<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, 1999
Commission File Number 2-39621
UNITED FIRE & CASUALTY COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Iowa 42-0644327
- ------------------------ ---------------------------------
(State of Incorporation) (IRS Employer Identification No.)
118 Second Avenue, S.E.
Cedar Rapids, Iowa 52407
- -----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319) 399-5700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
As of July 30, 1999, 10,078,539 shares of common stock were outstanding.
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C>
Part 1. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999 (unaudited) and
December 31, 1998 2
Unaudited Consolidated Statements of Operations for the three month periods ended
June 30, 1999 and 1998 3
Unaudited Consolidated Statements of Operations for the six month periods ended
June 30, 1999 and 1998 4
Unaudited Consolidated Statements of Cash Flows for the six month periods ended
June 30, 1999 and 1998 5
Notes to Unaudited Consolidated Financial Statements 6
Report of Independent Public Accountants 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Part II. Other Information 17
</TABLE>
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS JUNE 30, December 31,
1999 1998
UNAUDITED Audited
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS
Fixed maturities
Held-to-maturity, at amortized cost (market
value $337,165 in 1999 and $626,180 in 1998) $ 325,646 $ 591,237
Available-for-sale, at market (amortized cost $650,473
in 1999 and $320,171 in 1998) 640,476 321,966
Equity securities (cost $25,606 in 1999 and $23,450 in 1998) 112,130 111,076
Mortgage loans 2,736 2,777
Policy loans 8,694 8,707
Other long-term investments, at market (cost $11,770 in 1999
and $11,517 in 1998) 13,368 14,368
Short-term investments 26,123 33,985
- ----------------------------------------------------------------------------------------------------------------------------
$1,129,173 $1,084,116
CASH AND CASH EQUIVALENTS 15,274 -
ACCRUED INVESTMENT INCOME 16,955 16,130
ACCOUNTS RECEIVABLE 51,315 44,868
DEFERRED POLICY ACQUISITION COSTS 76,071 67,592
PROPERTY AND EQUIPMENT 12,388 13,334
REINSURANCE RECEIVABLES 14,282 12,910
PREPAID REINSURANCE PREMIUMS 2,078 2,923
INTANGIBLES 692 817
INCOME TAXES RECEIVABLE 3,589 3,757
OTHER ASSETS 3,887 4,147
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,325,704 $1,250,594
============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Future policy benefits and losses, claims and settlement expenses
Property and casualty insurance $ 267,505 $ 251,117
Life insurance 630,724 575,189
Unearned premiums 125,729 116,418
Accrued expenses and other liabilities 21,153 18,922
Employee benefit obligations 10,921 9,813
Deferred income taxes 18,878 22,853
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $1,074,910 $ 994,312
- ----------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock $ 33,595 $ 33,639
Additional paid-in capital 7,606 7,927
Retained earnings 155,497 155,421
Accumulated other comprehensive income, net of tax 54,096 59,295
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 250,794 $ 256,282
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,325,704 $1,250,594
============================================================================================================================
</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 AND NUMBER OF SHARES)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Three months ended June 30,
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues
Net premiums earned $ 60,648 $ 59,941
Investment income, net 18,339 16,796
Realized investment gains and other income 296 17,220
Commission and policy fee income 545 491
- ----------------------------------------------------------------------------------------------------------------------------
79,828 94,448
- ----------------------------------------------------------------------------------------------------------------------------
Benefits, Losses and Expenses
Losses and settlement expenses 47,959 48,012
Increase in liability for future policy benefits 1,491 984
Amortization of deferred policy acquisition costs 12,197 12,154
Other underwriting expenses 12,067 9,092
Interest on policyholders' accounts 7,061 6,679
- ----------------------------------------------------------------------------------------------------------------------------
80,775 76,921
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (947) 17,527
Federal income taxes (benefit) (1,488) 4,917
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 541 $ 12,610
============================================================================================================================
Earnings per common share $ .05 $ 1.18
============================================================================================================================
Weighted average common shares outstanding 10,081,320 10,685,374
============================================================================================================================
Cash dividends declared per common share $ 0.17 $ 0.17
============================================================================================================================
</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 AND NUMBER OF SHARES)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Six months ended June 30,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues
Net premiums earned $ 120,798 $ 119,277
