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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
Commission File Number 2-39621
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UNITED FIRE & CASUALTY COMPANY
(Exact name of registrant as specified in its charter)
Iowa 42-0644327
- ---------------------------- ---------------------------------
(State of Incorporation) (IRS Employer Identification No.)
118 Second Avenue, S.E.
Cedar Rapids, Iowa 52407
- ------------------------------- ---------------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (319) 399-5700
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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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES [X] NO [_]
As of May 2, 2003, 10,037,544 shares of common stock were outstanding.
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UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2003 (unaudited)
and December 31, 2002 2
Unaudited Consolidated Statements of Income for the three
month periods ended March 31, 2003 and 2002 3
Unaudited Consolidated Statements of Cash Flows for the three
month periods ended March 31, 2003 and 2002 4
Notes to Unaudited Consolidated Financial Statements 5
Independent Accountants' Review Report 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 16
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 17
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(In thousands)
- --------------------------------------------------------------------------------
March 31, December 31,
2003 2002
Unaudited Audited
- --------------------------------------------------------------------------------
ASSETS
Investments
Fixed maturities
Held-to-maturity, at amortized cost (market
value $183,164 in 2003 and $199,441 in 2002) $ 170,876 $ 186,204
Available-for-sale, at market (amortized cost
$1,340,479 in 2003 and $1,352,285 in 2002) 1,409,301 1,398,636
Trading, at market (amortized cost $9,437
in 2003 and $4,344 in 2002) 8,749 4,117
Equity securities, at market (cost $37,092
in 2003 and $35,229 in 2002) 94,622 99,494
Mortgage loans 23,461 12,109
Policy loans 8,125 7,930
Other long-term investments 9,831 11,821
Short-term investments 11,676 1,725
- --------------------------------------------------------------------------------
$ 1,736,641 $ 1,722,036
Cash and Cash Equivalents $ 177,160 $ 136,892
Accrued Investment Income 25,999 27,523
Premiums Receivable 115,012 108,372
Deferred Policy Acquisition Costs 87,368 90,391
Property and Equipment 15,510 15,922
Reinsurance Receivables 40,741 40,667
Prepaid Reinsurance Premiums 5,029 6,514
Intangibles 1,549 2,159
Income Taxes Receivable -- 1,872
Other Assets 9,191 7,127
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 2,214,200 $ 2,159,475
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LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future policy benefits and losses, claims and
settlement expenses
Property and casualty insurance $ 402,863 $ 392,649
Life insurance 1,154,858 1,128,749
Unearned premiums 228,981 219,968
Accrued expenses and other liabilities 39,268 50,725
Income taxes payable 3,431 --
Deferred income taxes 14,266 11,838
- --------------------------------------------------------------------------------
TOTAL LIABILITIES $ 1,843,667 $ 1,803,929
- --------------------------------------------------------------------------------
Redeemable Preferred Stock
6.375% cumulative convertible preferred
stock - Series A, no par value $ 65,198 $ 65,113
Stockholders' Equity
Common stock $ 33,459 $ 33,458
Additional paid-in capital 6,946 6,943
Retained earnings 208,150 199,597
Accumulated other comprehensive income,
net of tax 56,780 50,435
- --------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 305,335 $ 290,433
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,214,200 $ 2,159,475
================================================================================
The Notes to Unaudited Consolidated Financial Statements are an integral part of
these statements.
2
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data and number of shares)
- --------------------------------------------------------------------------------
Three months ended
March 31,
2003 2002
- --------------------------------------------------------------------------------
Revenues
Net premiums earned $ 110,848 $ 97,382
Investment income, net of investment expenses 26,063 24,902
Realized investment gains (losses) (2,773) 544
Commission and other income 738 418
- --------------------------------------------------------------------------------
$ 134,876 $ 123,246
- --------------------------------------------------------------------------------
Benefits, Losses and Expenses
Losses and settlement expenses 68,098 65,650
Increase in liability for future policy
benefits 2,325 1,481
Amortization of deferred policy acquisition
costs 22,068 17,254
Other underwriting expenses 12,046 10,829
Interest on policyholders' accounts 13,854 12,504
- --------------------------------------------------------------------------------
118,391 107,718
- --------------------------------------------------------------------------------
Income before income taxes 16,485 15,528
Federal income tax expense 4,864 4,436
- --------------------------------------------------------------------------------
Net Income $ 11,621 $ 11,092
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Less preferred stock dividends and accretions 1,185 --
================================================================================
Earnings available to common shareholders $ 10,436 $ 11,092
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Weighted average common shares outstanding 10,037,466 10,036,475
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Basic earnings per common share $ 1.04 $ 1.11
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Diluted earnings per common share $ 0.99 $ 1.10
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Cash dividends declared per common share $ 0.19 $ 0.18
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The Notes to Unaudited Consolidated Financial Statements are an integral part of
these statements.
