-----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, Cbfi78cCPNHMs88P6PQHLhO1arLU869Co4XCLzFmajeLwfo632WOBLcga8SoO4Bz t3dvzkpygJ04IDfWjHfHyw== 0000950131-01-500507.txt : 20010409 0000950131-01-500507.hdr.sgml : 20010409 ACCESSION NUMBER: 0000950131-01-500507 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 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-K405 SEC ACT: SEC FILE NUMBER: 002-39621 FILM NUMBER: 1592137 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-K405 1 d10k405.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act - --- of 1934 for the fiscal year ended December 31, 2000 Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange - --- Act of 1934 for the transition period from to ---------- 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 52407-3909 - ---------------------------------------- -------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (319) 399-5700 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: None 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. X --- As of March 1, 2001, 10,035,819 shares of common stock were outstanding. The aggregate market value of voting stock held by non-affiliates of the registrant as of March 1, 2001, was approximately $91,181,583. Documents Incorporated by Reference: Portions of the annual stockholders report for the year ended December 31, 2000, are incorporated by reference into Part II. FORM 10-K TABLE OF CONTENTS
PAGE ---- PART I: Item 1. Business 1 Item 2. Properties 8 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 8 PART II: Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 8 Item 6. Selected Financial Data 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 7a. Quantitative and Qualitative Disclosures About Market Risk 8 Item 8. Financial Statements and Supplementary Data 8 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 15 PART III: Item 10. Directors and Executive Officers of the Registrant 15 Item 11. Executive Compensation 17 Item 12. Security Ownership of Certain Beneficial Owners and Management 21 Item 13. Certain Relationships and Related Transactions 21 PART IV: Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 22 Signatures 23
PART I. ITEM 1. BUSINESS GENERAL DESCRIPTION "United Fire" or "the Company" refers to United Fire & Casualty Company or United Fire & Casualty Company and its consolidated subsidiaries, as the context requires. The Company is engaged in the business of writing property, casualty and life insurance. The Company is an Iowa corporation incorporated in January 1946. Its principal executive office is located at 118 Second Avenue SE, P.O. Box 73909, Cedar Rapids, Iowa 52407-3909. Telephone: 319-399-5700. The Company's property and casualty segment includes the following companies, all of which are wholly owned by United Fire: Addison Insurance Company, an Illinois property and casualty insurer, Lafayette Insurance Company, a Louisiana property and casualty insurer, and American Indemnity Financial Corporation, a Delaware holding company. Addison Insurance Company is the sole owner of Addison Insurance Agency, an Illinois general agency. Lafayette Insurance Company is the sole owner of Insurance Brokers & Managers, Inc., a Louisiana general agency. American Indemnity Financial Corporation owns in excess of 99.9 percent of American Indemnity Company, a Texas property and casualty insurer. American Indemnity Company has three wholly owned subsidiaries, Texas General Indemnity Company, a Colorado property and casualty insurer, American Fire and Indemnity Company, a Texas property and casualty insurer, and American Computing Company, a non-insurer utilized for inter-company equipment financing. United Fire Lloyds, a Texas property and casualty insurer, is an affiliate of and operationally and financially controlled by the Company. The Company's life insurance segment subsidiary is United Life Insurance Company ("United Life"), a wholly owned Iowa life insurance company. A table reflecting premiums, operating results and assets attributable to the Company's segments is included in Note 11 of the Notes to Consolidated Financial Statements. As of December 31, 2000, the Company and its subsidiaries employed 737 full-time employees. MARKETING The Company markets its products principally through the following five regional locations: 1) Cedar Rapids, Iowa - 118 Second Avenue SE, P.O. Box 73909, Cedar Rapids, IA 52407-3909 (which also serves as the Company's home office) 2) Westminster, Colorado - 7301 N. Federal, Suite 302, P.O. Box 850, Westminster, CO 80030-4919 3) Lincoln, Nebraska - 1314 O Street, Suite 500, P.O. Box 82540, Lincoln, NE 68501 4) New Orleans, Louisiana - 2626 Canal Street, P.O. Box 53265, New Orleans, LA 70153-3265 5) Galveston, Texas - 2115 Winnie, P.O. Box 1259, Galveston, TX 77550 The Company is licensed as a property and casualty insurer in 40 states, primarily in the Midwest, West and South. Approximately 2,124 independent agencies represent the Company and its property and casualty subsidiaries. The life insurance subsidiary is licensed in 24 states, primarily Midwestern and Western, and is represented by approximately 1,280 independent agencies. The regional offices of the Company are staffed with underwriting, claims and marketing representatives and administrative technicians, all of whom provide support and assistance to the independent agencies. Also, home office staff technicians and specialists provide support to the subsidiaries, regional offices and independent agencies. The Company uses management reports to monitor subsidiary and regional offices for overall results and conformity to Company policy. The Company competes in the United States property and casualty insurance market with more than 3,500 other insurers. The industry is highly competitive, with insurers competing on the basis of service, price and coverage. Because the Company relies heavily on independent agencies, it utilizes a profit-sharing plan as an incentive to place high-quality property and casualty business with the Company. For 2000, property and casualty agencies will receive profit- sharing commissions of an estimated $8,767,000. To compete in the service arena, the Company has an agency interface system for utilization by its agency force allowing on-line application and acceptance of risks - a system which has greatly reduced processing time for both the Company and its agents. In addition, the Company's web-site allows for on-line quotes and billing inquiry. The life segment also operates in a highly competitive industry. The Company encounters significant competition in all lines of business from other life insurance companies and from other providers of financial services. The life segment utilizes competitive commission rates and other sales inducements to attract and maintain its relationship with independent agencies. 1 In 2000, direct premium writings on a statutory basis by state were as follows.
- -------------------------------------------------------------------------------------- (Dollars in Thousands) - -------------------------------------------------------------------------------------- Life, Accident and Property and Health Insurance Segment, Casualty Insurance Segment Including Annuities - -------------------------------------------------------------------------------------- Percent Percent Amount of Total Amount of Total Alabama $ 3,780 1.2% $ - - % Arkansas 6,056 1.9 12 - California 5,119 1.6 - - Colorado 21,610 6.7 5,127 2.7 Florida 6,046 1.9 7 - Idaho 2,621 0.8 - - Illinois 23,424 7.3 15,618 8.1 Indiana 2,616 0.8 - - Iowa 44,533 13.8 94,150 48.7 Kansas 14,308 4.4 3,207 1.7 Louisiana 41,934 13.0 94 - Minnesota 18,338 5.7 15,584 8.1 Mississippi 10,037 3.1 44 - Missouri 27,564 8.6 4,301 2.2 Nebraska 16,863 5.2 13,131 6.8 New Mexico 1,121 0.3 - - North Dakota 3,722 1.2 9,466 4.9 South Dakota 9,692 3.0 4,116 2.1 Texas 40,596 12.6 3,608 1.9 Utah 2,662 0.8 - - Wisconsin 11,613 3.6 15,414 8.0 Wyoming 3,575 1.1 440 0.2 Other 4,448 1.4 8,856 4.6 - -------------------------------------------------------------------------------------- $322,278 100.0% $193,175 100.0 % ======================================================================================
2 PRODUCTS PROPERTY AND CASUALTY INSURANCE SEGMENT The Company writes both personal and commercial lines of insurance. Personal lines are composed mostly of automobile and homeowners, but also include recreational vehicles, watercraft, dwelling fire and umbrella policies. The majority of commercial insurance consists of business packages, which include property, liability, inland marine, commercial automobile, workers' compensation and umbrella. The Company also writes fidelity and surety bonds. Specialty policies written include the Commercial Uni-Saver; TRADE-PRO for Contractors; GARAGE-PRO; Blanket Mortgage; and some forms of Errors and Omissions insurance. The following table sets forth statutory property and casualty net premiums earned, net losses incurred (excluding net loss adjustment expenses) and the loss ratio (ratio of net losses incurred to net premiums earned), by lines of insurance written, for the three years ended December 31, 2000, 1999 and 1998.
- ---------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ---------------------------------------------------------------------------------------------------------- Years Ended December 31 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------- Fire and allied lines (1) Net premiums earned $ 96,894 $ 76,557 $ 69,977 Net losses incurred 60,076 40,176 51,418 Loss ratio 62.0% 52.5% 73.5% - ---------------------------------------------------------------------------------------------------------- Automobile Net premiums earned $ 85,323 $ 64,558 $ 54,042 Net losses incurred 53,412 44,824 37,828 Loss ratio 62.6% 69.4% 70.0% - ---------------------------------------------------------------------------------------------------------- Other liability Net premiums earned $ 57,720 $ 38,922 $ 31,804 Net losses incurred 18,667 17,266 12,400 Loss ratio 32.3% 44.4% 39.0% - ---------------------------------------------------------------------------------------------------------- Workers' compensation Net premiums earned $ 25,858 $ 20,524 $ 20,797 Net losses incurred 12,567 15,119 16,275 Loss ratio 48.6% 73.7% 78.3% - ---------------------------------------------------------------------------------------------------------- Fidelity and surety Net premiums earned $ 18,087 $ 18,129 $ 17,669 Net losses incurred 2,138 387 1,748 Loss ratio 11.8% 2.1% 9.9% - ---------------------------------------------------------------------------------------------------------- Reinsurance Net premiums earned $ 22,539 $ 27,739 $ 25,708 Net losses incurred 36,547 34,003 24,647 Loss ratio 162.2% 122.6% 95.9% - ---------------------------------------------------------------------------------------------------------- Other Net premiums earned $ 850 $ 625 $ 533 Net losses incurred 712 66 8 Loss ratio 83.8% 10.6% 1.5% - ---------------------------------------------------------------------------------------------------------- Total property and casualty Net premiums earned $307,271 $247,054 $220,550 Net losses incurred 184,119 151,841 144,324 Loss ratio 59.9% 61.5% 65.4% ==========================================================================================================
(1) "Fire and allied lines" includes farmowners, homeowners, commercial multiple peril and inland marine. 3 The combined ratios below, which relate to property and casualty insurance, are the sum of the following: the loss ratio, calculated by dividing net losses incurred by net premiums earned; the loss adjustment expense ratio, calculated by dividing net loss adjustment expenses incurred by net premiums earned; and the underwriting expense ratio, calculated by dividing underwriting expenses incurred by net premiums written. The ratios in the table below have been prepared on both a statutory basis and a generally accepted accounting principles ("GAAP") basis. Generally, if the combined ratio is below 100 percent, there is an underwriting profit; if it is above 100 percent, there is an underwriting loss. STATUTORY COMBINED RATIOS [A bar graph displaying statutory combined ratios for the company as compared with the Insurance Industry from 1996 to 2000 appears here.] Statutory Combined Ratios
Company Industry 1996 104.4 105.8 1997 98.0 101.6 1998 114.8 105.6 1999 109.0 107.8 2000 105.9 110.3
================================================================================================================ (Dollars in Thousands) - ---------------------------------------------------------------------------------------------------------------- Statutory GAAP - ---------------------------------------------------------------------------------------------------------------- Years Ended December 31 2000 1999 1998 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------- Net premiums written $325,052 $254,214 $221,002 $325,052 $254,214 $221,002 Net premiums earned 307,271 247,054 220,550 307,271 247,054 220,550 - ---------------------------------------------------------------------------------------------------------------- Loss and loss adjustment expense ratio 74.2% 75.6% 81.9% 73.6% 75.1% 81.2% Underwriting expense ratio 31.7 33.4 32.9 31.7 34.1 34.0 - ---------------------------------------------------------------------------------------------------------------- Combined ratio 105.9% 109.0% 114.8% 105.3% 109.2% 115.2% - ---------------------------------------------------------------------------------------------------------------- Underwriting loss (5.9)% (9.0)% (14.8)% (5.3)% (9.2)% (15.2)% ================================================================================================================
LIFE INSURANCE SEGMENT United Life underwrites and markets single-premium whole life insurance, term life and universal life insurance, annuities, credit life insurance and individual disability income products. While United Life's lead annuity product is a single-premium deferred annuity, it also offers flexible premium annuities. The credit life insurance business involves the sale of credit life and credit accident and health products, working in conjunction to satisfy the need for debt protection in the event of disability and/or death. United Life also offers an individual disability income rider that is attached to the ordinary life insurance products. Total life insurance in force, before reinsurance, is $3,930,948,000 as of December 31, 2000. Universal life insurance represents 47 percent of insurance in force at December 31, 2000, compared to 49 percent at December 31, 1999. The following table presents information on United Life net premiums earned for the last three years on a GAAP basis.
====================================================================================================================== (Dollars in Thousands) - ---------------------------------------------------------------------------------------------------------------------- Percent Percent Percent Years Ended December 31 2000 of total 1999 of total 1998 of total - ---------------------------------------------------------------------------------------------------------------------- Universal life $ 9,016 34.3% $ 8,696 33.3% $10,524 41.6% Ordinary life (other than universal) 4,753 18.1 5,199 19.9 4,917 19.4 Accident and health 5,341 20.3 5,271 20.2 4,398 17.4 Annuities 2,422 9.2 2,264 8.7 1,613 6.4 Credit life 4,537 17.2 4,493 17.2 3,694 14.6 Group accident and health 235 0.9 177 0.7 149 0.6 - ---------------------------------------------------------------------------------------------------------------------- TOTAL NET PREMIUMS EARNED $26,304 100.0% $26,100 100.0% $25,295 100.0% ======================================================================================================================
4 CONSOLIDATED NET PREMIUMS WRITTEN The following table shows the statutory consolidated net premiums written and annuity deposits during the last three years by major category.
- ---------------------------------------------------------------------------------------------- (Dollars in Thousands) - ---------------------------------------------------------------------------------------------- Percent Percent Percent Years Ended December 31 2000 of total 1999 of total 1998 of total - ---------------------------------------------------------------------------------------------- Fire and allied lines (1) $103,385 20.0% $ 77,270 18.1% $ 69,606 18.5% Automobile 89,925 17.4 65,730 15.4 54,902 14.6 Other liability 62,313 12.1 43,433 10.2 31,738 8.4 Workers' compensation 27,855 5.4 21,735 5.1 20,332 5.4 Fidelity and surety 19,365 3.7 18,395 4.3 17,839 4.7 Reinsurance 21,244 4.1 26,944 6.3 26,052 6.9 Other Property and Casualty 965 0.2 707 0.2 533 0.1 Life and accident and health 26,427 5.1 27,293 6.3 34,961 9.5 Annuity deposits 165,181 32.0 145,810 34.1 119,717 31.9 - ---------------------------------------------------------------------------------------------- $516,660 100.0% $427,317 100.0% $375,680 100.0% ==============================================================================================
(1) "Fire and allied lines" includes farmowners, homeowners, commercial multiple peril and inland marine. REINSURANCE Property and casualty insurance segment The Company has acted as a reinsurer, assuming both property and casualty reinsurance from other insurance or reinsurance companies. The bulk of the business assumed is property reinsurance with the emphasis on catastrophe covers. During the second quarter of 2000, the Company decided to significantly reduce its writings in assumed reinsurance business. A small portion of the business expired on July 1, 2000, and the bulk of the business expired on December 31, 2000. Contracts will be renewed with a very limited number of brokers to continue writing assumed reinsurance business. The Company will continue to have exposure related to the assumed reinsurance contracts that were previously written. The Company follows the industry practice of reinsuring a portion of its direct and assumed reinsurance exposure and cedes to reinsurers a portion of the premium received. Reinsurance is purchased to reduce the net liability on individual risks to predetermined limits and to protect against catastrophic losses such as hurricanes and tornadoes. Such catastrophe protection is purchased on both direct and assumed business. The Company uses many reinsurers, both domestic and foreign. There are no concentrations of credit risk associated with reinsurance. Principal reinsurers include Employers Reinsurance Corporation, AXA Reassurance, Continental Casualty Company and Partner Reinsurance Company of the U.S. The limits on risks retained by the Company's property and casualty segment vary by line of business, and risks in excess of the retention limits are reinsured. For the property lines of business, the retention is $1,000,000. The following table presents the casualty business retention levels.
