UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended March 31, 2002
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 6, 2002, 10,036,819 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 March 31, 2002 (unaudited) and
December 31, 2001 2
Unaudited Consolidated Statements of Income for the three month periods ended
March 31, 2002 and 2001 3
Unaudited Consolidated Statements of Cash Flows for the three month periods ended
March 31, 2002 and 2001 4
Notes to Unaudited Consolidated Financial Statements 5
Report of Independent Public Accountants 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(In thousands)
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS March 31, December 31,
2002 2001
Unaudited Audited
- --------------------------------------------------------------------------------------------------------------------------------
Investments
Fixed maturities
Held-to-maturity, at amortized cost (market
value $236,545 in 2002 and $252,481 in 2001) $ 227,529 $ 241,616
Available-for-sale, at market (amortized cost $1,204,650
in 2002 and $1,142,669 in 2001) 1,193,526 1,142,614
Equity securities, at market (cost $35,880 in 2002 and $35,151 in 2001) 117,302 110,357
Policy loans 8,260 8,201
Other long-term investments, at market (cost $10,002 in 2002
and $10,002 in 2001) 9,853 10,166
Short-term investments 13,075 48,008
- ------------------------------------------------------------------------------------------------------------------------------
$ 1,569,545 $ 1,560,962
Cash and Cash Equivalents $ 12,627 $ 150
Accrued Investment Income 23,976 25,723
Accounts Receivable 96,682 88,380
Deferred Policy Acquisition Costs 112,023 102,703
Property and Equipment 14,791 15,233
Reinsurance Receivables 44,142 45,656
Prepaid Reinsurance Premiums 5,726 4,050
Intangibles 2,545 3,177
Income Taxes Receivable - 368
Other Assets 5,426 5,437
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,887,483 $ 1,851,839
==============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future policy benefits and losses, claims and settlement expenses
Property and casualty insurance $ 364,543 $ 366,519
Life insurance 977,773 956,797
Unearned premiums 198,953 187,787
Accrued expenses and other liabilities 29,829 35,139
Employee benefit obligations 14,744 13,950
Income taxes payable 1,341 -
Deferred income taxes 14,110 12,659
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 1,601,293 $ 1,572,851
- ------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock $ 33,456 $ 33,453
Additional paid-in capital 6,928 6,912
Retained earnings 198,499 189,214
Accumulated other comprehensive income, net of tax 47,307 49,409
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 286,190 $ 278,988
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,887,483 $ 1,851,839
==============================================================================================================================
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)
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Three months ended March 31,
2002 2001
- ---------------------------------------------------------------------------------------------------------------
Revenues
Net premiums earned $ 97,382 $ 87,804
Investment income, net 24,902 23,485
Realized investment gains and other income 555 925
Commission and policy fee income 407 538
- --------------------------------------------------------------------------------------------------------------
123,246 112,752
- --------------------------------------------------------------------------------------------------------------
Benefits, Losses and Expenses
Losses and settlement expenses 65,650 56,483
Increase in liability for future policy benefits 1,481 1,472
Amortization of deferred policy acquisition costs 17,254 14,947
Other underwriting expenses 10,829 13,501
Interest on policyholders' accounts 12,504 11,428
- --------------------------------------------------------------------------------------------------------------
107,718 97,831
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 15,528 14,921
Federal income taxes 4,436 4,274
- --------------------------------------------------------------------------------------------------------------
Net income $ 11,092 $ 10,647
==============================================================================================================
Earnings available to common shareholders $ 11,092 $ 10,647
==============================================================================================================
Weighted average common shares outstanding 10,036,475 10,035,819
==============================================================================================================
Basic earnings per common share $ 1.11 $ 1.06
==============================================================================================================
Diluted earnings per common share $ 1.10 $ 1.06
==============================================================================================================
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 CASH FLOWS
(In thousands)
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Three months ended March 31,
