<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, 2000
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 November 3, 2000, 10,035,819 shares of common stock were outstanding.
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
INDEX
Part 1. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000 (unaudited)
and December 31, 1999 2
Unaudited Consolidated Statements of Income for the three month
periods ended September 30, 2000 and 1999 3
Unaudited Consolidated Statements of Income for the nine month
periods ended September 30, 2000 and 1999 4
Unaudited Consolidated Statements of Cash Flows for the nine month
period sended September 30, 2000 and 1999 5
Notes to Unaudited Consolidated Financial Statements 6
Report of Independent Public Accountants 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Part II. Other Information 17
<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,
2000 1999
Unaudited Audited
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments
Fixed maturities
Held-to-maturity, at amortized cost (market
value $295,773 in 2000 and $314,168 in 1999) $ 291,026 $ 311,152
Available-for-sale, at market (amortized cost 908,763
in 2000 and $800,467 in 1999) 877,439 $ 768,307
Equity securities (cost $40,438 in 2000 and $38,755 in 1999) 116,594 109,148
Policy loans 8,404 8,645
Other long-term investments, at market (cost $12,491 in 2000
and $12,841 in 1999) 11,312 13,328
Short-term investments 19,072 20,131
-------------------------------------------------------------------------------------------------------
$1,323,847 $1,230,711
Cash and Cash Equivalents 18,948 9,749
Accrued Investment Income 20,839 19,857
Accounts Receivable 71,857 51,304
Deferred Policy Acquisition Costs 96,960 90,074
Property and Equipment 15,943 16,863
Reinsurance Receivables 42,520 29,715
Prepaid Reinsurance Premiums 2,598 3,019
Intangibles 6,733 8,044
Income Taxes Receivable - 1,169
Other Assets 6,174 7,211
-------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,606,419 $1,467,716
=======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future policy benefits and losses, claims and settlement expenses
Property and casualty insurance $ 355,368 $ 338,243
Life insurance 788,287 701,350
Unearned premiums 168,814 148,472
Accrued expenses and other liabilities 25,128 22,043
Employee benefit obligations 12,668 12,385
Income taxes payable 680 -
Deferred income taxes 8,066 7,430
-------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $1,359,011 $1,229,923
-------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock $ 33,453 $ 33,534
Additional paid-in capital 6,912 7,252
Retained earnings 170,050 163,953
Accumulated other comprehensive income, net of tax 36,993 33,054
-------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 247,408 $ 237,793
-------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,606,419 $1,467,716
=======================================================================================================
</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 INCOME
(In thousands, except per share data and number of shares)
<TABLE>
<CAPTION>
===================================================================
Three months ended
September 30,
2000 1999
-------------------------------------------------------------------
<S> <C> <C>
Revenues
Net premiums earned $ 86,071 $ 70,501
Investment income, net 22,089 19,272
Realized investment gains (losses)
and other income (1,057) 593
Commission and policy fee income 568 502
-------------------------------------------------------------------
107,671 90,868
-------------------------------------------------------------------
Benefits, Losses and Expenses
Losses and settlement expenses 58,192 47,900
Increase in liability for future
policy benefits 520 1,527
Amortization of deferred policy
acquisition costs 14,931 14,334
Other underwriting expenses 13,303 9,367
Interest on policyholders' accounts 11,619 9,655
-------------------------------------------------------------------
98,565 82,783
-------------------------------------------------------------------
Income before income taxes 9,106 8,085
Federal income tax 2,012 1,687
-------------------------------------------------------------------
Net income $ 7,094 $ 6,398
===================================================================
Earnings available to common
shareholders $ 7,094 $ 6,398
===================================================================
Weighted average common shares
outstanding 10,036,853 10,078,294
===================================================================
Basic and diluted earnings per common
share $ 0.71 $ 0.63
===================================================================
Cash dividends declared per common
share $ 0.18 $ 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 INCOME
(In thousands, except per share data and number of shares)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
Nine months ended
September 30,
2000 1999
---------------------------------------------------------------------------------
<S> <C> <C>
Revenues
Net premiums earned $ 244,397 $ 191,299
Investment income, net 64,365 55,047
Realized investment gains (losses) and other income (916) 1,927
Commission and policy fee income 1,668 1,480
---------------------------------------------------------------------------------