- ---------------------------------------------------------------- Accident Years Casualty Retention - ---------------------------------------------------------------- 1983 and prior $ 225,000 1984 through 1986 300,000 1987 through 1991 500,000 1992 through 1994 750,000 1995 and later 1,000,000 ================================================================
The ceding of reinsurance does not legally discharge the Company from primary liability under its policies, and the Company must pay the loss if the reinsurer fails to meet its obligation. The Company monitors the financial condition of its reinsurers. At December 31, 2000 and 1999, there are no uncollectable reinsurance balances that would result in a material impact on the Company's financial statements. In accordance with GAAP and industry practice, the Company accounts for insurance written and losses incurred net of reinsurance ceded. The table on the following page sets forth the statutory aggregate direct and assumed premiums written, ceded reinsurance and net premiums written for the three years ended December 31, 2000, 1999 and 1998. 5
- --------------------------------------------------------------------------------------------- (Dollars in Thousands) - --------------------------------------------------------------------------------------------- Percent Percent Percent Years ended December 31 2000 of total 1999 of total 1998 of total - --------------------------------------------------------------------------------------------- Fire and allied lines (1) $116,429 35.8% $ 87,594 34.5% $ 81,229 36.8% Automobile 90,747 27.9 69,557 27.4 56,452 25.5 Other liability 65,801 20.2 48,157 18.9 35,010 15.8 Workers' compensation 28,385 8.7 22,192 8.7 20,736 9.4 Fidelity and surety 20,776 6.4 19,751 7.8 19,000 8.6 Reinsurance assumed 24,179 7.4 29,950 11.8 28,979 13.1 Other 1,483 0.5 1,044 0.4 800 0.4 - --------------------------------------------------------------------------------------------- Aggregate direct and assumed premiums written $347,800 106.9% $278,245 109.5% $242,206 109.6% Reinsurance ceded 22,748 6.9 24,031 9.5 21,204 9.6 - --------------------------------------------------------------------------------------------- Net premiums written $325,052 100.0% $254,214 100.0% $221,002 100.0% =============================================================================================
(1) "Fire and allied lines" includes farmowners, homeowners, commercial multiple peril and inland marine. Life insurance segment United Life reinsures a portion of its exposure and cedes to reinsurers a portion of the premium received on the policies reinsured. United Life enters into reinsurance agreements to reduce the net liability on individual risks to predetermined limits. United Life retains $200,000 per insured and reinsures the excess. The ceding of reinsurance does not legally discharge United Life from primary liability under its policies. United Life must pay the loss if the reinsurer fails to meet its obligation. The Company monitors the financial condition of its reinsurers. At December 31, 2000 and 1999, there are no uncollectable reinsurance balances that would result in a material impact on the Company's financial statements. United Life follows the GAAP and industry practice of accounting for insurance written and losses incurred net of reinsurance ceded. United Life's primary reinsurance companies are ERC Reinsurance Company, RGA Reinsurance Company and Business Men's Assurance Company of America. These companies insure both life and disability risks. RESERVES Property and casualty insurance segment Applicable insurance laws require the Company's property and casualty segment to maintain reserves for losses and loss adjustment expenses with respect to both reported and unreported losses. The Company's property and casualty segment establishes reserves for reported losses one of two ways. For some classes of claims under $5,000 reserves are set based upon a schedule, determined by averaging claims paid over a 13-month period. All other reserves are established on an individual case basis. These reserves are based upon policy provisions, accident facts, injury or damage exposure, trends in the legal system, and other factors. The amount of reserves for unreported losses is determined for each line of insurance by using the probable number and nature of losses arising from occurrences on the basis of historical and statistical information. Once reserves have been established, they are closely monitored and adjusted as needed. Loss reserves are estimates at a given time of the ultimate amount expected to be paid on incurred losses. Estimates are based on facts and circumstances known when the estimates are made. Reserves are not discounted for the time value of money. The loss settlement period on insurance losses may be many years, and as additional facts regarding individual losses become known, it often becomes necessary to refine and adjust the estimates of liability on a loss. Inflation is implicitly provided for in the reserving function through review of cost trends, historical reserving results and projections of future economic conditions. Reserves for loss adjustment expenses are intended to cover the actual cost of investigating losses and defending lawsuits arising from losses. These reserves are continuously revised based on historical analysis and management's expectations. The table on the following page presents a development of net loss and loss adjustment expense reserve liabilities and payments for the years 1991 through 2000. The top line of the table shows the estimated liability for unpaid losses and loss adjustment expenses recorded at December 31 for each of the indicated years. This liability represents the estimated amount of losses and loss adjustment expenses for losses arising in all prior years that are unpaid at December 31, including losses that had been incurred but not yet reported, net of applicable ceded reinsurance. The upper portion of the table shows the re- estimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table. The second half of the table displays cumulative losses paid and loss adjustment expenses paid for each of the years indicated on a GAAP basis. 6
- -------------------------------------------------------------------------------------------------------------------------- Years Ended December 31 - -------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - -------------------------------------------------------------------------------------------------------------------------- 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Liability for Unpaid Losses and LAE $123,219 $158,825 $170,798 $180,653 $188,700 $209,876 $218,912 $243,006 $310,637 $320,506 Liability re- estimated as of: One year later 128,042 154,572 153,691 160,776 159,571 176,332 192,297 213,047 273,706 Two years later 125,888 148,507 142,572 172,546 145,486 169,348 185,700 233,325 Three years later 124,428 144,159 158,312 164,133 142,877 164,030 198,298 Four years later 122,384 134,309 155,313 161,961 140,639 172,366 Five years later 118,568 132,075 154,849 162,424 147,412 Six years later 117,648 132,747 157,005 169,472 Seven years later 119,123 135,559 161,898 Eight years later 122,230 140,038 Nine years later 126,953 - -------------------------------------------------------------------------------------------------------------------------- Redundancy (Deficiency) $ (3,734) $ 18,787 $ 8,900 $ 11,181 $ 41,288 $ 37,510 $ 20,614 $ 9,681 $ 36,931 ========================================================================================================================== Cumulative amount of liability paid through: One year later $ 44,694 $ 54,291 $ 51,550 $ 80,246 $ 56,618 $ 61,694 $ 62,988 $ 71,251 $ 97,021 Two years later 69,296 84,074 102,637 109,281 83,071 93,599 97,142 123,965 Three years later 87,052 96,976 119,349 123,469 97,763 110,531 122,818 Four years later 95,059 107,420 127,333 132,414 106,770 122,413 Five years later 99,483 112,360 133,531 137,597 112,456 Six years later 102,677 116,929 137,295 141,524 Seven years later 105,907 119,657 140,127 Eight years later 108,287 121,861 Nine years later 110,248 - --------------------------------------------------------------------------------------------------------------------------
LIFE INSURANCE SEGMENT United Life's reserves meet, or exceed, the minimum statutory Iowa Insurance Law requirements. These reserves are developed and analyzed by independent consulting actuaries. The reserves reflected in the Company's Consolidated Financial Statements are calculated in accordance with GAAP. These reserves are determined based upon the Company's best estimates of mortality and morbidity, persistency, expenses and investment income. Statutory reserves are determined based upon mortality rates and interest rates specified by state law. INVESTMENTS The Company must comply with state insurance laws that prescribe the kind, quality and concentration of investments that may be made by insurance companies. The Company determines the mix of its investment portfolio based upon these state laws, liquidity needs, tax position, and general market conditions. The Company must also consider the timing of when liability obligations are due. Modifications are made to the investment portfolio as the conditions listed above change. Invested assets relating to the property and casualty segment are invested to meet liquidity needs and maximize after-tax returns with appropriate risk diversification. Assets relating to the life insurance segment are invested to meet liquidity needs, maximize the investment return and achieve a matching of assets and liabilities. Substantially, all bond purchases in 2000 were taxable bonds rather than municipal bonds, due to the more attractive yields offered by taxable bonds. 7
Investment results for the years indicated are summarized in the following table. - --------------------------------------------------------------------------------------- (Dollars in Thousands) - --------------------------------------------------------------------------------------- Annualized Yield Years Ended Average Investment on Average December 31 Invested Assets (1) Income, Net (2) Invested Assets - --------------------------------------------------------------------------------------- 2000 $1,316,906 $86,867 6.6% 1999 1,157,414 75,317 6.5 1998 1,040,008 67,928 6.5 =======================================================================================
(1) Average of amounts at beginning and end of year. (2) Investment income after deduction of investment expenses, but before applicable income tax. ITEM 2. PROPERTIES The Company owns two buildings in Cedar Rapids, Iowa, which it occupies as its home office. One building is a five-story building occupied entirely by the Company. The other is an eight-story office building in which the first floor is leased to tenants. The Company occupies the second through eighth floors of this building. The two buildings are connected with a skywalk. Lafayette Insurance Company owns one building in New Orleans, Louisiana, which serves as its home office. The building consists of two floors of office space and a floor of parking. American Indemnity Company, a subsidiary of American Indemnity Financial Corporation, owns two adjacent and connected buildings in Galveston, Texas, which serve as its home office. One building is seven stories and the other one is three stories. The facility is substantially occupied by American Indemnity Company, with a small percentage leased. ITEM 3. LEGAL PROCEEDINGS The registrant has no pending legal proceedings other than ordinary routine litigation incidental to the business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the shareholders during the fourth quarter of 2000. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated herein by reference to the information included in the "MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS" section of the 2000 annual report to stockholders. ITEM 6. SELECTED FINANCIAL DATA Incorporated herein by reference to the information included in the "SELECTED FINANCIAL DATA" section of the 2000 annual report to stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated herein by reference to the information included in the "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" section of the 2000 annual report to stockholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Incorporated herein by reference to the information included in the "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" section of the 2000 annual report to stockholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated herein by reference to the information included on pages 24 through 45 of the 2000 annual report to stockholders. 8 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of United Fire & Casualty Company: We have audited the accompanying consolidated balance sheets of UNITED FIRE & CASUALTY COMPANY (an Iowa corporation) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These consolidated financial statements and the supplementary schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and supplementary schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Fire & Casualty Company and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. As explained in Note 1 to the consolidated financial statements, effective January 1, 1999, the Company and its subsidiaries changed their method of accounting for derivative instruments and hedging activities. Our audit was made for the purpose of forming an opinion on the basic financial statements of the Company taken as a whole. The supplementary schedules (Schedule II - Valuation and Qualifying Accounts, Schedule III - Supplementary Insurance Information, Schedule IV - Reinsurance, and Schedule VI - Supplemental Information Concerning Property and Casualty Insurance Operations) are presented for purposes of additional analysis and are not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Chicago, Illinois February 15, 2001 9 INDEX TO SUPPLEMENTARY SCHEDULES Consolidated Schedules II - Valuation and Qualifying Accounts 11 III - Supplementary Insurance Information 12 IV - Reinsurance 13 VI - Supplemental Information Concerning Property and Casualty Insurance Operations 14
All other schedules have been omitted as not required, not applicable, not deemed material or because the information is included in the Consolidated Financial Statements. 10 SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
- ----------------------------------------------------------------------------------------------------------- A B C D E - ----------------------------------------------------------------------------------------------------------- Balance at Charged to Descrip- beginning of costs and Charged to Balance at end tion period expenses other accounts Deductions of period - ----------------------------------------------------------------------------------------------------------- 2000 Allowance for bad debts $ 899 $ 274 $ - $ - $ 1,173 Deferred tax asset valuation allowance 15,139 - - 3,769 (2) 11,370 Restructuring liability 972,000 - - 972,000 - 1999 Allowance for bad debts 731 168 - - 899 Deferred tax asset valuation allowance - - 15,139 (1) - 15,139 Restructuring liability - 972,000 (4) - - 972,000 1998 Allowance for bad debts 1,030 - - 299 (3) 731 - -----------------------------------------------------------------------------------------------------------
(1) Recorded in connection with purchase of American Indemnity Financial Corporation. (2) Primarily attributable to the utilization of deferred tax assets related to the Company's investment in American Indemnity Financial Corporation. (3) Reversal of allowance due to subsequent collections. (4) A liability for employee termination benefits and future contractual lease payments related to abandoned facilities in connection with the purchase of American Indemnity Financial Corporation. 11 SCHEDULE III. SUPPLEMENTARY INSURANCE INFORMATION
======================================================================================================================== (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------------ Future Policy Benefits, Benefits, Deferred Losses, Realized Claims, Policy Claims Earned Investment Net Losses and Acquisition and Loss Unearned Premium Gains and Investment Settlement Costs Expenses Premiums Revenue (Losses) Income Expenses - ------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 2000 Property and casualty $23,385 $ 358,032 $150,453 $307,271 $ 2,927 $25,536 $226,168 Life, accident and health(1) 75,014 822,158 14,759 26,094 (4,752) 61,331 16,880 - ------------------------------------------------------------------------------------------------------------------------ Total $98,399 $1,180,190 $165,212 $333,365 $(1,825) $86,867 $243,048 ========================================================================================================================
=============================================================================== (Dollars in Thousands) - ------------------------------------------------------------------------------- Amortization of Deferred Other Interest on Policy Under- Policy- Acquisition writing holders' Premiums Costs Expenses Accounts Written - ------------------------------------------------------------------------------- Year Ended December 31, 2000 Property and casualty $48,080 $ 54,784 $ - $325,052 Life, accident and health(1) 10,314 4,594 42,410 25,010 - ------------------------------------------------------------------------------- Total $58,394 $ 59,378 $ 42,410 $350,062 ===============================================================================
(1) Annuity deposits are included in future policy benefits, losses, claims, and loss expenses.
======================================================================================================================== (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------------ Future Policy Benefits, Benefits, Deferred Losses, Realized Claims, Policy Claims Earned Investment Net Losses and Acquisition and Loss Unearned Premium Gains and Investment Settlement Costs Expenses Premiums Revenue (Losses) Income Expenses - ------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 1999 Property and casualty $20,533 $ 338,243 $132,846 $247,054 $ 2,444 $23,477 $185,643 Life, accident and health(1) 69,541 701,350 15,626 25,997 492 51,840 16,805 - ------------------------------------------------------------------------------------------------------------------------ Total $90,074 $1,039,593 $148,472 $273,051 $ 2,936 $75,317 $202,448 ========================================================================================================================
=============================================================================== (Dollars in Thousands) - ------------------------------------------------------------------------------- Amortization of Deferred Other Interest on Policy Under- Policy- Acquisition writing holders' Premiums Costs Expenses Accounts Written - ------------------------------------------------------------------------------- Year Ended December 31, 1999 Property and casualty segment $39,998 $ 46,559 $ - $254,214 Life, accident and health(1) 9,865 4,842 32,286 25,359 - ------------------------------------------------------------------------------- Total $49,863 $ 51,401 $ 32,286 $279,573 ===============================================================================
(1) Annuity deposits are included in future policy benefits, losses, claims, and loss expenses.
======================================================================================================================== (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------------ Future Policy Benefits, Benefits, Deferred Losses, Realized Claims, Policy Claims Earned Investment Net Losses and Acquisition and Loss Unearned Premium Gains and Investment Settlement Costs Expenses Premiums Revenue (Losses) Income Expenses - ------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 1998 Property and casualty segment $16,339 $ 251,117 $100,080 $220,550 $20,981 $23,157 $179,089 Life, accident and health(1) 51,253 575,189 16,338 25,177 1,815 44,771 16,006 - ------------------------------------------------------------------------------------------------------------------------ Total $67,592 $ 826,306 $116,418 $245,727 $22,796 $67,928 $195,095 ========================================================================================================================
=============================================================================== (Dollars in Thousands) - ------------------------------------------------------------------------------- Amortization of Deferred Other Interest on Policy Under- Policy- Acquisition writing holders' Premiums Costs Expenses Accounts Written - ------------------------------------------------------------------------------- Year Ended December 31, 1998 Property and casualty segment $39,001 $ 36,084 $ - $221,002 Life, accident and health(1) 8,891 4,231 26,568 31,927 - ------------------------------------------------------------------------------- Total $47,892 $ 40,315 $ 26,568 $252,929 ===============================================================================
(1) Annuity deposits are included in future policy benefits, losses, claims, and loss expenses. Certain amounts included in this schedule for earlier years have been reclassified to conform with the 2000 financial statement presentation. 12 SCHEDULE IV. REINSURANCE
- --------------------------------------------------------------------------------------------- (Dollars in Thousands) - --------------------------------------------------------------------------------------------- Percentage Ceded to Assumed of Amount Gross Other From Other Net Assumed to Amount Companies Companies Amount Net Earned - --------------------------------------------------------------------------------------------- Year ended December 31, 2000 Life insurance in force $3,930,948 $422,577 $ - $3,508,371 Premiums earned: Property and casualty $ 303,378 $ 27,765 $31,658 $ 307,271 10.30% Life insurance 21,899 1,071 - 20,828 Accident and health insurance 5,410 144 - 5,266 - --------------------------------------------------------------------------------------------- Total $ 330,687 $ 28,980 $31,658 $ 333,365 9.50% ============================================================================================= Year Ended December 31, 1999 Life insurance in force $3,839,897 $396,382 $ - $3,443,515 Premiums earned: Property and casualty $ 239,971 $ 27,206 $34,289 $ 247,054 13.88% Life insurance 22,080 1,316 - 20,764 Accident and health insurance 5,408 175 - 5,233 - --------------------------------------------------------------------------------------------- Total $ 267,459 $ 28,697 $34,289 $ 273,051 12.56% ============================================================================================= Year Ended December 31, 1998 Life insurance in force $3,672,130 $358,022 $ - $3,314,108 Premiums earned: Property and casualty $ 209,328 $ 22,349 $33,571 $ 220,550 15.22% Life insurance 21,856 959 - 20,897 Accident and health insurance 4,414 134 - 4,280 - --------------------------------------------------------------------------------------------- Total $ 235,598 $ 23,442 $33,571 $ 245,727 13.66% =============================================================================================
Certain amounts included in this schedule for earlier years have been reclassified to conform with the 2000 financial statement presentation. 13 SCHEDULE VI. SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
================================================================================================================= (Dollars in Thousands) - ----------------------------------------------------------------------------------------------------------------- Reserves for Unpaid Affiliation with Registrant: Deferred claims and Company and Policy Claim Realized Net consolidated property and Acquisition Adjustment Unearned Earned Investment Investment casualty subsidiaries Costs Expenses Premiums Premiums Gains Income - ----------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2000 $23,385 $358,032 $150,453 $307,271 $2,927 $25,536 ================================================================================================================= Year Ended December 31, 1999 $20,533 $338,243 $132,846 $247,054 $2,444 $23,477 ================================================================================================================= Year Ended December 31, 1998 $16,339 $251,117 $100,080 $220,550 $20,981 $23,157 ================================================================================================================= ================================================================================================================= (Dollars in Thousands) - ----------------------------------------------------------------------------------------------------------------- Claims and Claim Adjustment Expenses Incurred Related to Amortization Affiliation with Registrant: ------------------- of Deferred Paid Claims Company and (1) (2) Policy and Claim consolidated property and Current Prior Acquisition Adjustment Premiums casualty subsidiaries Year Years Costs Expenses Written - ------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 2000 $264,891 $(36,931) $48,080 $218,091 $325,052 ============================================================================================================ Year Ended December 31, 1999 $211,575 $(25,135) $39,998 $170,470 $254,214 ============================================================================================================ Year Ended December 31, 1998 $206,603 $(26,615) $39,001 $155,894 $221,002 ============================================================================================================
