to the property and
casualty segment, 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 a GAAP basis. 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 1993 to 1997 appears here.] Statutory Combined
Ratios
<TABLE>
<CAPTION>
Company Industry
<S> <C> <C>
1993 102.5 106.9
1994 97.6 108.5
1995 95.8 106.5
1996 104.4 105.8
1997 98.4 101.8
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- ---------------------------------------------------------------------------------------------------------
Statutory GAAP
- ---------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net premiums written $226,915 $221,934 $197,546 $226,915 $221,934 $197,546
Net premiums earned 225,510 215,781 185,994 225,822 215,470 185,994
- ---------------------------------------------------------------------------------------------------------
Losses and loss adjustment expenses 66.6% 72.7 % 63.8% 66.2% 72.3 % 63.6%
Underwriting expenses 31.8 31.7 32.0 33.0 33.0 31.0
- ---------------------------------------------------------------------------------------------------------
Combined ratios 98.4 104.4 95.8 99.2 105.3 94.6
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Underwriting margin 1.6% (4.4)% 4.2% 0.8% (5.3)% 5.4%
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The following table shows the calendar year development of the unpaid losses
and loss adjustment expenses of the property and casualty segment for 1988
through 1997. The top line of the table shows the estimated liability for unpaid
losses and loss adjustment expenses recorded at the balance sheet date 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 the balance sheet date, 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 botton portion of the table
displays cumulative losses and loss adjustment payments for each of the years
indicated.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Years Ended December 31
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- ----------------------------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for
Unpaid
Losses and LAE $85,012 $103,607 $113,572 $123,219 $158,825 $170,798 $180,653 $188,700 $209,876 $218,912
Liability re-
estimated as of:
One year later 79,869 96,487 111,804 128,042 154,572 153,691 160,776 159,571 176,332
Two years later 80,395 96,976 112,390 125,888 148,507 142,572 172,546 145,486
Three years later 76,698 97,295 111,276 124,428 144,159 158,312 164,133
Four years later 76,469 95,752 113,898 122,384 134,309 155,313
Five years later 75,368 96,345 113,703 118,568 132,075
Six years later 75,257 97,159 103,303 117,648
Seven years later 75,912 79,024 102,318
Eight years later 69,518 78,624
Nine years later 69,069
- ----------------------------------------------------------------------------------------------------------------------
Redundancy $15,943 $ 24,983 $ 11,254 $ 5,571 $ 26,750 $ 15,485 $ 16,520 $ 43,214 $ 33,544
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Cumulative amount of
liability paid through:
One year later $27,277 $ 37,598 $ 39,497 $ 44,694 $ 54,291 $ 51,550 $ 80,246 $ 56,618 $ 61,694
Two years later 41,865 56,574 63,589 69,296 84,074 102,637 109,281 83,071
Three yearslater 52,551 69,767 77,141 87,052 96,976 119,349 123,469
Four years later 57,658 76,443 87,627 95,059 107,420 127,333
Five years later 61,795 82,013 85,379 99,483 112,360
Six years later 64,912 67,021 88,558 102,677
Seven years later 60,026 69,314 90,575
Eight years later 61,339 70,315
Nine years later 62,139
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
LIFE INSURANCE
United Life Insurance Company is in the business of writing life insurance.
Incorporated in May, 1962 and commencing business in October, 1962, the Iowa
based corporation is wholly owned by the Company and has no subsidiaries.
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. In the 1980s, United Life
Insurance Company was one of the first companies in the nation to offer
universal life 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 $3,403,208,000 as of
December 31, 1997. Universal life represents 55% of insurance in force at
December 31, 1997, compared to 57% at December 31, 1996. The following table
presents net premium information for the last three years.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(Dollars in Thousands)
- --------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Universal life $ 7,495 $ 7,381 $ 7,926
Ordinary life (other than universal) 5,605 6,760 9,647
Accident and health 2,821 2,191 1,822
Annuities 1,151 1,434 902
Credit life 1,977 1,528 1,217
Group accident and health 182 141 125
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total net premiums earned $19,231 $19,435 $21,639
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Reinsurance Ceded
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 risk 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 and the ceding company must
pay the loss if the reinsurer fails to meet its obligation. United Life
Insurance Company is not aware of any of its reinsurers experiencing financial
difficulties that would result in a material impact on its 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
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 to the Consolidated
Financial Statements.
7
<PAGE>
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 which is 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 fourth through
eighth floors of this building and rents the third floor and an office on the
second floor to its subsidiary, United Life Insurance Company. 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.
Management believes that the properties of the Company are adequate for
conducting its business.
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 in the over-the-counter market under the
NASDAQ symbol UFCS. On March 2, 1998, there were 954 holders of record of the
Company's common stock. The following table 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.
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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Cash
Share Price Dividends
High Low Declared
- --------------------------------------------------------------------
<S> <C> <C> <C>
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
1996
Quarter Ended
March 31 37 1/4 27 3/8 $ 0.15
June 30 40 29 3/16 0.15
September 30 35 1/2 30 0.15
December 31 38 30 0.15
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
</TABLE>
8
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data)
- ------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $1,157,922 $1,024,835 $937,594 $828,126 $733,020
Operating revenues
Net premiums earned 244,939 234,797 207,528 184,748 174,137
Investment income, net 61,686 56,936 53,603 46,420 40,233
Realized investment gains and other income 2,676 6,726 1,698 796 1,860
Commission and policy fee income 1,829 1,815 1,761 1,881 1,713
Net income 28,732 21,960 28,803 22,521 18,645
Earnings per common share 2.68 2.04 2.66 2.08 1.72
Cash dividends declared
per common share 0.63 0.60 0.55 0.49 0.45
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
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, 1997 appears here.]
<TABLE>
Earnings Per Common Share
<CAPTION>
Earnings Per Common Dividends
Share Declared
<S> <C> <C>
1993 1.72 0.45
1994 2.08 0.49
1995 2.66 0.55
1996 2.04 0.60
1997 2.68 0.63
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ASSETS
The Company's total assets grew by 13% to $1,157,922,000 in 1997. A majority
of the increase was in the portfolio of fixed income securities. The Company's
investment strategy has been to invest primarily in long-term, high-quality
securities. Held-to-maturity investments comprise 82% of the total fixed income
portfolio, as compared to 91% at December 31, 1996. During 1997, the Company
purchased and classified more securities as available-for-sale in an effort to
expand its portfolio management strategy and to increase total returns. The
Company expects this trend to continue in 1998. The Company did not classify any
securities as trading in 1997 or 1996. Net unrealized gains of $1,913,000 were
recorded in 1997 on the available-for-sale fixed income securities, compared to
net unrealized losses of $1,415,000 in 1996.
Approximately 22% of the fixed income portfolio is invested in collateralized
mortgage obligations ("CMOs"), compared to 26% at December 31, 1996. The Company
did not add to its mortgage-backed securities/CMO holdings during the last half
of 1997. Returns were not as attractive as those found in other investment
alternatives. The Company minimized its prepayment risk by buying most issues
priced at a slight discount. While buying at a discount does not prevent
prepayment, the yield is not penalized as is the case when a premium is paid. In
addition, although the stated maturity is longer than the average life of the
issues, the Company concentrated on buying issues with an expected maturity in
the seven-to-twelve-year range.
9
<PAGE>
Using a conservative investment practice the Company last utilized in 1987,
the Company started writing covered call options on approximately 1% of its
equity portfolio to generate additional portfolio income. This program will
continue to be utilized and expanded as situations and market conditions merit
such use.
The Company also invests in common and preferred stocks, all of which are
classified as available-for-sale. Other long-term investments are primarily
holdings in limited partnership funds investing in banks and insurance
companies. Net unrealized appreciation on stocks and other long-term investments
increased $38,859,000, or 58% in 1997 compared to 1996.
Flat growth in premiums resulted in a 1% increase in accounts receivable from
property and casualty insurance agents and brokers. The balance of this asset at
December 31, 1997 was $44,060,000, compared to $43,433,000 at December 31, 1996.
Deferred policy acquisition costs ("DAC") are expenses such as commissions,
premium taxes and other costs associated with underwriting insurance policies.
At the beginning of a policy period, an asset is established for the associated
costs, and is then amortized over the lives of the respective policy terms to
achieve a matching of expenses to revenue. In 1997, the Company's DAC increased
7%.
Property and equipment grew by 14% to $14,443,000 during 1997 due primarily
to purchases, net of disposals, of $1,362,000 in new electronic data processing
equipment.
Losses, expenses and reserves that are due to the Company from reinsurance
brokers are classified as reinsurance receivables. This balance increased by
$1,940,000 or 16% in 1997. The Company has not experienced significant
collection problems with regard to these receivables and has no information
indicating that any of its current reinsurance balances are uncollectible.
CASH FLOW AND LIQUIDITY
Most of the cash that the Company receives is generated from insurance
premiums paid by policyholders. The premiums are invested in assets maturing at
regular intervals in order to meet the Company's obligations to pay policy
benefits, claims and claim adjusting expenses. Net cash provided by the
Company's operating activities was $43,211,000 in 1997, compared to $43,921,000
in 1996. Operating cash flows continue to be ample to meet policyholders
obligations.
Short-term investments, composed of money market accounts and fixed income
securities are available for the Company's short-term cash needs. In
addition, a six-million dollar line of credit is maintained with a local
bank. During 1997, the Company borrowed $1,000,000 against the line of credit
for 4 days. No funds were borrowed during 1996.
LIABILITIES
The property and casualty segment's gross liability before reinsurance for
losses and settlement expenses increased 5% to $231,768,000 between 1997 and
1996. Gross reserves remaining on the 1994 Northridge earthquake were $4,058,000
as of December 31, 1997, compared to $4,599,000 at December 31, 1996. This is
the only significant catastrophe related reserve that the Company has for both
years.
