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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, 1999
[ ] 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, 2000, 10,060,084 shares of common stock were outstanding. The
aggregate market value of voting stock held by non-affiliates of the registrant
as of March 1, 2000, was approximately $78,069,131.
FORM 10-K TABLE OF CONTENTS
PAGE
PART I:
Item 1. Business 1
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of
Security Holders 7
PART II:
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 7a. Quantitative and Qualitative Disclosures
About Market Risk 15
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 42
PART III:
Item 10. Directors and Executive Officers of the
Registrant 42
Item 11. Executive Compensation 44
Item 12. Security Ownership of Certain Beneficial
Owners and Management 49
Item 13. Certain Relationships and Related Transactions 49
PART IV:
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 50
Signatures 51
PART I.
ITEM 1. BUSINESS
GENERAL DESCRIPTION
United Fire & Casualty Company and its subsidiaries (the "Company") are
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. Phone: 319-399-5700.
The Company has two reportable business segments in its operations;
property and casualty insurance and life insurance. The Company's property and
casualty segment includes the following subsidiaries: Addison Insurance Company,
a wholly owned property and casualty insurer; Addison Insurance Agency, a wholly
owned general agency of Addison Insurance Company; Lafayette Insurance Company,
a wholly owned property and casualty insurer; Insurance Brokers & Managers Inc.,
a wholly owned general agency of Lafayette Insurance Company; American Indemnity
Financial Corporation, a wholly owned holding company; American Indemnity
Company, a wholly owned property and casualty company of American Indemnity
Financial Corporation and its subsidiaries: American Fire and Indemnity Company,
Texas General Indemnity Company, American Computing Company, and the affiliate
American Indemnity Lloyds, which is financially and operationally controlled by
the Company. The Company's life insurance segment subsidiary is United Life
Insurance Company, a wholly owned life insurance company. A table reflecting
premiums, operating results and assets attributable to the Company's segments is
included in Note 10 of the Notes to Consolidated Financial Statements. As of
December 31, 1999, the Company and its subsidiaries employed 727 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, Galveston, TX 77550
The Company is licensed as a property and casualty insurer in 43
states, primarily in the Midwest, West and South. Approximately 2,150
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 1,200 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. In addition, home
office staff technicians and specialists provide support to the subsidiaries and
regional offices as well as to independent agencies. The Company uses management
reports to monitor subsidiary and regional offices for overall results and
conformity to Company policy. In 1999, 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
- - - - - - --------------------------------------------------------------------------------
Arkansas $ 4,287 1.7% $ -- --%
California 3,640 1.5 -- --
Colorado 15,870 6.5 4,665 2.7
Illinois 20,749 8.5 14,074 8.1
Iowa 40,381 16.5 85,646 49.0
Kansas 11,334 4.6 3,271 1.9
Louisiana 34,607 14.1 104 0.1
Minnesota 14,872 6.1 14,806 8.5
Mississippi 9,252 3.8 254 0.1
Missouri 23,169 9.5 5,106 2.9
Nebraska 14,820 6.0 13,946 8.0
North Dakota 3,336 1.4 5,774 3.3
South Dakota 8,946 3.7 4,286 2.4
Texas 13,730 5.6 3,163 1.8
Wisconsin 8,630 3.5 14,944 8.6
Wyoming 3,272 1.3 519 0.3
Other 13,978 5.7 4,037 2.3
- - - - - - --------------------------------------------------------------------------------
$244,873 100.0% $174,595 100.0%
================================================================================
1
The insurance industry is highly competitive, and the Company competes
with other stock insurance companies, the underwriters at Lloyds of London and
reinsurance reciprocals. Because the Company relies heavily on independent
agencies, it utilizes a profit-sharing contract with the agencies as an
incentive to place high quality property and casualty business with the Company.
For 1999, property and casualty agencies will receive profit-sharing commissions
of an estimated $6,434,000.
PRODUCTS
PROPERTY AND CASUALTY INSURANCE SEGMENT
The Company writes both personal and commercial lines of insurance.
Personal lines are comprised 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, 1999, 1998
and 1997.
- - - - - - --------------------------------------------------------------------------------
(Dollars in Thousands)
- - - - - - --------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- - - - - - --------------------------------------------------------------------------------
Fire and allied lines (1)
Net premiums earned $ 76,557 $ 69,997 $ 69,693
Net losses incurred 40,176 51,418 41,472
Loss ratio 52.5% 73.5% 59.5%
- - - - - - --------------------------------------------------------------------------------
Automobile
Net premiums earned $ 64,558 $ 54,042 $ 53,207
Net losses incurred 44,824 37,828 35,492
Loss ratio 69.4% 70.0% 66.7%
- - - - - - --------------------------------------------------------------------------------
Other liability
Net premiums earned $ 38,922 $ 31,804 $ 32,394
Net losses incurred 17,266 12,400 9,418
Loss ratio 44.4% 39.0% 29.1%
- - - - - - --------------------------------------------------------------------------------
Workers' compensation
Net premiums earned $ 20,524 $ 20,797 $ 22,324
Net losses incurred 15,119 16,275 15,492
Loss ratio 73.7% 78.3% 69.4%
- - - - - - --------------------------------------------------------------------------------
Fidelity and surety
Net premiums earned $ 18,129 $ 17,669 $ 16,893
Net losses incurred 387 1,748 2,086
Loss ratio 2.1% 9.9% 12.3%
- - - - - - --------------------------------------------------------------------------------
Reinsurance
Net premiums earned $ 27,739 $ 25,708 $ 30,478
Net losses incurred 34,003 24,647 18,268
Loss ratio 122.6% 95.9% 59.9%
- - - - - - --------------------------------------------------------------------------------
Other
Net premiums earned $ 625 $ 533 $ 521
Net losses incurred 66 8 105
Loss ratio 10.6% 1.5% 20.2%
- - - - - - --------------------------------------------------------------------------------
Total property and casualty
Net premiums earned $247,054 $220,550 $225,510
Net losses incurred 151,841 144,324 122,333
Loss ratio 61.5% 65.4% 54.2%
================================================================================
(1) "Fire and allied lines" includes farmowners, homeowners, commercial multiple
peril and inland marine.
2
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 and net loss adjustment expenses incurred by net premiums earned; and
the expense ratio, calculated by dividing underwriting expenses incurred by net
premiums written. The ratios in the table have been prepared on the basis of
statutory financial information and on the basis of generally accepted
accounting principles ("GAAP"). 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.
[A bar graph displaying statutory combined ratios for the company as compared
with the Insurance Industry from 1995 to 1999 appears here.]
Statutory Combined Ratios
Company Industry
1995 95.8 106.5
1996 104.4 105.8
1997 98.0 101.8
1998 114.8 105.0
1999 109.2 107.5
- - - - - - ----------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- - - - - - ----------------------------------------------------------------------------------------------------------------------
Statutory GAAP
- - - - - - ----------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997 1999 1998 1997
- - - - - - ----------------------------------------------------------------------------------------------------------------------
Net premiums written $254,214 $221,002 $226,915 $254,214 $221,002 $226,915
Net premiums earned 247,054 220,550 225,510 247,054 220,550 225,822
- - - - - - ----------------------------------------------------------------------------------------------------------------------
Losses and loss adjustment expenses 75.6% 81.9% 66.6% 75.1% 81.2% 66.2%
Underwriting expenses 33.4 32.9 31.8 34.1 34.0 33.0
- - - - - - ----------------------------------------------------------------------------------------------------------------------
Combined ratios 109.0% 114.8% 98.4% 109.2% 115.2% 99.2%
- - - - - - ----------------------------------------------------------------------------------------------------------------------
Underwriting margin (9.0)% (14.8)% 1.6% (9.2)% (15.2)% 0.8%
======================================================================================================================
LIFE INSURANCE SEGMENT
United Life Insurance Company underwrites and markets single-premium
whole life insurance, term life and universal life insurance, annuities, credit
insurance and individual disability income products. While United Life Insurance
Company's lead annuity product is a single-premium deferred annuity, it also
offers flexible premium annuities. The credit 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 Insurance Company also offers an individual disability income rider
that is attached to the ordinary life insurance products.
Total life insurance in force, before reinsurance, is $3,839,897,000 as
of December 31, 1999. Universal life represents 49 percent of insurance in force
at December 31, 1999, compared to 51 percent at December 31, 1998. The following
table presents net premium earned information for the last three years on a GAAP
basis.
- - - - - - --------------------------------------------------------------------------------
(Dollars in Thousands)
- - - - - - --------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- - - - - - --------------------------------------------------------------------------------
Universal life $ 8,696 $10,524 $ 7,495
Ordinary life (other than universal) 5,199 4,917 5,605
Accident and health 5,271 4,398 2,821
Annuities 2,264 1,613 1,151
Credit life 4,493 3,694 1,977
Group accident and health 177 149 182
- - - - - - --------------------------------------------------------------------------------
Total net premiums earned $26,100 $25,295 $19,231
================================================================================
3
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)
- - - - - - --------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- - - - - - --------------------------------------------------------------------------------
Fire and allied lines (1) $ 77,270 $ 69,606 $ 70,917
Automobile 65,730 54,902 53,566
Other liability 43,433 31,738 32,261
Workers' compensation 21,735 20,332 21,659
Fidelity and surety 18,395 17,839 17,542
Reinsurance 26,944 26,052 30,430
Other 707 533 540
Life and accident and health 27,293 34,961 25,705
Annuities 145,810 119,717 93,062
- - - - - - --------------------------------------------------------------------------------
$427,317 $375,680 $345,682
================================================================================
(1) "Fire and allied lines" includes farmowners, homeowners, commercial multiple
peril and inland marine.
REINSURANCE
PROPERTY AND CASUALTY INSURANCE SEGMENT
The Company acts as a reinsurer, assuming both property and casualty
reinsurance from approximately 370 companies. The bulk of the business assumed
is property reinsurance with the emphasis on catastrophe covers. The business
originates through approximately 40 brokers, with the largest producer
accounting for approximately 39 percent of the reinsurance assumed.
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 American Reinsurance Company,
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 ceding 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, 1999 and 1998, there are
no uncollectible reinsurance balances that would result in a material impact on
the Company's financial statements. The Company follows the industry practice of
accounting 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, 1999, 1998 and 1997.
4
- - - - - - ------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- - - - - - ------------------------------------------------------------------------------------------------------------
Percent Percent Percent
Years Ended December 31, 1999 of Total 1998 of Total 1997 of Total
- - - - - - ------------------------------------------------------------------------------------------------------------
Fire and allied lines (1) $ 87,594 34% $ 81,229 37% $ 86,200 38%
Automobile 69,557 27 56,452 26 55,269 24
Other liability 48,157 19 35,010 16 35,645 16
Workers' compensation 22,192 9 20,736 9 22,075 10
Fidelity and surety 19,751 8 19,000 9 18,599 8
Reinsurance assumed 29,950 12 28,979 13 33,882 15
Other 1,044 - 800 - 799 -
- - - - - - ------------------------------------------------------------------------------------------------------------
Aggregate direct and assumed
premiums written $278,245 109% $242,206 110% $252,469 111%
Reinsurance ceded 24,031 9 21,204 10 25,554 11
- - - - - - ------------------------------------------------------------------------------------------------------------
Net premiums written $254,214 100% $221,002 100% $226,915 100%
============================================================================================================
(1) "Fire and allied lines"" includes farmowners, homeowners, commercial
multiple peril and inland marine.
LIFE INSURANCE SEGMENT
United Life Insurance Company reinsures a portion of its exposure and
cedes to reinsurers a portion of the premium received on the policies reinsured.
Reinsurance is purchased to reduce the net liability on individual risks to
predetermined limits. United Life Insurance Company retains $200,000 per insured
and reinsures the excess.
The ceding of reinsurance does not legally discharge United Life
Insurance Company from primary liability under its policies. The ceding 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, 1999 and
1998, there are no uncollectible reinsurance balances that would result in a
material impact on the Company's financial statements. United Life Insurance
Company follows the industry practice of accounting for insurance written and
losses incurred net of reinsurance ceded. United Life Insurance Company'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. Factor or average reserves are set on some of
the less volatile lines on losses under $5,000. These factors are determined by
averaging claims paid over a 13-month period. Case reserves are set on all other
reported losses. 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. Established
reserves 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 following table presents a development of net loss and loss
adjustment expense reserve liabilities and payments for the years 1990 through
1999. 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.
