UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
INDEX
Part 1. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2001 (unaudited) and
December 31, 2000 2
Unaudited Consolidated Statements of Income for the three month periods ended
March 31, 2001 and 2000 3
Unaudited Consolidated Statements of Cash Flows for the three month periods ended
March 31, 2001 and 2000 4
Notes to Unaudited Consolidated Financial Statements 5
Report of Independent Public Accountants 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
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 March 31, December 31,
2001 2000
Unaudited Audited
- -------------------------------------------------------------------------------------------------------------------
Investments
Fixed maturities
Held-to-maturity, at amortized cost (market
value $285,330 in 2001 and $292,857 in 2000) $ 273,443 $ 283,431
Available-for-sale, at market (amortized cost $1,001,368
in 2001 and $952,949 in 2000) 997,773 928,947
Equity securities (cost $31,000 in 2001 and $30,667 in 2000) 106,027 111,132
Policy loans 8,343 8,437
Other long-term investments, at market (cost $11,524 in 2001
and $12,326 in 2000) 11,950 12,864
Short-term investments 29,902 58,290
- -------------------------------------------------------------------------------------------------------------------
$ 1,427,438 $ 1,403,101
Cash and Cash Equivalents $ 15,677 $ -
Accrued Investment Income 21,826 22,578
Accounts Receivable 75,998 63,955
Deferred Policy Acquisition Costs 95,547 98,399
Property and Equipment 16,452 16,732
Reinsurance Receivables 39,819 41,487
Prepaid Reinsurance Premiums 3,405 2,846
Intangibles 6,111 6,459
Income Taxes Receivable - 658
Other Assets 5,829 6,279
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,708,102 $ 1,662,494
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future policy benefits and losses, claims and settlement expenses
Property and casualty insurance $ 351,183 $ 358,032
Life insurance 856,971 822,158
Unearned premiums 175,576 165,212
Accrued expenses and other liabilities 22,046 34,303
Employee benefit obligations 13,338 13,115
Income taxes payable 1,670 -
Deferred income taxes 16,509 12,245
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 1,437,293 $ 1,405,065
- -------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock $ 33,453 $ 33,453
Additional paid-in capital 6,912 6,912
Retained earnings 181,187 172,346
Accumulated other comprehensive income, net of tax 49,257 44,718
- -------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 270,809 $ 257,429
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,708,102 $ 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 March 31,
2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Revenues
Net premiums earned $ 87,804 $ 78,808
Investment income, net 23,485 20,783
Realized investment gains and other income 925 108
Commission and policy fee income 538 533
- ----------------------------------------------------------------------------------------------------------------------
112,752 100,232
- ----------------------------------------------------------------------------------------------------------------------
Benefits, Losses and Expenses
Losses and settlement expenses 56,483 56,018
Increase in liability for future policy benefits 1,472 1,955
Amortization of deferred policy acquisition costs 14,947 14,783
Other underwriting expenses 13,501 14,421
Interest on policyholders' accounts 11,428 9,503
- ----------------------------------------------------------------------------------------------------------------------
97,831 96,680
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes 14,921 3,552
Federal income tax 4,274 170
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 10,647 $ 3,382
======================================================================================================================
Earnings available to common shareholders $ 10,647 $ 3,382
======================================================================================================================
Weighted average common shares outstanding 10,035,819 10,060,061
======================================================================================================================
Basic and diluted earnings per common share $ 1.06 $ 0.34
======================================================================================================================
Cash dividends declared per common share $ 0.18 $ 0.17
======================================================================================================================
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 CASH FLOWS
(In thousands)
- ------------------------------------------------------------------------------------------------------------------
Three months ended March 31,
2001 2000
- ------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 10,647 $ 3,382
Adjustments to reconcile net income to net cash provided by
operating activities
Net bond discount accretion $ (133) $ (3)
Depreciation and amortization 1,214 713
Realized investment gains (925) (108)
Changes in:
Accrued investment income 752 582
Accounts receivable (12,043) (3,493)
Deferred policy acquisition costs 2,852 (1,769)
Reinsurance receivables 1,668 (7,192)
Prepaid reinsurance premiums (559) 593
Income taxes receivable 658 734
Other assets 450 (902)
Future policy benefits and losses, claims and
settlement expenses (4,936) 6,467
Unearned premiums 10,364 4,075
Accrued expenses and other liabilities (12,257) 1,916
Employee benefit obligations 223 521
Income taxes payable 1,670 -
Deferred income taxes 1,820 (438)
Other, net (7,877) (61)
- ------------------------------------------------------------------------------------------------------------------
Total adjustments $ (17,059) $ 1,635
- ------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities $ (6,412) $ 5,017
- ------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Proceeds from sale of available-for-sale investments $ 43,178 $ 6,220
Proceeds from call and maturity of held-to-maturity investments 11,538 7,309
Proceeds from call and maturity of available-for-sale investments 22,188 21,655
Proceeds from sale of short-term and other investments 93,333 11,390
Purchase of held-to-maturity investments (1,397) (2,333)
Purchase of available-for-sale investments (112,982) (67,087)
Purchase of short-term and other investments (64,277) (8,803)
Proceeds from sale of property and equipment - 53
Purchase of property and equipment (586) (164)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities $ (9,005) $(31,760)
- ------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Policyholders' account balances
Deposits to investment and universal-life-type contracts $ 60,326 $ 53,645
Withdrawals from investment and universal-life-type contracts (27,426) (23,983)
Purchase and retirement of common stock - (65)
Payment of cash dividends (1,806) (1,710)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 31,094 $ 27,887
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents $ 15,677 $ 1,144
Cash and Cash Equivalents at Beginning of Year - 9,749
- ------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 15,677 $ 10,893
==================================================================================================================
The Notes to Unaudited Consolidated Financial Statements are an integral part of
these statements.