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.
10
<PAGE>
The liability for future policy benefits and interest on policyholders'
accounts increased 12%, due primarily to two factors. First, this liability is
increased immediately by the full premiums paid by policyholders for annuity
products and most universal life products. In 1997, the Company received
premiums of $57,734,000 in non-internal rollovers on annuity products and
$13,550,000 on universal life products. These same two product lines had
$22,510,000 of interest credited during 1997 which also causes a direct increase
to future policy benefits. In addition, fluctuations in surrender benefits paid
as well as the future policy benefits for other product lines account for the
remainder of the change.
The Company's employee benefit obligations increased $1,901,000 or 28% in
1997, compared to 1996. Changes to the pension plan benefits formula and new
early retirement provisions contributed to this increase.
Deferred income taxes grew 120% to $27,868,000. A deferred tax liability of
$37,549,000 on unrealized appreciation was a major contributor to the growth in
this liability.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997,
COMPARED TO YEAR ENDED DECEMBER 31, 1996
PROPERTY AND CASUALTY OPERATIONS
The property and casualty segment had a statutory combined ratio (net losses
incurred and net loss adjustment expenses incurred to net premiums earned, plus
expenses incurred to premiums written) of 98% for the year ended 1997, compared
to 104% for 1996.
The Company has experienced very moderate premium growth, as has most of the
property and casualty industry. Premiums written increased 2% between 1997 and
1996. Overall industry growth is projected to be around 3%.
On the loss side, the Company's automobile lines of business improved
considerably in 1997, with a loss ratio (net losses incurred to net premiums
earned) of 66.7%, compared to 83.7% in 1996. Another significant line of
business for the Company is other liability with a loss ratio of 29.1% in 1997,
compared to 33.4% in 1996. The reinsurance line also showed substantial
improvement decreasing to 59.9% in 1997 from 73.2% in 1996.
Results in the workers' compensation line deteriorated in 1997, when compared
to 1996. Net premiums earned decreased $1,883,000 or 8% and the loss ratio rose
to 69.4% from 50.2% in 1996. An increase in claims severity in 1997, as well as
continuing rate reductions due to competition have contributed to these results.
A lack of significant catastrophe exposure has contributed to the Company's
favorable underwriting results. The property and casualty segment sustained
approximately $6,780,000 in gross direct catastrophe losses 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 incurred on all catastrophe losses for the years ending 1997, 1996 and
1995 were $8,926,000, $13,350,000 and $13,936,000, respectively. Ceded incurred
on all catastrophes for the years ending 1997, 1996 and 1995 were $1,313,000,
$2,839,000 and $3,119,000, respectively.
The property and casualty segment's underwriting and acquisition expenses
increased 2% to $74,992,000. The 2% growth in premium writings have produced
corresponding moderate increases in expenses such as commissions and other
policy related expenses.
LIFE OPERATIONS
The Company's earnings decreased $2,071,000 or 26% in 1997 compared to 1996.
Much of this can be attributed to an adjustment to deferred acquisition costs
which resulted in additional amortization of approximately $2,057,000 which was
a result of an acceleration of amortization of prior years' amounts deferred.
11
<PAGE>
Losses incurred showed an increase of $4,190,000 over 1996 primarily due 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 has grown
due to a significant increase 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% over 1996.
The life segment's realized gains decreased $1,141,000 in 1997 compared to
1996. The gains in 1996 were a result of the Company taking advantage of market
conditions and selling a few of its available-for-sale fixed income securities.
INVESTMENT RESULTS
Growth in the Company's portfolio of fixed income securities contributed to
the 8% increase in investment income. For 1996, realized gains and other income
included $2,074,000 of interest received in connection with the settlement of a
Federal income tax Revenue Agent Review for previous tax years.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996,
COMPARED TO YEAR ENDED DECEMBER 31, 1995
PROPERTY AND CASUALTY OPERATIONS
Property and casualty premiums earned increased 16%, or $29,476,000 in 1996,
when compared to 1995. Our direct business provided a majority of the growth,
with much of the increase concentrated in the midwestern states and Louisiana.
Loss and settlement expenses incurred by the property and casualty segment
for 1996 increased 32% or $37,589,000 over 1995. While 1996 and 1995 produced an
unusually large number of hurricanes, the Company did not have much exposure
related to these storms. Several other factors did contribute to underwriting
results. The Company's consistent and long-term growth inevitably led to a
higher number of claims. During the first quarter of 1996, frigid weather
causing frozen water pipes resulted in substantial water damage. Several large
fire losses also occurred during the first few months of the year. Wind and hail
storms occurring during the summer months in the midwestern states led to an
increase in loss activity. In addition, a small number of large commercial auto
liability losses were incurred throughout the year.
In 1996, the Company's largest catastrophe loss incurred year-to-date was the
1994 Northridge earthquake, with gross losses incurred of $3,149,000 in 1996
compared to $3,847,000 in 1995 and $10,342,000 in 1994. Ceded losses incurred
related to this catastrophe were $2,882,000 in 1996, compared to $3,005,000 in
1995 and $4,319,000 in 1994. Gross incurred on other catastrophe losses for the
years ending 1996, 1995 and 1994 were $10,200,000, $10,089,000 and $5,784,000,
respectively. Ceded incurred on all other catastrophes for the years ending
1996, 1995 and 1994 were $(43,000), $114,000 and $(17,000), respectively.
The $12,280,000 increase in property and casualty underwriting and
acquisition expenses was primarily due to an increase in commissions, premium
taxes and other policy issue expenses, associated with growth in premiums.
12
<PAGE>
LIFE OPERATIONS
The decrease of $2,204,000 in premiums earned was attributable to a decrease
in collected traditional life premiums of $2,854,000. One product, single
premium whole life, saw a decrease of $3,591,000.
Other underwriting and operating expenses decreased $1,979,000 due to a
larger deferral of expenses associated with acquisition of new business. An
increase in premiums collected of $10,305,000 in the single premium deferred
annuity block along with additional acquisition expenses is responsible for 50%
of this decrease. The balance of the decrease was due to a combination of slight
increases in premiums collected and refinement in the way deferrable acquisition
expenses are determined and allocated.
Interest credited was flat in 1996 for two reasons. First, one block of
universal life had withdrawals of $15,125,000 in December, 1995 and $15,561,000
in the first two months of 1996, which caused a reduction of approximately
$2,025,000 in interest credited in 1996 compared to 1995. Second, deferred
annuity policies with a five-year interest rate guaranteed between 7.1% and 8.0%
renewed in 1996 at a rate between 5.0% and 5.5% representing approximately a
$500,000 decrease in interest credited. Also, all deferred annuity policies with
guarantees of less than 6.5% earned up to 1.0% less in 1996.
INVESTMENT RESULTS
Growth in the Company's fixed maturity portfolio contributed to the 6%
increase in investment income. The unusual increase in realized gains and other
income resulted from primarily two sources. The Company took advantage of market
conditions and sold a small number of its available-for-sale fixed income
securities. In addition, the settlement of a Federal income tax Revenue Agent
Review for previous tax years resulted in the receipt of $2,074,000 in interest,
which is included in realized investment gains and other income.
REGULATION
The insurance industry is governed by the National Association of Insurance
Commissioners ("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 project, originally expected to be completed by January 1, 1998, has
been extended to 1999. It is expected that the new rules would have financial
effects on the insurance industry's statutory results, including those of the
Company. Due to the incomplete and complex proposed changes, it is impossible to
estimate the impact at this time. The changes would not affect the accompanying
financial statements, which are based on generally accepted accounting
principles.
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, 1997 and 1996, both the property and casualty and the
life segment 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 which, if or when implemented, would have a material effect on the
Company's liquidity, capital resources or operations.
13
<PAGE>
YEAR 2000
The insurance industry is data intensive and utilizes computer technology
extensively. An important issue facing all computer users is the approaching
Year 2000. Many computer systems and applications have been designed with
two-digit date fields. With the turn of the century, these programs may
recognize the Year 2000 as 1900 or not at all. If left unresolved, this could
cause systems to process critical financial and operational information
incorrectly. The Company is aware of this issue and is finalizing its systems
for compliance for the Year 2000. Beginning in 1984, programming to accommodate
four-digit date fields was initiated. Testing is currently being conducted on
all systems and will be completed in 1998. Expenses incurred in connection with
the conversions and testing have been expensed as incurred and absorbed into
normal operating expenses. The remaining costs for Year 2000 compliance are not
expected to be material to operations.
The Company is also reviewing its third-party vendors for compliance with
Year 2000 and has received many affirmative responses. While the Company is
reviewing its third part vendors' Year 2000 compliance, it cannot assure that
the systems of these vendors that the Company relies on will be converted in a
timely manner, or that their failure to convert would not have an adverse affect
on the Company's systems.
OUTLOOK
Management expects premium growth to be modest to flat during 1998. The
Company will continue to explore new geographic areas, in addition to our
current development of Arkansas, Mississippi and New Mexico, for expansion.
The loss frequency to date for 1998 has been down due to the mild winter
throughout the Company's major exposure areas, giving the year a good start.
However, the storm season is fast approaching and El Nino hasn't finished yet.
A new management team was created with the appointment of John A. Rife, a
21-year veteran with the Company, as President. He maintains his position as
President of United Life Insurance Company, a position he has held for 13 years.
Kevin Kubik joined the Company, filling the newly created position of Vice
President and Chief Investment Officer.
