UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended June 30, 2001
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 August 2, 2001, 10,035,819 shares of common stock were outstanding.
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
INDEX
Part 1. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2001 (unaudited) and
December 31, 2000 2
Consolidated Statements of Income (unaudited) for the three-month
periods ended June 30, 2001 and 2000 3
Consolidated Statements of Income (unaudited) for the six-month
periods ended June 30, 2001 and 2000 4
Consolidated Statements of Cash Flows (unaudited) for the six-month
periods ended June 30, 2001 and 2000 5
Notes to Unaudited Consolidated Financial Statements 6
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 14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 15
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS June 30, December 31,
2001 2000
Unaudited Audited
- ------------------------------------------------------------------------------------------------------------------------------
Investments
Fixed maturities
Held-to-maturity, at amortized cost (market
value $274,895 in 2001 and $292,857 in 2000) $ 264,508 $ 283,431
Available-for-sale, at market (amortized cost $1,045,848
in 2001 and $952,949 in 2000) 1,033,336 928,947
Equity securities (cost $30,775 in 2001 and $30,667 in 2000) 109,277 111,132
Policy loans 8,426 8,437
Other long-term investments, at market (cost $10,498 in 2001
and $12,326 in 2000) 10,391 12,864
Short-term investments 21,512 58,290
- ------------------------------------------------------------------------------------------------------------------------------
$1,447,450 $1,403,101
Cash and Cash Equivalents $ 24,514 $ -
Accrued Investment Income 25,632 22,578
Accounts Receivable 80,722 63,955
Deferred Policy Acquisition Costs 100,094 98,399
Property and Equipment 15,982 16,732
Reinsurance Receivables 42,375 41,487
Prepaid Reinsurance Premiums 3,455 2,846
Intangibles 5,670 6,459
Income Taxes Receivable 3,681 658
Other Assets 5,941 6,279
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,755,516 $1,662,494
==============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future policy benefits and losses, claims and settlement expenses
Property and casualty insurance $ 361,583 $ 358,032
Life insurance 888,140 822,158
Unearned premiums 187,832 165,212
Accrued expenses and other liabilities 23,971 34,303
Employee benefit obligations 13,387 13,115
Deferred income taxes 14,031 12,245
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $1,488,944 $1,405,065
- ------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock $ 33,453 $ 33,453
Additional paid-in capital 6,912 6,912
Retained earnings 179,166 172,346
Accumulated other comprehensive income, net of tax 47,041 44,718
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 266,572 $ 257,429
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,755,516 $1,662,494
==============================================================================================================================
The Notes to Unaudited Consolidated Financial Statements are an integral part
of these statements.
2
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data and number of shares)
- ------------------------------------------------------------------------------------------------------------------
Three months ended June 30,
2001 2000
(unaudited) (unaudited)
- ------------------------------------------------------------------------------------------------------------------
Revenues
Net premiums earned $ 89,935 $ 79,518
Investment income, net 24,790 21,493
Realized investment gains and other income 573 33
Commission and policy fee income 543 567
- ------------------------------------------------------------------------------------------------------------------
115,841 101,611
- ------------------------------------------------------------------------------------------------------------------
Benefits, Losses and Expenses
Losses and settlement expenses 72,179 58,953
Increase in liability for future policy benefits 1,331 2,262
Amortization of deferred policy acquisition costs 16,153 15,387
Other underwriting expenses 16,249 14,613
Interest on policyholders' accounts 11,900 10,562
- ------------------------------------------------------------------------------------------------------------------
117,812 101,777
- ------------------------------------------------------------------------------------------------------------------
Loss before income taxes (1,971) (166)
Federal income tax benefit (1,756) (1,115)
- ------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (215) $ 949
==================================================================================================================
(Loss) earnings available to common shareholders $ (215) $ 949
==================================================================================================================
Weighted average common shares outstanding 10,035,819 10,056,499
==================================================================================================================
Basic and diluted (loss) earnings per common share $ (.02) $ 0.09
==================================================================================================================
Cash dividends declared per common share $ 0.18 $ 0.18
==================================================================================================================
The Notes to Unaudited Consolidated Financial Statements are an integral part of
these statements.
