-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DX0XA+9FZmVuAjY+T2nnSpEWZIkmksA4f1XaZYyn7yyKvmcKIlrKcZO86DfbTFkw vAR7EGw3IfdJxiE3pIm6sw== 0000950131-00-003442.txt : 20000516 0000950131-00-003442.hdr.sgml : 20000516 ACCESSION NUMBER: 0000950131-00-003442 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED FIRE & CASUALTY CO CENTRAL INDEX KEY: 0000101199 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 420644327 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 002-39621 FILM NUMBER: 634608 BUSINESS ADDRESS: STREET 1: 118 SECOND AVE SE CITY: CEDAR RAPIDS STATE: IA ZIP: 52407 BUSINESS PHONE: 3193995700 MAIL ADDRESS: STREET 1: P O BOX 73909 CITY: CEDAR RAPIDS STATE: IA ZIP: 52407 10-Q 1 FORM 10-Q 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, 2000 Commission File Number 2-39621 UNITED FIRE & CASUALTY COMPANY (Exact name of registrant as specified in its charter) Iowa 42-0644327 - ------------------------ --------------------------------- (State of Incorporation) (IRS Employer Identification No.) 118 Second Avenue, S.E. Cedar Rapids, Iowa 52407 - --------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (319) 399-5700 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO________ ------- As of May 4, 2000, 10,056,499 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, 2000 (unaudited) and December 31, 1999 2 Unaudited Consolidated Statements of Operations for the three month periods ended March 31, 2000 and 1999 3 Unaudited Consolidated Statements of Cash Flows for the three month periods ended March 31, 2000 and 1999 4 Notes to Unaudited Consolidated Financial Statements 5 Report of Independent Public Accountants 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk 12 Part II. Other Information 13
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES PART I: FINANCIAL INFORMATION Item 1. Financial Statements CONSOLIDATED BALANCE SHEETS
(In thousands) - -------------------------------------------------------------------------------------------------------------- ASSETS March 31, December 31, 2000 1999 Unaudited Audited - -------------------------------------------------------------------------------------------------------------- Investments Fixed maturities Held-to-maturity, at amortized cost (market value $310,454 in 2000 and $314,168 in 1999) $ 306,267 $ 311,152 Available-for-sale, at market (amortized cost $840,247 in 2000 and $800,467 in 1999) 809,243 768,307 Equity securities (cost $38,412 in 2000 and $38,755 in 1999) 108,486 109,148 Policy loans 8,496 8,645 Other long-term investments, at market (cost $12,844 in 2000 and $12,841 in 1999) 12,897 13,328 Short-term investments 17,704 20,131 - -------------------------------------------------------------------------------------------------------------- $1,263,093 $1,230,711 Cash and Cash Equivalents 10,893 9,749 Accrued Investment Income 19,275 19,857 Accounts Receivable 54,797 51,304 Deferred Policy Acquisition Costs 91,843 90,074 Property and Equipment 16,566 16,863 Reinsurance Receivables 36,907 29,715 Prepaid Reinsurance Premiums 2,426 3,019 Intangibles 7,738 8,044 Income Taxes Receivable 435 1,169 Other Assets 8,113 7,211 - -------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,512,086 $1,467,716 ============================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Future policy benefits and losses, claims and settlement expenses Property and casualty insurance $ 342,941 $ 338,243 Life insurance 732,781 701,350 Unearned premiums 152,547 148,472 Accrued expenses and other liabilities 23,959 22,043 Employee benefit obligations 12,906 12,385 Deferred income taxes 7,113 7,430 - -------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES $1,272,247 $1,229,923 - -------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock $ 33,527 $ 33,534 Additional paid-in capital 7,222 7,252 Retained earnings 165,625 163,953 Accumulated other comprehensive income, net of tax 33,492 33,054 Treasury stock (27) - - -------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $ 239,839 $ 237,793 - -------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,512,086 $1,467,716 ==============================================================================================================
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 March 31, 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- Revenues Net premiums earned $ 78,808 $ 60,150 Investment income, net 20,783 17,436 Realized investment gains and other income 108 1,038 Commission and policy fee income 533 433 $ 100,232 $ 79,057 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- Benefits, Losses and Expenses Losses and settlement expenses $ 56,018 $ 45,261 Increase in liability for future policy benefits 1,955 1,108 Amortization of deferred policy acquisition costs 14,783 10,916 Other underwriting expenses 14,421 10,942 Interest on policyholders' accounts 9,503 8,080 $ 96,680 $ 76,307 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- Income before income taxes $ 3,552 $ 2,750 Federal income taxes (benefit) 170 (214) - ------------------------------------------------------------------------------------------------------------------------------- Net income $ 3,382 $ 2,964 =============================================================================================================================== Earnings available to common shareholders $ 3,382 $ 2,964 =============================================================================================================================== Weighted average common shares outstanding 10,060,061 10,091,721 =============================================================================================================================== Basic and diluted earnings per common share $0.34 $0.29 =============================================================================================================================== 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 CASH FLOWS
