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 September 30, 1999
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 X
--- ---
As of November 3, 1999, 10,073,539 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 September 30, 1999 (unaudited)
and December 31, 1998 2
Unaudited Consolidated Statements of Operations for the three
month periods ended September 30, 1999 and 1998 3
Unaudited Consolidated Statements of Operations for the
nine month periods ended September 30, 1999 and 1998 4
Unaudited Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 1999 and 1998 5
Notes to Unaudited Consolidated Financial Statements 6
Report of Independent Public Accountants 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Part II. Other Information 19
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(In thousands)
- --------------------------------------------------------------------------------------------------------------------------
ASSETS September 30, December 31,
1999 1998
Unaudited Audited
- --------------------------------------------------------------------------------------------------------------------------
Investments
Fixed maturities
Held-to-maturity, at amortized cost (market
value $328,825 in 1999 and $626,180 in 1998) $ 321,082 $ 591,237
Available-for-sale, at market (amortized cost $761,076
in 1999 and $320,171 in 1998) 742,399 321,966
Equity securities (cost $38,730 in 1999 and $23,450 in 1998) 115,155 111,076
Mortgage loans - 2,777
Policy loans 8,621 8,707
Other long-term investments, at market (cost $12,288 in 1999
and $11,517 in 1998) 14,686 14,368
Short-term investments 18,451 33,985
- --------------------------------------------------------------------------------------------------------------------------
$1,220,394 $1,084,116
Cash and Cash Equivalents 1,116 -
Accrued Investment Income 17,853 16,130
Accounts Receivable 65,380 44,868
Deferred Policy Acquisition Costs 88,135 67,592
Property and Equipment 15,244 13,334
Reinsurance Receivables 36,055 12,910
Prepaid Reinsurance Premiums 3,145 2,923
Intangibles 9,070 817
Income Taxes Receivable 3,757 3,757
Other Assets 8,695 4,147
- --------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,468,844 $1,250,594
==========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Future policy benefits and losses, claims and settlement expenses
Property and casualty insurance $ 338,425 $ 251,117
Life insurance 669,625 575,189
Unearned premiums 155,474 116,418
Accrued expenses and other liabilities 32,551 18,922
Employee benefit obligations 12,934 9,813
Deferred income taxes 13,808 22,853
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $1,222,817 $ 994,312
- --------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock $ 33,595 $ 33,639
Additional paid-in capital 7,606 7,927
Retained earnings 160,179 155,421
Accumulated other comprehensive income, net of tax 44,760 59,295
Treasury Stock (113) -
- --------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 246,027 $ 256,282
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,468,844 $1,250,594
==========================================================================================================================
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 OPERATIONS
(In thousands, except per share data and number of shares)
- ---------------------------------------------------------------------------------------------------------------------------
Three months ended September 30,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Revenues
Net premiums earned $ 70,501 $ 61,543
Investment income, net 19,272 16,964
Realized investment gains and other income 593 318
Commission and policy fee income 502 487
- ---------------------------------------------------------------------------------------------------------------------------
90,868 79,312
- ---------------------------------------------------------------------------------------------------------------------------
Benefits, Losses and Expenses
Losses and settlement expenses 47,900 53,685
Increase in liability for future policy benefits 1,527 (263)
Amortization of deferred policy acquisition costs 14,334 12,168
Other underwriting expenses 9,367 13,103
Interest on policyholders' accounts 9,655 6,569
- ---------------------------------------------------------------------------------------------------------------------------
82,783 85,262
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 8,085 (5,950)
Federal income taxes (benefit) 1,687 (3,987)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 6,398 $ (1,963)
===========================================================================================================================
Earnings (loss) per common share $ 0.63 $ (0.19)
===========================================================================================================================
Weighted average common shares outstanding 10,078,294 10,088,460
===========================================================================================================================
Cash dividends declared per common share $ 0.17 $ 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 OPERATIONS
(In thousands, except per share data and number of shares)
- ---------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Revenues