2002 2001
- -----------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 11,092 $ 10,647
- -----------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by
operating activities
Net bond discount accretion $ (248) $ (133)
Depreciation and amortization 1,285 1,214
Realized investment gains (544) (925)
Changes in:
Accrued investment income 1,747 752
Accounts receivable (8,302) (12,043)
Deferred policy acquisition costs (9,320) 2,852
Reinsurance receivables 1,514 1,668
Prepaid reinsurance premiums (1,676) (559)
Income taxes receivable 368 658
Other assets 11 450
Future policy benefits and losses, claims and
settlement expenses 1,581 (4,936)
Unearned premiums 11,166 10,364
Accrued expenses and other liabilities (5,310) (12,257)
Employee benefit obligations 794 223
Income taxes payable 1,341 1,670
Deferred income taxes 2,179 1,820
Other, net 2,247 (7,877)
- -----------------------------------------------------------------------------------------------------------------
Total adjustments $ (1,167) $ (17,059)
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Net cash provided by (used in) operating activities $ 9,925 $ (6,412)
- -----------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Proceeds from sale of available-for-sale investments $ - $ 43,178
Proceeds from call and maturity of held-to-maturity investments 14,261 11,538
Proceeds from call and maturity of available-for-sale investments 36,315 22,188
Proceeds from sale of short-term and other investments 111,675 93,333
Purchase of held-to-maturity investments - (1,397)
Purchase of available-for-sale investments (98,417) (112,982)
Purchase of short-term and other investments (76,702) (64,277)
Purchase of property and equipment (211) (586)
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities $ (13,079) $ (9,005)
- -----------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Policyholders' account balances
Deposits to investment and universal life contracts $ 44,260 $ 60,326
Withdrawals from investment and universal life contracts (26,841) (27,426)
Purchase and retirement of common stock 19 -
Payment of cash dividends (1,807) (1,806)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 15,631 $ 31,094
- -----------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents $ 12,477 $ 15,677
Cash and Cash Equivalents at Beginning of Year 150 -
- -----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 12,627 $ 15,677
=================================================================================================================
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. BASIS OF PRESENTATION
The terms "United Fire," "we," "us," or "our" refer to United Fire &
Casualty Company or United Fire & Casualty Company and its consolidated
subsidiaries and affiliate, as the context requires. In the opinion of the
management of United Fire, 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 our annual report on Form 10-K for the year ended December 31,
2001. The review report of Arthur Andersen LLP accompanies the unaudited
consolidated financial statements included in Item 1 of Part I.
We maintain our records in conformity with the accounting practices
prescribed or permitted by the Insurance Departments of the states in which we
are domiciled (statutory accounting principles). 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, the 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, 2002 and 2001. There were no significant payments of interest
through March 31, 2002 and 2001, other than interest credited to policyholders'
accounts.
NOTE 2. NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," which became effective January 1, 2002. SFAS No. 141 requires all
business combinations initiated after June 30, 2001, to be accounted for using
the purchase method. Additionally, an acquired intangible asset should be
recognized separately 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. We
have evaluated our intangible asset of $7.9 million established in the purchase
of American Indemnity Financial Corporation in 1999 in accordance with SFAS
No.141, and determined that we are subject to the provision of SFAS No.141
requiring that an intangible asset arising out of contractual or other legal
rights should be recognized separately from goodwill and amortized over its
estimated useful life. We are amortizing this intangible asset on a
straight-line basis over a 10-year estimated useful life, which results in an
annual amortization expense of $785,000, or $196,000 per quarter. Accumulated
amortization of $1.9 million has been expensed through December 31, 2001. The
carrying value of our intangible asset had been reduced by $3.7 million through
December 31, 2001 as a result of adjustments to the deferred tax valuation
allowance also established in the acquisition of American Indemnity Financial
Corporation. Further adjustments to this deferred tax valuation allowance will
also reduce the intangible asset until the carrying value is zero. During the
first quarter of 2002, this intangible asset has been further reduced by
$548,000 due to additional adjustments to the deferred tax valuation allowance.
