<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 September 30, 1998
Commission File Number 2-39621
UNITED FIRE & CASUALTY COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS
CHARTER)
Iowa 42-0644327
- ----------------------- ------------------------------
(State of Incorporation) (IRS Employer Identification No.)
118 Second Avenue, S.E.
Cedar Rapids, Iowa 52407
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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
---- ----
As of November 5, 1998, 10,091,721 shares of common stock were outstanding.
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
INDEX
Part 1. Financial Information
<TABLE>
<CAPTION>
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998 (unaudited) and 2
December 31, 1997
Unaudited Consolidated Statements of Operations for the three month periods ended
September 30, 1998 and 1997 3
Unaudited Consolidated Statements of Operations for the nine month periods ended 4
September 30, 1998 and 1997
Unaudited Consolidated Statements of Cash Flows for the nine month periods ended
September 30, 1998 and 1997 5
Notes to Unaudited Consolidated Financial Statements 6
Report of Independent Public Accountants 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Part II. Other Information 15
</TABLE>
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
ASSETS SEPTEMBER 30, December 31,
1998 1997
UNAUDITED Audited
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS
Fixed maturities
Held-to-maturity, at amortized cost (market
value $666,571 in 1998 and $709,867 in 1997) $ 623,157 $ 677,360
Available-for-sale, at market (amortized cost $269,356
in 1998 and $145,019 in 1997) 276,516 146,932
Equity securities (cost $23,312 in 1998 and $26,296 in 1997) 97,254 128,698
Mortgage loans 2,792 2,862
Policy loans 8,670 8,405
Other long-term investments, at market (cost $11,312 in 1998
and $9,000 in 1997) 15,107 12,448
Short-term investments 15,157 19,195
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$1,038,653 $ 995,900
CASH AND CASH EQUIVALENTS - 2,378
ACCRUED INVESTMENT INCOME 15,012 14,159
ACCOUNTS RECEIVABLE 48,589 44,060
DEFERRED POLICY ACQUISITION COSTS 66,732 60,215
PROPERTY AND EQUIPMENT 13,497 14,443
REINSURANCE RECEIVABLES 15,699 14,430
PREPAID REINSURANCE PREMIUMS 3,186 4,064
INTANGIBLES 880 1,082
INCOME TAXES RECEIVABLE 3,967 -
OTHER ASSETS 7,824 7,191
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TOTAL ASSETS $1,214,039 $ 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 $ 250,761 $ 231,768
Life insurance 545,680 482,437
Unearned premiums 121,059 108,296
Accrued expenses and other liabilities 20,873 18,373
Employee benefit obligations 9,245 8,665
Income taxes payable - 3,307
Deferred income taxes 18,853 27,868
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TOTAL LIABILITIES $ 966,471 $ 880,714
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STOCKHOLDERS' EQUITY
Common stock $33,639 $ 35,758
Additional paid-in capital 7,927 9,331
Retained earnings 152,988 161,906
Net unrealized appreciation, net of applicable income taxes of
$28,482 in 1998 and $37,549 in 1997 53,014 70,213
- ---------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 247,568 $ 277,208
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,214,039 $ 1,157,922
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</TABLE>
The Notes to Unaudited Consolidated Financial Statements are an integral part of
these statements.
