EXHIBIT 99.3
Unaudited Pro Forma Consolidated Financial Statements
In these Unaudited Pro Forma Consolidated Financial Statements and the Notes hereto, the terms “United Fire,” “we,” “us,” or “our” refer to United Fire & Casualty Company or United Fire & Casualty Company and its consolidated subsidiaries and its affiliate, as the context requires.
On March 28, 2011, we acquired 100 percent of the outstanding common stock of Mercer Insurance Group, Inc. (“Mercer Insurance Group”) for cash consideration of $191.5 million. The acquisition was funded through a combination of cash and short-term debt. After the acquisition, having combined our pre-existing operations with those of Mercer Insurance Group, we now market our products through over 1,200 independent property and casualty agencies. In addition, the acquisition allows us to diversify our exposure to weather and other catastrophe risks across our geographic markets.
This transaction was accounted for under the acquisition method using Mercer Insurance Group historical financial information and applying fair value estimates to the acquired assets, liabilities and commitments as of the acquisition date. The excess of the purchase price over the estimated fair value of the tangible assets acquired and liabilities assumed at the acquisition date has been allocated to goodwill and intangible assets of our property and casualty insurance segment.
The unaudited pro forma consolidated balance sheet as of December 31, 2010 gives effect to the acquisition as if it had occurred on December 31, 2010. The unaudited pro forma consolidated statements of income for the fiscal year ended December 31, 2010, gives effect to the acquisition as if it had occurred on January 1, 2010.
The pro forma adjustments and have been made solely for purposes of developing the pro forma financial information for illustrative purposes necessary to comply with the requirements of applicable disclosure and reporting regulations. The actual results reported in periods following the closing date of the acquisition may differ significantly from the pro forma consolidated financial statements for a number of reasons, including, but not limited to, differences in the ordinary course of the business conducted following the acquisition, differences between the assumptions used to prepare these pro forma adjustments and actual amounts, cost savings from operating efficiencies, potential synergies, and the impact of the incremental costs incurred in integrating Mercer Insurance Group.
As a result, the pro forma financial information does not purport to be indicative of what our financial condition or results of operations would have been had the transaction been completed on the applicable dates of the pro forma consolidated financial statements. The information reported in the pro forma consolidated financial statements is based upon the information reported in our historical financial statements along with the audited financial statements of Mercer Insurance Group and does not purport to project our future financial condition and results of operations after giving effect to the acquisition.
The pro forma adjustments are described in the accompanying Notes to the Unaudited Pro Forma Consolidated Financial Statements presented on the following pages. The pro forma adjustments are based on assumptions relating to the allocation of consideration paid for the tangible and intangible assets acquired and liabilities assumed of Mercer Insurance Group based on provisional estimates of fair value. The provisional estimate of fair value for certain assets and liabilities is subject to adjustment as additional information is obtained within a measurement period of one year from the acquisition date. Any adjustment to the provisional amounts that have been established will be recognized in the period that the adjustment is identified in accordance with the acquisition method.
The pro forma financial information should be read in conjunction with our historical financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 1, 2011, and in our report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 5, 2011, and the audited financial statements of Mercer Insurance Group contained in Exhibit 99.2 to the Current Report on Form 8-K/A to which these Unaudited Pro Forma Consolidated Financial Statements and Notes are attached as Exhibit 99.3.