5
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible
Assets", which became 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. Pursuant to the adoption of SFAS No. 141, we do not have
any unamortized goodwill reported at January 1, 2002. The adoption of SFAS No.
142 had no effect on our Consolidated Financial Statements.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which becomes effective for fiscal years beginning
after June 15, 2002. SFAS No. 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible, long-lived assets
and the associated asset retirement costs. We have not yet determined the impact
that the adoption of this statement will have on our Consolidated Financial
Statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which becomes effective for fiscal
years beginning after December 15, 2001, and interim periods within those fiscal
years. SFAS No. 144 revises and clarifies the existing professional guidance
addressing: (a) recognition and measurement of the impairment of long-lived
assets to be held and used; (b) the measurement of long-lived assets to be
disposed of by sale; and (c) the reporting of discontinued operations and
components of an entity that either has been disposed of (by sale, by
abandonment, or in a distribution to owners) or is classified as held for sale.
The adoption of SFAS No. 144 had no effect on our Consolidated Financial
Statements.
NOTE 3. SEGMENT INFORMATION
We have two reportable business segments in our 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 our home
office. The two segments are evaluated by management on both a statutory and a
GAAP basis. Results are analyzed based on a variety of factors including
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 our annual report on Form 10-K for the year ended December 31,
2001. Since all insurance is sold domestically, we have no revenue allocated to
foreign operations. The following analysis is reported on a GAAP basis and is
reconciled to our unaudited Consolidated Financial Statements.
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
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Property and Life
Casualty Insurance Insurance Total
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Three Months Ended March 31, 2002
- ----------------------------------------------------------------------------------------------------------------------------
Revenues $ 97,705 $ 25,627 $ 123,332
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Intersegment eliminations (31) (55) (86)
- ----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 97,674 $ 25,572 $ 123,246
============================================================================================================================
Net income $ 8,368 $ 2,724 $ 11,092
============================================================================================================================
Assets $ 736,621 $ 1,150,862 $1,887,483
============================================================================================================================
Three Months Ended March 31, 2001
- ----------------------------------------------------------------------------------------------------------------------------
Revenues $ 88,951 $ 23,870 $ 112,821
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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
============================================================================================================================
Depreciation expense and property and equipment acquisitions are reflected in
the property and casualty insurance segment.
6
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Derivative Instruments
We write covered call options on our equity portfolio to generate
additional portfolio income; we do 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 loss, 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, 2002 we had $200,000 in open covered call options.
In assessing the impact of any embedded derivative instruments, we have
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 us after
December 31, 1997. We have analyzed our financial instruments and contracts in
accordance with SFAS No. 133 and determined there is no material effect on our
Consolidated Financial Statements.
NOTE 5. COMPREHENSIVE INCOME
The change in our stockholders' equity from transactions and other events
and circumstances from non-shareholder sources is referred to as comprehensive
income. It includes all changes in equity during a period except those resulting
from investments by shareholders and dividends to shareholders. The primary
components of our comprehensive income are net income and net unrealized gains
and losses on available-for-sale securities. Comprehensive income was $8,990,000
and $15,186,000 for the three months ended March 31, 2002 and 2001,
respectively.
NOTE 6. ESCROW AGREEMENT
During the third quarter of 2001, we presented a claim against an escrow
account held for the deferred payment of $1.00 per share to prior shareholders
of American Indemnity Financial Corporation ("AIFC"), which was acquired by us
in August of 1999. As of September 30, 2001, the amount of this escrow totaled
$1,990,000 and is recorded as a part of other assets on our Consolidated Balance
Sheet. Representatives of AIFC have responded to our claim. We are corresponding
with AIFC's stockholder representatives and we expect to have a resolution to
the excrow claim later this year.
NOTE 7. EARNINGS PER SHARE
We compute earnings per share in accordance with SFAS No. 128, "Earnings
per Share". Basic earnings per share is computed by dividing net income
available to common shareholders by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share gives effect to all
dilutive potential common shares outstanding during the period (including stock
options), using the treasury stock method. In computing diluted earnings per
share, the average fair market value of the stock for the period is used in
determining the number of shares assumed to be purchased from the exercise of
stock options. The calculation of basic and diluted earnings per share is
displayed in the following table.
