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, 1999
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
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As of May 5, 1999, 10,091,721 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, 1999 (unaudited) and 2
December 31, 1998
Unaudited Consolidated Statements of Operations for the three month periods ended
March 31, 1999 and 1998 3
Unaudited Consolidated Statements of Cash Flows for the three month periods ended
March 31, 1999 and 1998 4
Notes to Unaudited Consolidated Financial Statements 5
Report of Independent Public Accountants 10
Item 2. Management's Discussion and Analysis of Financial Condition and 11
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Part II. Other Information 15
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
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ASSETS MARCH 31, December 31,
1999 1999
UNAUDITED Audited
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INVESTMENTS
Fixed maturities
Held-to-maturity, at amortized cost (market
value $354,035 in 1999 and $626,180 in 1998) $ 334,563 $ 591,237
Available-for-sale, at market (amortized cost $603,962
in 1999 and $320,171 in 1998) 608,354 321,966
Equity securities (cost $25,618 in 1999 and $23,450 in 1998) 106,112 111,076
Mortgage loans 2,753 2,777
Policy loans 8,776 8,707
Other long-term investments, at market (cost $11,782 in 1999
and $11,517 in 1998) 14,889 14,368
Short-term investments 20,802 33,985
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$1,096,249 $1,084,116
CASH AND CASH EQUIVALENTS 8,432 -
ACCRUED INVESTMENT INCOME 16,036 16,130
ACCOUNTS RECEIVABLE 47,615 44,868
DEFERRED POLICY ACQUISITION COSTS 68,766 67,592
PROPERTY AND EQUIPMENT 12,905 13,334
REINSURANCE RECEIVABLES 16,545 12,910
PREPAID REINSURANCE PREMIUMS 2,533 2,923
INTANGIBLES 755 817
INCOME TAXES RECEIVABLE 3,509 3,757
OTHER ASSETS 4,082 4,147
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TOTAL ASSETS $1,277,427 $1,250,594
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Future policy benefits and losses, claims and settlement expenses
Property and casualty insurance $ 262,352 $ 251,117
Life insurance 597,717 575,189
Unearned premiums 118,508 116,418
Accrued expenses and other liabilities 12,711 18,922
Employee benefit obligations 10,382 9,813
Deferred income taxes 21,017 22,853
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TOTAL LIABILITIES $1,022,687 $ 994,312
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STOCKHOLDERS' EQUITY
Common stock $ 33,639 $ 33,639
Additional paid-in capital 7,927 7,927
Retained earnings 156,668 155,421
Accumulated other comprehensive income, net of tax 56,743 59,295
Treasury stock (237) -
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TOTAL STOCKHOLDERS' EQUITY $ 254,740 $ 256,282
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,277,427 $1,250,594
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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)
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Three months ended March 31,
1999 1998
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Revenues
Net premiums earned $ 60,150 $ 59,336
Investment income, net 17,436 16,226
Realized investment gains and other income 1,038 4,203
Commission and policy fee income 433 464
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79,057 80,229
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Benefits, Losses and Expenses
Losses and settlement expenses 45,261 41,106
Increase in liability for future policy benefits 1,108 1,373
Amortization of deferred policy acquisition costs 10,916 10,929
Other underwriting expenses 10,942 8,756
Interest on policyholders' accounts 8,080 6,187
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76,307 68,351
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Income before income taxes 2,750 11,878
Federal income taxes (benefit) (214) 2,996
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Net income $ 2,964 $ 8,882
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Earnings per common share $ 0.29 $ 0.83
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Weighted average common shares outstanding 10,091,721 10,720,430
