1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities - --- Exchange Act of 1934 for the quarterly period ended June 30, 1996 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 - ---------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (319) 399-5700 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- As of July 31, 1996, 10,738,162 shares of common stock were outstanding.
2 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES TABLE OF CONTENTS PART I: FINANCIAL INFORMATION Report of Independent Public Accountants................................. 1 Consolidated Balance Sheets as of June 30, 1996 and December 31, 1995.... 2 Unaudited Consolidated Statements of Operations - Three-Month Periods Ended June 30, 1996 and 1995..................................... 3 Unaudited Consolidated Statements of Operations - Six-Month Periods Ended June 30, 1996 and 1995..................................... 4 Unaudited Consolidated Statements of Cash Flows - Six-Month Periods Ended June 30, 1996 and 1995..................................... 5 Notes to Unaudited Consolidated Financial Statements..................... 6 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 10 PART II: OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K Signatures............................................................... 12 Exhibit 11. Computation of Net Income Per Common Share............................................................. 13
3 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of United Fire & Casualty Company: We have reviewed the accompanying consolidated balance sheet of UNITED FIRE & CASUALTY COMPANY (an Iowa corporation) AND SUBSIDIARIES as of June 30, 1996, and the related consolidated statements of operations for the three-month and six-month periods ended June 30, 1996 and 1995, and the consolidated statements of cash flows for the six-month periods ended June 30, 1996 and 1995. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above in order for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of United Fire & Casualty Company and Subsidiaries as of December 31, 1995, and, in our report dated February 22, 1996, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1995, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Arthur Andersen LLP Chicago, Illinois July 31, 1996 1
4 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1996 AND DECEMBER 31, 1995 <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) - ---------------------------------------------------------------------------------------------------------------- ASSETS 1996 1995 UNAUDITED Audited - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> INVESTMENTS Fixed maturities Held-to-maturity, at amortized cost (market value $627,749 in 1996 and $617,915 in 1995)..................................................... $ 619,680 $ 589,687 Available-for-sale, at market (cost $78,099 in 1996 and $80,464 in 1995) 73,872 84,707 Equity securities (cost $25,048 in 1996 and $25,558 in 1995)................ 79,633 75,678 Mortgage loans............................................................... 3,001 3,041 Policy loans................................................................. 7,449 7,163 Other long-term investments (cost $8,038 in 1996 and $7,563 in 1995)........ 9,319 8,627 Short-term investments....................................................... 9,085 21,530 - ---------------------------------------------------------------------------------------------------------------- 802,039 790,433 CASH AND CASH EQUIVALENTS....................................................... 7,314 6,998 ACCRUED INVESTMENT INCOME....................................................... 11,682 11,517 ACCOUNTS RECEIVABLE............................................................. 51,841 38,620 DEFERRED POLICY ACQUISITION COSTS............................................... 56,622 52,670 PROPERTY AND EQUIPMENT.......................................................... 13,175 13,252 REINSURANCE RECEIVABLES......................................................... 18,169 15,996 PREPAID REINSURANCE PREMIUMS.................................................... 4,051 3,865 INTANGIBLES..................................................................... 1,462 1,589 INCOME TAXES RECEIVABLE......................................................... - 1,005 OTHER ASSETS.................................................................... 7,353 7,161 - ---------------------------------------------------------------------------------------------------------------- TOTAL ASSETS.................................................................... $ 973,708 $ 943,106 ================================================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY - ---------------------------------------------------------------------------------------------------------------- LIABILITIES Future policy benefits and losses, claims and settlement expenses Property and casualty insurance............................................ $ 214,174 $ 203,702 Life insurance............................................................. 398,829 393,603 Unearned premiums............................................................ 108,084 97,025 Accrued expenses and other liabilities....................................... 23,576 23,376 Employee benefit obligations................................................. 6,240 5,693 Income taxes payable......................................................... 455 - Deferred income taxes........................................................ 8,092 10,954 - ---------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES............................................................... $ 759,450 $ 734,353 - ---------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock................................................................... $ 35,830 $ 36,098 Additional paid-in capital..................................................... 9,923 12,031 Retained earnings.............................................................. 135,110 124,430 Net unrealized appreciation, net of applicable income taxes of $17,907 in 1996 and $19,232 in 1995.................................................... 33,732 36,194 Less: Treasury stock........................................................... 337 - - ---------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY...................................................... $ 214,258 $ 208,753 - ---------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................... $ 973,708 $ 943,106 ================================================================================================================ The Notes to Unaudited Consolidated Financial Statements are an integral part of these statements. </TABLE> 2