309,514 249,753
---------------------------------------------------------------------------------
Benefits, Losses and Expenses
Losses and settlement expenses 173,163 141,120
Increase in liability for future policy benefits 4,737 4,126
Amortization of deferred policy acquisition costs 45,101 37,447
Other underwriting expenses 42,337 32,376
Interest on policyholders' accounts 31,684 24,796
---------------------------------------------------------------------------------
297,022 239,865
---------------------------------------------------------------------------------
Income before income taxes 12,492 9,888
Federal income tax (benefit) 1,067 (15)
---------------------------------------------------------------------------------
Net Income $ 11,425 $ 9,903
=================================================================================
Earnings available to common shareholders $ 11,425 $ 9,903
=================================================================================
Weighted average common shares outstanding 10,051,086 10,083,729
=================================================================================
Basic and diluted earnings per common share $ 1.14 $ 0.98
=================================================================================
Cash dividends declared per common share $ 0.53 $ 0.51
=================================================================================
</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>
=======================================================================
Nine months ended
September 30,
2000 1999
-----------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 11,425 $ 9,903
-----------------------------------------------------------------------
Adjustments to reconcile net income to
net cash provided by operating activities
Net bond discount accretion (269) (197)
Depreciation and amortization 3,890 1,805
Realized investment losses (gains) 1,173 (1,927)
Changes in:
Accrued investment income (982) (791)
Accounts receivable (20,553) (7,130)
Deferred policy acquisition costs (6,886) (16,153)
Reinsurance receivables (12,805) (847)
Prepaid reinsurance premiums 421 3,048
Income taxes receivable 1,169 --
Other assets 1,037 (2,856)
Future policy benefits and losses,
claims and settlement expenses 22,042 18,390
Unearned premiums 20,342 10,277
Accrued expenses and other
liabilities 3,085 (2,893)
Employee benefit obligations 283 3,121
Income taxes payable 680 --
Deferred income taxes (1,277) 281
Other, net 444 10,343
-----------------------------------------------------------------------
Total adjustments $ 11,793 $ 14,471
-----------------------------------------------------------------------
Net cash provided by operating activities $ 23,218 $ 24,374
-----------------------------------------------------------------------
Cash Flows From Investing Activities
Proceeds from sale of available-for-
sale investments $ 49,332 $ 25,327
Proceeds from call and maturity of held-
to-maturity investments 23,663 25,429
Proceeds from call and maturity of
available-for-sale investments 48,390 58,023
Proceeds from sale of other investments 69,995 93,419
Purchase of held-to-maturity
investments (3,332) (1,662)
Purchase of available-for-sale
investments (208,509) (208,192)
Purchase of other investments (68,170) (75,810)
Proceeds from sale of property and
equipment 165 937
Purchase of property and equipment (1,824) (795)
Acquisition of property & casualty
company, net of cash acquired -- (22,249)
-----------------------------------------------------------------------
Net cash used in investing activities $ (90,290) $(105,573)
-----------------------------------------------------------------------
Cash Flows From Financing Activities
Policyholders' account balances
Deposits to investment and universal-
life-type contracts $ 158,703 $ 139,264
Withdrawals from investment and
universal-life-type contracts (76,683) (49,614)
Purchase and retirement of common stock (421) (481)
Payment of cash dividends (5,328) (6,854)
-----------------------------------------------------------------------
Net cash provided by financing activities $ 76,271 $ 82,315
-----------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents $ 9,199 $ 1,116
Cash and Cash Equivalents at Beginning of Year 9,749 --
-----------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 18,948 $ 1,116
=======================================================================
</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, 1999. 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, 2000.
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. Net income taxes received for the nine-month periods ended
September 30, 2000 and 1999 were $215,000 and $295,000, respectively. Through
September 30, 2000, tax and interest payments received in connection with the
settlement of a Federal income tax Revenue Agent Review were $1,160,000 and
$889,000, respectively. Interest payments received in connection with the
Revenue Agent Review are $257,000 in excess of the related amount accrued at
December 31, 1999. There were no significant payments of interest through
September 30, 2000 and 1999, other than interest credited to policyholders'
accounts.
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
September 30, 2000 is as follows.