- -----------------------------------------------------------------------------------------------------------------------
March 31 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Earnings available to common shareholders $11,092,000 $10,647,000
Weighted average common shares outstanding 10,036,475 10,035,819
Effect of stock options outstanding (dilutive potential shares)
7,396 456
- -----------------------------------------------------------------------------------------------------------------------
Weighted average common and potential shares outstanding 10,043,871 10,036,275
Basic earnings per share
1.11 1.06
Diluted earnings per share
1.10 1.06
=======================================================================================================================
7
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, 2002,
and the related consolidated statements of income for the three-month periods
ended March 31, 2002 and 2001, and the consolidated statements of cash flows for
the three-month periods ended March 31, 2002 and 2001. 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, 2001 and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended (not presented separately herein) and, in our report dated
February 8, 2002, 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, 2001, 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 6, 2002
8
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 which involve risks and
uncertainties that could cause actual results to differ materially from those
expected and projected. Such forward-looking statements are based on current
expectations, estimates, forecasts and projections about the industry in which
we operate, management's beliefs, and assumptions made by management. Words such
as "expects," "anticipates," "intends," "plans," "believes," "continues,"
"seeks," "estimates," "predicts," "should," "could," "may," "will continue,"
"might" and variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed in such forward-looking statements. Among the
factors that could cause our actual outcomes and results to differ are the
following: uncertainties with respect to loss reserving; the occurrence of
catastrophic events or other insured or reinsured events with a frequency or
severity exceeding our estimates; the actual amount of new and renewal business
and demand for our products and services; the competitive environment in which
we operate, including price, product and service competition; developments in
domestic and global financial markets that could affect our investment portfolio
and financing plans; estimates of the financial statement impact of regulatory
actions; uncertainties relating to government and regulatory policies; legal
developments; changing rates of inflation, interest rates and other economic
conditions; the impact of mergers and acquisitions, including the ability to
successfully integrate acquired businesses and achieve cost savings; a
continuation of the global economic slowdown or a broad downturn in the economy
in general; our relationship with our agencies; the valuation of invested
assets; the recovery of deferred acquisition costs; or our relationship with our
reinsurers. These are representative of the risks, uncertainties and assumptions
that could cause actual outcomes and results to differ materially from what is
expressed in forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of their
dates. Except as required under the federal securities laws and the rules and
regulations of the Securities and Exchange Commission, we do not have any
intention or obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
RESULTS OF OPERATIONS
Our net operating income for the three months ended March 31, 2002 was
$10.7 million, or $1.07 per share, versus $10.0 million, or $1.00 per share, for
the three months ended March 31, 2001. For the first quarter of 2002, net income
was $11.1 million, or $1.11 basic earnings per share, which includes net
realized capital gains of $354,000, or four cents basic earnings per share.
Diluted earnings for the first quarter of 2002 was $1.10 per share. For the
three months ended March 31, 2001, net income was $10.6 million, or $1.06 basic
and diluted earnings per share, including net realized capital gains of
$601,000, or six cents per share.
Results between the first quarters of 2002 and 2001 improved due to
property and casualty premium growth, which resulted primarily from the
continuation of pricing increases and from fewer and less severe losses due to
catastrophes. Net premiums written through the first quarter of 2002 were $100.4
million compared to $91.3 million for the same period last year. While property
and casualty premiums grew, underwriting expenses decreased slightly, partially
as the result of the reduction of our assumed reinsurance business, which has a
higher commission expense than our direct
9
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
business. In addition, because our growth in premiums was generated through
pricing, as opposed to increased policy count, our cost of underwriting the
business has not grown proportionately with the increase in premium volume.