The Company sold a small subsidiary, Crabtree Premium Finance Company, a
premium finance company which was not contributing to Company growth or service
strategy. On February 27, 1998, most of the assets of this subsidiary were sold
to Mepco Insurance Premium Financing, Inc. of Chicago, Illinois.
CHAIRMAN'S REPORT
The good news is that last year your Company's net income increased 31% to
$28,732,000 or $2.68 per share, just $71,000 shy of a record. In 1995, its best
year ever, it earned $28,803,000 or $2.66 per share (that year there was an
average of 102,000 more shares outstanding than in 1997). Stockholders' equity
increased $49,349,000 or 22% to $277,208,000 or $ 25.84 per share. The return on
equity was 11%.
During the year the market value of your United Fire shares increased 25%
while the Dow Jones Industrial Average increased 23% and the S&P 500 increased
31%. Over the past five years, United Fire & Casualty's stock has not been a bad
proxy for the S&P 500, slightly outperforming it, with a total return including
dividends of 169% or an annual equivalent of 22% while the index had a total
return of 151% or an annual equivalent of 20%, once again demonstrating that
insurance stocks can be a good investment for the long term investor.
Your Company's combined ratio, a measure of the underwriting profitability
of its property and casualty business, improved by six points to 98%. Over
the past five years it has averaged 100%. Fortunately during the year we
experienced no major catastrophes.
The bad news is that last year underwriting experience for all
property/casualty companies improved and the industry posted record earnings.
Four years of a soft market with no relief in sight and the industry's combined
ratio decreased by four points to 102%, its lowest in 18 years. According to the
Property Claim Service, the 25 catastrophes reported during 1997 was the lowest
number since 1987. It was a difficult year not to make money in the insurance
business unless one were in the managed care business. A booming stock market
made even the most inept insurance company managements look good.
14
<PAGE>
Indicative of the soft environment in which we operate, total property and
casualty premiums written increased by only 2% to $226,915,000 while direct
workers' compensation premiums actually declined by 3%. Most of our growth came
from our Denver and New Orleans regional offices which both had a very good year
from a loss ratio and a production standpoint. Denver expanded into New Mexico
and New Orleans continued to develop Mississippi and Arkansas to balance its
exposures in Louisiana. The outlook for growth this year is not encouraging and
we are not going to pursue business we believe to be inadequately priced. With
medical costs once again on the rise and worker's compensation rates continuing
to be under pressure the prospects for that line are not good.
Life insurance premiums increased 8% to $21,955,000 and annuity premiums,
which are not included as insurance premiums under GAAP accounting, amounted to
$92,095,000. Banks, especially small-town banks, continue to be an increasingly
important source of this business and we were generally able to maintain our
spread on this business despite a decline in interest rates. Life insurance
earnings decreased $2,071,000 to $6,061,000 resulting in a return on equity for
the life insurance segment of our business of 8%. In 1996 our life insurance
earnings were favorably impacted by realized gains of $1,361,000 compared to
$220,000 this year.
Rather than storms, pestilence or plagues, your Company's story this year is
the story of its most important asset, its people. While I was indisposed most
of the year, they performed admirably and demonstrated that if CEOs aren't
completely unnecessary, they are a very expensive luxury that certainly aren't
worth nearly what they are paid.
Last May, John Rife, who has been the President of United Life Insurance
Company for the past 13 years, was also named President of United Fire &
Casualty Company. As I was sure it would be, his appointment has been well
received by the staff. I am confident he will continue the people-oriented
policies which I believe have been one of the foundations for your Company's
success. Actually, John had been my point person since my hospitalization
earlier in the year.
Under John's leadership, United Life has grown to a company with over
$596,000,000 in assets and the book value of your Company's $24,473,000
investment has grown to over $97,000,000. In recent years it has consistently
been one of the best performers among its peers, i.e., small to medium-sized
life insurers affiliated with property and casualty companies. Not bad for a
company that is in a category that A.M. Best and other pundits say is doomed to
failure.
In June, Kevin Kubik joined us as Vice President of Investments. For over 50
years, the investment of your Company's funds has been the province of the
McIntyres, first my father who started his career in the investment business and
then yours truly. We have always believed in making our own mistakes rather than
paying someone else to make them for us. However, when our invested assets
surpassed three-quarters of a billion dollars it became apparent that managing
them could no longer be handled on a part-time basis. It would be nice to say we
found Kevin, but in fact he found us and his timing couldn't have been better.
After a career which included experience with the investment departments of two
life insurance companies and as a fixed-income manager with a large money
manager in Chicago, he wanted to return to Cedar Rapids to raise his family.
We're glad he did.
One of my favorite pastimes is looking at insurance companies that might be
acquisition candidates. Several years ago we were interested in a small Iowa
life insurance company that was for sale. Their products were compatible with
ours, we used the same actuary and even the names were similar. We thought it
would make a good fit with our United Life but could never make a deal. In the
course of our discussions we discovered one of their hidden assets was the
assistant in their accounting department. Later Sam Hague joined us to head up
our Life Accounting Department. When John assumed responsibility for our entire
operations, Sam was promoted to Executive Vice President of United Life
responsible for all our life operations. In a position usually filled by
"high-pressure sales types" he's doing an excellent job. One reason we never
stop looking is you never know when you're going to find a gem.
On July 1, Mike Hansen, Vice President in charge of our Fidelity and Surety
Department, retired. Mike, who was our surety claims person (note: I can be
politically correct, too) assumed responsibility for the department in 1989 when
Dick Ehlinger passed away. At the time, many so-called experts questioned our
judgment in putting a claims person in charge of the department, but Mike proved
them wrong. Under Mike's leadership the department's premiums grew from
$6,278,000 to $17,542,000 and its loss ratio averaged 10.4%. Now it's Jeff
Chapin's and Dave Lange's turn. With a staff of 23 professionals we have no
doubt they will succeed.
15
<PAGE>
If the pundits are to be believed, sometime within the next two years the
economy is going to grind to a halt, the sky will fall and chaos will reign as
federal, state and local governments, credit cards and nearly every other aspect
of modern life become infected with the Year 2000 virus. However, we are not
panicking. Maybe we just don't know any better, but perhaps our policy of
developing most of our major software systems in-house rather than relying on
outside vendors permitted our Information Services Department to foresee and
address this problem sooner than many. We think so and just to make sure will be
running another test of all our systems this summer.
The trend towards consolidation, which has been sweeping all financial
services, continues to gain momentum in the property and casualty business. Two
recent mergers that particularly interested us were Safeco's acquisition of
American States and St. Pauls' pending acquisition of USF&G.
Going back to the days of John Phelan, the long-time president of American
States and a very good insurance person who built it into a well-respected
company and who, like my father, flew his own plane, no company has made more
passes at us over the years than American States. The story was always the same,
they were larger, they had Lincoln National behind them, they would survive and
we would make a good fit. Funny thing, we're still here but they aren't around
anymore.
Like USF&G, your Company is often referred to in the trade by its initials,
UF&C and the similarity has sometimes caused confusion. When we were small and
unknown we took it as a compliment, later as USF&G lost its way and got into
trouble it became an embarrassment. Therefore, we were pleased when the St. Paul
announced they would spend $2.8 billion to solve our problem of mistaken
identity.
Another trend is demutualization. Even "the rock" is now considering becoming
a stock company. Over two hundred years ago, Adam Smith extolled the virtues of
the profit motive in the "Wealth of Nations". Today, even in what was once the
Communist empire, its value is acknowledged so it shouldn't be any surprise that
the managements of mutual insurance companies are finally beginning to see the
light, too. One of the insurance departments' challenges will be to restrain
managements' greed and make sure the mutuals' policyholders are fairly
compensated for the surplus their managements covet.
For the fifth consecutive year, Ward Financial Group, an insurance
consultant, named your Company one of the 50 outstanding property/casualty
companies in the United States based on performance and security. This may
become a boring story, but one which we never tire.