Certain amounts included in this schedule for earlier years have been reclassified to conform with the 2000 financial statement presentation. 14 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors of the Company (Age), Present Position, Served as Business Experience Director Since Scott McIntyre Jr. (67), Chairman of the Board, 1956 United Fire & Casualty Company Mr. McIntyre has been employed by the Company since 1954. Mr. McIntyre's term as a director of the Company expires in May 2002. Christopher R. Drahozal ( 39), Professor, 1997 University of Kansas, Lawrence, Kansas Professor of Law at the University of Kansas, where he has been teaching since 1994. Mr. Drahozal was in private practice in Washington, D.C., 10-91/4-94. Mr. Drahozal is the son-in-law of Scott McIntyre Jr., Chairman, United Fire & Casualty Company. Mr. Drahozal's term as director of the Company expires in May 2003. Jack B. Evans (52), President, 1995 Hall-Perrine Foundation, Cedar Rapids, Iowa Mr. Evans has been President of the Hall-Perrine Foundation, Cedar Rapids, Iowa, since January 1, 1996. Prior to that, Mr. Evans was employed by SCI Financial Group, Cedar Rapids, Iowa, serving as its President from 1993 to 1996. Mr. Evans' term as director of the Company expires in May 2003. Kyle D. Skogman (50), President, Skogman Construction Co. of Iowa 2000 Mr. Skogman is President of Skogman Construction Co. of Iowa and has served in that capacity since 1990. Mr. Skogman was appointed to fill an unexpired board term in December 2000. Mr. Skogman's term as director of the Company expires in May 2001. Casey D. Mahon (49), Adjunct Professor of Law, University of Iowa, 1993 Iowa City, Iowa Adjunct Professor of Law at the University of Iowa. Employed as Senior Vice President & General Counsel of McLeodUSA, Inc. from 6/93 until she retired 2/1/98. Ms. Mahon's term as a director of the Company expires in May 2002. Leonard J. Marshall (71), Retired 1988 Mr. Marshall, who was employed by General Accident Insurance Company of Philadelphia, Pennsylvania, from 1-83/10-91, retired in October 1991. Mr. Marshall's term as a director of the Company expires in May 2002. Thomas K. Marshall (67), Retired 1983 Mr. Marshall, who was Vice President-Development of Grinnell College, Grinnell, Iowa, from 1982 to August 31, 1992, is retired. Mr. Marshall's term as director of the Company expires in May 2003. George D. Milligan (44), President, 1999 The Graham Group, Inc., Des Moines, Iowa Mr. Milligan has been the President of The Graham Group, Inc. since March 1985. Prior to that Mr. Milligan was Merchandising Manager for Continental Grain Co., New York, New York from October 1979 to March 1985. Mr. Milligan's term as director of the Company expires in May 2003. Mary K. Quass (50), President & CEO, Quass Communications, 1998 Cedar Rapids, Iowa Ms. Quass held the position of President and Chief Executive Officer of Quass Broadcasting Company from 1988 to 1998. In January 1998, Quass Broadcasting Company merged with Capstar Broadcasting Partners to form Central Star Communications, Inc. In July 1999, Central Star Communications, Inc. merged with AM-FM, Inc. Ms. Quass's term as a director of the Company expires in May 2001. John A. Rife (58), President & CEO United Fire & Casualty Company, 1988 United Life Insurance Company Mr. Rife started with the Company in September 1976. He became Prsesident of United Life Insurance Company in December 1984, in May 1997 he was appointed President of the Company, in May 2000 he was appointed as Chief Executive Officer of the Company, and in August 1999 he was named President of the American Indemnity Companies. Mr. Rife's term as director of the Company expires in May 2001. Byron G. Riley (70), Attorney, Bradley & Riley, P.C., 1983 Cedar Rapids, Iowa Mr. Riley is an attorney with the law firm of Bradley & Riley, P.C., Cedar Rapids, Iowa, and has practiced law with that law firm since September 1981. Mr. Riley's term as a director of the Company expires in May 2002. 15 Executive Officers of the Company:
Name (Age) Office Held Scott McIntyre Jr. (67) Chairman of the Board since 1980, Director since 1956 John A. Rife (58) Chief Executive Officer, United Fire & Casualty Company since May 2000; President of United Fire & Casualty Company since May 1997; President of United Life Insurance Company since 1984 Richard B. Swain (43) Senior Vice President since February 1999; Vice President Underwriting at Hastings Mutual Ins. Company, Hastings, Michigan, from May 1998 to February 1999; employed by the Company as Vice President, Lincoln Regional Office, from October 1993 to May 1998 Kent G. Baker (57) Vice President and Chief Financial Officer since 1984 John R. Cruise (59) Vice President, Reinsurance, since 1986 E. Dean Fick (56) Vice President, Claims, since 1991 Shona Frese (56) Corporate Secretary since December 1996; employed by the Company since 1966 David L. Hellen (48) Resident Vice President, Denver regional office, since 1987 Wilburn J. Hollis (60) Vice President, Human Resources, since June 1996; Director of Human Resources at Norwest Financial in Des Moines, Iowa, from 1989 to 1996 E. Addison Hulit (61) Vice President since May 1995; employed by the Company since 1993 Robert B. Kenward (58) Vice President, Information Services, since 1992 Kevin L. Kubik (46) Vice President and Chief Investment Officer since June 1997; employed by Van Kampen American Capital Investment Advisory Inc. from 1989 to 1997 David A. Lange (43) Corporate Secretary since February 1997; Fidelity and Surety Claim Manager since 1987 Dianne M. Lyons (37) Controller since November 1999; employed by the Company as Accounting Manager and Financial Accountant since 1983. James A. Mason (53) Resident Vice President since February 2000; Branch Manager, Reliance Insurance Company, New Orleans, from January 1999 to January 2000; Regional President, Southern Region, from 1995 to 1998 and Vice President / General Manager from 1992 to 1994, St. Paul Insurance Company, Dallas Texas Galen E. Underwood (60) Treasurer since 1979 Stanley A. Wiebold (56) Vice President, Underwriting, since 1986 Michael T. Wilkins (37) Resident Vice President since 1998; employed by the Company since 1985
16 ITEM 11. EXECUTIVE COMPENSATION Executive Compensation includes the amount expensed for financial reporting purposes under the Company's qualified profit sharing (401(k)) plan. All employees of the Company are eligible to participate after they have completed one hour of service with the Company and have attained twenty-one years of age. The plan is not integrated with Social Security, and provides for employer contributions in such amounts as the Board of Directors may annually determine. The benefit payable under the plan is equal to the vested account balance. Executive Compensation includes the amounts expensed for financial reporting purposes as contributions to the Company's pension plan for the named individuals. The pension plan is a noncontributory plan, which is integrated with social security. All employees of the Company are eligible to participate after they have completed one year of service, attained twenty-one years of age and have met hourly requirements with the Company. In 1995 through October, 1996, the normal retirement pension payable under the plan was based on the employee's highest annual earnings for five (5) consecutive years of employment, and provided a benefit of 1.25 percent of monthly compensation times years of benefit service with a maximum of 32 years. Effective November 1, 1996, the pension plan was amended. The normal retirement benefit was changed from 1.25 percent of average monthly compensation, times years of benefit service, to 1.25 percent of average monthly compensation, plus 0.5 percent of average monthly compensation in excess of the covered compensation limit, all multiplied by years of benefit service. Years of benefit service was changed from a cap of 32 years to 35 years. Early retirement eligibility was changed from age 59-1/2 to age 55 with five years of service. Early retirement benefits were previously reduced actuarially for all retirees. Now, early retirement benefits have a subsidized reduction if the employee retires with 20 years or more of service. The pension plan owned 101,029 shares of the Company common stock as of December 31, 2000, and has made deposits with United Life Insurance Company to be used by the plan to purchase retirement annuities from that company. The annuity fund, maintained by United Life Insurance Company, is credited with compound interest on the average fund balance for the year. The interest rate will be equivalent to the ratio of net investment income to mean assets of United Life Insurance Company. In 1983, the Company adopted the United Lafayette Employee Stock Ownership Plan. Effective January 1, 1988, the Plan was amended to convert the Tax Credit Employee Stock Ownership Plan to an Employee Stock Ownership Plan. The Plan is for the benefit of eligible employees and their beneficiaries. All employees are eligible to participate in the Plan upon completion of one year of service, attaining age twenty-one and meeting hourly requirements with the Company. Contributions to this plan are made at the discretion of the Board of Directors. These contributions are based upon a percentage of total payroll and are allocated to participants on the basis of compensation. Contributions are made in cash, which is used by the Trustee to acquire shares of the Company stock to allocate to participants' accounts. As of December 31, 2000, 1999 and 1998, the Trustee owned 127,386, 123,733 and 120,333 shares of Company stock, respectively. The Company made contributions to the plan of $50,000, $60,000, and 1,050,000 in 2000, 1999 and 1998 respectively. On August 21, 1998, the Company adopted a nonqualified employee stock option plan, which authorizes the issuance of up to 500,000 shares of the Company's common stock to employees. The granting of the options will help to attract and retain the best available persons for positions of substantial responsibility and will provide certain employees with an additional incentive to contribute to the success of the Company and its subsidiaries. As of December 31, 2000, 16,771 options had been granted under the plan. 17 The following table summarizes the compensation of the Company's Chief Executive Officer and the four most highly compensated executive officers (other than the Chief Executive Officer) for the last three years. SUMMARY COMPENSATION TABLE
Annual Compensation Options Name and Principal Position Year Salary Bonus Granted - ----------------------------------------------------------------------------- Scott McIntyre, Jr. (7) 2000 $290,000(1) $ (2) 5,000 Chairman, United Fire & Casualty Co. 1999 $290,000(1) $ -(2) - 1998 $290,000(1) $ -(2) - - ------------------------------------------------------------------------------ John A. Rife (7) 2000 $233,333(1)(5) $ (2) 5,000 President/CEO, United Fire & Casualty Co. 1999 $210,000(1) $ - (4) 1,181 President, United Life Insurance Company 1998 $190,000(3) $ 3,032(4) - President, American Indemnity Companies - ------------------------------------------------------------------------------ E. Dean Fick 2000 $147,750 $ (4)(6) - Vice President-Claims, 1999 $141,750 $ 7,088(4) - United Fire & Casualty Company 1998 $135,000 $ -(4) - - ------------------------------------------------------------------------------ Kevin L. Kubik 2000 $133,500 $ (4)(6) - Vice President-Chief Investment Officer, 1999 $125,000 $ 9,375(4) 500 United Fire & Casualty Company 1998 $113,500 $ 3,513(4) - - ------------------------------------------------------------------------------ E. Addison Hulit 2000 $121,500 $ 5,775(4)(6) - Vice President, United Fire & Casualty Co. 1999 $115,500 -(4) 500 President, Addison Insurance Company 1998 $110,000 18,700(4) - - ------------------------------------------------------------------------------
Footnotes to summary compensation table: (1) Recommended by the Compensation Committee and approved by the Board of Directors in February of each year. (2) Bonus, if any, determined at the regular meeting of the Directors in February of each year based on recommendation of the Compensation Committee and prior year performance. (3) Determined by the Chairman based on annual review in December of each year. (4) Determined by the bonus plan in effect for all salaried employees based on the performance for the preceding year. (5) Compensation from 1/1/00-5/31/00 of $210,000 and from 6/1/00-12/31/00 of $250,000; reflecting mid-year promotion and raise. (6) Calculated and paid in April 2001. (7) Director and Officer of United Fire & Casualty Company. 18 Compensation committee The Company's compensation committee is responsible for recommending the salary and bonus of the Chairman and President to the Board of Directors. The members of the Compensation Committee are Casey D. Mahon, Leonard J. Marshall and George D. Milligan. In establishing a salary and bonus, factors such as earnings, underwriting ratios, return on equity and growth in shareholder value are considered. Consideration is also given to the salaries and bonuses paid to comparable executives in the insurance industry and in other similarly sized companies in Iowa. Aggregate Option Exercises in 2000 and Year-End Values
- ------------------------------------------------------------------------------------------------------------- Number of Securities (1) Value of Unexercised Underlying In-the- Number of shares Value Unexercised Options Money Options Acquired on Realized at December 31, 2000 at December 31, 2000 Name Exercise Exercisable Unexercisable Exercisable Unexercisable - -------------------------------------------------------------------------------------------------------------- Scott McIntyre Jr. 0 0 0 5,000 0 NA John A. Rife 0 0 0 6,181 0 NA E. Dean Fick 0 0 0 0 0 NA Kevin L. Kubik 0 0 0 500 0 NA E. Addison Hulit 0 0 0 500 0 NA - -------------------------------------------------------------------------------------------------------------- (1) None of the employee unexercised options are in-the-money.
Option Grants in 2000
- ------------------------------------------------------------------------------------------------------------------ Number of % of Total Potential Realizable Value Securities Options Exercise At Assumed Annual Rates Options Granted to Price Expiration Of Stock Appreciation for Granted Employees $/Shares Date Option Term Name 5% 10% - ------------------------------------------------------------------------------------------------------------------- Scott McIntyre Jr. 5,000 47% $20.12 February, 2010 $63,267 $160,330 John A. Rife 5,000 47% $20.12 February, 2010 63,267 160,330 E. Dean Fick 0 0% $ 0.00 -- -- Kevin L. Kubik 0 0% $ 0.00 -- -- E. Addison Hulit 0 0% $ 0.00 -- -- - -------------------------------------------------------------------------------------------------------------------
PENSION PLAN TABLE
- ------------------------------------------------------------------------------------------------------------------ Years of Service - ------------------------------------------------------------------------------------------------------------------ Salary 15 20 25 30 35 - ------------------------------------------------------------------------------------------------------------------- 100,000 $23,618 $31,490 $39,363 $47,235 $55,108 110,000 26,243 34,990 43,738 52,485 61,233 135,000 32,805 43,740 54,675 65,610 76,545 150,000 36,743 48,990 61,238 73,485 85,733 170,000 41,993 55,990 69,988 83,985 97,983 - ---------------------------------------------------------------------------------------------------------------------
The credited years of service on December 31, 2000, for the persons named in the Summary Compensation Table are as follows: Mr. McIntyre, 35 years (maximum allowed); Mr. Rife, 24 years; Mr. Fick, 10 years; Mr. Kubik, 4 years; and Mr. Hulit, 7 years. The pension plan provides a benefit of 1.25 percent of average annual earnings, plus 0.5 percent of average annual earnings in excess of Covered Compensation multiplied by years of service or 35 years, whichever is lesser. Earnings are limited to $170,000 for pension plan purposes by the IRS. This limit is adjusted with inflation based upon the CPI and is scheduled to remain the same for participants retiring before December 31, 2001. Bonuses paid to officers are not included in pensionable earnings. The 2000 Covered Compensation table was used for the calculations in the table above. Pension figures for Scott McIntyre Jr., Chairman, and John A. Rife, President, are based upon $170,000 of pensionable earnings. Benefit amounts in the Pension Plan Table are computed assuming payments are made on the normal life annuity basis. Benefits listed in the table are not subject to deduction for Social Security or other offset amounts. Director Compensation Nonemployee directors are paid a fee of $500 per meeting attended, plus direct expenses, for attendance at director's meetings. When there is a committee meeting, the director serving on that committee receives an additional $400. An annual retainer of $2,500 is paid to each nonemployee director with the exception of the Vice Chairman who receives an annual retainer of $10,000. 19 The following graph compares the cumulative total stockholder return on Common Stock for the last five fiscal years with the cumulative total return of the S&P 500 Index and S&P Property-Casualty Insurance Index, assuming an investment of $100 in each of the above at their closing prices on December 31, 1995 and reinvestment of dividends. TOTAL SHAREHOLDER RETURNS [PERFORMANCE GRAPH APPEARS HERE]
INDEXED RETURNS --------------------------------------------------- BASE PERIOD YEARS ENDING ------ ------------------------------------------ COMPANY / INDEX DEC 95 DEC 96 DEC 97 Dec 98 DEC 99 DEC 00 - ------------------------ ------ ------ ------ ------ ------ ------ UNITED FIRE & CAS CO 100 128.14 163.62 126.62 87.61 79.40 S&P 500 INDEX 100 122.96 163.98 210.85 255.21 231.98 INSURANCE (PPTY-CAS)-500 100 121.51 176.76 164.47 122.60 190.95
20 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security ownership of certain beneficial owners. The following table sets forth information as of March 1, 2001, with respect to ownership of the Company's $3.33 1/3 par value common stock by principal security holders. Except as otherwise indicated, each of the persons named below has sole voting and investment powers with respect to the shares indicated.
- ----------------------------------------------------------------------------------------------------------- Amount and Nature of Percent Beneficial of Name of Beneficial Owner Address of Beneficial Owner Ownership Class (1) - ----------------------------------------------------------------------------------------------------------- Scott McIntyre Jr. (1) 2222 1st Ave. NE, Apt. 1004 1,539,223 15.34% Cedar Rapids, Iowa 52402 Mildred R. McIntyre (1) Cottage Grove Place 1,129,406 11.25 2115 1st Ave. SE, Apt. 2217 Cedar Rapids, Iowa 52402 General Accident Corporation of America 436 Walnut St. 2,025,680 20.18 Philadelphia, Pennsylvania 19105-1109 Susan M. Carlton (1) 29 Pine Terrace 355,241 3.54 Orchard Park, New York 14127 Margaret Pless (1) 3726 Bentley Dr. 312,125 3.11 Durham, North Carolina 27707 - -----------------------------------------------------------------------------------------------------------
(1) Scott McIntyre Jr., Mildred R. McIntyre, Susan M. Carlton and Margaret Pless are all members of the same family. Included in the number of shares owned by Scott McIntyre, Jr. are 371,812 shares which he owns in his capacity as trustee of three trusts, one of which his children are the beneficiaries, one of which his wife is the beneficiary, and the other of which all of Mildred R. McIntyre's grandchildren are the beneficiaries. Included in the number of shares owned by Mildred R. McIntyre are 533,245 shares which she owns in her capacity as trustee of a trust in which she also has a life interest, and in which Scott McIntyre Jr., Susan M. Carlton and Margaret Pless each have an equal interest in the remainder. (b) Security ownership of management. The following table sets forth information as of March 1, 2001, with respect to ownership of the Company's $3.33 1/3 par value common stock by management. Except as otherwise indicated, each of the persons named below has sole voting and investment powers with respect to the shares indicated.
- ------------------------------------------------------------------------------- Amount and Nature of Percent Of Name of Beneficial Owner Beneficial Ownership Class (1) - ------------------------------------------------------------------------------- Scott McIntyre Jr. (1) 1,539,223 15.34% Kyle D. Skogman 500 - Byron G. Riley, Jr. 3,306 0.03 George D. Milligan 200 - Thomas K. Marshall 2,346 0.02 Leonard J. Marshall 1,000 0.01 Casey D. Mahon 2,000 0.02 Jack B. Evans 6,134 0.06 John A. Rife 2,184 0.02 Christopher R. Drahozal 115,394 1.15 Mary K. Quass 600 .01 Kevin L. Kubik 3,000 .03 E. Dean Fick 1,000 .01 E. Addison Hulit 255 - 36 officers and directors as a group 1,689,342 16.83 - -------------------------------------------------------------------------------
(1) Included in the number of shares owned by Scott McIntyre Jr., are 121,500 shares held in the name of J. Scott McIntyre, Trustee of the Mildred Reynolds McIntyre Trust, 225,000 shares held in the name of Scott McIntyre Jr., or successor, Dee Ann McIntyre Trust, 25,312 shares held in the name of Scott McIntyre Jr., Irrevocable Trust and 50,035 shares held by the McIntyre Foundation. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Page ---- (a) 1. and 2. Financial Statements and Supplementary Data 8 (a) 3. Exhibits 3.1 Articles of Incorporation of United Fire & Casualty Company, incorporated by reference from Registrant's form S-8 Registration Statement, filed with the Commission on December 19, 1997. 3.2 By Laws of United Fire & Casualty Company, as amended, incorporated by reference from the Registrant's form S-8 Registration Statement, filed with the Commission on December 19, 1997. 10.1 United Fire & Casualty Company Nonqualified Employee Stock Option Plan, incorporated by reference from Registrant's form S-8 Registration Statement, filed with the Commission on September 9, 1998. 10.2 United Fire & Casualty Company Employee Stock Purchase Plan, incorporated by reference from Registrant's form S-8 Registration Statement, filed with the Commission on December 22, 1997. 11 Statement re: computation of per share earnings. 13 The following portions of the Registrant's Annual Report to Stockholders for the year ended December 31, 2000, which are incorporated herein by reference: 13.1 Market For Registrant's Common Equity and Related Stockholder Matters, page 22. 13.2 Selected Financial Data, page 4. 13.3 Management's Discussion and Analysis of Financial Condition and Results of Operations, pages 8 to 14. 13.4 Quantitative and Qualitative Disclosures about Market risk, pages 11 to 13. 13.5 Financial Statements and Supplementary Data, pages 24 to 41. 21 Subsidiaries of the registrant. 24 23 Consent of Arthur Andersen LLP, independent auditors 25 28 Information from reports furnished to State Insurance Regulatory Authorities. This information will be filed by paper. 26 (b) No reports on Form 8-K were filed during the last quarter of the period covered by this report. 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 By /s/ John A. Rife ---------------------------------- John A. Rife, President, Director Date 2/16/01 -------------------------------- By /s/ Kent G. Baker ---------------------------------- Kent G. Baker, Vice-President, Principal Accounting Officer and Chief Financial Officer Date 2/16/01 -------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By /s/ Scott McIntyre Jr. By /s/ Kyle D. Skogman -------------------------------- --------------------------------- Scott McIntyre Jr., Chairman and Director Kyle D. Skogman, Director Date 2/16/01 Date 2/16/01 ----------------------------- ------------------------------ By /s/ George D. Milligan By /s/ Casey D. Mahon -------------------------------- --------------------------------- George D. Milligan, Director Casey D. Mahon, Director Date 2/16/01 Date 2/16/01 ----------------------------- ------------------------------ By /s/ Leonard J. Marshall By /s/ Byron G. Riley ------------------------------- --------------------------------- Leonard J. Marshall, Director Byron G. Riley, Director Date 2/16/01 Date 2/16/01 ----------------------------- ------------------------------ By /s/ Thomas K. Marshall By /s/ Jack B. Evans ------------------------------- --------------------------------- Thomas K. Marshall, Director Jack B. Evans, Vice Chairman and Director Date 2/16/01 ----------------------------- Date 2/16/01 ------------------------------ By /s/ Mary K. Quass - -------------------------------- Mary K. Quass, Director Date 2/16/01 ------------------------------- SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT (a),(b),(c) Four copies of the annual stockholders report for the year ended December 31, 2000, and four copies of the proxy statement will be furnished to the Securities and Exchange Commission when they are mailed to security holders. The annual report and proxy statement (foregoing material) shall not be deemed to be "filed" with the Commission or otherwise subject to the liabilities of Section 18 of the Act, except for that which is incorporated from the annual stockholders report on this Form 10-K by reference. 24 2000 10-K REFERENCED FINANCIAL INFORMATION SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data) - --------------------------------------------------------------------------------------------------------------- Years Ended December 31 2000 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------- Total assets $1,662,494 $1,467,716 $1,250,594 $1,157,922 $1,024,835 Operating revenues Net premiums earned 333,365 273,051 245,727 244,939 234,797 Investment income, net 86,867 75,317 67,928 61,686 56,936 Realized investment gains (losses) and other (1,825) 2,936 22,796 2,676 6,726 income Commission and policy fee income 2,172 1,912 1,815 1,829 1,815 Net income 15,527 15,384 23,677 28,732 21,960 Basic and diluted earnings per common share 1.55 1.53 2.28 2.68 2.04 Cash dividends declared per common share 0.71 0.68 0.67 0.63 0.60 ===============================================================================================================
The selected financial data herein has been derived from the financial statements of the Company and its subsidiaries. The data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the "Consolidated Financial Statements and related notes." [A bar graph displaying earnings per common share and dividends declared for the five years ended December 31, 2000 appears here.] Earnings Per Common Share
Earnings Per Common Share Dividends Declared 1996 2.04 0.60 1997 2.68 0.63 1998 2.28 0.67 1999 1.53 0.68 2000 1.55 0.71
ITEM 6 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on NASDAQ under the symbol UFCS. On March 1, 2001, there were 923 holders of record of the Company's common stock. The following table sets forth, for the calendar periods indicated, the high and low bid quotations for the common stock and cash dividends declared. These quotations reflect inter-dealer prices without retail markups, markdowns or commissions and may not necessarily represent actual transactions. The Company's policy has been to pay quarterly cash dividends, and the Company intends to continue that policy. The table set forth below shows the quarterly dividends paid in 1999 and 2000. Payments of any future dividends and the amounts of such dividends, however, will depend upon factors such as net income, financial condition, capital requirements and general business conditions. The Company has paid dividends every quarter since March 1968. State law permits the payment of dividends only from statutory accumulated earned profits arising from business. The Company's subsidiaries are also subject to state law restrictions on dividends. See Note 8 in the Notes to Consolidated Financial Statements.
