<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 1998
Commission File Number 2-39621
UNITED FIRE & CASUALTY COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Iowa 42-0644327
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(State of Incorporation) (IRS Employer Identification No.)
118 Second Avenue, S.E.
Cedar Rapids, Iowa 52407
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319) 399-5700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
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As of August 6, 1998, 10,091,721 shares of common stock were outstanding.
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
<S> <C>
Part 1. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998 (unaudited) and
December 31, 1997 2
Unaudited Consolidated Statements of Operations for the
three month periods ended June 30, 1998 and 1997 3
Unaudited Consolidated Statements of Operations for the six month
periods ended June 30, 1998 and 1997 4
Unaudited Consolidated Statements of Cash Flows for the six month
periods ended June 30, 1998 and 1997 5
Notes to Unaudited Consolidated Financial Statements 6
Report of Independent Public Accountants 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Part II. Other Information 14
</TABLE>
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UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
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ASSETS JUNE 30, December 31,
1998 1997
UNAUDITED Audited
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<S> <C> <C>
INVESTMENTS
Fixed maturities
Held-to-maturity, at amortized cost (market
value $675,342 in 1998 and $709,867 in 1997) $ 640,823 $ 677,360
Available-for-sale, at market (amortized
cost $231,083 in 1998 and $145,019 in 1997) 235,094 146,932
Equity securities (cost $22,955 in 1998 and
$26,296 in 1997) 105,421 128,698
Mortgage loans 2,814 2,862
Policy loans 8,443 8,405
Other long-term investments, at market
(cost $10,930 in 1998
and $9,000 in 1997) 15,120 12,448
Short-term investments 19,130 19,195
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$1,026,845 $ 995,900
CASH AND CASH EQUIVALENTS - 2,378
ACCRUED INVESTMENT INCOME 15,247 14,159
ACCOUNTS RECEIVABLE 51,300 44,060
DEFERRED POLICY ACQUISITION COSTS 68,673 60,215
PROPERTY AND EQUIPMENT 13,314 14,443
REINSURANCE RECEIVABLES 14,964 14,430
PREPAID REINSURANCE PREMIUMS 3,460 4,064
INTANGIBLES 955 1,082
OTHER ASSETS 4,164 7,191
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TOTAL ASSETS $1,198,922 $1,157,922
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Future policy benefits and losses, claims
and settlement expenses
Property and casualty insurance $ 244,049 $ 231,768
Life insurance 519,806 482,437
Unearned premiums 117,867 108,296
Accrued expenses and other liabilities 26,898 18,373
Employee benefit obligations 9,634 8,665
Income taxes payable 1,099 3,307
Deferred income taxes 23,233 27,868
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TOTAL LIABILITIES $ 942,586 $ 880,714
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STOCKHOLDERS' EQUITY
Common stock $ 35,639 $ 35,758
Additional paid-in capital 7,927 9,331
Retained earnings 179,867 161,906
Net unrealized appreciation, net of
applicable income taxes of
$31,542 in 1998 and $37,549 in 1997 59,153 70,213
Less: treasury stock 26,250 -
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TOTAL STOCKHOLDERS' EQUITY $ 256,336 $ 277,208
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,198,922 $1,157,922
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</TABLE>
The Notes to Unaudited Consolidated Financial Statements are an integral part
of these statements.
2
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UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
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Three months ended June 30,
1998 1997
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<S> <C> <C>
Revenues
Net premiums earned $ 59,941 $ 60,403
Investment income, net 16,796 15,137
Realized investment gains and other income 17,220 52
Commission and policy fee income 491 517
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94,448 76,109
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Benefits, Losses and Expenses
Losses and settlement expenses 48,012 40,793
Increase in liability for future policy benefits 984 1,339
Amortization of deferred policy acquisition costs 12,154 13,292
Other underwriting expenses 9,092 7,973
Interest on policyholders' accounts 6,679 6,154
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76,921 69,551
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Income before income taxes 17,527 6,558
Federal income taxes 4,917 1,440
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Net income $ 12,610 $ 5,118
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Earnings per common share $ 1.18 $ 0.48
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Weighted average common shares outstanding 10,685,374 10,727,408
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Cash dividends declared per common share $ 0.17 $ 0.16
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</TABLE>
The Notes to Unaudited Consolidated Financial Statements are an integral part
of these statements.