On May 20th, your Board of Directors voted to increase the dividend seven
percent to $.64 per share. This too is becoming a boring story, but one of
which, hopefully, you won't tire either.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
Consolidated Balance Sheets
December 31, 1997 and 1996
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
(Dollars in Thousands
Except Number of Shares)
- ----------------------------------------------------------------------------------------------------------
ASSETS 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments (Notes 2 and 3)
Fixed maturities
Held-to-maturity, at amortized cost
(market value $709,867 in 1997 and $668,541 in 1996) $ 677,360 $ 651,138
Available-for-sale, at market (cost $145,019
in 1997 and $69,317 in 1996) 146,932 67,902
Equity securities (cost $26,296 in 1997 and $25,898 in 1996) 128,698 91,314
Mortgage loans 2,862 2,959
Policy loans 8,405 7,591
Other long-term investments, at market (cost $9,000 in 1997 and $8,395
in 1996) 12,448 9,970
Short-term investments 19,195 29,330
- ----------------------------------------------------------------------------------------------------------
$ 995,900 $ 860,204
Cash and Cash Equivalents 2,378 14,389
Accrued Investment Income (Note 3) 14,159 12,195
Accounts Receivable (net of allowance for doubtful accounts
of $1,030 in 1997 and $597 in 1996) 44,060 43,433
Deferred Policy Acquisition Costs 60,215 56,083
Property and Equipment, primarily land and buildings, at cost,
less accumulated depreciation of $15,781 in 1997 and $15,443 in 1996 14,443 12,630
Reinsurance Receivables (Note 5) 14,430 12,490
Prepaid Reinsurance Premiums 4,064 4,229
Intangibles 1,082 1,335
Income Taxes Receivable (Note 8) - 709
Other Assets 7,191 7,138
- ----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,157,922 $1,024,835
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------
Liabilities
Future policy benefits and losses, claims and settlement expenses (Notes 5 and 6)
Property and casualty insurance $ 231,768 $ 221,207
Life insurance (Note 3) 482,437 431,582
Unearned premiums 108,296 105,008
Accrued expenses and other liabilities 18,373 19,721
Employee benefit obligations (Note 9) 8,665 6,764
Income taxes payable (Note 8) 3,307 -
Deferred income taxes (Note 8) 27,868 12,694
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 880,714 $ 796,976
- ----------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $3.33 1/3 par value; authorized 20,000,000 shares (Note 12)
10,727,322 shares issued and outstanding in 1997
10,727,712 shares issued and outstanding in 1996 $ 35,758 $ 35,759
Additional paid-in capital 9,331 9,342
Retained earnings (Note 7) 161,906 139,933
Net unrealized appreciation, net of applicable income taxes of
$37,549 in 1997 and $22,750 in 1996 (Note 2) 70,213 42,825
- ----------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 277,208 $ 227,859
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,157,922 $1,024,835
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
17
<PAGE>
Consolidated Statements of Operations
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data
and Number of Shares)
- ----------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Net premiums earned (Note 5) $ 244,939 $ 234,797 $ 207,528
Investment income, net (Note 2) 61,686 56,936 53,603
Realized investment gains and other income (Note 2) 2,676 6,726 1,698
Commission and policy fee income 1,829 1,815 1,761
- ----------------------------------------------------------------------------------------------------------------
$ 311,130 $ 300,274 $ 264,590
- ----------------------------------------------------------------------------------------------------------------
Benefits, Losses and Expenses
Losses and settlement expenses $ 159,199 $ 161,293 $ 125,548
Increase in liability for future policy benefits 5,016 8,817 7,695
Amortization of deferred policy acquisition costs 52,380 48,364 44,557
Other underwriting expenses 33,857 33,722 28,212
Interest on policyholders' accounts 22,510 20,701 20,528
- ----------------------------------------------------------------------------------------------------------------
$ 272,962 $ 272,897 $ 226,540
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes $ 38,168 $ 27,377 $ 38,050
Federal income taxes (Note 8) 9,436 5,417 9,247
- ----------------------------------------------------------------------------------------------------------------
Net Income $ 28,732 $ 21,960 $ 28,803
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Earnings per common share (Note 12) $ 2.68 $ 2.04 $ 2.66
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding (Note 12) 10,727,440 10,773,591 10,829,606
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Cash dividends declared per common share (Note 12) $ 0.63 $ 0.60 $ 0.55
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
18
<PAGE>
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data and Number of Shares)
- -----------------------------------------------------------------------------------------------------------
Additional Net
Common Paid-In Retained Unrealized
Stock Capital Earnings Appreciation Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1994 $24,066 $12,049 $113,617 $20,921 $170,653
Net income - - 28,803 - 28,803
Cash dividend declared on
common stock, $.55 per share - - (5,957) - (5,957)
Change in net unrealized
appreciation, net of
applicable income taxes - - - 15,273 15,273
Three for two stock split (Note 12) 12,033 - (12,033) - -
Purchase and retirement of
372 shares of common stock (1) (18) - - (19)
- -----------------------------------------------------------------------------------------------------------
Balances, December 31, 1995 $36,098 $12,031 $124,430 $36,194 $208,753
Net income - - 21,960 - 21,960
Cash dividend declared on
common stock, $.60 per share - - (6,457) - (6,457)
Change in net unrealized
appreciation, net of
applicable income taxes - - - 6,631 6,631
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
Cash dividend declared on
common stock, $.63 per share - - (6,759) - (6,759)
Change in net unrealized
appreciation, net of
applicable income taxes - - - 27,388 27,388
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
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
19
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Income $ 28,732 $ 21,960 $ 28,803
- ------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities
Net bond discount accretion (307) (489) (1,244)
Depreciation and amortization 1,117 2,104 1,229
Realized investment gains (2,610) (4,651) (1,698)
Realized gain on sale of property - (2) -
Changes in:
Accrued investment income (1,964) (678) (1,106)
Accounts receivable (627) (4,813) (4,756)
Deferred policy acquisition costs (4,132) (3,413) (5,125)
Reinsurance receivables (1,940) (1,793) 9,348
Prepaid reinsurance premiums 165 (577) (637)
Income taxes receivable/payable 4,016 296 (1,831)
Other assets (53) 23 231
Future policy benefits and losses, claims and settlement
expenses 16,652 32,105 6,308
Unearned premiums 3,288 8,196 13,381
Accrued expenses and other liabilities (1,454) (3,640) 3,391
Employee benefit obligations 1,901 1,071 807
Deferred income taxes 427 (1,778) 2,232
- ------------------------------------------------------------------------------------------------------------
Total adjustments $ 14,479 $ 21,961 $ 20,530
- ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 43,211 $ 43,921 $ 49,333
- ------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Proceeds from sale of available-for-sale investments $ 27,390 $ 35,251 $ 1,344
Proceeds from call and maturity of held-to-maturity investments 62,834 67,696 33,154
Proceeds from call and maturity of available-for-sale
investments 5,298 10,562 3,313
Proceeds from sale of other investments 62,189 19,012 2,593
Purchase of investments held-to-maturity (89,519) (127,982) (108,582)
Purchase of investments available-for-sale (105,408) (30,872) (3,793)
Purchase of other investments (53,429) (28,149) (15,456)
Proceeds from sale of property and equipment 1,942 735 2,133
Purchase of property and equipment (4,619) (1,961) (3,368)
- ------------------------------------------------------------------------------------------------------------
Net cash used in investing activities $(93,322) $(55,708) $(88,662)
- ------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Policyholders' account balances
Deposits to investment and universal life type contracts $127,644 $ 96,890 $ 87,041
Withdrawals from investment and universal
life type contracts (82,881) (68,212) (45,173)
Purchase and retirement of common stock (12) (3,028) (19)
Payment of cash dividends (6,651) (6,472) (5,777)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 38,100 $ 19,178 $ 36,072
- ------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents $(12,011) $ 7,391 $ (3,257)
Cash and Cash Equivalents at Beginning of Year 14,389 6,998 10,255
- ------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 2,378 $ 14,389 $ 6,998
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
20
<PAGE>
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 Company and its property and casualty subsidiaries market most forms of
commercial and personal property and casualty insurance products, including
fidelity and surety bonds and reinsurance. The business is generated through
approximately 1,700 independent agencies and brokers in 35 states, with 70% of
the Company's direct premiums originating in six Midwestern states in 1997.
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 independent agencies.
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 Crabtree 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 1997 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.
21
<PAGE>
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.
Liabilities for future policy benefits are computed by the net level premium
method using interest assumptions ranging from 4.5% to 8.0% and withdrawal,
mortality and morbidity assumptions appropriate at the time the policies 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 1.5% to 2.0% 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, 1997 and 1996 are securities on deposit with
various regulatory authorities as required by law with carrying values of
$543,801,000 and $481,703,000, 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 and other long-term investments, 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. Income taxes paid during 1997, 1996 and 1995 were $5,789,000,
$8,201,000, and $8,801,000, 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
1997, 1996 or 1995.
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 twenty-eight years.
22
<PAGE>
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.
Benefit Plans
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.
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 a stated deductible has been
met. Participants become eligible for the benefits if they retire from the
Company after reaching age 55 with ten or more years of service in the plan. The
plan is contributory, with retiree contributions adjusted annually.
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 earning per share ("EPS"). Under the new standard, the
presentation of primary EPS has been replaced with a presentation of basic EPS.
Basic EPS is computed excluding dilution caused by common stock equivalents such
as stock options. The 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 does not have a material
effect on the Company's Consolidated Financial Statements.
In February, 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 129, "Disclosure of Information about Capital Structure." SFAS No. 129,
adopted by the Company effective December 31, 1997, contains disclosure
requirements including liquidation preferences of preferred stock, rights and
privileges of the outstanding equity securities and the redemption amounts for
all issues of capital stocks that are redeemable. SFAS No. 129 does not have a
material effect on the Company's Consolidated Financial Statements.
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", effective
January 1, 1996. SFAS No. 121 requires the separation of long-lived assets and
certain identifiable intangibles into two categories for purposes of accounting
for an impairment of assets: those to be held and used and those to be disposed
of. The Company has intangibles to be held and used from the purchase of Addison
Insurance Company and the assumption of a book of business in 1990. SFAS No. 121
requires that intangibles to be held and used should be reviewed whenever events
or changes in circumstances indicate that the carrying value may not be
recoverable. The Company has determined that its intangible assets are not
impaired and has not written down their value.
In June, 1997, the FASB issued 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 securities available-for-sale and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" requiring that public
businesses report financial and descriptive information about its reportable
operating segments. SFAS No. 130 is effective for interim periods beginning
after December 15, 1997 and SFAS No. 131 is effective for annual periods
beginning after December 15, 1997 for the initial year of adoption and interim
periods thereafter. The impact of adopting SFAS No. 130 and SFAS No. 131 will
require additional disclosure in the Consolidated Financial Statements and is
not expected to have a material effect on the Company's Consolidated Financial
Statements or Notes to Consolidated Financial Statements.
In February, 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits", effective for fiscal years
beginning after December 15, 1997. The new statement standardizes the disclosure
requirements for these benefit plans and the impact is not expected to have a
material effect on the Company's Consolidated Financial Statements or Notes to
Consolidated Financial Statements.
23
<PAGE>
NOTE 2.