3
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data and number of shares)
- -----------------------------------------------------------------------------------------------------------------------------
Six months ended June 30,
2001 2000
(unaudited) (unaudited)
- -----------------------------------------------------------------------------------------------------------------------------
Revenues
Net premiums earned $ 177,739 $ 158,326
Investment income, net 48,275 42,276
Realized investment gains and other income 1,498 141
Commission and policy fee income 1,081 1,100
- -----------------------------------------------------------------------------------------------------------------------------
228,593 201,843
- -----------------------------------------------------------------------------------------------------------------------------
Benefits, Losses and Expenses
Losses and settlement expenses 128,662 114,971
Increase in liability for future policy benefits 2,803 4,217
Amortization of deferred policy acquisition costs 31,100 30,170
Other underwriting expenses 29,750 29,034
Interest on policyholders' accounts 23,328 20,065
- -----------------------------------------------------------------------------------------------------------------------------
215,643 198,457
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 12,950 3,386
Federal income tax (benefit) 2,518 (945)
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 10,432 $ 4,331
=============================================================================================================================
Earnings available to common shareholders $ 10,432 $ 4,331
=============================================================================================================================
Weighted average common shares outstanding 10,035,819 10,058,280
=============================================================================================================================
Basic and diluted earnings per common share $ 1.04 $ 0.43
=============================================================================================================================
Cash dividends declared per common share $ 0.36 $ 0.35
=============================================================================================================================
The Notes to Unaudited Consolidated Financial Statements are an integral part
of these statements.
4
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
- -----------------------------------------------------------------------------------------------------------------------------
Six months ended June 30,
2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 10,432 $ 4,331
- -----------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by
operating activities
Net bond discount accretion $ (452) $ (117)
Depreciation and amortization 2,124 1,605
Realized investment gains (1,498) (141)
Changes in:
Accrued investment income (3,054) (2,019)
Accounts receivable (16,767) (15,594)
Deferred policy acquisition costs (1,695) (7,129)
Reinsurance receivables (888) (6,686)
Prepaid reinsurance premiums (609) (150)
Income taxes receivable (3,023) (1,228)
Other assets 338 (657)
Future policy benefits and losses, claims and
settlement expenses 8,736 13,659
Unearned premiums 22,620 16,800
Accrued expenses and other liabilities (10,332) (830)
Employee benefit obligations 272 835
Deferred income taxes 531 (44)
Other, net (5,301) 3,152
- -----------------------------------------------------------------------------------------------------------------------------
Total adjustments $ (8,998) $ 1,456
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 1,434 $ 5,787
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Proceeds from sale of available-for-sale investments $ 49,789 $ 43,774
Proceeds from call and maturity of held-to-maturity investments 20,558 14,822
Proceeds from call and maturity of available-for-sale investments 54,052 30,573
Proceeds from sale of short-term and other investments 157,536 34,388
Purchase of held-to-maturity investments (1,397) (2,333)
Purchase of available-for-sale investments (194,950) (147,515)
Purchase of short-term and other investments (119,108) (30,486)
Proceeds from sale of property and equipment - 136
Purchase of property and equipment (585) (1,179)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities $ (34,105) $ (57,820)
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Policyholders' account balances
Deposits to investment and universal-life-type contracts $ 106,888 $ 109,279
Withdrawals from investment and universal-life-type contracts (46,091) (52,238)
Purchase and retirement of common stock - (409)
Payment of cash dividends (3,612) (5,230)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 57,185 $ 51,402
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents $ 24,514 $ (631)
Cash and Cash Equivalents at Beginning of Year - 9,749
- -----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 24,514 $ 9,118
=============================================================================================================================
The Notes to Unaudited Consolidated Financial Statements are an integral part
of these statements.
5
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
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, 2000. 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.
For purposes of reporting cash flows, cash and cash equivalents include
cash and non-negotiable certificates of deposit with original maturities of
three months or less. Net income taxes paid for the six-month periods ended
June 30, 2001 and 2000 were $4,651,000 and $727,000, respectively. There were
no significant payments of interest through June 30, 2001 and 2000, other than
interest credited to policyholders' accounts.
Note 2. New Accounting Standards
Effective January 1, 2000, the Company adopted Statement of Position
("SOP") 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance
Contracts That Do Not Transfer Insurance Risk." The SOP provides guidance on
accounting for insurance and reinsurance contracts that do not transfer
insurance risk. All of the Company's reinsurance agreements are
risk-transferring arrangements, accounted for according to SFAS No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts." The impact of adopting SOP 98-7 had no effect on the Company's
Consolidated Financial Statements.