(In thousands) - ------------------------------------------------------------------------------------------------------------------------------- Three months ended March 31, 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Net income $ 3,382 $ 2,964 - ------------------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by Operating activities Net bond discount accretion $ (3) $ (74) Depreciation and amortization 713 814 Realized investment gains and other income (108) (1,038) Changes in: Accrued investment income 582 94 Accounts receivable (3,493) (2,747) Deferred policy acquisition costs (1,769) (1,174) Reinsurance receivables (7,192) (3,635) Prepaid reinsurance premiums 593 390 Income taxes receivable/payable 734 248 Other assets (902) 65 Future policy benefits and losses, claims and settlement expenses 6,467 13,008 Unearned premiums 4,075 2,090 Accrued expenses and other liabilities 1,916 (4,495) Employee benefit obligations 521 569 Deferred income taxes (438) (462) Other, net (61) (195) - ------------------------------------------------------------------------------------------------------------------------------- Total adjustments $ 1,635 $ 3,458 - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities $ 5,017 $ 6,422 - ------------------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities Proceeds from sale of available-for-sale investments $ 6,220 $ 10,240 Proceeds from call and maturity of held-to-maturity investments 7,309 10,186 Proceeds from call and maturity of available-for-sale investments 21,655 11,557 Proceeds from sale of other investments 11,390 30,143 Purchase of investments held-to-maturity (2,333) - Purchase of investments available-for-sale (67,087) (60,059) Purchase of other investments (8,803) (16,820) Proceeds from sale of property and equipment 53 - Purchase of property and equipment (164) (323) - ------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities $(31,760) $(15,076) - ------------------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities Policyholders' account balances Deposits to investment and universal-life-type contracts $ 53,645 $ 35,390 Withdrawals from investment and universal-life-type contracts (23,983) (14,635) Purchase and retirement of common stock (38) - Payment of cash dividends (1,710) (3,432) Purchase of common stock (27) (237) - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities $ 27,887 $ 17,086 - ------------------------------------------------------------------------------------------------------------------------------- Net Increase in Cash and Cash Equivalents $ 1,144 $ 8,432 Cash and Cash Equivalents at Beginning of Year 9,749 - - ------------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 10,893 $ 8,432 ===============================================================================================================================
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, 1999. 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, 2000. For purposes of reporting cash flows, cash and cash equivalents include cash and non-negotiable certificates of deposit with original maturities of three months or less. There were no income taxes paid for the three month periods ended March 31, 2000 and 1999. There were no significant payments of interest through March 31, 2000 and 1999, other than interest credited to policyholders' accounts. 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, 2000 is as follows. 5 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - -------------------------------------------------------------------------------------------------------------------------- March 31, 2000 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 $ 15,084 $ - $ 505 $ 14,579 Mortgage-backed securities 9,009 510 3 9,516 All others 1,813 209 1 2,021 States, municipalities and political 174,849 5,080 894 179,035 subdivisions Foreign 3,032 - 42 2,990 Public utilities 19,466 37 206 19,297 Corporate bonds Collateralized mortgage obligations 14,690 178 155 14,713 All other corporate bonds 68,324 659 680 68,303 - --------------------------------------------------------------------------------------------------------------------------- Total held-to-maturity $306,267 $ 6,673 $ 2,486 $310,454 =========================================================================================================================== Available-for-sale Fixed Maturities Bonds United States Government, government agencies and authorities Collateralized mortgage obligations $ 30,701 $ 16 $ 759 $ 29,958 Mortgage-backed securities 10,725 1 247 10,479 All others 32,561 2 663 31,900 States, municipalities & political subdivisions 88,208 683 3,389 85,502 Foreign 28,807 18 1,966 26,859 Public utilities 120,732 602 3,815 117,519 Corporate bonds Collateralized mortgage obligations 63,909 1,641 1,366 64,184 All other corporate bonds 464,604 1,200 22,962 442,842 - --------------------------------------------------------------------------------------------------------------------------- Total available-for-sale fixed maturities $840,247 $ 4,163 $ 35,167 $809,243 - --------------------------------------------------------------------------------------------------------------------------- Equity securities Common stocks Public utilities $ 8,639 $ 7,443 $ 1,955 $ 14,127 Banks, trust and insurance companies 12,486 37,008 567 48,927 All other common stocks 16,353 29,149 840 44,662 Nonredeemable preferred stocks 934 - 164 770 - --------------------------------------------------------------------------------------------------------------------------- Total equity securities $ 38,412 $ 73,600 $ 3,526 $108,486 - --------------------------------------------------------------------------------------------------------------------------- Total available-for-sale $878,659 $ 77,763 $38,693 $917,729 =========================================================================================================================== Other long-term investments $ 12,844 $ 563 $ 510 $ 12,897 ===========================================================================================================================