3
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
- -----------------------------------------------------------------------------------------------------
Three months ended March 31,
2003 2002
- -----------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 11,621 $ 11,092
- -----------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by
operating activities
Net bond discount accretion $ (127) $ (248)
Depreciation and amortization 891 1,285
Realized investment (gains) losses 2,773 (544)
Net cash flows from trading investments (5,093) --
Changes in:
Accrued investment income 1,524 1,747
Premiums receivable (6,640) (8,302)
Deferred policy acquisition costs (2,980) (6,127)
Reinsurance receivables (74) 1,514
Prepaid reinsurance premiums 1,485 (1,676)
Income taxes receivable 1,872 368
Other assets (2,064) 11
Future policy benefits and losses, claims and
settlement expenses 17,482 1,581
Unearned premiums 9,013 11,166
Accrued expenses and other liabilities (11,457) (4,516)
Income taxes payable 3,431 1,341
Deferred income taxes (441) 2,179
Other, net 1,660 (946)
- -----------------------------------------------------------------------------------------------------
Total adjustments $ 11,255 $ (1,167)
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 22,876 $ 9,925
- -----------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Proceeds from sale of available-for-sale investments $ 5,970 $ --
Proceeds from call and maturity of held-to-maturity investments 17,160 14,261
Proceeds from call and maturity of available-for-sale investments 43,987 36,315
Proceeds from sale of short-term and other investments 264 107
Purchase of held-to-maturity investments (1,606) --
Purchase of available-for-sale investments (41,405) (98,417)
Purchase of short-term and other investments (22,213) (67)
Purchase of property and equipment (629) (211)
- -----------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities $ 1,528 $ (48,012)
- -----------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Policyholders' account balances
Deposits to investment and universal life contracts $ 40,431 $ 44,260
Withdrawals from investment and universal life contracts (21,590) (26,841)
Issuance of common stock 4 19
Payment of cash dividends (2,981) (1,807)
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 15,864 $ 15,631
- -----------------------------------------------------------------------------------------------------
Net Change in Cash and Cash Equivalents $ 40,268 $ (22,456)
Cash and Cash Equivalents at Beginning of Year 136,892 46,263
- -----------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 177,160 $ 23,807
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The Notes to Unaudited Consolidated Financial Statements are an integral part of
these statements.
4
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The terms "United Fire," "we," "us," or "our" refer to United Fire &
Casualty Company or United Fire & Casualty Company and its consolidated
subsidiaries and affiliate, as the context requires. In the opinion of the
management of United Fire, the accompanying unaudited Consolidated Financial
Statements contain all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the financial position, the results of operations,
and cash flows for the periods presented. The results for the interim periods
are not necessarily indicative of the results of operations that may be expected
for the year. The Consolidated Financial Statements contained herein should be
read in conjunction with our annual report on Form 10-K for the year ended
December 31, 2002. The review report of Ernst & Young LLP as of and for the
three-month period ended March 31, 2003 accompanies the unaudited Consolidated
Financial Statements included in Item 1 of Part I.
We maintain our records in conformity with the accounting practices
prescribed or permitted by the insurance departments of the states in which we
are domiciled. To the extent that certain of these practices differ from
accounting principles generally accepted in the United States, we have made
adjustments to present the accompanying Consolidated Financial Statements on the
basis of accounting principles generally accepted in the United States.
To prepare our Consolidated Financial Statements in conformity with
accounting principles generally accepted in the United States, we make estimates
and assumptions that affect the amounts of assets and liabilities reported in
our Consolidated Financial Statements, the disclosure of contingent assets and
liabilities at the date of our Consolidated Financial Statements and the amounts
of revenues and expenses during the reporting period reported in our
Consolidated Financial Statements. Actual results could differ from those based
on our estimates and assumptions.
We are a defendant in legal actions arising from normal business
activities. Management, after consultation with legal counsel, is of the opinion
that any liability resulting from these actions will not have a material impact
on our financial position and operating results.
For purposes of reporting cash flows, cash and cash equivalents include
cash, money market accounts and non-negotiable certificates of deposit with
original maturities of three months or less. We paid no income taxes for the
three-month periods ended March 31, 2003 and 2002. We made no significant
payments of interest for the three-month periods ended March 31, 2003 and 2002,
other than interest credited to policyholders' accounts.
