10-Q 1 0001.txt 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 June 30, 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 August 4, 2000, 10,036,268 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 June 30, 2000 (unaudited) and 2 December 31, 1999 Unaudited Consolidated Statements of Income for the three month periods ended June 30, 2000 and 1999 3 Unaudited Consolidated Statements of Income for the six month periods ended June 30, 2000 and 1999 4 Unaudited Consolidated Statements of Cash Flows for the six month periods ended June 30, 2000 and 1999 5 Notes to Unaudited Consolidated Financial Statements 6 Report of Independent Public Accountants 11 Item 2. Management's Discussion and Analysis of Financial Condition and 12 Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk 15 Part II. Other Information 16
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES PART I: FINANCIAL INFORMATION Item 1. Financial Statements CONSOLIDATED BALANCE SHEETS
(In thousands) -------------------------------------------------------------------------------------------------------------------------- ASSETS June 30, December 31, 2000 1999 Unaudited Audited -------------------------------------------------------------------------------------------------------------------------- Investments Fixed maturities Held-to-maturity, at amortized cost (market value $302,164 in 2000 and $314,168 in 1999) $ 298,810 $ 311,152 Available-for-sale, at market (amortized cost $871,644 in 2000 and $800,467 in 1999) 832,819 768,307 Equity securities (cost $40,659 in 2000 and $38,755 in 1999) 109,121 109,148 Policy loans 8,390 8,645 Other long-term investments, at market (cost $12,474 in 2000 and $12,841 in 1999) 11,510 13,328 Short-term investments 16,960 20,131 -------------------------------------------------------------------------------------------------------------------------- $1,277,610 $1,230,711 Cash and Cash Equivalents 9,118 9,749 Accrued Investment Income 21,876 19,857 Accounts Receivable 66,898 51,304 Deferred Policy Acquisition Costs 97,203 90,074 Property and Equipment 16,755 16,863 Reinsurance Receivables 36,401 29,715 Prepaid Reinsurance Premiums 3,169 3,019 Intangibles 7,590 8,044 Income Taxes Receivable 2,397 1,169 Other Assets 7,868 7,211 -------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,546,885 $1,467,716 ========================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Future policy benefits and losses, claims and settlement expenses Property and casualty insurance $ 347,820 $ 338,243 Life insurance 762,473 701,350 Unearned premiums 165,272 148,472 Accrued expenses and other liabilities 19,503 22,043 Employee benefit obligations 13,220 12,385 Deferred income taxes 4,942 7,430 -------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES $1,313,230 $1,229,923 -------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock $ 33,522 $ 33,534 Additional paid-in capital 7,200 7,252 Retained earnings 164,763 163,953 Accumulated other comprehensive income, net of tax 28,515 33,054 Treasury stock (345) - -------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $ 233,655 $ 237,793 -------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,546,885 $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 INCOME
(In thousands, except per share data and number of shares) --------------------------------------------------------------------------------------------------------------------------- Three months ended June 30, 2000 1999 --------------------------------------------------------------------------------------------------------------------------- Revenues Net premiums earned $ 79,518 $ 60,648 Investment income, net 21,493 18,339 Realized investment gains and other income 33 296 Commission and policy fee income 567 545 ----------- ----------- 101,611 79,828 --------------------------------------------------------------------------------------------------------------------------- Benefits, Losses and Expenses Losses and settlement expenses 58,953 47,959 Increase in liability for future policy benefits 2,262 1,491 Amortization of deferred policy acquisition costs 15,387 12,197 Other underwriting expenses 14,613 12,067 Interest on policyholders' accounts 10,562 7,061 ----------- ----------- 101,777 80,775 --------------------------------------------------------------------------------------------------------------------------- Loss before income taxes (166) (947) Federal income tax benefit (1,115) (1,488) ----------- ----------- Net income $ 949 $ 541 =========================================================================================================================== Earnings available to common shareholders $ 949 $ 541 =========================================================================================================================== Weighted average common shares outstanding 10,056,499 10,081,320 =========================================================================================================================== Basic and diluted earnings per common share $ 0.09 $ 0.05 =========================================================================================================================== Cash dividends declared per common share $ 0.18 $ 0.17 ===========================================================================================================================
The Notes to Unaudited Consolidated Financial Statements are an integral part of these statements. 3 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data and number of shares) -------------------------------------------------------------------------------------------------------------------------- Six months ended June 30, 2000 1999 -------------------------------------------------------------------------------------------------------------------------- Revenues Net premiums earned $ 158,326 $ 120,798 Investment income, net 42,276 35,775 Realized investment gains and other income 141 1,334 Commission and policy fee income 1,100 978 ---------------------------------- 201,843 158,885 -------------------------------------------------------------------------------------------------------------------------- Benefits, Losses and Expenses Losses and settlement expenses 114,971 93,220 Increase in liability for future policy benefits 4,217 2,599 Amortization of deferred policy acquisition costs 30,170 23,113 Other underwriting expenses 29,034 23,009 Interest on policyholders' accounts 20,065 15,141 ---------------------------------- 