99.3-1
Unaudited Pro Forma Consolidated Balance Sheet
December 31, 2010
December 31, 2010
| Pro Forma | ||||||||||||||||||
| Historical | Combined | |||||||||||||||||
| United Fire & | United Fire & | |||||||||||||||||
| Casualty | Mercer | Pro Forma | Casualty | |||||||||||||||
| (In Thousands, Except Per Share Data and Number of Shares) | Company | Insurance Group | Adjustments | Company | ||||||||||||||
ASSETS | ||||||||||||||||||
Investments | ||||||||||||||||||
| Fixed maturities | ||||||||||||||||||
| Held-to-maturity, at amortized cost (fair value $6,422 in 2010) | $ | 6,364 | $ | — | $ | — | $ | 6,364 | ||||||||||
| Available-for-sale, at fair value (amortized cost $2,554,726 in 2010) | 2,278,429 | 397,130 | — | 2,675,559 | ||||||||||||||
| Equity securities, at fair value (cost $62,351 in 2010) | 149,706 | 10,691 | — | 160,397 | ||||||||||||||
| Trading securities, at fair value (amortized cost $12,322 in 2010) | 12,886 | — | — | 12,886 | ||||||||||||||
| Mortgage loans | 6,497 | — | — | 6,497 | ||||||||||||||
| Policy loans | 7,875 | — | — | 7,875 | ||||||||||||||
| Other long-term investments | 20,041 | — | — | 20,041 | ||||||||||||||
| Short-term investments | 1,100 | 9,849 | — | 10,949 | ||||||||||||||
| $ | 2,482,898 | $ | 417,670 | $ | — | $ | 2,900,568 | |||||||||||
Cash and cash equivalents | $ | 180,057 | $ | 16,345 | $ | (111,575 | ) | A | $ | 84,827 | ||||||||
Accrued investment income | 28,977 | 4,261 | — | 33,238 | ||||||||||||||
Premiums receivable | 124,459 | 35,172 | — | 159,631 | ||||||||||||||
Deferred policy acquisition costs | 87,524 | 18,192 | 9,786 | B | 115,502 | |||||||||||||
Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $51,950 in 2010) | 21,554 | 20,316 | (5,311 | ) | C | 36,559 | ||||||||||||
Reinsurance receivables and recoverables | 46,731 | 72,905 | (14,109 | ) | D | 105,527 | ||||||||||||
Prepaid reinsurance premiums | 1,586 | 6,331 | — | 7,917 | ||||||||||||||
Goodwill and intangible assets | — | 5,416 | 25,441 | E | 30,857 | |||||||||||||
Income taxes receivable | 17,772 | — | — | 17,772 | ||||||||||||||
Deferred income taxes | — | — | — | — | ||||||||||||||
Other assets | 15,881 | 3,846 | — | 19,727 | ||||||||||||||
TOTAL ASSETS | $ | 3,007,439 | $ | 600,454 | $ | (95,768 | ) | $ | 3,512,125 | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||
Liabilities | ||||||||||||||||||
| Future policy benefits and losses, claims and loss settlement expenses | ||||||||||||||||||
| Property and casualty insurance | $ | 603,090 | $ | 304,641 | $ | 644 | F | $ | 908,375 | |||||||||
| Life insurance | 1,389,331 | — | — | 1,389,331 | ||||||||||||||
| Unearned premiums | 200,341 | 73,793 | — | 274,134 | ||||||||||||||
| Accrued expenses and other liabilities | 78,439 | 29,002 | — | 107,441 | ||||||||||||||
| Deferred income taxes | 19,814 | (3,141 | ) | 1,238 | G | 17,911 | ||||||||||||
| Debt | — | 3,000 | 79,900 | H | 82,900 | |||||||||||||
| Trust preferred securities | — | 15,609 | — | 15,609 | ||||||||||||||
TOTAL LIABILITIES | $ | 2,291,015 | $ | 422,904 | $ | 81,782 | $ | 2,795,701 | ||||||||||
Stockholders’ Equity | ||||||||||||||||||
| Common stock, $3.33 1/3 par value; authorized 75,000,000 shares; 26,195,552 shares issued and outstanding in 2010 | $ | 87,318 | $ | — | $ | — | $ | 87,318 | ||||||||||
| Additional paid-in capital | 136,147 | 73,386 | (73,386 | ) | I | 136,147 | ||||||||||||
| Retained earnings | 415,981 | 98,481 | (98,481 | ) | I | 415,981 | ||||||||||||
| Accumulated other comprehensive income, net of tax | 76,978 | 15,315 | (15,315 | ) | I | 76,978 | ||||||||||||
| Unearned ESOP shares | — | (1,253 | ) | 1,253 | I | — | ||||||||||||
| Treasury stock | — | (8,379 | ) | 8,379 | I | — | ||||||||||||
TOTAL STOCKHOLDERS’ EQUITY | $ | 716,424 | $ | 177,550 | $ | (177,550 | ) | $ | 716,424 | |||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 3,007,439 | $ | 600,454 | $ | (95,768 | ) | $ | 3,512,125 | |||||||||
The Notes to Unaudited Pro Forma Consolidated Financial Statements are an integral part of these statements.