Pursuant to Statement of Financial Accounting Standard No. 123, "Accounting
for Stock-Based Compensation," we elected to apply Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for stock options
issued under our stock-based compensation plan. Opinion No. 25 prescribes the
use of the intrinsic value method of accounting for our employee and director
stock-based compensation awards. Accordingly, we have not recognized
compensation expense for these awards. We have determined that the compensation
cost for the three-month periods ended March 31, 2003 and 2002 determined upon
application of Statement No. 123 has an immaterial impact on the net income and
earnings per share reported in our Consolidated Financial Statements.
Certain amounts included in the Consolidated Financial Statements for prior
years have been reclassified to conform to the 2003 financial statement
presentation.
Note 2. New Accounting Standards
In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amended Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation." The new
standard provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
Additionally, the Statement amends the disclosure requirements of Statement No.
123 to require prominent disclosures in annual and interim financial statements
about the
5
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. This Statement is effective for financial
statements for fiscal years ending after December 15, 2002. In compliance with
Statement No. 148, we have elected to continue to follow the intrinsic value
method in accounting for our stock-based employee compensation arrangement as
defined by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and we have made the applicable disclosures in Note 1.
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 149, "Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities." This Statement improves
financial reporting by requiring that contracts with comparable characteristics
be accounted for similarly. In particular, this Statement (a) clarifies under
what circumstances a contract with an initial net investment meets the
characteristic of a derivative discussed in paragraph 6(b) of Statement No. 133,
(b) clarifies when a derivative contains a financing component, (c) amends the
definition of an underlying variable to conform it to language used in Financial
Accounting Standards Board Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," and (d) amends certain other existing pronouncements.
These changes will result in more consistent reporting of contracts as either
derivatives or hybrid instruments. Statement No. 149 is to be applied
prospectively to contracts entered into or modified after June 30, 2003. We have
not yet determined the impact that the adoption of this Statement will have on
our Consolidated Financial Statements.
Note 3. Segment Information
We have two reportable business segments in our operations: property and
casualty insurance and life insurance. Our property and casualty insurance
segment conducts business from our home office in Cedar Rapids, Iowa and from
three other locations. All four locations are aggregated because they target a
similar customer base, market the same products, and use the same marketing
strategies. The life insurance segment operates from our home office in Cedar
Rapids, Iowa. Our management evaluates the two segments on both the basis of
accounting practices prescribed by our states of domicile and also on the basis
of accounting principles generally accepted in the United States. We analyze
results based on a variety of factors, including profitability, expenses and
return on equity. The basis we use to determine and analyze segments and to
measure segment profit has not changed from that reported in our annual report
on Form 10-K for the year ended December 31, 2002. Because all of our insurance
products are sold only domestically, we allocate no revenue to foreign
operations.
We report the following analysis on the basis of accounting principles
generally accepted in the United States. We have reconciled the analysis to our
unaudited Consolidated Financial Statements to adjust for intersegment
eliminations.
- -------------------------------------------------------------------------------------------
(In Thousands)
- -------------------------------------------------------------------------------------------
Property and
Casualty Life
Insurance Insurance Total
- -------------------------------------------------------------------------------------------
Three months ended March 31, 2003
- -------------------------------------------------------------------------------------------
Revenues $ 109,383 $ 25,580 $ 134,963
- -------------------------------------------------------------------------------------------
Intersegment eliminations (31) (56) (87)
- -------------------------------------------------------------------------------------------
Total revenues $ 109,352 $ 25,524 $ 134,876
===========================================================================================
Net income (loss) $ 11,777 $ (156) $ 11,621
===========================================================================================
Assets $ 838,903 $ 1,375,297 $ 2,124,200
===========================================================================================
Three months ended March 31, 2002
- -------------------------------------------------------------------------------------------
Revenues $ 97,705 $ 25,627 $ 123,332
- -------------------------------------------------------------------------------------------
Intersegment eliminations (31) (55) (86)
- -------------------------------------------------------------------------------------------
Total revenues $ 97,674 $ 25,572 $ 123,246
===========================================================================================
Net income $ 8,368 $ 2,724 $ 11,092
===========================================================================================
Assets $ 736,621 $ 1,150,862 $ 1,887,483
===========================================================================================
Depreciation expense and property and equipment acquisitions are reflected in
the property and casualty insurance segment.
6
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Derivative Instruments
We write covered call options on our equity portfolio to generate
additional portfolio income; we do not use these instruments for hedging
purposes. We record covered call options at fair value and include them in
accrued expenses and other liabilities. We recognize income or loss associated
with covered call options, including changes in the fair value of the covered
call options, currently in earnings as a component of realized investment gains
(losses). At March 31, 2003 we had no open covered call options.
Our investment portfolio includes trading securities with embedded
derivatives, which are primarily convertible debt and equity instruments. These
securities are recorded at fair value. Income or loss, including the change in
the fair value of these trading securities, is recognized currently in earnings
as a component of realized investment gains (losses). At March 31, 2003, our
trading portfolio of debt and equity securities had a market value of
$8,853,000.