198,457 157,082 -------------------------------------------------------------------------------------------------------------------------- Income before income taxes 3,386 1,803 Federal income tax benefit (945) (1,702) ---------------------------------- Net Income $ 4,331 $ 3,505 ========================================================================================================================== Earnings available to common shareholders $ 4,331 $ 3,505 ========================================================================================================================== Weighted average common shares outstanding 10,058,280 10,086,492 ========================================================================================================================== Basic and diluted earnings per common share $ .43 $ .35 ========================================================================================================================== Cash dividends declared per common share $ 0.35 $ 0.34 ==========================================================================================================================
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)
---------------------------------------------------------------------------------------------------------------------- Six months ended June 30, 2000 1999 ---------------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Net income $ 4,331 $ 3,505 ---------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities Net bond discount accretion $ (117) $ (176) Depreciation and amortization 1,605 925 Realized investment gains and other income (141) (1,334) Changes in: Accrued investment income (2,019) (825) Accounts receivable (15,594) (6,447) Deferred policy acquisition costs (7,129) (8,479) Reinsurance receivables (6,686) (1,372) Prepaid reinsurance premiums (150) 845 Income taxes receivable (1,228) 168 Other assets (657) 260 Future policy benefits and losses, claims and settlement expenses 13,659 19,662 Unearned premiums 16,800 9,311 Accrued expenses and other liabilities (830) 3,946 Employee benefit obligations 835 1,108 Deferred income taxes (44) (1,175) Other, net 3,152 6,192 ---------------------------------------------------------------------------------------------------------------------- Total adjustments $ 1,456 $ 22,609 ---------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities $ 5,787 $ 26,114 ---------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities Proceeds from sale of available-for-sale investments $ 43,774 $ 15,226 Proceeds from call and maturity of held-to-maturity investments 14,822 19,667 Proceeds from call and maturity of available-for-sale investments 30,573 39,474 Proceeds from sale of other investments 34,388 49,369 Purchase of held-to-maturity investments (2,333) (502) Purchase of available-for-sale investments (147,515) (138,948) Purchase of other investments (30,486) (42,024) Proceeds from sale of property and equipment 136 789 Purchase of property and equipment (1,179) (643) ---------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities $ (57,820) $ (57,592) ---------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities Policyholders' account balances Deposits to investment and universal-life-type contracts $ 109,279 $ 81,705 Withdrawals from investment and universal-life-type contracts (52,238) (29,444) Purchase and retirement of common stock (64) (365) Payment of cash dividends (5,230) (5,144) Purchase of common stock (345) - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities $ 51,402 $ 46,752 ---------------------------------------------------------------------------------------------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents $ (631) $ 15,274 Cash and Cash Equivalents at Beginning of Year 9,749 - ---------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 9,118 $ 15,274 ======================================================================================================================
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, 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 June 30, 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. Net income taxes paid/(received) for the six-month periods ended June 30, 2000 and 1999 were $727,000 and $(695,000). There were no significant payments of interest through June 30, 2000 and 1999, other than interest credited to policyholders' accounts. Interest received from a Revenue Agent Review was $196,000 through June 30, 2000. 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 June 30, 2000 is as follows. 6 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) ----------------------------------------------------------------------------------------------------------------------------- June 30, 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 $ 15,089 $ - $ 532 $ 14,557 Mortgage-backed securities 8,544 461 4 9,001 All others 1,821 214 - 2,035 States, municipalities and political 171,852 4,809 969 175,692 subdivisions Foreign 3,029 - 42 2,987 Public utilities 19,461 37 279 19,219 Corporate bonds Collateralized mortgage obligations 13,887 150 253 13,784 All other corporate bonds 65,127 518 756 64,889 ----------------------------------------------------------------------------------------------------------------------------- Total held-to-maturity $298,810 $ 6,189 $ 2,835 $302,164 ============================================================================================================================= Available-for-sale Fixed Maturities Bonds United States Government, Government agencies and authorities Collateralized mortgage obligations $ 30,283 $ 7 $ 772 $ 29,518 Mortgage-backed securities 10,284 2 221 10,065 All others 32,544 2 553 31,993 States, municipalities & political subdivisions 78,548 245 3,552 75,241 Foreign 34,562 43 2,252 32,353 Public utilities 137,534 860 4,349 134,045 Corporate bonds Collateralized mortgage obligations 51,053 908 1,068 50,893 All other corporate bonds 496,836 1,599 29,724 468,711 ----------------------------------------------------------------------------------------------------------------------------- Total available-for-sale fixed maturities $871,644 $ 3,666 $42,491 $832,819 ----------------------------------------------------------------------------------------------------------------------------- Equity securities Common stocks Public utilities $ 8,639 $ 7,464 $ 1,899 $ 14,204 Banks, trust and insurance companies 8,732 23,770 516 31,986 All other common stocks 22,354 40,771 943 62,182 Nonredeemable preferred stocks 934 - 185 749 ----------------------------------------------------------------------------------------------------------------------------- Total equity securities $ 40,659 $72,005 $ 3,543 $109,121 ----------------------------------------------------------------------------------------------------------------------------- Total available-for-sale $912,303 $75,671 $46,034 $941,940 ============================================================================================================================= Other long-term investments $ 12,474 $ 6 $ 970 $ 11,510 =============================================================================================================================