======================================================================== Cash Share Price Dividends High Low Declared - ------------------------------------------------------------------------ 2000 Quarter Ended March 31 $23.31 $17.38 $0.17 June 30 19.69 15.50 0.18 September 30 20.50 15.50 0.18 December 31 20.63 16.19 0.18 1999 Quarter Ended March 31 $35.50 $25.50 $0.17 June 30 26.88 22.25 0.17 September 30 26.50 22.19 0.17 December 31 23.38 19.25 0.17 ========================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. Such risks and uncertainties include the following: 1) the uncertainties of the loss reserving process; 2) the occurrence of catastrophic events or other insured or reinsured events with a frequency or severity exceeding the Company's estimates; 3) the actual amount of new and renewal business; 4) the competitive environment in which the Company operates; 5) developments in global financial markets that could affect the Company's investment portfolio and financing plans; 6) estimates of the financial statement impact due to regulatory actions; 7) uncertainties relating to government and regulatory policies; 8) legal developments; 9) changing rates of inflation and other economic conditions; and 10) the impact of mergers and acquisitions, including the ability to successfully integrate acquired businesses and achieve cost savings. The words "believe," "anticipate," "estimate," "expect," "intend," or "will continue" and variations thereof and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000, COMPARED TO THE YEAR ENDED DECEMBER 31, 1999 For the twelve months ended December 31, 2000, net income was $15,527,000 or $1.55 per share, compared to $15,384,000 or $1.53 per share for 1999. A hailstorm in New Orleans occurring January 23 contributed $3,829,000 of after- tax net losses to the 2000 results. Operating earnings (after-tax net income, excluding realized investment gains (losses) and other income) improved in 2000 to $16,713,000 or $1.67 per share (from $13,476,000 or $1.34 per share in the prior year), primarily as a result of increased premium revenue and a reduction of operating expenses due to the consolidation of certain company functions. However, realized investment gains (losses) and other income of $(1,186,000) on an after-tax basis, compared to realized investment gains and other income of $1,908,000 in 1999 on an after-tax basis, weakened net income for the year ended December 31, 2000. In August 1999, the Company acquired American Indemnity Financial Corporation ("American Indemnity"), a holding company that owns four property and casualty insurance companies. The year 2000 results presented in the Consolidated Statements of Operations and certain tables and charts within this report include twelve months of results of operations of American Indemnity. The 1999 results include five months of results of operations of American Indemnity. Results presented for years prior to 1999 have not been restated for the effect of the purchase. Property and casualty insurance segment For the year 2000, the property and casualty segment recorded net income of $9,810,000, compared to net income of $6,062,000 for 1999. Despite the New Orleans hailstorm catastrophe, the Company's property and casualty results improved in 2000 in several lines of business. The loss ratio (net losses incurred divided by net premiums earned) decreased (showed improvement) in the following areas: automobile, other liability, and workers' compensation. In each of these lines of business, the 2000 loss ratio was lower than in 1999. Improvements in the Company's underwriting function and a decrease in the severity of claims has led to enhanced profitability in these lines. Three lines of business deteriorated in 2000, when compared to 1999: Fire and allied lines business was negatively impacted by the New Orleans hailstorm, with a loss ratio of 62 percent in 2000, compared to 52.5 percent in 1999. The fidelity and surety line of business had a loss ratio of 11.8 percent in 2000, compared to 2.1 percent percent in 1999. Despite this increase, the Company's results in the fidelity and surety line were considerably better than those to be reported for the fidelity and surety industry. The estimated loss ratio for fidelity and surety for the industry is 27.5 percent. The continued growth of construction projects, coupled with shortages in the construction labor market, have contributed to increased losses in these lines, both for the Company and for the industry as a whole. The reinsurance line of business has also deteriorated, with a loss ratio of 162.2 percent in 2000, compared to 122.6 percent in 1999. The bulk of the business assumed was property reinsurance with the emphasis on catastrophe covers. In response to the tighter margins in this particular line, the Company has decided to significantly reduce its writings in assumed reinsurance business. A small portion of the business expired on July 1, 2000, and the bulk of the business expired on December 31, 2000. Contracts will be renewed with a very limited number of brokers to continue writing assumed reinsurance business. The Company will continue to have exposure, primarily the catastrophe covers, related to the assumed reinsurance contracts that were previously written. Management believes that as of December 31, 2000, the loss reserves established for the assumed reinsurance business are adequate. The assumed reserves will be adjusted as additional facts become known. Net premiums (direct plus assumed reinsurance less ceded reinsurance) written by the property and casualty segment increased by $70,838,000 to $325,052,000 between 2000 and 1999, due to price increases, new and renewal business and twelve months of business from American Indemnity Company. Net premiums written increase in every line of business, with the exception of reinsurance. The largest dollar growth in net premiums written was reported in fire and allied lines, which increased from $77,270,000 in 1999 to $103,385,000 in 2000. The largest percentage growth was in other liability, with a 43 percent increase in net premiums written due in part to price firming in the commercial lines of business. Direct premiums written by the property and casualty segment increased $77,405,000 or 32 percent over 1999. The state of Iowa remains the segment's largest volume state, with direct premiums of $44,533,000. In 2000, Texas became our third state in terms of direct premium volume for the property and casualty segment, with direct premiums of $40,596,000, compared to $13,730,000 in 1999. Management expects continued growth in property and casualty premiums for 2001, due to price increases in the industry and less fierce competition. Should industry conditions change, with falling prices and increased competition (as has been the market situation for the past few years), the growth that management anticipates may not develop. To measure underwriting profitability, the property and casualty industry uses the combined ratio, which is calculated by dividing net losses and net loss adjustment expenses incurred by net premiums earned, plus other underwriting expenses incurred divided by net premiums written. Generally, if the combined ratio is below 100 percent, the Company experiences an underwriting profit; if it is above 100 percent an underwriting loss exists. In 2000, the segment's GAAP combined ratio was 105.3 percent, compared to 109.2 percent in 1999. The improvement resulted from the growth in premiums, a lower underwriting expense ratio, due in part to the consolidation of functions, and the closing of southern branch offices of the American Indemnity group of companies. Catastrophes, including the New Orleans hailstorm, negatively affected the combined ratio, adding eight percent to the ratio in 2000 and six percent in 1999, and resulted in after-tax net incurred losses and expenses of $15,778,000 or $1.57 per share in 2000, compared to $9,561,000 or $.95 per share in 1999. Life insurance segment The life insurance segment reported net income of $5,717,000 for the year ended 2000, compared to $9,322,000 for the year ended 1999. During the third quarter of 2000, write-downs on two fixed maturity securities contributed significantly to the segments' realized investment gain (losses) and other income of $(3,089,000), net of tax. Net premiums earned by the life segment (after intercompany eliminations) in 2000 totaled $26,094,000, compared to $25,997,000 in 1999. On a statutory basis, annuity deposits increased to $165,181,000, compared to $145,810,000 in 1999. GAAP reported premium revenue does not reflect annuity deposits. GAAP revenues for annuities consist of policy surrender charges and investment income earned. The life segment's largest expenditure is interest credited to annuities and universal life policies. In 2000, two primary factors; growth in new and existing account balances and higher interest rates, contributed to the increase in interest credited of $42,410,000, which was a 31 percent increase from $32,286,000 in 1999. Investment results The Company reported net investment income of $86,867,000 in 2000, compared to $75,317,000 in 1999 primarily as a result of growth in the Company's investment portfolio. Over 90 percent of the Company's investment income originated in 2000 from interest on fixed income securities (the portfolio balance grew by $124,761,000). The remaining investment revenue was 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. The investment yield (investment income divided by average invested assets) was 6.6 percent in 2000 and 6.5 percent in 1999. The Company's realized investment gains (losses) and other income was $(1,825,000) in 2000, compared to $2,936,000 in 1999. Losses recognized on the sale of securities held by the American Indemnity group of companies, and two security write-downs were the major factors in the 2000 results. Included as other income is interest of $257,000 and $632,000, respectively, related to a refund in connection with a federal income tax Revenue Agent Review for previous tax years. Federal income taxes The provision for Federal income taxes for the year ended 2000 and 1999 was $1,822,000 and $1,834,000, respectively. Pre-tax income was very similar between the two years, as were the components of Federal income tax expense. At December 31, 2000, the Company has $29,709,000 of net operating loss ("NOLs") carryforwards, the utilization of which is limited (pursuant to Section 382 of the Internal Revenue Code) and was generated by the purchase of American Indemnity Company in August, 1999. The NOL's will expire in various future years, beginning in 2001 through 2019. The Company has recorded a net deferred tax liability of $12,245,000 at December 31, 2000 and $7,430,000 at December 31, 1999. The deferred tax liability increased primarily due to net unrealized appreciation on investment securities. The Company has a valuation allowance of $11,370,000 as of December 31, 2000 related to American Indemnity NOLs. The valuation allowance recorded on the Company's deferred tax asset decreased $3,769,000 between years, due primarily to the utilization of NOL carryforwards. If the Company determines that the benefit of the American Indemnity NOLs can be realized in the future, the related reduction in the deferred tax asset valuation allowance will be recorded as a reduction to goodwill. RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999, COMPARED TO THE YEAR ENDED DECEMBER 31, 1998 On August 10, 1999, the Company acquired American Indemnity Financial Corporation ("American Indemnity") as a wholly owned subsidiary for approximately $30,212,000 in cash in exchange for 1,962,410 shares of common stock. Common stockholders of American Indemnity received approximately $14.35 per share of common stock at the closing of the transaction and deferred consideration of up to $1.00 to be paid per share in August 2001, subject to adjustments relating to indemnities. An escrow account with a balance of $1,990,000 is included in the Company's consolidated balance sheets in other assets for payment of the deferred consideration. The transaction was accounted for using the purchase method of accounting. Loss reserve increases and the write-off of uncollectible balances were also made, which were not considered purchase accounting. These costs were recorded in operations in 1999. Management believes that all material one-time adjustments (other than purchase accounting) were identified and properly reflected in 1999 operations. A schedule summarizing the assets acquired and the liabilities assumed as of August 10, 1999, as well as proforma results of operations, can be found in Note 15 of the Notes to Consolidated Financial Statements. Results presented in the Consolidated Statements of Operations and certain tables and charts within this report include approximately five months of results of operations of American Indemnity in 1999 and 12 months of operation of American Indemnity in 2000. Amounts in years prior to 1999 have not been restated for the effect of the purchase. Property and casualty insurance segment The property and casualty segment reported an increase in net premiums earned of $26,504,000 or 12 percent in 1999, when compared to 1998. The purchase of American Indemnity contributed $19,413,000 of the growth. Net premiums earned in each line of business increased, with the exception of workers' compensation, which decreased slightly between years. With the purchase of American Indemnity, and the resulting expansion into southern and southeastern states in 1999, management anticipated that property and casualty net premiums earned would increase into 2000. The property and casualty segment's largest expenditures are for losses and loss adjustment expenses. These costs increased by $6,554,000 in 1999, or 4.0 percent. Without the American Indemnity purchase, losses and expenses would have decreased by $8,032,000. Subsequent to the purchase of American Indemnity, the Company's management reviewed and increased that subsidiary's direct case loss reserves by approximately $10,000,000. This measure was necessary to raise American Indemnity's loss reserves to a level that was in accordance with the reserving philosophy of the Company. The Company had exposure to 23 catastrophes, in both 1999 and 1998. The catastrophes negatively impacted net income (net of tax) by $9,561,000 or $.95 per share in 1999, and $19,188,000 or $1.85 per share in 1998. All but three lines of business showed improvement in the loss ratio (lower loss ratios) in 1999, compared to 1998. The three lines that deteriorated were other liability, reinsurance and all other. Catastrophe activity negatively impacted the Company's reinsurance line of business. The loss ratio for net assumed reinsurance, which constitutes business assumed from other insurance companies, deteriorated to 122.6 percent in 1999, from 95.9 percent in 1998. In 1999, the segment's GAAP combined ratio was 109 percent, compared to 115 percent in 1998. The catastrophes discussed above added 6.0 percent to the combined ratio in 1999 and 11 percent in 1998. Life insurance segment The life insurance segment reported net income after consolidating eliminations of $9,322,000 in 1999, compared to $10,614,000 in 1998. Investment income increased by $7,069,000 or 16 percent over 1998. The life segment's largest expenditure is interest credited to annuities and universal life policies. As new premiums and existing account balances increase, the interest credited to policies will grow proportionately. The interest credited to these two products during 1999 totaled $32,286,000, which was a 21 percent increase over 1998. Losses incurred, resulting primarily from death claims, is the second largest cost incurred by the life insurance segment. Losses incurred decreased slightly to $11,647,000 in 1999 compared to $12,299,000 in 1998. Investment results The Company reported net investment income of $75,317,000 in 1999, compared to $67,928,000 in 1998. More than 90 percent 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. The investment yield (investment income divided by average invested assets) was 6.5 percent in 1999 and 1998. Realized gains were $2,936,000 in 1999, compared to $22,796,000 in 1998. During the second quarter of 1998, the Company took advantage of market conditions and sold some of its equity securities. The proceeds were used to purchase 625,000 shares of its common stock. The sales generated realized gains of $16,858,000, which contributed to the 1998 results. FINANCIAL CONDITION Investments The Company invests primarily in fixed-income and equity securities with the objective of maximizing after-tax investment income, matching assets to liabilities and maintaining liquidity. The Company maintains its portfolio in compliance with Company and state insurance department investment guidelines. At December 31, 2000, the Company held investment grade securities (as defined by the National Association of Insurance Commissioners "NAIC" - Securities Valuation Office and having NAIC ratings of Class 1 or Class 2) with a carrying value of $1,117,080,000, representing 90 percent of total fixed maturity investments. Purchases of fixed maturity investments with credit ratings below investment grade are securities that the Company views as having the potential for upgrade in the future. The Company minimizes its risk associated with below-investment-grade securities by monitoring credit risk of the issuers and by spreading the exposure among various issuers. 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 did not have trading securities at December 31, 2000, or at December 31, 1999. At December 31, 2000, $283,431,000 or 23 percent of the fixed maturity portfolio was classified as held-to-maturity, compared to $311,152,000 or 29 percent at December 31, 1999. The held-to-maturity securities are reported at amortized cost, while available-for-sale securities are reported at market value. Unrealized appreciation, net of tax of $37,051,000 from the Company's available-for-sale investments and other invested assets is reflected in a separate component of stockholders' equity. The increase in unrealized appreciation over 1999 resulted from a general improvement in market prices. 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 were allowed to reassess their held-to-maturity portfolios without "tainting" the remaining securities classified as held-to-maturity. 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 increased other comprehensive income by approximately $6,013,000, net of deferred income taxes. At December 31, 2000, the Company's fixed maturity portfolio included collateralized mortgage obligations (CMO) of $101,596,000, or 8.0 percent of the fixed-income portfolio, compared to $126,232,000, or 12 percent, as of December 31, 1999. The decreases have been the result of sales and prepayments of CMOs in 2000 and 1999, which were subsequently replaced with corporate bonds. Market risk The main objectives in managing the investment portfolios of the Company and its subsidiaries are to maximize after-tax investment income and total investment returns. Investment strategies are developed based on a number of factors, including estimated duration of reserve liabilities, short and long- term liquidity needs, projected tax status, general economic conditions, expected rates of inflation and regulatory requirements. Investment decisions are managed based on investment guidelines approved by Company management. The Company's investment portfolio is subject to market risk arising from the potential change in the value of the various securities held within the portfolio. Market risk comprises many factors, such as interest rate risk, liquidity risk, foreign exchange risk, credit risk and equity price risk. The Company's primary market risk exposure is interest rate risk. Interest rate risk is the price sensitivity of a fixed income security or portfolio to changes in interest rates. The Company also has limited exposure to equity price risk and foreign exchange risk. The active management of market risk is integral to the Company's operations. The potential changes in the value of the Company's investment portfolio due to the market risk factors noted above are analyzed within the overall context of asset and liability management. A technique used by the Company to aid in the management of its investment and reserve portfolios is the calculation of duration. Our actuaries estimate the payout pattern of our reserve liabilities to determine their duration, which is the present value of the weighted average payments expressed in years. A target duration is then established for the Company's investment portfolio so that the estimated cash inflows of the investment portfolio will match the estimated cash outflows of the reserve portfolio at any given point in time. The investment manager of the Company then structures the investment portfolio to meet the target duration to achieve the required cash inflow based on liquidity and market risk factors. Duration relates primarily to our life insurance segment because the long-term nature of its reserve liabilities increases the importance of projecting estimated cash inflows over an extended time frame. The Company's life segment had $634,551,000 in deferred annuity liabilities that are specifically allocated to fixed income securities. The management of the life segment investments concentrates primarily on matching the duration of the investments to that of the deferred annuity obligations. The duration for the investment portfolio must take into consideration interest rate risk. This is done through the use of sensitivity analysis, which measures the price sensitivity of the fixed income securities to changes in interest rates. The alternative valuations of the investment portfolio given the various hypothetical interest rate changes utilized by the sensitivity analysis allow management to revalue the potential cash flow from the investment portfolio under varying market interest-rate scenarios. Duration can then be recalculated at the differing levels of projected cash inflows. Amounts set forth in Table 1 detail the material impact of hypothetical interest rate changes on the fair value of certain core fixed income investments held at December 31, 2000. The sensitivity analysis measures the change in fair values arising from immediate changes in selected interest rate scenarios. Hypothetical parallel shifts in the yield curve of plus or minus 100 and 200 basis points (BP) were employed in the simulations. Additionally, based upon the yield curve shifts, estimates of prepayment speeds for the mortgage related products and likelihood of call or put options being exercised were employed in the simulations. According to this analysis, at current levels of interest rates, the duration of the investments supporting the deferred annuity liabilities is 0.39 years shorter than the projected duration of the liabilities. If interest rates increase by 100 basis points, this difference would be expected to narrow to .38 years. The selection of a 100-basis-point increase in interest rates should not be construed as a prediction by the Company's management of future market events, but rather to illustrate the potential impact of an event. TABLE 1--SENSITIVITY ANALYSIS (IN THOUSANDS)
Interest Rate Risk ASSET -200 BP -100 BP BASE +100 BP +200 BP - ---------------------------------------------------------------------------------------------- Estimated Fair Value of Fixed Maturities $1,343,112 $1,285,665 $1,231,209 1,172,805 $1,114,365
Table 2 details the effect on fair value for a positive or negative 10 percent price change on the Company's common equity portfolio. TABLE 2 (IN THOUSANDS)
Equity Price Risk Asset -10% Base +10% - --------------------------------------------------------------- Common Stock $100.19 $111,132 $122,245