99.3-2
Unaudited Pro Forma Consolidated Statement of Income
December 31, 2010
December 31, 2010
| Pro Forma | ||||||||||||||||||
| Historical | Combined | |||||||||||||||||
| United Fire & | United Fire & | |||||||||||||||||
| (In Thousands, Except Per Share Data and | Casualty | Mercer | Pro Forma | Casualty | ||||||||||||||
| Number of Shares) | Company | Insurance Group | Adjustments | Company | ||||||||||||||
Revenues | ||||||||||||||||||
| Net premiums earned | $ | 469,473 | $ | 135,964 | $ | — | $ | 605,437 | ||||||||||
| Investment income, net of investment expenses | 111,685 | 13,878 | (742 | ) | J | 124,821 | ||||||||||||
| Realized investment gains | ||||||||||||||||||
| Other-than-temporary impairment charges | (459 | ) | (115 | ) | — | (574 | ) | |||||||||||
| All other realized gains | 8,948 | 1,901 | — | 10,849 | ||||||||||||||
| Total realized investment gains | 8,489 | 1,786 | — | 10,275 | ||||||||||||||
| Other income | 1,425 | 1,930 | — | 3,355 | ||||||||||||||
| $ | 591,072 | $ | 153,558 | $ | (742 | ) | $ | 743,888 | ||||||||||
Benefits, Losses and Expenses | ||||||||||||||||||
| Losses and loss settlement expenses | $ | 309,796 | $ | 83,737 | $ | — | $ | 393,533 | ||||||||||
| Future policy benefits | 27,229 | — | — | 27,229 | ||||||||||||||
| Amortization of deferred policy acquisition costs | 113,371 | 37,091 | 9,786 | K | 160,248 | |||||||||||||
| Other underwriting expenses | 39,305 | 11,914 | (699 | ) | L | 50,520 | ||||||||||||
| Interest on policyholders’ accounts | 42,988 | — | — | 42,988 | ||||||||||||||
| $ | 532,689 | $ | 132,742 | $ | 9,087 | $ | 674,518 | |||||||||||
Income before income taxes | $ | 58,383 | $ | 20,816 | $ | (9,829 | ) | $ | 69,370 | |||||||||
| Federal income tax expense | 10,870 | 6,080 | (3,953 | ) | M | 12,997 | ||||||||||||
Net Income | $ | 47,513 | $ | 14,736 | $ | (5,876 | ) | $ | 56,373 | |||||||||
Earnings per common share | ||||||||||||||||||
Basic | $ | 1.81 | $ | 2.14 | ||||||||||||||
Diluted | $ | 1.80 | $ | 2.14 | ||||||||||||||
Weighted average common shares outstanding | ||||||||||||||||||
Basic | 26,318,214 | 26,318,214 | ||||||||||||||||
Diluted | 26,337,678 | 26,337,678 | ||||||||||||||||
| The Notes to Unaudited Pro Forma Consolidated Financial Statements are an integral part of these statements. |
99.3-3
Notes to Unaudited Pro Forma Consolidated Financial Statements
NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Business
We are engaged in the business of writing property and casualty insurance and life insurance and selling annuities through a network of independent agencies. We report our operations in two business segments: property and casualty insurance and life insurance. We are licensed as a property and casualty insurer in 43 states plus the District of Columbia and as a life insurer in 29 states.
