1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1996
--------------
Transition Report Pursuant to Section 13 or 15(d) of the Securities
- -- Exchange Act of 1934 for the transition period from to
--------- ---------
Commission File Number 2-39621
UNITED FIRE & CASUALTY COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Iowa 42-0644327
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(State of Incorporation) (IRS Employer Identification No.)
118 Second Avenue, S.E.
Cedar Rapids, Iowa 52407
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319) 399-5700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
As of May 2, 1996, 10,829,399 shares of common stock were outstanding.
2
UNITED FIRE & CASUALTY COMPANY
AND SUBSIDIARIES
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
Report of Independent Public Accountants................................. 1
Consolidated Balance Sheets for March 31, 1996 and December 31, 1995..... 2
Unaudited Consolidated Statements of Operations - Three-Month
Periods Ended March 31, 1996 and 1995.................................... 3
Unaudited Consolidated Statements of Cash Flows - Three-Month
Periods Ended March 31, 1996 and 1995.................................... 4
Notes to Unaudited Consolidated Financial Statements..................... 5
Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 9
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures............................................................... 11
Exhibit 11. Computation of Net Income Per
Common Share............................................................. 12
3
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, 1996,
and the related consolidated statements of operations and cash flows for the
three-month periods ended March 31, 1996 and 1995. These financial statements
are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the financial statements referred to above in order for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of United Fire & Casualty Company and
Subsidiaries as of December 31, 1995, and, in our report dated February 22,
1996, we expressed an unqualified opinion on that statement. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 1995, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Chicago, Illinois
May 2, 1996
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4
UNITED FIRE & CASUALTY COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER , 1995
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(Dollars in Thousands)
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ASSETS 1996 1995
UNAUDITED Audited
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INVESTMENTS
Fixed maturities
Held-to-maturity, at amortized cost (market value $622,130 in 1996 and
$617,915 in 1995)...................................................................... $607,431 $589,687
Available-for-sale, at market (cost $79,857 in 1996 and $80,464 in 1995)............... 78,268 84,707
Equity securities (cost $24,941 in 1996 and $25,558 in 1995)............................. 79,339 75,678
Mortgage loans........................................................................... 3,021 3,041
Policy loans............................................................................. 7,275 7,163
Other long-term investments (cost $8,028 in 1996 and $7,563 in 1995)..................... 9,321 8,627
Short-term investments................................................................... 7,014 21,530
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791,669 790,433
CASH AND CASH EQUIVALENTS.................................................................. 6,429 6,998
ACCRUED INVESTMENT INCOME.................................................................. 11,454 11,517
ACCOUNTS RECEIVABLE........................................................................ 44,231 38,620
DEFERRED POLICY ACQUISITION COSTS.......................................................... 53,093 52,670
PROPERTY AND EQUIPMENT..................................................................... 13,130 13,252
REINSURANCE RECEIVABLES.................................................................... 16,935 15,996
PREPAID REINSURANCE PREMIUMS............................................................... 4,048 3,865
INTANGIBLES................................................................................ 1,525 1,589
INCOME TAXES RECEIVABLE.................................................................... -- 1,005
OTHER ASSETS............................................................................... 8,917 7,161
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TOTAL ASSETS $951,431 $943,106
================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
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LIABILITIES
Future policy benefits and losses, claims and settlement expenses
Property and casualty insurance........................................................ $208,626 $203,702
Life insurance......................................................................... 391,054 393,603
Unearned premiums........................................................................ 100,062 97,025
Accrued expenses and other liabilities................................................... 17,836 23,376
Employee benefit obligations............................................................. 5,870 5,693
Income taxes payable..................................................................... 2,736 --
Deferred income taxes.................................................................... 10,226 10,954
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TOTAL LIABILITIES.......................................................................... $736,410 $734,353
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STOCKHOLDERS' EQUITY
Common stock.............................................................................. $ 36,098 $ 36,098
Additional paid-in capital................................................................ 12,030 12,031
Retained earnings......................................................................... 131,560 124,430
Net unrealized appreciation, net of applicable income taxes of $18,769 in 1996
and $19,232 in 1995..................................................................... 35,333 36,194
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TOTAL STOCKHOLDERS' EQUITY................................................................. $215,021 $208,753
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................................. $951,431 $943,106
================================================================================================================================
THE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
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5
UNITED FIRE & CASUALTY COMPANY
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE-MONTH PERIODS ENDED MARCH 31, 1996 AND 1995
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(Dollars in Thousands)
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1996 1995
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Revenues
Premiums earned.......................................................................... $ 55,593 $ 51,447
Investment income, net................................................................... 14,020 12,311
Realized investment gains and other income............................................... 4,057 373
Commission and policy fee income......................................................... 431 462
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74,101 64,593
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Benefits, Losses and Expenses
Losses and settlement expenses........................................................... 35,737 31,047
Increase in liability for future policy benefits......................................... 1,053 2,927
Amortization of deferred policy acquisition costs........................................ 14,304 11,524
Other underwriting expenses.............................................................. 5,924 6,626