The amortized cost and fair value of held-to-maturity and available-for-sale fixed maturities at March 31, 2000 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. 6 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ----------------------------------------------------------------------------------------------------------------- March 31, 2000 Held-to-maturity Available-for-sale - ----------------------------------------------------------------------------------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value - ----------------------------------------------------------------------------------------------------------------- Due in one year or less $ 13,075 $ 13,194 $ 13,483 $ 13,492 Due after one year through five years 56,353 56,848 240,901 234,922 Due after five years through ten years 77,177 78,644 299,213 283,510 Due after ten years 120,879 122,960 181,315 172,698 Mortgage-backed securities 9,009 9,516 10,725 10,479 Collateralized mortgage obligations 29,774 29,292 94,610 94,142 - ----------------------------------------------------------------------------------------------------------------- $306,267 $310,454 $840,247 $809,243 =================================================================================================================
Note 3. New Accounting Standards In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June 1999, SFAS No.133 was amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB No. 133 - an amendment of FASB Statement No. 133". SFAS No. 133 is now effective for all fiscal quarters of fiscal years beginning after June 15, 2000. A company may also implement SFAS No. 133 as of the beginning of any fiscal quarter after issuance. 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. Effective January 1, 1999, the Company early adopted SFAS No. 133. 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 impact on the Company's Consolidated Financial Statements due to the reclassification 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. There was no other material effect on the Company's Consolidated Financial Statements. Refer to Note 5 for further discussion. Effective January 1, 2000, the Company adopted SOP 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk". The SOP provides guidance on accounting for insurance and reinsurance contracts that do not transfer insurance risk. All of the Company's reinsurance agreements are risk-transferring arrangements, accounted for according to SFAS No. 113, "Accounting and Reporting for Reinsurance of Short- Duration and Long-Duration Contracts." The impact of adopting SOP 98-7 did not have a material effect on the Company's Consolidated Financial Statements. Note 4. Segment Information The Company has two reportable business segments in its operations; property and casualty insurance and life insurance. The property and casualty segment has 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 7 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 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 1999 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.
- ----------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ----------------------------------------------------------------------------------------------------------------------------- Property and Life Casualty Insurance Insurance Total - ----------------------------------------------------------------------------------------------------------------------------- March 31, 2000 - ----------------------------------------------------------------------------------------------------------------------------- Revenues $ 79,308 $ 20,991 $ 100,299 - ----------------------------------------------------------------------------------------------------------------------------- Intersegment eliminations (34) (33) (67) - ----------------------------------------------------------------------------------------------------------------------------- Total revenues $ 79,274 $ 20,958 $ 100,232 ============================================================================================================================= Net income $ 1,404 $ 1,978 $ 3,382 ============================================================================================================================= Assets $645,830 $866,256 $1,512,086 ============================================================================================================================= March 31, 1999 - ----------------------------------------------------------------------------------------------------------------------------- Revenues $ 60,162 $ 18,954 $ 79,116 - ----------------------------------------------------------------------------------------------------------------------------- Intersegment eliminations (34) (25) (59) - ----------------------------------------------------------------------------------------------------------------------------- Total revenues $ 60,128 $ 18,929 $ 79,057 ============================================================================================================================= Net income $ 141 $ 2,823 $ 2,964 ============================================================================================================================= Assets $543,351 $734,076 $1,277,427 =============================================================================================================================
Depreciation expense and property and equipment acquisitions are reflected in the property and casualty insurance segment. Note 5. Derivative Instruments The Company writes covered call options on its equity portfolio to generate additional portfolio income and does not use these instruments for hedging purposes. Covered call options are recorded at fair value and included in accrued expenses and other liabilities. Any income or gains or losses, including the change in the fair value of the covered call options, is recognized currently in earnings and included in realized investment gains and other income. At March 31, 2000 and December 31, 1999, there were no open covered call options. 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. Comprehensive Income Comprehensive income was $3,820,000 and $412,000 for the three months ended March 31, 2000 and March 31, 1999, respectively. 