The rates we pay for reinsurance increased on our reinsurance contracts
that renewed on January 1, 2002, and those contracts now limit or exclude
coverage for terrorist activities. We will utilize terrorist exclusions on our
direct policies, to the extent such exclusions are approved by state regulators.
We expect continued price increases to occur in the property and casualty
insurance industry due to the anticipated industry-wide increase in reinsurance
rates.
PROPERTY AND CASUALTY INSURANCE SEGMENT
Our property and casualty segment reported a gross underwriting profit of
$4.1 million in the first quarter of 2002, compared to $3.3 million for the
first quarter of 2001. As a measure of our underwriting profitability, we
calculate a "combined ratio," which is the sum of two ratios, the loss ratio and
the expense ratio. On a statutory basis of accounting, the loss ratio is
calculated by dividing net losses and net loss adjustment expenses incurred by
net premiums earned, because losses occur over the life of a policy. On a
statutory basis of accounting, the expense ratio is stated as a percentage of
premiums written rather than premiums earned, because most underwriting expenses
are paid when policies are written and are not amortized over the policy period.
The statutory underwriting profit margin is the extent to which the combined
ratio is less than 100 percent. For the first quarter of 2002, our statutory
combined ratio was 98 percent, compared to 96 percent for the first quarter of
2001.
Under generally accepted accounting principles, the loss ratio is computed
in the same manner as under the statutory basis of accounting, but the expense
ratio is determined by matching underwriting expenses to the period when net
premiums were earned, rather than by when net premiums were written. Through the
first quarter of 2002, our combined ratio, calculated on the basis of generally
accepted accounting principles, was 95 percent, compared to 96 percent for the
first quarter of 2001.
Property and casualty losses and loss adjustment expenses incurred
increased by $8.7 million between March 31, 2002 and March 31, 2001. We
experienced an improvement in profitability in our two largest lines of
business, fire and allied lines and automobile, due to both pricing initiatives
and fewer and less severe catastrophe losses. However, results deteriorated in
our workers' compensation, other liability and assumed reinsurance lines of
business. An increase in severity has contributed to deterioration in our
workers' compensation business. A small number of products liability losses led
to increased losses in the other liability lines of business. Additionally, we
have had losses related to the run-off from some of our assumed reinsurance
business. Pre-tax catastrophe losses, net of reinsurance, were $436,000 for the
first quarter of 2002, which added less than one point to the combined ratio,
with an after-tax earnings impact of 3 cents per share. For the same period in
2001, pre-tax catastrophe losses were $1.4 million, which added 2 points to the
first quarter 2001 combined ratio, with an after-tax earnings impact of nine
cents per share.
LIFE INSURANCE SEGMENT
Our life insurance segment recorded net income of $2.7 million for the
first quarter of both 2002 and 2001. Between quarters, premiums earned increased
by $504,000. Our life insurance segment's increase in net investment income of
$1.6 million, or nine percent, was offset by an increase in losses of $471,000,
or 13 percent, and an increase in interest credited on policyholders' accounts
of $1.1 million, or nine percent. For the first quarter of 2002, we credited
interest of $12.5 million to policyholder accounts, compared to interest
credited of $11.4 million for the first quarter of 2001.
10
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INVESTMENT RESULTS
We recorded consolidated pre-tax investment income of $24.9 million for the
first quarter of 2002, compared with $23.5 million for the first quarter of
2001. During the first three months of 2002, our invested assets grew from $1.56
billion to $1.57 billion.
We did not record impairments on investment securities during the first
quarter of 2001 or 2002. Our accounting policy for impairment recognition
requires other-than-temporary impairment charges to be recorded when we
determine that we are unable to recover our cost basis in an investment.
Impairment charges on investments are included in net realized gains and losses.
Factors considered in evaluating whether a decline in value is
other-than-temporary include: the length of time and the extent to which the
fair value has been less than cost; the financial conditions and near-term
prospects of the issuer; and our intent and ability to retain the investment for
a period of time sufficient to allow for any anticipated recovery.