2
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Three months ended September 30,
1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues
Net premiums earned $ 61,543 $ 61,971
Investment income, net 16,964 15,238
Realized investment gains and other income 318 283
Commission and policy fee income 487 485
- ---------------------------------------------------------------------------------------------------
79,312 77,977
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Benefits, Losses and Expenses
Losses and settlement expenses 53,685 43,949
Increase (decrease) in liability for future policy benefits (263) 1,785
Amortization of deferred policy acquisition costs 12,168 11,780
Other underwriting expenses 13,103 10,583
Interest on policyholders' accounts 6,569 5,931
- ---------------------------------------------------------------------------------------------------
85,262 74,028
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Income (loss) before income taxes (5,950) 3,949
Federal income taxes (benefit) (3,987) 358
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Net income (loss) $ (1,963) $ 3,591
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- ---------------------------------------------------------------------------------------------------
Earnings (loss) per common share $ (0.19) $ 0.33
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Weighted average common shares outstanding 10,088,460 10,727,322
- ---------------------------------------------------------------------------------------------------
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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
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Nine months ended September 30,
1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues
Net premiums earned $ 180,820 $ 181,630
Investment income, net 49,986 45,412
Realized investment gains and other income 21,741 1,031
Commission and policy fee income 1,442 1,443
- ---------------------------------------------------------------------------------------------
253,989 229,516
- ---------------------------------------------------------------------------------------------
Benefits, Losses and Expenses
Losses and settlement expenses 142,803 121,707
Increase in liability for future policy benefits 2,094 4,387
Amortization of deferred policy acquisition costs 35,251 36,795
Other underwriting expenses 30,951 28,363
Interest on policyholders' accounts 19,435 17,584
- ---------------------------------------------------------------------------------------------
230,534 208,836
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Income before income taxes 23,455 20,680
Federal income taxes 3,926 4,568
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Net Income $ 19,529 $ 16,112
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Earnings per common share $ 1.86 $ 1.50
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Weighted average common shares outstanding 10,495,773 10,727,479
- ---------------------------------------------------------------------------------------------
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Cash dividends declared per common share $ 0.50 $ 0.47
- ---------------------------------------------------------------------------------------------
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</TABLE>
The Notes to Unaudited Consolidated Financial Statements are an integral part of
these statements.
4
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Nine months ended September 30,
1998 1997
- -------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 19,529 $ 16,112
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Adjustments to reconcile net income to net cash provided by
operating activities
Net bond discount accretion (429) (18)
Depreciation and amortization 264 2,138
Realized investment gains (21,741) (1,031)
Changes in:
Accrued investment income (853) (1,111)
Accounts receivable (4,529) (5,445)
Deferred policy acquisition costs (6,517) (3,692)
Reinsurance receivables (1,269) (2,211)
Prepaid reinsurance premiums 878 (306)
Income taxes receivable (3,967) (746)
Other assets (633) 658
Future policy benefits and losses, claims and
settlement expenses 20,764 15,285
Unearned premiums 12,763 8,994
Accrued expenses and other liabilities 4,217 (310)
Employee benefit obligations 580 1,438
Income taxes payable (3,307) -
Deferred income taxes - 518
Other, net (3,400) -
- -------------------------------------------------------------------------------------------------------------
Total adjustments $ (7,179) $ 14,161
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Net cash provided by operating activities $ 12,350 $ 30,273
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Cash Flows From Investing Activities
Proceeds from sale of available-for-sale investments $ 53,117 $ 19,638
Proceeds from call and maturity of held-to-maturity investments 64,627 45,775
Proceeds from call and maturity of available-for-sale investments 19,778 3,717
Proceeds from sale of other investments 31,464 40,458
Purchase of investments held-to-maturity (10,877) (90,547)
Purchase of investments available-for-sale (172,817) (48,108)
Purchase of other investments (28,690) (27,264)
Proceeds from sale of property and equipment 2,275 -
Purchase of property and equipment (1,391) (2,929)
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities $ (42,514) $(59,260)
- -------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Policyholders' account balances
Deposits to investment and universal life type contracts $ 113,320 $ 91,496
Withdrawals from investment and universal life type contracts (51,848) (66,373)
Purchase and retirement of common stock (26,723) (12)
Payment of cash dividends (6,963) (6,651)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 27,786 $ 18,460
- -------------------------------------------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents $ (2,378) $(10,527)
Cash and Cash Equivalents at Beginning of Year 2,378 14,389
- -------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ - $ 3,862
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</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 September 30, 1998.