Basis of Presentation
We maintain our records in conformity with the accounting practices prescribed or permitted by the insurance departments of the states in which we are domiciled. To the extent that certain of these practices differ from U.S. generally accepted accounting principles (“GAAP”), we have made adjustments to present the accompanying Unaudited Pro Forma Consolidated Financial Statements in conformity with GAAP. Certain financial information that is included in our Annual Report on Form 10-K, including certain financial statement footnote disclosures, are not required by the rules and regulations of the Securities and Exchange Commission (“SEC”) for the reporting of pro forma financial information and have been condensed or omitted.
In the opinion of the management of United Fire, the accompanying Unaudited Pro Forma Consolidated Financial Statements contain all adjustments necessary to present fairly the pro forma financial position and results of operations for the period presented. All significant intercompany transactions have been eliminated in consolidation. The pro forma financial information should be read in conjunction with our historical financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 1, 2011, and in our report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 5, 2011, and the audited financial statements of Mercer Insurance Group contained in Exhibit 99.2 to the Current Report on Form 8-K/A to which these Unaudited Pro Forma Consolidated Financial Statements and Notes are attached as Exhibit 99.3.
NOTE 2. ACQUISITION OF MERCER INSURANCE GROUP
On March 28, 2011, we purchased 100.0 percent of the outstanding common stock of Mercer Insurance Group, which was funded through a combination of cash and short-term debt. The excess of the purchase price over the estimated fair value of the tangible assets acquired and liabilities assumed at the acquisition date has been allocated to goodwill and intangible assets of our property and casualty insurance segment.
We are in the process of completing valuation procedures of the separately identifiable intangible assets acquired and assessing the related useful lives of those assets. Provisional amounts have been recognized for these intangible assets, which may be subject to adjustment within one year from the acquisition date. We expect to continue to obtain further information during the measurement period to assist us in determining the fair value of certain of the assets acquired and liabilities assumed. Any adjustment to the provisional amounts that have been established will be recognized in the period that the adjustment is identified in accordance with the acquisition method.
99.3-4
The following is a summary of the fair value of the tangible and intangible assets acquired and liabilities assumed of Mercer Insurance Group at the date of acquisition based on provisional estimates of fair value:
| (In Thousands) | March 28, 2011 | |||
Assets | ||||
| Available-for-sale fixed maturity securities | $ | 401,548 | ||
| Equity securities | 10,666 | |||
| Cash and cash equivalents | 18,855 | |||
| Accrued investment income | 3,741 | |||
| Premiums receivable | 35,822 | |||
| Value of business acquired | 27,436 | |||
| Property and equipment | 15,228 | |||
| Reinsurance receivables and recoverables | 58,193 | |||
| Prepaid reinsurance premiums | 6,289 | |||
| Income taxes receivable | 2,732 | |||
| Deferred income taxes | 3,543 | |||
| Goodwill and intangible assets | 31,500 | |||
| Other assets | 11,333 | |||
| Total assets | $ | 626,886 | ||
Liabilities | ||||
| Reserves for losses, claims and loss settlement expenses | $ | 310,647 | ||
| Unearned premiums | 72,249 | |||
| Accrued expenses and other liabilities | 33,902 | |||
| Debt | 3,000 | |||
| Trust preferred securities | 15,614 | |||
| Total liabilities | $ | 435,412 | ||
| Total net assets acquired | $ | 191,474 | ||
NOTE 3. UNAUDITED PRO FORMA ADJUSTMENTS
The following unaudited pro forma adjustments related to our acquisition of Mercer Insurance Group have been made to the information reported in the accompanying unaudited pro forma consolidated balance sheet as of December 31, 2010 and the unaudited pro forma consolidated statement of income for the fiscal year ended December 31, 2010:
A. Cash and Cash Equivalents
The adjustment to cash and cash equivalents primarily represents the consideration paid to acquire Mercer Insurance Group. Additionally, the adjustment includes the elimination of acquisition-related expenses, which consist of legal, audit and other professional fees.