4
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
In the opinion of the management of United Fire & Casualty Company and
Subsidiaries (the "Company"), the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the financial position, the results of operations,
and cash flows for the periods presented. The results for the interim periods
are not necessarily indicative of the results of operations that may be expected
for the year. The financial statements contained herein should be read in
conjunction with the Company's annual report on Form 10-K for the year ended
December 31, 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. There were no income taxes paid for the three month periods
ended March 31, 2001 and 2000. There were no significant payments of interest
through March 31, 2001 and 2000, other than interest credited to policyholders'
accounts.
5
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Investments
A reconciliation of the amortized cost (cost for equity securities) to fair
values of investments in held-to-maturity and available-for-sale fixed
maturities, marketable equity securities and other long-term investments as of
March 31, 2001 is as follows.
- -----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- -----------------------------------------------------------------------------------------------------------------
March 31, 2001 Gross Gross
Amortized Unrealized Unrealized Fair
Type of Investment Cost Appreciation Depreciation Value
- -----------------------------------------------------------------------------------------------------------------
Held-to-maturity
Fixed Maturities
Bonds
United States Government,
Government agencies and authorities
Collateralized mortgage obligations $ 15,105 $ 348 $ - $ 15,453
Mortgage-backed securities 7,446 591 - 8,037
All others 1,847 316 - 2,163
States, municipalities and political subdivisions 163,572 8,524 521 171,575
Foreign 3,021 159 - 3,180
Public utilities 17,961 461 - 18,422
Corporate bonds
Collateralized mortgage obligations 9,225 212 - 9,437
All other corporate bonds 55,266 1,816 19 57,063
- -----------------------------------------------------------------------------------------------------------------
Total held-to-maturity $ 273,443 $ 12,427 $ 540 $ 285,330
=================================================================================================================
Available-for-sale
Fixed Maturities
Bonds
United States Government,
Government agencies and authorities
Collateralized mortgage obligations $ 27,754 $ 909 $ - $ 28,663
Mortgage-backed securities 12 1 - 13
All others 32,267 1,255 54 33,468
States, municipalities & political subdivisions 80,047 2,044 175 81,916
Foreign 33,583 651 1,692 32,542
Public utilities 185,056 6,075 1,852 189,279
Corporate bonds
Collateralized mortgage obligations 39,896 977 507 40,366
All other corporate bonds 602,753 13,433 24,660 591,526
- -----------------------------------------------------------------------------------------------------------------
Total available-for-sale fixed maturities $1,001,368 $ 25,345 $28,940 $ 997,773
=================================================================================================================
Equity securities
Common stocks
Public utilities $ 2,644 $ 5,741 $ - $ 8,385
Banks, trust and insurance companies 8,851 42,082 152 50,781
All other common stocks 19,133 28,638 1,272 46,499
Nonredeemable preferred stocks 372 6 16 362
- -----------------------------------------------------------------------------------------------------------------
Total available-for-sale equity securities $ 31,000 $ 76,467 $ 1,440 $ 106,027
- -----------------------------------------------------------------------------------------------------------------
Total available-for-sale $1,032,368 $101,812 $30,380 $1,103,800
=================================================================================================================
Other long-term investments $ 11,524 $ 715 $ 289 $ 11,950
=================================================================================================================
6
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, 2001 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.
- ---------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- ---------------------------------------------------------------------------------------------------
March 31, 2001 Held-to-maturity Available-for-sale
- ---------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ---------------------------------------------------------------------------------------------------
Due in one year or less $ 15,356 $ 15,545 $ 23,807 $ 23,096
Due after one year through five years 56,987 59,299 392,168 391,292
Due after five years through ten years 71,668 75,198 342,752 341,873
Due after ten years 97,656 102,361 174,980 172,470
Mortgage-backed securities 7,446 8,037 12 14
Collateralized mortgage obligations 24,330 24,890 67,649 69,028
- ---------------------------------------------------------------------------------------------------
$273,443 $285,330 $1,001,368 $997,773
===================================================================================================
Note 3. 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 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.