For purposes of reporting cash flows, cash and cash equivalents include
cash and non-negotiable certificates of deposit with original maturities of
three months or less. Income taxes paid, net of refunds for the nine month
periods ended September 30, 1998 and 1997 were $11,200,000 and $5,589,000,
respectively. There were no significant payments of interest through
September 30, 1998 and 1997, other than interest credited to policyholders'
accounts.
6
<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 September 30, 1998 is as
follows.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- ---------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1998 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 $ 25,617 $ 1,594 $- $ 27,211
Mortgage-backed securities 15,356 1,361 - 16,717
All others 2,261 480 - 2,741
States, municipalities and political subdivisions 219,350 16,763 23 236,090
Foreign 6,484 536 - 7,020
Public utilities 69,356 2,979 - 72,335
Corporate bonds
Collateralized mortgage obligations 87,423 5,954 581 92,796
All other corporate bonds 197,310 14,688 337 211,661
- ---------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity $623,157 $ 44,355 $941 $666,571
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE
Fixed Maturities
Bonds
United States Government,
government agencies and authorities
Collateralized mortgage obligations $ 850 $ 43 $- $ 893
Mortgage-backed securities 48 4 - 52
All others 7,665 244 - 7,909
States, municipalities & political subdivisions 49,634 1,828 - 51,462
Foreign 7,627 28 1,053 6,602
Public utilities 11,238 362 34 11,566
Corporate bonds
Collateralized mortgage obligations 52,856 3,434 - 56,290
All other corporate bonds 139,438 3,820 1,516 141,742
- ----------------------------------------------------------------------------------------------------------------------------
Total available-for-sale fixed maturities $269,356 $ 9,763 $ 2,603 $276,516
- ----------------------------------------------------------------------------------------------------------------------------
Equity securities
Common stocks
Public utilities $ 3,525 $ 8,230 $- $ 11,755
Banks, trust and insurance companies 8,949 45,544 - 54,493
All other common stocks 9,993 20,612 620 29,985
Nonredeemable preferred stocks 845 177 1 1,021
- ----------------------------------------------------------------------------------------------------------------------------
Total equity securities $ 23,312 $ 74,563 $621 $ 97,254
- ----------------------------------------------------------------------------------------------------------------------------
Total available-for-sale $292,668 $ 84,326 $ 3,224 $373,770
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Other long-term investments $ 11,312 $ 3,817 $ 22 $ 15,107
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</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 September 30, 1998 by contractual
maturity are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- --------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1998 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 $ 8,154 $ 8,311 $ 192 $ 192
Due after one year through five years 135,508 143,731 17,665 17,448
Due after five years through ten years 148,186 160,967 98,329 99,207
Due after ten years 202,913 216,839 99,416 102,434
Mortgage-backed securities 15,356 16,716 48 52
Collateralized mortgage obligations 113,040 120,007 53,706 57,183
- --------------------------------------------------------------------------------------------------------------
$623,157 $666,571 $269,356 $276,516
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</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 earnings per share ("EPS"). Under the
new standard, the presentation of primary EPS has been replaced with a
presentation of basic EPS. Basic EPS is computed excluding dilution caused by
common stock equivalents such as stock options. The Company adopted a
Nonqualified Employee Stock Option Plan on September 9, 1998. The Plan will
permit the Company to grant options to purchase shares of its common stock.
As of September 30, 1998, the Company has not issued options and therefore,
basic and diluted EPS are equal.
In February, 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 129, "Disclosure of Information about Capital Structure."
SFAS No. 129, adopted by the Company effective December 31, 1997, contains
disclosure requirements including liquidation preferences of preferred stock,
rights and privileges of outstanding equity securities and the redemption
amounts for all issues of capital stocks that are redeemable. As the Company
does not issue these types of securities, SFAS No. 129 does not have a
material effect on the Company's Consolidated Financial Statements.
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", governing the reporting and presentation of
comprehensive income and its components which includes traditional net income
and items previously recorded directly in equity, such as the change in
unrealized gains or losses on securities available-for-sale. In accordance
with the interim reporting guidelines of SFAS No. 130, comprehensive income
was $2,330,000 and $34,352,000 for the nine months ended September 30, 1998
and 1997, respectively. Comprehensive income (loss) was $(8,102,000) and
$11,553,000 for the three months ended September 30, 1998 and 1997,
respectively.