6
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
-----------------------------------------------------------------------------------------------------------------------
September 30, 2000 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 $ 15,094 $ 13 $ 452 $ 14,655
Mortgage-backed securities 8,152 459 2 8,609
All others 1,830 234 - 2,064
States, municipalities and political subdivisions 169,778 5,380 864 174,294
Foreign 3,026 8 8 3,026
Public utilities 19,456 114 183 19,387
Corporate bonds
Collateralized mortgage obligations 13,340 161 213 13,288
All other corporate bonds 60,350 679 579 60,450
-----------------------------------------------------------------------------------------------------------------------
Total held-to-maturity $291,026 $ 7,048 $ 2,301 $295,773
=======================================================================================================================
Available-for-sale
Fixed Maturities
Bonds
United States Government,
Government agencies and authorities
Collateralized mortgage obligations $ 29,872 $ 50 $ 564 $ 29,358
Mortgage-backed securities 5,743 36 162 5,617
All others 39,381 235 451 39,165
States, municipalities & political subdivisions 78,297 323 2,535 76,085
Foreign 35,571 92 2,220 33,443
Public utilities 145,837 1,531 3,270 144,098
Corporate bonds
Collateralized mortgage obligations 50,092 969 575 50,486
All other corporate bonds 523,970 3,070 27,853 499,187
-----------------------------------------------------------------------------------------------------------------------
Total available-for-sale fixed maturities $908,763 $ 6,306 $37,630 $877,439
-----------------------------------------------------------------------------------------------------------------------
Equity securities
Common stocks
Public utilities $ 8,867 $10,533 $ 144 $ 19,256
Banks, trust and insurance companies 11,101 38,677 298 49,480
All other common stocks 19,536 29,697 2,159 47,074
Nonredeemable preferred stocks 934 - 150 784
-----------------------------------------------------------------------------------------------------------------------
Total equity securities $ 40,438 $78,907 $ 2,751 $116,594
-----------------------------------------------------------------------------------------------------------------------
Total available-for-sale $949,201 $85,213 $40,381 $994,033
=======================================================================================================================
Other long-term investments $ 2,491 $ - $ 1,179 $ 11,312
=======================================================================================================================
</TABLE>
The amortized cost and fair value of held-to-maturity and available-for-
sale fixed maturities at September 30, 2000 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.
7
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
====================================================================
(Dollars in Thousands)
--------------------------------------------------------------------
September 30, 2000 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 $ 13,867 $ 13,958 $ 16,171 $ 16,224
Due after one year through
five years 55,434 56,017 309,826 303,278
Due after five years through
ten years 69,748 71,608 324,598 310,001
Due after ten years 115,391 117,639 172,462 162,474
Mortgage-backed securities 8,152 8,609 5,743 5,617
Collateralized mortgage
obligations 28,434 27,942 79,963 79,845
--------------------------------------------------------------------
$291,026 $295,773 $908,763 $877,439
====================================================================
</TABLE>
Note 3. New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." In June 1999, SFAS
No. 133 was amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
FASB No. 133 - an amendment of FASB Statement No. 133". SFAS No. 133 is
now effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. A company may also implement SFAS No. 133 as of the
beginning of any fiscal quarter after issuance. 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. Effective January 1, 1999, the Company early adopted SFAS No.
133. 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 impact on the
Company's Consolidated Financial Statements due to the reclassification
from held-to-maturity to available-for-sale, effective 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. There was no
other material effect on the Company's Consolidated Financial Statements.
Refer to Note 5 for further discussion.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an amendment of
FASB Statement No. 133," which is effective for all fiscal quarters
beginning after June 15, 2000 due to the Company's early adoption of
SFAS No. 133. This statement amends the accounting and reporting
standards of SFAS No. 133 for certain derivative instruments and certain
hedging activities. Because the Company has limited involvement with
derivative financial instruments, and does not engage in the derivative
market for hedging purposes, the impact of adopting SFAS No. 138 did not
have a material effect on the Company's Consolidated Financial
Statements.
Effective January 1, 2000, the Company adopted Statement of Position
("SOP") 98-7, "Deposit Accounting: Accounting for Insurance and
Reinsurance Contracts That Do Not Transfer Insurance Risk". The SOP
provides guidance on accounting for insurance and reinsurance contracts
that do not transfer insurance risk. All of the Company's reinsurance
agreements are risk-transferring arrangements, accounted for according to
SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration
and Long-Duration Contracts." The impact of adopting SOP 98-7 did not
have any effect on the Company's Consolidated Financial Statements.