Note 5. Comprehensive Income
Comprehensive income includes all changes in equity during a period except
those resulting from investments by shareholders and dividends to shareholders.
The primary components of our comprehensive income are net income and net
unrealized gains and losses on available-for-sale securities. Comprehensive
income was $17,966,000 and $8,990,000 for the three months ended March 31, 2003
and 2002, respectively.
Note 6. Escrow Agreement
During the third quarter of 2001, we presented a claim against an escrow
account held for the deferred payment of $1.00 per share to prior shareholders
of American Indemnity Financial Corporation, which was acquired by us in August
1999. The amount of this escrow totaled $1,990,000 and is recorded as a part of
other assets on our Consolidated Balance Sheets. We have filed a lawsuit to
enforce the payment to us of the amount of our claim, and we anticipate American
Indemnity Financial Corporation's stockholder representatives will resist our
claim. It is too early in the litigation to make an estimate as to the
likelihood or amount of recovery.
Note 7. Earnings Per Share
We compute earnings per share in accordance with Statement of Financial
Accounting Standard No. 128, "Earnings per Share." Accordingly, we compute basic
earnings per share by dividing net income or loss available to common
stockholders (net income or loss less dividends to preferred stockholders and
accretions of preferred stock issuance costs) by the weighted-average number of
common shares outstanding during the period. Diluted earnings per share gives
effect to all potentially dilutive common shares outstanding during the period.
The potentially dilutive shares we consider in our diluted earnings per share
calculation relate to our convertible preferred stock outstanding and our
outstanding stock options.
We determine the dilutive effect of our convertible preferred stock using
the "if-converted" method. Under this method, we add to the denominator of the
earnings per share calculation a number determined by multiplying the number of
convertible preferred shares by the stated conversion rate. We add to the
numerator of the earnings per share equation the amount of preferred dividends
and accretions due to the assumed conversion of all the convertible preferred
stock to common stock. If the effect of the if-converted method is
anti-dilutive, the effect on diluted earnings per share of our convertible
preferred stock is disregarded. The effect of the if-converted method was
dilutive for the first quarter of 2003, and was therefore included in the
calculation of the first quarter diluted earnings per share.
We determine the dilutive effect of our outstanding stock options using the
"treasury stock" method. Under this method, we assume the exercise of all of the
outstanding options whose exercise price is less than the weighted-average fair
market value of our common stock during the period. This method assumes that the
proceeds from the hypothetical stock option exercises are used to repurchase
shares of common stock at the weighted-average fair market value of the stock
during the period. The net of the assumed options exercised and assumed common
shares repurchased represents the number of potentially dilutive common shares,
which we add to the denominator of the earnings per share calculation.
7
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The components of basic and diluted earnings per share are as follows:
- ------------------------------------------------------------------------------
Three months ended March 31 2003 2002
- ------------------------------------------------------------------------------
Net income $ 11,621,000 $ 11,092,000
Earnings available to common stockholders 10,436,000 11,092,000
Weighted average common shares outstanding 10,037,466 10,036,475
Potentially dilutive common shares 1,721,591 7,396
- ------------------------------------------------------------------------------
Weighted average common and potential shares
outstanding 11,759,057 10,043,871
Basic earnings per share $ 1.04 $ 1.11
Diluted earnings per share 0.99 1.10
==============================================================================
Note 8. Redeemable Preferred Stock
On May 6, 2002, we issued 2,760,000 shares of 6.375 percent convertible
preferred stock, Series A at $25 per share. The issuance of the preferred stock
resulted in the collection of net proceeds totaling $64,884,000. The preferred
shares are non-voting. Dividends on the preferred stock are cumulative from the
date of original issuance and are payable on March 15, June 15, September 15 and
December 15 of each year, beginning on June 15, 2002. We incurred dividends of
$1,100,000 on our preferred stock in the first quarter of 2003. The preferred
stock has a liquidation preference and redemption price of $25 per share.
Issuance costs in connection with our preferred stock offering totaled
$4,116,000. We are accreting these costs over a 12-year period. Through March
31, 2003, we have accreted $314,000 related to the preferred stock issuance
costs, of which $85,000 was accreted in the first quarter of 2003. We will
review the accretion period annually to determine if we need to accelerate the
accretion.
The preferred stock is convertible at the option of the holder at any time,
unless previously redeemed, into shares of common stock at an initial conversion
price of $40.26 per share of common stock, which is equivalent to .621 shares of
common stock for each share of preferred stock converted. The conversion price
is subject to adjustment upon the occurrence of certain events.
We may redeem all or any shares of preferred stock on or after May 15,
2005. The preferred stock will be subject to mandatory redemption on May 15,
2014.