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Cash dividends declared per common share $ 0.17 $ 0.16
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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,
1999 1998
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Cash Flows From Operating Activities
Net income $ 2,964 $ 8,882
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Adjustments to reconcile net income to net cash provided by
Operating activities
Net bond discount accretion (74) (45)
Depreciation and amortization 814 805
Realized investment gains (1,038) (4,203)
Changes in:
Accrued investment income 94 (18)
Accounts receivable (2,747) (2,223)
Deferred policy acquisition costs (1,174) (4,132)
Reinsurance receivables (3,635) (300)
Prepaid reinsurance premiums 390 130
Income taxes receivable/payable 248 (1,970)
Other assets 65 2,339
Future policy benefits and losses, claims and
settlement expenses 13,008 10,341
Unearned premiums 2,090 2,227
Accrued expenses and other liabilities (4,495) (4,953)
Employee benefit obligations 569 485
Deferred income taxes (462) 968
Other, net (195) (194)
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Total adjustments $ 3,458 $ (743)
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Net cash provided by operating activities $ 6,422 $ 8,139
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Cash Flows From Investing Activities
Proceeds from sale of available-for-sale investments $ 10,240 $ 6,612
Proceeds from call and maturity of held-to-maturity investments 10,186 29,577
Proceeds from call and maturity of available-for-sale investments 11,557 8,540
Proceeds from sale of other investments 30,143 15,218
Purchase of investments held-to-maturity - (6,848)
Purchase of investments available-for-sale (60,059) (64,112)
Purchase of other investments (16,820) (10,439)
Proceeds from sale of property and equipment - 16
Purchase of property and equipment (323) (175)
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Net cash used in investing activities $(15,076) $(21,611)
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Cash Flows From Financing Activities
Policyholders' account balances
Deposits to investment and universal life type contracts $ 35,390 $ 44,028
Withdrawals from investment and universal life type contracts (14,635) (19,698)
Purchase and retirement of common stock - (768)
Payment of cash dividends (3,432) (3,430)
Purchase of common stock (237) (49)
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Net cash provided by financing activities $ 17,086 $ 20,083
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Net Increase in Cash and Cash Equivalents $ 8,432 $ 6,611
Cash and Cash Equivalents at Beginning of Year - 2,378
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Cash and Cash Equivalents at End of Period $ 8,432 $ 8,989
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The Notes to Unaudited Consolidated Financial Statements are an integral part of
these statements.
4
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In the opinion of the management of United Fire & Casualty Company and
Subsidiaries (the "Company"), the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the financial position, the results of operations,
and cash flows for the periods presented. The results for the interim periods
are not necessarily indicative of the results of operations that may be expected
for the year. The financial statements contained herein should be read in
conjunction with the Company's annual report on Form 10-K for the year ended
December 31, 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
March 31, 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 three month periods
ended March 31, 1999 and 1998 were $0 and $4,000,000, respectively. There were
no significant payments of interest through March 31, 1999 and 1998, other than
interest credited to policyholders' accounts.
5
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. INVESTMENTS
A reconciliation of the amortized cost (cost for equity securities) to fair
values of investments in held-to-maturity and available-for-sale fixed
maturities, marketable equity securities and other long-term investments as of
March 31, 1999 is as follows.