Investment income, net 35,775 33,022
Realized investment gains and other income 1,334 21,423
Commission and policy fee income 978 955
- ---------------------------------------------------------------------------------------------------------------------------
158,885 174,677
- ---------------------------------------------------------------------------------------------------------------------------
Benefits, Losses and Expenses
Losses and settlement expenses 93,220 89,118
Increase in liability for future policy benefits 2,599 2,357
Amortization of deferred policy acquisition costs 23,113 23,083
Other underwriting expenses 23,009 17,848
Interest on policyholders' accounts 15,141 12,866
- ---------------------------------------------------------------------------------------------------------------------------
157,082 145,272
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,803 29,405
Federal income taxes (benefit) (1,702) 7,913
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $ 3,505 $ 21,492
===========================================================================================================================
Earnings per common share $ .35 $ 2.01
===========================================================================================================================
Weighted average common shares outstanding 10,086,492 10,702,805
===========================================================================================================================
Cash dividends declared per common share $ 0.34 $ 0.33
===========================================================================================================================
</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)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Six months ended June 30,
1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 3,505 $ 21,492
- ------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by
Operating activities
Net bond discount accretion (176) (171)
Depreciation and amortization 925 198
Realized investment gains (1,334) (21,423)
Changes in:
Accrued investment income (825) (1,088)
Accounts receivable (6,447) (7,240)
Deferred policy acquisition costs (8,479) (8,458)
Reinsurance receivables (1,372) (534)
Prepaid reinsurance premiums 845 604
Income taxes receivable/payable 168 (2,208)
Other assets 260 3,027
Future policy benefits and losses, claims and
settlement expenses 19,662 14,748
Unearned premiums 9,311 9,571
Accrued expenses and other liabilities 3,946 10,241
Employee benefit obligations 1,108 969
Deferred income taxes (1,175) 1,320
Other, net 6,192 (61)
- ------------------------------------------------------------------------------------------------------------------------
Total adjustments $ 22,609 $ (505)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 26,114 $ 20,987
- ------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Proceeds from sale of available-for-sale investments $ 15,226 $ 41,734
Proceeds from call and maturity of held-to-maturity investments 19,667 43,364
Proceeds from call and maturity of available-for-sale investments 39,474 13,687
Proceeds from sale of other investments 49,369 25,346
Purchase of investments held-to-maturity (502) (7,364)
Purchase of investments available-for-sale (138,948) (116,164)
Purchase of other investments (42,024) (26,907)
Proceeds from sale of property and equipment 789 1,480
Purchase of property and equipment (643) (422)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities $(57,592) $(25,246)
- ------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Policyholders' account balances
Deposits to investment and universal life type contracts $ 81,705 $ 70,378
Withdrawals from investment and universal life type contracts (29,444) (35,476)
Purchase and retirement of common stock (365) (1,523)
Payment of cash dividends (5,144) (5,248)
Purchase of common stock - (26,250)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 46,752 $ 1,881
- ------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents $ 15,274 $ (2,378)
Cash and Cash Equivalents at Beginning of Year - 2,378
- ------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 15,274 $ -
========================================================================================================================
</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, 1998. The review report of Arthur Andersen
LLP accompanies the unaudited consolidated financial statements included in
Item 1 of Part I.
The Company maintains its records in conformity with the accounting
practices prescribed or permitted by the Insurance Department of the State of
Iowa. To the extent that certain of these practices differ from generally
accepted accounting principles ("GAAP"), adjustments have been made in order
to present the accompanying financial statements on the basis of GAAP.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Certain amounts included in the financial statements for the previous
year have been reclassified to conform with the financial statement
presentation at June 30, 1999.
For purposes of reporting cash flows, cash and cash equivalents include
cash and non-negotiable certificates of deposit with original maturities of
three months or less. Income taxes paid, net of refunds for the six month
periods ended June 30, 1999 and 1998 were $(695,000) and $8,800,000,
respectively. There were no significant payments of interest through June 30,
1999 and 1998, other than interest credited to policyholders' accounts.