Effective July 1, 2000, the Company adopted Financial Accounting Standards
Board ("FASB") Interpretation ("FIN") No. 44, "Accounting for Certain
Transactions Including Stock Compensation (an Interpretation of Accounting
Principles Board ("APB") Opinion No. 25)". FIN No. 44 clarifies the application
of APB Opinion No. 25 for only certain issues, such as (a) the definition of
employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. The adoption of FIN No. 44 had no
impact on the Company's Consolidated Financial Statements.
Effective December 31, 2000, the Company adopted Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition." The impact of adopting SAB No. 101 had
no effect on the Company's Consolidated Financial Statements.
6
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In July 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations", which becomes effective January 1,
2002. SFAS No. 141 requires all business combinations initiated after June 30,
2001 to be accounted for using the purchase method. The impact of adopting SFAS
No. 141 will not have any effect on the Company's Consolidated Financial
Statements. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets", which becomes effective January 1, 2002. SFAS No. 142
eliminates the amortization of goodwill over its estimated useful life, but
requires goodwill to be subject to at least an annual assessment for impairment
by applying a fair-value-based test. Additionally, an acquired intangible asset
should be separately recognized from goodwill if the benefit of the intangible
asset is obtained through contractual or other legal rights, or if the
intangible asset can be sold, transferred, licensed, rented, or exchanged,
regardless of the acquirer's intent to do so. Recognized intangible assets
(other than those with an indefinite life) will then be amortized over their
estimated useful lives. The Company is currently evaluating the impact that the
adoption of SFAS No. 142 will have on its results of operations and financial
position.
Note 3. Segment Information
The Company has two reportable business segments in its operations;
property and casualty insurance and life insurance. The property and casualty
segment has five locations from which it conducts its business. All offices
target a similar customer base and market the same products, using the same
marketing strategies, and are therefore aggregated. The life insurance segment
operates from the Company's home office. The two segments are evaluated by
management, based on both a statutory and a GAAP basis. Results are analyzed
based on profitability, expenses and return on equity. The basis for determining
and analyzing segments and the measurement of segment profit has not changed
from that reported in the Company's 2000 Form 10-K. The Company's selling
location is used in allocating revenues between foreign and domestic, and as
such, the Company has no revenues allocated to foreign countries. The following
analysis is reported on a GAAP basis and is reconciled to the Company's
Consolidated Financial Statements.
- --------------------------------------------------------------------------------
(Dollars in Thousands)
- --------------------------------------------------------------------------------
Property and Life
Casualty Insurance Insurance Total
- --------------------------------------------------------------------------------
June 30, 2001
- --------------------------------------------------------------------------------
Revenues $180,256 $ 48,508 $ 228,764
- --------------------------------------------------------------------------------
Intersegment eliminations (63) (108) (171)
- --------------------------------------------------------------------------------
Total revenues $180,193 $ 48,400 $ 228,593
================================================================================
Net income $ 5,449 $ 4,983 $ 10,432
================================================================================
Assets $704,920 $1,050,596 $1,755,516
================================================================================
June 30, 2000
- --------------------------------------------------------------------------------
Revenues $159,964 $ 42,014 $ 201,978
- --------------------------------------------------------------------------------
Intersegment eliminations (69) (66) (135)
- --------------------------------------------------------------------------------
Total revenues $159,895 $ 41,948 $ 201,843
================================================================================
Net income $ 889 $ 3,442 $ 4,331
================================================================================
Assets $661,984 $ 884,901 $1,546,885
================================================================================
Depreciation expense and property and equipment acquisitions are reflected in
the property and casualty insurance segment.
7
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 4. 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 June 30, 2001 the Company had $32,845 of open covered call options.
In assessing the impact of any embedded derivative instruments, the Company has
elected to apply SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", 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.
Note 5. Comprehensive Income
Comprehensive income (loss) was $12,755,000 and $(208,000) for the six
months ended June 30, 2001 and 2000, respectively. Comprehensive loss was
$(2,431,000) and $(4,029,000) for the three months ended June 30, 2001 and 2000,
respectively.