In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" requiring that public businesses
report financial and descriptive information about its reportable operating
segments. SFAS No. 131 is effective for annual periods beginning after
December 15, 1997 for the initial year of adoption and interim periods
thereafter. The impact of adopting SFAS No. 131 will require additional
disclosure in the Consolidated Financial Statements and is not expected to
have a material effect on the Company's Consolidated Financial Statements or
Notes to Consolidated Financial Statements.
8
<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. As part of the
implementation, the Company expects to reclass a portion of its fixed income
securities from the held-to-maturity category to the available-for-sale
category. Depending on market conditions, this could effect the Company's
asset balance, as well as unrealized appreciation and deferred income taxes.
9
<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 September 30,
1998, and the related consolidated statements of operations for the
three-month and nine-month periods ended September 30, 1998 and 1997, and the
consolidated statements of cash flows for the nine-month periods ended
September 30, 1998 and 1997. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of United Fire & Casualty Company
and Subsidiaries as of December 31, 1997, and, in our report dated February 19,
1998, we expressed an unqualified opinion on that statement. In our
opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 1997, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ Arthur Andersen LLP
------------------------
Chicago, Illinois
November 5, 1998
10
<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 grew 5% through the third quarter of 1998, compared to
December 31, 1997, with invested assets providing a majority of the growth.
The fixed income portfolio, comprised primarily of high-quality securities,
increased $75,381,000, or 9%. The maturity structure of the Company's fixed
income securities is laddered to attain a matching of assets with
liabilities. The Company's mix of fixed income securities between
available-for-sale and held-to-maturity has changed since December 31, 1997.
Substantially all 1998 fixed income security purchases have been classified
as available-for-sale. Management expects to continue classifying most fixed
income security purchases as available-for-sale during the fourth quarter of
1998. There were no securities classified as trading in 1997, nor through
September 30, 1998. Collateralized mortgage obligation (CMO) holdings account
for 19% of the fixed income portfolio at September 30, 1998 compared to 22%
as of December 31, 1997. The Company sold CMOs in 1998 and replaced the
securities with corporate bonds.
The Company's equity portfolio decreased $31,444,000 through September 30,
1998 partially due to a downturn in general market conditions. In
addition, in the second quarter of 1998, the Company rebalanced its equity
portfolio, thereby generating realized gains on sales. Proceeds were used to
repurchase 625,000 shares of the Company's common stock from General Accident
Insurance Company of America. The purchased shares represented approximately
5.9% of the Company's outstanding stock. The transaction was negotiated
privately and the Company paid $42 per share for the stock. Management
believes the purchase was an excellent use of capital as the Company's stock
represents good value at then prevailing price levels. In July, the Company
contributed 25,000 shares of the treasury stock to its Employee Stock
Ownership Plan. The remaining 600,000 shares were retired on July 13, 1998.
During the last half of 1997, and continuing into 1998, the Company began
writing covered call options to generate additional portfolio income. At
September 30, 1998, options were written on 3% of the equity portfolio,
compared to 1% at December 31, 1997.
Typically, property and casualty premium writings are higher in each of
the first ten months of the year when compared to November and December. This
results in increased accounts receivable from insurance agents and brokers at
the end of each of the first three quarters, when compared with annual
receivable balances. Between September 30, 1998 and December 31, 1997
accounts receivable grew by $4,529,000 or 10%. On a nine-month basis, the
property and casualty segment's premium writings have decreased slightly
between years.