3
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UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
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Six months ended June 30,
1998 1997
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<S> <C> <C>
Revenues
Net premiums earned $ 119,277 $ 119,659
Investment income, net 33,022 30,174
Realized investment gains and other income 21,423 748
Commission and policy fee income 955 958
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174,677 151,539
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Benefits, Losses and Expenses
Losses and settlement expenses 89,118 77,758
Increase in liability for future policy benefits 2,357 2,602
Amortization of deferred policy acquisition costs 23,083 25,015
Other underwriting expenses 17,848 17,780
Interest on policyholders' accounts 12,866 11,653
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145,272 134,808
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Income before income taxes 29,405 16,731
Federal income taxes 7,913 4,210
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Net Income $ 21,492 $ 12,521
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Earnings per common share $ 2.01 $ 1.17
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Weighted average common shares outstanding 10,702,805 10,727,559
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Cash dividends declared per common share $ 0.33 $ 0.31
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</TABLE>
The Notes to Unaudited Consolidated Financial Statements are an integral part
of these statements.
4
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UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
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Six months ended June 30,
1998 1997
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<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 21,492 $ 12,521
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Adjustments to reconcile net income to net cash
provided by operating activities
Net bond discount accretion (171) (9)
Depreciation and amortization 198 1,425
Realized investment gains (21,423) (748)
Changes in:
Accrued investment income (1,088) (955)
Accounts receivable (7,240) (8,626)
Deferred policy acquisition costs (8,458) (3,310)
Reinsurance receivables (534) 1,526
Prepaid reinsurance premiums 604 (34)
Income taxes receivable - (1,066)
Other assets 3,027 469
Future policy benefits and losses, claims and
settlement expenses 14,748 5,701
Unearned premiums 9,571 7,577
Accrued expenses and other liabilities 10,241 (1,233)
Employee benefit obligations 969 959
Income taxes payable (2,208) -
Deferred income taxes 1,320 480
Other, net (61) -
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Total adjustments $ (505) $ 2,156
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Net cash provided by operating activities $ 20,987 $ 14,677
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Cash Flows From Investing Activities
Proceeds from sale of available-for-sale investments $ 41,734 $ 617
Proceeds from call and maturity of held-to-maturity
investments 43,364 27,657
Proceeds from call and maturity of available-for-sale
investments 13,687 2,196
Proceeds from sale of other investments 25,346 28,046
Purchase of investments held-to-maturity (7,364) (67,380)
Purchase of investments available-for-sale (116,164) (10,578)
Purchase of other investments (26,907) (12,185)
Proceeds from sale of property and equipment 1,480 -
Purchase of property and equipment (422) (999)
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Net cash used in investing activities $(25,246) $(32,626)
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Cash Flows From Financing Activities
Policyholders' account balances
Deposits to investment and universal life type
contracts $ 70,378 $ 59,657
Withdrawals from investment and universal life
type contracts (35,476) (44,324)
Purchase and retirement of common stock (1,523) (12)
Payment of cash dividends (5,248) (4,934)
Purchase of common stock (26,250) -
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Net cash provided by financing activities $ 1,881 $ 10,387
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Net Decrease in Cash and Cash Equivalents $ (2,378) $ (7,562)
Cash and Cash Equivalents at Beginning of Year 2,378 14,389
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Cash and Cash Equivalents at End of Period $ - $ 6,827
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</TABLE>
The Notes to Unaudited Consolidated Financial Statements are an integral part of
these statements.
5
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In the opinion of the management of United Fire & Casualty Company and
Subsidiaries (the "Company"), the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position, the results
of operations, and cash flows for the periods presented. The results for the
interim periods are not necessarily indicative of the results of operations
that may be expected for the year. The financial statements contained herein
should be read in conjunction with the Company's annual report on Form 10-K
for the year ended December 31, 1997. The review report of Arthur Andersen
LLP accompanies the unaudited consolidated financial statements included in
Item 1 of Part I.