8
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
United Fire & Casualty Company:
We have reviewed the accompanying consolidated balance sheet of UNITED FIRE &
CASUALTY COMPANY (an Iowa corporation) AND SUBSIDIARIES as of June 30, 2001, and
the related consolidated statements of income for the three-month and six-month
periods ended June 30, 2001 and 2000, and the consolidated statements of cash
flows for the six-month periods ended June 30, 2001 and 2000. 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, 2000 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended (not presented separately herein) and, in our report dated
February 15, 2001, 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, 2000, 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
August 2, 2001
9
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, which are not historical facts, and involve risks and
uncertainties that could cause actual results to differ materially from those
expected and projected. Such risks and uncertainties include the following: 1)
the uncertainties of the loss reserving process; 2) the occurrence of
catastrophic events or other insured or reinsured events with a frequency or
severity exceeding the Company's estimates; 3) the actual amount of new and
renewal business; 4) the competitive environment in which the Company operates;
5) developments in global financial markets that could affect the Company's
investment portfolio and financing plans; 6) estimates of the financial
statement impact due to regulatory actions; 7) uncertainties relating to
government and regulatory policies; 8) legal developments; 9) changing rates of
inflation and other economic conditions; and 10) the impact of mergers and
acquisitions, including the ability to successfully integrate acquired
businesses and achieve cost savings. The words "believe," "anticipate,"
"estimate," "expect," "intend," or "will continue" and variations thereof and
similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of their dates. The Company undertakes no obligation to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
RESULTS OF OPERATIONS
The Company recorded a net operating loss, which excludes net realized
gains and losses on securities, of $587,000 or $.06 per share for the second
quarter of 2001, compared to net operating income of $927,000 or $.09 per share
for the second quarter of 2000. Catastrophes, primarily storm activity occurring
across the United States during the second quarter of 2001, contributed
$6,578,000 or $.66 per share to the three-month net operating loss. According to
estimates from Insurance Services Office, the second quarter of 2001 will be the
second-worst second quarter in the last ten years for insured-property losses.
Despite the Company's overall second quarter results, the Company's life segment
had a very favorable second quarter, reporting net income of $2,248,000,
compared to $1,464,000 for the second quarter of 2000.
Revenues, consisting principally of net premiums earned and net
investment income, increased between the second quarters of 2000 and 2001 by
$14,230,000 (14%) to $115,841,000. Price increases and new business in the
property and casualty segment accounted for the increase in premiums earned.
Growth in the investment portfolio contributed to the increase in net investment
income between the second quarters of 2000 and 2001.
The GAAP combined ratio was 112 percent for the second quarter of 2001, up
from 108 percent for the same period last year, due primarily to an increase in
claim severity. Excluding catastrophes, the GAAP combined ratio was 100 percent
and 96 percent, respectively.
Net loss for the second quarter of 2001 was $215,000 or $.02 per share,
compared to net income of $949,000 or $.09 per share for the second quarter of
2000. The Company recorded after-tax realized investment gains and other income
of $372,000 in the second quarter of 2001, compared to $22,000 in the same
period of 2000.
10
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Year-to-date results:
The Company recorded net operating income of $9,458,000 or $.94 per share
through June 30, 2001, compared to net operating income of $4,239,000 or $.42
per share through June 30, 2000. The total after-tax impact on the Company's
six-month results from all catastrophes occurring in 2001 and prior years was
$7,483,000, or $.75 per share, compared to $11,309,000 or $1.12 per share
through the second quarter of 2000. The GAAP combined ratio improved to 102
percent for the first half of 2001 from 108 percent for the same period last
year. Excluding catastrophes, the year-to-date GAAP combined ratio was 95
percent and 96 percent, respectively.
Net income, which includes net operating income and realized investment
gains and losses on securities, through June 30, 2001 was $10,432,000 or $1.04
per share, compared to net income of $4,331,000 or $.43 per share through the
first half of 2000.
Property and casualty insurance segment
Storm activity negatively impacted the property and casualty segment's
quarter and year-to-date current earnings. For the second quarter of 2001 the
property and casualty segment recorded a net loss of $2,463,000, compared to a
net loss of $515,000 for the second quarter of 2000. Net premiums earned by the
property and casualty segment increased between the second quarters by
$10,442,000 (14%) to $83,421,000. Losses and settlement expenses grew by
$11,188,000 (20%) to $68,393,000, largely as the result of an increase in the
severity of claims, primarily in the fire and workers' compensation lines of
business.