Net premiums earned $ 191,299 $ 180,820
Investment income, net 55,047 49,986
Realized investment gains and other income 1,927 21,741
Commission and policy fee income 1,480 1,442
- ---------------------------------------------------------------------------------------------------------------------------
249,753 253,989
- ---------------------------------------------------------------------------------------------------------------------------
Benefits, Losses and Expenses
Losses and settlement expenses 141,120 142,803
Increase in liability for future policy benefits 4,126 2,094
Amortization of deferred policy acquisition costs 37,447 35,251
Other underwriting expenses 32,376 30,951
Interest on policyholders' accounts 24,796 19,435
- ---------------------------------------------------------------------------------------------------------------------------
239,865 230,534
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 9,888 23,455
Federal income taxes (benefit) (15) 3,926
Net Income $ 9,903 $ 19,529
===========================================================================================================================
Earnings per common share $ .98 $ 1.86
===========================================================================================================================
Weighted average common shares outstanding 10,083,729 10,495,773
===========================================================================================================================
Cash dividends declared per common share $ 0.51 $ 0.50
===========================================================================================================================
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)
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Nine months ended September 30,
1999 1998
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Cash Flows From Operating Activities
Net income $ 9,903 $ 19,529
- ----------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by
Operating activities
Net bond discount accretion (197) (429)
Depreciation and amortization 1,805 264
Realized investment gains (1,927) (21,741)
Changes in:
Accrued investment income (791) (853)
Accounts receivable (7,130) (4,529)
Deferred policy acquisition costs (16,153) (6,517)
Reinsurance receivables (847) (1,269)
Prepaid reinsurance premiums 3,048 878
Income taxes receivable/payable - (7,274)
Other assets (2,856) (633)
Future policy benefits and losses, claims and
Settlement expenses 18,390 20,764
Unearned premiums 10,277 12,763
Accrued expenses and other liabilities (2,893) 4,217
Employee benefit obligations 3,121 580
Deferred income taxes 281 -
Other, net 10,343 (3,400)
- ----------------------------------------------------------------------------------------------------------------------
Total adjustments $ 14,471 $ (7,179)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 24,374 $ 12,350
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Proceeds from sale of available-for-sale investments $ 25,327 $ 53,117
Proceeds from call and maturity of held-to-maturity investments 25,429 64,627
Proceeds from call and maturity of available-for-sale investments 58,023 19,778
Proceeds from sale of other investments 93,419 31,464
Purchase of investments held-to-maturity (1,662) (10,877)
Purchase of investments available-for-sale (208,192) (172,817)
Purchase of other investments (75,810) (28,690)
Proceeds from sale of property and equipment 937 2,275
Purchase of property and equipment (795) (1,391)
Acquisition of property & casualty company, net of cash acquired (22,249) -
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities $(105,573) $ (42,514)
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Policyholders' account balances
Deposits to investment and universal life type contracts $ 139,264 $ 113,320
Withdrawals from investment and universal life type contracts (49,614) (51,848)
Purchase and retirement of common stock (481) (26,723)
Payment of cash dividends (6,854) (6,963)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 82,315 $ 27,786
- ----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents $ 1,116 $ (2,378)
Cash and Cash Equivalents at Beginning of Year - 2,378
- ----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 1,116 $ -
======================================================================================================================
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. 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, 1998. 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.
Certain amounts included in the financial statements for the previous year
have been reclassified to conform with the financial statement presentation at
September 30, 1999.
For purposes of reporting cash flows, cash and cash equivalents include
cash and non-negotiable certificates of deposit with original maturities of
three months or less. Income taxes paid, net of refunds for the nine month
periods ended September 30, 1999 and 1998 were $(295,000) and $11,200,000,
respectively. There were no significant payments of interest through September
30, 1999 and 1998, other than interest credited to policyholders' accounts.
6
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
September 30, 1999 is as follows.