The Company maintains its records in conformity with the accounting
practices prescribed or permitted by the Insurance Department of the State of
Iowa. To the extent that certain of these practices differ from generally
accepted accounting principles ("GAAP"), adjustments have been made in order
to present the accompanying financial statements on the basis of GAAP.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Certain amounts included in the financial statements for the previous
year have been reclassified to conform with the financial statement
presentation at June 30, 1998.
For purposes of reporting cash flows, cash and cash equivalents include
cash and non-negotiable certificates of deposit with original maturities of
three months or less. Income taxes paid, net of refunds for the six month
periods ended June 30, 1998 and 1997 were $8,800,000 and $4,794,000,
respectively. There were no significant payments of interest through June
30, 1998 and 1997, other than interest credited to policyholders' accounts.
6
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. INVESTMENTS
A reconciliation of the amortized cost to fair values of investments in
held-to-maturity and available-for-sale fixed maturities, marketable equity
securities and other long-term investments as of June 30, 1998 is as follows.
<TABLE>
<CAPTION>
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(Dollars in Thousands)
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JUNE 30, 1998 Gross Gross
Amortized Unrealized Unrealized Fair
TYPE OF INVESTMENT Cost Appreciation Depreciation Value
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<S> <C> <C> <C> <C>
HELD-TO-MATURITY
Fixed Maturities
Bonds
United States Government,
government agencies and authorities
Collateralized mortgage obligations $ 26,122 $ 724 $ - $ 26,846
Mortgage-backed securities 16,570 1,460 1 18,029
All others 3,399 360 1 3,758
States, municipalities and political subdivisions 224,638 14,007 94 238,551
Foreign 6,488 388 - 6,876
Public utilities 74,464 2,016 32 76,448
Corporate bonds
Collateralized mortgage obligations 90,295 4,809 335 94,769
All other corporate bonds 198,847 11,421 203 210,065
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Total held-to-maturity $640,823 $35,185 $ 666 $675,342
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AVAILABLE-FOR-SALE
Fixed Maturities
Bonds
United States Government,
government agencies and authorities
Collateralized mortgage obligations $ 44,060 $ 2,124 $ 14 $ 46,170
Mortgage-backed securities 48 4 - 52
All others 7,660 157 - 7,817
States, municipalities & political subdivisions 46,687 803 64 47,426
Foreign 7,632 15 53 7,594
Public utilities 5,424 57 10 5,471
Corporate bonds
Collateralized mortgage obligations 9,726 369 92 10,003
All other corporate bonds 109,846 1,390 675 110,561
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Total available-for-sale fixed maturities $231,083 $ 4,919 $ 908 $235,094
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Equity securities
Common stocks
Public utilities $ 3,525 $ 7,435 $ - $ 10,960
Banks, trust and insurance companies 8,976 50,970 - 59,946
All other common stocks 9,609 24,022 187 33,444
Nonredeemable preferred stocks 845 226 - 1,071
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Total equity securities $ 22,955 $82,653 $ 187 $105,421
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Total available-for-sale $254,038 $87,572 $1,095 $340,515
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Other long-term investments $ 10,930 $ 4,221 $31 $ 15,120
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</TABLE>
7
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of held-to-maturity and
available-for-sale fixed maturities at June 30, 1998 by contractual maturity
are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
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(Dollars in Thousands)
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JUNE 30, 1998 Held-to-maturity Available-for-sale
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Amortized Fair Amortized Fair
Cost Value Cost Value
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<S> <C> <C> <C> <C>
Due in one year or less $ 8,521 $ 8,692 $ 241 $ 242
Due after one year through five years 131,377 137,760 14,659 14,468
Due after five years through ten years 151,678 161,128 79,832 80,153
Due after ten years 216,260 228,118 82,517 84,006
Mortgage-backed securities 16,570 18,029 48 52
Collateralized mortgage obligations 116,417 121,615 53,786 56,173
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$640,823 $675,342 $231,083 $235,094
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</TABLE>
NOTE 3. NEW ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share" effective December 31, 1997. This standard
supersedes APB Opinion No. 15 " Earnings Per Share" and simplifies the
standards for computing and presenting earning per share ("EPS"). Under the
new standard, the presentation of primary EPS has been replaced with a
presentation of basic EPS. Basic EPS is computed excluding dilution caused
by common stock equivalents such as stock options. The Company does not
currently issue stock options or other stock-based awards, and therefore,
basic and diluted EPS are equal.