6
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. INVESTMENTS
A reconciliation of the amortized cost (cost for equity securities) to fair
values of investments in held-to-maturity and available-for-sale fixed
maturities, marketable equity securities and other long-term investments as of
June 30, 1999 is as follows.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- ----------------------------------------------------------------------------------------------------------------------------
JUNE 30, 1999 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 $ 15,073 $ 50 $ 214 $ 14,909
Mortgage-backed securities 10,975 867 3 11,839
All others 1,788 282 - 2,070
States, municipalities and political subdivisions 183,734 8,046 84 191,696
Foreign 3,040 70 - 3,110
Public utilities 19,945 360 20 20,285
Corporate bonds
Collateralized mortgage obligations 17,775 375 140 18,010
All other corporate bonds 73,316 2,141 211 75,246
- ----------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity $325,646 $ 12,191 $ 672 $337,165
============================================================================================================================
AVAILABLE-FOR-SALE
Fixed Maturities
Bonds
United States Government,
Government agencies and authorities
Collateralized mortgage obligations $ 32,928 $ 312 $ 206 $ 33,034
Mortgage-backed securities 38 3 - 41
All others 7,411 2 210 7,203
States, municipalities and political subdivisions 85,870 1,045 1,973 84,942
Foreign 23,329 74 1,027 22,376
Public utilities 83,959 486 1,773 82,672
Corporate bonds
Collateralized mortgage obligations 68,123 2,346 1,158 69,311
All other corporate bonds 348,815 3,025 10,943 340,897
- ----------------------------------------------------------------------------------------------------------------------------
Total available-for-sale fixed maturities $650,473 $ 7,293 $17,290 $640,476
- ----------------------------------------------------------------------------------------------------------------------------
Equity securities
Common stocks
Public utilities $2,200 $3,497 $ - $5,697
Banks, trust and insurance companies 8,986 50,454 - 59,440
All other common stocks 14,420 32,685 112 46,993
- ----------------------------------------------------------------------------------------------------------------------------
Total equity securities $ 25,606 $ 86,636 $ 112 $112,130
- ----------------------------------------------------------------------------------------------------------------------------
Total available-for-sale $676,079 $ 93,929 $17,402 $752,606
============================================================================================================================
Other long-term investments $ 11,770 $ 1,822 $ 224 $ 13,368
============================================================================================================================
</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, 1999 by contractual maturity are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- ---------------------------------------------------------------------------------------------------------------------------
JUNE 30, 1999 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 $ 8,435 $ 8,561 $ 6,694 $ 6,788
Due after one year through five years 66,611 68,874 119,152 120,106
Due after five years through ten years 75,021 78,107 243,270 235,447
Due after ten years 131,756 136,865 180,268 175,749
Mortgage-backed securities 10,975 11,839 38 41
Collateralized mortgage obligations 32,848 32,919 101,051 102,345
- ---------------------------------------------------------------------------------------------------------------------------
$325,646 $337,165 $650,473 $640,476
===========================================================================================================================
</TABLE>
NOTE 3. NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income",
governing the reporting and presentation of comprehensive income and its
components which includes traditional net income and items previously recorded
directly in equity, such as the change in unrealized gains or losses on
securities available-for-sale. In accordance with the interim reporting
guidelines of SFAS No. 130, comprehensive income (loss) was $(1,694,000) and
$10,432,000 for the six months ended June 30, 1999 and 1998, respectively.
Comprehensive income (loss) was $(2,106,000) and $1,069,000 for the three months
ended June 30,1999 and 1998, respectively.
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" requiring that public businesses report
financial and descriptive information about its reportable operating segments
effective December 31, 1998. SFAS No. 131 did not have a material effect on the
Company's Consolidated Financial Statements or Notes to Consolidated Financial
Statements. Refer to Note 4 for interim disclosure.
Effective January 1, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." The new statement
standardizes the disclosure requirements for these benefit plans and did not
have a material effect on the Company's Consolidated Financial Statements or
Notes to Consolidated Financial Statements.
In June, 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities",
effective for all fiscal quarters of fiscal years beginning after June 15,1999.
The new statement requires all derivatives (including certain derivative
instruments embedded in other contracts) to be recorded on the balance sheet at
fair value and establishes special accounting for certain types of hedges. The
Company adopted SFAS No. 133 effective January 1, 1999. As part of the
implementation, the Company reclassed a portion of its fixed income securities
from the held-to-maturity category to the available-for-sale category, as of
January 1, 1999. Refer to Note 5 for further disclosure.
The Company adopted Statement of Position ("SOP") 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments," effective
January 1, 1999. The accounting guidance of this SOP focuses on the timing of
recognition and measurement of liabilities for insurance-related assessments.
Guidance is also provided on recording
8
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
assets representing future recoveries of assessments through premium tax offsets
or policy surcharges. The SOP was issued to reduce diversity in practice and to
improve comparability and disclosure. In accordance with SOP 97-3, the Company
estimates its liabilities for insurance-related assessments, as opposed to
recording the liability and expense when notified by insurance regulators. This
change in timing did not have a material effect on the Company's Consolidated
Financial Statements or Notes to Consolidated Financial Statements.
SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," was adopted by the Company effective January 1,
1999. This SOP requires that certain costs related to the development or
purchase of internal-use software be capitalized and amortized over the
estimated useful life of the software. The SOP also requires that costs related
to the preliminary project stage and the post-implementation and operations
stage of an internal-use computer software development project be expensed as
incurred. The SOP changed the timing of the recognition of the Company's
software development expenses and did not have a material effect on the
Company's Consolidated Financial Statements or Notes to Consolidated Financial
Statements.
SOP 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance
Contracts That Do Not Transfer Insurance Risk," is effective for financial
statements for fiscal years beginning after June 15, 1999. The SOP provides
guidance on accounting for insurance and reinsurance contracts that do not
transfer insurance risk. The impact of adopting SOP 98-7 is not expected to have
a material effect on the Company's Consolidated Financial Statements or Notes to
Consolidated Financial Statements.
NOTE 4. SEGMENT INFORMATION
The Company has two reportable business segments in its operations; property
and casualty insurance and life insurance. The property and casualty segment has
four locations from which it conducts its business. All offices target a similar
customer base and market the same products using the same marketing strategies
and are therefore aggregated. The life insurance segment operates from the
Company's home office. The two segments are evaluated by management based on
both a statutory and a GAAP basis. Results are analyzed based on profitability,
expenses and return on equity. The basis for determining and analyzing segments
and the measurement of segment profit has not changed from that reported in the
Company's 1998 Form 10K. The Company's selling location is used in allocating
revenues between foreign and domestic, and as such, the Company has no revenues
allocated to foreign countries. The following analysis is reported on a GAAP
basis and is reconciled to the Company's Consolidated Financial Statements.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
PROPERTY AND LIFE
CASUALTY INSURANCE INSURANCE TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
JUNE 30, 1999
- -----------------------------------------------------------------------------------------------------------------------------
Revenues $121,638 $ 37,366 $ 159,004
- -----------------------------------------------------------------------------------------------------------------------------
Intersegment eliminations (68) (51) (119)
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues $121,570 $ 37,315 $ 158,885
=============================================================================================================================
Net income (loss) $ (933) $ 4,438 $ 3,505
=============================================================================================================================
Assets $556,480 $769,224 $1,325,704
=============================================================================================================================
JUNE 30, 1998
- -----------------------------------------------------------------------------------------------------------------------------
Revenues $141,329 $ 33,484 $ 174,813
- -----------------------------------------------------------------------------------------------------------------------------
Intersegment eliminations (79) (57) (136)
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues $141,250 $ 33,427 $ 174,677
=============================================================================================================================
Net income $ 17,116 $ 4,376 $ 21,492
=============================================================================================================================
Assets $464,846 $734,076 $1,198,922
=============================================================================================================================
</TABLE>
Depreciation expense and property and equipment acquisitions
are reflected in the property and casualty insurance segment.
9
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. DERIVATIVE INSTRUMENTS
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," effective January 1, 1999. SFAS No. 133 cannot be applied
retroactively. The new statement requires all derivatives (including certain
derivative instruments embedded in other contracts) to be recorded on the
balance sheet as either an asset or a liability at fair value and establishes
special accounting for certain types of hedges. The Company has had limited
involvement with derivative financial instruments, and does not engage in the
derivative market for hedging purposes.
The Company has written covered call options on its equity portfolio to
generate additional portfolio income and does not use these instruments for
hedging purposes. Covered call options are recorded at fair value and included
in accrued expenses and other liabilities. Any income or gains or losses,
including the change in the fair value of the covered call options is recognized
currently in earnings and included in realized investment gains and other
income. At June 30, 1999, there were no covered call options outstanding,
compared to covered call options written on approximately four percent of the
equity portfolio at December 31, 1998.
In assessing the impact of any embedded derivative instruments, the Company
has elected to apply SFAS No. 133 only to those instruments or contracts with
embedded derivative instruments issued, acquired, or substantively modified by
the Company after December 31, 1997. The Company has analyzed its financial
instruments and contracts in accordance with SFAS No. 133 and determined there
is no material effect on the Company's Consolidated Financial Statements.
As part of the implementation of SFAS No. 133, the Company was allowed to
reassess its held-to-maturity portfolio without "tainting" the remaining
securities classified as held-to-maturity. The cumulative effect of the impact
on the Company's Consolidated Financial Statements due to the reclassification
of $246,623,000 of fixed-income securities from held-to-maturity to
available-for-sale, as of January 1, 1999, increased the carrying value of
available-for-sale fixed-income securities by approximately $9,250,000 and other
comprehensive income by approximately $6,013,000, net of deferred income taxes.