8
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Effective for the fiscal year ending December 31, 2000, the Company is
required to adopt Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition". Management assessed the impact that adoption of SAB No.
101 will have on the Company's Consolidated Financial Statements as of
September 30, 2000 and has concluded that the adoption of SAB No. 101
will not have any effect on the Company's Consolidated Financial
Statements.
Effective July 1, 2000, the Company adopted FASB Interpretation ("FIN")
No. 44, "Accounting for Certain Transactions Including Stock Compensation
(an Interpretation of Accounting Principles Board ("APB") Opinion No.
25)". FIN No. 44 clarifies the application of APB Opinion No. 25 for
only certain issues, such as (a) the definition of employee for purposes
of applying APB Opinion No. 25, (b) the criteria for determining whether
a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed
stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. The adoption of FIN No.
44 had no impact on the Company's 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 five 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 1999 Form 10-K. 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)
--------------------------------------------------------------------
<S> <C> <C> <C>
Property and
Casualty Life
Insurance Insurance Total
---------------------------------------------------------------------
September 30, 2000
---------------------------------------------------------------------
Revenues $248,461 $ 61,314 $ 309,775
Intersegment eliminations (103) (158) (261)
Total revenues $248,358 $ 61,156 $ 309,514
Net income $ 8,027 $ 3,398 $ 11,425
Assets $690,815 $915,604 $1,606,419
September 30, 1999
---------------------------------------------------------------------
Revenues $191,708 $ 58,225 $ 249,933
Intersegment eliminations (103) (77) (180)
Total revenues $191,605 $ 58,148 $ 249,753
Net income $ 3,152 $ 6,751 $ 9,903
Assets $667,145 $801,699 $1,468,844
=====================================================================
</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 writes 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 September 30, 2000 the Company had $40,000 of open covered call
options. 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, effective 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. Comprehensive Income (Loss)
Comprehensive income (loss) was $15,367,000 and $(4,632,000) for the nine
months ended September 30, 2000 and 1999, respectively. Comprehensive income
(loss) was $15,575,000 and $(2,938,000) for the three months ended September 30,
2000 and 1999, respectively.
Note 7. Leases
Beginning July 31, 2000, the Company began leasing mainframe equipment and
software, which is located solely at its Cedar Rapids location. This is a three-
year noncancellable operating lease with monthly rental expense of approximately
$100,000.
Note 8. Acquisition
In August 1999, the Company acquired American Indemnity Financial Corporation
as a wholly owned subsidiary. American Indemnity Financial Corporation is a
Galveston, Texas, based holding company that is made up of the following
regional property and casualty insurance companies: American Indemnity Company,
American Fire and Indemnity Company, Texas General Indemnity Company, and
American Indemnity Lloyds. The nine-month and three-month amounts for the period
ended September 30, 2000 include the results of American Indemnity Financial
Corporation. The nine-month and three-month amounts for the period ended
September 30, 1999 include two months of results of American Indemnity Financial
Corporation. The following table presents the unaudited pro forma results of
operations for the three-month and nine-month periods ended September 30, 1999,
had the acquisition occurred on January 1, 1999.
10
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
------------------------------------------------------------
(Dollars in Thousands Except Per Share Data)
------------------------------------------------------------
Three months ended Nine months ended
September 30, 1999 September 30, 1999
Unaudited Unaudited
------------------------------------------------------------
<S> <C> <C>
Revenues $95,916 $287,111
Net income 4,930 6,267
Earnings per share 0.49 0.62
------------------------------------------------------------
</TABLE>
The pro forma financial information is presented for informational
purposes only and is not necessarily indicative of the operating results
that would have occurred had the acquisitions been consummated as of the
above date, nor are such operating results necessarily indicative of
future operating results.
11
<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,
2000, and the related consolidated statements of income for the three-month and
nine-month periods ended September 30, 2000 and 1999, and the consolidated
statements of cash flows for the nine-month periods ended September 30, 2000 and
1999. 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 auditing standards generally accepted in the United States, 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 accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of United Fire &
Casualty Company and Subsidiaries as of December 31, 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended (not presented separately herein) and, in our report dated
February 17, 2000, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1999, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
Arthur Andersen LLP
Chicago, Illinois
November 3, 2000
12
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This information contained in the following 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 nine months ended September 30, 2000, net income, including realized
investment losses and other income, was $11,425,000 or $1.14 per share, compared
to $9,903,000 or $.98 per share for the first nine months of 1999. The largest
catastrophe in 2000 was a hailstorm in the New Orleans area occurring January
22 - 24. Through September 30, this storm caused approximately $3,737,000 in net
incurred losses (after tax) and resulted in a reduction to net income of $.37
per share.