5
- - - - - - ----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31
- - - - - - ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- - - - - - ----------------------------------------------------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- - - - - - ----------------------------------------------------------------------------------------------------------------------------------
Liability for Unpaid
Losses and LAE $113,572 $ 123,219 $ 158,825 $ 170,798 $ 180,653 $188,700 $ 209,876 $ 218,912 $ 243,006 $ 310,637
Liability re-
estimated as of:
One year later 111,804 128,042 154,572 153,691 160,776 159,571 176,332 192,297 213,047
Two years later 112,390 125,888 148,507 142,572 172,546 145,486 169,348 185,700
Three years later 111,276 124,428 144,159 158,312 164,133 142,877 164,030
Four years later 113,898 122,384 134,309 155,313 161,961 140,639
Five years later 113,703 118,568 132,075 154,849 162,424
Six years later 103,303 117,648 132,747 157,005
Seven years later 102,318 119,123 135,559
Eight years later 103,418 122,230
Nine years later 106,844
==================================================================================================================================
Redundancy
(Deficiency) $ 6,728 $ 989 $ 23,266 $ 13,793 $ 18,229 $ 48,061 $ 45,846 $ 33,212 $ 29,959
==================================================================================================================================
Cumulative amount of
liability paid through:
One year later $ 39,497 $ 44,694 $ 54,291 $ 51,550 $ 80,246 $ 56,618 $ 61,694 $ 62,988 $ 71,251
Two years later 63,589 69,296 84,074 102,637 109,281 83,071 93,599 97,142
Three years later 77,141 87,052 96,976 119,349 123,469 97,763 110,531
Four years later 87,627 95,059 107,420 127,333 132,414 106,770
Five years later 85,379 99,483 112,360 133,531 137,597
Six years later 88,558 102,677 116,929 137,295
Seven years later 90,575 105,907 119,657
Eight years later 92,967 108,287
Nine years later 94,398
- - - - - - ----------------------------------------------------------------------------------------------------------------------------------
LIFE INSURANCE SEGMENT
United Life Insurance Company's reserves meet, or exceed, the minimum
statutory Iowa Insurance Law requirements. These reserves are developed and
analyzed by independent consulting actuaries. Their presentation in this report
differs from the statutory basis and is described in Note 1 of the Notes to
Consolidated Financial Statements.
INVESTMENTS
Management of the investment portfolio is handled internally by the
Company's chief investment officer. This function involves complying with state
insurance department investment regulations and maintaining adequate assets to
pay Company obligations, while achieving competitive yields.
The Company considers itself to be a long-term investor and generally
intends, at the time of purchase, to hold to maturity most of the
available-for-sale fixed-income securities that it buys, unless yield
enhancement strategies provide excess returns. The Company re-evaluated the
classification of its current invested assets as of January 1, 1999, and has
moved some fixed-income securities from held-to-maturity to available-for-sale,
pursuant to its adoption of Statement of Financial Accounting Standards ("SFAS")
No. 133. See Note 1 of the Notes to Consolidated Financial Statements for
additional discussion.
6
The Company's property and casualty segment has historically emphasized
investments in tax-exempt fixed-income securities. At the same time, an attempt
is made to maintain a balanced portfolio that reflects the Company's changing
tax situation, as well as changes in the tax law. Based on the Company's
underwriting philosophy and goals for this segment, the emphasis toward
tax-exempt fixed-income securities will continue. However, recent yields in the
taxable fixed-income markets are relatively attractive, so additional purchases
in this asset class are planned.
The life insurance segment has emphasized, and will continue to
emphasize, investing in taxable fixed-income securities (primarily bonds issued
by corporations and utilities) that are high quality with an allocation to
medium-grade securities and mortgage-related securities, including
collateralized mortgage obligations.
The Company strives to maintain diversification in its portfolio among
issues, issuers and industries. 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
- - - - - - --------------------------------------------------------------------------------
1999 $1,157,414 $75,317 6.5%
1998 1,040,008 67,928 6.5
1997 928,052 61,686 6.6
================================================================================
(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.
The Company owns a small parking lot adjacent to the eight-story
building and a parking lot adjacent to the five-story building.
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, as well as a parking lot located adjacent to the
building.
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
None
PART II
ITEM 5. 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, 2000, there were 939 holders of record of the Company's common
stock. The table on the following page 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. 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.
7
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 7 in the Notes to
Consolidated Financial Statements.
- - - - - - --------------------------------------------------------------------------------
Cash
Share Price Dividends
High Low Declared
- - - - - - --------------------------------------------------------------------------------
1999
Quarter Ended
March 31 $35 1/2 $25 1/2 $0.17
June 30 26 7/8 22 1/4 0.17
September 30 26 1/2 22 1/5 0.17
December 31 23 3/8 19 1/4 0.17
1998
Quarter Ended
March 31 $45 3/4 $40 1/2 $0.16
June 30 44 37 7/8 0.17
September 30 41 3/4 32 1/8 0.17
December 31 38 1/2 32 0.17
================================================================================
ITEM 6. SELECTED FINANCIAL DATA
- - - - - - ---------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data)
- - - - - - ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997 1996 1995
- - - - - - ---------------------------------------------------------------------------------------------------------------------------
Total assets $1,467,716 $1,250,594 $1,157,922 $1,024,835 $937,594
Operating revenues
Net premiums earned 273,051 245,727 244,939 234,797 207,528
Investment income, net 75,317 67,928 61,686 56,936 53,603
Realized investment gains and other income 2,936 22,796 2,676 6,726 1,698
Commission and policy fee income 1,912 1,815 1,829 1,815 1,761
Net income 15,384 23,677 28,732 21,960 28,803
Basic and diluted earnings per common share 1.53 2.28 2.68 2.04 2.66
Cash dividends declared
per common share .68 0.67 0.63 0.60 0.55
===========================================================================================================================
Earnings per common share and cash dividends declared per common share
have been retroactively restated for additional shares issued as a result of a
three-for-two stock split to stockholders of record as of December 18, 1995.
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 "The Chairman's Report," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the "Consolidated
Financial Statements and related Notes."
PAGE 8
[A bar graph displaying earnings per common share and dividends declared for the
five years ended December 31, 1999 appears here.]
Earnings Per Common Share
Earnings Per Common Share Dividends Declared
1995 2.66 0.55
1996 2.04 0.60
1997 2.68 0.63
1998 2.28 0.67
1999 1.53 0.68
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in the following Management's Discussion and
Analysis contains forward-looking information as defined in the Private
Securities Litigation Reform Act of 1995 and is therefore subject to certain
risks and uncertainties. Actual results could differ materially from information
within the forward-looking statements as a result of many factors, including,
but not limited to, market conditions, competition and natural disasters.
RESULTS OF OPERATIONS 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 per share to be paid in two years, subject to
adjustments relating to indemnities. An escrow account with a balance of
$1,990,000 is included in the Company's consolidated balance sheets in other
assets for payment of the deferred consideration.
American Indemnity, 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 American Indemnity Lloyds. The American
Indemnity insurers offer personal and commercial lines of insurance through
independent agents.
The transaction was accounted for using the purchase method of
accounting. A schedule summarizing the assets acquired and the liabilities
assumed as of August 10, 1999, as well as pro forma results of operations, can
be found in Note 14 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. Prior year amounts 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, management anticipates property and casualty net premiums
earned to continue to 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
percent. Without the American Indemnity purchase, losses and loss adjustment
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 to a level that was in accordance with
the reserving philosophy of the Company.
The Company had exposure to 23 catastrophes, in each of 1999 and 1998.
The catastrophes negatively impacted net income (after tax) by $9,561,000, or
$.95 per share in 1999, and $19,188,000, or $1.85 per share in 1998.
Experience in the Company's property and casualty segment is measured
by the loss ratio (net losses incurred divided by net premiums earned). The
lower the loss ratio, the more favorable the results. 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 and 59.9
percent in 1997.
To measure total underwriting profitability, the property and casualty
industry uses the statutory 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
1999, the segment's combined ratio was 109 percent, compared to 115 percent in
1998 and 98 percent in 1997. The catastrophes discussed above added 6 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.
9
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 and 6.6 percent in 1997.
Realized investment gains and other income were $2,936,000 in 1999,
compared to $22,796,000 in 1998. Included as other income in 1999 is accrued
interest of $632,000 related to a refund in connection with a Federal income tax
Revenue Agent Review for previous tax years. 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.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998, COMPARED TO THE YEAR
ENDED DECEMBER 31, 1997 PROPERTY AND CASUALTY INSURANCE SEGMENT
A majority of the property and casualty insurance segment's revenue was
generated from personal and commercial insurance premiums. During the last
several years, this industry has faced fierce competition, which has limited
premium growth and squeezed underwriting profits. Under these conditions, the
Company has worked hard to maintain its market share without compromising its
underwriting standards. The Company's property and casualty segment had a slight
decrease in premiums earned of 2 percent in 1998. The reinsurance line of
business had the largest change in net premiums earned, decreasing by
$4,770,000, or 16 percent, between 1998 and 1997. All other lines of business
increased or decreased slightly between years. Looking to the future, management
did not expect significant relief from the intense competition and continued to
respond to market pressures by seeking out profitable business at adequate
rates.
The property and casualty segment's largest expenditures were for
losses and loss adjustment expenses. According to the Insurance Services Office,
a supplier of property and casualty statistical information, U.S. property and
casualty insurers will have reported catastrophe losses (excluding expenses) of
approximately $10 billion for events occurring in 1998, making 1998 the
third-worst year for catastrophe losses in the last 10 years. The Company's
exposure to 23 of these catastrophes negatively impacted net income by
$19,188,000, or $1.85 per share, net of tax in 1998. This amount includes losses
and expenses, net of ceded reinsurance.
The largest storms affecting the Company occurred between May 30 and
June 1, 1998, in Iowa, Minnesota, South Dakota and Wisconsin. These storms,
although individually not large enough to penetrate our catastrophe reinsurance
cover of $5,000,000, generated net incurred losses of $4,711,000. Other storms
in Iowa and Minnesota, on May 15 and 16, resulted in net incurred losses in
excess of $3,647,000. Severe storms occurring in several Midwestern states
between June 24 and 30 resulted in additional catastrophe net incurred losses of
$3,620,000. Hurricane Georges hit Louisiana and Mississippi September 21 through
September 28, causing over $4,000,000 in net incurred losses for the Company.
Finally, storms occurring November 9 through November 11 in several Midwestern
states resulted in over $1,200,000 in net incurred losses.
Experience in the Company's property lines of business deteriorated in
1998, as measured by the loss ratio (net losses incurred divided by net premiums
earned). The fire and allied lines loss ratio increased to 73.5 percent,
compared to 59.5 percent in 1997 and 66.1 percent in 1996. These are the lines
of business most affected by catastrophe losses and include personal and
commercial property coverage for homeowners and commercial businesses.
Catastrophe activity negatively impacted the Company's reinsurance business as
well. The loss ratio for net assumed reinsurance, which constitutes business
assumed from other insurance companies, deteriorated to 95.9 percent in 1998,
from 59.9 percent in 1997 and 73.2 percent in 1996. The Company's workers'
compensation business was also experiencing decreasing underwriting profit.
Reserve strengthening in the fourth quarter of 1998, due to adverse legal
decisions, contributed to deteriorating workers' compensation experience. In
addition, tough competition to retain market share also contributed to the
unfavorable results. The Company's corporate workers' compensation claims
manager resigned in January 1999, and a search for
10
his replacement was underway. The Company's fidelity and surety business
continued to be very profitable, with a loss ratio of 9.9 percent, down from
12.3 percent in 1997 and 12.7 percent in 1996.
As a profitability measure, the property and casualty industry uses the
statutory combined ratio, which is calculated by dividing net losses and net
loss adjustment expenses incurred by net premiums earned, plus 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 1998, the segment's combined ratio was
115 percent, compared to 98 percent in 1997 and 104 percent in 1996. The
catastrophes discussed above added 11 percent to the combined ratio in 1998.
LIFE INSURANCE SEGMENT
The Company's life insurance segment had record earnings in 1998. The
segment reported net income after consolidating eliminations of $10,614,000,
compared to $6,060,000 in 1997. Growth in net premiums earned of $6,064,000, or
32 percent, was a major factor in the favorable results. Much of the premium
growth came from the segment's single premium credit life and accident and
health products. Management anticipated smaller growth in the life insurance
segment's premium income in 1999.
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.
Losses incurred, resulting primarily from death claims, is the second largest
cost incurred by the life insurance segment. In 1998, there were a higher number
of death claims and larger benefits were paid out on these claims, as compared
with prior years. In addition, an increase in retention from $100,000 to
$200,000 per insured, effective January 1, 1995, has increased both premium
revenue and losses incurred.
INVESTMENT RESULTS
Federal Reserve Chairman Dr. Alan Greenspan described the United States
economy as an "oasis of prosperity" in reference to other international
economies that slumped in 1998 and experienced financial turmoil, defaults and
currency devaluations. The United States experienced moderate economic growth of
3.9 percent, combined with low inflation of 1.6 percent, as declining commodity
prices and increased labor productivity led the Dow Jones Industrial Average to
a record high of 9374 and lower interest rates. During 1998, interest rates
declined over 1 percent for various intermediate and longer-term bond maturities
that the Company typically seeks to invest in. For perspective, the 30-year U.S.
Treasury bond yield declined to its lowest level ever during the 21 years that
it has been offered. This generally lower level of interest rates was partially
offset by widening corporate bond spreads over U.S. treasury bonds. Fixed-income
purchases in these corporate bonds, which included additional purchases of
private placements and higher-yielding medium grade obligations (substantially
all United States corporations), minimized the decline in yields added to the
investment portfolio. For 1999, we were more conservative with our forecast on
economic growth. Concerns of deflation, Year 2000 problems, competitiveness of
the new Euro currency/members, and international financial instability are
expected to slow United States earnings and economic growth (mostly in the
second half) and pose further volatility to the financial markets.