NOTE 6. ACQUISITION
On August 10, 1999 the Company finalized the purchase of American Indemnity
Financial Corporation ("American Indemnity"), whereby the Company acquired
American Indemnity as a wholly owned subsidiary for approximately $30,205,000 in
cash. Common stockholders of American Indemnity received approximately $14.35
per share at the closing of the transaction and deferred consideration of up to
$1.00 per share in two years, subject to adjustments relating to indemnities.
American Indemnity is a Galveston, Texas, based holding company that is made
up of a group of regional property and casualty insurance companies that offer
personal and commercial lines of insurance through independent agents. As of
December 31, 1998, total assets of American Indemnity were $152,608,000, and for
the year ended December 31, 1998, total revenues of $69,289,000 and a net loss
of $5,846,000 were reported.
10
<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, 1999,
and the related consolidated statements of operations for the three-month and
six-month periods ended June 30, 1999 and 1998, and the consolidated
statements of cash flows for the six-month periods ended June 30, 1999 and
1998. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above in order for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of United Fire & Casualty Company
and Subsidiaries as of December 31, 1998, and, in our report dated February
17, 1999, we expressed an unqualified opinion on that statement. In our
opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 1998, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Chicago, Illinois
July 30, 1999 (Except with
respect to the matter
discussed in Note 6,
as to which the date is
August 10, 1999)
11
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis contains forward-looking
information as defined in the Private Securities Litigation Reform Act of 1995
and is therefore subject to certain risks and uncertainties. Actual results
could differ materially from information within the forward-looking
statements as a result of many factors, including, but not limited to, market
conditions, competition, and natural disasters.
RESULTS OF OPERATIONS
For the six months ended June 30, 1999, total net income, including
realized capital gains, decreased to $3,505,000 or 35 cents per share, from
$21,492,000 or $2.01 per share through the first half of 1998. The 1998
results included $21,423,000 of realized capital gains that resulted
primarily from the sale of equity securities. The decrease in realized
capital gains was the contributing factor in the decrease in revenues from
$174,677,000 for the first half of 1998 to $158,885,000 for the first half of
1999. Premiums earned increased by $1,521,000 between years and investment
income grew by eight percent, or $2,753,000. The six-month earnings included
a 67 cents per share after-tax charge for catastrophe losses, which totaled
$6,776,000, compared to a charge of 66 cents per share, or $7,027,000, for
the first half of 1998. Six-month catastrophe losses contributed ten points
to the consolidated property and casualty combined ratio (claims and expenses
as a percentage of premiums) of 114 percent. For the same period last year,
catastrophes also contributed ten points to the consolidated property and
casualty combined ratio of 110 percent.
Total net income for the three months ended June 30, 1999, including
realized capital gains, were $541,000 or five cents per share, versus
$12,610,000 or $1.18 per share for the second quarter of 1998. Included in
the 1998 results were $17,220,000 of realized capital gains resulting
primarily from the sale of equity securities. Comparatively, for the second
quarter of 1999, realized capital gains were $296,000. Revenues for the
second quarter of 1999 were $79,828,000 compared to $94,448,000 for the
second quarter of 1998. The decrease was primarily attributable to the 1998
equity sales. Premiums earned increased by $707,000 between quarters, and
investment income grew by nine percent, or $1,543,000. Current year second
quarter earnings included an after-tax charge of approximately 46 cents per
share for catastrophe losses, which totaled approximately $4,643,000,
compared to an after-tax charge of approximately 66 cents per share, or
approximately $7,027,000, for the second quarter of 1998.
PROPERTY AND CASUALTY INSURANCE SEGMENT
The property and casualty segment had a net loss of $933,000 for the
first six months of 1999, compared to net income of $17,116,000 for the same
period in 1998. The prior year figures included realized capital gains of
$20,309,000, primarily due to the sale of equity securities. Premiums earned
decreased just $32,000 between years. Written premiums have increased
$5,086,000 or four percent. Losses and settlement expenses incurred have
increased $4,951,000 over the first half of 1998, with a majority of the
increase coming from reinsurance assumed from other companies. Other
underwriting expenses increased $5,732,000 for the first six months of 1999
compared to the first six months of 1998, with $4,628,000 due to a reduction
of the deferral of acquisition costs. Higher loss ratios by line of business
reduced the deferral of expenses in 1999 when compared to 1998, causing a
larger immediate recognition of underwriting expenses.