To the extent that actual results differ from the assumptions utilized, the Company's duration and rate increase measures could be significantly impacted. Additionally, the Company's calculation assumes that the current relationship between short-term and long-term interest rates (the term structure of interest rates) will remain constant over time. As a result, these calculations may not fully capture the impact of non-parallel changes in the term structure of interest rates and/or large changes in interest rates. Foreign currency exchange rate risk arises from the possibility that changes in foreign currency exchange rates will affect the fair value of financial instruments. The Company has limited foreign currency exchange rate risk in its transactions with foreign reinsurers. This activity relates to the settlement of amounts due to or from foreign reinsurers in the normal course of business. Management considers this risk to be immaterial to the Company's operations. Equity price risk is the potential loss arising from changes in the fair value of equity securities. The Company's exposure to this risk relates to its equity securities portfolio and covered call options that have been written at various times. Covered call options have been written at various times to generate additional portfolio income. The market risk associated with the Company's covered call options is minimized, as the covered call options are written on common stocks that are held in the portfolio and that are "out of the money" (written above the stock's market value at time of contract). If the market price of this underlying common stock were to decline, it would be unusual for the option to be exercised since this exercise price would be higher than the market price. At December 31, 2000, there were no open covered call options. OTHER ASSETS Commissions and other costs of underwriting insurance, which vary with and are primarily related to the production of business, have been deferred and capitalized to the extent recoverable. The resulting asset is referred to as deferred acquisition costs (DAC), and constitutes the Company's second largest asset, after investments. The DAC asset is amortized over the life of the insurance policies written, to attain a matching of revenue to expenses. The Company's life segment had an increase in deferred acquisition costs of $5,473,000, or 8.0 percent, to $75,014,000, due principally to its growth in statutory premium volume. Deferred acquisition costs of the property and casualty segment increased in 2000 by $2,852,000, or 14 percent, to $23,385,000, also attributable to an increase in premium volume. Accounts receivable are amounts due from property and casualty insurance agents and brokers for premiums written, less commissions paid. These receivables increased by 25 percent or $12,651,000, from $51,304,000 to $63,955,000 between 2000 and 1999. The increase in property and casualty writings accounted for the growth in this asset. An allowance for doubtful accounts of $1,173,000 has been established at December 31, 2000, compared to $899,000 at December 31, 1999. The Company did not experience difficulties in collecting balances from its agents in 2000 or 1999. 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, and is established to provide for the payment of policy benefits that are to be paid in the future. With respect to annuity and most universal life products, the Company records a liability equal to the amount of the premiums paid by policyholders, less insurance charges and expense loads, plus interest credited to the policy. As deposits from annuities and universal life products have grown, future policy benefits have grown. The liability increased by $120,808,000, or 17 percent, to $822,158,000 between December 31, 1999 and 2000. Claims and settlement expenses, which relate to the property and casualty segment, also increased in 2000. Direct and assumed reserves established for losses and expenses have increased by $19,789,000, or 6.0 percent, to $358,032,000 from 1999 to 2000. Accrued expenses and other liabilities have increased from $22,043,000 at December 31, 1999, to $34,303,000 at December 31, 2000, due primarily to the inclusion of a net negative cash balance of $9,307,000. Positive cash balances have been netted against checks issued for claims that have not yet cleared the banking system. Short-term investments are available for the Company's cash needs - see following section "Cash flow and liquidity". Deferred income taxes have increased by $4,815,000 to $12,245,000, due in large part to growth in unrealized appreciation of $17,944,000. Federal income taxes on the net unrealized appreciation are deferred until such time that the securities are sold. The Company has had limited involvement with derivative financial instruments and does not engage in the derivative market for hedging purposes. The Company has, at times, written covered call options to generate additional portfolio income. There were no open covered call options at December 31, 2000, and December 31, 1999. Stockholders' equity The Company's stockholders' equity increased from $237,793,000 at December 31, 1999, to $257,429,000 at December 31, 2000, an increase of 8.0 percent in 2000. Decreases to equity included $7,134,000 of declared dividends and $421,000 due to the retirement of 24,265 shares of common stock. Increases to equity included net income of $15,527,000 and net unrealized appreciation of $11,664,000 (net of tax). In February 2000, the Company's Board of Directors authorized the repurchase of an additional 100,000 shares of its common stock through open market or privately negotiated transactions, which brought the total number of shares authorized for repurchase to 114,075. During 2000, the Company purchased 24,865 shares of its common stock at a cost of $430,000. This brings the remaining repurchase authorization to 89,210 shares as of December 31, 2000. Cash flow and liquidity Cash flow and liquidity is primarily derived from the operating cash flows of the Company's property and casualty and life insurance operations. 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 $42,543,000 in 2000, compared to $34,452,000 in 1999. Funds which the Company has available for short-term cash needs are invested primarily in money market accounts and fixed-income securities. At December 31, 2000, the Company's consolidated invested assets included $58,290,000 of short- term investments. In addition, the Company maintains a $20 million bank line of credit. During 2000, the Company did not utilize the line of credit. During 1999, the Company borrowed funds against the line of credit, with a maximum outstanding balance of $4,000,000. Under the terms of the agreement, interest on outstanding notes is payable at the lender's prevailing prime rate, minus 1.0 percent. Interest expense in connection with the line of credit borrowing was $22,000 in 1999. Management believes that the Company's liquid assets and net cash provided by operations will enable it to meet any foreseeable cash requirements. Regulation The insurance industry is governed by the NAIC and individual state insurance departments. All of the insurance departments of the states in which the Company is domiciled have adopted codification of insurance Statutory Accounting Principles effective January 1, 2001. Previously, these principles were prescribed in a variety of publications, as well as state laws, regulations and general administrative rules. Subject to final interpretation by the NAIC and the individual state insurance departments, the effect on the statutory financial statements as of January 1, 2001, is estimated to be an increase to stockholders' equity of approximately $10,900,000. This change does not affect the accompanying financial statements, which are based on generally accepted accounting principles ("GAAP"). Pursuant to codification rules, permitted statutory accounting practices may be utilized, with approval from an insurer's state of domicile insurance department. The Company does not use permitted practices that individually or in the aggregate materially affect statutory surplus or risk-based capital. The NAIC annually calculates a number of financial ratios to assist state insurance regulators in monitoring the financial condition of insurance companies. A "usual range" of results for each ratio is used as a benchmark. Departure from the usual range on four or more of the ratios could lead to inquiries from individual state insurance commissioners as to certain aspects of a company's business. American Indemnity had four ratios which were out of the "usual range". Two of the ratios, "change in net writings" and "change in surplus," resulted from a 100 percent reinsurance quota share contract between American Indemnity and the Company which was effective January 1, 2000, for all new and renewal policies. This arrangement had the effect of decreasing premium writings, thus resulting in a decrease in net writings ("change in writings") of 100%. The quota share arrangement also contributed to a substantial increase in the statutory surplus ("change in surplus") of American Indemnity Company. The quota share agreement contributed to the improved statutory financial condition of American Indemnity Company. To comply with NAIC and state insurance departments' solvency regulations, the Company is required to calculate a minimum capital requirement based on insurance risk factors. The risk-based capital results are used to identify companies that merit regulatory attention or the initiation of regulatory action. At December 31, 2000, both the life segment and the property and casualty segment had capital well in excess of the required levels. The Company is not aware of any other current recommendations by the NAIC or other regulatory authorities in the states in which the Company conducts business that, if or when implemented, would have a material effect on the Company's liquidity, capital resources or operations. Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Balance Sheets December 31, 2000 and 1999
====================================================================================================== (Dollars in Thousands Except Number of Shares) - ------------------------------------------------------------------------------------------------------ ASSETS 2000 1999 - ------------------------------------------------------------------------------------------------------ Investments (Notes 2, 3 and 4) Fixed maturities Held-to-maturity, at amortized cost (market value $292,857 in 2000 and $314,168 in 1999) $ 283,431 $ 311,152 Available-for-sale, at market (amortized cost $952,949 in 2000 and $800,467 in 1999) 928,947 768,307 Equity securities, at market (cost $30,667 in 2000 and $38,755 in 1999) 111,132 109,148 Policy loans 8,437 8,645 Other long-term investments, at market (cost $12,326 in 2000 and $12,841 in 1999) 12,864 13,328 Short-term investments 58,290 20,131 - ------------------------------------------------------------------------------------------------------ $1,403,101 $1,230,711 Cash and Cash Equivalents - 9,749 Accrued Investment Income (Note 4) 22,578 19,857 Accounts Receivable, (net of allowance for doubtful accounts of $1,173 in 2000 and $899 in 1999) 63,955 51,304 Deferred Policy Acquisition Costs 98,399 90,074 Property and Equipment, primarily land and buildings, at cost, less accumulated depreciation of $27,172 in 2000 and $23,912 in 1999 16,732 16,863 Reinsurance Receivables (Note 6) 41,487 29,715 Prepaid Reinsurance Premiums 2,846 3,019 Intangibles 6,459 8,044 Income Taxes Receivable (Note 9) 658 1,169 Other Assets 6,279 7,211 - ------------------------------------------------------------------------------------------------------ TOTAL ASSETS $1,662,494 $1,467,716 ====================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Future policy benefits and losses, claims and settlement expenses (Notes 6 and 7) Property and casualty insurance $ 358,032 $ 338,243 Life insurance (Note 4) 822,158 701,350 Unearned premiums 165,212 148,472 Accrued expenses and other liabilities 34,303 22,043 Employee benefit obligations (Note 10) 13,115 12,385 Deferred income taxes (Note 9) 12,245 7,430 - ------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES $1,405,065 $1,229,923 - ------------------------------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY Common stock, $3.33 1/3 par value; authorized 20,000,000 shares (Note 13) 10,035,819 shares issued and outstanding in 2000 10,060,084 shares issued and outstanding in 1999 $ 33,453 $ 33,534 Additional paid-in capital 6,912 7,252 Retained earnings (Note 8) 172,346 163,953 Accumulated other comprehensive income, net of tax 44,718 33,054 - ------------------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY $ 257,429 $ 237,793 - ------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,662,494 $1,467,716 ======================================================================================================
The Notes to Consolidated Financial Statements are an integral part of these statements. Consolidated Statements of Operations Years Ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data and Number of Shares) - --------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- Revenues Net premiums earned (Note 6) $ 333,365 $ 273,051 $ 245,727 Investment income, net (Note 2) 86,867 75,317 67,928 Realized investment gains (losses) and other income (Note 2) (1,825) 2,936 22,796 Commission and policy fee income 2,172 1,912 1,815 - ---------------------------------------------------------------------------------------------------------------------------- $ 420,579 $ 353,216 $ 338,266 - ---------------------------------------------------------------------------------------------------------------------------- Benefits, Losses and Expenses Losses and settlement expenses $ 236,807 $ 197,291 $ 191,388 Increase in liability for future policy benefits 6,241 5,157 3,707 Amortization of deferred policy acquisition costs 58,394 49,863 47,892 Other underwriting expenses 59,378 51,401 40,315 Interest on policyholders' accounts 42,410 32,286 26,568 - ---------------------------------------------------------------------------------------------------------------------------- $ 403,230 $ 335,998 $ 309,870 - ---------------------------------------------------------------------------------------------------------------------------- Income before income taxes $ 17,349 $ 17,218 $ 28,396 Federal income taxes (Note 9) 1,822 1,834 4,719 - ---------------------------------------------------------------------------------------------------------------------------- Net Income $ 15,527 $ 15,384 $ 23,677 ============================================================================================================================ Earnings available to common shareholders (Note 13) $ 15,527 $ 15,384 $ 23,677 ============================================================================================================================ Weighted average common shares outstanding (Note 13) 10,047,248 10,079,563 10,393,930 ============================================================================================================================ Basic and diluted earnings per common share (Note 13) $ 1.55 $ 1.53 $ 2.28 ============================================================================================================================
The Notes to Consolidated Financial Statements are an integral part of these statements. Consolidated Statements of Stockholders' Equity Years Ended December 31, 2000, 1999 and 1998
- ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data and Number of Shares) - ---------------------------------------------------------------------------------------------------------------------------------- Accumulated Other Additional Comprehensive Common Paid-In Retained Income, Stock Capital Earnings Net of Tax Total - ---------------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1997 $35,758 $ 9,331 $161,906 $ 70,213 $277,208 Net income - - 23,677 - 23,677 Change in net unrealized depreciation (1) - - - (10,918) (10,918) - ---------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income (Note 14) 12,759 Cash dividend declared on common stock, $.67 per share - - (6,964) - (6,964) Purchase and retirement of 635,601 shares of common stock (2,119) (1,404) (23,198) - (26,721) - ---------------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1998 $33,639 $ 7,927 $155,421 $ 59,295 $256,282 - ---------------------------------------------------------------------------------------------------------------------------------- Transition adjustment for the effect of a change in accounting principle, net of tax (Note 1) - - - 6,013 6,013 Net income - - 15,384 - 15,384 Change in net unrealized depreciation (1) - - - (32,254) (32,254) - ---------------------------------------------------------------------------------------------------------------------------------- Total comprehensive loss (Note 14) (10,857) Cash dividend declared on common stock, $.68 per share - - (6,852) - (6,852) Purchase and retirement of 31,637 shares of common stock (105) (675) - - (780) - ---------------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1999 $33,534 $ 7,252 $163,953 $33,054 $237,793 - ---------------------------------------------------------------------------------------------------------------------------------- Net income - - 15,527 - 15,527 Change in net unrealized appreciation (1) - - - 11,664 11,664 - ---------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income (Note 14) 27,191 Cash dividend declared on common stock, $.71 per share - - (7,134) - (7,134) Purchase and retirement of 24,265 shares of common stock (81) (340) - - (421) - ---------------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 2000 $33,453 $ 6,912 $172,346 $44,718 $257,429 - ----------------------------------------------------------------------------------------------------------------------------------
(1) The change in net unrealized appreciation (depreciation) is net of reclassification adjustments and income taxes (see Note 14). The Notes to Consolidated Financial Statements are an integral part of these statements. Consolidated Statements of Cash Flows Years Ended December 31, 2000, 1999 and 1998
- ----------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ----------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Net Income $ 15,527 $ 15,384 $ 23,677 - ----------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities Net bond discount accretion (370) 88 (1,428) Depreciation and amortization 4,452 3,078 468 Realized net investment (gains) losses 2,082 (2,303) (22,793) Changes in: Accrued investment income (2,721) (2,795) (1,971) Accounts receivable (12,651) 6,338 (808) Deferred policy acquisition costs (8,325) (18,092) (7,377) Reinsurance receivables (11,772) 5,493 1,520 Prepaid reinsurance premiums 173 3,174 1,141 Income taxes receivable/payable 511 2,588 (7,064) Other assets 932 (1,372) 3,044 Future policy benefits and losses, claims and settlement expenses 25,969 19,300 20,258 Unearned premiums 16,740 3,275 8,122 Accrued expenses and other liabilities 12,260 (14,214) 549 Employee benefit obligations 730 2,572 1,148 Deferred income taxes (1,465) (1,293) 609 Other, net 471 13,231 (1,034) - ----------------------------------------------------------------------------------------------------------------------- Total adjustments $ 27,016 $ 19,068 $ (5,616) - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities $ 42,543 $ 34,452 $ 18,061 - ----------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities Proceeds from sale of available-for-sale investments $ 68,963 $ 35,653 $ 78,471 Proceeds from call and maturity of held-to-maturity investments 31,614 35,398 101,180 Proceeds from call and maturity of available-for-sale investments 68,038 95,762 31,084 Proceeds from sale of other investments 126,035 102,256 38,956 Purchase of held-to-maturity investments (3,482) (1,682) (14,461) Purchase of available-for-sale investments (284,116) (295,670) (258,744) Purchase of other investments (163,036) (86,856) (55,972) Proceeds from sale of property and equipment 104 1,469 3,009 Purchase of property and equipment (3,485) (1,429) (2,120) Acquisition of property and casualty company, net of cash acquired - (22,249) - - ----------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities $ (159,365) $ (137,348) $ (78,597) - ----------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities Policyholders' account balances Deposits to investment and universal-life-type contracts $ 218,951 $ 189,715 $ 158,491 Withdrawals from investment and universal-life-type contracts (104,323) (69,432) (66,648) Purchase and retirement of common stock (421) (780) (26,721) Payment of cash dividends (7,134) (6,858) (6,964) - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities $ 107,073 $ 112,645 $ 58,158 - ----------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents $ (9,749) $ 9,749 $ (2,378) Cash and Cash Equivalents at Beginning of Year 9,749 - 2,378 - ----------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ - $ 9,749 $ - =======================================================================================================================
The Notes to Consolidated Financial Statements are an integral part of these statements. Note 1. Significant Accounting Policies Nature of operations, principles of consolidation and basis of reporting The Consolidated Financial Statements have been prepared on the basis of generally accepted accounting principles ("GAAP"), which differ in some respects from those followed in reports to insurance regulatory authorities. United Fire & Casualty Company (the "Company") and its insurance subsidiaries are engaged in the business of property and casualty insurance and life insurance. The accompanying Consolidated Financial Statements include United Fire & Casualty Company and its wholly owned subsidiaries, United Life Insurance Company, Lafayette Insurance Company, Insurance Brokers & Managers, Inc., Addison Insurance Company, Addison Insurance Agency, UFC Premium Finance Company, American Indemnity Financial Corporation, American Indemnity Company, American Fire and Indemnity Company, Texas General Indemnity Company, American Computing Company, and the affiliate United Fire Lloyds, which is financially and operationally controlled by the Company. All material intercompany items have been eliminated in consolidation. 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 Consolidated Financial Statements for prior years have been reclassified to conform with the 2000 financial statement presentation. Property and casualty segment Premiums are reflected in income on a daily pro rata basis over the terms of the respective policies. Unearned premium reserves are established for the portion of premiums written applicable to the unexpired term of policies in force. Certain costs of underwriting new business, principally commissions, premium taxes and variable underwriting and policy issue expenses, have been deferred. Such costs are being amortized as premium revenue is recognized. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, losses and expenses, and certain other costs expected to be incurred as the premium is earned. Unpaid losses and settlement expenses are based on estimates of reported and unreported claims and related settlement expenses. While management believes the reserve for claims and settlement expenses is adequate, the reserve is continually reviewed and, as adjustments become necessary, they are reflected in current operations. Changes in assumptions used in estimating reserves could cause the reserves to change in the near term. Life segment On whole life and term insurance (traditional business), premiums are reported as earned when due, and benefits and expenses are associated with premium income so as to result in the recognition of profits over the lives of the related contracts. On universal life and annuity (nontraditional) business, income and expenses are reported as charged and credited to policyholder account balances through the use of the retrospective deposit method. This method results in the recognition of profits over the lives of the related contracts, which is accomplished by means of the provision for future policy benefits and the deferral and subsequent amortization of life policy acquisition costs. The costs of acquiring new life business, principally commissions and certain variable underwriting, agency and policy issue expenses, have been deferred. These costs are being amortized to income over the premium paying period of the related traditional policies in proportion to the ratio of the expected annual premium revenue to the expected total premium revenue, and over the anticipated lives of nontraditional policies in proportion to the ratio of the expected annual gross margins to the expected total gross margins. The expected premium revenue and gross margins are based upon the same mortality and withdrawal assumptions used in determining future policy benefits. For nontraditional policies, changes in the amount or timing of expected gross margins will result in adjustment to the cumulative amortization of these costs. The effect on the amortization of deferred policy acquisition costs for revisions to estimated gross profits is reflected in earnings in the period such estimated gross profits are revised. The effect on the deferred policy acquisition costs that would result from realization of unrealized gains (losses) is recognized with an offset to accumulated other comprehensive income in the Consolidated Statements of Stockholders' Equity as of the balance sheet date. As of December 31, 2000, an adjustment to decrease deferred policy acquisition costs by $336,000 was made with a corresponding decrease to accumulated other comprehensive income. In 1999, the adjustment was to increase deferred policy acquisition costs by $12,808,000. Liabilities for future policy benefits are computed by the net level premium method using interest assumptions ranging from 4.5% to 8.0% and withdrawal, mortality and morbidity assumptions appropriate at the time the policies were issued. Health reserves are stated at amounts determined by estimates on individual cases and estimates of unreported claims based on past experience. Liabilities for universal-life-type and investment contracts are stated at policyholder account values before surrender charges. Liabilities for traditional immediate annuities are based primarily upon statutory reserves. Policy claim liabilities are determined using actuarial estimates. These estimates are based on historical information, along with certain assumptions about future events. Changes in assumptions for such things as medical costs, environmental hazards and legal actions, as well as changes in actual experience, could cause these estimates to change in the near term. Investments Investments in held-to-maturity fixed-income securities are recorded at amortized cost. The Company has the ability and intent to hold these investments until maturity. Available-for-sale fixed-income securities, equity securities and other long-term investments are recorded at fair value. If an other-than- temporary impairment occurs in a security, the Company writes the security down to the new value and recognizes a loss in current earnings. Policy loans and short-term investments are recorded at cost. Included in investments at December 31, 2000 and 1999, are securities on deposit with various regulatory authorities, as required by law, with carrying values of $896,059,000 and $755,436,000, respectively. Realized gains or losses on disposition of investments are included in the computation of net income. Cost of investments sold is determined by the specific identification method. Changes in unrealized appreciation and depreciation, resulting from available-for-sale fixed-income securities, equity securities, other long-term investments and certain life deferred policy acquisition costs, are reported as direct increases or decreases in stockholders' equity, less applicable income taxes. Reinsurance Premiums earned and losses and settlement expenses are reported net of reinsurance ceded and are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Cash and cash equivalents 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. Negative cash balances are included in accrued expenses and other liabilities. Net income taxes paid during 2000, 1999 and 1998 were $2,088,000, $505,000 and $11,201,000, respectively. Through December 31, 2000, tax and interest payments received in connection with the settlement of a federal income tax Revenue Agent Review were $1,160,000 and $889,000, respectively. There were no significant payments of interest other than interest credited to policyholders' accounts in 2000, 1999 or 1998. Property, equipment and depreciation Property and equipment is carried at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the underlying assets. Depreciation expense totaled $3,512,000, $2,458,000, and $203,000 for the years ending December 31, 2000, 1999 and 1998, respectively. Amortization of intangibles Intangibles, including goodwill and agency relationships, are being amortized by the straight-line method over periods of up to 10 years. The carrying value of goodwill and other intangibles is reviewed regularly for impairment in the recoverability of the underlying asset. Any impairment of goodwill would be charged to operations in the period that the impairment was recognized. The Company did not take an impairment write-down of goodwill or other intangibles in 2000, 1999 or 1998. Amortization expense totaled $940,000, $620,000, and $265,000 for the years ending December 31, 2000, 1999 and 1998, respectively. During 2000, the Company reduced goodwill by $645,000 as a result of an adjustment to the deferred tax asset valuation allowance related to the acquisition of American Indemnity Financial Corporation. Refer to Note 9 for further discussion. Income taxes The Company files a consolidated federal income tax return. Deferred tax assets and liabilities are determined at the end of each period, based on differences between the financial statement bases of assets and liabilities and the tax bases of those same assets and liabilities, using the currently enacted statutory tax rates. Deferred income tax expense is measured by the change in the net deferred income tax asset or liability during the year. Contingent liabilities The Company is a defendant in legal actions arising from normal business activities. Management, after consultation with legal counsel, is of the opinion that any liability resulting from these actions will not have a material impact on the financial condition and operating results of the Company. Accounting changes 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. This is shown as a change in accounting principle in the Consolidated Statements of Stockholders' Equity. There was no other material effect on the Company's Consolidated Financial Statements. Refer to Note 3 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 was effective for all fiscal quarters beginning after June 15, 2000, due to the Company's early adoption of SFAS No. 133. 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 did not have a material effect on the Company's Consolidated Financial Statements. Effective January 1, 2000, the Company adopted Statement of Position ("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 had no effect on the Company's Consolidated Financial Statements. Effective December 31, 2000, the Company adopted Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition." The impact of adopting SAB No. 101 had no effect on the Company's Consolidated Financial Statements. Effective July 1, 2000, the Company adopted FASB Interpretation ("FIN") No. 44, "Accounting for Certain Transactions Including Stock Compensation (an Interpretation of Accounting Principles Board ("APB") Opinion No. 25)". FIN No. 44 clarifies the application of APB Opinion No. 25 for only certain issues, such as (a) the definition of employee for purposes of applying APB Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. The adoption of FIN No. 44 had no impact on the Company's Consolidated Financial Statements. Note 2. SUMMARY OF 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, equity securities and other long-term investments as of December 31, 2000 and 1999 is as follows.
- --------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2000 (Dollars in Thousands) - --------------------------------------------------------------------------------------------------------------------------------- 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 $ 15,099 $ 127 $ 46 $ 15,180 Mortgage-backed securities 7,832 507 1 8,338 All others 1,838 288 - 2,126 States, municipalities and political subdivisions 167,554 7,479 542 174,491 Foreign 3,024 102 - 3,126 Public utilities 17,966 330 23 18,273 Corporate bonds Collateralized mortgage obligations 12,785 209 66 12,928 All other corporate bonds 57,333 1,180 118 58,395 - --------------------------------------------------------------------------------------------------------------------------------- Total held-to-maturity $283,431 $10,222 $ 796 $ 292,857 ================================================================================================================================= Available-for-sale Fixed maturities Bonds United States Government, government agencies and authorities Collateralized mortgage obligations $ 27,992 $ 459 $ 45 $ 28,406 Mortgage-backed securities 12 1 - 13 All others 34,228 966 165 35,029 States, municipalities and political subdivisions 81,496 1,545 247 82,794 All foreign bonds 35,572 399 2,216 33,755 Public utilities 161,865 3,578 2,610 162,833 Corporate bonds Collateralized mortgage obligations 45,344 665 703 45,306 All other corporate bonds 566,440 8,064 33,693 540,811 - --------------------------------------------------------------------------------------------------------------------------------- Total available-for-sale fixed maturities $952,949 $15,677 $39,679 $ 928,947 - --------------------------------------------------------------------------------------------------------------------------------- Equity securities Common stocks Public utilities $ 2,644 $ 6,626 $ - $ 9,270 Banks, trust and insurance companies 8,999 44,409 114 53,294 All other common stocks 18,652 30,475 916 48,211 Nonredeemable preferred stocks 372 1 16 357 - --------------------------------------------------------------------------------------------------------------------------------- Total available-for-sale equity securities $ 30,667 $81,511 $ 1,046 $ 111,132 - --------------------------------------------------------------------------------------------------------------------------------- Total available-for-sale $983,616 $97,188 $40,725 $1,040,079 ================================================================================================================================= Other long-term investments $ 12,326 $ 1,061 $ 523 $ 12,864 =================================================================================================================================
- --------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1999 (Dollars in Thousands) - --------------------------------------------------------------------------------------------------------------------------------- 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 $ 12,385 $ - $ 581 $ 11,804 Mortgage-backed securities 9,475 599 3 10,071 All others 1,804 205 - 2,009 States, municipalities and political subdivisions 177,580 4,521 1,279 180,822 Foreign 3,035 4 47 2,992 Public utilities 19,473 70 258 19,285 Corporate bonds Collateralized mortgage obligations 17,747 208 364 17,591 All other corporate bonds 69,653 894 953 69,594 - --------------------------------------------------------------------------------------------------------------------------------- Total held-to-maturity $311,152 $ 6,501 $ 3,485 $ 314,168 ================================================================================================================================= Available-for-sale Fixed maturities Bonds United States Government, government agencies and authorities Collateralized mortgage obligations $ 30,326 $ 6 $ 730 $ 29,602 Mortgage-backed securities 14,899 2 282 14,619 All others 33,290 - 799 32,491 States, municipalities and political subdivisions 89,335 735 5,078 84,992 All foreign bonds 28,898 22 2,032 26,888 Public utilities 113,142 377 3,927 109,592 Corporate bonds Collateralized mortgage obligations 66,157 1,800 1,459 66,498 All other corporate bonds 424,420 984 21,779 403,625 - --------------------------------------------------------------------------------------------------------------------------------- Total available-for-sale fixed maturities $800,467 $ 3,926 $36,086 $ 768,307 - --------------------------------------------------------------------------------------------------------------------------------- Equity securities Common stocks Public utilities $ 8,639 $ 7,758 $ 1,860 $ 14,537 Banks, trust and insurance companies 12,486 35,281 464 47,303 All other common stocks 16,696 30,412 609 46,499 Nonredeemable preferred stocks 934 - 125 809 - --------------------------------------------------------------------------------------------------------------------------------- Total available-for-sale equity securities $ 38,755 $73,451 $ 3,058 $ 109,148 - --------------------------------------------------------------------------------------------------------------------------------- Total available-for-sale $839,222 $77,377 $39,144 $ 877,455 ================================================================================================================================= Other long-term investments $ 12,841 $ 913 $ 426 $ 13,328 =================================================================================================================================
The amortized cost and fair value of held-to-maturity and available-for- sale fixed maturities at December 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.
- ---------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ---------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2000 Held-to-maturity Available-for-sale - ---------------------------------------------------------------------------------------------------------------------------- Amortized Cost Fair Value Amortized Cost Fair Value - ---------------------------------------------------------------------------------------------------------------------------- Due in one year or less $ 16,631 $ 16,752 $ 16,452 $ 16,565 Due after one year through five years 54,202 55,617 364,673 357,036 Due after five years through ten years 67,267 69,990 320,496 308,388 Due after ten years 109,615 114,052 177,980 173,233 Mortgage-backed securities 7,832 8,338 12 13 Collateralized mortgage obligations 27,884 28,108 73,336 73,712 - ---------------------------------------------------------------------------------------------------------------------------- $283,431 $292,857 $952,949 $928,947 ============================================================================================================================
Proceeds from sales of available-for-sale investments during 2000, 1999 and 1998 were $68,963,000, $35,653,000, and $78,471,000, respectively. Gross gains of $8,172,000, $2,920,000, and $23,208,000, respectively, were realized on those sales. Gross losses of $10,987,000, $895,000 and $385,000, respectively, were realized on those sales in 2000, 1999 and 1998. There were no sales of held-to-maturity securities during 2000, 1999 or 1998. A summary of realized investment gains (losses) resulting from sales, calls and maturities and net changes in unrealized investment appreciation (depreciation), less applicable income taxes, is as follows.
- ------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- Realized investment gains (losses) Fixed maturities $(4,366) $ 577 $ (145) Equity securities 1,847 1,678 22,448 Other investments 437 48 490 - ------------------------------------------------------------------------------------------------------------------------------- $(2,082) $ 2,303 $ 22,793 - ------------------------------------------------------------------------------------------------------------------------------- Net changes in unrealized investment appreciation (depreciation) Available-for-sale fixed maturities, equity securities and other long-term investments $18,281 $(53,552) $(15,491) Deferred policy acquisition costs (336) $ 13,181 (726) Income taxes (6,281) 14,130 5,299 - ------------------------------------------------------------------------------------------------------------------------------- $11,664 $(26,241) $(10,918) =============================================================================================================================== Net changes in unrealized investment appreciation (depreciation), fixed maturities $14,568 $(65,882) $ 2,318 ===============================================================================================================================
The net investment income for the years ended December 31, 2000, 1999 and 1998 is composed of the following.
- ------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ Investment income Interest on fixed maturities $82,493 $70,134 $63,748 Dividends on equity securities 3,305 2,899 2,571 Interest on other long-term investments 2,318 3,332 2,867 Interest on mortgage loans - 105 218 Interest on policy loans 654 676 666 Other 2,102 1,688 1,232 - ------------------------------------------------------------------------------------------------------------------------------ Total investment income $90,872 $78,834 $71,302 Less investment expenses 4,005 3,517 3,374 - ------------------------------------------------------------------------------------------------------------------------------ Investment income, net $86,867 $75,317 $67,928 ==============================================================================================================================
Note 3. 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 December 31, 2000 and 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 4. Fair Value of Financial Instruments The Company estimated the fair value of its financial instruments based on relevant market information or by discounting estimated future cash flows at estimated current market discount rates appropriate to the particular asset or liability shown. In most cases, quoted market prices were used in determining the fair value of fixed maturities, equity securities and short-term investments. Where quoted market prices were unavailable, the estimate was based on recent trading. Other long-term investments, consisting primarily of holdings in limited partnership funds, are valued by the various fund managers. In management's opinion, these values reflect fair value at December 31, 2000 and 1999. Policy loans are carried at the actual amount loaned to the policyholder. No policy loans are made for amounts in excess of the cash surrender value of the related policy. Accordingly, in all instances, the policy loans are fully collateralized by the related liability for future policy benefits for traditional insurance policies and by the policyholders' account balance for interest-sensitive policies. For accrued investment income, carrying value is a reasonable estimate of fair value, due to its short-term nature. The fair value of the liabilities for annuity products, which are in a benefit payment phase, guaranteed investment contracts and structured settlements, is based on a discount rate of 7.0 percent at December 31, 2000 and 1999. The fair value of annuities currently in an accumulation phase is based on the net cash surrender value. A summary of the carrying value and estimated fair value of assets and liabilities meeting the definition of financial instruments at December 31, 2000 and 1999 is as follows.
========================================================================================================================= (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------------- At December 31 2000 1999 - ------------------------------------------------------------------------------------------------------------------------- Fair Carrying Fair Carrying Assets Value Value Value Value - ------------------------------------------------------------------------------------------------------------------------- Investments Held-to-maturity fixed maturities $292,857 $283,431 $314,168 $311,152 Available-for-sale fixed maturities 928,947 928,947 768,307 768,307 Equity securities 111,132 111,132 109,148 109,148 Policy loans 8,437 8,437 8,645 8,645 Other long-term investments 12,864 12,864 13,328 13,328 Short-term investments 58,290 58,290 20,131 20,131 Other Assets Accrued investment income 22,578 22,578 19,857 19,857 - ------------------------------------------------------------------------------------------------------------------------- Liabilities - ------------------------------------------------------------------------------------------------------------------------- Policy Reserves Annuity (Accumulations) $599,610 $634,551 $493,962 $520,274 Annuity (On-Benefits) 4,658 3,225 2,883 3,098 Structured settlements 893 1,041 795 940 Guaranteed investment contracts 3,251 3,245 2,741 2,761 =========================================================================================================================
Note 5. Short-Term Borrowings The Company maintains a $20 million bank line of credit. During 2000, the Company did not borrow against this available line of credit. Under the terms of the agreement, interest on outstanding notes is payable at the lender's prevailing prime rate minus 1.0 percent. There is no loan balance outstanding as of December 31, 2000. During 1999, the Company borrowed funds against the line of credit, with a maximum outstanding balance of $4,000,000, and recorded interest expense of $22,000. There was no loan balance outstanding as of December 31, 1999. Note 6. Reinsurance Property and casualty segment The property and casualty insurance companies cede portions of their insurance business to other insurance companies on both a pro rata and excess of loss basis. Insurance ceded by the property and casualty insurance companies does not relieve their primary liability as the originating insurers. Written premiums ceded were $22,748,000, $24,031,000 and $21,204,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Earned premiums ceded were $27,765,000, $27,206,000 and $22,349,000 for the years ended December 31, 2000, 1999 and 1998, respectively. The Company believes all amounts are collectible and realizable with regard to reinsurance receivables and prepaid reinsurance premiums, respectively. There are no concentrations of credit risk associated with reinsurance. The property and casualty insurance companies also assume portions of their insurance business from other insurance companies. Written premiums assumed for the years ended December 31, 2000, 1999 and 1998 were $25,522,000, $33,372,000 and $33,751,000, respectively. Assumed premiums earned for the years ended December 31, 2000, 1999 and 1998 were $31,658,000, $34,289,000 and $33,571,000, respectively. The Company's reinsurance assumed from foreign insurance companies is accounted for using the periodic method, whereby premiums are recognized as revenue over the policy term, and claims, including an estimate of claims incurred but not reported, are recognized as they occur. The amount of reinsurance business assumed from foreign insurance companies is not material to the Company's Consolidated Financial Statements. Life Segment United Life follows the policy of reinsuring that portion of the risk in excess of $200,000 on the life of any individual. Policy benefit reserves and claims are stated after deduction of reserves and claims applicable to reinsurance ceded to other companies; however, United Life is contingently liable for these amounts in the event such companies are unable to pay their portion of the claims and is contingently liable for ceded insurance in force of $422,577,000 and $396,382,000 at December 31, 2000 and 1999, respectively. Approximately 56 percent of ceded life insurance in force has been ceded to two reinsurers. The Company believes all amounts are collectible with regard to reinsurance receivables. Note 7. Liability for Property and Casualty Losses and Settlement Expenses The table below provides an analysis of changes in losses and loss adjustment expenses ("LAE") reserves for 2000 and 1999 (net of reinsurance amounts). The decrease in estimated losses and LAE for claims occurring in prior years indicates that the Company's property and casualty loss and LAE reserves were slightly redundant at December 31, 1999 and 1998. Changes in the reserves are reflected in the income statement for the year when the changes are made. In 2000, underwriting profit (before tax) benefited by $36,931,000. In 1999, the benefit (before tax) was $25,135,000. These gains resulted primarily from settling reported and unreported reserves (established in prior years) for less than expected. During 1999, subsequent to the purchase of American Indemnity, the Company reviewed that company's loss and LAE case reserves and increased the liabilities to a level that was consistent with the reserving philosophies of the Company. A portion of the reserve increases was for losses that occurred in prior accident years. This would have negatively impacted the 1999 change in estimated losses and LAE for claims occurring in prior years. As a condition of the purchase of American Indemnity, an adverse development reinsurance agreement was negotiated that protects the Company against adverse development of the losses and LAE acquired. Conditions and trends that have affected the reserve development reflected in the table may change, and care should be exercised in extrapolating future reserve redundancies or deficiencies from such development. The Company is not aware of any significant contingent liabilities as far as environmental issues are concerned. Because of the type of property coverage the Company writes, there exists the potential for exposure to environmental pollution and asbestos claims. The Company's underwriters are aware of these exposures and use limited riders or endorsements to limit exposure.