8
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Stockholders and Board of Directors of
United Fire & Casualty Company
We have reviewed the accompanying consolidated balance sheet of United Fire &
Casualty Company (an Iowa corporation) and subsidiaries as of March 31, 2003,
and the related consolidated statement of income for the three-month period
ended March 31, 2003, and the consolidated statement of cash flows for the
three-month period ended March 31, 2003. These financial statements are the
responsibility of the Company's management. We did not make a similar review of
the consolidated financial statements for the corresponding periods of the prior
year (2002).
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data, and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements at March 31, 2003,
and for the three-month period then ended, for them to be in conformity with
accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of United Fire &
Casualty Company and subsidiaries as of December 31, 2002, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended, not presented herein, and in our report dated February 17,
2003, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2002, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ Ernst & Young LLP
May 2, 2003
Chicago, Illinois
9
The following is a copy of Arthur Andersen LLP's previously issued report.
Arthur Andersen has ceased practicing before the Securities and Exchange
Commission and is therefore unable to reissue this report.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
United Fire & Casualty Company:
We have reviewed the accompanying consolidated balance sheet of UNITED FIRE &
CASUALTY COMPANY (an Iowa corporation) AND SUBSIDIARIES as of March 31, 2002,
and the related consolidated statements of income for the three-month periods
ended March 31, 2002 and 2001, and the consolidated statements of cash flows for
the three-month periods ended March 31, 2002 and 2001. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States, the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above in order for them to be in
conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of United Fire &
Casualty Company and Subsidiaries as of December 31, 2001 and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended (not presented separately herein) and, in our report dated
February 8, 2002, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2001, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ Arthur Andersen LLP
Chicago, Illinois
May 6, 2002
10
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENT
This discussion may contain forward-looking statements about our
operations, anticipated performance and other similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor under the
Securities Act of 1933 and the Securities Act of 1934 for forward-looking
statements. The forward-looking statements are not historical facts and involve
risks and uncertainties that could cause actual results to differ materially
from those expected and projected. Such forward-looking statements are based on
current expectations, estimates, forecasts and projections about the industry in
which we operate, management's beliefs and assumptions made by management. Words
such as "expects," "anticipates," "intends," "plans," "believes," "continues,"
"seeks," "estimates," "predicts," "should," "could," "may," "will continue,"
"might" and variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed in such forward-looking statements. Among the
factors that could cause our actual outcomes and results to differ are the
following: uncertainties with respect to loss reserving; the occurrence of
catastrophic events or other insured or reinsured events with a frequency or
severity exceeding our estimates; the actual amount of new and renewal business
and demand for our products and services; the competitive environment in which
we operate, including price, product and service competition; developments in
domestic and global financial markets that could affect our investment portfolio
and financing plans; impact of regulatory actions on our Consolidated Financial
Statements; uncertainties relating to government and regulatory policies; legal
developments; changing rates of inflation, interest rates and other economic
conditions; a continuation, or worsening of global economic conditions; a
continuation of, or a slow recovery from the United States recession; our
relationship with our agencies; the valuation of invested assets; the recovery
of deferred acquisition costs; or our relationship with our reinsurers. These
are representative of the risks, uncertainties and assumptions that could cause
actual outcomes and results to differ materially from what is expressed in
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates. Except as
required under the federal securities laws and the rules and regulations of the
Securities and Exchange Commission, we do not have any intention or obligation
to update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
REGULATION G COMPLIANCE MEASURES
In response to new disclosure regulations adopted by the Securities and
Exchange Commission as part of its implementation of the Sarbanes-Oxley Act of
2002 (specifically Regulation G which became effective March 2003), measures
used in this discussion that are not based on accounting principles generally
accepted in the United States (Non-GAAP) are defined and reconciled to the most
directly comparable GAAP measures and operating measures in the "Definitions of
Non-GAAP information and reconciliation to comparable GAAP measures" section at
the end of this discussion.
11
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net income for the first quarter of 2003 was $11,621,000, or $1.04 per
share (after providing for the dividend on the convertible preferred stock),
which includes net realized capital losses of $2,773,000, compared to first
quarter 2002 net income of $11,092,000, or $1.11 per share, which included net
realized capital gains of $544,000. First quarter diluted earnings were $.99 per
share and $1.10 per share for 2003 and 2002, respectively.
Net operating income for the first quarter of 2003 was $12,238,000 versus
$10,738,000 for the first quarter of 2002. First quarter operating earnings were
$1.22 per share (after providing for the dividend on the convertible preferred
stock) and $1.07 per share for 2003 and 2002, respectively.