12
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For the three months ended June 30, 1999, the property and casualty
segment had a net loss of $1,061,000, compared to net income of $10,189,000
for the second quarter of 1998. Premiums earned for the quarter increased
$166,000. Losses and settlement expenses decreased by $718,000 between the
three months ended June 30, 1999 and June 30, 1998. Other underwriting
expenses increased $3,343,000 due to a reduction of the deferral of
acquisition costs. Higher loss ratios by line of business reduced the
deferral of acquisition costs during the second quarter of 1999, when
compared to the second quarter of 1998, causing a larger immediate
recognition of underwriting expenses.
LIFE INSURANCE SEGMENT
Offsetting the property and casualty results was net income of $4,438,000
for the six months ended June 30, 1999 reported by the Company's life
insurance segment, compared to $4,376,000 for the six months ended June 30,
1998. Premiums earned increased by $1,546,000, or 14 percent, over the same
period in 1998, primarily due to the earnings on a large block of credit life
and accident and health insurance. Losses incurred decreased by $849,000 or
13 percent due to an improvement in experience. Amortization of deferred
acquisition costs increased $2,706,000 or 111 percent over the first half of
1998, due primarily to amortization of deferred expenses on the significant
volume of credit life and accident and health business written during 1998
and 1997. Other underwriting expenses decreased $571,000, or 23 percent, when
compared to the first six months of 1998. The improvement is due to the mix
of premiums written in 1999 versus 1998. This year, a majority of growth has
been in annuity products, which have a commission rate of five percent. The
credit life and accident and health premiums, with a commission and other
compensation rate of 60 percent, were $4,127,000, compared to $8,003,000 in
1998. Interest on policyholders' accounts increased $2,274,000 for the six
months ended June 30, 1999, compared to June 30, 1998. As the balances in the
annuity and universal life accounts increase by new premiums, the interest
credited to these accounts also increases.
INVESTMENT RESULTS
Net investment income increased $2,753,000, or eight percent, through the
first six months of 1999, compared to the first six months of 1998. Realized
investment gains decreased by $20,089,000. A majority of the gains recognized
through the first half of 1998 resulted from sales of equity securities.
Proceeds from the sales in 1998 were used to repurchase 625,000 shares of the
Company's common stock and to rebalance its equity portfolio.
TAX BENEFIT
The tax benefit of $1,702,000 for the six-month period ended June 30,
1999, was due primarily to the deduction of municipal interest. As a result
of this deduction, the Company had a net operating loss for tax purposes,
which was carried back to 1997 and applied against income for that year,
generating a tax refund.
STOCK OPTIONS
In February and April 1999, the Company granted options under a
Nonqualified Employee Stock Option Plan to purchase an aggregate of 500 and
5,521 shares of common stock, respectively, at an exercise price of $29.25
and $26.12 per share, to officers and other employees. At the date of grant
(measurement date), the market value of the Company's common stock was equal
to or less than the exercise price on all options. At June 30, 1999, the
market value of the Company's common stock was below the exercise price on
all options.
13
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
INVESTMENTS
The investment portfolio is comprised primarily of fixed maturity
securities and equity securities. The Company's investment strategy is to
invest principally in long-term, high-quality securities. Fixed maturities,
which the Company has the ability and intent to hold to maturity, are
classified as held-to-maturity. The remaining fixed maturities and all of the
Company's equity securities are classified as available-for-sale.
Effective January 1, 1999, the Company reevaluated its investment
classifications and transferred $246,623,000 of fixed-income securities from
held-to-maturity to available-for-sale. This transfer was made in conjunction
with the implementation of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which allowed a one-time adjustment in
its classifications without the possibility of "tainting" the remaining
securities classified as held-to-maturity. The impact on the Company's
Consolidated Financial Statements as of January 1, 1999, due to the
reclassification from held-to-maturity to available-for-sale increased the
carrying value of available-for-sale fixed-income securities by approximately
$9,250,000, increased other comprehensive income by approximately $6,013,000
and increased deferred income taxes by approximately $3,237,000.
The Company has had limited involvement with derivative financial
instruments, and does not engage in the derivative market for hedging
purposes. The Company has investments in collateralized mortgage obligations.
These securities account for 14 percent of the fixed-income portfolio at June
30, 1999, compared to 16 percent as of December 31, 1998.