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- -----------------------------------------------------------------------------------------------------------------------------
September 30, 1999 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 $ 15,078 $ 29 $ 375 $ 14,732
Mortgage-backed securities 10,131 711 3 10,839
All others 1,796 260 - 2,056
States, municipalities and political 181,263 6,123 417 186,969
subdivisions
Foreign 3,037 32 - 3,069
Public utilities 19,520 234 88 19,666
Corporate bonds
Collateralized mortgage obligations 16,598 243 203 16,638
All other corporate bonds 73,659 1,554 357 74,856
- -----------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity $321,082 $ 9,186 $ 1,443 $328,825
=============================================================================================================================
Available-for-sale
Fixed Maturities
Bonds
United States Government,
Government agencies and authorities
Collateralized mortgage obligations $ 31,920 $ 90 $ 764 $ 31,246
Mortgage-backed securities 15,569 8 318 15,259
All others 40,549 160 671 40,038
States, municipalities and political subdivisions 88,517 1,152 3,471 86,198
Foreign 28,906 95 1,608 27,393
Public utilities 92,880 778 2,534 91,124
Corporate bonds
Collateralized mortgage obligations 69,998 1,926 1,158 70,766
All other corporate bonds 392,737 2,336 14,698 380,375
- -----------------------------------------------------------------------------------------------------------------------------
Total available-for-sale fixed maturities $761,076 $ 6,545 $25,222 $742,399
- -----------------------------------------------------------------------------------------------------------------------------
Equity securities
Common stocks
Public utilities $ 9,633 $ 8,668 $ 179 $ 18,122
Banks, trust and insurance companies 12,735 43,489 563 55,661
All other common stocks 15,429 25,492 436 40,485
Nonredeemable preferred stocks 933 - 46 887
- -----------------------------------------------------------------------------------------------------------------------------
Total equity securities $ 38,730 $77,649 $ 1,224 $115,155
- -----------------------------------------------------------------------------------------------------------------------------
Total available-for-sale $799,806 $84,194 $26,446 $857,554
=============================================================================================================================
Other long-term investments $ 12,288 $ 2,509 $ 111 $ 14,686
=============================================================================================================================
7
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 September 30, 1999 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)
- ----------------------------------------------------------------------------------------------------------------------
September 30, 1999 Held-to-maturity Available-for-sale
- ----------------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ----------------------------------------------------------------------------------------------------------------------
Due in one year or less $ 9,821 $ 9,944 $ 16,974 $ 16,767
Due after one year through five years 64,028 65,741 179,822 179,239
Due after five years through ten years 76,975 79,469 264,529 254,161
Due after ten years 128,451 131,462 182,264 174,961
Mortgage-backed securities 10,131 10,839 15,569 15,259
Collateralized mortgage obligations 31,676 31,370 101,918 102,012
- ----------------------------------------------------------------------------------------------------------------------
$321,082 $328,825 $761,076 $742,399
======================================================================================================================
Note 3. New Accounting Standards
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income",
governing the reporting and presentation of comprehensive income and its
components which includes traditional net income and items previously recorded
directly in equity, such as the change in unrealized gains or losses on
securities available-for-sale. In accordance with the interim reporting
guidelines of SFAS No. 130, comprehensive income (loss) was $(4,632,000) and
$2,330,000 for the nine months ended September 30, 1999 and 1998, respectively.
Comprehensive loss was $(2,938,000) and $(8,102,000) for the three months ended
September 30,1999 and 1998, respectively.
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" requiring that public businesses report financial and
descriptive information about its reportable operating segments effective
December 31, 1998. SFAS No. 131 did not have a material effect on the Company's
Consolidated Financial Statements or Notes to Consolidated Financial Statements.
Refer to Note 4 for interim disclosure.
Effective January 1, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." The new
statement standardizes the disclosure requirements for these benefit plans and
did not have a material effect on the Company's Consolidated Financial
Statements or Notes to Consolidated Financial Statements.
In June, 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities",
effective for all fiscal quarters of fiscal years beginning after June 15,1999.
The new statement requires all derivatives (including certain derivative
instruments embedded in other contracts) to be recorded on the balance sheet at
fair value and establishes special accounting for certain types of hedges. The
Company adopted SFAS No. 133 effective January 1, 1999. As part of the
implementation, the Company reclassed a portion of its fixed income securities
from the held-to-maturity category to the available-for-sale category, as of
January 1, 1999. Refer to Note 5 for further disclosure.
The Company adopted Statement of Position ("SOP") 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments," effective
January 1, 1999. The accounting guidance of this SOP focuses on the timing of
recognition and measurement of liabilities for insurance-related assessments.
Guidance is also provided on recording
8
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
assets representing future recoveries of assessments through premium tax offsets
or policy surcharges. The SOP was issued to reduce diversity in practice and to
improve comparability and disclosure. In accordance with SOP 97-3, the Company
estimates its liabilities for insurance-related assessments, as opposed to
recording the liability and expense when notified by insurance regulators. This
change in timing did not have a material effect on the Company's Consolidated
Financial Statements or Notes to Consolidated Financial Statements.
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use," was adopted by the Company effective January 1, 1999. This
SOP requires that certain costs related to the development or purchase of
internal-use software be capitalized and amortized over the estimated useful
life of the software. The SOP also requires that costs related to the
preliminary project stage and the post-implementation and operations stage of an
internal-use computer software development project be expensed as incurred. The
SOP changed the timing of the recognition of the Company's software development
expenses and did not have a material effect on the Company's Consolidated
Financial Statements or Notes to Consolidated Financial Statements.