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(Dollars in Thousands)
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MARCH 31, 1999 Gross Gross
Amortized Unrealized Unrealized Fair
TYPE OF INVESTMENT Cost Appreciation Depreciation Value
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HELD-TO-MATURITY
Fixed Maturities
Bonds
United States Government,
Government agencies and authorities
Collateralized mortgage obligations $ 15,068 $ 248 $ - $ 15,316
Mortgage-backed securities 12,454 1,070 - 13,524
All others 1,781 349 - 2,130
States, municipalities and political subdivisions 186,087 12,783 - 198,870
Foreign 3,043 179 6 3,216
Public utilities 20,306 605 - 20,911
Corporate bonds
Collateralized mortgage obligations 18,234 488 30 18,692
All other corporate bonds 77,590 3,792 6 81,376
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Total held-to-maturity $334,563 $ 19,514 $ 42 $354,035
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AVAILABLE-FOR-SALE
Fixed Maturities
Bonds
United States Government,
government agencies and authorities
Collateralized mortgage obligations $ 37,670 $ 971 $ 8 $ 38,633
Mortgage-backed securities 41 3 - 44
All others 9,813 73 110 9,776
States, municipalities & political subdivisions 80,315 2,438 224 82,529
Foreign 22,186 134 1,712 20,608
Public utilities 59,558 1,113 496 60,175
Corporate bonds
Collateralized mortgage obligations 70,326 3,085 799 72,612
All other corporate bonds 324,053 5,540 5,616 323,977
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Total available-for-sale fixed maturities $603,962 $ 13,357 8,965 $608,354
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Equity securities
Common stocks
Public utilities $ 3,525 $ 7,735 $ - $ 11,260
Banks, trust and insurance companies 9,057 50,264 - 59,321
All other common stocks 13,036 22,766 271 35,531
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Total equity securities $ 25,618 $ 80,765 $271 $106,112
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Total available-for-sale $629,580 $ 94,122 9,236 $714,466
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Other long-term investments $ 11,782 $ 3,194 $ 87 $ 14,889
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6
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of held-to-maturity and available-for-sale
fixed maturities at March 31, 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.
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(Dollars in Thousands)
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MARCH 31, 1999 Held-to-maturity Available-for-sale
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Amortized Fair Amortized Fair
Cost Value Cost Value
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Due in one year or less $ 5,772 $ 5,880 $ 3,836 $ 3,891
Due after one year through five years 69,119 72,571 133,531 135,029
Due after five years through ten years 78,479 83,390 215,464 213,700
Due after ten years 135,437 144,662 143,094 144,445
Mortgage-backed securities 12,454 13,524 41 44
Collateralized mortgage obligations 33,302 34,008 107,996 111,245
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$334,563 $354,035 $603,962 $608,354
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NOTE 3. NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted 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 was $412,000 and
$9,363,000 for the three months ended March 31, 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 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, effective 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 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
7
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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. All of the Company's reinsurance agreements are
risk-transferring arrangements, accounted for according to SFAS No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts." The impact of adopting SOP 98-7 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 10K. 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.
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(Dollars in Thousands)
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PROPERTY AND LIFE
CASUALTY INSURANCE INSURANCE TOTAL
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MARCH 31, 1999
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Revenues $ 60,162 $ 18,954 $ 79,116
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Intersegment eliminations (34) (25) (59)
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Total revenues $ 60,128 $ 18,929 $ 79,057
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Net income $ 141 $ 2,823 $ 2,964
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Assets $543,351 $734,076 $1,277,427
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MARCH 31, 1998
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Revenues $ 64,013 $ 16,304 $ 80,317
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Intersegment eliminations (44) (44) (88)
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Total revenues $ 63,969 $ 16,260 $ 80,229
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Net income $6,902 $1,980 $ 8,882
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Assets $571,060 $623,662 $1,194,722
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Depreciation expense and property and equipment acquisitions are reflected in
the property and casualty insurance segment.
8
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 writes covered call options on its equity portfolio to
generate additional portfolio income, and does not use these instruments for
hedging purposes. Covered call options are recorded at fair value and
included in accrued expenses and other liabilities. 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, 1999, covered
call options were written on approximately five percent of the equity
portfolio, compared to approximately four percent 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, effective 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. PENDING ACQUISITION
The Company and American Indemnity Financial Corporation ("American
Indemnity") signed a definitive agreement on March 4, 1999, whereby the Company
will acquire American Indemnity as a wholly owned subsidiary for approximately
$30,205,000 in cash. Common stockholders of American Indemnity would receive
approximately $14.35 per share at the closing of the transaction and deferred
consideration of $1.00 per share in two years, subject to adjustments relating
to indemnities.
The acquisition is conditioned upon approval by American Indemnity's common
shareholders, approvals from insurance regulators in Texas, Colorado and Iowa,
where the insurance companies are domiciled, compliance with all applicable
provisions of the Hart-Scott-Rodino Antitrust Improvement Act of 1976 and the
expiration of all applicable waiting periods thereunder and certain other
customary conditions. It is anticipated that the acquisition will be completed
during the third quarter of 1999.