SUMMARY OF INVESTMENTS
Approximately 22% of the fixed income portfolio is invested in
collateralized mortgage obligations ("CMOs"), compared to 26% at December 31,
1996. The Company did not add to its mortgage-backed securities/CMO holdings
during the last half of 1997. Returns were not as attractive as those found
in other investment alternatives. The Company minimized its prepayment risk
by buying most issues priced at a slight discount. While buying at a discount
does not prevent prepayment, the yield is not penalized as is the case when a
premium is paid. In addition, although the stated maturity is longer than the
average life of the issues, the Company concentrated on buying issues with an
expected maturity in the seven-to-twelve-year range.
A reconciliation of the amortized cost 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, 1997 and 1996 is as
follows.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997 (Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Type of Investment Cost Appreciation Depreciation Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 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
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996 (Dollars in Thousands)
- ----------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Type of Investment Cost Appreciation Depreciation Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-maturity
Fixed Maturities
Bonds
United States
Government, government agencies and
authorities
Collateralized mortgage obligations $ 27,552 $ 340 $ 849 $ 27,043
Mortgage-backed securities 22,780 1,938 2 24,716
All others 3,351 300 28 3,623
States, municipalities and political subdivisions 208,332 8,532 786 216,078
Foreign 6,842 199 45 6,996
Public utilities 79,793 381 1,077 79,097
Corporate bonds
Collateralized mortgage obligations 97,757 2,963 762 99,958
All other corporate bonds 204,731 7,252 953 211,030
- -------------------------------------------------------------------------------------------------------------
Total held-to-maturity $651,138 $ 21,905 $ 4,502 $668,541
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Available-for-sale
Fixed Maturities
Bonds
United States
Government, government agencies and
authorities
Collateralized mortgage obligations $ 49,899 $ 667 $ 1,320 $ 49,246
Mortgage-backed securities 64 5 -- 69
All others 6,684 75 5 6,754
Public utilities 206 -- 10 196
Corporate bonds
Collateralized mortgage obligations 11,848 87 928 11,007
All other corporate bonds 616 18 4 630
- -------------------------------------------------------------------------------------------------------------
Total available-for-sale fixed maturities $ 69,317 $ 852 $ 2,267 $ 67,902
- -------------------------------------------------------------------------------------------------------------
Equity securities
Common stocks
Public utilities $ 3,525 $ 4,973 $ -- $ 8,498
Banks, trust and insurance companies 12,009 42,618 -- 54,627
All other common stocks 9,514 18,106 308 27,312
Nonredeemable preferred stocks 850 47 20 877
- -------------------------------------------------------------------------------------------------------------
Total equity securities $ 25,898 $ 65,744 $ 328 $ 91,314
- -------------------------------------------------------------------------------------------------------------
Total available-for-sale $ 95,215 $ 66,596 $ 2,595 $159,216
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Other long-term investments $ 8,395 $ 1,612 $ 37 $ 9,970
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
The amortized cost and fair value of held-to-maturity and
available-for-sale fixed maturities at December 31, 1997, 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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997 Held-to-maturity Available-for-sale
- -------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 7,605 $ 7,666 $ 205 $ 207
Due after one year through five years 123,686 129,540 5,776 5,360
Due after five years through ten years 167,825 176,798 26,356 26,520
Due after ten years 239,052 250,666 50,417 51,507
Mortgage-backed securities 19,270 21,095 56 61
Collateralized mortgage obligations 119,922 124,102 62,209 63,277
- -------------------------------------------------------------------------------------------------------
$677,360 $709,867 $145,019 $146,932
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of available-for-sale investments during 1997, 1996
and 1995 were $27,390,000, $35,251,000, and $1,344,000, respectively. Gross
gains of $3,242,000, $3,499,000, and $790,000, respectively, were realized on
those sales. Gross losses of $15,000, $342,000 and zero, respectively, were
realized on those sales in 1997, 1996 and 1995.
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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized investment gains (losses)
Fixed maturities $ (401) $ 2,966 $ 692
Equity securities 3,011 1,843 791
Other investments -- (158) 215
- -------------------------------------------------------------------------------------------------------
$ 2,610 $ 4,651 $ 1,698
- -------------------------------------------------------------------------------------------------------
Net changes in unrealized investment appreciation
Available-for-sale fixed maturities,
equity securities and other long-term investments $ 42,187 $ 10,149 $ 23,496
Income taxes (14,799) (3,518) (8,223)
- -------------------------------------------------------------------------------------------------------
$ 27,388 $ 6,631 $ 15,273
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Net changes in unrealized investment appreciation
(depreciation), fixed maturities $ 18,432 $(16,483) $ 54,671
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
The net investment income for the years ended December 31, 1997, 1996 and
1995 is composed of the following.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(Dollars in Thousands)
- --------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment income
Interest on fixed maturities $ 56,837 $ 53,459 $ 50,913
Dividends on equity securities 2,526 2,352 2,276
Interest on other long-term investments 3,228 1,819 1,075
Interest on mortgage loans 226 232 239
Interest on policy loans 616 571 530
Other 1,832 1,653 1,734
- --------------------------------------------------------------------------------
Total investment income $ 65,265 $ 60,086 $ 56,767
Less investment expenses 3,579 3,150 3,164
- --------------------------------------------------------------------------------
Net investment income $ 61,686 $ 56,936 $ 53,603
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
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, 1997 and 1996.
The estimated fair value of mortgage loans was based on the estimated
discounted future cash flows using 6.25% at December 31, 1997 and 6.5% at
December 31, 1996.
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% at December 31, 1997 and
6.5% at December 31, 1996. 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,
1997 and 1996 is as follows.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------
At December 31, 1997 1996
- ------------------------------------------------------------------------------------------------------
Fair Carrying Fair Carrying
Assets Value Value Value Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments
Held-to-maturity fixed maturities $ 709,867 $ 677,360 $668,541 $651,138
Available-for-sale fixed maturities 146,932 146,932 67,902 67,902
Equity securities 128,698 128,698 91,314 91,314
Mortgage loans 3,126 2,862 3,425 2,959
Policy loans 8,405 8,405 7,591 7,591
Other long-term investments 12,448 12,448 9,970 9,970
Short-term investments 19,195 19,195 29,330 29,330
Other Assets
Accrued investment income 14,159 14,159 12,195 12,195
- ------------------------------------------------------------------------------------------------------
Liabilities
- ------------------------------------------------------------------------------------------------------
Policy Reserves
Annuity (Accumulations) $ 300,035 $ 313,118 $264,136 $273,419
Annuity (On-Benefits) 2,955 2,702 2,469 2,719
Structured settlements 450 702 240 411
Guaranteed investment contracts 1,914 1,920 1,638 2,111
- ------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 4.
SHORT-TERM BORROWINGS
The Company maintains a six-million dollar line of credit with a local
bank. Under the terms of the agreement, interest on outstanding notes would
be payable at the lender's then prevailing prime rate. During 1997, the
Company borrowed $1,000,000 at 8.5% against the line of credit for 4 days. No
funds were borrowed during 1996.
27
<PAGE>
NOTE 5.
REINSURANCE
Property and Casualty Operations
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 $25,716,000, $27,106,000 and $26,053,000
for the years ended December 31, 1997, 1996 and 1995, 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, 1997, 1996 and 1995 were $40,198,000,
$38,545,000 and $33,014,000, respectively.
Life Operations
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 $339,430,000, and
$432,836,000 at December 31, 1997 and 1996, respectively. Approximately 61%
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 following table provides an analysis of losses and loss adjustment
expenses ("LAE"), including a reconciliation of beginning and ending
liability balances for 1997 and 1996.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- --------------------------------------------------------------------------------------------------------
At December 31, 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gross liability for losses and LAE at beginning of year $ 221,207 $198,403
Less reinsurance receivables 11,331 9,703
- --------------------------------------------------------------------------------------------------------
Net liability for losses and LAE at beginning of year $ 209,876 $188,700
Provision for losses and LAE for claims occurring in the current year 183,723 186,132
Decrease in estimated losses and LAE for claims occurring in prior years (33,544) (29,129)
- --------------------------------------------------------------------------------------------------------
$ 360,055 $345,703
- --------------------------------------------------------------------------------------------------------
Losses and LAE payments for claims occurring during
Current year $ 79,449 $ 79,209
Prior years 61,694 56,618
- --------------------------------------------------------------------------------------------------------
$ 141,143 $135,827
- --------------------------------------------------------------------------------------------------------
Net liability for losses and LAE at end of year $ 218,912 $209,876
Plus reinsurance receivables 12,856 11,331
- --------------------------------------------------------------------------------------------------------
Gross liability for losses and LAE at end of year $ 231,768 $221,207
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
The Consolidated Financial Statements include the estimated liability for
unpaid losses and LAE of the property and casualty lines of business. The
liabilities for losses and LAE are determined using case-basis evaluations
and represent estimates of the ultimate net cost of all unpaid losses and LAE
incurred (both reported and not reported) through December 31 of each year.
These estimates are continually reviewed and, as experience develops and new
information becomes known, the liability is adjusted as necessary. Such
adjustments, if any, are reflected in current operations.
28
<PAGE>
In 1997, all lines of business contributed to the $33,544,000 decrease in
estimated losses and LAE for claims occurring in prior years. In 1996 as
well, the Company experienced favorable loss development. The lines of
business contributing to this $29,129,000 redundancy included commercial
multiple peril, other liability, personal auto liability and workers'
compensation lines.
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.
NOTE 7.
STATUTORY REPORTING, CAPITAL REQUIREMENTS AND DIVIDEND AND RETAINED EARNINGS
RESTRICTIONS
Statutory stockholders' surplus and net income at December 31, 1997,
1996 and 1995 and for the years then ended are as follows.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(Dollars in Thousands)
- --------------------------------------------------------------------------------
Statutory Statutory
Stockholders' Net Income
Surplus
- --------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------
1995
Property and casualty $158,055 $23,213
Life, accident and health 45,911 2,224
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
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. 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.