Premiums earned through March 31, 2003 were $110,848,000 compared to
$97,382,000 through March 31, 2002. This premium growth was attributable to
property and casualty premium rate increases in 2002 and the continuation of
these pricing increases in the first quarter of 2003. Investment income, net of
expenses, increased by $1,161,000 or 5 percent, compared to the first three
months of 2002. We attribute investment income growth between quarters to an
increase in cash provided by premiums and annuity deposits. Pre-tax net realized
investment losses totaled $2,773,000, versus pre-tax net realized investment
gains of $544,000 for the first three months of 2002. The deterioration was
primarily attributable to investment write-downs of $3,504,000 in the first
quarter of 2003, compared to none in the first quarter of 2002.
Property and Casualty Insurance Segment
Net premiums written in the first quarter of 2003 were $114,292,000,
compared to $100,412,000 in the first quarter of 2002. Net premiums earned in
the first quarter of 2003 were $103,357,000, compared to $90,535,000 in the
first quarter of 2002. The strong results in both premiums written and premiums
earned is due primarily to premium rate increases in 2002 and 2003, as the
number of policies in force has actually declined over the past year.
The loss ratio, which includes loss adjustment expenses, was 61.4 percent
for the first quarter of 2003, versus 67.9 percent for the first quarter of
2002. The improvement in the loss ratio is primarily attributable to an increase
in premium rates and a decrease in claims frequency. Despite this improvement in
claims frequency, claims severity has increased in the first quarter of 2003.
The three-month direct pure loss ratio, which does not include loss adjustment
expenses, for commercial business was 42 percent through March 31, 2003,
compared to 46 percent for the first three months of 2002. The three-month
personal lines direct pure loss ratio was 63 percent, compared to 65 percent for
the same period of 2002.
The expense ratio deteriorated to 28.2 percent in the first quarter of
2003, compared to 27.5 percent in the first quarter of 2002. This deterioration
was primarily the result of the increase in amortization of our deferred
acquisition costs asset.
Pre-tax catastrophe losses, net of reinsurance, were $500,000 for the first
quarter of 2003, which added less than one point to the combined ratio, with an
after-tax earnings impact of 3 cents per share. In comparison, pre-tax
catastrophe losses, net of reinsurance, were $436,000 for the first quarter of
2002, which added less than one point to the combined ratio, with an after-tax
earnings impact of 3 cents per share. With respect to catastrophes that have
occurred after March 31, 2003, we have exposure to a hailstorm which passed
through Texas in April of this year and to a series of severe storms which hit
the Midwest in early May of this year. To date, we have incurred approximately
$3,000,000 in losses related to the hailstorm and approximately $4,000,000 with
respect to the series of severe storms. We expect additional claims relating to
the series of severe storms, which will increase our incurred losses. None of
the losses related to the above mentioned storms are included in our first
quarter results.
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UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Life Insurance Segment
In the first quarter of 2003, our life insurance segment recorded a pre-tax
loss of $227,000, compared to pre-tax income of $4,249,000 for the first quarter
of 2002. The deterioration was primarily attributable to investment write-downs
of $3,504,000 in the first quarter of 2003, compared to none in the first
quarter of 2002.
Net premiums earned in the first quarter of 2003 were $7,491,000, compared
to $6,847,000 in the first quarter of 2002. Net investment income increased by
$2,108,000, or 11.4 percent, in the first quarter of 2003. These improvements in
our life insurance segment's first quarter results were offset by investment
write-downs, an increase in losses of $452,000, or 10.7 percent, and an increase
in interest credited on policyholder accounts of $1,350,000, or 10.8 percent.
Investment Results
We recorded consolidated pre-tax net investment income of $26,063,000 for
the first three months of 2003, compared with $24,902,000 for the same period in
2002. During the first three months of 2003, our invested assets grew from
$1,722,036,000 to $1,736,641,000.
Pre-tax net realized investment losses totaled $2,773,000, versus pre-tax
net realized investment gains of $544,000 for the first three months of 2002. We
wrote down two securities in the first quarter of 2003, resulting in pre-tax
charges of $3,504,000.
The composition of our investment portfolio at March 31, 2003 is presented
in the following table in accordance with accounting principles generally
accepted in the United States:
- -------------------------------------------------------------------------------------------------------------
Property & Casualty
Insurance Segment Life Insurance Segment Total
- -------------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of
(Dollars in Thousands) Total Total Total
- -------------------------------------------------------------------------------------------------------------
Fixed maturities/(1)/ $ 417,396 79.4% $ 1,171,530 96.7% $ 1,588,926 91.4%
Equity securities 90,902 17.3 3,720 0.3 94,622 5.4
Mortgage loans 5,719 1.1 17,742 1.5 23,461 1.4
Policy loans -- -- 8,125 0.7 8,125 0.5
Other long-term investments 9,831 1.9 -- -- 9,831 0.6
Short-term investments 1,575 0.3 10,101 0.8 11,676 0.7
- -------------------------------------------------------------------------------------------------------------
Total $ 525,423 100.0% $ 1,211,218 100.0% $ 1,736,641 100.0%
=============================================================================================================
/(1)/ Available for sale and trading fixed maturities are carried at fair
value, while held to maturity fixed maturities are carried at amortized cost.