The amortized cost and fair value of held-to-maturity and available-for-sale fixed maturities at June 30, 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. 7 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) --------------------------------------------------------------------------------------------------------------------------- June 30, 2000 Held-to-maturity Available-for-sale --------------------------------------------------------------------------------------------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value --------------------------------------------------------------------------------------------------------------------------- Due in one year or less $ 11,805 $ 11,912 $ 18,345 $ 18,365 Due after one year through five years 54,405 54,743 280,691 271,969 Due after five years through ten years 77,505 78,830 303,890 285,614 Due after ten years 117,575 119,337 177,098 166,395 Mortgage-backed securities 8,544 9,001 10,284 10,065 Collateralized mortgage obligations 28,976 28,341 81,336 80,411 --------------------------------------------------------------------------------------------------------------------------- $298,810 $302,164 $871,644 $832,819 ===========================================================================================================================
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. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133," which is effective for all fiscal quarters beginning after June 15, 2000. This statement amends the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and certain hedging activities. Because the Company has limited involvement with derivative financial instruments, and does not engage in the derivative market for hedging purposes, the impact of adopting SFAS No. 138 will not have a material effect on the Company's Consolidated Financial Statements. 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 any effect on the Company's Consolidated Financial Statements. 8 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 4. Segment Information The Company has two reportable business segments in its operations; property and casualty insurance and life insurance. The property and casualty segment has five locations from which it conducts its business. All offices target a similar customer base and market the same products using the same marketing strategies and are therefore aggregated. The life insurance segment operates from the Company's home office. The two segments are evaluated by management based on both a statutory and a GAAP basis. Results are analyzed based on profitability, expenses and return on equity. The basis for determining and analyzing segments and the measurement of segment profit has not changed from that reported in the Company's 1999 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 ----------------------------------------------------------------------------- June 30, 2000 ----------------------------------------------------------------------------- Revenues $159,964 $ 42,014 $ 201,978 ----------------------------------------------------------------------------- Intersegment eliminations (69) (66) (135) ----------------------------------------------------------------------------- Total revenues $159,895 $ 41,948 $ 201,843 ============================================================================= Net income $ 889 $ 3,442 $ 4,331 ============================================================================= Assets $661,984 $884,901 $1,546,885 ============================================================================= June 30, 1999 ----------------------------------------------------------------------------- Revenues $121,638 $ 37,366 $ 159,004 ----------------------------------------------------------------------------- Intersegment eliminations (68) (51) (119) ----------------------------------------------------------------------------- Total revenues $121,570 $ 37,315 $ 158,885 ============================================================================= Net (loss) income $ (933) $ 4,438 $ 3,505 ============================================================================= Assets $556,480 $769,224 $1,325,704 =============================================================================
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 June 30, 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 9 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS securities by approximately $9,250,000 and other comprehensive income by approximately $6,013,000, net of deferred income taxes. Note 6. Comprehensive Income/Loss Comprehensive loss was $(208,000) and $(1,694,000) for the six months ended June 30, 2000 and June 30, 1999, respectively. Comprehensive loss was $(4,029,000) and $(2,106,000) for the three months ended June 30, 2000 and June 30, 1999, respectively. 