The Company's deferred policy acquisition costs (DAC) include expenses
such as commissions, premium taxes and other costs associated with
underwriting insurance policies. The Company establishes an asset for these
expenses and amortizes the asset over the duration of the policy periods. In
addition, the DAC asset generated on nontraditional policies (i.e., annuities
and universal life) is adjusted by way of a valuation allowance for
unrealized holding gains and losses from securities classified as
available-for-sale with a corresponding credit or charge to stockholders'
equity. The DAC asset increased $6,517,000 or 11%, with much of the increase
attributable to the life segment, whose premium writings are increasing. This
increase was offset in the third quarter by a reduction in the life segment
DAC asset on nontraditonal policies with a corresponding decrease in
unrealized appreciation of $3,286,000 (before tax) for unrealized holding
gains and losses.
Reinsurance receivables include losses, expenses and reserves that are due
to the Company from reinsurance brokers. This balance increased by $1,269,000
or 9% through September 30, 1998. The Company has not experienced significant
collection problems with regard to reinsurance receivables and has no
information indicating that any of its current reinsurance balances are
uncollectible.
Other assets increased by $633,000 or 9%. An increase in the life
segment's receivable from investment brokers was partially offset by the sale
of most of the assets of Crabtree Premium Finance Company, a small subsidiary
on February 27, 1998. Under the provisions of the sale, no material gain or
loss was recognized.
11
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CASH FLOW AND LIQUIDITY
Most of the cash that the Company receives is generated from insurance
premiums paid by policyholders. The premiums are invested in assets maturing
at regular intervals in order to meet the Company's obligations to pay policy
benefits, claims and claim adjusting expenses and operating expenses. Net
cash provided by the Company's operating activities was $12,350,000 through
the first nine months of 1998, compared to $30,273,000 through September 30,
1997. This is due, principally, to the realized gains on the sale of equity
securities discussed above. Operating cash flows continue to be ample to meet
policyholders obligations.
Short-term investments, composed of money market accounts and fixed income
securities with maturities of one year or less, are available for the
Company's short-term cash needs. In addition, a $15,000,000 line of credit is
maintained with a bank. The Company borrowed funds against this line of
credit during the second and third quarters. The balance of the borrowing at
September 30, 1998 is $1,100,000. No funds were borrowed during 1997.
LIABILITIES
The property and casualty segment's gross liability before reinsurance for
losses and settlement expenses increased $18,993,000 or 8% between
September 30, 1998 and December 31,1997. Storm activity in the third quarter
contributed to this increase. In addition, some of the Company's liability
lines of business are experiencing an increase in reserves for loss
adjustment expenses. The Company's exposure to environmental pollution and
asbestos claims is viewed as not material. Underwriters are aware of these
exposures and use riders or endorsements to limit their exposure.
Due to strong growth, the liability for future policy benefits and
interest on policyholders' accounts increased $63,243,000 or 13% through the
first three quarters of 1998. This liability is increased immediately by the
full premiums paid by policyholders for annuity products and most universal
life products. In 1998, the Company received premiums of $64,482,000 in non
internal rollovers on annuity products and $10,207,000 on universal life
products. These same two product lines had $19,435,000 of interest credited
and $30,355,000 in decreases for surrenders, risk charges and mortality
experience during 1998. Fluctuations in the other life segment products lines
account for the remainder of the change.
The life segment's unearned premiums increased $8,091,000 or 108% due to
growth in the single premiums credit life/A&H products. These products have a
policy duration of a few months to a maximum of ten years, and therefore, any
significant increase in new writings will cause an increase in this liability.
Accrued expenses and other liabilities increased $2,500,000 or 14% through
September 30, 1998. Contributing to this growth was a balance of $1,100,000
owed against the Company's $15,000,000 line of credit and a negative cash
balance for book purposes of $5,874,000 due to outstanding checks. Offsetting
this was a decrease in general operating expense accruals, a decrease in
stockholders dividends payable and a decrease in amounts payable for
securities.
As of September 30, 1998, the Company has federal income taxes receivable
of $3,967,000. At December 31, 1997, the Company had a liability for federal
income taxes of $3,307,000. This represents a net decrease of $7,274,000. The
Company made federal income tax payments of $11,200,000 through September 30,
1998, compared to $5,789,000 through December 31, 1997.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
PROPERTY AND CASUALTY OPERATIONS
The property and casualty segment had a statutory combined ratio (net
losses incurred and net loss adjustment expenses incurred to net premiums
earned, plus expenses incurred to premiums written) of 115% for the first
nine months of 1998, compared to 102% for the same period of 1997. For the
third quarter, the combined ratios were 126% and 107%, respectively.