8 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - ---------------------------------------- To the Stockholders and Board of Directors of United Fire & Casualty Company: We have reviewed the accompanying consolidated balance sheet of UNITED FIRE & CASUALTY COMPANY (an Iowa corporation) AND SUBSIDIARIES as of March 31, 2000, and the related consolidated statements of operations for the three-month periods ended March 31, 2000 and 1999, and the consolidated statements of cash flows for the three-month periods ended March 31, 2000 and 1999. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above in order for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of United Fire & Casualty Company and Subsidiaries as of December 31, 1999 and the related consolidated statements of operations, stockholder's equity and cash flows for the year then ended (not presented separately herein), and, in our report dated February 17, 2000, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1999, 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 4, 2000 9 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 The property and casualty segment recorded net income of $1,404,000 for the first quarter of 2000, compared to $141,000 for the first quarter of 1999. An increase in premiums and an improvement in underwriting results contributed to the favorable results. Property and casualty premiums earned increased by $18,349,000, or 34 percent over the first quarter of 1999, with a portion of the growth attributable to the American Indemnity purchase that occurred in August, 1999. The statutory combined ratio (net losses and net loss adjustment expenses incurred divided by net premiums earned, plus other underwriting expenses incurred divided by net premiums written) for the quarter improved to 107 percent compared to 113 percent for the first quarter of 1999. Without the effect of the catastrophes, the March 2000 and March 1999 statutory combined ratios would have been 95 percent, and 107 percent, respectively. The largest catastrophe loss in the first quarter of 2000 was a hailstorm in the New Orleans area occurring January 22 - 24. This storm caused approximately $5,000,000 in net insured losses (before tax). The after-tax net incurred losses and expenses for all catastrophes was $5,439,000, or $.54 per share for the first quarter of 2000, compared to $2,133,000, or $.21 per share for the first quarter of 1999. Life insurance segment The life insurance segment reported net income of $1,978,000 for the first quarter of 2000, compared to $2,823,000 for the first quarter of 1999. Total gross income for the life segment increased by $2,037,000, or 11 percent, and total expenses increased by $3,344,000, or 23 percent. Moderate premium growth on a GAAP basis, coupled with increased interest credited to policyholders has resulted in lower earnings in the first quarter of 2000, compared with the first quarter of 1999. Investment results The Company reported net investment income of $20,783,000 for the first quarter of 2000, compared to $17,436,000 for the first quarter of 1999. A majority of the Company's investment income originates from interest on fixed income securities. The remaining investment revenue is derived from dividends on equity securities, interest on other long-term investments, interest on policy loans and rent earned from tenants in the Company's home office. Realized investment gains decreased between the first quarter of 2000 and 1999 by $930,000. During the first quarter of 1999, the Company sold several bond positions that had significantly increased in price. 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, high quality securities. Fixed income securities that the Company 10 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION has the ability and intent to hold to maturity are classified as held-to- maturity. The remaining fixed income securities and all of the Company's equity securities are classified as available-for-sale. The Company currently has no securities classified as trading. The held-to-maturity securities are reported at amortized cost, and available-for-sale securities are reported at market value. Unrealized appreciation or depreciation of available-for-sale investments is reflected in a separate component of stockholders' equity. Effective January 1, 1999, the Company reclassified a portion of its held-to- maturity investment portfolio to available-for-sale in conjunction with the adoption of Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." Generally, reclassifications are allowed only in rare circumstances. However, given the new restrictions that SFAS No. 133 has on hedging interest rate risk for held-to- maturity securities, all companies adopting SFAS No. 133 will be allowed to reassess their held-to-maturity portfolios without "tainting" the remaining securities classified as held-to-maturity. The impact on the Company's Consolidated Financial Statements, 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, and other comprehensive income by approximately $6,013,000, net of deferred income taxes. 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. These securities account for 11 percent of the fixed-income portfolio at March 31, 2000, compared to 12 percent as of December 31, 1999. Other assets Deferred acquisition costs constitute the Company's second largest asset, after investments, and represent underwriting and acquisition expenses associated with writing insurance policies. These expenses are capitalized and are amortized over the life of the policies written to attain a matching of revenue to expenses. The Company's life segment had an increase in deferred acquisition costs of $1,115,000. Deferred acquisition costs of the property and casualty segment increased in 2000 by $654,000. Accounts receivable consist of amounts due from property and casualty insurance agents and brokers for premiums written, less commissions paid. These receivables increased by 7 percent, or $3,493,000, over December 31, 1999, due to the increase in property and casualty premiums written. 