In February, 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 129, "Disclosure of Information about Capital Structure."
SFAS No. 129, adopted by the Company effective December 31, 1997, contains
disclosure requirements including liquidation preferences of preferred stock,
rights and privileges of outstanding equity securities and the redemption
amounts for all issues of capital stocks that are redeemable. As the Company
does not issue these types of securities, SFAS No. 129 does not have a
material effect on the Company's Consolidated Financial Statements.
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", governing the reporting and presentation of
comprehensive income and its components which includes traditional net income
and items previously recorded directly in equity, such as the change in
unrealized gains or losses on securities available-for-sale. In accordance
with the interim reporting guidelines of SFAS No. 130, comprehensive income
was $10,432,000 and $22,799,000 for the six months ended June 30, 1998 and
1997, respectively. Comprehensive income was $1,069,000 and $14,654,000 for
the three months ended June 30, 1998 and 1997, respectively.
In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" requiring that public businesses
report financial and descriptive information about its reportable operating
segments. SFAS No. 131 is effective for annual periods beginning after
December 15, 1997 for the initial year of adoption and interim periods
thereafter. The impact of adopting SFAS No. 131 will require additional
disclosure in the Consolidated Financial Statements and is not expected to
have a material effect on the Company's Consolidated Financial Statements or
Notes to Consolidated Financial Statements.
8
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In February, 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits", effective for fiscal years
beginning after December 15, 1997. The new statement standardizes the
disclosure requirements for these benefit plans and the impact is not
expected to have a material effect on the Company's Consolidated Financial
Statements or Notes to Consolidated Financial Statements.
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", effective for all fiscal quarters of
fiscal years beginning after June 15,1999. The new statement requires all
derivatives to be recorded on the balance sheet at fair value and establishes
special accounting for certain types of hedges. The impact of adopting SFAS
No. 133 is not expected to have a material effect on the Company's
Consolidated Financial Statements or Notes to Consolidated Financial
Statements.
9
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
United Fire & Casualty Company:
We have reviewed the accompanying consolidated balance sheet of UNITED FIRE &
CASUALTY COMPANY (an Iowa corporation) AND SUBSIDIARIES as of June 30, 1998,
and the related consolidated statements of operations for the three-month and
six-month periods ended June 30, 1998 and 1997, and the consolidated
statements of cash flows for the six-month periods ended June 30, 1998 and
1997. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of United Fire & Casualty Company
and Subsidiaries as of December 31, 1997, and, in our report dated February
19, 1998, we expressed an unqualified opinion on that statement. In our
opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 1997, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
Arthur Andersen LLP
Chicago, Illinois
August 6, 1998
10
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ASSETS
The Company's assets have grown to $1,198,922,000 as of June 30, 1998
compared to $1,157,922,000 at December 31, 1997. The fixed income portfolio,
comprised primarily of long-term, high-quality securities, generated a
majority of the growth. Available-for-sale fixed income securities accounted
for 27% of the total fixed income portfolio at June 30, 1998, compared to 18%
at December 31, 1997. All fixed income security purchases in 1998 have been
classified as available-for-sale and management expects all fixed income
security purchases to continue to be classified as available-for-sale
throughout the second half of 1998. Trading securities were not held during
1998 or 1997. Net unrealized gains of $4,011,000 and $1,913,000,
respectively, were recorded on available-for-sale fixed income securities
through June 30, 1998 and December 31, 1997.