- -------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - -------------------------------------------------------------------------------------------------------- At December 31, 2000 1999 - -------------------------------------------------------------------------------------------------------- Gross liability for losses and LAE at beginning of year $338,243 $251,117 Less reinsurance receivables 27,606 8,111 - -------------------------------------------------------------------------------------------------------- Net liability for losses and LAE at beginning of year $310,637 $243,006 Net liability for losses and LAE at acquisition date - 51,661 Provision for losses and LAE for claims occurring in the current year 263,099 210,778 Decrease in estimated losses and LAE for claims occurring in prior years (36,931) (25,135) - -------------------------------------------------------------------------------------------------------- $536,805 $480,310 - -------------------------------------------------------------------------------------------------------- Losses and LAE payments for claims occurring during Current year $119,278 $ 93,646 Prior years 97,021 76,027 - -------------------------------------------------------------------------------------------------------- $216,299 $169,673 - -------------------------------------------------------------------------------------------------------- Net liability for losses and LAE at end of year $320,506 $310,637 Plus reinsurance receivables 37,526 27,606 - -------------------------------------------------------------------------------------------------------- Gross liability for losses and LAE at end of year $358,032 $338,243 ========================================================================================================
Note 8. Statutory Reporting, Capital Requirements and Dividend and Retained Earnings Restrictions Statutory stockholders' surplus and net income at December 31, 2000, 1999 and 1998 and for the years then ended are as follows. - -------------------------------------------------------------------------------- (Dollars in Thousands) - -------------------------------------------------------------------------------- Statutory Statutory Stockholders, Surplus Net Income (Loss) - -------------------------------------------------------------------------------- 2000 Property and casualty $183,604 $7,829 Life, accident and health 66,217 (819) - -------------------------------------------------------------------------------- 1999 Property and casualty $179,689 $ 191 Life, accident and health 53,912 2,605 - -------------------------------------------------------------------------------- 1998 Property and casualty $202,342 $9,990 Life, accident and health 53,038 2,052 ================================================================================ The insurance industry is governed by the NAIC and individual state insurance departments. All of the insurance departments of the states in which the Company is domiciled have adopted codification of insurance Statutory Accounting Principles effective January 1, 2001. Previously, these principles were prescribed in a variety of publications, as well as state laws, regulations, and general administrative rules. Subject to final interpretation by the NAIC and the individual state insurance departments, the effect on the statutory financial statements as of January 1, 2001, is estimated to be an increase to stockholders' equity of approximately $10,900,000. This change does not affect the accompanying financial statements, which are based on GAAP. Pursuant to codification rules, permitted statutory accounting practices may be utilized, with approval from an insurer's state of domicile insurance department. The Company does not use permitted practices that individually or in the aggregate materially affect statutory surplus or risk-based capital. As part of the NAIC and state insurance department's solvency regulations, the Company is required to calculate a minimum capital requirement based on insurance risk factors. The risk-based capital results are used by the NAIC and state insurance departments to identify companies that merit regulatory attention or the initiation of regulatory action. At December 31, 2000, both the life segment and the property and casualty companies had capital well in excess of their required levels. The State of Iowa Insurance Department governs the amount of dividends that may be paid to stockholders without prior approval by the Insurance Department. Based on these restrictions, the Company could make a maximum of $138,873,000 in dividend distributions to stockholders in 2000. Dividend payments by the insurance subsidiaries to the Company are subject to similar restrictions in the states in which they are domiciled. The Company received no dividends from its subsidiaries in 2000 or 1999. In the fourth quarter of 2000, the Company contributed $15,000,000 in cash to United Life Insurance Company to support the growth of life insurance premiums and annuity deposits. Note 9. Federal Income Tax Federal income tax expense is composed of the following.
- ------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------- Years Ended December 31 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Current $ 357 $ 541 $4,110 Deferred 1,465 1,293 609 - ------------------------------------------------------------------------------------------------------------------- Total $1,822 $1,834 $4,719 ===================================================================================================================
A reconciliation of income tax expense computed at the applicable Federal tax rate of 35 percent in 2000, 35 percent in 1999, and 34 percent in 1998 to the amount recorded in the Consolidated Financial Statements is as follows.
- ----------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ----------------------------------------------------------------------------------------------------------------------- Years Ended December 31 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Computed expected rate $ 6,072 $ 6,026 $ 9,655 Reduction for tax-exempt municipal bond interest (4,572) (4,994) (5,023) income Reduction for nontaxable dividend income (724) (631) (557) Other, net 1,046 1,433 644 - ----------------------------------------------------------------------------------------------------------------------- Federal income taxes, as provided $ 1,822 $ 1,834 $ 4,719 =======================================================================================================================
The significant components of the net deferred tax liability at December 31, 2000 and 1999 are as follows.
- ------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------- At December 31 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities Deferred acquisition costs $ 26,802 $ 24,039 Net unrealized appreciation on investment securities 24,024 17,743 Depreciation on assets 1,503 1,216 Net bond discount accretion and premium amortization 1,735 1,177 Other 2,170 3,151 - ------------------------------------------------------------------------------------------------------------------- Gross deferred tax liability $ 56,234 $ 47,326 - ------------------------------------------------------------------------------------------------------------------- Deferred tax assets Financial statement reserves in excess of income tax reserves $ 22,696 $ 22,765 Unearned premium adjustment 10,352 9,107 Postretirement benefits other than pensions 3,160 2,761 Salvage and subrogation 956 662 Pension 1,421 1,685 Alternative minimum tax (AMT) credit carryforwards 2,106 - Net operating loss carryforwards (NOL) 10,020 14,641 Other 4,648 3,414 - ------------------------------------------------------------------------------------------------------------------- Gross deferred tax assets $ 55,359 $ 55,035 Valuation Allowance (11,370) (15,139) - ------------------------------------------------------------------------------------------------------------------- Net deferred tax liability $ 12,245 $ 7,430 ===================================================================================================================
The Company has tax net operating loss ("NOL") carryforwards totaling $29,709,218 as of December 31, 2000. These NOL carryforwards were purchased by the Company when it acquired American Indemnity. The NOL carryforwards expire as follows: 2001, $1,564,975; 2002, $621,205; 2003, $2,508,745; 2004, $1,246,728; 2005, $118,137; 2006, $43,352; 2007, $13,450; 2008, $13,410; 2009, $4,604,277; 2010, $989,347; 2011, $5,516,449; 2017, $6,882,190; 2018, $4,180,254; 2019, $1,406,699. The Company is required to establish a valuation allowance for any portion of the deferred tax asset that management believes will not be realized. The Company has a valuation allowance of $11,370,000 for deferred tax assets primarily relating to American Indemnity's NOLs, which can only be used to offset future income of the property and casualty segment. If the Company determines that the benefit of the American Indemnity NOLs can be realized in the future, the related reduction in the deferred tax asset valuation allowance will be recorded as a reduction to goodwill. The Company has AMT credit carryforwards of $2,106,000, which do not expire. Under prior federal income tax law, one-half of the excess of a life insurance company's income from operations over its taxable investment income was not taxed, but was set aside in a special tax account designated as "Policyholders' Surplus". At December 31, 2000, the Company had approximately $2,121,000 of untaxed "Policyholders' Surplus" on which no payment of federal income taxes will be required unless it is distributed as a dividend, or under other specified conditions. Barring the enactment of new tax legislation, the Company does not believe that any significant portion of the account will be taxed in the near future; therefore, no deferred tax liability has been recognized relating to the Policyholders' Surplus balance. If the entire Policyholders' Surplus balance became taxable at the current federal rate, the tax would be approximately $742,000. Note 10. Employee Benefit Obligations Effective December 31, 1999, the pension plans of the Company and American Indemnity were merged. The merged defined benefit pension plan covers substantially all employees. Under this plan, retirement benefits are primarily a function of the number of years of service and the level of compensation. It is the Company's policy to fund this plan on a current basis to the extent deductible under existing tax regulations. The Company used December 31 as the date for measuring plan assets and liabilities. Effective January 1, 2000, the postretirement health care plans of the Company and American Indemnity were merged. This merger brought all non-retired American Indemnity employees into the Company's plan; retired American Indemnity employees were not affected by this merger and will retain their full benefits accrued under the American Indemnity plan. The merged defined benefit postretirement health care plan covers substantially all benefit-eligible employees. The plan pays stated percentages of most necessary medical and dental expenses incurred by retirees, after subtracting payments by Medicare or other providers and after the stated deductible has been met. Participants become eligible for the benefits if they retire from the Company after reaching age 55 with 10 or more years of participation in the plan and 10 years of employment with the plan sponsor. The plan is contributory, with retiree contributions adjusted annually. Under the merged plan, the employment date of the non-retired American Indemnity employees is considered to be January 1, 2000 for purposes of determining eligibility for plan benefits. The effect of the merger was the termination of the future accrual of medical and dental benefits and the forfeiture of said benefits previously accrued for these employees under the American Indemnity postretirement health care plan. The change and elimination of medical and dental benefits resulted in a negative plan amendment of $253,000, which is considered negative prior service cost that will be amortized over a period of 11 years as a reduction to the net periodic postretirement benefit cost recognized in earnings. In addition, these employees will not be eligible for postretirement life insurance as previously accrued for under the American Indemnity postretirement health care plan. The elimination of the accrued life insurance benefit resulted in a curtailment gain of $103,000, which is reflected as a current gain in 2000 earnings, and a negative plan amendment of $391,000, which is considered negative prior service cost that will be amortized to earnings over a period of 12 years. The retirees of American Indemnity retained their health care and life insurance benefits provided under the American Indemnity postretirement health care plan, having reached age 55 with 25 years of service, or age 60 with 20 years of service, or age 65 with 15 years of service as of December 31, 1999. The following table provides a reconciliation of the changes in the plan's benefit obligations and fair value of plan assets and a statement of the funded status for 2000 and 1999. The table includes the obligations and fair values acquired in connection with the purchase of American Indemnity. The amounts related to the acquisition are based on valuations as of December 31, 1999, which approximates the valuation had it been measured as of the acquisition date.
(Dollars in Thousands) - --------------------------------------------------------------------------------------------------------- Pension benefits Other benefits - --------------------------------------------------------------------------------------------------------- At December 31 2000 1999 2000 1999 - --------------------------------------------------------------------------------------------------------- Reconciliation of benefit obligation Obligation at beginning of year $ 23,618 $ 23,277 $ 9,118 $ 7,993 Service Cost 1,127 921 384 365 Interest Cost 1,837 1,523 596 479 Plan amendments - - (723) - Actuarial (gain) loss 1,316 (3,214) (758) (1,907) Benefit payments and adjustments (1,472) (690) (285) 101 Acquisition - 1,801 - 2,087 - --------------------------------------------------------------------------------------------------------- Obligation at December 31 $ 26,426 $ 23,618 $ 8,332 $ 9,118 - --------------------------------------------------------------------------------------------------------- Reconciliation of fair value of plan assets Fair value of plan assets at beginning of year $ 19,857 $ 17,296 $ - $ - Actual return on plan assets (590) (147) - - Employer contributions 1,303 500 203 (101) Participant contribution - - 82 - Benefits payments and adjustments (1,472) (690) (285) 101 Acquisition - 2,898 - - - --------------------------------------------------------------------------------------------------------- Fair value of plan assets at December 31 $ 19,098 $ 19,857 $ - $ - - --------------------------------------------------------------------------------------------------------- Funded status Funded status at December 31 $ (7,328) $ (3,761) $ (8,332) $ (9,118) Unrecognized prior service cost 840 937 102 832 Unrecognized (gain) loss 2,791 (784) (1,188) (491) - --------------------------------------------------------------------------------------------------------- Accrued benefit cost $ (3,697) $ (3,608) $ (9,418) $ (8,777) =========================================================================================================
The following table provides the components of net periodic benefit cost for the plans for 2000, 1999 and 1998.
- ------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------------------- Pension benefits Other benefits - ------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31 2000 1999 1998 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- Plan costs Service cost $ 1,127 $ 921 $ 935 $ 384 $ 365 $ 424 Interest cost 1,837 1,523 1,425 596 480 523 Expected return on plan assets 590 (1,407) (1,324) - - - Amortization of transition (asset) obligation - (42) (48) - - - Amortization of prior service cost 97 97 97 87 142 173 Amortization of net (gain) loss (2,246) - - (39) 4 68 Effect of curtailment - - - (103) - - - ------------------------------------------------------------------------------------------------------------------------------- Net periodic benefit cost $ 1,405 $ 1,092 $ 1,085 $ 925 $ 991 $ 1,188 ===============================================================================================================================
The unrecognized prior service cost and the actuarial loss are being amortized on a straight-line basis over an average period of eight years. This period represents the average remaining employee service period until the date of full eligibility. The assumptions used in the measurement of the Company's benefit obligations are shown in the following table.
- ------------------------------------------------------------------------------------------- Weighted-average assumptions as of Pension benefits Other benefits December 31 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------- Discount rate 7.50% 7.50% 7.50% 7.50% Expected return on plan assets 8.25% 8.25% N/A N/A Rate of compensation increase 4.00% 4.00% N/A N/A - -------------------------------------------------------------------------------------------
For measurement purposes, an 8.25 percent pre-65 annual rate of increase in the per capita cost of covered health care benefits was assumed for 2000. The rate was assumed to decrease gradually each year to a rate of 5.25 percent for 2005 and remain at that level thereafter. A 6.75 percent post-65 annual rate of increase in the per capita cost of covered health care benefits was assumed for 2000. The rate was assumed to decrease gradually each year to a rate of 5.25 percent in 2004 and remain at that level thereafter. For dental claims, a 6.0 percent annual rate of increase was assumed for 2000, decreasing gradually to 4.8 percent for 2004 and thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1.0 percent change in assumed health care cost trend rates would have the following effects.
- ------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------ 1% Increase 1% Decrease - ------------------------------------------------------------------------------------------------------------------ Effect on total of service and interest cost components of net periodic postretirement health care benefit cost $ 177 $(140) Effect on the health care component of the accumulated postretirement benefit obligation 1,167 (949) - ------------------------------------------------------------------------------------------------------------------
The annual per capita contributions for the benefits provided to retired American Indemnity employees are capped. As a result, increases in the assumed health care cost trend rate will have no significant effect on the accumulated postretirement benefit obligation or on the net periodic postretirement benefit cost as of December 31, 2000. The Company has a profit-sharing plan in which employees who meet service requirements are eligible to participate. The amount of the Company's contribution is discretionary and is determined annually, but cannot exceed the amount deductible for federal income tax purposes. The Company's contribution to the plan for the years ended December 31, 2000, 1999 and 1998, was $793,000, $503,000 and $883,000, respectively. The Company also has an Employee Stock Ownership Plan ("ESOP") for the benefit of eligible employees and their beneficiaries. All employees are eligible to participate in the plan upon completion of one year of service, meeting the hourly requirements with the Company and attaining age 21. Contributions to this plan are made at the discretion of the Board of Directors. These contributions are based upon a percentage of total payroll and are allocated to participants on the basis of compensation. Contributions are made in stock or cash, which is used by the Trustee to acquire shares of the Company stock to allocate to participants' accounts. As of December 31, 2000, 1999 and 1998, the ESOP owned 127,386, 123,733 and 120,333 shares of Company stock, respectively. Shares owned by the ESOP are included in shares issued and outstanding for purposes of calculating earnings per share and dividends paid on the shares are charged to retained earnings. The Company made contributions to the plan of $50,000, $60,000 and $1,050,000 in 2000, 1999 and 1998 respectively. On August 21, 1998, the Company adopted a nonqualified employee stock option plan which authorizes the issuance of up to 500,000 shares of the Company's common stock to employees. The plan is administered by the Board of Directors. The Board has the authority to determine which employees will receive options, when options will be granted and the terms and conditions of the options. The Board may also take any action it deems necessary and appropriate for the administration of the plan. Pursuant to the plan, the Board may, at its sole discretion, grant options to any employees of the Company or any of its affiliated companies, including any director. These options are granted to buy shares of the Company's stock at the market value of the stock on the date of grant. The options vest and are exercisable in installments of 20 percent of the number of shares covered by the option award each year from the grant date the option is granted. To the extent not exercised, installments shall accumulate and be exercisable by the optionee, in whole or in part, in any subsequent year included in the option period, but not later than 10 years from the grant date. The Company has elected to account for its stock options under APB No. 25 and, as such, no compensation cost is recognized since the exercise price of the Company's stock options is equal to, or greater than, the market price of the underlying stock on the date of grant. Stock options are generally granted free of charge to the eligible employees of the Company as designated by the Board of Directors. However, during 1999, eligible employees had the opportunity to purchase the options at $10 per option in lieu of receiving a cash bonus for services rendered, up to the total amount of bonus awarded for the year. Options granted pursuant to the plan may not be sold, pledged, assigned or transferred by the optionee. In cases of termination, any unexercised accrued installments of the option granted under the plan to such terminated optionee shall expire and become unexercisable as of the earlier of: (i) the expiration of the applicable option period, or (ii) 30 days after the termination of employment occurs, provided however, that the Company may, in its discretion, extend said date up to and including a date one year following such termination of employment. In cases of death or disability, any unexercised accrued installments of the option granted under the plan to such optionee shall expire and become unexercisable as of the earlier of: (i) the applicable option expiration date, or (ii) the first anniversary of the date of death of such optionee (if applicable), or (iii) the first anniversary of the date of the termination of employment by reason of disability (if applicable). The following table sets forth the activity of the Company's stock option plan for the years ended December 31, 2000 and 1999.