Note 4. Segment Information
The Company has two reportable business segments in its operations;
property and casualty insurance and life insurance. The property and casualty
segment has five locations from which it conducts its business. All offices
target a similar customer base and market the same products, using the same
marketing strategies, and are therefore aggregated. The life insurance segment
operates from the Company's home office. The two segments are evaluated by
management, based on both a statutory and a GAAP basis. Results are analyzed
based on profitability, expenses and return on equity. The basis for determining
and analyzing segments and the measurement of segment profit has not changed
from that reported in the Company's 2000 Form 10-K. The Company's selling
location is used in allocating revenues between
7
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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
- ----------------------------------------------------------------------------------------------
March 31, 2001
- ----------------------------------------------------------------------------------------------
Revenues $ 88,951 $ 23,870 $ 112,821
- ----------------------------------------------------------------------------------------------
Intersegment eliminations (34) (35) (69)
- ----------------------------------------------------------------------------------------------
Total revenues $ 88,917 $ 23,835 $ 112,752
==============================================================================================
Net income $ 7,912 $ 2,735 $ 10,647
==============================================================================================
Assets $ 687,582 $ 1,020,520 $ 1,708,102
==============================================================================================
March 31, 2000
- ----------------------------------------------------------------------------------------------
Revenues $ 79,308 $ 20,991 $ 100,299
- ----------------------------------------------------------------------------------------------
Intersegment eliminations (34) (33) (67)
- ----------------------------------------------------------------------------------------------
Total revenues $ 79,274 $ 20,958 $ 100,232
==============================================================================================
Net income $ 1,404 $ 1,978 $ 3,382
==============================================================================================
Assets $ 645,830 $ 866,256 $ 1,512,086
==============================================================================================
Depreciation expense and property and equipment acquisitions are reflected in
the property and casualty insurance segment.
Note 5. Derivative Instruments
The Company writes covered call options on its equity portfolio to generate
additional portfolio income and does not use these instruments for hedging
purposes. Covered call options are recorded at fair value and included in
accrued expenses and other liabilities. Any income or gains or losses, including
the change in the fair value of the covered call options, is recognized
currently in earnings and included in realized investment gains and other
income. At March 31, 2001 the Company had no open covered call options. In
assessing the impact of any embedded derivative instruments, the Company has
elected to apply Statement of Financial Accounting Standards ("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 6. Comprehensive Income
Comprehensive income was $15,186,000 and $3,820,000 for the three months ended
March 31, 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 March 31, 2001,
and the related consolidated statements of income for the three-month periods
ended March 31, 2001 and 2000, and the consolidated statements of cash flows for
the three-month periods ended March 31, 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
May 3, 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
Net operating income, which excludes net realized gains on securities, was
$10,046,000 or $1.00 per share for the first quarter of 2001, compared to
$3,312,000 or $.33 per share for the first quarter of 2000. Increased premium
revenue, a reduction of underwriting expenses and improved catastrophe loss
experience contributed to the Company's first quarter earnings.
Revenue, comprised of premiums earned, commission income, net investment
income and net realized gains on securities, was $112,752,000 for the first
quarter of 2001, compared to $100,232,000 for the same period in 2000. Net
premiums written for the quarter were up by $15,105,000 to $97,364,000, an
increase of 18%. Price increases and new business in the property and casualty
segment were the primary contributors to this growth. Net investment income also
increased, rising to $23,485,000 for the three months ended March 31, 2001,
compared to $20,783,000 for the first quarter of 2000.
The GAAP combined ratio improved to 93% for the first quarter of 2001 from
107% for the same period last year. Excluding catastrophes, the GAAP combined
ratio was 91% for the first quarter of 2001 and 95% for the first quarter of
2000. The after-tax charge to earnings from catastrophes was $914,000, or $.09
per share, for the first quarter of 2001 compared to $5,439,000, or $.54 per
share, for the first quarter of 2000. The reduction in underwriting expenses was
due in part to the closing of four southern branch offices and efficiency gains
in other areas of the Company, both of which occurred throughout 2000.