The State of Iowa Insurance Department imposes certain capital
requirements on insurance companies on a statutory basis. Under the
applicable regulations, the Company is required to maintain minimum capital
stock of $2,500,000 and minimum additional paid-in capital and retained
earnings in the aggregate amount of $2,500,000. At December 31, 1997, the
Company's capital stock was $35,758,000 and total statutory paid-in capital
and retained earnings were $195,568,000.
The amount of dividends that may be paid to stockholders without prior
approval by the State of Iowa Insurance Department is limited to the excess
of statutory retained earnings over contributed surplus. Contributed surplus
as of December 31, 1997, was $8,058,000. Based upon this restriction, the
Company could make a maximum of $179,451,000 in dividend distributions to
stockholders in 1998. 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 1997 or
1996.
In addition, the insurance departments governing the Company and its
subsidiaries have imposed risk-based capital ("RBC") requirements. The
regulation is based on a model adopted by the NAIC. An RBC formula
establishes capital requirements for insurance companies based on an
individual company's major areas of risk, including assets, credit,
underwriting and off-balance sheet risk. The 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, 1997 and
1996, the life and property and casualty segments had adjusted capital well
in excess of the required capital levels.
29
<PAGE>
NOTE 8.
FEDERAL INCOME TAXES
Federal income tax expense is composed of the following.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(Dollars in Thousands)
- --------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $9,009 $ 7,195 $7,015
Deferred 427 (1,778) 2,232
- --------------------------------------------------------------------------------
Total $9,436 $ 5,417 $9,247
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
A reconciliation of income tax expense computed at the applicable Federal tax
rate of 35% in 1997, 1996 and 1995 to the amount recorded in the Consolidated
Financial Statements is as follows.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed expected rate $13,359 $9,489 $13,318
Reduction for tax-exempt municipal bond interest income (4,686) (4,227) (4,057)
Reduction of nontaxable dividend income (581) (534) (520)
Other, net 1,344 689 506
- -------------------------------------------------------------------------------------------------------
Federal income taxes, as provided $9,436 $5,417 $ 9,247
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
The significant components of the net deferred tax liability at December
31, 1997 and 1996 are as follows.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------
At December 31, 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Financial statement reserves in excess of income tax reserves $19,301 $18,344
Unearned premium adjustment 6,769 6,606
Postretirement benefits other than pensions 1,579 1,279
Salvage and subrogation 671 646
Pension 1,240 1,065
Other 2,940 2,758
- -------------------------------------------------------------------------------------------------------
Gross deferred tax assets $32,500 $30,698
- -------------------------------------------------------------------------------------------------------
Deferred tax liabilities
Deferred acquisition costs $18,669 $17,215
Net unrealized appreciation on investment securities 37,549 22,750
Depreciation on assets 1,139 1,198
Net bond discount accretion and premium amortization 1,595 1,378
Other 1,416 851
- -------------------------------------------------------------------------------------------------------
Gross deferred tax liability $60,368 $43,392
- -------------------------------------------------------------------------------------------------------
Net deferred tax liability $27,868 $12,694
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
NOTE 9.
EMPLOYEE BENEFIT OBLIGATIONS
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.
The following table sets forth the funded status of the Company's
qualified pension plan and amounts recognized in the Consolidated Financial
Statements.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of accumulated obligation at
September 30, 1997, 1996 and 1995
Vested benefit obligation $(16,635) $(14,301) $(10,697)
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Accumulated benefit obligation $(17,114) $(14,713) $(11,122)
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Projected benefit obligation $(20,902) $(18,299) $(14,307)
Plan assets at fair value at September 30, 1997, 1996 and 1995 16,565 15,045 13,318
- -------------------------------------------------------------------------------------------------------
Plan assets less than projected benefit obligation at
September 30, 1997, 1996 and 1995 $ (4,337) $ (3,254) $ (989)
Unrecognized net asset (established January 1, 1987) (90) (137) (185)
Unrecognized prior service cost 1,132 1,229 4
Unrecognized net loss (858) (911) (1,598)
- -------------------------------------------------------------------------------------------------------
Pension liability $ (4,153) $ (3,073) $ (2,768)
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Net pension cost includes the following components
Service cost-benefits earned during the period $ 805 $ 655 $ 505
Interest cost on projected benefit obligations 1,410 1,051 806
Actual return on plan assets (2,136) (1,753) (2,165)
Net amortization and deferral 1,001 640 1,102
- -------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 1,080 $ 593 $ 248
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
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% 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 change 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 weighted average discount rate used in determining the actuarial
present value of projected benefit obligation was 7.0% at September 30, 1997,
7.5% at September 30, 1996, and 7.0% at September 30, 1995. The rate of
increase in future compensation levels was 4.0% at September 30, 1997, 4.5%
at September 30, 1996 and 4.0% at September 30, 1995. The expected long-term
rate of return on plan assets was 8.0% at September 30, 1997, 1996 and 1995.
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, 1997, 1996 and 1995
was $936,000, $717,000 and $1,561,000, respectively.
31
<PAGE>
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 twenty-one. 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, 1997, 1996 and 1995, the Trustee owned 93,127, 92,806 and 86,712 shares
of Company stock, respectively. The Company did not make a contribution to
the plan in 1997. In 1996 and 1995, the Company made a contribution to the
plan of $142,000 and zero, respectively.
The following table reconciles the accrued postretirement benefit
obligation and amounts recognized in the Consolidated Financial Statements.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
(Dollars in Thousands)
- ---------------------------------------------------------------------
At December 31, 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Accumulated Postretirement Benefit Obligation
Retirees $(1,800) $(1,831)
Other fully eligible participants (737) (901)
Other active participants (3,510) (2,899)
- ---------------------------------------------------------------------
(6,047) (5,631)
Unrecognized prior service cost 166 206
Unrecognized actuarial loss 1,369 1,734
- ---------------------------------------------------------------------
Accrued postretirement benefit liability $(4,512) $(3,691)
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- --------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits attributed to service during the year $338 $356 $239
Interest cost on accumulated postretirement benefit obligation 421 342 286
Amortization of prior service cost 40 40 40
Amortization of actuarial loss 58 132 45
- --------------------------------------------------------------------------------------------------------
Net postretirement benefit expense $857 $870 $610
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
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.
For medical claims, a health care cost trend rate of 9.0% was assumed for
1997, decreasing annually to 5.5% in 2003. For dental claims, a health care
cost trend rate of 6.5% was assumed for 1997, decreasing annually to 5.0% in
2003. The health care cost trend rate assumption has a significant effect on
the amounts reported. To illustrate, increasing the assumed health care cost
trend rates by one percentage point in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1997 by
$1,210,000 and the aggregate of the service and interest cost components of
net postretirement benefit expense for the year then ended by $173,000. The
weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% and 7.5% as of December 31, 1997
and 1996, respectively.
32
<PAGE>
NOTE 10.
OPERATIONS IN DIFFERENT INDUSTRIES
The Company conducts its operations principally in two industries,
property and casualty insurance and life insurance.
Total revenue by industry includes sales to both outside customers and
intersegment sales which 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 table sets forth certain data for each of the Company's business
segments.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Property and casualty insurance
Net premiums earned $225,822 $215,470 $185,994
Loss and loss adjustment expenses 149,536 155,820 118,231
Underwriting and acquisition expenses 74,992 73,371 61,091
- -------------------------------------------------------------------------------------------------------
Underwriting income (loss) $ 1,294 $(13,721) $ 6,672
Investment income, net 23,007 21,349 21,009
Realized investment gains and other income 2,456 5,365 1,174
Commission and policy fee income 1,877 1,904 1,863
- --------------------------------------------------------------------------------------------------------
Operating earnings $ 28,634 $ 14,897 $ 30,718
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Assets $561,599 $496,808 $453,854
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Life insurance
Net premiums earned $ 19,231 $ 19,435 $ 21,639
Investment income, net 38,823 35,720 32,609
Realized investment gains and other income 220 1,361 524
- -------------------------------------------------------------------------------------------------------
Total revenues $ 58,274 $ 56,516 $ 54,772
Benefits, underwriting and acquisition expenses 48,740 44,036 47,440
- -------------------------------------------------------------------------------------------------------
Operating earnings $ 9,534 $ 12,480 $ 7,332
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Assets $596,323 $528,027 $483,740
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Premium revenue between segments $ 114 $ 108 $ 105
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
Depreciation expense and property and equipment acquisitions for the years
ended December 31, 1997, 1996 and 1995, 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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data)
- --------------------------------------------------------------------------------------------------------
Quarters First Second Third Fourth Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 $ 0.69 $ 0.48 $ 0.33 $ 1.18 $ 2.68
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Fiscal year ended December 31, 1996
Total revenues $74,101 $71,592 $76,316 $78,265 $300,274
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Net income $ 8,755 $ 5,161 $ 1,299 $ 6,745 $ 21,960
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Earnings per common share $ 0.81 $ 0.48 $ 0.12 $ 0.63 $ 2.04
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 12.
EARNINGS AND DIVIDENDS PER COMMON SHARE
The Company declared a three for two stock split in the form of a 50%
stock dividend to stockholders of record as of December 18, 1995. Cash
dividends per common share of $.63 and $.60 were declared in 1997 and 1996,
respectively. Earnings per common share, weighted average common shares
outstanding and cash dividends declared per common share have been
retroactively restated for all periods presented.