The Company reported net investment income of $67,928,000 in 1998,
compared to $61,686,000 in 1997. More than 90 percent of the income originated
from interest on fixed maturities. The remaining investment revenue was derived
from dividends on equity securities, interest on other long-term investments,
interest on mortgage loans, interest on policy loans and rent earned from
tenants in the Company's home office. The Company's investment yield remained
fairly stable over the three-year period ending in 1998. The yield was 6.5
percent in 1998, 6.6 percent in 1997 and 6.9 percent in 1996.
Realized gains reported by the Company increased significantly in 1998,
growing to $22,796,000 from $2,676,000 in 1997. 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. During the third quarter of 1998, 600,000 of
the treasury shares were retired and 25,000 shares were contributed to the
Company's Employee Stock Ownership Plan.
FINANCIAL CONDITION
INVESTMENTS
The investment portfolio is comprised primarily of fixed maturity
securities and equity securities. The Company's investment strategy is to invest
principally in long-term, high-quality securities. As of December 31, 1999, 91
percent of the fixed maturity securities were investment grade (as defined by
the National Association of Insurance Commissioners "NAIC" -Securities Valuation
Office and having NAIC ratings of Class 1 or Class 2), compared to 90 percent at
December 31, 1998. The below-investment-grade holdings present opportunities for
much higher returns than with other available debt securities.
11
Many of the below-investment-grade holdings purchased are securities that the
Company views as having the potential for upgrade in the near future. Also, 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 currently has no securities classified as
trading. At December 31, 1999, 29 percent of the fixed maturity portfolio was
classified as held-to-maturity compared to 65 percent at December 31, 1998. The
held-to-maturity securities are reported at amortized cost, while
available-for-sale securities are reported at market value. Unrealized
appreciation or depreciation of available-for-sale investments is reflected in a
separate component of stockholders' equity.
Effective January 1, 1999, the Company reclassified a portion of its
held-to-maturity investment portfolio to available-for-sale in conjunction with
the adoption of Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Generally,
reclassifications are allowed only in rare circumstances. However, given the new
restrictions that SFAS No. 133 has on hedging interest rate risk for
held-to-maturity securities, all companies adopting SFAS No. 133 will be allowed
to reassess their held-to-maturity portfolios without "tainting" the remaining
securities classified as held-to-maturity. The impact on the Company's
Consolidated Financial Statements, due to the reclassification from
held-to-maturity to available-for-sale, increased the carrying value of
available-for-sale fixed-income securities by approximately $9,250,000, and
other comprehensive income by approximately $6,013,000, net of deferred income
taxes.
The Company has had limited involvement with derivative financial
instruments and does not engage in the derivative market for hedging purposes.
The Company has, at times, written covered call options to generate additional
portfolio income. At December 31, 1999, there were no open covered call options,
compared to options written on approximately 4 percent of the equity portfolio
at December 31, 1998. The Company also has investments in collateralized
mortgage obligations (CMO), though these holdings have decreased during 1999 and
1998. CMO's account for 12 percent of the fixed-income portfolio at December 31,
1999, compared to 16 percent as of December 31, 1998. The decreases have been
the result of sales and prepayments of CMOs in 1999 and 1998, which were
subsequently replaced with corporate bonds.
OTHER ASSETS
Deferred acquisition costs constitute the Company's second largest
asset, after investments, and represent underwriting and acquisition expenses
associated with writing insurance policies. These expenses are capitalized and
are amortized over the life of the policies written to attain a matching of
revenue to expenses. The Company's life segment had an increase in deferred
acquisition costs of $18,288,000 due principally to its growth in statutory
premium volume. Deferred acquisition costs of the property and casualty segment
increased in 1999 by $4,194,000, with $2,830,000 arising from the deferred
acquisition costs of American Indemnity.
Accounts receivable are amounts due from property and casualty
insurance agents and brokers for premiums written, less commissions paid. These
receivables increased by 14 percent, or $6,436,000, over December 31, 1998. The
American Indemnity purchase contributed $1,586,000 of the growth. An increase in
property and casualty writings (before considering American Indemnity) accounted
for much of the remainder of the increase in accounts receivable.
An allowance for doubtful accounts of $899,000 has been established at
December 31, 1999, compared to $731,000 at December 31, 1998. The Company did
not experience difficulties in collecting balances from its agents in 1999 or
1998.
The Company's other assets are composed primarily of accrued investment
income, property and equipment (primarily land and buildings), and reinsurance
receivables (amounts due from the Company's reinsurers for losses and expenses).
LIABILITIES
The Company's largest liability is that of future policy benefits,
which relates exclusively to the life segment. The liability increased by
$126,161,000, or 22 percent, between December 31, 1999 and 1998. Future policy
benefits are increased immediately by the full premiums paid by policyholders
for annuity products and most universal life products. As these product lines
have grown, the future policy benefits have grown proportionately. Claims and
settlement expenses, which relate to the property and casualty segment, also
increased in 1999. Direct and assumed reserves established for losses and
expenses have increased $87,126,000, or 35 percent. Of this increase,
$79,370,000 relates to the purchase of American Indemnity.
12
$18,489,000, or seven percent. Decreases to equity included $26,241,000 of net
unrealized depreciation, $6,852,000 of declared dividends and $780,000 due to
the retirement of 31,637 shares of common stock. The net unrealized depreciation
resulted from unrealized losses of $11,201,000 on the Company's available-for-
sale equity portfolio, unrealized losses of $22,071,000 on the available-for-
sale fixed maturity securities, and unrealized gains of $7,031,000 related to
other investments and adjustments to deferred acquisition costs. The Company has
board authorization to purchase an additional 14,075 shares of the Company's
common stock. Net income increased the Company's stockholders' equity by
$15,384,000.
CASH FLOW AND LIQUIDITY
Most of the cash the Company receives is generated from insurance
premiums paid by policyholders and from investment income. Premiums are invested
in assets maturing at regular intervals in order to meet the Company's
obligations to pay policy benefits, claims and claim adjusting expenses. Net
cash provided by the Company's operating activities was $34,452,000 in 1999,
compared to $18,061,000 in 1998. Operating cash flows continue to be ample to
meet obligations to policyholders.
Short-term investments, composed of money market accounts and
fixed-income securities, are available for the Company's short-term cash needs.
In addition, the Company maintains a $20 million line of credit with a local
bank. 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 one. There is no loan balance outstanding as of December 31, 1999.
Interest expense in connection with the line of credit borrowing was $22,000 in
1999. During 1998, the Company borrowed funds against the line of credit, with a
maximum outstanding balance of $3,450,000. There was no loan balance outstanding
as of December 31, 1998. Interest expense in connection with the line of credit
borrowing was $11,000 in 1998.
REGULATION
The insurance industry is governed by the NAIC and individual state
insurance departments. These governing agencies are working on a project to
codify insurance statutory accounting practices. Currently, these practices are
prescribed in a variety of publications, as well as state laws, regulations and
general administrative rules. The Company expects the State of Iowa to adopt
codification by January 1, 2001, and the Company expects the new rules to have a
financial effect upon application. The Company has not yet determined this
impact. The changes would not affect the accompanying financial statements,
which are based on GAAP. Prior to implementation of the codified rules,
permitted statutory accounting practices are used when prescribed statutory
practices do not address the accounting for transactions. 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 to
identify companies that merit regulatory attention or the initiation of
regulatory action. At December 31, 1999, the life segment and all but one of the
property and casualty subsidiaries had capital well in excess of their required
levels. American Indemnity Company's risk-based capital was beneath the minimum
level prescribed by the NAIC. In response to the situation, the Company has made
the decision to reinsure the underwriting business of American Indemnity Company
in accordance with a 100 percent quota share reinsurance agreement effective
January 1, 2000, for all American Indemnity Company policies new or renewed on
or after January 1, 2000. This measure should bring American Indemnity Company's
capital back to a point that is in excess of required NAIC 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.
IMPACT OF YEAR 2000
In prior filings, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In 1999, the Company completed its final
programming and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission-critical information technology and non- information technology systems.
The Company believes that its systems successfully responded to the Year 2000
date change. The expenses incurred during 1999 in connection with Year 2000
planning, implementation and testing the Company's systems were not material.
The Company's total costs incurred in connection with the Year 2000 remediation
were approximately $1,500,000.
The Company's transition into the year 2000 has, to date, been considered
uneventful and successful and did not result in any noteworthy events with the
Company or its suppliers. However, the potential for problems resulting from
Year-2000 issues still exists.
13
Accordingly, the Company will continue to monitor it's systems, and will
maintain contact with its vendors concerning the status of their Year 2000
transition.
SUBSEQUENT EVENTS
In February 2000, the Board of Directors authorized the repurchase
of an additional 100,000 shares of the Company's stock. The total
number of shares that are now authorized for repurchase is 114,075.
CHAIRMAN'S REPORT
Recently, your Company has been doing very well, but you couldn't tell
it from the performance of its stock. Most financial service stocks have not
done well during the past year and, unfortunately, insurance stocks seem to have
been particularly out of favor. In fact, they are so far out of favor that not
even a dot.com in their name or a corner on the market for black tulip bulbs
would help their price. Many, including your stock in United Fire, are selling
below book value.
After five quarters of disappointing underwriting results for our
property and casualty business, experience improved in the third quarter of
1999, and the last two quarters have been quite satisfactory. For the year,
earnings were $15,384,000, or $1.53 per share, compared with $23,677,000 or
$2.28 in 1998. Operating earnings, earnings excluding realized gains, increased
52 percent to $13,476,000. In the last six months of the year, your Company
earned $11,879,000, compared with only $2,185,000 in the same period the
previous year. For the year, premiums earned increased 11 percent to
$273,051,000, and investment income also increased 11 percent to $75,317,000.
Total assets increased $217,122,000 to $1,468,000,000.
For our property and casualty segment, the combined ratio improved six
points to 109 percent, which is approximately in line with what we expect the
industry's results to be. For the last six months, our combined ratio was 106
percent. A better indicator of the improvement in your Company's underwriting
fortunes would be a comparison excluding the business of the American Indemnity,
which we acquired on August 10, 1999. When the business written by the American
Indemnity is excluded from the calculation, our combined ratio improved by eight
points to 107 percent. Excluding the American Indemnity, premiums written
increased 7 percent to $237,000,000. Direct catastrophe losses for the year
totaled $10,000,000 (before tax), down from $21,000,000 (before tax) in 1998.
United Life Insurance Company continues to contribute significantly to
our earnings. Earnings for the year were $9,322,000, down 12 percent from
$10,614,000 for 1998. 1998's earnings benefited from reserve adjustments made in
the last quarter of that year, which amounted to $1,615,000. Statutory premiums
written, which include $146,000,000 of individual annuities, increased 12
percent to $173,000,000. In the past four years, premiums written have nearly
doubled. The company that one of the rating agencies criticized for becoming an
asset accumulator has now accumulated $825,293,000 in assets and an equity of
$103,993,000. We may not know what we're doing, but we seem to be doing it very
well. United Life's return on average invested assets was 7.5 percent, compared
to 7.7 percent in 1998.
Last year, we described the development of our Web Site and featured
our Home Page on the cover of our Annual Report. We're so proud of it, we
decided to use it again, but changed the color. Nearly all our agents have now
been trained on the use of our Web Site, and many are using its interactive
capabilities to secure quotes and obtain up to-date claim and account
information. It is averaging 1,750 visits per week. It can be accessed at
www.unitedfiregroup.com. Unlike many companies doing business on the internet,
we make a profit and have had no problem handling our Christmas returns.
On March 4,1999, we entered into an agreement to acquire the American
Indemnity Financial Corporation of Galveston, Texas. The transaction was
consummated on August 10th. The American Indemnity Group is comprised of four
insurance companies, three of which are domiciled in Texas. In 1999 it wrote
approximately $62,000,000 in direct premiums, principally in the states of
Texas, Florida, Louisiana and Alabama. Despite the Galveston address its coastal
exposures are minimal. Its book of business is predominantly small commercial
risks and is very comparable to our own. The profile of its agencies is similar
to ours and its non-Texas business fits well with that of the Lafayette
Insurance Co., expanding it into two additional states, Alabama and Tennessee.
We concluded it was a good fit and would be a good way to expand our base.
The acquisition of American Indemnity is the seventh such transaction
in which we've been involved since I joined the Company in the mid-'50s (there
were at least three others of which I am aware prior to then), so growth by
acquisition is not a new strategy for your Company. Some have worked out well
and others have not. This time, as I told our staff,
14
"I think I finally got it right!" At least I hope so! We're optimistic. One of
our guiding principles has been to never bet the family farm on any one deal. An
AOL/Time-Warner deal is not our style.
While only five months elapsed between the date the acquisition was
announced and the deal closed, at times, it seemed like an eternity. The
transaction had to be reviewed by the F. T. C., the S. E. C. and three state
insurance departments. To truly appreciate our system of government, everyone
should go through that experience at least once. Then people would understand
what politicians really mean when they cry out for more regulation. No rational
person could create such a system.
(Recently I read an article that described the Russian bureaucracy as a
labyrinth. Don't worry, the Russians have nothing on us.)