Net income for the first quarter of 2001 was $10,647,000, or $1.06 per share,
compared to net income of $3,382,000, or $.34 per share, for the first quarter
of 2000. The Company recorded after-tax realized investment gains and other
income of $601,000 in the first quarter of 2001, compared to $70,000 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
Property and casualty insurance segment
For the first quarters of 2001 and 2000, the property and casualty segment
recorded net income of $7,912,000 and $1,404,000, respectively. Results of the
segment benefited from the reduction in catastrophes and the improvement in
underwriting expenses. Net written premiums of $91,332,000 was up 19% over the
first quarter of 2000. Based upon current conditions, management anticipates
that annual growth in property and casualty premiums written in 2001 will be
approximately 15%.
Life insurance segment
For the first quarter of 2001, the life segment reported net income of
$2,735,000, compared to net income of $1,978,000 for the first quarter of 2000.
Premium revenue was relatively flat between the first quarters of 2001 and 2000,
while net investment income grew by $2,565,000, or 18%. Net realized investment
gains were $506,000 in the first quarter of 2001, compared to net realized
investment losses of $2,000 in the first quarter of 2000. The life segment's
operating expenses increased by $1,706,000, or 10%, between the first quarters
of 2001 and 2000, due primarily to interest credited to new and existing
policies.
Investment results
The increase in net investment income from $20,783,000 in the first quarter of
2000 to $23,485,000 in the first quarter of 2001 was attributable to growth in
the Company's investment portfolio. Realized investment gains on securities
increased by $817,000 to $925,000 through March 31, 2001, when compared to the
same period in 2000. This increase was attributable to gains realized on
available-for-sale corporate fixed income securities that were sold during the
first quarter 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 $24,337,000, or 2%, between December 31, 2000 and March 31, 2001. Of
this growth, $14,857,000 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 March 31, 2001, $997,773,000, or 78%, 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 March 31, 2001 or December 31, 2000.
11
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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. 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 quarter
of 2001, a decrease in the life segment's unrealized loss component resulted in
a decrease to DAC of $7,877,000. As of March 31, 2001, this component
contributed $3,863,000 to the reported DAC asset, compared to $11,741,000 as of
December 31, 2000. The variance in this component is the primary reason for a
decrease in the life segment's DAC balance, from $75,014,000 at December 31,
2000 to $69,687,000 at March 31, 2001, a change of 7%.
Deferred acquisition costs of the property and casualty segment, uneffected by
unrealized gains or losses, increased during the first quarter of 2001 by
$2,475,000, or 11%, to $25,860,000. The segment's growth in premium volume was
the primary contributor to this increase.
Accounts receivable are amounts due from property and casualty insurance
agents and brokers for premiums written less commissions paid. These receivables
increased by 19%, or $12,043,000, from $63,955,000 to $75,998,000 between
December 31, 2000 and March 31, 2001. The increase in property and casualty
writings accounted for the growth in this asset. 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
payment of policy benefits that are to be paid in the future. With respect to
annuity and most universal life products, the Company records a liability equal
to the amount of the premiums paid by policyholders, less insurance charges and
expense loads, plus interest credited to the policy. As deposits from annuities
and universal life products have grown, future policy benefits have grown. The
liability increased by $34,813,000, or 4%, to $856,971,000 between December 31,
2000 and March 31, 2001. Direct and assumed reserves established for losses and
expenses decreased by $6,849,000, or 2%, to $351,183,000 from December 31, 2000
to March 31, 2001.
Accrued expenses and other liabilities decreased from $34,303,000 at December
31, 2000 to $22,046,000 at March 31, 2001 due to settlement of accounts payable.
Expenses the Company accrues at the end of the year, such as premium taxes and
contingent commissions payable to property and casualty agents, are
substantially paid for by the end of the following first quarter. 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".
12
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Deferred income taxes have increased by $4,264,000 to $16,509,000, due in part
to growth in unrealized appreciation of $6,983,000. 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 no open covered call options at March 31, 2001 and December
31, 2000.
Stockholders' equity
The Company's stockholders' equity increased from $257,429,000 at December 31,
2000, to $270,809,000 at March 31, 2001, an increase of 5%. Increases to equity
included net income of $10,647,000 and net unrealized appreciation of $4,539,000
(net of tax). Stockholder dividends of $1,806,000 decreased stockholders'
equity. The Company did not repurchase shares of its common stock during the
first quarter of 2001. As of March 31, 2001, the Company had authorization
granted by the Board of Directors to repurchase 89,210 shares of its common
stock.
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 used in the Company's operating activities was $(6,412,000) through March
31, 2001, versus $5,017,000 of cash provided by operating activities through
March 31, 2000.
Funds the Company has available for short-term cash needs are invested
primarily in money market accounts and fixed-income securities. At March 31,
2001, the Company's consolidated invested assets included $29,902,000 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 foreseeable 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.
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UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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)
May 3, 2001
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(Date)
John A. Rife
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John A. Rife
President, Chief Executive Officer
K.G. Baker
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K.G. Baker
Vice President, Chief Financial Officer and Principal Accounting Officer
15