<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 March 31, 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 May 4, 2000, 10,056,499 shares of common stock were outstanding.
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
<S> <C>
Part 1. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2000 (unaudited) and
December 31, 1999 2
Unaudited Consolidated Statements of Operations for the three month periods ended
March 31, 2000 and 1999 3
Unaudited Consolidated Statements of Cash Flows for the three month periods ended
March 31, 2000 and 1999 4
Notes to Unaudited Consolidated Financial Statements 5
Report of Independent Public Accountants 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
Part II. Other Information 13
</TABLE>
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------------------------------------
ASSETS March 31, December 31,
2000 1999
Unaudited Audited
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments
Fixed maturities
Held-to-maturity, at amortized cost (market
value $310,454 in 2000 and $314,168 in 1999) $ 306,267 $ 311,152
Available-for-sale, at market (amortized cost $840,247
in 2000 and $800,467 in 1999) 809,243 768,307
Equity securities (cost $38,412 in 2000 and $38,755 in 1999) 108,486 109,148
Policy loans 8,496 8,645
Other long-term investments, at market (cost $12,844 in 2000
and $12,841 in 1999) 12,897 13,328
Short-term investments 17,704 20,131
- --------------------------------------------------------------------------------------------------------------
$1,263,093 $1,230,711
Cash and Cash Equivalents 10,893 9,749
Accrued Investment Income 19,275 19,857
Accounts Receivable 54,797 51,304
Deferred Policy Acquisition Costs 91,843 90,074
Property and Equipment 16,566 16,863
Reinsurance Receivables 36,907 29,715
Prepaid Reinsurance Premiums 2,426 3,019
Intangibles 7,738 8,044
Income Taxes Receivable 435 1,169
Other Assets 8,113 7,211
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,512,086 $1,467,716
==============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future policy benefits and losses, claims and settlement expenses
Property and casualty insurance $ 342,941 $ 338,243
Life insurance 732,781 701,350
Unearned premiums 152,547 148,472
Accrued expenses and other liabilities 23,959 22,043
Employee benefit obligations 12,906 12,385
Deferred income taxes 7,113 7,430
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $1,272,247 $1,229,923
- --------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock $ 33,527 $ 33,534
Additional paid-in capital 7,222 7,252
Retained earnings 165,625 163,953
Accumulated other comprehensive income, net of tax 33,492 33,054
Treasury stock (27) -
- --------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 239,839 $ 237,793
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,512,086 $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 OPERATIONS
<TABLE>
<CAPTION>
(In thousands, except per share data and number of shares)
- -------------------------------------------------------------------------------------------------------------------------------
Three months ended March 31,
2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues
Net premiums earned $ 78,808 $ 60,150
Investment income, net 20,783 17,436
Realized investment gains and other income 108 1,038
Commission and policy fee income 533 433
$ 100,232 $ 79,057
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Benefits, Losses and Expenses
Losses and settlement expenses $ 56,018 $ 45,261
Increase in liability for future policy benefits 1,955 1,108
Amortization of deferred policy acquisition costs 14,783 10,916
Other underwriting expenses 14,421 10,942
Interest on policyholders' accounts 9,503 8,080
$ 96,680 $ 76,307
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 3,552 $ 2,750
Federal income taxes (benefit) 170 (214)
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,382 $ 2,964
===============================================================================================================================
Earnings available to common shareholders $ 3,382 $ 2,964
===============================================================================================================================
Weighted average common shares outstanding 10,060,061 10,091,721
===============================================================================================================================
Basic and diluted earnings per common share $0.34 $0.29
===============================================================================================================================
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 CASH FLOWS
<TABLE>
<CAPTION>
(In thousands)
- -------------------------------------------------------------------------------------------------------------------------------
Three months ended March 31,
2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 3,382 $ 2,964
- -------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by
Operating activities
Net bond discount accretion $ (3) $ (74)
Depreciation and amortization 713 814
Realized investment gains and other income (108) (1,038)
Changes in:
Accrued investment income 582 94
Accounts receivable (3,493) (2,747)
Deferred policy acquisition costs (1,769) (1,174)
Reinsurance receivables (7,192) (3,635)