SOP 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance
Contracts That Do Not Transfer Insurance Risk," is effective for financial
statements for fiscal years beginning after June 15, 1999. The SOP provides
guidance on accounting for insurance and reinsurance contracts that do not
transfer insurance risk. The impact of adopting SOP 98-7 is not expected to have
a material effect on the Company's Consolidated Financial Statements or Notes to
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
four 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 1998 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
- ------------------------------------------------------------------------------
September 30, 1999
- ------------------------------------------------------------------------------
Revenues $191,708 $ 58,225 $ 249,933
- ------------------------------------------------------------------------------
Intersegment eliminations (103) (77) (180)
- ------------------------------------------------------------------------------
Total revenues $191,605 $ 58,148 $ 249,753
===============================================================================
Net income $ 3,152 $ 6,751 $ 9,903
===============================================================================
Assets $667,145 $801,699 $ 1,468,844
===============================================================================
September 30, 1998
- ------------------------------------------------------------------------------
Revenues $203,637 $ 50,546 $ 254,183
- ------------------------------------------------------------------------------
Intersegment eliminations (105) (89) (194)
- ------------------------------------------------------------------------------
Total revenues $203,532 $ 50,457 $ 253,989
===============================================================================
Net income $ 12,677 $ 6,852 $ 19,529
===============================================================================
Assets $541,337 $672,702 $ 1,214,039
===============================================================================
Depreciation expense and property and equipment acquisitions are reflected in
the property and casualty insurance segment.
9
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Derivative Instruments
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," effective January 1, 1999. SFAS No. 133 cannot be applied
retroactively. The new statement requires all derivatives (including certain
derivative instruments embedded in other contracts) to be recorded on the
balance sheet as either an asset or a liability at fair value and establishes
special accounting for certain types of hedges. The Company has had limited
involvement with derivative financial instruments, and does not engage in the
derivative market for hedging purposes.
The Company has written 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 September 30, 1999, covered call options were written on
approximately two percent of the equity portfolio, compared to covered call
options written on approximately four percent of the equity portfolio at
December 31, 1998.
In assessing the impact of any embedded derivative instruments, the Company
has elected to apply SFAS No. 133 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.
As part of the implementation of SFAS No. 133, the Company was allowed to
reassess its held-to-maturity portfolio without "tainting" the remaining
securities classified as held-to-maturity. The cumulative effect of the impact
on the Company's Consolidated Financial Statements due to the reclassification
of $246,623,000 of fixed-income securities from held-to-maturity to available-
for-sale, as of January 1, 1999, increased the carrying value of available-for-
sale fixed-income securities by approximately $9,250,000 and other comprehensive
income by approximately $6,013,000, net of deferred income taxes.
Note 6. Acquisition
On August 10, 1999, the Company acquired American Indemnity Financial
Corporation ("American Indemnity") as a wholly owned subsidiary for
approximately $30,200,000 in cash in exchange for 1,962,410 shares of common
stock. Common stockholders of American Indemnity received approximately $14.35
per share of common stock at the closing of the transaction and deferred
consideration of up to $1.00 per share in two years, subject to adjustments
relating to indemnities. An escrow account with a balance of $1,990,000 is
included in the Company's consolidated balance sheets in other assets for
payment of the deferred consideration.
American Indemnity is a Galveston, Texas, based holding company that is made
up of the following regional property and casualty insurance companies: American
Indemnity Company, American Fire and Indemnity Company, Texas General Indemnity
Company, and American Indemnity Lloyds. The American Indemnity insurers offer
personal and commercial lines of insurance through independent agents.
The transaction was accounted for using the purchase method of accounting.
American Indemnity's results for the period August 10, 1999 through September
30, 1999 are included in the consolidated statements of operations for the
three-month and nine-month periods ended September 30, 1999. The purchase price
paid for American Indemnity has
10
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
been allocated to the assets acquired and liabilities assumed based on a
preliminary determination of their values and the excess purchase price has been
recorded as goodwill. The Company may adjust this purchase price allocation when
a final determination of fair values is made. However, any adjustment is not
expected to be material. Goodwill of approximately $9,100,000 will be amortized
on a straight-line basis for a period of ten years. The following schedule
summarizes the assets acquired and the liabilities assumed as of August 10,
1999.