Collateralized mortgage obligation (CMO) holdings accounted for 20% of
the fixed income portfolio at June 30, 1998 compared to 22% as of December
31, 1997. The Company sold CMOs in 1998 and replaced the securities with
higher yield generating investments.
In the second quarter of 1998, the Company realized gains from equity
sales and rebalanced the equity portfolio. Proceeds were used to repurchase
625,000 shares of the Company's common stock from General Accident Insurance
Company of America. The purchased shares represent approximately 5.9% of the
Company's outstanding stock. The transaction was negotiated privately. The
Company paid $42 per share. Management believes the purchase was an
excellent use of capital as the Company's stock represents good value at
current price levels.
During the last half of 1997, and continuing into 1998, the Company
began writing covered call options to generate additional portfolio income.
At June 30, 1998, options were written on 5% of the equity portfolio,
compared to 1% at December 31, 1997.
Second quarter property and casualty premium writings increased over the
last quarter of 1997. As a result, accounts receivable from property and
casualty insurance agents and brokers increased $7,240,000 or 16% between
June 30, 1998 and December 31, 1997. When comparing six-month periods,
premiums earned decreased between 1998 and 1997 by $2,217,000 or 2%. Stiff
competition within the industry has had the effect of lowering prices and the
Company's philosophy is to avoid pursuing business which is inadequately
priced.
The Company's deferred policy acquisition costs (DAC) include expenses
such as commissions, premium taxes and other costs associated with
underwriting insurance policies. The Company establishes an asset for these
expenses and amortizes the asset over the duration of the policy periods. The
DAC asset increased $8,458,000 or 14%, with much of the increase attributable
to the life segment, whose premium writings are increasing.
Reinsurance receivables include losses, expenses and reserves that are
due to the Company from reinsurance brokers. This balance increased by
$534,000 or 4% through June 30, 1998. The Company has not experienced
significant collection problems with regard to reinsurance receivables and
has no information indicating that any of its current reinsurance balances
are uncollectible.
11
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Other assets decreased by $3,027,000 or 42%. On February 27, 1998, the
Company sold most of the assets of Crabtree Premium Finance Company, a small
subsidiary. Under the provisions of the sale, no material gain or loss was
recognized. Almost all of the decrease in other assets was attributable to
this sale.
CASH FLOW AND LIQUIDITY
Most of the cash that the Company receives is generated from insurance
premiums paid by policyholders. The premiums are invested in assets maturing
at regular intervals in order to meet the Company's obligations to pay policy
benefits, claims and claim adjusting expenses and operating expenses. Net
cash provided by the Company's operating activities was $20,987,000 in the
first half of 1998, compared to $14,677,000 in the first half of 1997.
Operating cash flows continue to be ample to meet policyholders obligations.
Short-term investments, composed of money market accounts and fixed
income securities are available for the Company's short-term cash needs. In
addition, a $6,000,000 line of credit is maintained with a local bank. The
Company borrowed funds against this line of credit during the second quarter.
The balance of the borrowing at June 30, 1998 is $3,000,000. No funds were
borrowed during 1997.
LIABILITIES
The property and casualty segment's gross liability before reinsurance
for losses and settlement expenses increased $12,281,000 or 5% between June
30, 1998 and December 31,1997. The Company has limited exposure to
environmental pollution and asbestos claims. The Company's underwriters are
aware of these exposures and use riders or endorsements to limit their
exposure.
The liability for future policy benefits and interest on policyholders'
accounts increased $37,136,000 or 8% during the six months of 1998. This
liability is increased immediately by the full premiums paid by policyholders
for annuity products and most universal life products. In 1998, the Company
received premiums of $38,651,000 in non internal rollovers on annuity
products and $6,837,000 on universal life products. These same two product
lines had $12,866,000 of interest credited and $21,558,000 in decreases for
surrenders, risk charges and deaths during 1998. Fluctuations in the other
life segment products lines account for the remainder of the change.