Interest on policyholders' accounts...................................................... 5,115 4,828
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62,133 56,952
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Income before income taxes............................................................... 11,968 7,641
Federal income taxes..................................................................... 3,213 1,393
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Net Income............................................................................... $ 8,755 $ 6,248
==================================================================================================================================
Net Income per common share ............................................................. $ .81 $ .58
==================================================================================================================================
Weighted average common shares outstanding................................................. 10,829,448 10,829,706
==================================================================================================================================
Cash dividends declared per common share................................................... $ .15 $ .13
==================================================================================================================================
THE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
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UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE-MONTH PERIODS ENDED MARCH 31, 1996 AND 1995
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(Dollars in Thousands)
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1996 1995
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Cash Flows From Operating Activities
Net income................................................................................. $ 8,755 $ 6,248
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Adjustments to reconcile net income to net cash provided by operating activities
Net bond discount accretion.............................................................. (199) (529)
Depreciation and amortization............................................................ 597 654
Realized investment gains................................................................ (2,000) (373)
Changes in:
Accrued Investment income............................................................. 63 565
Accounts receivable................................................................... (5,611) (4,869)
Deferred policy acquisition costs..................................................... (423) (754)
Reinsurance receivables............................................................... (939) 5,714
Prepaid reinsurance premiums.......................................................... (183) (664)
Income taxes receivable/payable....................................................... 3,741 1,005
Other assets.......................................................................... (1,756) (586)
Future policy benefits and losses,
claims and settlement expenses...................................................... 5,340 (214)
Unearned premiums..................................................................... 3,037 3,735
Accrued expenses and other liabilities................................................ (3,915) 1,161
Employee benefit obligations.......................................................... 177 383
Deferred income taxes................................................................. (265) (36)
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Total adjustments........................................................................ $(2,336) $ 5,192
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Net cash provided by operating activities................................................ $ 6,419 $11,440
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Cash Flows From Investing Activities
Proceeds from sale of available-for-sale investments..................................... $ 9,169 $ 85
Proceeds from call and maturity of held-to-maturity investments.......................... 17,364 7,585
Proceeds from call and maturity of available-for-sale investments........................ 4,297 514
Proceeds from sale of other investments.................................................. 15,359 4,641
Purchase of investments held-to-maturity................................................. (34,888) (17,132)
Purchase of investments available-for-sale............................................... (10,264) --
Purchase of other investments............................................................ (1,399) (4,740)
Proceeds from sale of property and equipment............................................. 91 15
Purchase of property and equipment....................................................... (502) (353)
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Net cash used in investing activities.................................................... $ (773) $(9,385)
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Cash Flows From Financing Activities
Policyholders' account balances
Deposits to investment and universal life type contracts............................. $23,385 $19,005
Withdrawals from investment and universal life type contracts........................ (26,350) (19,614)
Purchase and retirement of common stock.................................................. (2) (6)
Payment of cash dividends................................................................ (3,248) (2,744)
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Net cash used in financing activities.................................................... $(6,215) $(3,359)
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Decrease in Cash and Cash Equivalents...................................................... $ (569) $(1,304)
Cash and Cash Equivalents at Beginning of Year............................................. 6,998 10,255
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Cash and Cash Equivalents at End of Period................................................. $ 6,429 $ 8,951
==================================================================================================================================
The Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.
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UNITED FIRE & CASUALTY COMPANY
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
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, 1995. The review report of Arthur Andersen LLP accompanies the
unaudited consolidated financial statements included in Item 1 of Part I.
NOTE 2.
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, adjustments have been made in order to present
the accompanying financial statements on the basis of generally accepted
accounting principles.
The preparation of financial statements in conformity with generally accepted
accounting principles ("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, 1996.
NOTE 3.
For purposes of reporting cash flows, cash and cash equivalents include
cash and non-negotiable certificates of deposit with original maturities of
three months or less. Income taxes paid, net of refunds for the three months
ended March 31, 1996 and 1995 were $(263,000), and $400,000, respectively. There
were no significant payments of interest through March 31, 1996 and 1995, other
than interest credited to policyholders' accounts.
NOTE 4.
Earnings per common share, common shares outstanding and weighted average
common shares outstanding have been retroactively restated for additional shares
issued as a result of a three for two stock split to stockholders of record as
of December 18, 1995.
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UNITED FIRE & CASUALTY COMPANY
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5.
Included in realized gains and other income is $2,057,000 in interest in
connection with the settlement of a Federal income tax Revenue Agent Review for
previous tax years.