One of those insurance departments, the department of a state in which
we are licensed and have been doing business for over forty years, required not
only all our Officers and Directors to be fingerprinted, but my mother too. So
one day I went out to the retirement home where she lives and drove her to the
Cedar Rapids Police Station. For her, it was a great adventure and gave her
something to tell the "girls" about that evening. I have no doubt the citizens
of Colorado sleep easier at night knowing their insurance department has the
fingerprints of my 97-year-old mother on file.
There are many theories on what it will take to reverse the
underwriting cycle. One is the "big blow" theory that postulates what we need is
another hurricane like Andrew. Then there is the "surplus-surplus" theory that
prays for a bad stock market and its corollary, the negative cash flow theory.
With Reliance selling its most profitable operation, its surety business, to The
Travelers, who just a few years ago exited the business, and CGU putting all of
its United States operations up for sale, maybe things are about to get better.
If not, perhaps the ancient Aztecs have it right and what the gods really want
is a human sacrifice.
Last year, Congress finally enacted legislation revamping how financial
institutions are to be regulated. Apparently the members of Congress and the
lobbyists who have been living off this issue for years finally came to the
conclusion they had milked it for all it was worth, so they might as well take
some action. Among the bill's provisions is one which will permit banks,
insurance companies and securities dealers to acquire each other. This is
supposed to usher in the wonderful world of "one-stop" financial services. The
only problem is that this may be the revolution nobody wants except the
investment bankers who have visions of collecting fat fees for arranging such
deals. Past attempts at bundling financial services together (the concept of
"one-stop" financial services is not new) have not been roaring successes. The
financial services customer knows what he or she wants and we believe that what
he or she wants is suppliers that are good at what they do and not a pretty red
umbrella. Anyway the internet may well make the whole question moot as customers
learn to surf the "net" to find the best deal. This only lays credence to the
proposition that by the time Congress finally addresses a problem, the problem
has probably resolved itself.
No commentary on the last year of the millenium (although it really
wasn't) would be complete without some mention of the bug that didn't bite, Y2K.
I suppose we will never know how much this foolishness cost. The expenses
incurred can be divided into two categories. The necessary expenses, those
incurred to rewrite computer programs and test the systems (this work had
largely been completed prior to 1999) and the ridiculous ones incurred to
produce paper to fill other people's files. With the preparation of emergency
plans, making of filings and conducting of audits, by year-end this part of the
fiasco took on the appearance of a Chinese fire drill. Then "poof," nothing
happened! Cassandra struck out again. Oh well, our Board Meetings should be a
lot shorter now that we don't have Y2K to talk about.
Once again, Ward Financial Group named your company one of the 50
outstanding property and casualty companies in the United States, based on
performance and security.
Last year, I offered some investment advice about insurance stocks. It
was bad advice and I hope no one took it. If you did, I'm sorry, but if it's any
consolation, unfortunately so did I!
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has exposure to market risk arising from potential losses
due to adverse changes in interest rates and market prices. The Company's
primary market risk exposure is changes in interest rates, although the Company
has some exposure to changes in equity prices and limited exposure to foreign
currency exchange rates.
The active management of market risk is integral to the Company's
operations. Investment guidelines are in place that define the overall framework
for managing the Company's market and other investment risks, including
accountability and controls. In addition, the Company has specific investment
policies for each of its subsidiaries that delineate the investment limits and
strategies that are appropriate, given each entity's liquidity, surplus, product
and regulatory requirements. In response to market risk, the Company may respond
by rebalancing its existing asset portfolio, or by changing the character of
future investment purchases.
15
The Company's interest rate risk is the price sensitivity of a
fixed-income security to changes in interest rates. One of the measures that the
Company uses to quantify this exposure is duration, which relates primarily to
the life insurance segment and measures the sensitivity of the fair value of
assets and liabilities to changes in interest rates. The Company's life segment
had $502,274,000 in deferred annuity liabilities that are specifically allocated
to fixed-income securities. The management of these investments concentrates
mostly upon the proper matching of the duration of the deferred annuity
obligations and that of the assets supporting these obligations. This is done by
projecting asset and liability cash flows under a variety of market
interest-rate scenarios. Duration is calculated by revaluing these cash flows at
alternative levels of interest rates, and determining the change in discounted
value from that developed using current market interest rates. The projections
include assumptions regarding asset prepayment and extension risk, and the
effect of varying market interest rate conditions on lapse and partial
withdrawal activity. Based upon these projections, at current levels of interest
rates, the duration of the assets supporting deferred annuity liabilities is
0.10 years longer than the projected duration of the liabilities. If interest
rates increase by 100 basis points, this difference would be expected to narrow
to .01 years.
Based upon the information and assumptions in effect at December 31,
1999, management estimates that an immediate increase of 100 basis points in
interest rates for all of its interest-sensitive financial instruments would
result in a net hypothetical loss in fair value of $22,718,000, net of tax. The
Company has included corresponding changes in certain deferred annuity
liabilities in this sensitivity analysis. The selection of a 100 basis point
immediate parallel 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 such an event.
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/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. Assuming an immediate decrease in market prices of 10 percent
for equity securities, the hypothetical loss in fair value is estimated to be
$10,915,000. 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, 1999, there were no open covered call options.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
- - - - - - -------------------------------------------------------------------------------------------------------------
(Dollars in Thousands
Except Number of Shares)
- - - - - - -------------------------------------------------------------------------------------------------------------
ASSETS 1999 1998
- - - - - - -------------------------------------------------------------------------------------------------------------
INVESTMENTS (Notes 2 and 3)
Fixed maturities
Held-to-maturity, at amortized cost (market value $314,168 in 1999
and $626,180 in 1998) $ 311,152 $ 591,237
Available-for-sale, at market (amortized cost $800,467 in 1999
and $320,171 in 1998) 768,307 321,966
Equity securities (cost $38,755 in 1999 and $23,450 in 1998) 109,148 111,076
Mortgage loans -- 2,777
Policy loans 8,645 8,707
Other long-term investments, at market (cost $12,841 in 1999
and $11,517 in 1998) 13,328 14,368
Short-term investments 20,131 33,985
- - - - - - -------------------------------------------------------------------------------------------------------------
$1,230,711 $1,084,116
CASH AND CASH EQUIVALENTS 9,749 --
ACCRUED INVESTMENT INCOME (Note 3) 19,857 16,130
ACCOUNTS RECEIVABLE, (net of allowance for doubtful accounts
of $899 in 1999 and $731 in 1998) 51,304 44,868
DEFERRED POLICY ACQUISITION COSTS 90,074 67,592
PROPERTY AND EQUIPMENT, primarily land and buildings, at cost,
Less accumulated depreciation of $20,284 in 1999 and $15,984 in 1998 16,863 13,334
REINSURANCE RECEIVABLES (Note 5) 29,715 12,910
PREPAID REINSURANCE PREMIUMS 3,019 2,923
INTANGIBLES 8,044 817
INCOME TAXES RECEIVABLE (Note 8) 1,169 3,757
OTHER ASSETS 7,211 4,147
- - - - - - -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,467,716 $1,250,594
=============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Future policy benefits and losses, claims and settlement expenses (Notes 5 and 6)
Property and casualty insurance $ 338,243 $ 251,117
Life insurance (Note 3) 701,350 575,189
Unearned premiums 148,472 116,418
Accrued expenses and other liabilities 22,043 18,922
Employee benefit obligations (Note 9) 12,385 9,813
Deferred income taxes (Note 8) 7,430 22,853
- - - - - - -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $1,229,923 $ 994,312
- - - - - - -------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $3.33 1/3 par value; authorized 20,000,000 shares (Note 12)
10,060,084 shares issued and outstanding in 1999
10,091,721 shares issued and outstanding in 1998 $ 33,534 $ 33,639
Additional paid-in capital 7,252 7,927
Retained earnings (Note 7) 163,953 155,421
Accumulated other comprehensive income, net of tax 33,054 59,295
- - - - - - -------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 237,793 $ 256,282
- - - - - - -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,467,716 $1,250,594
=============================================================================================================
The Notes to Consolidated Financial Statements are an integral part of these statements.
17
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- - - - - - ----------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data
and Number of Shares)
- - - - - - ----------------------------------------------------------------------------------------------------------
1999 1998 1997
- - - - - - ----------------------------------------------------------------------------------------------------------
REVENUES
Net premiums earned (Note 5) $ 273,051 $ 245,727 $ 244,939
Investment income, net (Note 2) 75,317 67,928 61,686
Realized investment gains and other income (Note 2) 2,936 22,796 2,676
Commission and policy fee income 1,912 1,815 1,829
- - - - - - ----------------------------------------------------------------------------------------------------------
$ 353,216 $ 338,266 $ 311,130
- - - - - - ----------------------------------------------------------------------------------------------------------
BENEFITS, LOSSES AND EXPENSES
Losses and settlement expenses $ 197,291 $ 191,388 $ 159,199
Increase in liability for future policy benefits 5,157 3,707 5,016
Amortization of deferred policy acquisition costs 49,863 47,892 50,269
Other underwriting expenses 51,401 40,315 35,968
Interest on policyholders' accounts 32,286 26,568 22,510
- - - - - - ----------------------------------------------------------------------------------------------------------
$ 335,998 $ 309,870 $ 272,962
- - - - - - ----------------------------------------------------------------------------------------------------------
Income before income taxes $ 17,218 $ 28,396 $ 38,168
Federal income taxes (Note 8) 1,834 4,719 9,436
- - - - - - ----------------------------------------------------------------------------------------------------------
NET INCOME $ 15,384 $ 23,677 $ 28,732
==========================================================================================================
Earnings available to common shareholders (Note 12) $ 15,834 $ 23,677 $ 28,732
==========================================================================================================
Weighted average common shares outstanding (Note 12) 10,079,563 10,393,930 10,727,440
==========================================================================================================
Basic and diluted earnings per common share (Note 12) $ 1.53 $ 2.28 $ 2.68
==========================================================================================================
The Notes to Consolidated Financial Statements are an integral part of these statements.
18
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- - - - - - ------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data and Number of Shares)
- - - - - - ------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Additional Comprehensive
Common Paid-In Retained Income, Net
Stock Capital Earnings of Tax Total
- - - - - - ------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 $ 35,759 $ 9,342 $ 139,933 $ 42,825 $ 227,859
Net income -- -- 28,732 -- 28,732
Change in net unrealized
appreciation (1) -- -- -- 27,388 27,388
- - - - - - ------------------------------------------------------------------------------------------------------------------
Total comprehensive income (Note 13) 56,120
Cash dividend declared on
common stock $.63 per share -- -- (6,759) -- (6,759)
Purchase and retirement of
390 shares of common stock (1) (11) -- -- (12)
- - - - - - ------------------------------------------------------------------------------------------------------------------
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 13) 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 13) (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
==================================================================================================================
(1) The change in net unrealized appreciation (depreciation) is net of
reclassification adjustments and income taxes.
The Notes to Consolidated Financial Statements are an integral part of these
statements.
19
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- - - - - - ----------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- - - - - - ----------------------------------------------------------------------------------------------------
1999 1998 1997
- - - - - - ----------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net Income $ 15,384 $ 23,677 $ 28,732
- - - - - - ----------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities
Net bond discount accretion 88 (1,428) (307)
Depreciation and amortization 3,078 468 1,117
Realized net investment gains (2,303) (22,793) (2,610)
Realized net gain on sale of property -- (3) --
Changes in:
Accrued investment income (2,795) (1,971) (1,964)
Accounts receivable 6,338 (808) (627)
Deferred policy acquisition costs (18,092) (7,377) (4,132)
Reinsurance receivables 5,493 1,520 (1,940)
Prepaid reinsurance premiums 3,174 1,141 165
Income taxes receivable/payable 2,588 (7,064) 4,016
Other assets (1,372) 3,044 (53)
Future policy benefits and losses, claims and
settlement expenses 19,300 20,258 16,652
Unearned premiums 3,275 8,122 3,288
Accrued expenses and other liabilities (14,214) 549 (1,454)
Employee benefit obligations 2,572 1,148 1,901
Deferred income taxes (1,293) 609 427
Other, net 13,231 (1,031) --
- - - - - - ----------------------------------------------------------------------------------------------------
Total adjustments $ 19,068 $ (5,616) $ 14,479
- - - - - - ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 34,452 $ 18,061 $ 43,211
- - - - - - ----------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Proceeds from sale of available-for-sale investments $ 35,653 $ 78,471 $ 27,390
Proceeds from call and maturity of held-to-maturity
investments 35,398 101,180 62,834
Proceeds from call and maturity of available-for-sale
investments 95,762 31,084 5,298
Proceeds from sale of other investments 102,256 38,956 62,189
Purchase of investments held-to-maturity (1,682) (14,461) (89,519)
Purchase of investments available-for-sale (295,670) (258,744) (105,408)
Purchase of other investments (86,856) (55,972) (53,429)
Proceeds from sale of property and equipment 1,469 3,009 1,942
Purchase of property and equipment (1,429) (2,120) (4,619)
Acquisition of property and casualty company, net of
cash acquired (22,249) -- --
- - - - - - ----------------------------------------------------------------------------------------------------
Net cash used in investing activities $(137,348) $ (78,597) $ (93,322)
- - - - - - ----------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Policyholders' account balances
Deposits to investment and universal-life-type contracts $ 189,715 $ 158,491 $ 127,644
Withdrawals from investment and universal-life-type
contracts (69,432) (66,648) (82,881)
Purchase and retirement of common stock (780) (26,721) (12)
Payment of cash dividends (6,858) (6,964) (6,651)
- - - - - - ----------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 112,645 $ 58,158 $ 38,100
- - - - - - ----------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents $ 9,749 $ (2,378) $ (12,011)
Cash and Cash Equivalents at Beginning of Year -- 2,378 14,389
- - - - - - ----------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 9,749 $ -- $ 2,378
====================================================================================================
The Notes to Consolidated Financial Statements are an integral part of these statements.