Prepaid reinsurance premiums 593 390
Income taxes receivable/payable 734 248
Other assets (902) 65
Future policy benefits and losses, claims and
settlement expenses 6,467 13,008
Unearned premiums 4,075 2,090
Accrued expenses and other liabilities 1,916 (4,495)
Employee benefit obligations 521 569
Deferred income taxes (438) (462)
Other, net (61) (195)
- -------------------------------------------------------------------------------------------------------------------------------
Total adjustments $ 1,635 $ 3,458
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 5,017 $ 6,422
- -------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Proceeds from sale of available-for-sale investments $ 6,220 $ 10,240
Proceeds from call and maturity of held-to-maturity investments 7,309 10,186
Proceeds from call and maturity of available-for-sale investments 21,655 11,557
Proceeds from sale of other investments 11,390 30,143
Purchase of investments held-to-maturity (2,333) -
Purchase of investments available-for-sale (67,087) (60,059)
Purchase of other investments (8,803) (16,820)
Proceeds from sale of property and equipment 53 -
Purchase of property and equipment (164) (323)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities $(31,760) $(15,076)
- -------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Policyholders' account balances
Deposits to investment and universal-life-type contracts $ 53,645 $ 35,390
Withdrawals from investment and universal-life-type contracts (23,983) (14,635)
Purchase and retirement of common stock (38) -
Payment of cash dividends (1,710) (3,432)
Purchase of common stock (27) (237)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 27,887 $ 17,086
- -------------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents $ 1,144 $ 8,432
Cash and Cash Equivalents at Beginning of Year 9,749 -
- -------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 10,893 $ 8,432
===============================================================================================================================
</TABLE>
The Notes to Unaudited Consolidated Financial Statements are an integral part of
these statements.
4
<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
March 31, 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. There were no income taxes paid for the three month periods
ended March 31, 2000 and 1999. There were no significant payments of interest
through March 31, 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
March 31, 2000 is as follows.
5
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- --------------------------------------------------------------------------------------------------------------------------
March 31, 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 $ 15,084 $ - $ 505 $ 14,579
Mortgage-backed securities 9,009 510 3 9,516
All others 1,813 209 1 2,021
States, municipalities and political 174,849 5,080 894 179,035
subdivisions
Foreign 3,032 - 42 2,990
Public utilities 19,466 37 206 19,297
Corporate bonds
Collateralized mortgage obligations 14,690 178 155 14,713
All other corporate bonds 68,324 659 680 68,303
- ---------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity $306,267 $ 6,673 $ 2,486 $310,454
===========================================================================================================================
Available-for-sale
Fixed Maturities
Bonds
United States Government,
government agencies and authorities
Collateralized mortgage obligations $ 30,701 $ 16 $ 759 $ 29,958
Mortgage-backed securities 10,725 1 247 10,479
All others 32,561 2 663 31,900
States, municipalities & political subdivisions 88,208 683 3,389 85,502
Foreign 28,807 18 1,966 26,859
Public utilities 120,732 602 3,815 117,519
Corporate bonds
Collateralized mortgage obligations 63,909 1,641 1,366 64,184
All other corporate bonds 464,604 1,200 22,962 442,842
- ---------------------------------------------------------------------------------------------------------------------------
Total available-for-sale fixed maturities $840,247 $ 4,163 $ 35,167 $809,243
- ---------------------------------------------------------------------------------------------------------------------------
Equity securities
Common stocks
Public utilities $ 8,639 $ 7,443 $ 1,955 $ 14,127
Banks, trust and insurance companies 12,486 37,008 567 48,927
All other common stocks 16,353 29,149 840 44,662
Nonredeemable preferred stocks 934 - 164 770
- ---------------------------------------------------------------------------------------------------------------------------
Total equity securities $ 38,412 $ 73,600 $ 3,526 $108,486
- ---------------------------------------------------------------------------------------------------------------------------
Total available-for-sale $878,659 $ 77,763 $38,693 $917,729
===========================================================================================================================
Other long-term investments $ 12,844 $ 563 $ 510 $ 12,897
===========================================================================================================================
</TABLE>
The amortized cost and fair value of held-to-maturity and available-for-sale
fixed maturities at March 31, 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.