Year-to-date, the property and casualty segment recorded net income of
$5,449,000, compared to net income of $889,000 for the first half of 2000. For
the six-month period ended June 30, 2001, growth in net premiums earned exceeded
increases in losses and settlement expenses. Net premiums earned increased by
$19,614,000 (14%) to $164,883,000, while losses and settlement expenses
increased by $10,812,000 (10%) to $121,160,000. A majority of this year's
catastrophe losses were incurred during the second quarter of 2001.
Life insurance segment
The life segment reported favorable results for the second quarter of 2001.
Three-month net income was $2,248,000, compared to net income of $1,464,000 for
the same period in 2000. Between the second quarters of 2000 and 2001, increases
in the life segment's investment income and realized investment gains exceeded
the growth in operating expenses, while premium revenue was relatively flat. Net
investment income grew by $2,562,000 (17%) to $17,691,000 between the second
quarters of 2000 and 2001, and realized investment gains increased by $1,017,000
to $361,000 between the second quarters of 2000 and 2001. The life segment's
operating expenses increased by $2,342,000 (12%) to $21,084,000 when compared to
the second quarter of 2000, due primarily to growth in losses and settlement
expenses.
Year-to-date, the life segment's net income was $4,983,000 compared to net
income of $3,442,000 for the first half of 2000. There was little change in the
life segment's premium revenue when compared to the first half of 2000, while
net investment income grew by $5,127,000 (17%) to $34,677,000 and realized
investment gains increased by $1,525,000 to $867,000 through June 30, 2001.
Operating expenses increased by $4,048,000 (11%) to $40,709,000, due primarily
to interest credited on policyholders' accounts and increases in losses and
settlement expenses.
11
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Investment results
The composition of the investment portfolio at June 30, 2001, is presented in
the following table.
Property & Casualty Life
Segment Segment Total
----------------------- --------------------- -------------------------
($ in thousands) Percent To Percent To Percent To
Total Total Total
---------- ---------- ----------
Fixed income securities/1/ $ 358,133 73.0% $ 939,711 98.2% $ 1,297,844 89.7%
Equity securities 104,535 21.3 4,742 0.5 109,277 7.5
Policy loans - 0.0 8,426 0.9 8,426 0.6
Short-term 17,456 3.6 4,056 0.4 21,512 1.5
Other 10,391 2.1 - 0.0 10,391 0.7
--------- --------- --------- --------- ----------- ---------
$ 490,515 100.0% $ 956,935 100.0% $ 1,447,450 100.0%
========= ========= ========= ========= =========== =========
Net investment income during the second quarter of 2001 increased by
$3,297,000 (15%) to $24,790,000 from the same period in 2000 as a result of an
increase in invested assets. Invested assets at June 30, 2001 were
$1,447,450,000 versus $1,277,610,000 at June 30, 2000. Net realized gains on
investments increased to $1,498,000 in the first half of 2001, compared to
$141,000 for the six-month period ending June 30, 2000. This increase was
attributable to gains realized on available-for-sale corporate fixed income
securities that were sold during the first half of 2001, and the retirement of a
fixed income security issue with strong call protection.
FINANCIAL CONDITION
Investments
The Company's investments, comprised primarily of fixed income securities,
increased $44,349,000, or 3%, between December 31, 2000 and June 30, 2001. Of
this growth, $8,849,000 was attributable to changes in the market prices of the
Company's securities classified as available-for-sale and other invested assets,
both of which are reported at market value. The unrealized appreciation from
these investments is reported net of tax in a separate component of
stockholders' equity. At June 30, 2001, $1,033,336,000, or 80%, of the fixed
income security portfolio was classified as available-for-sale, compared to
$928,947,000, or 77%, at December 31, 2000. The Company has the ability and the
intent to hold a majority of its fixed income securities to maturity, but has
moved towards a larger concentration of available-for-sale fixed income
securities to be able to take advantage of the constantly changing market
conditions. The Company's remaining fixed income securities are classified as
held-to-maturity and are reported at amortized cost. The Company did not have
securities classified as trading at June 30, 2001 or December 31, 2000.
Other assets
Commissions and other costs of underwriting insurance, which vary with and
are primarily related to the production of business, are deferred and
capitalized to the extent recoverable. The resulting asset is referred to as
deferred acquisition costs (DAC), and constitutes the Company's second largest
asset, after investments. The DAC asset is amortized over the life of the
insurance policies written, to attain a matching of revenue to expense. Growth
in premiums written will typically result in an increase to the DAC asset.