20
NOTES TO CONSOLIDATED FINANCIAL 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 and its insurance subsidiaries (the
"Company") 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 American Indemnity 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 1999 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 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. These associations are 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 and 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
21
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, 1999, an adjustment to increase deferred policy
acquisition costs of $12,808,000 was made with a corresponding decrease to
accumulated other comprehensive income. In 1998, the adjustment was to reduce
deferred policy acquisition costs by $726,000.
Liabilities for future policy benefits are computed by the net level
premium method using interest assumptions ranging from 4.5 percent to 8.0
percent 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. If, however, a permanent impairment occurs in a security, the
Company writes the security down to the new value. Available-for-sale
fixed-income securities, equity securities and other long-term investments are
recorded at fair value. Mortgage loans are recorded at the unpaid balance
amount. Policy loans and short-term investments are recorded at cost. Included
in investments at December 31, 1999 and 1998, are securities on deposit with
various regulatory authorities as required by law with carrying values of
$755,436,000 and $651,173,000, 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.
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 three
months or less. Negative cash balances are included in accrued expenses and
other liabilities. Income taxes paid during 1999, 1998 and 1997 were $505,000,
$11,201,000 and $5,789,000, respectively. There were no other significant
payments of interest other than interest credited on policyholders' accounts in
1999, 1998 or 1997.
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.
AMORTIZATION OF INTANGIBLES
Intangibles, including goodwill and agency relationships, are being
amortized by the straight-line method over periods of up to 28 years.
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.
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
22
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.
Effective January 1, 1999, the Company adopted Statement of Position
("SOP") 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments". The accounting guidance of this SOP focuses on
the timing of recognition and measurement of liabilities for insurance-related
assessments. Guidance is also provided on recording assets presenting future
recoveries of assessments through premium tax offsets or policy surcharges. The
SOP was issued to reduce diversity in practice and to improve comparability and
disclosure. Under SOP 97-3, the Company estimates its liabilities for
insurance-related assessments, as opposed to recording the liability and expense
when notified by insurance regulators. This change in timing did not have a
material effect on the Company's Consolidated Financial Statements.
Effective January 1, 1999, the Company adopted SOP 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use". SOP
98-1 requires that certain costs related to the development or purchase of
internal- use software be capitalized and amortized over the estimated useful
life of the software. The SOP also requires that costs related to the
preliminary project stage and the post-implementation and operations stage of an
internal-use computer software development project be expensed as incurred. SOP
98-1 changed the timing of the Company's software development expenses and the
impact did not have a material effect on the Company's Consolidated Financial
Statements.
SOP 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance
Contracts That Do Not Transfer Insurance Risk," is effective for financial
statements for fiscal years beginning after June 15, 1999. The SOP provides
guidance on accounting for insurance and reinsurance contracts that do not
transfer insurance risk. All of the Company's reinsurance agreements are
risk-transferring arrangements, accounted for according to SFAS No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts." The impact of adopting SOP 98-7 will not have a material effect on
the Company's Consolidated Financial Statements.
23
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,
1999 and 1998 is as follows.
- - - - - - -------------------------------------------------------------------------------------------------------------
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
=============================================================================================================
24
- - - - - - -------------------------------------------------------------------------------------------------------------
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 $ 22,152 $ 489 $ -- $ 22,641
Mortgage-backed securities 13,923 1,211 -- 15,134
All others 1,773 427 -- 2,200
States, municipalities and political subdivisions 218,465 15,495 21 233,939
Foreign 6,480 449 -- 6,929
Public utilities 51,466 2,323 -- 53,789
Corporate bonds
Collateralized mortgage obligations 86,382 4,109 753 89,738
All other corporate bonds 190,596 11,548 334 201,810
- - - - - - -------------------------------------------------------------------------------------------------------------
Total held-to-maturity $591,237 $36,051 $1,108 $626,180
=============================================================================================================
Available-for-sale
Fixed maturities
Bonds
United States
Government, government agencies and authorities
Collateralized mortgage obligations $ 31,054 $ 1,347 $ -- $ 32,401
Mortgage-backed securities 45 3 -- 48
All others 9,814 155 37 9,932
States, municipalities and political subdivisions 53,645 1,286 69 54,862
All foreign bonds 11,734 -- 937 10,797
Public utilities 26,198 295 88 26,405
Corporate bonds
Collateralized mortgage obligations 6,162 296 -- 6,458
All other corporate bonds 181,519 2,865 3,321 181,063
- - - - - - -------------------------------------------------------------------------------------------------------------
Total available-for-sale fixed maturities $320,171 $ 6,247 $4,452 $321,966
- - - - - - -------------------------------------------------------------------------------------------------------------
Equity securities
Common stocks
Public utilities $3,525 $ 9,408 $ -- $ 12,933
Banks, trust and insurance companies 9,092 53,628 -- 62,720
All other common stocks 9,992 24,631 324 34,299
Nonredeemable preferred stocks 841 289 6 1,124
- - - - - - -------------------------------------------------------------------------------------------------------------
Total available-for-sale equity securities $ 23,450 $87,956 $ 330 $111,076
- - - - - - -------------------------------------------------------------------------------------------------------------
Total available-for-sale $343,621 $94,203 $4,782 $433,042
=============================================================================================================
Other long-term investments $ 11,517 $ 2,894 $ 43 $ 14,368
=============================================================================================================
25
The amortized cost and fair value of held-to-maturity and available-for-sale
fixed maturities at December 31, 1999, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
- - - - - - ------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- - - - - - ------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999 Held-to-maturity Available-for-sale
- - - - - - ------------------------------------------------------------------------------------------------------
Amortized Cost Fair Value Amortized Cost Fair Value
- - - - - - ------------------------------------------------------------------------------------------------------
Due in one year or less $ 12,608 $ 12,755 $ 10,756 $ 10,755
Due after one year through five years 59,276 60,135 206,479 202,047
Due after five years through ten years 76,917 78,159 294,520 278,916
Due after ten years 122,744 123,653 177,329 165,870
Mortgage-backed securities 9,475 10,071 14,900 14,619
Collateralized mortgage obligations 30,132 29,395 96,483 96,100
- - - - - - ------------------------------------------------------------------------------------------------------
$311,152 $314,168 $800,467 $768,307
======================================================================================================
Proceeds from sales of available-for-sale investments during 1999, 1998 and 1997
were $35,653,000, $78,471,000, and $27,390,000, respectively. Gross gains of
$2,920,000, $23,208,000, and $3,242,000, respectively, were realized on those
sales. Gross losses of $895,000, $385,000 and $15,000, respectively, were
realized on those sales in 1999, 1998 and 1997.
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, 1999 1998 1997
- - - - - - ----------------------------------------------------------------------------------------------------
Realized investment gains (losses)
Fixed maturities $ 577 $ (145) $ (401)
Equity securities 1,678 22,448 3,011
Other investments 48 493 --
- - - - - - ----------------------------------------------------------------------------------------------------
$ 2,303 $ 22,796 $ 2,610
- - - - - - ----------------------------------------------------------------------------------------------------
Net changes in unrealized investment appreciation (depreciation)
Available-for-sale fixed maturities,
equity securities and other long-term investments $(53,552) $(15,491) $ 42,187
Deferred policy acquisition costs 13,181 (726) --
Income taxes 14,130 5,299 (14,799)
- - - - - - ----------------------------------------------------------------------------------------------------
$(26,241) $(10,918) $ 27,388
====================================================================================================
Net changes in unrealized investment appreciation
(depreciation), fixed maturities $(65,882) $ 2,318 $ 18,432
====================================================================================================
The net investment income for the years ended December 31, 1999, 1998 and 1997
is composed of the following.
- - - - - - ----------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- - - - - - ----------------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- - - - - - ----------------------------------------------------------------------------------------------------
Investment income
Interest on fixed maturities $70,134 $ 63,748 $ 56,837
Dividends on equity securities 2,899 2,571 2,526
Interest on other long-term investments 3,332 2,867 3,228
Interest on mortgage loans 105 218 226
Interest on policy loans 676 666 616
Other 1,688 1,232 1,832
- - - - - - ----------------------------------------------------------------------------------------------------
Total investment income $78,834 $ 71,302 $ 65,265
Less investment expenses 3,517 3,374 3,579
- - - - - - ----------------------------------------------------------------------------------------------------
Investment income, net $75,317 $ 67,928 $ 61,686
====================================================================================================
26
NOTE 3.
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.
Market values for collateralized mortgage obligations were provided by various
data vendors. 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, 1999 and
1998.
The estimated fair value of mortgage loans was based on the estimated
discounted future cash flows using 6.25 percent at December 31, 1998.
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, are based on a discount rate of 7.0 percent at December 31, 1999
and 6.25 percent at December 31, 1998. The fair value of annuities currently in
an accumulation phase is based on the net cash surrender value. The fair value
of covered call options is based on a quoted market price.
A summary of the carrying value and estimated fair value of assets and
liabilities meeting the definition of financial instruments at December 31, 1999
and 1998 is as follows.
- - - - - - -----------------------------------------------------------------------------------
(Dollars in Thousands)
- - - - - - -----------------------------------------------------------------------------------
At December 31, 1999 1998
- - - - - - -----------------------------------------------------------------------------------
FAIR CARRYING Fair Carrying
Assets VALUE VALUE Value Value
- - - - - - -----------------------------------------------------------------------------------
Investments
Held-to-maturity fixed maturities $314,168 $311,152 $626,180 $591,237
Available-for-sale fixed maturities 768,307 768,307 321,966 321,966
Equity securities 109,148 109,148 111,076 111,076
Mortgage loans -- -- 2,857 2,777
Policy loans 8,645 8,645 8,707 8,707
Other long-term investments 13,328 13,328 14,368 14,368
Short-term investments 20,131 20,131 33,985 33,985
Other Assets
Accrued investment income 19,857 19,857 16,130 16,130
- - - - - - -----------------------------------------------------------------------------------
Liabilities
- - - - - - -----------------------------------------------------------------------------------
Policy Reserves
Annuity (Accumulations) $493,962 $520,274 $382,741 $400,869
Annuity (On-Benefits) 2,883 3,098 2,998 2,905
Structured settlements 795 940 443 738
Guaranteed investment contracts 2,741 2,761 2,129 2,150
Covered call options -- -- 421 421
- - - - - - -----------------------------------------------------------------------------------
NOTE 4.
SHORT-TERM BORROWINGS
The Company maintains a $20 million line of credit with a local bank.
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 one. There is no loan balance outstanding as of December 31, 1999.
Interest expense in connection with the line of credit borrowing was $22,000 in
1999. During 1998, the Company borrowed funds against the line of credit, with a
maximum outstanding balance of $3,450,000, and recorded interest expense of
$11,000. There was no loan balance outstanding as of December 31, 1998.
27
NOTE 5.
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. Earned
premiums ceded were $27,206,000, $22,349,000 and $25,716,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. The Company believes all amounts
are collectible with regard to reinsurance receivables. 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. Assumed premiums earned
for the years ended December 31, 1999, 1998 and 1997 were $34,289,000,
$33,571,000 and $40,198,000, respectively.
LIFE SEGMENT
United Life Insurance Company 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
Insurance Company 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 $396,382,000 and $358,022,000 at December
31, 1999 and 1998, respectively. Approximately 63 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 6.
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 1999, 1998 and 1997 (net of reinsurance
amounts). Changes in the reserves are reflected in the income statement for the
year when the changes are made. Loss and LAE development on claims occurring in
prior years benefited underwriting profit (before tax) by $25,135,000 in 1999
and $26,615,000 in 1998. These gains are due in part to the effects of settling
reported (case) and unreported (IBNR) reserves established in prior years for
less than expected.
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 were for losses that occurred in prior accident
years. This would have negatively impacted the 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.
- - - - - - -------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- - - - - - -------------------------------------------------------------------------------------------------
At December 31, 1999 1998
- - - - - - -------------------------------------------------------------------------------------------------
Gross liability for losses and LAE at beginning of year $ 251,117 $ 231,768
Less reinsurance receivables 8,111 12,856
- - - - - - -------------------------------------------------------------------------------------------------
Net liability for losses and LAE at beginning of year $ 243,006 $ 218,912
Net liability for losses and LAE at acquisition date 51,661 --
Provision for losses and LAE for claims occurring in the current year 211,575 206,603
Decrease in estimated losses and LAE for claims occurring in prior years (25,135) (26,615)
- - - - - - -------------------------------------------------------------------------------------------------
$ 481,107 $ 398,900
- - - - - - -------------------------------------------------------------------------------------------------
Losses and LAE payments for claims occurring during
Current year $ 94,443 $ 92,906
Prior years 76,027 62,988
- - - - - - -------------------------------------------------------------------------------------------------
$ 170,470 $ 155,894
- - - - - - -------------------------------------------------------------------------------------------------
Net liability for losses and LAE at end of year $ 310,637 $ 243,006
Plus reinsurance receivables 27,606 8,111
- - - - - - -------------------------------------------------------------------------------------------------
Gross liability for losses and LAE at end of year $ 338,243 $ 251,117
=================================================================================================
28
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.