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 $31,431,000, or 4 percent, between March 31, 2000 and December 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 have grown, the future policy benefits have grown proportionately. Claims and settlement expenses, which relate to the property and casualty segment also increased through March 31, 2000. Direct and assumed reserves established for property and casualty losses and expenses have increased $4,698,000, or 1 percent. The Company has, at times, written covered call options to generate additional portfolio income. At March 31, 2000 and December 31, 1999, there were no open covered call options. 11 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Stockholders' equity The Company's stockholders' equity increased by $2,046,000, or one percent. Increases to equity included net income of $3,382,000 and net unrealized appreciation of $438,000. Decreases to equity included $1,710,000 of declared dividends, $37,000 due to the retirement of 2,085 shares of common stock, and $27,000 due to the repurchase of 1,500 shares of the Company's common stock, currently held in treasury. 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 $5,017,000 through the first quarter of 2000 compared to $6,422,000 through the first quarter of 1999. 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 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, 2000. Impact of Year 2000 In 1999, the Company completed its final programming and testing of systems for Year 2000 compliance. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission-critical information technology and non- information technology systems. The Company believes that its systems successfully responded to the Year 2000 date change. The Company's transition into the Year 2000 has, to date, been considered uneventful and successful and did not result in any significant events with the Company or its suppliers. However, the potential for problems resulting from Year 2000 issues still exists. Accordingly, the Company will continue to monitor its systems, and will maintain contact with its vendors concerning the status of their Year 2000 transition. Subsequent events In May, 2000 the Company notified its reinsurance brokers that effective with the July 1, 2000 contract renewal, the Company will no longer be a market for assumed reinsurance. The Company intends to provide an orderly run-off of the inforce business. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has exposure to market risk arising from potential losses due to adverse changes in interest rates and market prices. The Company's primary market risk exposure is changes in interest rates, although the Company has some exposure to changes in equity prices and limited exposure to foreign currency exchange rates. The active management of market risk is integral to the Company's operations. Investment guidelines are in place that define the overall framework for managing the Company's market and other investment risks, including accountability and controls. In addition, the Company has specific investment policies for each of its subsidiaries that delineate the investment limits and strategies that are appropriate given each entity's liquidity, surplus, product and regulatory requirements. In response to market risk, the Company may respond by rebalancing its existing asset portfolio, or by changing the character of future investment purchases. Covered call options are written from time to time on common stocks owned by the Company. Generally, the calls are written on stocks the Company views as over-priced relative to their market value. Writing of in-the-money calls at transaction date has not been done, but the Company is not restricted in any way from doing so. The practice of writing covered calls is considered a conservative equity strategy by market analysts. There have been no material changes in the Company's market risk or market risk factors from that reported in the Company's 1999 Form 10K. 12 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 4, 2000 - ------------------------------------------------------------------------------- (Date) - -------------------------------------------------------------------------------- John A. Rife President - -------------------------------------------------------------------------------- K.G. Baker Vice President, Chief Financial Officer and Principal Accounting Officer 13 EX-11 2 COMPUTATION OF EARNINGS PER COMMON SHARE Exhibit 11. Computation of Earnings Per Common Share
- ------------------------------------------------------------------------------------------ (Dollars in Thousands Except Per Share Data and Number of Shares) - ------------------------------------------------------------------------------------------ Weighted Average Three Month Periods Ended Number of Shares Net Earnings Per March 31, Outstanding Income Common Share - ------------------------------------------------------------------------------------------ 2000 10,060,061 $3,382 $0.34 1999 10,091,721 2,964 0.29 - ------------------------------------------------------------------------------------------
Computation of weighted average number of common and common equivalent shares:
- ------------------------------------------------------------------------------------------ Three Month Periods Ended March 31, 2000 1999 - ------------------------------------------------------------------------------------------ Common shares outstanding beginning of the period 10,060,084 10,091,721 Weighted average of the common Shares purchased and retired or reissued (23) - - ------------------------------------------------------------------------------------------ Weighted average number of common shares 10,060,061 10,091,721 ==========================================================================================
13 EX-27 3 FINANCIAL DATA SCHEDULE
7 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 809,243 306,267 310,454 108,486 0 0 1,263,093 10,893 36,907 91,843 1,512,086 1,075,722 152,547 0 0 0 0 0 33,527 206,366 1,512,086 78,808 20,783 108 533 57,973 14,783 23,924 3,552 170 3,382 0 0 0 3,382 .34 .34 0 0 0 0 0 0 0
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