For the three months ended September 30, 2000, net income, including realized
investment losses and other income, was $7,094,000 or $.71 per share compared to
$6,398,000 or $.63 per share for the same period in 1999. The nine-month and
three-month 2000 amounts include the results of American Indemnity Financial
Corporation, which the Company purchased in August 1999. The nine-month and
three-month 1999 amounts include two months of results of American Indemnity
Financial Corporation.
Property and casualty insurance segment
The Company has two reportable business segments in its operations; property
and casualty insurance and life insurance. For the nine months ended September
30, 2000, the property and casualty segment recorded net income of $8,027,000,
compared to net income of $3,152,000 through September 30, 1999. Contributing to
the improved results was an increase in premiums earned of $53,341,000 or 31
percent. A portion of this premium growth has been the result of the purchase of
the American Indemnity companies, which occurred during August 1999. Losses and
loss adjustment expenses incurred increased $31,781,000 or 24 percent. Losses
and expenses relating to catastrophes totaled $12,854,000 or $1.28 per share
(after tax) for the first nine months of 2000, compared to $8,267,000, or $.82
per share (after tax) for the first nine months of 1999. The combined ratio (net
losses and net loss adjustment expenses incurred divided by net premiums earned,
plus other underwriting expenses incurred divided by net premiums written)
through September, 2000 improved to 104 percent compared to 110 percent through
September, 1999. The combined ratio, calculated without the effect of the
catastrophes, was 95 percent and 102 percent for the first nine months of 2000,
and 1999, respectively.
For the three months ended September 30, 2000 and 1999, the property and
casualty segment recorded net income of $7,138,000 and $4,085,000, respectively.
Premiums earned increased by $16,277,000 or 26 percent. The after-tax net
incurred losses and expenses for catastrophes was $1,545,000, or $.15 per share
for the third quarter of 2000, compared to $2,083,000, or $.21 per share for the
third quarter of 1999. The combined ratio for the quarter improved to 98 percent
compared to 102 percent for the third quarter of 1999. The combined ratio,
calculated without the effect of the catastrophes, was 95 percent, and 97
percent, for the three months ended September 30, 2000 and 1999, respectively.
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UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
During the second quarter of 2000, the Company made the decision to not renew
many of its assumed reinsurance property and casualty contracts, effective after
June 30, 2000. A small portion of this business expired on July 1, 2000, and the
bulk of it will not be renewed on January 1, 2001. Agreements will continue with
a very limited number of brokers. The Company intends to provide an orderly run-
off of those contracts not renewed.
Life insurance segment
The life insurance segment reported net income of $3,398,000 through the
first nine months of 2000, compared to $6,751,000 for the same period of 1999.
Premiums earned were flat between the two years. Though the life segment is
writing an increasing amount of annuity business, reported premium revenue does
not reflect annuity deposits. Revenues for annuities consist of policy surrender
charges and investment income earned. Expenses incurred by the life segment
increased by $8,296,000, or 17 percent when comparing the first nine months of
2000 and 1999. Of that increase, $6,888,000 is attributable to expenses related
to interest credited to policyholder account balances. In addition, death claims
were higher through the third quarter of 2000, when compared to the same period
in 1999. Death claims, below expectations in 1999, are returning to normal
levels. During the third quarter of 2000, the Company recorded a permanent
write-down on two fixed maturity securities, which contributed to the life
segment's realized investment losses of $2,301,000 (net of tax). This write-down
was largely responsible for the net loss of $44,000 recorded by the life segment
for the three months ended September 30, 2000. For the third quarter of 1999,
the net income was $2,313,000.
Investment results
Investment results are included in the net income figures reported above in
the property and casualty and life insurance segments. Through September 30,
2000, the Company reported net investment income of $64,365,000 ,compared to
$55,047,000 for the first nine months of 1999. For the third quarters of 2000
and 1999, net investment income was $22,089,000 and $19,272,000, respectively. A
majority of the Company's investment income originates from interest on fixed
income securities. The remaining investment revenue is derived from dividends on
equity securities, interest on other long-term investments, interest on policy
loans and rent earned from tenants in the Company's home office. The Company
recorded net realized investment losses of $916,000 through September 30, 2000,
compared to net realized investment gains of $1,927,000 through September 30,
1999. Realized gains recorded on several bonds in the second quarter were more
than offset by a permanent write-down on two fixed maturity securities which
occurred in the third quarter.