The composition of our investment portfolio at March 31, 2002 is presented
in the following table in accordance with generally accepted accounting
principles:
Property & Casualty Life
Segment Segment Total
---------------------------- ----------------------------- --------------------------
($ in thousands) Percent of Percent of Percent of
Total Total Total
------------ -------------- --------------
Fixed income/(1)/ $ 400,038 75.2% $ 1,021,017 98.4% $ 1,421,055 90.6%
Equity 111,002 20.9 6,300 0.6 117,302 7.5
Policy - 0.0 8,260 0.8 8,260 0.5
Short- 10,515 2.0 2,560 0.2 13,075 0.8
Other 9,853 1.9 - 0.0 9,853 0.6
--------- ---------- ------------ --------- ----------- --------
Total $ 531,408 100.0% $ 1,038,137 100.0% $ 1,569,545 100.0%
========= ========== ============ ========= ----------- --------
/(1)/ Available for sale fixed income securities are carried at fair value,
while held to maturity fixed income securities are carried at amorized
cost.
11
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION,
As of March 31, 2002, when compared to December 31, 2001, our assets,
liabilities and stockholders' equity each increased by two percent. Invested
assets, primarily fixed income securities, increased $8.6 million, or one
percent, from December 31, 2001. Included in this growth is a decrease of $2.8
million attributable to changes in the market prices of our securities
classified as available-for-sale and other invested assets, both of which are
reported at fair value. The unrealized appreciation from these investments is
reported net of tax as a separate component of stockholders' equity.
At March 31, 2002, $1,193.5 million, or 84 percent, of our fixed income
security portfolio was classified as available-for-sale, compared to $1,142.6
million, or 83 percent, at December 31, 2001. Our remaining fixed income
securities are classified as held-to-maturity and are reported at amortized
cost. We did not have securities classified as trading securities at March 31,
2002 or December 31, 2001.
We defer and capitalize, to the extent recoverable, commissions and other
costs of underwriting insurance, which vary with and are primarily related to
the production of our property and casualty lines of business. To attain a
matching of revenue to expense, the deferred acquisition costs asset is
amortized over the life of the insurance policies written. Growth in premiums
written will typically result in an increase of the deferred acquisition costs
asset. However, the deferred acquisition costs asset is limited by
unprofitability in individual lines of business. Therefore, if a line of
business is unprofitable, we are limited in the underwriting expenses, if any,
that we may capitalize and amortize for that line of business. In addition, a
premium deficiency will be recognized if the expected loss ratio for a line of
business exceeds 100 percent. This deficiency is charged against unamortized
deferred acquisition costs to the extent necessary to eliminate the deficiency.
Our property and casualty insurance segment's deferred acquisition costs
asset increased $4.5 million, or 15 percent, to $33.8 million at March 31, 2002,
from the deferred acquisition costs asset at December 31, 2001. The growth was
attributable to the increase in premiums written and reduced premium deficiency
in our homeowners and reinsurance assumed lines of business.
Deferred policy acquisition costs related to traditional life insurance
policies are amortized over the premium paying period of the related policies in
proportion to the ratio of the present value of annual expected premium income
to the present value of total expected premium income. Adjustments are made each
year to recognize actual experience as compared to assumptions used for the
current period.
Deferred policy acquisition costs related to annuity and universal life
contracts sold by our life segment are deferred and amortized using the
retrospective deposit method. Under the retrospective deposit method,
acquisition costs are amortized in proportion to the present value of expected
gross profits from investment, mortality and expense margins and surrender
charges. Actual gross profits can vary from our estimates, resulting in
increases or decreases in the rate of amortization. We periodically review these
estimates and evaluate the recoverability of the deferred acquisition costs
asset. When appropriate, we revise our assumptions on the estimated gross
profits of these contracts and the cumulative amortization for the books of
business are re-estimated and adjusted by a cumulative charge or credit to
income.