6
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- -----------------------------------------------------------------------------------------------------------------
March 31, 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 $ 13,075 $ 13,194 $ 13,483 $ 13,492
Due after one year through five years 56,353 56,848 240,901 234,922
Due after five years through ten years 77,177 78,644 299,213 283,510
Due after ten years 120,879 122,960 181,315 172,698
Mortgage-backed securities 9,009 9,516 10,725 10,479
Collateralized mortgage obligations 29,774 29,292 94,610 94,142
- -----------------------------------------------------------------------------------------------------------------
$306,267 $310,454 $840,247 $809,243
=================================================================================================================
</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.
Effective January 1, 2000, the Company adopted 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 a material effect 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
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
7
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 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>
March 31, 2000
- -----------------------------------------------------------------------------------------------------------------------------
Revenues $ 79,308 $ 20,991 $ 100,299
- -----------------------------------------------------------------------------------------------------------------------------
Intersegment eliminations (34) (33) (67)
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 79,274 $ 20,958 $ 100,232
=============================================================================================================================
Net income $ 1,404 $ 1,978 $ 3,382
=============================================================================================================================
Assets $645,830 $866,256 $1,512,086
=============================================================================================================================
March 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------
Revenues $ 60,162 $ 18,954 $ 79,116
- -----------------------------------------------------------------------------------------------------------------------------
Intersegment eliminations (34) (25) (59)
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 60,128 $ 18,929 $ 79,057
=============================================================================================================================
Net income $ 141 $ 2,823 $ 2,964
=============================================================================================================================
Assets $543,351 $734,076 $1,277,427
=============================================================================================================================
</TABLE>
Depreciation expense and property and equipment acquisitions are reflected in
the property and casualty insurance segment.
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 March 31, 2000 and December 31, 1999, there were no 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
Comprehensive income was $3,820,000 and $412,000 for the three months ended
March 31, 2000 and March 31, 1999, respectively.
8
<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 March 31, 2000,
and the related consolidated statements of operations for the three-month
periods ended March 31, 2000 and 1999, and the consolidated statements of cash
flows for the three-month periods ended March 31, 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, stockholder's 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
May 4, 2000
9
<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
Property and casualty insurance segment
The property and casualty segment recorded net income of $1,404,000 for the
first quarter of 2000, compared to $141,000 for the first quarter of 1999. An
increase in premiums and an improvement in underwriting results contributed to
the favorable results. Property and casualty premiums earned increased by
$18,349,000, or 34 percent over the first quarter of 1999, with a portion of the
growth attributable to the American Indemnity purchase that occurred in August,
1999. The statutory 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) for the quarter improved to 107
percent compared to 113 percent for the first quarter of 1999. Without the
effect of the catastrophes, the March 2000 and March 1999 statutory combined
ratios would have been 95 percent, and 107 percent, respectively.
The largest catastrophe loss in the first quarter of 2000 was a hailstorm in
the New Orleans area occurring January 22 - 24. This storm caused approximately
$5,000,000 in net insured losses (before tax). The after-tax net incurred
losses and expenses for all catastrophes was $5,439,000, or $.54 per share for
the first quarter of 2000, compared to $2,133,000, or $.21 per share for the
first quarter of 1999.
Life insurance segment
The life insurance segment reported net income of $1,978,000 for the first
quarter of 2000, compared to $2,823,000 for the first quarter of 1999. Total
gross income for the life segment increased by $2,037,000, or 11 percent, and
total expenses increased by $3,344,000, or 23 percent. Moderate premium growth
on a GAAP basis, coupled with increased interest credited to policyholders has
resulted in lower earnings in the first quarter of 2000, compared with the first
quarter of 1999.
Investment results
The Company reported net investment income of $20,783,000 for the first
quarter of 2000, compared to $17,436,000 for the first quarter of 1999. 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. Realized
investment gains decreased between the first quarter of 2000 and 1999 by
$930,000. During the first quarter of 1999, the Company sold several bond
positions that had significantly increased in price.
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, high quality securities. Fixed income securities that
the Company
10
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
has the ability and intent to hold to maturity are classified as held-to-
maturity. The remaining fixed income securities and all 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 a separate component of stockholders' equity.