Accrued expenses and other liabilities increased $8,525,000 or 46%
through June 30, 1998. Contributing to this growth was a balance of
$3,000,000 owed against the Company's $6,000,000 line of credit and a
negative cash balance for book purposes of $6,148,000 due to outstanding
checks. In July, 1998, the line of credit was increased to $15,000,000.
Income taxes payable decreased by $2,208,000 or 67% compared to December
31, 1997. The Company made federal income tax payments of $8,800,000 in the
first half of 1998.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
PROPERTY AND CASUALTY OPERATIONS
The property and casualty segment had a statutory combined ratio (net
losses incurred and net loss adjustment expenses incurred to net premiums
earned, plus expenses incurred to premiums written) of 110% for the first
half of 1998, compared to 100% for the same period of 1997. For the second
quarter, the combined ratios were 118% and 101%, respectively.
12
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Losses incurred by the property and casualty segment increased $3,520,000 or
6% between the first six months of 1998 and 1997, while loss expenses
incurred increased $4,744,000 or 39%. Of the sixteen storms in the United
States classified as catastrophes by the Property Claims Services during the
second quarter, ten of those directly impacted business insured by the
Company's property and casualty segment. The heaviest losses resulted from
storms occurring May 30 through June 1 in Iowa, Minnesota, South Dakota and
Wisconsin. The 1998 catastrophes added 20% to the Company's combined ratio
for the three months ended June 30, 1998. Incurred losses on all 1998
catastrophes, on a net basis, was $10,810,000 through June 30, 1998.
The property and casualty segment's other underwriting expenses and
amortization of deferred policy acquisition costs have decreased by
$1,476,000 or 4% between the first half of 1998 and 1997. The decrease in
premium volume has reduced many of the expenses incurred in connection with
the writing of insurance policies.
LIFE OPERATIONS
The life segment's earnings before taxes increased $1,923,000 or 40%
through the first half of 1998, compared to the first half of 1997. Premium
writings have grown from $10,093,000 at June 30, 1997 to $15,829,000 at June
30, 1998. The increase is attributable to the segment's single premium
credit life/A&H products. Premiums earned increased $1,835,000 or 20% and
net investment income increased by $2,409,000 or 13%. Losses incurred by the
life segment are up between June 30, 1998 and 1997 due to both a higher
frequency and larger amounts of death claims than experienced in prior years.
INVESTMENT RESULTS
Net investment income increased $2,848,000 or 9% between June 30,
1998 and 1997. Realized gains increased from $52,000 for the second quarter
of 1997 to $17,220,000 for the second quarter of 1998. Realized gains for
the six-month periods were $21,423,000 and $748,000, respectively. The sale
of equity securities, discussed above under ASSETS, was the primary reason
for the large increase.
YEAR 2000
The insurance industry is data intensive and utilizes computer
technology extensively. An important issue facing all computer users is the
approaching Year 2000. Many computer systems and applications have been
designed with two-digit date fields. With the turn of the century, these
programs may recognize the Year 2000 as 1900 or not at all. If left
unresolved, this could cause systems to process critical financial and
operational information incorrectly. The Company is aware of this issue and
is finalizing its systems for compliance for the Year 2000. Beginning in
1984, programming to accommodate four-digit date fields was initiated.
Testing is currently being conducted on all systems and will be completed in
1998. Expenses incurred in connection with the conversions and testing have
been expensed as incurred and absorbed into normal operating expenses. The
remaining costs for Year 2000 compliance are not expected to be material to
operations.
The Company is also reviewing its third-party vendors for compliance
with Year 2000 and has received many affirmative responses. While the
Company is reviewing its third-party vendors' Year 2000 compliance, it cannot
assure that the systems of these vendors that the Company relies on will be
converted in a timely manner, or that their failure to convert would not have
an adverse affect on the Company's systems.
OTHER
Effective September 1, 1998, the Company is moving the operations of
Addison Insurance Company (a wholly owned subsidiary) to its home office in
Cedar Rapids, from Lombard, Illinois. This move will result in a decrease in
operating expenses. In connection with the relocation, the Company is
planning to terminate 18 employees, 14 of which are management positions. The
Company has accrued $235,000 in termination benefits which is included in
other underwriting expenses. Termination benefits totaling $26,000 were paid
through June 30, 1998. There are no other significant costs related to the
closing of the Addison office.