NOTE 7.
STATUTORY REPORTING, CAPITAL REQUIREMENTS AND DIVIDEND AND RETAINED EARNINGS
RESTRICTIONS
Statutory stockholders' surplus and net income at December 31, 1999, 1998 and
1997 and for the years then ended are as follows.
- - - - - - --------------------------------------------------------------------------------
(Dollars in Thousands)
- - - - - - --------------------------------------------------------------------------------
Statutory
Stockholders' Statutory
Surplus Net Income
- - - - - - --------------------------------------------------------------------------------
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
- - - - - - --------------------------------------------------------------------------------
1997
Property and casualty $231,326 $23,627
Life, accident and health 53,095 2,331
================================================================================
The Company and its insurance subsidiaries prepare their statutory
financial statements in conformity with practices prescribed or permitted by
their states of domicile. Prescribed statutory accounting practices include a
variety of publications of the National Association of Insurance Commissioners
("NAIC"), as well as state laws, regulations and general administrative rules.
The NAIC is currently working on a project to codify insurance statutory
accounting practices. The Company expects the State of Iowa to adopt
codification by January 1, 2001, and the Company expects the new rules to have a
financial effect upon application. The Company has not yet determined this
impact. The changes would not affect the accompanying financial statements,
which are based on GAAP. Prior to implementation of the codified rules,
permitted statutory accounting practices are used when prescribed statutory
practices do not address the accounting for transactions. 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, 1999, the life
segment and all but one of the property and casualty subsidiaries had capital
well in excess of their required levels. American Indemnity Company's risk-based
capital was beneath the minimum level prescribed by the NAIC. In response to the
situation, the Company has made the decision to reinsure the underwriting
business of American Indemnity Company in accordance with a 100 percent quota
share reinsurance agreement effective January 1, 2000, for all American
Indemnity Company policies new or renewed on or after January 1, 2000. This
measure should bring American Indemnity Company's capital back to a point that
is in excess of required NAIC 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
$134,195,000 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 1999 or 1998.
29
NOTE 8.
FEDERAL INCOME TAXES
Federal income tax expense is composed of the following.
- - - - - - --------------------------------------------------------------------------------
(Dollars in Thousands)
- - - - - - --------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- - - - - - --------------------------------------------------------------------------------
Current $ 541 $4,110 $9,009
Deferred 1,293 609 427
- - - - - - --------------------------------------------------------------------------------
Total $1,834 $4,719 $9,436
================================================================================
A reconciliation of income tax expense computed at the applicable Federal tax
rate of 35 percent in 1999, 34 percent in 1998, and 35 percent in 1997 to the
amount recorded in the Consolidated Financial Statements is as follows.
- - - - - - -------------------------------------------------------------------------------------------
(Dollars in Thousands)
- - - - - - -------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- - - - - - -------------------------------------------------------------------------------------------
Computed expected rate $ 6,026 $ 9,655 $ 13,359
Reduction for tax-exempt municipal bond interest income (4,994) (5,023) (4,686)
Reduction for nontaxable dividend income (631) (557) (581)
Other, net 1,433 644 1,344
- - - - - - -------------------------------------------------------------------------------------------
Federal Income Taxes, as provided $ 1,834 $ 4,719 $ 9,436
===========================================================================================
The significant components of the net deferred tax liability at December 31,
1999 and 1998 are as follows.
- - - - - - -----------------------------------------------------------------------------------------
(Dollars in Thousands)
- - - - - - -----------------------------------------------------------------------------------------
At December 31, 1999 1998
- - - - - - -----------------------------------------------------------------------------------------
Deferred tax liabilities
Deferred acquisition costs $ 24,039 $ 21,046
Net unrealized appreciation on investment securities 17,743 32,248
Depreciation on assets 1,216 948
Net bond discount accretion and premium amortization 1,177 1,452
Other 3,151 1,091
- - - - - - -----------------------------------------------------------------------------------------
Gross deferred tax liability $ 47,326 $ 56,785
- - - - - - -----------------------------------------------------------------------------------------
Deferred tax assets
Financial statement reserves in excess of income tax reserves $ 22,765 $ 19,376
Unearned premium adjustment 9,107 6,800
Postretirement benefits other than pensions 2,761 1,935
Salvage and subrogation 662 676
Pension 1,685 958
Alternative minimum tax (AMT) credit carryforwards -- 778
Net operating loss carryforwards (NOL) 14,641 --
Other 3,414 3,409
- - - - - - -----------------------------------------------------------------------------------------
Gross deferred tax assets $ 55,035 $ 33,932
Valuation Allowance (15,139) --
- - - - - - -----------------------------------------------------------------------------------------
Net deferred tax liability $ 7,430 $ 22,853
=========================================================================================
The Company has tax net operating loss ("NOL") carryforwards totaling
$42,912,023 as of December 31,1999. These NOL carryforwards were purchased by
the Company when it acquired American Indemnity. These NOL carryforwards expire
as follows: 2000: $4,927,522; 2001: $2,271,256; 2002: $621,205; 2003:
$4,596,950; 2004: $1,246,728; 2005: $118,137; 2006: $43,352; 2007: $13,450;
2008: $13,410; 2009: $4,604,277; 2010: $989,347; 2011: $6,284,626; 2017:
$6,882,190; 2018: $5,175,066; 2019: $5,124,507. 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 established a valuation
allowance of $15,139,000 for deferred tax assets primarily relating to American
Indemnity's NOLs, which can only be used to offset future income of that
company. If the benefit of the American Indemnity NOLs is realized in the
future, it will result in a reduction of goodwill and be amortized into income
over its remaining life by reducing goodwill amortization expense.
30
NOTE 9.
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 the 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 the plan on a current basis to the extent
deductible under existing tax regulations. For 1999, the Company used December
31 as the date for measuring plan assets and liabilities. As permitted by SFAS
No. 87, "Employers' Accounting for Pensions," the Company used September 30 as
the date for measuring plan assets and liabilities in 1998 in order to obtain
information necessary for the preparation of the financial statements on a
timely basis.
The Company has a defined benefit postretirement health care plan that
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 service
in the plan. The plan is contributory, with retiree contributions adjusted
annually.
The employees of American Indemnity are covered by a separate
postretirement benefit plan, which provides health care and life insurance
benefits to retired employees, after reaching age 55 with 25 years of service,
age 60 with 20 years of service or age 65 with 15 years of service.
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 1999 and 1998. 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, 1999 1998 1999 1998
- - - - - - ----------------------------------------------------------------------------------------------
RECONCILIATION OF BENEFIT OBLIGATION
Obligation at beginning of year $ 23,277 $ 20,901 $ 7,993 $ 6,047
Service Cost 921 935 365 424
Interest cost 1,523 1,425 479 523
Participant contributions -- -- -- 57
Actuarial (gain) loss (3,214) 693 (1,907) 1,176
Benefit payments and adjustments (690) (677) 101 (234)
Acquisition 1,801 -- 2,087 --
- - - - - - ----------------------------------------------------------------------------------------------
Obligation at December 31 $ 23,618 $ 23,277 $ 9,118 $ 7,993
- - - - - - ----------------------------------------------------------------------------------------------
RECONCILIATION OF FAIR VALUE OF PLAN ASSETS
Fair value of plan assets at beginning of year $ 17,296 $ 16,565 $ -- $ --
Actual return on plan assets (147) 283 -- --
Employer contributions 500 1,125 (101) 177
Participant contribution -- -- -- 57
Benefit payments and adjustments (690) (677) 101 (234)
Acquisition 2,898 -- -- --
- - - - - - ----------------------------------------------------------------------------------------------
Fair value of plan assets at December 31 $ 19,857 $ 17,296 $ -- $ --
- - - - - - ----------------------------------------------------------------------------------------------
FUNDED STATUS
Funded status at December 31 $ (3,761) $ (5,981) $ (9,118) $ (7,993)
Unrecognized transition (asset) obligation -- (42) -- --
Unrecognized prior service cost 937 1,035 832 1,234
Unrecognized (gain) loss (784) 876 (491) 1,058
- - - - - - ----------------------------------------------------------------------------------------------
Accrued benefit cost $ (3,608) $ (4,112) $ (8,777) $ (5,701)
==============================================================================================
31
The following table provides the components of net periodic benefit cost for the
plans for 1999, 1998 and 1997.
- - - - - - -------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- - - - - - -------------------------------------------------------------------------------------------------
Pension benefits Other benefits
- - - - - - -------------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997 1999 1998 1997
- - - - - - -------------------------------------------------------------------------------------------------
PLAN COSTS
Service cost $ 921 $ 935 $ 805 $ 365 $ 424 $ 338
Interest cost 1,523 1,425 1,410 480 523 421
Expected return on plan assets (1,407) (1,324) (1,184) -- -- --
Amortization of transition (asset) (42) (48) (48) -- -- --
obligation
Amortization of prior service cost 97 97 97 142 173 40
Amortization of net loss -- -- -- 4 68 58
- - - - - - -------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 1,092 $ 1,085 $ 1,080 $ 991 $ 1,188 $ 857
=================================================================================================
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, 1999 1998 1999 1998
- - - - - - --------------------------------------------------------------------------------
Discount rate 7.50% 6.75% 7.50% 6.75%
Expected return on plan assets 8.25 8.00 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
1999. 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 covered health care benefits was assumed for 1999. The rate was assumed
to decrease gradually each year to a rate of 5.25 percent in 2005 and remain at
that level thereafter. For dental claims, a 6.0 percent annual rate of increase
was assumed for 1999, decreasing gradually to 4.75 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 percent change in assumed health
care cost trend rates would have the following effects.
The figures do not include amounts for the American Indemnity plan, as
the annual per capita contributions for the benefits provided to retired
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, 1999.
- - - - - - -------------------------------------------------------------------------------------------
(Dollars in thousands)
- - - - - - -------------------------------------------------------------------------------------------
1 Percent 1 Percent
Increase Decrease
- - - - - - -------------------------------------------------------------------------------------------
Effect on total of service and interest cost components of
Net periodic postretirement health care benefit cost $ 158 $ 133
Effect on the heath care component of the accumulated
Postretirement benefit obligation 1,316 1,105
- - - - - - -------------------------------------------------------------------------------------------
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, 1999, 1998 and 1997, was $503,000,
$883,000 and $936,000, 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 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, 1999, 1998 and 1997, the ESOP owned 123,733, 120,333 and 93,127
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 $60,000, $1,050,000 and zero in 1999, 1998 and 1997
respectively.
32
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. Pursuant to the plan, the granting of stock
options is made at the discretion of the Board of Directors. Certain employees
have been granted options to buy shares of the Company's stock at the market
value of the stock on the date of grant. The options are exercisable in
installments of 20 percent of the number of shares covered by the option each
year from the 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
ten 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.
A total of 6,021 employee stock options were granted in February, 1999
and April 1999. All options are outstanding as of December 31, 1999. No options
had been granted as of December 31, 1998. None of the options are exercisable as
of December 31, 1999. The remaining life on the options granted in February 1999
is 9.8 years, and for those granted in April 1999, the remaining life is 9.7
years. The exercise price of the unexercisable options is $29.25 for the
February 1999 options and $26.12 for the April 1999 options. The grant date fair
value of the employee stock options, as prescribed by SFAS No. 123 has been
determined to have an immaterial impact on net income and earnings per share.
NOTE 10.
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. The business is generated through approximately 2,150
independent agencies and brokers in 43 states, with 55 percent of the Company's
direct premiums originating in nine Midwestern states in 1999.
United Life Insurance Company underwrites and markets ordinary life
(primarily universal life), annuities (primarily single premium) and credit life
products to individuals and groups through approximately 1,200 independent
agencies in 24 states. 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 Life
Casualty 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 2,444 492 2,936
OTHER 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 0
- - - - - - --------------------------------------------------------------------------------------------------
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
==================================================================================================
33
- - - - - - --------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- - - - - - --------------------------------------------------------------------------------------------------
Property and Life
Casualty 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 20,981 1,815 22,796
Other 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
==================================================================================================
- - - - - - --------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- - - - - - --------------------------------------------------------------------------------------------------
Property and Life
Casualty Insurance Insurance Consolidated
- - - - - - --------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
- - - - - - --------------------------------------------------------------------------------------------------
Revenues
Net premiums earned $ 225,822 $ 19,231 $ 245,053
Net investment income 23,007 38,823 61,830
Realized investment gains 2,456 220 2,676
Other income 1,829 -- 1,829
- - - - - - --------------------------------------------------------------------------------------------------
Total reportable segments $ 253,114 $ 58,274 $ 311,388
- - - - - - --------------------------------------------------------------------------------------------------
Intersegment eliminations (145) (113) (258)
- - - - - - --------------------------------------------------------------------------------------------------
Total revenues $ 252,969 $ 58,161 $ 311,130
==================================================================================================
Net income before income taxes
Revenues $ 253,114 $ 58,274 $ 311,388
Benefits, losses and expenses 224,480 48,740 273,220
- - - - - - --------------------------------------------------------------------------------------------------
Total reportable segments $ 28,634 $ 9,534 $ 38,168
- - - - - - --------------------------------------------------------------------------------------------------
Intersegment eliminations (18) 18 --
- - - - - - --------------------------------------------------------------------------------------------------
Total net income before income taxes $ 28,616 $ 9,552 $ 38,168
- - - - - - --------------------------------------------------------------------------------------------------
Income tax expense 5,944 3,492 9,436
- - - - - - --------------------------------------------------------------------------------------------------
Net income $ 22,672 $ 6,060 $ 28,732
==================================================================================================
Assets
Total reportable segments $ 682,177 $ 596,323 $ 1,278,500
Intersegment eliminations (120,578) -- (120,578)
- - - - - - --------------------------------------------------------------------------------------------------
Total assets $ 561,599 $ 596,323 $ 1,157,922
==================================================================================================
Depreciation expense and property and equipment acquisitions for the years ended December 31,
1999, 1998 and 1997, are reflected in the property and casualty insurance segment.