For the year ended December 31, 1998, total assets of American Indemnity
were $152,608,000, total revenues were $69,289,000 and a net loss of $5,846,000
was reported.
9
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, 1999,
and the related consolidated statements of operations for the three-month
periods ended March 31, 1999 and 1998, and the consolidated statements of cash
flows for the three-month periods ended March 31, 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
May 5, 1999
10
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This information contained in the following 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
PROPERTY AND CASUALTY INSURANCE SEGMENT
Premiums earned by the Company's property and casualty segment decreased
$198,000 in the first quarter of 1999, compared to the same period in 1998. The
segment's losses and settlement expenses increased 15 percent, with much of the
increase attributed to business assumed from other insurers. Losses resulting
from the 1998 catastrophes continued to develop in 1999. Incurred losses of
$1,789,000 were reported in the first quarter for 1998 catastrophe losses. Also,
several catastrophic storms occurred during the first quarter of 1999, resulting
in net losses incurred by the Company of $1,492,000. In total, catastrophes that
occurred during 1998 and 1999 decreased the Company's March 31, 1999 results by
$.33 per share, before tax. The current claims experience has contributed to the
increase in the Company's first quarter combined ratio (claims and expenses as a
percentage of premiums), of 113 percent, compared to 102 percent at March 31,
1998. Without the effect of the catastrophes, the March 1999 combined ratio
would have been 107 percent.
Other underwriting expenses increased $2,387,000 for the quarter ended
March 31, 1999 compared to the first quarter of 1998, due primarily to
deferred acquisition costs. Higher loss ratios by line of business reduced
the deferral of expenses in 1999 when compared to 1998, causing a larger
immediate recognition of underwriting expenses.
LIFE INSURANCE SEGMENT
Offsetting the property and casualty results were before-tax profits of
$4,355,000 reported by the Company's life insurance segment, compared to
$3,017,000 at March 31, 1998, an increase of 44 percent. The improvement in
results was due in large part to a decrease in claims. In addition, the life
segment had an increase in net premiums earned of 19 percent.
Interest on policyholders' accounts increased $1,893,000 for the quarter
ended March 31, 1999 compared to March 31, 1998. As the balances in the
annuity and universal life accounts increase by new premium so does the
interest credited to these accounts. Through March 31, 1999, the Company
credited $8,080,000 to these accounts which reflects a 31 percent increase
over the same period in 1998.
INVESTMENT RESULTS
Net investment income increased $1,210,000 or seven percent through March
31, 1999, compared to March 31, 1998. Realized investment gains decreased by
$3,165,000. The gains recognized in the first quarter of 1998 were primarily on
the equity portfolio due principally to the exercise of written covered call
options.
11
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
TAX BENEFIT
The negative tax expense of $214,000 for the quarter ended March 31, 1999
was due primarily to the deduction of municipal interest. With the effect of the
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.
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 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 Statement of Financial Accounting Standards ("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. At March 31, 1999, covered call options were written on
approximately five percent of the equity portfolio, compared to approximately
four percent at December 31, 1998. The Company also has investments in
collateralized mortgage obligations (CMO). These securities account for 15
percent of the fixed-income portfolio at March 31, 1999, compared to 16
percent as of December 31, 1998.
OTHER ASSETS
Deferred acquisition costs constitute the Company's second largest asset,
after investments. The total of $68,766,000 represents deferred underwriting and
acquisition expenses associated with writing insurance policies. Deferred
acquisition costs are amortized over the life of the policies written to attain
a matching of revenue to expenses. The Company's life segment has generated more
than half of the increase of $1,174,000, due to its growth in premium volume.
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 March 31, 1999 of $47,615,000 has increased six
percent from December 31, 1998. The Company has not experienced difficulties in
collecting balances from its agents. The Company's other assets are composed
primarily of accrued investment income, property and equipment (primarily land
and buildings), and reinsurance receivables (amounts due from the Company's
reinsurers for losses and expenses).