Effective January 1, 1999, the Company reclassified a portion of its held-to-
maturity investment portfolio to available-for-sale in conjunction with the
adoption of Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Generally,
reclassifications are allowed only in rare circumstances. However, given the new
restrictions that SFAS No. 133 has on hedging interest rate risk for held-to-
maturity securities, all companies adopting SFAS No. 133 will be allowed to
reassess their held-to-maturity portfolios 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, 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.
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 11 percent of the fixed-income portfolio at March 31, 2000, compared to 12
percent as of December 31, 1999.
Other assets
Deferred acquisition costs 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 $1,115,000. Deferred acquisition costs of the property and
casualty segment increased in 2000 by $654,000. Accounts receivable consist of
amounts due from property and casualty insurance agents and brokers for premiums
written, less commissions paid. These receivables increased by 7 percent, or
$3,493,000, over December 31, 1999, due to the increase in property and casualty
premiums written. 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 $31,431,000,
or 4 percent, between March 31, 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. As these product lines
have grown, the future policy benefits have grown proportionately. Claims and
settlement expenses, which relate to the property and casualty segment also
increased through March 31, 2000. Direct and assumed reserves established for
property and casualty losses and expenses have increased $4,698,000, or 1
percent. The Company has, at times, written covered call options to generate
additional portfolio income. At March 31, 2000 and December 31, 1999, there
were no open covered call options.
11
<PAGE>
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Stockholders' equity
The Company's stockholders' equity increased by $2,046,000, or one percent.
Increases to equity included net income of $3,382,000 and net unrealized
appreciation of $438,000. Decreases to equity included $1,710,000 of declared
dividends, $37,000 due to the retirement of 2,085 shares of common stock, and
$27,000 due to the repurchase of 1,500 shares of the Company's common stock,
currently held in treasury.
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 $5,017,000 through the first quarter
of 2000 compared to $6,422,000 through the first 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 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 March 31, 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.
Subsequent events
In May, 2000 the Company notified its reinsurance brokers that effective with
the July 1, 2000 contract renewal, the Company will no longer be a market for
assumed reinsurance. The Company intends to provide an orderly run-off of the
inforce business.
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 10K.
12
<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)
May 4, 2000
- -------------------------------------------------------------------------------
(Date)
- --------------------------------------------------------------------------------
John A. Rife
President
- --------------------------------------------------------------------------------
K.G. Baker
Vice President, Chief Financial Officer and Principal Accounting Officer
13
<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
March 31, Outstanding Income Common Share
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2000 10,060,061 $3,382 $0.34
1999 10,091,721 2,964 0.29
- ------------------------------------------------------------------------------------------
</TABLE>
Computation of weighted average number of common
and common equivalent shares:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Three Month Periods Ended March 31, 2000 1999
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Common shares outstanding beginning of the period 10,060,084 10,091,721
Weighted average of the common
Shares purchased and retired or reissued (23) -
- ------------------------------------------------------------------------------------------
Weighted average number of common shares 10,060,061 10,091,721
==========================================================================================
</TABLE>
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 809,243
<DEBT-CARRYING-VALUE> 306,267
<DEBT-MARKET-VALUE> 310,454
<EQUITIES> 108,486
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,263,093
<CASH> 10,893
<RECOVER-REINSURE> 36,907
<DEFERRED-ACQUISITION> 91,843
<TOTAL-ASSETS> 1,512,086
<POLICY-LOSSES> 1,075,722
<UNEARNED-PREMIUMS> 152,547
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 33,527
<OTHER-SE> 206,366
<TOTAL-LIABILITY-AND-EQUITY> 1,512,086
78,808
<INVESTMENT-INCOME> 20,783
<INVESTMENT-GAINS> 108
<OTHER-INCOME> 533
<BENEFITS> 57,973
<UNDERWRITING-AMORTIZATION> 14,783
<UNDERWRITING-OTHER> 23,924
<INCOME-PRETAX> 3,552
<INCOME-TAX> 170
<INCOME-CONTINUING> 3,382
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,382
<EPS-BASIC> .34
<EPS-DILUTED> .34
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