However, the DAC asset is limited by
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UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
unprofitability in individual lines of insurance. Therefore, if a line of
business is unprofitable, an insurer is limited in the underwriting expenses (if
any) that may be capitalized and amortized for that line of business. As of June
30, 2001, the Company's property and casualty segment's DAC asset grew by
$3,130,000 (13%) to $26,516,000 from December 31, 2000.
The life segment's DAC asset decreased between December 31, 2000 and June
30, 2001 by $1,436,000 (2%). One component of a life company's estimate of the
DAC asset related to universal life and annuity business is the impact of
unrealized gains and losses resulting from certain available for sale securities
in its investment portfolio. In the first half of 2001, the unrealized loss
component of the Company's life segment DAC calculation contributed a decrease
of $5,263,000 in the reported DAC asset. This unrealized loss component of DAC
was partially offset by an increase in the life segment's net deferred expenses
of $3,827,000.
Accounts receivable, which consist of amounts due from property and
casualty insurance agents and brokers, increased by $16,767,000 (26%) to
$80,722,000 between December 31, 2000 and June 30, 2001 due primarily to two
factors; 1) an increase in property and casualty premiums written and 2) an
increase in the utilization of the Company's payment plans - as more premiums
were deferred, the balance in the accounts receivable increased.
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 and is established to provide for the
future payment of benefits on life insurance policies in force. As of June 30,
2001, future policy benefits grew by $65,982,000 (8%) to $888,140,000 from
December 31, 2000. An increase in deposits and interest credited (less certain
policy charges) from annuities and universal life products have resulted in the
increase in future policy benefits. Through the first half of 2001, annuity and
universal life deposits totaled $83,560,000 and interest credited to
policyholder accounts totaled $23,328,000.
The property and casualty segment's reserves for direct and assumed losses
and expenses increased by $3,551,000 (1%) to $361,583,000 between December 31,
2000 and June 30, 2001.
Accrued expenses and other liabilities decreased from $34,303,000 at
December 31, 2000 to $23,971,000 at June 30, 2001. Included in the December 31,
2000 accrued expenses and other liabilities was a negative cash balance of
$9,307,000, which primarily represents amounts which have been issued for claims
that have not yet cleared the banking system. Short-term investments are
available for the Company's cash needs. See "Cash flow and liquidity".
Deferred income taxes have increased by $1,786,000 to $14,031,000, due in
part to net unrealized appreciation on investment securities. Federal income
taxes on net unrealized appreciation are deferred until the securities are sold.
The Company has had limited involvement with derivative financial
instruments and does not engage in the derivative market for hedging purposes.
The Company has, at times, written covered call options to generate additional
portfolio income. There were $32,485 and $0 of open covered call options at June
30, 2001 and December 31, 2000, respectively.
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UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Stockholders' equity
The Company's stockholders' equity increased from $257,429,000 at December
31, 2000, to $266,572,000 at June 30, 2001, an increase of 4%. Increases to
equity included net income of $10,432,000 and net unrealized appreciation of
$2,323,000 (net of tax). Stockholder dividends of $3,612,000 decreased
stockholders' equity. As of June 30, 2001, the Company had authorization granted
by the Board of Directors to repurchase 89,210 shares of its common stock. The
Company did not repurchase shares of its common stock during the first half of
2001.
Cash flow and liquidity
Cash flow and liquidity is primarily derived from the operating cash flows
of the Company's property and casualty and life insurance operations. 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 $1,434,000
through June 30, 2001, versus $5,787,000 of cash provided by operating
activities through June 30, 2000.
Funds the Company has available for short-term cash needs are invested
primarily in money market accounts and fixed-income securities. At June 30,
2001, the Company's consolidated invested assets included $21,512,000 of
short-term investments. In addition, the Company maintains a $20 million bank
line of credit. During 2001 and 2000, the Company did not utilize the line of
credit. Under the terms of the agreement, interest on outstanding notes is
payable at the lender's prevailing prime rate, minus 1%. Management believes
that the Company's liquid assets and net cash provided by operations will enable
it to meet any expected cash requirements.
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 2000 Form 10-K.
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UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) 11 - Computation of Earnings Per Common Share
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)
August 2, 2001
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(Date)
- ----------------------------------
John A. Rife
President, Chief Executive Officer
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K.G. Baker
Vice President, Chief Financial Officer and Principal Accounting Officer
15