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- ----------------------------------------------------------------------------------------------------------------------
Assets acquired
Fixed maturity securities $ 68,499
Equity securities 14,344
Other Assets 55,498
- ----------------------------------------------------------------------------------------------------------------------
Total assets acquired $138,341
======================================================================================================================
Liabilities assumed
Policy reserves and unearned premiums $102,483
Deferred income taxes (1,500)
Other liabilities 18,237
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities assumed $119,220
======================================================================================================================
Net assets acquired 19,121
- ----------------------------------------------------------------------------------------------------------------------
Excess of acquisition cost over net assets acquired 9,100
- ----------------------------------------------------------------------------------------------------------------------
Total purchase price $ 28,221
======================================================================================================================
In connection with the purchase, the Company developed a plan (the "exit
plan") to close certain branches and involuntarily terminate certain employees
of American Indemnity. A liability of $972,000 to reflect employee termination
benefits and future contractual lease payments related to abandoned facilities
was included in the allocation of the purchase price. During the third quarter
of 1999, the Company reduced this liability by $49,000 for lease payments on the
abandoned facilities. The exit plan is expected to be completed by the end of
1999.
The following table presents the unaudited proforma results of operations for
the three- and nine-month periods ended September 30, 1999 and 1998, had the
acquisition occurred on January 1, 1998.
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data)
- -----------------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended Three months ended Nine months ended
September 30, 1999 September 30, 1999 September 30, 1998 September 30, 1998
Unaudited Unaudited Unaudited Unaudited
- -----------------------------------------------------------------------------------------------------------------------------
Revenues $95,916 $287,111 $95,929 $306,315
Net income (loss) 4,930 6,267 (2,607) 14,695
Earnings (loss) per
share 0.49 .62 (0.26) 1.40
- -----------------------------------------------------------------------------------------------------------------------------
The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the operating results that would have
occurred had the acquisitions been consummated as of the above dates, nor are
such operating results necessarily indicative of future operating results.
11
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 September 30,
1999, and the related consolidated statements of operations for the three-month
and nine-month periods ended September 30, 1999 and 1998, and the consolidated
statements of cash flows for the nine-month periods ended September 30, 1999 and
1998. 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 generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our 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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of United Fire & Casualty Company and
Subsidiaries as of December 31, 1998, and, in our report dated February 17,
1999, we expressed an unqualified opinion on that statement. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 1998, 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
November 3, 1999
12
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis contains forward-looking
information as defined in the Private Securities Litigation Reform Act of 1995
and is therefore subject to certain risks and uncertainties. Actual results
could differ materially from information within the forward-looking statements
as a result of many factors, including, but not limited to, market conditions,
competition, and natural disasters.
RESULTS OF OPERATIONS
Net income, including realized capital gains, was $6,398,000 or $.63 per
share for the quarter ended September 30, 1999, compared to a net loss of
$(1,963,000) or $(.19) per share for the same period in 1998. An improvement in
property and casualty underwriting results was a contributing factor in the
Company's third quarter earnings improvement. In addition, the Company's life
segment continues to report profitable results. On a direct basis, the Company
has had minimal exposure to catastrophes during the third quarter, including
limited direct losses resulting from Hurricane Floyd. From an assumed
reinsurance perspective, it is too early to determine what the Company's
exposure to Hurricane Floyd will be. Early predictions of Floyd's potential
devastation were much higher than actual experience. As a result, management
feels that assumed losses from Hurricane Floyd will not have a material impact
on the Company's results.
On August 10, 1999, the Company acquired American Indemnity Financial
Corporation ("American Indemnity") as a wholly owned subsidiary for
approximately $30,200,000 in cash. Common stockholders of American Indemnity
received approximately $14.35 per share at the closing of the transaction and
deferred consideration of up to $1.00 per share in two years, subject to
adjustments relating to indemnities.
For the nine-month period ended September 30, 1999, the Company reported
net income, including realized capital gains, of $9,903,000 or $.98 per share,
compared to $19,529,000 or $1.86 per share for the same period in 1998. The 1998
results included $14,131,000 of realized capital gains (after tax), that
resulted from the sale of equity securities.
Property and casualty insurance segment
For the three months ended September 30, 1999, the property and casualty
segment earned $4,085,000, compared to a loss of $(4,439,000) for the third
quarter of 1998. Net catastrophe losses resulted in charges against net income
of $2,083,000 or $.21 per share, during the third quarter of 1999, compared to
$3,577,000 or $.35 per share for the third quarter of 1998. These losses added
five percent to the statutory combined ratio for the third quarter of 1999,
bringing the total quarter statutory combined ratio to 110 percent. For the
third quarter of 1998, catastrophe losses added 11 percent to the statutory
combined ratio, bringing the total quarter statutory combined ratio to 126
percent.