One component of our life segment's estimate of the deferred acquisition
costs asset related to universal life and annuity business is the impact of
unrealized gains and losses resulting from certain available-for-sale securities
in our investment portfolio. At March 31, 2002, our life segment's deferred
acquisition costs increased by $4.8 million, or seven
12
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
percent from December 31, 2001. The unrealized loss component of our life
segment's deferred acquisition costs calculation contributed an increase of $3.2
million in the reported deferred acquisition costs asset.
Cash flow and liquidity is primarily derived from operating cash flows. We
invest premiums and annuity deposits in assets maturing at regular intervals in
order to meet our obligations to pay policy benefits, claims and claim adjusting
expenses. Net cash provided by our operating activities was $9.9 million through
March 31, 2002, compared to cash used of $6.4 million through March 31, 2001. We
also have significant cash flows from sales and scheduled and unscheduled
investment security maturities, redemptions and prepayments. These cash flows
totaled $50.6 million through March 31, 2002 and $76.9 through March 31, 2001.
If our operating and investment cash flows are not sufficient to support our
operations, we have short-term investments which we could utilize for that
purpose. We may also borrow up to $20 million on a bank line of credit.
Funds we have available for short-term cash needs are invested primarily in
money market accounts and fixed income securities. At March 31, 2002, our
consolidated invested assets included $13.1 million of short-term investments.
We did not utilize our line of credit during 2002 or 2001. Under the terms of
our credit agreement, interest on outstanding notes is payable at the lender's
prevailing prime rate, minus one percent.
Stockholders' equity increased from $279.0 million at December 31, 2001 to
$286.2 million at March 31, 2002, an increase of three percent. Net income of
$11.1 million increased equity. Decreases to equity included net unrealized
depreciation of $2.1 million, after tax, and stockholder dividends of $1.8
million. At March 31, 2002, book value was $28.51 per share, compared to $27.80
per share at December 31, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure to market risk arising from potential losses due to
adverse changes in interest rates and market prices. Our primary market risk
exposure is changes in interest rates, although we have some exposure to changes
in equity prices and limited exposure to foreign currency exchange rates.
The active management of market risk is integral to our operations.
Investment guidelines are in place that define the overall framework for
managing our market and other investment risks, including accountability and
controls. In addition, we have for each of our subsidiaries specific investment
policies 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, we 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 us. Generally, the calls are written on stocks we view as over-priced
relative to their market value. Writing of in-the-money calls at transaction
date has not been done, but we are 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 our market risk or market risk
factors from that reported in our annual report on Form 10-K for the year ended
December 31, 2001.
13
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Fourth Restated Articles of Incorporation (incorporated
by reference to Exhibit 4.1 of the registrant's
Amendment No. 1 to Form S-3 Registration Statement
filed with the Securities and Exchange Commission on
April 4, 2002, SEC File Number 333-83446)
First Amendment to Fourth Restated Articles of
Incorporation (incorporated by reference to Exhibit 4.3
of the registrant's Amendment No. 3 to Form S-3
Registration Statement filed with the Securities and
Exchange Commission on May 4, 2002, SEC File Number
333-83446)
3.2 By Laws of United Fire & Casualty Company, as amended,
incorporated by reference from the Registrant's form
S-8 Registration Statement, filed with the Commission
on December 19, 1997.
10.1 United Fire & Casualty Company Nonqualified Employee
Stock Option Plan, incorporated by reference from
Registrant's form S-8 Registration Statement, filed
with the Commission on September 9, 1998.
10.2 United Fire & Casualty Company Employee Stock Purchase
Plan, incorporated by reference from Registrant's form
S-8 Registration Statement, filed with the Commission
on December 22, 1997.
11 Statement re: computation of per share earnings.
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED FIRE & CASUALTY COMPANY
- -----------------------------------------------
(Registrant)
May 6, 2002
- -----------------------------------------------
(Date)
/S/ John A. Rife
- -----------------------------------------------
John A. Rife
President, Chief Executive Officer
/S/ K.G. Baker
- -----------------------------------------------
K.G. Baker
Vice President, Chief Financial Officer and Principal Accounting Officer
14