OTHER ASSETS
Deferred acquisition costs total $76,071,000 at June 30, 1999 and
represent deferred underwriting and acquisition expenses associated with
writing insurance policies. Deferred acquisition costs are amortized over the
life of the policies written to attain a matching of revenue to expenses. For
the six months ended June 30, 1999, the Company's life segment has generated
a $7,993,000 increase in deferred acquisition costs due to growth during the
second quarter of 1999 in credit life and accident and health statutory
premiums collected. The property and casualty segment had a small increase of
$486,000 in deferred acquisition costs. The flat growth was due to
unfavorable loss experience in some lines of business, particularly workers'
compensation and reinsurance assumed.
Accounts receivable, which pertains to the property and casualty segment,
are amounts due from insurance agents and brokers for premiums written, less
commissions paid. The balance at June 30, 1999, of $51,315,000 has increased
14 percent from December 31, 1998. The Company has not experienced
difficulties in collecting balances from its agents. The Company's other
assets are composed primarily of accrued investment income, property and
equipment (primarily land and buildings), and reinsurance receivables
(amounts due from the Company's reinsurers for losses and expenses).
LIABILITIES
The Company's largest liability is that of future policy benefits, which
relates exclusively to the life segment. The liability increased by
$55,535,000 or ten percent between December 31, 1998, and June 30, 1999.
Future policy benefits are increased immediately by the full premiums paid by
policyholders for annuity products and most universal life products. As these
product lines grow, the future policy benefits grow proportionately. Claims
and settlement expenses, which relate primarily to the property and casualty
segment, also increased from December 31, 1998. Direct and assumed
14
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
reserves established for losses and expenses have increased $16,388,000, or
seven percent. Of this increase, $741,000 relates to 1998 and 1999
catastrophe activity. Ceded recoverables for direct and assumed loss and loss
adjustment expense reserves of $12,410,000 are reflected in the reinsurance
receivables asset account. At June 30, 1999, the Company had no covered call
options outstanding, compared to covered call options written on
approximately four percent of the equity portfolio at December 31, 1998.
STOCKHOLDERS' EQUITY
The Company's stockholders' equity decreased by $5,488,000 to
$250,794,000 at June 30, 1999, compared to December 31, 1998. Net income of
$3,505,000 increased equity, while net unrealized depreciation on the
Company's available-for-sale securities and other long-term investments
decreased equity by $5,199,000. The Company declared $3,429,000 in
stockholders' dividends through June 30, 1999, and the Company purchased
13,182 shares of its common stock at a cost of $365,000 during the first half
of 1999.
CASH FLOW AND LIQUIDITY
Most of the cash the Company receives is generated from insurance
premiums paid by policyholders and from investment income. Premiums are
invested in assets maturing at regular intervals in order to meet the
Company's obligations to pay policy benefits, claims and claim adjusting
expenses. Net cash provided by the Company's operating activities was
$26,114,000 through the first half of 1999, compared to $20,987,000 through
the first half of 1998. Operating cash flows continue to be ample to meet
obligations to policyholders.
Short-term investments, composed of money market accounts and fixed-income
securities, are available for the Company's short-term cash needs. In addition,
the Company maintains a $20 million line of credit with a local bank. Under the
terms of the agreement, interest on outstanding notes is payable at the lender's
prevailing prime rate less one percent. There is no loan balance outstanding as
of June 30, 1999.
IMPACT OF YEAR 2000
The insurance industry is data intensive and utilizes computer technology
extensively. The Year 2000 problem is, simply stated, the inability to
correctly process dates after December 31, 1999.
The Company recognizes that the Year 2000 problem is a major business
issue in addition to a technical problem. In 1989, the Company issued a
ten-year term bond policy. It was recognized then that the commonly used two
digit year was going to be inadequate for processing beyond 1999. A plan was
developed that would allow the information services department, through
routine program and system maintenance, to gradually migrate to a four-digit
year. By the mid-1990s the Company had progressed beyond the awareness phase
and was well into the formal planning and execution/testing phases. Testing
of the Company's "mission critical systems" was completed by December 31,
1998. Testing included present and future date testing which simulated
critical dates in the Year 2000. The Company has successfully completed the
move of all tested internal systems into production.