SUBSEQUENT EVENTS
Subsequent to June 30, 1998, the Company contributed 25,000 shares of
treasury stock to its Employee Stock Ownership Plan. The remaining 600,000
shares held in treasury stock were retired on July 13, 1998.
FORWARD LOOKING STATEMENTS
This information contained in the Form 10-Q for the quarterly period
ended June 30, 1998 contains forward looking information as defined in the
Private Securities Litigation Reform Act of 1995 and is therefore subject to
certain risks and uncertainties. Actual results could differ materially from
information within the forward looking statements as a result of many
factors, including, but not limited to, market conditions, competition, and
natural disasters.
13
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 11 - Computation of Earnings Per Common Share
27 - Financial Data Schedule
(b) The Company filed one report on Form 8-K dated June 30, 1998 concerning the
repurchase on June 29, 1998 of 625,000 shares of its common stock from
General Accident Insurance Company of America.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED FIRE & CASUALTY COMPANY
- ------------------------------------------------------------------------------
(REGISTRANT)
AUGUST 6, 1998
- ------------------------------------------------------------------------------
(DATE)
/s/
- ------------------------------------------------------------------------------
JOHN A. RIFE
PRESIDENT
/s/
- ------------------------------------------------------------------------------
K.G. BAKER
VICE PRESIDENT , CHIEF FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER
14
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
EXHIBIT 11. COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data
and Number of Shares)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted Average
Three-Month Periods Ended Number of Shares Net Earnings Per
June 30, Outstanding Income Common Share
- ------------------------------------------------------------------------------
1998 10,685,374 $12,610 $1.18
1997 10,727,408 5,118 0.48
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data
and Number of Shares)
- ------------------------------------------------------------------------------
Weighted Average
Six-Month Periods Ended Number of Shares Net Earnings Per
June 30, Outstanding Income Common Share
- ------------------------------------------------------------------------------
1998 10,702,805 $21,492 $2.01
1997 10,727,559 12,521 1.17
- ------------------------------------------------------------------------------
</TABLE>
Computation of weighted average number of common
and common equivalent shares:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Three-Month Periods Ended June 30, 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Common shares outstanding beginning of the period 10,709,222 10,727,712
Weighted average of the common
shares purchased and retired or reissued (23,848) (304)
- ------------------------------------------------------------------------------
Weighted average number of common shares 10,685,374 10,727,408
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Six-Month Periods Ended June 30, 1998 1997
- ------------------------------------------------------------------------------
Common shares outstanding beginning of the period 10,727,322 10,727,712
Weighted average of the common
shares purchased and retired or reissued (24,517) (153)
- ------------------------------------------------------------------------------
Weighted average number of common shares 10,702,805 10,727,559
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 235,094
<DEBT-CARRYING-VALUE> 640,823
<DEBT-MARKET-VALUE> 675,342
<EQUITIES> 105,421
<MORTGAGE> 2,814
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,026,845
<CASH> 0
<RECOVER-REINSURE> 14,964
<DEFERRED-ACQUISITION> 68,673
<TOTAL-ASSETS> 1,198,922
<POLICY-LOSSES> 763,855
<UNEARNED-PREMIUMS> 117,867
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 35,639
<OTHER-SE> 220,697
<TOTAL-LIABILITY-AND-EQUITY> 256,336
119,277
<INVESTMENT-INCOME> 33,022
<INVESTMENT-GAINS> 21,423
<OTHER-INCOME> 955
<BENEFITS> 91,475
<UNDERWRITING-AMORTIZATION> 23,083
<UNDERWRITING-OTHER> 30,714
<INCOME-PRETAX> 29,405
<INCOME-TAX> 7,913
<INCOME-CONTINUING> 21,492
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,492
<EPS-PRIMARY> 2.01
<EPS-DILUTED> 2.01
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