Premium volume for the property and casualty segment increased, after many
quarters of stagnant growth. Premiums written by the property and casualty
segment increased $10,414,000 or 19 percent between years for the three months
ended September 30, 1999 and 1998. Of the premiums written increase, $7,393,000
is attributable to the acquisition of American Indemnity. The acquired
subsidiary had premiums earned of $6,970,000 subsequent to the acquisition and
losses and expenses incurred of $9,835,000. Included in the earned premiums is a
write off of $2,057,000 due to unearned premium related to a canceled
reinsurance contract. Subsequent to the purchase, the Company arranged for
reinsurance coverage for American Indemnity under the Company's reinsurance
program.
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UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The group's three-month underwriting expenses have decreased by $3,736,000,
or 29 percent. Improved underwriting results have enabled the Company to defer a
larger amount of acquisition expenses as opposed to an immediate charge to
income, when compared to the same period in 1998.
Through September 30, 1999, the property and casualty segment earned
$3,151,000, compared to $12,677,000 through the first nine months of 1998. For
the first nine months of 1999, net catastrophe losses resulted in charges
against net income of $8,267,000 or $.82 per share, compared to $10,603,000 or
$1.01 per share for the first nine months of 1998. These losses added seven
percent to the 1999 nine-month statutory combined ratio bringing the total
statutory combined ratio to 112 percent. Through the first nine months of 1998,
catastrophe losses added ten percent to the statutory combined ratio, bringing
the total statutory combined ratio to 115 percent. Premiums written increased by
nine percent or $15,500,000 through September 30, 1999 when compared to the
first nine months of 1998.
Life insurance segment
Through September 30, 1999, the life segment reported net income of
$6,751,000, compared to $6,852,000 through the first nine months of 1998.
Premiums earned increased by $2,891,000 or 17 percent, primarily due to the
unearned premium on the Company's large block of credit life/A&H business
beginning to earn out. Investment income increased by $5,520,000 or 17 percent
between the two periods. Losses and settlement expenses decreased by $2,473,000
or 25 percent due to more favorable experience than last year when losses
incurred for the year totaled $12,299,000 or a 27 percent increase over the
prior year. The change in the liability for future benefits increased $2,032,000
or 97 percent primarily because annuity premium collected during the last six
months has increased $31,689,000 compared to a $10,699,000 decrease the first
three months of the year. The entire collected premium plus interest credited
causes an increase in this liability. The large increase in the liability has
been partially offset by the following three things: 1)relatively flat account
balance changes for the universal life block, 2)a decrease in credit life
premiums of $6,771,000 for the year and 3)most of the increase in traditional
policies issued during 1998 and 1999 have been term policies. This type of
policy carries a much lower reserve than the single premium whole life policies
that the Company issued in a larger than usual volume in 1997 and 1998. As the
balances in the annuity and universal life accounts increase by new premium so
does the interest credited to these accounts. In 1999 the Company has credited
$24,796,000 to these accounts which reflects a $5,361,000 or 28 percent increase
over the same period in 1998.
For the three months ended September 30, 1999, the life segment earned
$2,313,000, compared to $2,475,000 for the third quarter of 1998. Premiums
earned increased by $1,345,000 or 23 percent and investment income increased by
$2,156,000 or 19 percent between the two periods, while losses and settlement
expenses decreased by $1,624,000 or 46 percent. The increase in liability for
future policy benefits grew by $1,790,000 and interest on policyholders'
accounts increased by $3,087,000.
Investment results
Net investment income increased $5,061,000, or ten percent, through the
first nine months of 1999, compared to the same period in 1998. Realized
investment gains decreased by $19,814,000. A majority of the gains recognized
through the first nine months of 1998 resulted from sales of equity securities.
Proceeds from the sales in 1998 were used to repurchase 625,000 shares of the
Company's common stock and to rebalance its equity portfolio. Net unrealized
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UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
appreciation, net of tax, decreased $14,535,000 through September 30, 1999
compared to December 31, 1998, due to the general increase in interest rates
during 1999.
Tax benefit
The tax benefit of $15,000 for the nine-month period ended September 30,
1999, was due primarily to the deduction of municipal interest. As a result of
this deduction, the Company had a net operating loss for tax purposes, which was
carried back to 1997 and applied against income for that year, generating a tax
refund.