33
<PAGE>
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, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1997, 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 Schedule
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
Chicago, Illinois
February 19, 1998
34
<PAGE>
INDEX TO SUPPLEMENTARY SCHEDULES
Consolidated Schedules
<TABLE>
<S> <C>
III -- Supplementary insurance information 36
IV -- Reinsurance 37
VI -- Supplemental information concerning property and casualty insurance 38
operations
</TABLE>
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.
35
<PAGE>
SCHEDULE III. SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(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
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(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
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1997
Property and casualty $149,536 $43,060 $31,758 $ -- $226,915
Life, accident and health 14,679 9,320 2,099 22,510 21,841(1)
- -------------------------------------------------------------------------------------------------------------------
Total $164,215 $52,380 $33,857 $22,510 $248,756
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Accident and health insurance premiums written.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(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
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------------------
Benefits, Amortization
Claims, of Deferred
Losses and Policy Under- Policy-
Settlement Acquisition writing holders' Premiums
Expenses Costs Expenses Accounts Written
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Accident and health insurance premiums written.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(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
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year Ended
December 31, 1995
Property and casualty $19,266 $203,702 $92,798 $185,994 $1,174 $20,994
Life, accident and health 33,404 393,603 4,014 21,534 524 32,609
- -----------------------------------------------------------------------------------------------------------------------------------
Total $52,670 $597,305 $96,812 $207,528 $1,698 $53,603
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------------------
Benefits, Amortization
Claims, of Deferred
Losses and Policy Under- Policy-
Settlement Acquisition writing holders' Premiums
Expenses Costs Expenses Accounts Written
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended
December 31, 1995
Property and casualty $118,231 $39,208 $21,775 $ -- $197,546
Life, accident and health 15,012 5,349 6,437 20,528 22,072(1)
- -------------------------------------------------------------------------------------------------------------------
Total $133,243 $44,557 $28,212 $20,528 $219,618
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Accident and health insurance premiums written.
Certain amounts included in this schedule for earlier years have been
reclassified to conform with the 1997 financial statement presentation.
36
<PAGE>
SCHEDULE IV. REINSURANCE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- ---------------------------------------------------------------------------------------------------
Percentage
Gross Ceded to Assumed Net of Amount
Amount Other From Other Amount Assumed to
Earned Companies Companies Earned Net Earned
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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%
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Year Ended December 31, 1995
Life insurance in force $3,133,052 $455,422 $ -- $2,677,630 0.0%
Premiums:
Property and casualty $ 179,033 $ 26,053 $ 33,014 $ 185,994 17.75%
Life insurance 20,881 1,066 -- 19,815 0.00%
Accident and health insurance 1,915 196 -- 1,719 0.00%
- ---------------------------------------------------------------------------------------------------
Total $ 201,829 $ 27,315 $ 33,014 $ 207,528 15.91%
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
Certain amounts included in this schedule for earlier years have been
reclassified to conform with the 1997 financial statement presentation.
37
<PAGE>
SCHEDULE VI. SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY AND CASUALTY INSURANCE OPERATIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(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
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year Ended
December 31, 1997 $18,235 $231,768 $100,769 $225,822 $2,456 $22,863
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended
December 31, 1996 $18,376 $221,207 $ 99,840 $215,470 $5,365 $21,216
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended
December 31, 1995 $19,266 $198,403 $ 96,812 $185,994 $1,174 $20,994
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Claims and Claim
Affiliation with Registrant Adjustment Expenses
Company and Incurred Related to Amortization
------------------------- of Deferred Paid Claims
consolidated property and (1) (2) Policy and Claim
casualty subsidiaries Current Prior Acquisition Adjustment Premiums
Year Years Costs Expenses Written
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended
December 31, 1997 $183,723 $(33,544) $43,060 $141,143 $226,915
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended
December 31, 1996 $186,132 $(29,129) $43,912 $135,827 $221,934
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Year Ended
December 31, 1995 $138,109 $(19,877) $41,814 $110,185 $197,546
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Certain amounts included in this schedule for earlier years have been
reclassified to conform with the 1997 financial statement presentation.
38
<PAGE>
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:
<TABLE>
<CAPTION>
Name (Age) Present Position, Name and Principal Business of Director
- ---------- -----------------------------------------------------------------------------
<S> <C>
Scott McIntyre Jr.(64) Chairman of the Board, United Fire & Casualty Company
Robert J. Bevenour (69) Retired
James T. Brophy (70) Private investor
Christopher R. Drahozal (36) Associate Professor of Law, University of Kansas School of Law
Jack B. Evans (49) President, Hall-Perrine Foundation and Vice Chairman of the Board, United Fire
& Casualty Company
Roy L. Ewen (75) Retired
Casey D. Mahon (46) Attorney at law; Adjunct Professor of Law, University of Iowa
Leonard J. Marshall (68) Retired
Thomas K. Marshall (64) Retired
Byron G. Riley (67) Attorney, Firm of Bradley & Riley, P.C.
</TABLE>
Executive Officers of the Company:
<TABLE>
<CAPTION>
Name (Age) Office Held (Tenure in Years)
- ---------- -----------------------------------------------------------------------------
<S> <C>
Scott McIntyre Jr. (64) Chairman of the Board, General Manager (31) and Director (41)
John A. Rife (55) President of the Company since May, 1997, President of United Life Insurance
Company (13), employed by the Company for the past 21 years
Kent G. Baker (54) Vice President and Chief Financial Officer (13)
John R. Cruise (56) Vice President, Reinsurance (11)
E. Dean Fick (53) Vice President, Claims (6), employed by Grinnell Mutual Reinsurance Company
24 years prior, serving as Senior Vice President, Claims (1987-1991)
Shona Frese (53) Corporate Secretary, employed by the Company for the past 31 years
David L. Hellen (45) Vice President, Denver Branch Office (10)
Wilburn J. Hollis (57) Vice President, Human Resources (1), Director of Human Resources at Norwest
Financial in Des Moines, Iowa from 1989 to 1996.
E. Addison Hulit (58) Vice President, Lombard Branch Office (2), employed by the Company for the
past 5 years, employed by Transamerica Insurance from 1991 to 1993; and
Traveler's Insurance for the 21 years prior
Robert B. Kenward (55) Vice President, Information Services (5), employed by the Company for the past
19 years
Kevin L. Kubik (43) Vice President and Chief Investment Officer since June, 1997, employed
by Van Kampen American Capital Investment Advisory Inc. from 1989 to 1997;
AEGON/USA Investment Management from 1986 to 1989 and Modern
Woodmen of American from 1977 to 1986.
David A. Lange (40) Corporate Secretary, Fidelity and Surety claim manager since 1987, employed
by Allied Group Insurance Co. from 1985 to 1987, Iowa National Mutual from
April, 1985 to October, 1985, employed by the company from 1981 to 1985
Gerald D. Seidl (64) General Counsel (29)
Richard B. Swain (40) Vice President, Lincoln Branch Office (1), employed by the Company for the
past 4 years, employed by the Allied Group for the 14 years prior
Galen E. Underwood (57) Treasurer (19)
Stanley A. Wiebold (53) Vice President, Underwriting (12)
</TABLE>
39
<PAGE>
Directors of Subsidiary Companies:
<TABLE>
<S> <C> <C>
United Life Insurance Company Addison Insurance Company Insurance Brokers & Managers, Inc.
C. Richard Ekstrand James T. Brophy Kent G. Baker
Scott McIntyre Jr. E. Addison Hulit Carlyn K. Lewis
John A. Rife Scott McIntyre Jr. Scott McIntyre Jr.
Byron G. Riley Linda J. Pearson John A. Rife
Gerald D. Seidl John A. Rife Gerald D. Seidl
Lafayette Insurance Company Crabtree Premium Finance Company
Carlyn K. Lewis E. Addison Hulit
Scott McIntyre Jr. Scott McIntyre Jr.
John A. Rife John A. Rife
Gerald D. Seidl
Leo F. Wegmann Jr.
</TABLE>
Officers of the Company:
United Fire & Casualty Company
<TABLE>
<S> <C>
Chairman Secretaries
Scott McIntyre Jr. Shona Frese
David A. Lange
President
John A. Rife Assistant Secretaries
Lucretia L. Canning
General Counsel Donna M. Fugate
Gerald D. Seidl
Treasurer
Vice Presidents Galen E. Underwood
Kent G. Baker
John R. Cruise Assistant Vice Presidents
E. Dean Fick John T. Anderson Jr.
David L. Hellen Jeffrey A. Chapin
Wilburn J. Hollis Robert J. DeCamp
E. Addison Hulit Dayton E. Roberts
Robert B. Kenward Allen R. Sorensen
Kevin L. Kubik
Richard B. Swain
Stanley A. Wiebold
</TABLE>
Officers of Subsidiary Companies:
<TABLE>
<S> <C> <C>
United Life Insurance Company Lafayette Insurance Company Addison Insurance Company
Chairman Chairman Chairman
Scott McIntyre Jr. Scott McIntyre Jr. Scott McIntyre Jr.
President President President
John A. Rife Carlyn K. Lewis E. Addison Hulit
Vice Presidents Secretary Vice Presidents
Ronald D. Brandt Leo F. Wegmann Jr. Robert A. Andretich
Rickey L. Pettyjohn Russell P. Shulfer
Treasurer
Secretary Kent G. Baker Secretary
Jean N. Newlin Schnake Linda J. Pearson
Executive Vice President and Treasurer Treasurer
Samuel E. Hague Kent G. Baker
</TABLE>
40
<PAGE>
<TABLE>
<S> <C>
Crabtree Premium Finance Company Insurance Brokers & Managers, Inc.
Chairman and President Chairman
Scott McIntyre Jr. Scott McIntyre Jr.