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 medium- to high-quality securities. Fixed income securities that
the Company has the ability and intent to hold to maturity are classified as
held-to-maturity. The remaining fixed income securities and all
14
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UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
of the Company's equity securities are classified as available-for-sale. The
Company currently has no securities classified as trading. The held-to-maturity
securities are reported at amortized cost, and available-for-sale securities are
reported at market value. Unrealized appreciation or depreciation of available-
for-sale investments is reflected in accumulated other comprehensive income, net
of tax, within stockholders' equity.
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 9 percent of the fixed-income portfolio at September 30, 2000, compared to
12 percent as of December 31, 1999.
Other assets
Deferred acquisition costs ("DAC") constitute the Company's second largest
asset, after investments, and represent underwriting and acquisition expenses
associated with writing insurance policies. These expenses are capitalized and
are amortized over the life of the policies written to attain a matching of
revenue to expenses. The Company's life segment had an increase in deferred
acquisition costs of $3,387,000 or 5 percent. Deferred acquisition costs of the
property and casualty segment increased in 2000 by $3,499,000 or 17 percent. For
both segments, the nine-month growth in premiums and annuity business, and the
related expenses contributed to the growth in DAC.
Accounts receivable consist of amounts due from property and casualty
insurance agents and brokers for premiums written, less commissions paid. These
receivables increased by 40 percent, or $20,553,000, over December 31, 1999.
Growth in premiums written in the property and casualty segment has resulted in
the increased accounts receivable balance. 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 $86,937,000,
or 12 percent, between September 30, 2000 and December 31, 1999. Future policy
benefits are increased immediately by the full premiums paid by policyholders
for annuity products and most universal life products. Because the annuity
business is continuing to grow, the associated future policy benefits have grown
proportionately. Direct and assumed loss and loss adjustment expense reserves
established for property and casualty claims have increased by $17,125,000, or 5
percent from December 31, 1999.
Covered call options, which the Company occasionally writes, are recorded as
liabilities. The options, when written, are utilized to generate additional
portfolio income. At September 30, 2000, the Company had $40,000 of open covered
call options. At December 31, 1999, there were no open covered call options.
Stockholders' equity
The Company's stockholders' equity increased by $9,615,000, or 4 percent. Net
income of $11,425,000 increased equity, as did net unrealized appreciation of
$3,939,000. Significant decreases to equity included $5,328,000 of declared
dividends and $421,000 due to the repurchase of 24,265 shares of the Company's
common stock.
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
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UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
obligations to pay policy benefits, claims and claim adjusting expenses. Net
cash provided by the Company's operating activities was $23,218,000 through
September 30, 2000 compared to $24,374,000 through the third quarter of 1999.
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. 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
September 30, 2000.
Impact of Year 2000
In 1999, the Company completed its final programming and testing of systems
for Year 2000 compliance. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission-critical
information technology and non-information technology systems. The Company
believes that its systems successfully responded to the Year 2000 date change.
The Company's transition into the Year 2000 has, to date, been considered
uneventful and successful and did not result in any significant events with the
Company or its suppliers. However, the potential for problems resulting from
Year 2000 issues still exists. Accordingly, the Company will continue to monitor
its systems, and will maintain contact with its vendors concerning the status of
their Year 2000 transition.
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
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.
Covered call options are written from time to time on common stocks owned
by the Company. Generally, the calls are written on stocks the Company views as
over-priced relative to their market value. Writing of in-the-money calls at
transaction date has not been done, but the Company is not restricted in any way
from doing so. The practice of writing covered calls is considered a
conservative equity strategy by market analysts.
There have been no material changes in the Company's market risk or market
risk factors from that reported in the Company's 1999 Form 10-K.
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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 3, 2000
----------------------------------------
(Date)
John A. Rife
----------------------------------------
John A. Rife
President, Chief Executive Officer
K.G. Baker
----------------------------------------
K.G. Baker
Vice President, Chief Financial Officer
and Principal Accounting Officer
17