10 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 June 30, 2000, and the related consolidated statements of income for the three-month and six-month periods ended June 30, 2000 and 1999, and the consolidated statements of cash flows for the six-month periods ended June 30, 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, stockholders' 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 August 4, 2000 11 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 During the second quarter of 2000, the Company made the decision to not renew many of its assumed reinsurance property and casualty contracts, effective after June 30, 2000. A small portion of this business expired on July 1, 2000 and the bulk of it will not be renewed on January 1, 2001. Agreements will continue with a very limited number of brokers. The Company intends to provide an orderly run- off of those contracts not renewed. Property and casualty insurance segment For the six months ended June 30, 2000, the property and casualty segment recorded net income of $889,000, compared to a net loss of $933,000 for the first half of 1999. Contributing to the improved results was an increase in premiums earned of $37,064,000 or 34 percent. A portion of this premium growth has been the result of the purchase of the American Indemnity companies, which occurred during the third quarter of 1999. Losses and loss adjustment expenses incurred increased $22,786,000 or 26 percent. The largest catastrophe loss in the first six months was a hailstorm in the New Orleans area occurring January 22-24. This storm caused approximately $3,600,000 in net incurred losses (after tax). The GAAP combined ratio (net losses incurred and net loss adjustment expenses incurred divided by net premiums earned, plus other underwriting expenses incurred divided by net premiums written) improved to 108 percent compared to 114 percent for the first half of 1999. The GAAP combined ratio, without the effect of the catastrophes, for 2000 and 1999 would have been 96 percent, and 104 percent, respectively. The after-tax net losses incurred and net loss adjustment expenses incurred for all catastrophes was $11,309,000, or $1.12 per share for the first half of 2000, compared to $6,776,000, or $.67 per share for the first half of 1999. For the second quarter of 2000, the property and casualty segment recorded a net loss of $515,000, compared to a net loss of $1,074,000 for the second quarter of 1999. Net premiums earned increased $18,715,000 or 34 percent. Net losses incurred and net loss adjustment expenses incurred increased $12,757,000 or 29 percent for the quarter, compared to the second quarter of 1999. The GAAP combined ratio for the quarter improved to 108 percent compared to 115 percent for the second quarter of 1999. The GAAP combined ratio, without the effect of the catastrophes, for the second quarters of 2000 and 1999 would have been 96 percent, and 102 percent, respectively. The after-tax net losses incurred and net loss adjustment expenses incurred for all catastrophes was $5,870,000, or $.58 per share for the second quarter of 2000, compared to $4,643,000, or $.46 per share for the second quarter of 1999. Life insurance segment The life insurance segment reported net income of $3,442,000 through the first six months of 2000, compared to $4,438,000 for the same period of 1999. Premiums earned increased by $464,000 or four percent. Though the life segment is writing an increasing amount of annuity business, premium revenue does not reflect annuity deposits. Revenues for annuities consist of policy surrender charges and investment income earned. Expenses incurred by the life segment increased by $6,163,000, or 20 percent when comparing the first six months of 2000 and 1999. Of that increase, $4,924,000 is attributable to expenses related to interest credited to policyholder account balances. 12 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Investment results For the first half of 2000, the Company reported net investment income of $42,276,000, compared to $35,775,000 for the first half of 1999. For the second quarters of 2000 and 1999, net investment income was $21,493,000 and $18,339,000, respectively. 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 six months of 2000 and 1999 by $1,193,000. During the first quarter of 1999, the Company sold several bond positions that had significantly increased in price. Comparing the second quarters of 2000 and 1999, realized investments gains decreased $263,000. 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- to high-quality securities. Fixed income securities that the Company 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 accumulated other comprehensive income, net of tax, within 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 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 are 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 10 percent of the fixed-income portfolio at June 30, 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 $5,377,000 or eight percent. Deferred acquisition costs of the property and casualty segment increased in 2000 by $1,752,000 or nine percent. For both segments, the six-month growth in premiums and annuity 13 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS deposits has resulted in higher deferred acquisition costs. Accounts receivable consist of amounts due from property and casualty insurance agents and brokers for premiums written, less commissions paid. These receivables increased by 30 percent, or $15,594,000, over December 31, 1999. Growth in premiums written in the property and casualty segment has resulted in the increased accounts receivable balance. 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 $61,123,000, or nine percent, between June 30, 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. Because the annuity business is continuing to grow, the associated future policy benefits have grown proportionately. Direct and assumed loss and loss adjustment expense reserves established for property and casualty claims have increased by $9,577,000, or three percent from December 31, 1999. Covered call options, which the Company occasionally writes, are recorded as liabilities. The options, when written, are utilized to generate additional portfolio income. At June 30, 2000 and December 31, 1999, the Company did not have any open covered call options. Stockholders' equity The Company's stockholders' equity decreased by $4,138,000, or two percent. Net income of $4,331,000 increased equity. Significant decreases to equity included $4,539,000 of unrealized losses, $3,520,000 of declared dividends and $345,000 due to the repurchase of 20,000 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 $5,788,000 through the first half of 2000 compared to $26,114,000 through the second 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 June 30, 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. 14 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 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 10-K. 15 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) August 4, 2000 ---------------------------------- (Date) ---------------------------------- John A. Rife President, Chief Executive Officer ---------------------------------- K.G. Baker Vice President, Chief Financial Officer and Principal Accounting Officer 16