B. Deferred Policy Acquisition Costs
The adjustment to deferred policy acquisition costs was made to eliminate Mercer Insurance Group’s historical deferred policy acquisition costs and to record the fair value of the asset established for the value of the business acquired (“VOBA”) from Mercer Insurance Group. Please refer to pro forma adjustment “K” for information on the calculation of fair value.
99.3-5
C. Property and Equipment
The adjustment to property and equipment was made to report the acquired assets, primarily land and buildings, to fair value, which approximates the appraised value of the respective assets.
D. Reinsurance Receivables and Recoverables
The adjustment to reinsurance receivables and recoverables was made to report the acquired asset at fair value. Please refer to pro forma adjustment “F” for information on the calculation of fair value.
E. Goodwill and Intangible Assets
The adjustment to goodwill and intangible assets represents the elimination of Mercer Insurance Group’s historical goodwill and intangible assets and the recognition of the goodwill and intangible assets related to the acquisition.
F. Future Policy Benefits and Losses, Claims and Loss Settlement Expenses — Property and Casualty Insurance
The adjustment to reserves for losses, claims and loss settlement expenses related to incurred claims and reinsurance receivables and recoverables was made to report the acquired amounts at fair value. Fair value is determined using a valuation model that is based on actuarial estimates of future cash flows for the underwriting liabilities. These future cash flows are adjusted for the time value of money using duration-matched risk-free interest rates, which approximate current U.S. Treasury bill rates, and a risk margin to compensate the acquirer for the risk associated with these liabilities.
G. Deferred Income Taxes
The adjustment to deferred income taxes represents the tax effect of the pro forma adjustments that result in differences between the financial statement bases of the assets acquired and liabilities assumed and the tax bases of those same assets and liabilities, using currently enacted statutory tax rates.
H. Debt
The adjustment to debt represents the funds borrowed for the consideration paid to acquire Mercer Insurance Group.
I. Stockholders’ Equity
The adjustments to the stockholders’ equity accounts represent the elimination of the following related to Mercer Insurance Group: additional paid-in capital; retained earnings; accumulated other comprehensive income, net of tax; unearned ESOP shares; and treasury stock.
J. Investment Income, Net of Investment Expenses
The adjustment to investment income represents the effect of reporting Mercer Insurance Group’s available-for-sale fixed maturity securities at fair value.
99.3-6
K. Amortization of Deferred Policy Acquisition Costs
The adjustment to deferred policy acquisition costs represents the effect of the amortization of the fair value of the VOBA asset, which is an intangible asset relating to the difference between the unearned premium reserves acquired in the transaction and the estimated fair value of the unexpired insurance policies, which consists of two components, (1) a provision for loss and loss settlement expenses that will be incurred as the premium is earned and (2) a provision for policy maintenance costs related to servicing those policies until they expire. Loss and loss settlement expenses are valued in a manner identical to that used for loss reserve valuation. Policy maintenance costs are valued based on estimates of future cash flows that are discounted to present value using duration-matched risk-free interest rates. VOBA is reported as a component of deferred policy acquisition costs in the accompanying unaudited pro forma consolidated balance sheet and will be substantially amortized over a twelve-month period from the acquisition date in proportion to the timing of the estimated underwriting profit associated with the in-force business. The amortization pattern for the VOBA asset will be greater in the initial months subsequent to the acquisition date in correlation to the large number of six-month policies that were underwritten by Mercer Insurance Group.
L. Other Underwriting Expenses
The adjustment to other underwriting expenses are to record the estimated net increase in amortization expense for intangible assets and depreciation expense for the fair value adjustments to property and equipment. Additionally, the adjustment includes the elimination of acquisition-related expenses, which consist of legal, audit and other professional fees.
M. Federal Income Tax Expense
The adjustment to federal income tax expense represents the tax effect of the pro forma adjustments to income using the statutory tax rate of 35.0 percent.
99.3-7