NOTE 6.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). SFAS No. 115 addresses the accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. The statement requires
that those investments be classified into the following three categories: 1)
debt securities that the enterprise has the positive intent and ability to hold
to maturity are classified as held-to-maturity securities and reported at
amortized cost; 2) debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities and reported at fair value, with unrealized gains and losses
included in net income; and 3) debt securities and marketable equity securities
not classified as either held-to-maturity securities or trading securities are
classified as available-for-sale securities and reported at fair value, with
unrealized gains and losses excluded from net income and reported as a separate
component of stockholders' equity. The Company classifies a majority of its
investments in fixed income securities as held-to-maturity.
In the fourth quarter of 1995, concurrent with the adoption of its
implementation guide on SFAS No. 115, the Financial Accounting Standards Board
allowed a one-time reassessment of the SFAS No. 115 classifications of all
securities currently held. Any reclassifications would be accounted for at fair
value in accordance with SFAS No. 115 and any reclassifications from the
held-to-maturity portfolio that resulted from this one-time reassessment would
not call into question the intent of the Company to hold other debt securities
to maturity in the future. The Company used the opportunity under this one-time
reassessment to reclassify $79,131,000 in securities from held-to-maturity to
the available-for-sale portfolio. In connection with this reclassification,
gross unrealized gains of $5,145,000 and gross unrealized losses of $908,000
were recorded in available-for-sale securities and in stockholders' equity.
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UNITED FIRE & CASUALTY COMPANY
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the amortized cost to fair values of investments in
held-to-maturity and available-for-sale fixed maturities, marketable equity
securities and other long-term investments as of March 31, 1996 is as follows.
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(Dollars in thousands)
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MARCH 31, 1996 Gross Gross
Amortized Unrealized Unrealized Fair
TYPE OF INVESTMENT Cost Appreciation Depreciation Value
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HELD-TO-MATURITY
Fixed Maturities
Bonds
United States Government, government agencies
and authorities
Collateralized mortgage obligations ("CMOs")................... $ 30,674 $ 293 $1,028 $ 29,939
Mortgage-backed securities.................................... 26,914 2,255 -- 29,169
All others.................................................... 4,084 329 33 4,380
States, municipalities and political subdivisions............... 191,312 8,735 1,177 198,870
Foreign........................................................ 6,853 242 -- 7,095
Public utilities............................................... 58,265 106 1,497 56,874
Corporate bonds
Collateralized mortgage obligations ("CMOs").................. 98,113 1,900 1,441 98,572
All other corporate bonds..................................... 191,216 7,022 1,007 197,231
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Total held-to-maturity.............................................. $607,431 $20,882 $6,183 $622,130
==================================================================================================================================
AVAILABLE-FOR-SALE
Fixed Maturities
Bonds
United States Government, government agencies
and authorities
Collateralized mortgage obligations ("CMOs").................... $ 64,406 $ 1,114 $2,011 $ 63,509
Mortgage-backed securities...................................... 70 5 -- 75
All others...................................................... 336 -- 7 329
Public utilities................................................. 206 -- 22 184
Corporate bonds
Collateralized mortgage obligations ("CMOs").................... 14,229 436 1,105 13,560
All other corporate bonds....................................... 610 14 13 611
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Total available-for-sale fixed maturities........................ $ 79,857 $ 1,569 $3,158 $ 78,268
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Equity securities
Common stocks
Public utilities................................................ $ 3,561 $ 4,948 $ -- $ 8,509
Banks, trust and insurance companies............................ 11,964 33,475 102 45,337
All other common stocks......................................... 8,566 16,372 264 24,674
Nonredeemable preferred stocks.................................... 850 -- 31 819
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Total equity securities........................................... $ 24,941 $54,795 $ 397 $ 79,339
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Total available-for-sale............................................ $104,798 $56,364 $3,555 $157,607
==================================================================================================================================
Other long-term investments......................................... $ 8,028 $ 1,444 $ 151 $ 9,321
==================================================================================================================================
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10
UNITED FIRE & CASUALTY COMPANY
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of held-to-maturity and
available-for-sale fixed maturities at March 31, 1996 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.