The Company is currently reviewing its significant vendors, suppliers and
agents to ensure that written statements of their readiness and commitment to
a date for their Year 2000 compliance are received. The Company will continue
to monitor the Year 2000 status of these entities and develop contingency
plans to reduce the possible disruption in business operations that may
result from the failure of third parties with which the Company has business
relationships to address their Year 2000 issues. Should a third party with
whom the Company transacts business have a system failure due to not
15
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
being Year 2000 compliant, the Company believes this could result in a delay in
processing or reporting transactions of the Company, or a potential disruption
in service to our customers. The failure of the Company's systems or the systems
of its vendors to be compliant with the Year 2000 could result in the incorrect
processing of critical financial and operational information. The Company is
analyzing its processing in an effort to identify the nature and magnitude of
problems that could result from such system errors. The Company is preparing a
contingency plan that will detail alternative processing methods in the event
that systems, including secondary systems, fail. Significant progress has been
made in the development of the contingency plan. The contingency plan should be
final and in place by September 1, 1999.
The Company is also addressing areas other than Information Technology to
ensure Year 2000 compliance. An assessment has identified the non-IT assets
that may be impacted by the Year 2000 problem. Although there are a few items
that will be impacted, none were deemed critical and all will be compliant by
the end of the third quarter of 1999.Expenses incurred in connection with
programming and testing have been expensed as incurred and absorbed into
normal operating expenses. Costs incurred through June 30, 1999, were
approximately $1,183,000. The Company believes the remaining costs for the
Year 2000 compliance will include salaries and overhead for existing
personnel of approximately $127,000 and replacement of hardware of
approximately $90,000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has exposure to market risk arising from potential losses due
to adverse changes in interest rates and market prices. The Company's primary
market risk exposure is changes in interest rates, although the Company has
some exposure to changes in equity prices and limited exposure to foreign
currency exchange rates.
The active management of market risk is integral to the Company's
operations. Investment guidelines are in place that define the overall
framework for managing the Company's market and other investment risks,
including accountability and controls. In addition, the Company has specific
investment policies for each of its subsidiaries that delineate the
investment limits and strategies that are appropriate given each entity's
liquidity, surplus, product and regulatory requirements. In response to
market risk, the Company may respond by rebalancing its existing asset
portfolio, or by changing the character of future investment purchases.
There have been no material changes in the Company's market risk or
market risk factors from that reported in the Company's 1998 Form 10K.
16
<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)
AUGUST 10, 1999
- -------------------------------------------------------------------------------
(DATE)
/s/ JOHN A. RIFE
- -------------------------------------------------------------------------------
JOHN A. RIFE
PRESIDENT
/s/ K.G. BAKER
- -------------------------------------------------------------------------------
K.G. BAKER
VICE PRESIDENT , CHIEF FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER
17
<PAGE>
EXHIBIT 11. COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data and Number of Shares)
- ------------------------------------------------------------------------------------------------------------------------
Weighted Average
Three-Month Periods Ended Number of Shares Net Earnings Per
June 30, Outstanding Income Common Share
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 10,081,320 $ 541 $ .05
1998 10,685,374 12,610 1.18
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
(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
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 10,086,492 $ 3,505 $ .35
1998 10,702,805 21,492 2.01
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Computation of weighted average number of common and common equivalent shares:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Three-Month Periods Ended June 30, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common shares outstanding beginning of the period 10,091,721 10,709,222
Weighted average of the common
shares purchased and retired or reissued (10,401) (23,848)
- ------------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares 10,081,320 10,685,374
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Six-Month Periods Ended June 30, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common shares outstanding beginning of the period 10,091,721 10,727,322
Weighted average of the common
shares purchased and retired or reissued (5,229) (24,517)
- ------------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares 10,086,492 10,702,805
========================================================================================================================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 640,476
<DEBT-CARRYING-VALUE> 325,646
<DEBT-MARKET-VALUE> 337,165
<EQUITIES> 112,130
<MORTGAGE> 2,736
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,129,173
<CASH> 15,274
<RECOVER-REINSURE> 14,282
<DEFERRED-ACQUISITION> 76,071
<TOTAL-ASSETS> 1,325,704
<POLICY-LOSSES> 898,229
<UNEARNED-PREMIUMS> 125,729
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 33,595
<OTHER-SE> 217,199
<TOTAL-LIABILITY-AND-EQUITY> 1,325,704
120,798
<INVESTMENT-INCOME> 35,775
<INVESTMENT-GAINS> 1,334
<OTHER-INCOME> 978
<BENEFITS> 95,819
<UNDERWRITING-AMORTIZATION> 23,113
<UNDERWRITING-OTHER> 38,150
<INCOME-PRETAX> 1,803
<INCOME-TAX> (1,702)
<INCOME-CONTINUING> 3,505
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,505
<EPS-BASIC> .35
<EPS-DILUTED> .35
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