13
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
At March 31, 2003, our consolidated total assets were $2,214,200,000,
compared to $2,159,475,000 at December 31, 2002. Invested assets, primarily
fixed income securities, increased only $14,605,000, or 1 percent, from December
31, 2002. This small increase was primarily a result of poor market conditions.
Because of the current unsettled investment environment, we have held most of
the funds generated by our operating and investment activities in cash and cash
equivalents rather than investing them. The slight increase in invested assets
is attributable to changes in the market prices of our securities classified as
available-for-sale, which are reported at fair value. The unrealized
appreciation from these investments is reported net of tax as a separate
component of stockholders' equity. Unrealized appreciation arising during the
first quarter of 2003 increased invested assets by $15,767,000 and was offset
slightly by the fact that we are not investing funds at a rate sufficient to
match the sale, call and maturity of investments during the first quarter of
2003.
At March 31, 2003, $1,409,301,000, or 89 percent, of our fixed income
security portfolio was classified as available-for-sale, compared to
$1,398,636,000, or 88 percent, at December 31, 2002. Our trading securities
consist primarily of convertible redeemable preferred securities, which are
recorded at fair value, with any changes in fair value recognized in earnings.
We classify our remaining fixed maturities as held-to-maturity and report them
at amortized cost.
Our property and casualty insurance segment's deferred policy acquisition
costs asset increased $2,952,000, or 8 percent, to $39,522,000 at March 31,
2003, from the deferred policy acquisition costs asset at December 31, 2002. The
growth was attributable primarily to the increase in net premiums written.
One component of our life insurance segment's estimate of the deferred
policy acquisition costs asset related to universal life and annuity business is
the impact of unrealized gains and losses resulting from certain
available-for-sale securities in our investment portfolio. The unrealized
investment component of our life insurance segment's deferred acquisition costs
calculation contributed a decrease of $35,583,000 in the reported deferred
acquisition costs asset, compared to the $29,579,000 decrease contributed at
December 31, 2002.
Cash flow and liquidity is primarily derived from operating cash flows. We
invest premiums and annuity deposits in assets maturing at regular intervals in
order to meet our obligations to pay policy benefits, claims and claim adjusting
expenses. Net cash provided by our operating activities was $22,876,000 for the
three months ended March 31, 2003, compared to $9,925,000 for the three months
ended March 31, 2002. The increase in cash provided by operating activities was
primarily due to growth in premiums. We also have significant cash flows from
sales of investments and scheduled and unscheduled investment security
maturities, redemptions and prepayments. These cash flows totaled $67,381,000
through March 31, 2003 and $50,683,000 through March 31, 2002. If our operating
and investment cash flows had not been sufficient to support our operations, we
have short-term investments that we could utilize for this purpose. At March 31,
2003, our consolidated invested assets included $11,676,000 of short-term
investments, which consist primarily of investments in commercial paper. We may
also borrow up to $20,000,000 on a bank line of credit. Under the terms of our
credit agreement, interest on outstanding notes is payable at the lender's
prevailing prime rate, minus one percent. We did not utilize our line of credit
during 2002 or in the first quarter of 2003.
Financing activities provided cash of $15,864,000 through the first three
months of 2003, compared to $15,631,000 through the first three months of 2002.
Cash provided by financing activities included annuity and universal life
deposits, less withdrawals, of $18,841,000 through March 31, 2003, compared to
$17,419,000 for the same period of 2002.
Stockholders' equity increased from $290,433,000 at December 31, 2002 to
$305,335,000 at March 31, 2003, an increase of 5 percent. The primary increases
to stockholders equity were net income of $11,621,000 and unrealized
appreciation (net of tax) of $6,345,000. Decreases to stockholders' equity
included stockholder dividends and preferred stock accretions of $3,067,000. At
March 31, 2003, book value was $30.42 per common share, compared to $28.94 per
common share at December 31, 2002.
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UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Definitions of Non-GAAP information and reconciliation to comparable GAAP
measures
We believe that investor understanding of our financial performance is
enhanced by disclosure of certain Non-GAAP financial measures. Statutory data is
prepared in accordance with statutory accounting rules as defined by the
National Association of Insurance Commissioners' Accounting Practices and
Procedures Manual and therefore is not reconciled to accounting principles
generally accepted in the United States.