- ------------------------------------------------------------------------------------------------------------------------- 2000 1999 - ------------------------------------------------------------------------------------------------------------------------- Weighted- Weighted- Shares of Average Shares of Average Common Price Common Price Stock per Share Stock per Share - ------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 6,021 $ 26.38 - $ - Granted 10,750 20.09 6,021 26.38 - ------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year(1) 16,771 $ 22.35 6,021 $ 26.38 - ------------------------------------------------------------------------------------------------------------------------- Options exercisable at year-end 1,204 $ 26.38 - $ - Weighted-average grant date fair value of options granted during the year $ 9.03 $ 10.88 =========================================================================================================================
(1) There were no options exercised, forfeited or expired during 2000 and 1999 The weighted-average grant date fair value of the options granted under the plan has been estimated using the Black-Scholes option pricing model. Under this model, the following significant assumptions are used to estimate the fair value of options as of the grant date: (1) the expected life of the options granted; (2) the current risk-free interest rate over the expected life of the options; (3) the expected volatility in the underlying stock price; and (4) the expected annual dividend rate. The weighted average assumptions used for 2000 and 1999 were: (1) 10 years; (2) 6.5 percent; (3) 49 percent; (4) $.68 and (1) 10 years; (2) 5.3 percent; (3) 38.9 percent; (4) $.68 respectively. The following table summarizes information about stock options outstanding at December 31, 2000.
- ------------------------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable - ------------------------------------------------------------------------------------------------------------------------- Number Weighted-Average Number Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average Exercise Prices at 12/31/00 Contractual Life (Yrs.) Exercise Price at 12/31/00 Exercise Price - ------------------------------------------------------------------------------------------------------------------------- $ 18 - 24 10,750 9.14 $ 20.09 - $ - 25 - 30 6,021 8.24 26.38 1,204 26.38 - ------------------------------------------------------------------------------------------------------------------------- $ 18 - 30 16,771 8.82 $ 22.35 1,204 $ 26.38 =========================================================================================================================
The Company has elected to account for its stock options under APB No. 25 and, as such, no compensation cost is recognized since the exercise price of the Company's stock options is equal to, or greater than, the market price of the underlying stock on the date of grant. Should the stock options have been accounted for under SFAS No. 123, compensation cost would have been recorded based on the grant-date fair value attributable to the number of options that eventually vest. This cost is recognized over the period in which the options vest, with the amount recognized at any date being at least equal to the value of the vested portion of the award at that date. The amount of compensation cost that would have been recognized as of December 31, 2000 and 1999 under SFAS No. 123 has been determined to have an immaterial impact on the net income and earnings per share reported in the Company's Consolidated Financial Statements. NOTE 11. 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 accounting policies of the segments are the same as those described in Significant Accounting Policies in Note 1. 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 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 analysis that follows is reported on a GAAP basis and is reconciled to the Company's Consolidated Financial Statements. The property and casualty segment markets most forms of commercial and personal property and casualty insurance products, including fidelity and surety bonds and reinsurance. Net premiums earned by the property and casualty segment for the years ended December 31, 2000, 1999 and 1998 were comprised mostly of fire and allied lines, automobile and other liability (78.1 percent, 72.9 percent and 70.7 percent, respectively.) The business is generated through approximately 2,124 independent agencies and brokers in 40 states, with 49% of the Company's direct premiums originating in eight Midwestern states in 2000. United Life underwrites and markets ordinary life (primarily universal life), annuities (primarily single premium) and credit life products to individuals and groups through approximately 1,280 independent agencies in 24 states. Net premiums earned by the life segment for the years ended December 31, 2000, 1999 and 1998 were comprised mostly of ordinary life (including universal life), accident and health and credit life (89.9 percent, 90.6 percent and 93.0 percent, respectively.) Total revenue by segment includes sales to both outside customers and intersegment sales that are eliminated to arrive at the total revenues as reported in the Company's Consolidated Statements of Operations. Intersegment sales are accounted for on the same basis as sales to outside customers. The following tables set forth certain data for each of the Company's business segments.
=================================================================================================================================== (Dollars in Thousands) - ----------------------------------------------------------------------------------------------------------------------------------- Property and Casualty Life Insurance Insurance Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2000 - ----------------------------------------------------------------------------------------------------------------------------------- Revenues Net premiums earned $ 307,271 $ 26,304 $ 333,575 Net investment income 25,536 61,468 87,004 Realized investment gains (losses) and other income 2,927 (4,752) (1,825) Commission and policy fee income 2,172 - 2,172 - ----------------------------------------------------------------------------------------------------------------------------------- Total reportable segments $ 337,906 $ 83,020 $ 420,926 - ----------------------------------------------------------------------------------------------------------------------------------- Intersegment eliminations (137) (210) (347) - ----------------------------------------------------------------------------------------------------------------------------------- Total revenues $ 337,769 $ 82,810 $ 420,579 =================================================================================================================================== Net income before income taxes Revenues $ 337,906 $ 83,020 $ 420,926 Benefits, losses and expenses 329,253 74,324 403,577 - ----------------------------------------------------------------------------------------------------------------------------------- Total reportable segments $ 8,653 $ 8,696 $ 17,349 - ----------------------------------------------------------------------------------------------------------------------------------- Intersegment eliminations 85 (85) - - ----------------------------------------------------------------------------------------------------------------------------------- Total net income before income taxes $ 8,738 $ 8,611 $ 17,349 =================================================================================================================================== Income tax (benefit) expense (1,072) 2,894 1,822 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 9,810 $ 5,717 $ 15,527 =================================================================================================================================== Assets Total reportable segments $ 818,583 $971,594 $1,790,177 Intersegment eliminations (127,683) - (127,683) - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $ 690,900 $971,594 $1,662,494 ===================================================================================================================================
Depreciation expense and property and equipment acquisitions for the years ended December 31, 2000, 1999 and 1998, are reflected in the property and casualty insurance segment.
=================================================================================================================================== (Dollars in Thousands) - ----------------------------------------------------------------------------------------------------------------------------------- Property and Casualty Life Insurance Insurance Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1999 - ----------------------------------------------------------------------------------------------------------------------------------- Revenues Net premiums earned $ 247,054 $ 26,100 $ 273,154 Net investment income 23,614 51,840 75,454 Realized investment gains and other income 2,444 492 2,936 Commission and policy fee income 1,912 - 1,912 - ----------------------------------------------------------------------------------------------------------------------------------- Total reportable segments $ 275,024 $ 78,432 $ 353,456 - ----------------------------------------------------------------------------------------------------------------------------------- Intersegment eliminations (137) (103) (240) - ----------------------------------------------------------------------------------------------------------------------------------- Total revenues $ 274,887 $ 78,329 $ 353,216 =================================================================================================================================== Net income before income taxes Revenues $ 275,024 $ 78,432 $ 353,456 Benefits, losses and expenses 272,315 63,923 336,238 - ----------------------------------------------------------------------------------------------------------------------------------- Total reportable segments $ 2,709 $ 14,509 $ 17,218 - ----------------------------------------------------------------------------------------------------------------------------------- Intersegment eliminations (22) 22 - - ----------------------------------------------------------------------------------------------------------------------------------- Total net income before income taxes $ 2,687 $ 14,531 $ 17,218 - ----------------------------------------------------------------------------------------------------------------------------------- Income tax (benefit) expense (3,375) 5,209 1,834 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 6,062 $ 9,322 $ 15,384 =================================================================================================================================== Assets Total reportable segments $ 807,558 $825,293 $1,632,851 Intersegment eliminations (165,135) - (165,135) - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $ 642,423 $825,293 $1,467,716 ===================================================================================================================================
Depreciation expense and property and equipment acquisitions for the years ended December 31, 2000, 1999 and 1998, are reflected in the property and casualty insurance segment.
=================================================================================================================================== (Dollars in Thousands) - ----------------------------------------------------------------------------------------------------------------------------------- Property and Casualty Life Insurance Insurance Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Revenues Net premiums earned $ 220,550 $ 25,295 $ 245,845 Net investment income 23,297 44,771 68,068 Realized investment gains and other income 20,981 1,815 22,796 Commission and policy fee income 1,815 - 1,815 - ----------------------------------------------------------------------------------------------------------------------------------- Total reportable segments $ 266,643 $ 71,881 $ 338,524 - ----------------------------------------------------------------------------------------------------------------------------------- Intersegment eliminations (140) (118) (258) - ----------------------------------------------------------------------------------------------------------------------------------- Total revenues $ 266,503 $ 71,763 $ 338,266 =================================================================================================================================== Net income before income taxes Revenues $ 266,643 $ 71,881 $ 338,524 Benefits, losses and expenses 254,306 55,822 310,128 - ----------------------------------------------------------------------------------------------------------------------------------- Total reportable segments $ 12,337 $ 16,059 $ 28,396 - ----------------------------------------------------------------------------------------------------------------------------------- Intersegment eliminations (10) 10 - - ----------------------------------------------------------------------------------------------------------------------------------- Total net income before income taxes $ 12,327 $ 16,069 $ 28,396 - ----------------------------------------------------------------------------------------------------------------------------------- Income tax (benefit) expense (736) 5,455 4,719 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 13,063 $ 10,614 $ 23,677 =================================================================================================================================== Assets Total reportable segments $ 675,361 $709,460 $1,384,821 Intersegment eliminations (134,227) - (134,227) - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $ 541,134 $709,460 $1,250,594 ===================================================================================================================================
Depreciation expense and property and equipment acquisitions for the years ended December 31, 2000, 1999 and 1998, are reflected in the property and casualty insurance segment. NOTE 12. Quarterly Financial Information (Unaudited) The following table sets forth selected quarterly financial information of the Company.
- -------------------------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data) - -------------------------------------------------------------------------------------------------- Quarters First Second Third Fourth Total - -------------------------------------------------------------------------------------------------- Fiscal year ended December 31, 2000 Total revenues $100,232 $101,611 $107,671 $111,065 $420,579 ================================================================================================== Net income $ 3,382 $ 949 $ 7,094 $ 4,102 $ 15,527 ================================================================================================== Basic and diluted earnings per common share $ 0.34 $ 0.09 $ 0.71 $ 0.41 $ 1.55 ================================================================================================== Fiscal year ended December 31, 1999 Total revenues $ 79,057 $ 79,828 $ 90,868 $103,463 $353,216 ================================================================================================== Net income $ 2,964 $ 541 $ 6,398 $ 5,481 $ 15,384 ================================================================================================== Basic and diluted earnings per common share $ 0.29 $ 0.05 $ 0.63 $ 0.54 $ 1.53 ================================================================================================== Fiscal year ended December 31, 1998 Total revenues $ 80,229 $ 94,448 $ 79,312 $ 84,277 $338,266 ================================================================================================== Net income $ 8,882 $ 12,610 $ (1,963) $ 4,148 $ 23,677 ================================================================================================== Basic and diluted earnings per common share $ 0.83 $ 1.18 $ (0.19) $ 0.41 $ 2.28 ==================================================================================================
Note 13. Earnings and Dividends Per Common Share Cash dividends per common share of $.71 and $.68 were declared in 2000 and 1999, respectively. In the calculation of earnings per share, stock options granted to employees were not included in the computation of diluted earnings per share because the option exercise prices were greater than the weighted average market price of the common shares over the period the options were outstanding during 2000. The options were still outstanding as of December 31, 2000. Note 14. Comprehensive Income The following table sets forth the components of other comprehensive income (loss), and the related tax effects, for the years 2000, 1999 and 1998.
- ---------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ---------------------------------------------------------------------------------------------------------------- Amount Income Tax Amount Before (Expense) Net of Tax Benefit Tax - ---------------------------------------------------------------------------------------------------------------- 2000 Net unrealized appreciation arising during the period $ 15,863 $(5,552) $ 10,311 Less: reclassification for realized losses included in income (2,082) 729 (1,353) - ---------------------------------------------------------------------------------------------------------------- Other comprehensive income $ 17,945 $(6,281) $ 11,664 ================================================================================================================ 1999 Transition adjustment for the effect of a change in accounting principle $ 9,250 $(3,237) $ 6,013 Net unrealized depreciation arising during the period (47,318) 16,561 (30,757) Less: reclassification for realized gains included in income 2,303 (806) 1,497 - ---------------------------------------------------------------------------------------------------------------- Other comprehensive loss $(40,371) $ 14,130 $(26,241) ================================================================================================================ 1998 Net unrealized appreciation arising during the period $ 6,251 $ (2,125) $ 4,126 Less: reclassification for realized gains included in income 22,793 (7,749) 15,044 - ---------------------------------------------------------------------------------------------------------------- Other comprehensive loss $(16,542) $ 5,624 $(10,918) ================================================================================================================
Note 15. Acquisition On August 10, 1999, the Company acquired American Indemnity Financial Corporation as a wholly owned subsidiary for approximately $30,212,000 in cash in exchange for 1,962,410 shares of common stock. The transaction was accounted for using the purchase method of accounting. Common stockholders of American Indemnity Financial Corporation received approximately $14.35 per share of common stock at the closing of the transaction and deferred consideration of up to $1.00 per share to be paid in two years, subject to adjustments relating to Indemnities. The purchase price paid for American Indemnity Financial Corporation has been allocated to the assets acquired and liabilities assumed, based on their fair values, and the excess purchase price has been recorded as goodwill. Goodwill of $7,846,000 is being amortized on a straight-line basis for a period of 10 years. An escrow account with a balance of $1,990,000 is included in the Company's consolidated balance sheets in other assets for payment of the deferred consideration. Any payments out of this account to American Indemnity Financial Corporation shareholders will be deemed additional consideration, and as such, would be recorded as additional goodwill relating to the purchase of American Indemnity Financial Corporation. In connection with the purchase, the Company developed a plan (the "exit plan") to close certain branches and involuntarily terminate certain employees of American Indemnity. A liability of $972,000, to reflect employee termination benefits of $626,000 and future contractual lease payments related to abandoned facilities of $346,000, was included in the allocation of the purchase price. The exit plan was completed by December 31, 1999. All of this liability was paid as of December 31, 2000. American Indemnity Financial Corporation, based in Galveston, Texas, is a holding company that is made up of the following regional property and casualty insurance companies: American Indemnity Company; American Fire and Indemnity Company; Texas General Indemnity Company; and United Fire Lloyds. The American Indemnity insurers offer personal and commercial lines of insurance through independent agents. The 1999 amounts in the consolidated statements of operations include American Indemnity Financial Corporation's result for the period of August 10, 1999, through December 31, 1999. The following schedule summarizes the assets acquired and the liabilities assumed as of August 10, 1999.
- ----------------------------------------------------------------------------------- Assets acquired (Dollars in Thousands) - ----------------------------------------------------------------------------------- Fixed maturity securities $ 68,499 Equity securities 14,344 Other assets 57,355 - ----------------------------------------------------------------------------------- Total assets acquired $140,198 - ----------------------------------------------------------------------------------- Liabilities assumed Policy reserves and unearned premiums $102,483 Other liabilities 17,340 - ----------------------------------------------------------------------------------- Total liabilities assumed $119,823 - ----------------------------------------------------------------------------------- Net assets acquired $ 20,375 - ----------------------------------------------------------------------------------- Excess of acquisition cost over net assets acquired 7,846 - ----------------------------------------------------------------------------------- Total purchase price $ 28,221 ===================================================================================
The following table presents the unaudited proforma results of operations for 1999 and 1998 had the acquisition occurred on January 1, 1998.
- ---------------------------------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data) - ---------------------------------------------------------------------------------------------------------- December 31, 1999 December 31, 1998 (Unaudited) (Unaudited) - ---------------------------------------------------------------------------------------------------------- Revenues $390,574 $407,555 Net income 11,748 17,831 Basic and diluted earnings per share 1.17 1.72 - ----------------------------------------------------------------------------------------------------------
The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the acquisitions been consummated as of the above dates, nor are such operating results necessarily indicative of future operating results. Note 16. Lease At December 31, 2000, the future minimum payments under a noncancellable operating lease arrangement are as follows (in thousands) : 2001 $1,197 2002 1,197 2003 698 -------------------------------------- Total $3,092
This lease is for the use of mainframe equipment and software located at the Cedar Rapids location, the initial term of which runs three years, with a purchase option granting the right to purchase the leased equipment at fair market value given a notice of ninety days. Total rental expense relating to this lease for 2000 amounted to $502,000. EX-11 2 dex11.txt STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11. STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
- --------------------------------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data) - --------------------------------------------------------------------------------------------------------- Weighted Average Earnings Number of Shares Net Per Years Ended December 31 Outstanding Income Common Share - --------------------------------------------------------------------------------------------------------- 2000 10,047,248 $15,527 $1.55 1999 10,079,563 15,384 1.53 1998 10,393,930 23,677 2.28 - ---------------------------------------------------------------------------------------------------------
Computation of weighted average number of common and common equivalent shares:
Years Ended December 31 - --------------------------------------------------------------------------------------------------------- 2000 1999 1998 - --------------------------------------------------------------------------------------------------------- Common shares outstanding beginning of the period 10,060,084 10,091,721 10,727,322 Weighted average of the common shares purchased and retired or reissued (12,836) (12,158) (333,392) - --------------------------------------------------------------------------------------------------------- Weighted average number of common shares 10,047,248 10,079,563 10,393,930 =========================================================================================================
EX-21 3 dex21.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT
Jurisdiction of Subsidiary Organization % of ownership by the Company, or one of its subsidiaries - ---------- --------------- --------------------------------------------------------- United Life Insurance Company Iowa 100% owned by the Company Lafayette Insurance Company Louisiana 100% owned by the Company Insurance Brokers & Managers, Inc. Louisiana 100% owned by Lafayette Insurance Company Addison Insurance Company Illinois 100% owned by the Company UFC Premium Finance Company Illinois 100% owned by Addison Insurance Company Addison Insurance Agency Illinois 100% owned by Addison Insurance Company United Credit Corporation Iowa 100% owned by the Company American Indemnity Financial Corporation Delaware 100% owned by the Company American Indemnity Company Texas 99.9%owned by American Indemnity Financial Corporation American Fire and Indemnity Company Texas 100% owned by American Indemnity Company Texas General Indemnity Company Colorado 100% owned by American Indemnity Company United Fire Lloyds Texas Financially and operationally controlled by the Company American Computing Company Texas 100% owned by American Indemnity Company
EX-23 4 dex23.txt CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23 [ARTHUR ANDERSEN LOGO] CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Form S-8 Registration Statements File Nos. 333-63103 and 333-42895. /s/ Arthur Andersen LLP - ------------------------- Arthur Andersen LLP Chicago, Illinois March 29, 2001 -----END PRIVACY-ENHANCED MESSAGE-----