Stock options
In February and April 1999, the Company granted options under a
Nonqualified Employee Stock Option Plan to purchase an aggregate of 500 and
5,521 shares of common stock, respectively, at an exercise price of $29.25 and
$26.12 per share, to officers and other employees. At the date of grant
(measurement date), the market value of the Company's common stock was equal to
or less than the exercise price on all options. At September 30, 1999, the
market value of the Company's common stock was below the exercise price on all
options.
FINANCIAL CONDITION
Investments
The investment portfolio is comprised primarily of fixed maturity
securities and equity securities. The Company's investment strategy is to invest
principally in medium and long-term, high-quality securities. Fixed maturities,
which the Company has the ability and intent to hold to maturity, are classified
as held-to-maturity. The remaining fixed maturities and all of the Company's
equity securities are classified as available-for-sale.
Effective January 1, 1999, the Company reevaluated its investment
classifications and transferred $246,623,000 of fixed-income securities from
held-to-maturity to available-for-sale. This transfer was made in conjunction
with the implementation of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which allowed a one-time adjustment in its
classifications without the possibility of "tainting" the remaining securities
classified as held-to-maturity. The impact on the Company's Consolidated
Financial Statements as of January 1, 1999, due to the reclassification from
held-to-maturity to available-for-sale increased the carrying value of
available-for-sale fixed-income securities by approximately $9,250,000,
increased other comprehensive income by approximately $6,013,000 and increased
deferred income taxes by approximately $3,237,000.
The Company has had limited involvement with derivative financial
instruments, and does not engage in the derivative market for hedging purposes.
The Company has investments in collateralized mortgage obligations, which
account for 13 percent of the fixed-income portfolio at September 30, 1999,
compared to 16 percent as of December 31, 1998.
Other assets
Deferred acquisition costs total $88,135,000 at September 30, 1999 and
represent deferred underwriting and acquisition expenses associated with writing
insurance policies. For the property and casualty segment, deferred acquisition
costs are amortized over the life of the policies written to attain a matching
of revenue to expenses. The life segment amortizes deferred acquisition costs
over gross profits. For the nine months ended September 30, 1999, the Company's
life segment has generated a $13,025,000 increase in deferred acquisition costs
due to growth during the second quarter of 1999 in credit life and accident and
health statutory premiums collected. The property and casualty
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UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
segment had an increase of $7,518,000 in deferred acquisition costs, due in
large part to the acquisition. American Indemnity's deferred acquisition costs
were calculated in a manner consistent with the methodology employed by the
Company.
Accounts receivable, which pertains to the property and casualty segment,
are amounts due from insurance agents and brokers for premiums written, less
commissions paid. The balance at September 30, 1999, of $65,380,000 has
increased 46 percent from December 31, 1998. Accounts receivable from the agents
of American Indemnity contributed $13,893,000 of the growth. Increased property
and casualty premium writings is also contributing to growth in accounts
receivable. The Company has not experienced problems with the collection of
balances from its agents. Reinsurance receivables grew significantly due to
balances owed American Indemnity by its reinsurance brokers. At September 30,
1999, American Indemnity had over $20,000,000 in receivables related to loss
reserves prior to the purchase. This large volume reflects American Indemnity's
prior low loss retention levels. Other assets increased by $4,548,000 due
primarily to miscellaneous assets acquired in the purchase of American
Indemnity, an escrow for deferred compensation related to the purchase, and to
balances owed the Company from investment brokers for trades made and not yet
settled.
Liabilities
The Company's largest liability is that of future policy benefits, which
relates exclusively to the life segment. The liability increased by $94,436,000
or 16 percent between December 31, 1998, and September 30, 1999. Future policy
benefits are increased immediately by the full premiums paid by policyholders
for annuity products and most universal life products. As these product lines
grow, the future policy benefits grow proportionately. Reserves for claims and
settlement expenses, which relate primarily to the property and casualty
segment, also increased through September 30, 1999, when compared to December
31, 1998. Direct and assumed reserves established for losses and expenses have
increased $87,308,000, or 35 percent. Of this increase, $72,772,000 relates to
the purchase of American Indemnity. At September 30, 1999, covered call options
were written on approximately two percent of the equity portfolio, compared to
approximately four percent of the equity portfolio at December 31, 1998.