34
NOTE 11.
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, 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 $ .29 $ .05 $ .63 $ .54 $ 1.53
===========================================================================================
Fiscal year ended December 31, 1998
Total revenues $ 80,229 $ 94,448 $ 79,312 $ 84,277 $338,266
===========================================================================================
Net income (loss) $ 8,882 $ 12,610 $ (1,963) $ 4,148 $ 23,677
===========================================================================================
Earnings (loss) per common share $ 0.83 $ 1.18 $ (.19) $ .41 $ 2.28
===========================================================================================
NOTE 12.
EARNINGS AND DIVIDENDS PER COMMON SHARE
Cash dividends per common share of $.68 and $.67 were declared in 1999
and 1998, 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 options' exercise price was greater than the average
market price of the common shares. The options were still outstanding as of
December 31, 1999.
NOTE 13.
COMPREHENSIVE INCOME
The following table sets forth the components of other comprehensive
income (loss), and the related tax effects, for the years 1999, 1998 and 1997.
- - - - - - -----------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- - - - - - -----------------------------------------------------------------------------------------------------------
Amount Income Tax Amount
Before Tax (Expense) Benefit Net of Tax
- - - - - - -----------------------------------------------------------------------------------------------------------
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)
===========================================================================================================
1997
Net unrealized appreciation arising during the period $ 44,797 $(15,679) $ 29,118
Less: reclassification for realized gains included
in income 2,610 (880) 1,730
- - - - - - -----------------------------------------------------------------------------------------------------------
Other comprehensive income $ 42,187 $(14,799) $ 27,388
===========================================================================================================
NOTE 14.
ACQUISITION
On August 10, 1999, the Company acquired 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 per share to be paid in two years,
subject to adjustments relating to indemnities. An escrow account with a balance
of $1,990,000 is included in the Company's consolidated balance sheets in other
assets for payment of the deferred consideration.
American Indemnity, 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 American Indemnity Lloyds. The American
Indemnity insurers offer personal and commercial lines of insurance through
independent agents.
35
The transaction was accounted for using the purchase method of
accounting. American Indemnity's results for the period August 10, 1999 through
December 31, 1999 are included in the consolidated statements of operations. The
purchase price paid for American Indemnity 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 approximately
$7,846,000 will be amortized on a straight-line basis for a period of ten years.
The following schedule summarizes the assets acquired and the liabilities
assumed as of August 10, 1999.
- - - - - - --------------------------------------------------------------------------------
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
================================================================================
In connection with the purchase, the Company developed a plan (the
"exit plan") to close certain branches and involuntarily terminate certain
employees of American Indemnity. A liability of $972,000 to reflect employee
termination benefits and future contractual lease payments related to abandoned
facilities was included in the allocation of the purchase price. The exit plan
was completed by December 31, 1999.
The following table presents the unaudited proforma results of operations for
1999, 1998 and 1997, had the acquisition occurred on January 1, 1997.
- - - - - - ----------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data)
- - - - - - ----------------------------------------------------------------------------
December 31, 1999 December 31, 1998 December 31, 1997
(Unaudited) (Unaudited) (Unaudited)
- - - - - - ----------------------------------------------------------------------------
Revenues $390,574 $407,555 $381,755
Net income 11,748 17,831 22,851
Basic and diluted
earnings per
share 1.17 1.72 2.13
- - - - - - ----------------------------------------------------------------------------
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.
36
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, 1999 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These consolidated financial statements and the
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 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 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, 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 taken as a whole. The supplementary data (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 17, 2000
37
INDEX TO SUPPLEMENTARY SCHEDULES
Consolidated Schedules
III - Supplementary Insurance Information 42
IV - Reinsurance 43
VI - Supplemental Information Concerning Property and Casualty
Insurance Operations 44
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.
38
SCHEDULE III. SUPPLEMENTARY INSURANCE INFORMATION
- - - - - - ----------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- - - - - - ----------------------------------------------------------------------------------------------------------
Future
Policy
Benefits,
Deferred Losses,
Policy Claims Earned Realized Net
Acquisition And Loss Unearned Premium Investment Investment
Costs Expenses Premiums Revenue Gains Income
- - - - - - ----------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31, 1999
PROPERTY AND CASUALTY $20,533 $ 338,243 $132,846 $247,054 $ 2,444 $23,477
LIFE, ACCIDENT AND HEALTH 69,541 701,350 15,626 25,997 492 51,840
- - - - - - ----------------------------------------------------------------------------------------------------------
TOTAL $90,074 $1,039,593 $148,472 $273,051 $ 2,936 $75,317
==========================================================================================================
(1) Accident and health insurance premiums written.
Year Ended
December 31, 1998
Property and casualty $16,339 $ 251,117 $100,080 $220,550 $20,981 $23,157
Life, accident and health 51,253 575,189 16,338 25,177 1,815 44,771
- - - - - - ----------------------------------------------------------------------------------------------------------
Total $67,592 $ 826,306 $116,418 $245,727 $22,796 $67,928
==========================================================================================================
(1) Accident and health insurance premiums written.
Year Ended
December 31, 1997
Property and casualty $18,235 $ 231,768 $100,769 $225,822 $ 2,456 $22,863
Life, accident and health 41,980 482,437 7,527 19,117 220 38,823
- - - - - - ----------------------------------------------------------------------------------------------------------
Total $60,215 $ 714,205 $108,296 $244,939 $ 2,676 $61,686
==========================================================================================================
(1) Accident and health insurance premiums written.
- - - - - - ----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- - - - - - ----------------------------------------------------------------------------------------------------------------
Benefits, Amortization
Claims, of Deferred Other Interest on
Net Losses and Policy Under- Policy-
Investment Settlement Acquisition writing holders' Premiums
Income Expenses Costs Expenses Accounts Written
- - - - - - ----------------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31, 1999
PROPERTY AND CASUALTY $23,477 $185,643 $39,998 $46,559 $ -- $254,214
LIFE, ACCIDENT AND HEALTH 51,840 16,805 9,865 4,842 32,286 25,359 (1)
- - - - - - ----------------------------------------------------------------------------------------------------------------
TOTAL $75,317 $202,448 $49,863 $51,401 $32,286 $279,573
================================================================================================================
(1) Accident and health insurance premiums written.
Year Ended
December 31, 1998
Property and casualty $23,157 $179,089 $39,001 $36,084 $ -- $221,002
Life, accident and health 44,771 16,006 8,891 4,231 26,568 31,927 (1)
- - - - - - ----------------------------------------------------------------------------------------------------------------
Total $67,928 $195,095 $47,892 $40,315 $26,568 $252,929
================================================================================================================
(1) Accident and health insurance premiums written.
Year Ended
December 31, 1997
Property and casualty $22,863 $149,536 $43,060 $31,758 $ -- $226,915
Life, accident and health 38,823 14,679 7,209 4,210 22,510 21,841 (1)
- - - - - - ----------------------------------------------------------------------------------------------------------------
Total $61,686 $164,215 $50,269 $35,968 $22,510 $248,756
================================================================================================================
(1) Accident and health insurance premiums written.
Certain amounts included in this schedule for earlier years have been reclassified to conform with the 1999
financial statement presentation.
39
SCHEDULE IV. REINSURANCE
- - - - - - ---------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- - - - - - ---------------------------------------------------------------------------------------------------------
Percentage
Gross Ceded to Assumed Net of Amount
Amount Other From Other Amount Assumed to
Earned Companies Companies Earned Net Earned
- - - - - - ---------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999
LIFE INSURANCE IN FORCE $3,839,897 $ 396,382 $ -- $3,443,515 0.0%
PREMIUMS:
PROPERTY AND CASUALTY $ 239,971 $ 27,206 $ 34,289 $ 247,054 13.88%
LIFE INSURANCE 22,080 1,316 -- 20,764 0.00%
ACCIDENT AND HEALTH INSURANCE 5,408 175 -- 5,233 0.00%
- - - - - - ---------------------------------------------------------------------------------------------------------
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 0.0%
Premiums:
Property and casualty $ 209,328 $ 22,349 $ 33,571 $ 220,550 15.22%
Life insurance 21,856 959 -- 20,897 0.00%
Accident and health insurance 4,414 134 -- 4,280 0.00%
- - - - - - ---------------------------------------------------------------------------------------------------------
Total $ 235,598 $ 23,442 $ 33,571 $ 245,727 13.66%
=========================================================================================================
Year Ended December 31, 1997
Life insurance in force $3,403,207 $ 339,430 $ -- $3,063,777 0.0%
Premiums:
Property and casualty $ 211,340 $ 25,716 $ 40,198 $ 225,822 17.80%
Life insurance 17,399 950 -- 16,449 0.00%
Accident and health insurance 2,963 181 -- 2,668 0.00%
- - - - - - ---------------------------------------------------------------------------------------------------------
Total $ 231,702 $ 26,847 $ 40,198 $ 244,939 16.40%
=========================================================================================================
Certain amounts included in this schedule for earlier years have been reclassified to conform with the
1999 financial statement presentation.
40
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, 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
=============================================================================================================
Year Ended
December 31, 1997 $18,235 $231,768 $100,769 $225,822 $ 2,456 $22,863
=============================================================================================================
- - - - - - ---------------------------------------------------------------------------------------------------
(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, 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
===================================================================================================
Year Ended
December 31, 1997 $183,723 $(33,544) $43,060 $141,143 $226,915
===================================================================================================
Certain amounts included in this schedule for earlier years have been reclassified to conform with
the 1999 financial statement presentation.
41
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,
BUSINESS EXPERIENCE SERVED AS DIRECTOR SINCE
Scott McIntyre Jr. (66), Chairman of the Board, United Fire & 1956
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 (38), Associate Professor, University of 1997
Kansas, Lawrence, Kansas
Associate 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 2000.
Jack B. Evans (51), President, Hall-Perrine Foundation, Cedar 1995
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 2000.
Roy L. Ewen (77), Retired 1974
Mr. Ewen, who was employed by the Company since 1947, retired
from the Company in January 1987. Mr. Ewen's term as a director
of the Company expires in May 2001.
Casey D. Mahon (48), Adjunct Professor of Law, University of 1993
Iowa, 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 (70), 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 (66), 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 2000.
George D. Milligan (43), President, The Graham Group, Inc., 1999
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. He was nominated to replace James T.
Brophy on the Board in November 1999.
Mary K. Quass (49), Executive Senior Vice President, AM-FM, Inc., 1998
Cedar Rapids, Iowa
Ms. Quass held the position of President and CEO 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 (57), President, United Fire & Casualty Company, 1998
United Life Insurance Company
Mr. Rife started with United Fire & Casualty Company in September
1976. He became President of United Life Insurance Company in
December 1984, and in May 1997 was also appointed President of
United Fire & Casualty Company. Mr. Rife's term as director of
the Company expires in May 2001.
Byron G. Riley (69), Attorney, Bradley & Riley, P.C., Cedar Rapids, 1983
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.
42
EXECUTIVE OFFICERS OF THE COMPANY:
NAME (AGE) OFFICE HELD
Scott McIntyre Jr. (66) Chairman of the Board since 1980, Director since 1956
John A. Rife (57) President of United Fire & Casualty Company since May
1997; President of United Life Insurance Company
since 1984
Richard B. Swain (42) Senior Vice President since February 1999; Vice
President Underwriting at Hastings Mutual Ins.
Company, Hastings, Michigan from May 1998 to February
1999; previously employed by the Company from October
1993 to May 1998
Kent G. Baker (56) Vice President and Chief Financial Officer since 1984
John R. Cruise (58) Vice President, Reinsurance since 1986
E. Dean Fick (55) Vice President, Claims since 1991
Shona Frese (55) Corporate Secretary since December 1996; employed by
the Company since 1966
David L. Hellen (47) Vice President, Denver regional office since 1987
Wilburn J. Hollis (59) 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 (60) Vice President since May 1995; employed by the
Company since 1993
Robert B. Kenward (57) Vice President, Information Services since 1992
Kevin L. Kubik (45) 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 (42) Corporate Secretary since February, 1997; Fidelity
and Surety claim manager since 1987
Dianne M. Lyons (36) Controller since November, 1999; employed by the
Company since 1983
Galen E. Underwood (59) Treasurer since 1979
Stanley A. Wiebold (55) Vice President, Underwriting since 1986
Michael T. Wilkins (36) Vice President since 1997; employed by the Company
since 1985
- - - - - - --------------------------------------------------------------------------------
DIRECTORS OF SUBSIDIARY COMPANIES
UNITED LIFE
INSURANCE COMPANY
C. Richard Ekstrand
Jack B. Evans
Scott McIntyre Jr.