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(Dollars in thousands)
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MARCH 31, 1996 Held-to-maturity Available-for-sale
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Amortized Amortized
Cost Fair Value Cost Fair Value
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Due in one year or less............................................. $ 6,566 $ 6,638 $ -- $ --
Due after one year through five years............................... 67,414 70,724 536 529
Due after five year through ten years............................... 172,810 179,131 616 595
Due after ten years................................................. 204,940 207,957 -- --
Mortgage-backed securities.......................................... 26,914 29,169 70 75
Collateralized mortgage obligations ("CMOs")........................ 128,787 128,511 78,635 77,069
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$607,431 $622,130 $79,857 $78,268
==================================================================================================================================
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11
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
ASSETS
The Company's fixed income portfolio increased $11,305,000 between March 31,
1996 and December 31, 1995. Net unrealized losses of $1,589,000 were recorded on
the available-for-sale fixed income securities. Approximately 30% of the fixed
income portfolio are collateralized mortgage obligations ("CMOs"), compared to
31% at December 31, 1995. The Company's ongoing review of the fixed income
market has shown that for asset and credit quality, CMOs still offer the best
yield available. The Company minimizes its prepayment risk by buying most issues
priced at a slight discount. While buying at a discount does not prevent
prepayment, the yield is not penalized as is the case when a premium is paid. In
addition, although the stated maturity is longer than the average life of the
issues, the Company is concentrating on buying issues with expected maturity in
the seven- to- twelve- year range. The Company also monitors the FLUX ratios of
the CMOs it is purchasing, looking to add less volatile positions to its
portfolio. FLUX measures cashflow variability about a predefined set of interest
rate scenarios.
The Company also invests in readily marketable common and preferred stocks,
all of which are classified as available-for-sale. Other long-term investments
are primarily holdings in limited partnership funds investing in banks.
Unrealized appreciation on stocks and other long-term investments, net of
applicable income taxes, increased between 1996 and 1995 by $4,507,000.
The Company's short-term investments, comprised of money market accounts,
overnight repurchase agreements and fixed maturities are utilized to meet
anticipated short-term cash requirements. The decrease in this asset of
$14,516,000 was due primarily to the life insurance segment's withdrawal of a
block of single premium business during the first quarter of 1996.
The Company's accounts receivable are balances due from property and
casualty insurance agents and brokers for premiums written, net of commissions.
In 1996, this asset grew by $5,611,000 or 15%. Premiums writings are increasing,
as is utilization of the Company's deferred billing plan.
The balance in the Company's deferred acquisition costs asset remained
relatively flat between years, due to an increase in premium writings with a
less than comparable increase in associated underwriting expenses.
Reinsurance receivables are loss and expense payments and ceded reserves
that are due the Company from reinsurers. The balance in this asset increased
$939,000 or 6%. The Company does not anticipate collection problems with
regard to any of its reinsurance receivables.
LIABILITIES
The property and casualty segment's gross reserves before ceded reinsurance
for losses and settlement expenses increased $4,924,000 or 2% between 1996 and
1995. The largest catastrophe reserve continues to be the Northridge earthquake,
with gross reserves remaining of $5,109,000, compared to $3,733,000 at December
31, 1995. 9
12
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY (CONTINUED)
The Company is not aware of any significant environmental liabilities.
Because the Company writes property coverage, there does exist the potential for
exposure to environmental pollution and asbestos claims. The Company's
underwriters are aware of these exposures and use limited riders or endorsements
to limit exposure.
The liability for future policy benefits and interest on policyholders'
accounts decreased $2,549,000 due to the full fund withdrawal of one block of
universal life business totaling $15,600,000 during the first quarter.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
PROPERTY AND CASUALTY OPERATIONS
Property and casualty premiums earned increased 13%, or $5,682,000 through
March 31, 1996, when compared to March 31, 1995. Much of the growth came from
our direct business and was concentrated in four midwestern states. In addition,
ceded premium rates remain flat, which has the effect of increasing net premium
writings.
Loss and loss adjustment expenses increased 14% or $4,038,000 over the
first quarter of 1995 due to general growth and winter storms that occurred in
the first two months of 1996.
The increase in the property and casualty segments' other underwriting
expenses, (including amortization of deferred acquisition costs) of $2,323,000
or 15%, resulted primarily from an increase in commissions incurred.
LIFE OPERATIONS
A decrease of $1,509,000 in premiums earned is completely attributed to a
decrease in collected traditional life products. Interest credited increased by
only $287,000 compared to $1,140,000 at March 31, 1995. This is a result of the
withdrawal of one block of universal life business totaling $15,600,000 during
the first quarter. The Company anticipates a similar comparison throughout 1996.
INVESTMENT RESULTS
Investment income rose 14% in 1996, over 1995, which is largely
attributable to a growing fixed income portfolio. In the first quarter of 1996,
the Company took advantage of market conditions and sold a few of its
available-for-sale fixed income securities, contributing to the realized gain
increase of $1,627,000.
10
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UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits-Exhibit 11 - Computation of Net Income Per Common Share (Page 12).
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
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(REGISTRANT)
MAY 2, 1996
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(DATE)
/s/ SCOTT MCINTYPRE, JR.
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SCOTT MCINTYRE, JR.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
/S/ K.G. BAKER
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K.G. BAKER, VICE PRESIDENT
CHIEF FINANCIAL OFFICER AND PRINCIPAL
ACCOUNTING OFFICER
11