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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