John A. Rife
Byron G. Riley
INSURANCE BROKERS &
MANAGERS, INC.
Kent G. Baker
Carlyn K. Lewis
Scott McIntyre Jr.
John A. Rife
LAFAYETTE
INSURANCE COMPANY
Carlyn K. Lewis
Scott McIntyre Jr.
Sarai K. Renken
John A. Rife
Leo F. Wegmann Jr.
ADDISON
INSURANCE COMPANY
James T. Brophy
E. Addison Hulit
Scott McIntyre Jr.
Linda J. Pearson
John A. Rife
AMERICAN INDEMNITY
FINANCIAL CORPORATION
Kent G. Baker
E. Dean Fick
Jack B. Evans
Scott McIntyre Jr.
John A. Rife
Byron G. Riley
J. Fellman Seinsheimer III
43
OFFICERS OF THE COMPANY
UNITED FIRE &
CASUALTY COMPANY
Chairman
Scott McIntyre Jr.
President
John A. Rife
Senior Vice President
Richard B. Swain
Vice Presidents
Kent G. Baker
John R. Cruise
E. Dean Fick
David L. Hellen
Wilburn J. Hollis
E. Addison Hulit
Robert B. Kenward
Kevin L. Kubik
Stanley A. Wiebold
Michael T. Wilkins
Assistant Vice Presidents
John T. Anderson Jr.
Jeffrey A. Chapin
Robert J. DeCamp
Bruce K. Miller
Allan J. Schons
Allen R. Sorensen
Douglas A. Walters
Secretaries
Shona Frese
David A. Lange
Assistant Secretary
Donna M. Fugate
Treasurer
Galen E. Underwood
Controller
Dianne M. Lyons
- - - - - - --------------------------------------------------------------------------------
OFFICERS OF SUBSIDIARY COMPANIES
UNITED LIFE
INSURANCE COMPANY
Chairman
Scott McIntyre Jr.
President
John A. Rife
Executive Vice President
and Treasurer
Samuel E. Hague
Vice Presidents
Ronald D. Brandt
Rickey L. Pettyjohn
Secretary
Jean N. Newlin Schnake
INSURANCE BROKERS &
MANAGERS, INC.
Chairman
Scott McIntyre Jr.
President
Carlyn K. Lewis
Secretary
Betty S. Castro
Treasurer
Kent G. Baker
LAFAYETTE
INSURANCE COMPANY
Chairman
Scott McIntyre Jr.
President
Carlyn K. Lewis
Secretary
Leo F. Wegmann Jr.
Treasurer
Kent G. Baker
ADDISON
INSURANCE COMPANY
Chairman
Scott McIntyre Jr.
President
E. Addison Hulit
Secretary
Shona Frese
Treasurer
Kent G. Baker
AMERICAN INDEMNITY
FINANCIAL CORPORATION
Chairman
Scott McIntyre Jr.
President
John A. Rife
Executive Vice President
Richard B. Swain
Senior Vice President
J. Fellman Seinsheimer III
Vice Presidents
Roger F. Briggs
Robert A. Payne
Mildred L. Phillips
Secretary
Helen K. Lohec
Treasurer
Vaughn V. Vaughan
- - - - - - --------------------------------------------------------------------------------
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
44
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, 1999, 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, 1999, 1998 and
1997, the Trustee owned 123,733, 120,333 and 93,127 shares of Company stock,
respectively. The Company made contributions to the plan of $60,000, $1,050,000,
and zero in 1999, 1998 and 1997 respectively.
On August 21, 1998, the Company adopted a nonqualified employee stock
option plan. 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, 1999, 6,021
options had been granted under the plan.
The following table summarizes the compensation of the Company's Chairman and
the four most highly compensated executive officers for the last three years.
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION
- - - - - - ---------------------------------------------------------------------------------------------
Name and Principal Position Year Salary Bonus
- - - - - - ---------------------------------------------------------------------------------------------
Scott McIntyre Jr., Chairman 1999 $290,000 (1) $ (2)
1998 290,000 (1) -- (2)
1997 290,000 (1) 58,000 (2)
- - - - - - ---------------------------------------------------------------------------------------------
John A. Rife, President United Fire & Casualty 1999 $210,000 (1) $ (4)(6)
Company, President United Life Insurance 1998 190,000 (3) 3,032 (4)
Company 1997 166,667 (3) 25,000 (4)
- - - - - - ---------------------------------------------------------------------------------------------
E. Dean Fick 1999 $141,750 $ (4)(6)
Vice President, Claims 1998 135,000 -- (4)
1997 131,250 19,688 (4)
- - - - - - ---------------------------------------------------------------------------------------------
Kevin L. Kubik 1999 $125,000 $ (4)(6)
Vice President and Chief Investment Officer 1998 113,500 3,513 (4)
1997 NA (5) NA (4)(5)
- - - - - - ---------------------------------------------------------------------------------------------
E. Addison Hulit, Vice President United Fire & 1999 $115,500 $ (4)(6)
Casualty Company, President Addison 1998 110,000 18,700 (4)
Insurance Company President 1997 105,000 23,950 (4)
- - - - - - ---------------------------------------------------------------------------------------------
45
FOOTNOTES TO SUMMARY COMPENSATION TABLE:
(1) Fixed by Compensation Committee in February of each year.
(2) Bonus, if any, determined at the regular meeting of the Directors in
February of each year based on prior year performance.
(3) Determined by Chairman in December of each year and will be reviewed
annually in December.
(4) Determined by the bonus plan in effect for all salaried employees based on
the performance for the preceding year.
(5) Employment began June 1997.
(6) Calculated and paid on or about April 1, 2000.
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 1999 AND YEAR-END VALUES
- - - - - - ---------------------------------------------------------------------------------------------------------------------------
Name Number of Securities (1) Value of Unexercised
Number of shares Value Underlying In-the-
Acquired on Realized Unexercised Options Money Options
Exercise at December 31, 1999 at December 31, 1999
Exercisable Unexercisable Exercisable Unexercisable
- - - - - - ---------------------------------------------------------------------------------------------------------------------------
Scott McIntyre Jr. 0 0 0 0 0 NA
John A. Rife 0 0 0 1,181 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 1999
- - - - - - ---------------------------------------------------------------------------------------------------------------------------
Name Number of % of Total Exercise Expiration Potential Realizable Value
Securities Options Price Date At Assumed Annual Rates
Options Granted to $/Share Of Stock Appreciation for
Granted Employees Option Term
5% 10%
- - - - - - ---------------------------------------------------------------------------------------------------------------------------
Scott McIntyre Jr. 0 0% $ 0.00 $ - $ -
John A. Rife 1,181 20% $26.12 April, 2009 19,400 49,163
E. Dean Fick 0 0% $ 0.00 - -
Kevin L. Kubik 500 8% $26.12 April, 2009 8,213 20,814
E. Addison Hulit 500 8% $26.12 April, 2009 8,213 20,814
- - - - - - ---------------------------------------------------------------------------------------------------------------------------
46
PENSION PLAN TABLE
- - - - - - --------------------------------------------------------------------------------
Years of Service
- - - - - - --------------------------------------------------------------------------------
Salary 15 20 25 30 35
- - - - - - --------------------------------------------------------------------------------
$100,000 $21,696 $28,392 $34,944 $41,664 $48,540
110,000 24,324 31,896 39,324 46,908 54,672
135,000 30,888 40,644 50,268 60,036 69,984
150,000 34,824 45,900 56,820 67,908 79,176
160,000 37,452 49,392 61,200 73,164 85,296
- - - - - - --------------------------------------------------------------------------------
The credited years of service on December 31, 1999, for the persons
named in the Summary Compensation Table are as follows: Mr. McIntyre, 35 years
(maximum allowed); Mr. Rife, 23 years; Mr. Fick, 9 years; Mr. Kubik, 3 years;
and Mr. Hulit, 6 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 $160,000 for pension plan purposes by the IRS. This
limit is adjusted with inflation based upon the CPI and is scheduled to increase
to $170,000 for participants retiring after December 31, 1999. Bonuses paid to
officers are not included in pensionable earnings.
The 1999 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 $160,000 of pensionable earnings.
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.
47
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, 1994 and
reinvestment of dividends.
TOTAL SHAREHOLDER RETURNS
[PERFORMANCE GRAPH APPEARS HERE]
INDEXED RETURNS
Base Years Ending
Period
Company/Index Dec 94 Dec 95 Dec 96 Dec 97 Dec 98 Dec 99
- - - - - - -------------------------------------------------------------------------
UNITED FIRE & CAS CO 100 155.76 199.59 254.86 197.23 136.47
S&P 500 INDEX 100 137.58 169.17 225.60 290.08 351.12
INSURANCE (PPTY-CAS) 500 100 135.40 164.52 239.33 222.69 166.00
48
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, 2000, 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 Percent
of Beneficial of
Name of Beneficial Owner Address of Beneficial Owner Ownership Class (1)
- - - - - - ------------------------------------------------------------------------------------------------------------------
Scott McIntyre Jr. (1) 2222 1st Ave. NE, Apt. 1004 1,544,988 15.36%
Cedar Rapids, Iowa 52402
Mildred R. McIntyre (1) Cottage Grove Place 1,144,671 11.38
2115 1st Ave. SE, Apt. 2217
Cedar Rapids, Iowa 52402
General Accident Corporation of America 436 Walnut St. 2,025,680 20.14
Philadelphia, Pennsylvania 19105-1109
Susan M. Carlton (1) 29 Pine Terrace 359,041 3.57
Orchard Park, New York 14127
Margaret Pless (1) 3726 Bentley Dr. 314,940 3.13
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, 2000, 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.
- - - - - - --------------------------------------------------------------------------------
Percent
Amount and Nature Of
Name of Beneficial Owner of Beneficial Ownership Class (1)
- - - - - - --------------------------------------------------------------------------------
Scott McIntyre Jr. (1) 1,544,988 15.36%
Roy L. Ewen 77,501 0.77
Byron G. Riley, Jr. 3,106 0.03
George D. Milligan 200 --
Thomas K. Marshall 2,324 0.02
Leonard J. Marshall 1,000 0.01
Casey D. Mahon 2,000 0.02
Jack B. Evans 4,134 0.04
John A. Rife 1,763 0.02
Christopher R. Drahozal 112,069 1.11
Mary K. Quass 100 --
Kevin L. Kubik 4,025 .04
E. Dean Fick 1,000 .01
E. Addison Hulit 255 --
34 officers and directors as a group 1,765,592 17.55
- - - - - - --------------------------------------------------------------------------------
(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 32,535 shares held by
the McIntyre Foundation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE
(a) 1. and 2. Financial Statements and Supplementary Data 17
(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.
21 Subsidiaries of the registrant.
23 Consent of Arthur Andersen LLP, independent
auditors
27 Financial data schedule. 53
28 Information from reports furnished to
State Insurance Regulatory Authorities. Filed by paper
(b) No reports on Form 8-K were filed during the last quarter of
the period covered by this report.
50
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 2/19/00
---------------------------------
By /s/ KENT G. BAKER
---------------------------------
Kent G. Baker, Vice-President, Principal Accounting
Officer and Chief Financial Officer
Date 2/19/00
---------------------------------
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/ ROY L. EWEN
------------------------------- -----------------------------------
Scott McIntyre Jr., Chairman and Roy L. Ewen, Director
Director
Date 2/19/00 Date 2/19/00
------------------------------ ----------------------------------
By /s/ GEORGE D. MILLIGAN By /s/ CHRISTOPHER R. DRAHOZAL
------------------------------- -----------------------------------
George D. Milligan, Director Christopher R. Drahozal, Director
Date 2/19/00 Date 2/19/00
------------------------------ ----------------------------------
By /s/ LEONARD J. MARSHALL By /s/ JACK B. EVANS
------------------------------- -----------------------------------
Leonard J. Marshall, Director Jack B. Evans, Vice Chairman and
Director
Date 2/19/00
------------------------------ Date 2/19/00
----------------------------------
By /s/ THOMAS K. MARSHALL
------------------------------- By /s/ BYRON G. RILEY
Thomas K. Marshall, Director -----------------------------------
Byron G. Riley, Director
Date 2/19/00 Date 2/19/00
------------------------------ ----------------------------------
By /s/ MARY K. QUASS
-------------------------------
Mary K. Quass, Director
Date 2/19/00
------------------------------
51
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
(1) Four copies of the annual stockholders report for the year ended December
31, 1999, will be furnished to the Securities Exchange Commission by April
3, 2000.
(2) Proxy statements will be furnished to security holders subsequent to the
filing of the 10-K. Four copies of the proxy statement will be furnished to
the Securities Exchange Commission when they are mailed to security
holders.
52