LIABILITIES
The Company's largest liability is that of future policy benefits, which
relates exclusively to the life segment. The liability increased by $22,528,000
or four percent between December 31, 1998 and March 31, 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. Claims and settlement
expenses, which relate primarily to the property and casualty segment, also
increased from December 31, 1998. Direct and assumed reserves
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UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
established for losses and expenses have increased $11,235,000 or four
percent. Of this increase, $6,685,000 relates to 1998 and 1999 catastrophe
activity. Ceded recoverables for direct and assumed loss and loss adjustment
expense reserves of $12,939,000 are reflected in the reinsurance receivables
asset account.
STOCKHOLDERS' EQUITY
The Company's stockholders' equity decreased by $1,542,000 to $254,740,000
at March 31, 1999 compared to December 31, 1998. Net income of $2,964,000
increased equity, while net unrealized depreciation on the Company's
available-for-sale securities and other long-term investments decreased equity
by $2,552,000. The Company declared $1,717,000 in stockholders' dividends
through March 31, 1999. The Company purchased 8,328 shares of its common stock
at a cost of $237,000 during the first quarter 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 $6,422,000 through the first quarter
of 1999 compared to $8,139,000 through the first quarter 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 $15 million line of credit with a local bank. Under the
terms of the agreement, interest on outstanding notes is payable at the lender's
prevailing prime rate less one percent. There is no loan balance outstanding as
of March 31, 1999.
IMPACT OF YEAR 2000
The insurance industry is data intensive and utilizes computer technology
extensively. An important issue facing all computer users is the approaching
Year 2000. Many computer systems and applications have been designed with
two-digit date fields. With the turn of the century, these programs may
recognize the Year 2000 as 1900 or not at all.
The Company has been aware for several years of the technological issues
associated with the approaching Year 2000. Beginning in the early 1990's, the
Company initiated an informal plan requiring the programming of four-digit date
fields in anticipation of the new century. Both the testing phase and
third-party vendor contact phase have been conducted through a formal project
plan. Testing of the Company's "mission critical systems" was completed by
December 31, 1998 and all systems tested were found to be compliant. All other
systems will be tested by December 1999. The Company is also reviewing its
third-party vendors for Year 2000 compliance and is requiring written
acknowledgment of testing and readiness. Third-party institutions providing
banking services, including lock box processing, checking and investment
processing have all certified to the Company that their systems are or will be
compliant by the end of 1999. The Company will continue to monitor this
situation for compliance.
In addition to systems that the Company uses to conduct its business, the
potential problems with the Year 2000 could also effect other aspects of the
Company's operations. Such non-information systems include, but are not limited
to, purchased worksheet programs, heating and air conditioning units, and
building elevators. The Company has addressed all of the ancillary systems in
its Year 2000 project and contingency plan. Failure of these secondary systems
would not have a material impact on the Company's operations.
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UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Expenses incurred in connection with programming and testing have been
expensed as incurred and absorbed into normal operating expenses. Costs incurred
through March 31, 1999 were approximately $1,119,000. The Company believes the
remaining costs for Year 2000 compliance will include salaries and overhead for
existing company personnel of approximately $131,000 and replacement of hardware
of approximately $150,000.
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 programming errors. The Company is preparing a
contingency plan that will detail alternative processing methods in the event
that systems, including secondary systems, fail. The Year 2000 contingency plan
is scheduled for completion by July 1, 1999
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.
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 10K.
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UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 11 - Computation of Earnings Per Common Share
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
- -------------------------------------------------------------
(REGISTRANT)
MAY 5, 1999
- -------------------------------------------------------------
(DATE)
- -------------------------------------------------------------
JOHN A. RIFE
PRESIDENT
- -------------------------------------------------------------
K.G. BAKER
VICE PRESIDENT , CHIEF FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER
15