12
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Losses incurred by the property and casualty segment increased $9,264,000 or
9% between the first nine months of 1998 and 1997. Involvement in sixteen
catastrophe storms during the second and third quarters negatively impacted
the Company's current year results. The heaviest losses resulted from storms
occurring May 30, 1998 through June 1, 1998 in Iowa, Minnesota, South Dakota
and Wisconsin and resulted in net incurred losses of $4,633,000. Severe
storms occurring in several midwestern states between June 24, 1998, and
June 30, 1998, also contributed over $3 million in incurred losses. The Company
had approximately $259,000 in net loss reserves in connection with Hurricane
Georges as of September 30, 1998. Ultimately, on a direct basis, the Company
expects this particular hurricane exposure to total approximately $2 million.
The Company will have some assumed losses in connection with Hurricane
Georges, but it has been unable to estimate the exposure at this time.
Incurred losses on all 1998 catastrophes, on a net basis, was $16,313,000
through September 30, 1998. Loss adjustment expenses increased $7,324,000 or
38 percent between years due to increasing costs of litigation, particularly
in the products liability line of business.
The property and casualty segment's other underwriting expenses and
amortization of deferred policy acquisition costs have increased by
$1,048,000 or 2% between the first nine months of 1998 and 1997. The decrease
in premium volume has reduced many of the expenses incurred in connection
with the writing of insurance policies.
LIFE OPERATIONS
The life segment's earnings before taxes increased $3,108,000 or 44%
through the first nine months of 1998, compared to the same period in 1997.
Premium writings have grown from $16,125,000 at September 30, 1997 to
$24,942,000 at September 30, 1998. The increase is primarily attributable to
the segment's single premium credit life/A&H products. Net premiums earned
increased $2,403,000 or 16% and net investment income increased by $3,800,000
or 13%. Losses incurred by the life segment are up between September 30, 1998
and 1997 due to both a higher frequency and larger amounts of death claims
than experienced in prior years.
INVESTMENT RESULTS
Net investment income increased $4,574,000 or 10% between September 30,
1998 and 1997. Realized gains increased from $1,031,000 through September 30,
1997 to $21,741,000 through the first nine months of 1998. The sale of equity
securities during the second quarter, discussed above under ASSETS, was the
primary reason for the large increase.
YEAR 2000
The insurance industry is data intensive and utilizes computer technology
extensively. An important issue facing all computer users is the approaching
Year 2000. Many computer systems and applications have been designed with
two-digit date fields. With the turn of the century, these programs may
recognize the Year 2000 as 1900 or not at all.
The Company has been aware for several years of the technological issues
associated with the approaching Year 2000. Beginning in 1984, the Company
initiated the programming of four-digit date fields in anticipation of the
new century. Throughout this year all in-house systems have been undergoing
testing which is scheduled to be completed by the end of 1998. The Company is
also reviewing its third-party vendors for Year 2000 compliance and is
requiring written acknowledgment of testing and readiness.
13
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Expenses incurred in connection with programming and testing have been
expensed as incurred and absorbed into normal operating expenses. The
remaining costs for Year 2000 compliance include salaries and overhead for
existing company personnel and are not expected to be material to operations.
In the event that the company's systems or those of their vendors are not
compliant with the Year 2000, the situation could result in the incorrect
processing of critical financial and operational information. The Company is
testing its systems in an effort to identify the nature and magnitude of
these potential errors. Should any of the mission critical systems fail, the
Company will have a plan in place detailing alternative processing methods.
This formal, documented contingency plan is scheduled for completion by
July 1, 1999.