Vice President President
Theresa J. McArthur Carlyn K. Lewis
Secretary Secretary
Christine Prete Betty S. Castro
Treasurer Treasurer
Kent G. Baker Kent G. Baker
</TABLE>
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 101,030 shares of the Company common stock as of
December 31, 1997, 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 have met
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, 1997, 1996 and 1995, the Trustee owned 93,127, 92,806 and
86,712 shares of Company common stock, respectively. The Company did not make
a contribution to the plan in 1997. In 1996 and 1995, the Company made a
contribution to the plan of $142,000 and zero, respectively.
41
<PAGE>
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 (1)
Annual Compensation
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Name Principal Position Year Salary Bonus
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Scott McIntyre Jr. Chairman 1997 290,000 (2) (3)
Scott McIntyre Jr. Chairman, President, CEO 1996 270,000 (2) 54,000 (3)
Scott McIntyre Jr. Chairman, CEO 1995 250,000 (2) 75,000 (3)
- -------------------------------------------------------------------------------------------------------
John A. Rife President, United Fire & Casualty 1997 166,667 (4) (4)
Company
John A. Rife President, United Life Insurance Company 1996 145,000 (4) 21,750 (4)
John A. Rife President, United Life Insurance Company 1995 135,000 (4) 13,500 (4)
- -------------------------------------------------------------------------------------------------------
E. Dean Fick Vice President, Claims 1997 131,250 (7)
E. Dean Fick Vice President, Claims 1996 120,000 9,000 (5)
E. Dean Fick Vice President, Claims 1995 109,500 17,520 (5)
- -------------------------------------------------------------------------------------------------------
E. Addison Hulit Vice President 1997 105,000 (7)
E. Addison Hulit Vice President 1996 87,333 16,300 (6)
E. Addison Hulit Vice President 1995 76,500 9,180 (5)
- -------------------------------------------------------------------------------------------------------
Kent G. Baker Vice President and Chief Financial 1997 95,000 (7)
Officer
Kent G. Baker Vice President and Chief Financial 1996 90,000 6,750 (5)
Officer
Kent G. Baker Vice President and Chief Financial 1995 85,000 13,600 (5)
Officer
- -------------------------------------------------------------------------------------------------------
</TABLE>
Footnotes to summary compensation table:
(1) Pursuant to SEC rules, the column "Other Annual Compensation" was omitted
because, in all cases, the amounts were less than the minimum required to
be reported.
(2) Fixed by Compensation Committee in February of each year. Present salary
was fixed at February, 1998 meeting.
(3) Bonus, if any, determined at the regular meeting of the Directors in
February of each year based on prior year performance. Current bonus will
be paid on or about April 1, 1998.
(4) Determined by Chairman. Salary is determined in December of each year and
will be reviewed annually in December. Current bonus will be paid on or
about April 1, 1998.
(5) Determined by the bonus plan in effect for all salaried employees based
on the performance for the preceding year.
(6) One-time promotion bonus.
(7) Calculated and paid on or about April 1, 1998.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Years of Service
- -------------------------------------------------------------------------------
Salary 15 20 25 30 35
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
100,000 24,052 32,069 40,086 48,103 56,121
131,250 32,255 43,006 53,758 64,510 75,261
150,000 37,177 49,669 61,961 74,353 86,746
160,000 39,802 53,069 68,336 79,603 92,871
- --------------------------------------------------------------------------------
</TABLE>
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 to $160,000 for
pension plan purposes by the IRS.
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.
42
<PAGE>
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, 1992 and
reinvestment of dividends.
TOTAL SHAREHOLDER RETURNS
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
INDEXED RETURNS
YEARS ENDING
Company/Index Dec92 Dec93 Dec94 Dec95 Dec96 Dec97
<S> <C> <C> <C> <C> <C> <C>
UNITED FIRE & CAS CO 100 100.15 109.58 170.68 218.71 279.27
S&P Property-Casualty Insurance 100 98.23 103.04 139.51 169.53 246.60
S&P 500 Index 100 110.08 111.53 153.45 188.68 251.63
</TABLE>
43
<PAGE>
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 2, 1998, 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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Amount
and Nature Percent
of Beneficial of
Name of Beneficial Owner Address of Beneficial Owner Ownership Class(1)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Scott McIntyre, Jr. (1) Cedar Rapids, Iowa 1,547,118 14.44%
Mildred R. McIntyre (1) Cedar Rapids, Iowa 1,167,746 10.90%
General Accident Corporation of America Philadelphia, Pennsylvania 2,650,680 24.75%
Susan M. Carlton (1) Orchard Park, New York 366,051 3.42%
Margaret Pless (1) Durham, North Carolina 330,120 3.08%
- -----------------------------------------------------------------------------------------------------
</TABLE>
(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 2, 1998, 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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Percent
Amount and Nature of
Name of Beneficial Owner of Beneficial Ownership Class (1)
- --------------------------------------------------------------------------------
<S> <C> <C>
Scott McIntyre, Jr. (1) 1,547,118 14.44%
Roy L. Ewen 79,601 0.74%
Robert J. Bevenour 3,500 0.03%
Byron G. Riley, Jr 2,906 0.03%
James T. Brophy 11,500 0.11%
Thomas K. Marshall 2,202 0.02%
Leonard J. Marshall 1,000 0.01%
Casey D. Mahon 2,000 0.02%
Jack B. Evans 4,134 0.04%
Christopher R. Drahozal 106,579 1.00%
30 officers and directors as a group 1,773,890 16.56%
- --------------------------------------------------------------------------------
</TABLE>
(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 9,200 shares held
by the McIntyre Foundation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
44
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
(a) 1. and 2. Financial Statements and Supplementary Data 17
(a) 3. Exhibits
3 (i) 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 (ii) 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.
11 Computation of Earnings Per Share
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
</TABLE>
45
<PAGE>
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
Date 3/26/98
----------------------------------------------------------
By /s/ Kent G. Baker
------------------------------------------------------------
Kent G. Baker, Vice-President, Principal Accounting Officer and
Chief Financial Officer
Date 3/26/98
-----------------------------------------------------------
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 By /s/ Roy L. Ewen
----------------------------------------- ------------------------
Scott McIntyre Jr., Chairman and Director Roy L. Ewen, Director
Date 3/26/98 Date 3/26/98
----------------------------------------- ------------------------
By /s/ James T. Brophy By /s/ Casey D. Mahon
----------------------------------------- ------------------------
James T. Brophy, Director Casey D. Mahon, Director
Date 3/26/98 Date 3/26/98
----------------------------------------- ------------------------
By /s/ Robert J. Bevenour By /s/ Leonard J. Marshall
----------------------------------------- ------------------------
Robert J. Bevenour, Director Leonard J. Marshall,
Director
Date 3/26/98 Date 3/26/98
----------------------------------------- ------------------------
By /s/ Christopher R. Drahozal By /s/ Thomas K. Marshall
----------------------------------------- ------------------------
Christopher R. Drahozal, Director Thomas K. Marshall,
Director
Date 3/26/98 Date 3/26/98
----------------------------------------- ------------------------
By /s/ Jack B. Evans By /s/ Byron G. Riley
----------------------------------------- ------------------------
Jack B. Evans, Vice Chairman and Director Byron G. Riley, Director
Date 3/26/98 Date 3/26/98
----------------------------------------- ------------------------
46
<PAGE>
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, 1997 will be furnished to the Securities Exchange
Commission by April 1, 1998.
(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.
47
<PAGE>
EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data)
- --------------------------------------------------------------------------------
Weighted Average Earnings
Number of Shares Net Per
Years Ended December 31 Outstanding Income Common Share
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 10,727,440 $ 28,732 $ 2.68
1996 10,773,591 21,960 2.04
1995 10,829,606 28,803 2.66
- --------------------------------------------------------------------------------
</TABLE>
Computation of weighted average number of common and common equivalent shares:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Years Ended December 31
- -------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common shares outstanding beginning of the period 10,727,712 10,829,461 10,829,706
Weighted average of the common
shares purchased and retired or reissued (272) (55,870) (100)
- -------------------------------------------------------------------------------------------------------
Weighted average number of common shares 10,727,440 10,773,591 10,829,606
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
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.
<PAGE>
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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 146,932
<DEBT-CARRYING-VALUE> 677,360
<DEBT-MARKET-VALUE> 709,867
<EQUITIES> 128,698
<MORTGAGE> 2,862
<REAL-ESTATE> 0
<TOTAL-INVEST> 995,900
<CASH> 2,378
<RECOVER-REINSURE> 14,430
<DEFERRED-ACQUISITION> 60,215
<TOTAL-ASSETS> 1,157,922
<POLICY-LOSSES> 714,205
<UNEARNED-PREMIUMS> 108,296
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 35,758
<OTHER-SE> 241,450
<TOTAL-LIABILITY-AND-EQUITY> 1,157,922
244,939
<INVESTMENT-INCOME> 61,686
<INVESTMENT-GAINS> 2,676
<OTHER-INCOME> 1,829
<BENEFITS> 164,215
<UNDERWRITING-AMORTIZATION> 52,380
<UNDERWRITING-OTHER> 56,367
<INCOME-PRETAX> 38,168
<INCOME-TAX> 9,436
<INCOME-CONTINUING> 28,732
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,732
<EPS-PRIMARY> 268
<EPS-DILUTED> 268
<RESERVE-OPEN> 209,876
<PROVISION-CURRENT> 183,723
<PROVISION-PRIOR> (33,544)
<PAYMENTS-CURRENT> 79,449
<PAYMENTS-PRIOR> 61,694
<RESERVE-CLOSE> 218,912
<CUMULATIVE-DEFICIENCY> (33,544)
</TABLE>