Net operating income: The difference between net income (after providing for the
dividend on the convertible preferred stock) and net operating income is the
inclusion of after-tax realized investment gains (losses). We utilize net
operating income to evaluate underlying performance and to provide information
commonly used by investors to evaluate insurance companies. This measure also is
described as net income before after-tax realized investment gains (losses).
- --------------------------------------------------------------------------------
Net Income After-tax Net
(after pref. realized Operating NI/NOI
divd.) gains (losses) Income per share
- --------------------------------------------------------------------------------
2003 $ 10,436,000 $ (1,802,000) $ 12,238,000 $ 1.04/$1.22
2002 $ 11,092,000 $ 354,000 $ 10,738,000 $ 1.11/$1.07
- --------------------------------------------------------------------------------
Catastrophe losses: Catastrophes are by their nature unpredictable, the
frequency and severity of catastrophic losses experienced in any year will
impact our results of operations and financial position. In evaluating the
underwriting performance of our property and casualty insurance segment, we do
so both including and excluding catastrophe losses.
Written premium: Under statutory accounting rules as defined by the National
Association of Insurance Commissioners' Accounting Practices and Procedures
Manual, written premiums is the amount recorded for policies issued and
recognized on an annualized basis at the effective date of the policy. We
analyze the trends in written premiums to help measure our underwriting results.
Earned premium, which is calculated and used in both statutory and GAAP
accounting, is recognized ratably over the policy term. The difference between
written and earned premium is unearned premium.
15
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure to market risk arising from potential losses due to
adverse changes in interest rates and market prices. Our primary market risk
exposure is changes in interest rates, although we have some exposure to changes
in equity prices and limited exposure to foreign currency exchange rates.
The active management of market risk is integral to our operations. We have
investment guidelines that define the overall framework for managing our market
and other investment risks, including accountability and controls. In addition,
we have for each of our subsidiaries specific investment policies that delineate
the investment limits and strategies that are appropriate given each entity's
liquidity, surplus, product and regulatory requirements. We respond to market
risk by rebalancing our existing asset portfolio or by changing the character of
future investment purchases.
We write covered call options from time to time on common stocks that we
own. Generally, we write the calls on stocks we view as over-priced relative to
their market value. We have not written in-the-money calls at transaction date,
but we are not restricted in any way from doing so. Some market analysts
consider the practice of writing covered calls to be a conservative equity
strategy.
There have been no material changes in our market risk or market risk
factors from that reported in our annual report on Form 10-K for the year ended
December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
In order to ensure that the information we must disclose in our filings
with the Securities and Exchange Commission is recorded, processed, summarized
and reported on a timely basis, we have formalized our disclosure controls and
procedures. Our principal executive officer and principal financial officer have
reviewed and evaluated the effectiveness of our disclosure controls and
procedures, as defined in Exchange Act Rules 13a-14(c) and 15d-14(c), as of a
date within 90 days prior to the filing date of this report (the "Evaluation
Date"). Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, our disclosure controls and procedures were effective in timely
alerting them to material information about us (and our consolidated
subsidiaries) required to be included in our periodic Securities and Exchange
Commission filings. Since the Evaluation Date, there have not been any
significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the Evaluation Date.
16
UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Fourth Restated Articles of Incorporation (incorporated by reference
to Exhibit 4.1 of Amendment No. 1 to our Form S-3 Registration
Statement filed with the Securities and Exchange Commission on April
4, 2002, SEC File Number 333-83446)
3.2 First Amendment to Fourth Restated Articles of Incorporation
(incorporated by reference to Exhibit 4.3 of Amendment No. 3 to our
Form S-3 Registration Statement filed with the Securities and
Exchange Commission as of May 3, 2002, SEC File Number 333-83446)
3.3 By-Laws of United Fire & Casualty Company, as amended, incorporated
by reference to 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 to 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 to Registrant's Form S-8 Registration
Statement, filed with the Commission on December 22, 1997.
99.1 Certification of John A. Rife, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, dated May 12, 2003.
99.2 Certification of Kent G. Baker, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, dated May 12, 2003.
99.3 Certification of John A. Rife, Pursuant To 13A-14 or 15D-14 of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act Of 2002, dated May 12, 2003.
99.4 Certification of Kent G. Baker, Pursuant To 13A-14 or 15D-14 of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act Of 2002, dated May 12, 2003.
(b) No reports on Form 8-K were filed during the period covered by this report.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED FIRE & CASUALTY COMPANY
(Registrant)
May 12, 2003
(Date)
By: /s/ John A. Rife
----------------------------
John A. Rife
President,
Chief Executive Officer
By: /s/ K.G. Baker
----------------------------
K.G. Baker
Vice President,
Chief Financial Officer and
Principal Accounting Officer
18