OTHER
Effective September 1, 1998, the Company moved the operations of Addison
Insurance Company (a wholly owned subsidiary) to its home office in Cedar
Rapids, from Lombard, Illinois. This move will result in a decrease in
operating expenses. In connection with the relocation, the Company terminated
18 employees, 4 of which were management positions. As of September 30, 1998,
the Company has accrued $71,000 in remaining termination benefits which is
included in other underwriting expenses. Termination benefits of $238,000
were paid through September 30, 1998. In connection with the move, the
Company has accrued $98,000 for a lease obligation which will terminate in
February, 1999. There are no other significant costs related to the closing
of the Addison office.
FORWARD LOOKING STATEMENTS
This information contained in the Form 10-Q for the quarterly period ended
September 30, 1998 contains forward looking information as defined in the
Private Securities Litigation Reform Act of 1995 and is therefore subject to
certain risks and uncertainties. Actual results could differ materially from
information within the forward looking statements as a result of many
factors, including, but not limited to, market conditions, competition, and
natural disasters.
14
<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
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED FIRE & CASUALTY COMPANY
- -------------------------------------------------------------------------------
(REGISTRANT)
NOVEMBER 5, 1998
- -------------------------------------------------------------------------------
(DATE)
/s/ JOHN A. RIFE
- -------------------------------------------------------------------------------
JOHN A. RIFE
PRESIDENT
/s/ K.G. BAKER
- -------------------------------------------------------------------------------
K.G. BAKER
VICE PRESIDENT , CHIEF FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER
15
<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 Net
Three-Month Periods Ended Number of Shares Income Earnings Per
September 30, Outstanding (Loss) Common Share
- --------------------------------------------------------------------------------------------------------
1998 10,088,460 $ (1,963) $ (0.19)
1997 10,727,322 3,591 0.33
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data and Number of Shares)
- --------------------------------------------------------------------------------------------------------
Weighted Average
Nine-Month Periods Ended Number of Shares Net Earnings Per
September 30, Outstanding Income Common Share
- --------------------------------------------------------------------------------------------------------
1998 10,495,773 $ 19,529 $ 1.86
1997 10,727,479 16,112 1.50
- --------------------------------------------------------------------------------------------------------
</TABLE>
Computation of weighted average number of common and common equivalent shares:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Three-Month Periods Ended September 30, 1998 1997
- -------------------------------------------------------------------------------------------
Common shares outstanding beginning of the period 10,066,721 10,727,322
Weighted average of the common
shares purchased and retired or reissued 21,739 -
- -------------------------------------------------------------------------------------------
Weighted average number of common shares 10,088,460 10,727,322
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Nine-Month Periods Ended September 30, 1998 1997
- -------------------------------------------------------------------------------------------
Common shares outstanding beginning of the period 10,727,322 10,727,712
Weighted average of the common
shares purchased and retired or reissued (231,549) (233)
- -------------------------------------------------------------------------------------------
Weighted average number of common shares 10,495,773 10,727,479
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 276,516
<DEBT-CARRYING-VALUE> 623,157
<DEBT-MARKET-VALUE> 666,571
<EQUITIES> 97,254
<MORTGAGE> 2,792
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,038,653
<CASH> 0
<RECOVER-REINSURE> 15,699
<DEFERRED-ACQUISITION> 66,732
<TOTAL-ASSETS> 1,214,039
<POLICY-LOSSES> 796,441
<UNEARNED-PREMIUMS> 121,059
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 33,639
<OTHER-SE> 213,929
<TOTAL-LIABILITY-AND-EQUITY> 247,568
180,820
<INVESTMENT-INCOME> 49,986
<INVESTMENT-GAINS> 21,741
<OTHER-INCOME> 1,442
<BENEFITS> 144,897
<UNDERWRITING-AMORTIZATION> 35,251
<UNDERWRITING-OTHER> 50,386
<INCOME-PRETAX> 23,455
<INCOME-TAX> 3,926
<INCOME-CONTINUING> 19,529
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,529
<EPS-PRIMARY> 1.86
<EPS-DILUTED> 1.86
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