Stockholders' equity
The Company's stockholders' equity decreased by $10,255,000 to $246,027,000
at September 30, 1999, compared to December 31, 1998. Net income of $9,903,000
increased equity, while net unrealized depreciation on the Company's available-
for-sale securities and other long-term investments decreased equity by
$14,535,000. The Company declared $5,142,000 in stockholders' dividends through
September 30, 1999, and the Company purchased 18,328 shares of its common stock
at a cost of $481,000 during the first nine months of 1999.
Cash flow and liquidity
Most of the cash the Company receives is generated from insurance premiums
paid by policyholders and from investment income. 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 $24,374,000 through the first half of
1999, compared to $12,350,000 through the first nine months of 1998. Operating
cash flows continue to be ample to meet obligations to policyholders.
Short-term investments, composed of money market accounts and fixed-income
securities, are available for the Company's short-term cash needs. In addition,
the Company maintains a $20 million line of credit with a local bank. Under
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UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
the terms of the agreement, interest on outstanding notes is payable at the
lender's prevailing prime rate less one percent. The Company had a balance
payable on the line of credit of $1,875,000 as of September 30, 1999.
Impact of Year 2000
The insurance industry is data intensive and utilizes computer technology
extensively. The Year 2000 problem is, simply stated, the inability to correctly
process dates after December 31, 1999.
The Company recognizes that the Year 2000 problem is a major business issue
in addition to a technical problem. In 1989, the Company issued a ten-year term
bond policy. It was recognized then that the commonly used two digit year was
going to be inadequate for processing beyond 1999. A plan was developed that
would allow the information services department, through routine program and
system maintenance, to gradually migrate to a four-digit year. By the mid-1990s
the Company had progressed beyond the awareness phase and was well into the
formal planning and execution/testing phases. Testing of the Company's "mission
critical systems" was completed by December 31, 1998. Testing included present
and future date testing which simulated critical dates in the Year 2000. The
Company has successfully completed the move of all tested internal systems into
production.
The Company has reviewed all significant vendors, suppliers and agents to
ensure that written statements of their readiness and commitment to a date for
their Year 2000 compliance are received. The Company will continue to monitor
the Year 2000 status of these entities and has developed a comprehensive
contingency plan to reduce the possible disruption in business operations that
may result from the failure of third parties with which the Company has business
relationships to address their Year 2000 issues. Should a third party with whom
the Company transacts business have a system failure due to not being Year 2000
compliant, the Company believes this could result in a delay in processing or
reporting transactions of the Company, or a potential disruption in service to
our customers.
The failure of the Company's systems or the systems of its vendors to be
compliant with the Year 2000 could result in the incorrect processing of
critical financial and operational information. The Company is analyzing its
processing in an effort to identify the nature and magnitude of problems that
could result from such system errors. The Company has prepared a contingency
plan that will detail alternative processing methods in the event that systems,
including secondary systems, fail. This plan is available for review and has
been forwarded to the Iowa Insurance Department.
The Company is currently reviewing the systems and equipment of American
Indemnity for Year 2000 compliance. The Company's home office staff has made
several site visits to American Indemnity to ensure that all systems are
compliant and tested by December 31, 1999. There are two American Indemnity
systems which are not Year 2000 compliant. One of the systems, a software
package for creating statutory annual filings, will be compliant by the end of
year. The other system, commercial rating software, is being replaced by the
Company's own systems, which are Year 2000 compliant. In the event that this
conversion and testing would not take place by December 31, 1999, the Company
has a plan of action to rate American Indemnity's commercial policies manually.
American Indemnity's personal workstations are approximately 85 percent
compliant, and will be 100 percent compliant by December 31, 1999.
The Company is also addressing areas other than Information Technology to
ensure Year 2000 compliance. An assessment has identified the non-IT assets that
may be impacted by the Year 2000 problem and most of these problem areas have
been corrected. Although there are a few items that remain, none were deemed
critical and all will be compliant by the end of 1999. Expenses incurred in
connection with programming and testing have been expensed as incurred and
absorbed into normal operating expenses. Costs incurred through September 30,
1999, were approximately $1,400,000. The Company believes the remaining costs
for the Year 2000 compliance will include salaries and overhead for existing
personnel of approximately $100,000 and replacement of hardware of approximately
$50,000.
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UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
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 on several 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 1998 Form 10-K.
18
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
27 - Financial Data Schedule
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)
November 3, 1999
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(Date)
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John A. Rife
President
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K.G. Baker
Vice President , Chief Financial Officer and Principal Accounting Officer
19