5 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS THREE-MONTH PERIODS ENDED JUNE 30, 1996 AND 1995 <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data) - ------------------------------------------------------------------------------------------- 1996 1995 - ------------------------------------------------------------------------------------------- <S> <C> <C> Revenues Premiums earned.......................................... $ 56,209 $ 49,833 Investment income, net................................... 14,078 13,513 Realized investment gains and other income............... 791 539 Commission and policy fee income......................... 514 477 - ------------------------------------------------------------------------------------------- 71,592 64,362 - ------------------------------------------------------------------------------------------- Benefits, Losses and Expenses Losses and settlement expenses........................... 39,753 29,866 Increase in liability for future policy benefits......... 1,541 1,783 Amortization of deferred policy acquisition costs........ 11,388 8,341 Other underwriting expenses.............................. 7,404 9,537 Interest on policyholders' accounts...................... 5,054 5,078 - ------------------------------------------------------------------------------------------- 65,140 54,605 - ------------------------------------------------------------------------------------------- Income before income taxes............................... 6,452 9,757 Federal income taxes..................................... 1,291 2,514 - ------------------------------------------------------------------------------------------- Net Income............................................... $ 5,161 $ 7,243 =========================================================================================== Net Income per common share ............................. $ 0.48 $ 0.67 =========================================================================================== Weighted average common shares outstanding.................. 10,794,675 10,829,706 =========================================================================================== Cash dividends declared per common share.................... $ 0.15 $ 0.14 =========================================================================================== The Notes to Unaudited Consolidated Financial Statements are in integral part of these statements. </TABLE> 3
6 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS SIX-MONTH PERIODS ENDED JUNE 30, 1996 AND 1995 <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data) - ------------------------------------------------------------------------------------------- 1996 1995 - ------------------------------------------------------------------------------------------- <S> <C> <C> Revenues Premiums earned......................................... $ 111,802 $ 101,280 Investment income, net.................................. 28,098 25,824 Realized investment gains and other income.............. 4,848 912 Commission and policy fee income........................ 945 939 - ------------------------------------------------------------------------------------------- 145,693 128,955 - ------------------------------------------------------------------------------------------- Benefits, Losses and Expenses Losses and settlement expenses.......................... 75,490 60,913 Increase in liability for future policy benefits........ 2,594 4,710 Amortization of deferred policy acquisition costs....... 25,692 19,865 Other underwriting expenses............................. 13,328 16,163 Interest on policyholders' accounts..................... 10,169 9,906 - ------------------------------------------------------------------------------------------- 127,273 111,557 - ------------------------------------------------------------------------------------------- Income before income taxes.............................. 18,420 17,398 Federal income taxes.................................... 4,504 3,907 - ------------------------------------------------------------------------------------------- Net Income.............................................. $ 13,916 $ 13,941 =========================================================================================== Net Income per common share ............................ $ 1.29 $ 1.25 =========================================================================================== Weighted average common shares outstanding................. 10,812,061 10,829,706 =========================================================================================== Cash dividends declared per common share................... $ 0.30 $ 0.27 =========================================================================================== The Notes to Unaudited Consolidated Financial Statements are an integral part of these statements. </TABLE> 4
7 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX-MONTH PERIODS ENDED JUNE 30, 1996 AND 1995 <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------ 1996 1995 - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> Cash Flows From Operating Activities Net income........................................................................ $ 13,916 $ 13,491 - ------------------------------------------------------------------------------------------------------------ Adjustments to reconcile net income to net cash provided by operating activities Net bond discount accretion.................................................... (340) (530) Depreciation and amortization.................................................. 1,143 470 Realized investment gains...................................................... (2,791) (912) Changes in: Accrued investment income.................................................. (165) (352) Accounts receivable........................................................ (13,221) (9,969) Deferred policy acquisition costs.......................................... (3,952) (3,109) Reinsurance receivables.................................................... (2,173) 4,605 Prepaid reinsurance premiums............................................... (186) (658) Income taxes receivable/payable............................................ 1,460 48 Other assets............................................................... (192) 761 Future policy benefits and losses, claims and settlement expenses......................................... 12,757 5,477 Unearned premiums.......................................................... 11,059 10,545 Accrued expenses and other liabilities..................................... 1,825 (5,177) Employee benefit obligations............................................... 547 393 Deferred income taxes...................................................... (1,537) 188 - ------------------------------------------------------------------------------------------------------------ Total adjustments.............................................................. $ 4,234 $ 1,780 - ------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities...................................... $ 18,150 $ 15,271 - ------------------------------------------------------------------------------------------------------------ Cash Flows From Investing Activities Proceeds from sale of available-for-sale investments........................... $ 18,894 $ 85 Proceeds from call and maturity of held-to-maturity investments................ 34,539 14,592 Proceeds from call and maturity of available-for-sale investments.............. 5,431 704 Proceeds from sale of other investments........................................ 17,176 6,690 Purchase of investments held-to-maturity....................................... (63,919) (47,819) Purchase of investments available-for-sale..................................... (18,773) (150) Purchase of other investments.................................................. (5,610) (7,154) Proceeds from sale of property and equipment................................... 229 823 Purchase of property and equipment............................................. (1,168) (1,586) - ------------------------------------------------------------------------------------------------------------ Net cash used in investing activities.......................................... $(13,201) $(33,815) - ------------------------------------------------------------------------------------------------------------ Cash Flows From Financing Activities Policyholders' account balances Deposits to investment and universal life type contracts................... $ 41,238 $ 45,024 Withdrawals from investment and universal life type contracts.............. (38,297) (27,912) Purchase and retirement of common stock........................................ (2,713) (6) Payment of cash dividends...................................................... (4,861) (4,332) - ------------------------------------------------------------------------------------------------------------ Net cash (used in) provided by financing activities............................ $ (4,633) $ 12,774 - ------------------------------------------------------------------------------------------------------------ Increase (Decrease) in Cash and Cash Equivalents.................................. $ 316 $ (5,770) Cash and Cash Equivalents at Beginning of Year.................................... 6,998 10,255 - ------------------------------------------------------------------------------------------------------------ Cash and Cash Equivalents at End of Period........................................ $ 7,314 $ 4,485 ============================================================================================================ The Notes to Unaudited Consolidated Financial Statements are an integral part of these statements. </TABLE> 5
8 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. In the opinion of the management of United Fire & Casualty Company and Subsidiaries (the "Company"), the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, the results of operations, and cash flows for the periods presented. The results for the interim periods are not necessarily indicative of the results of operations that may be expected for the year. The financial statements contained herein should be read in conjunction with the Company's annual report on Form 10-K for the year ended December 31, 1995. The review report of Arthur Andersen LLP accompanies the unaudited consolidated financial statements included in Item 1 of Part I. NOTE 2. The Company maintains its records in conformity with the accounting practices prescribed or permitted by the Insurance Department of the State of Iowa. To the extent that certain of these practices differ from generally accepted accounting principles ("GAAP"), adjustments have been made in order to present the accompanying financial statements on the basis of GAPP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts included in the financial statements for the previous year have been reclassified to conform with the financial statement presentation at June 30, 1996. NOTE 3. For purposes of reporting cash flows, cash and cash equivalents include cash and non-negotiable certificates of deposit with original maturities of three months or less. Income taxes paid, net of refunds for the six month periods ended June 30, 1996 and 1995 were $5,600,000, and $3,700,000, respectively. There were no significant payments of interest through June 30, 1996 and 1995, other than interest credited to policyholders' accounts. NOTE 4. Earnings per common share, common shares outstanding and weighted average common shares outstanding 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. 6
9 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 5. Included in realized gains and other income is $2,057,000 in interest in connection with the settlement of a Federal income tax Revenue Agent Review for previous tax years. NOTE 6. Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"). SFAS No. 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. The statement requires that those investments be classified into the following three categories: 1) debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost; 2) debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in net income; and 3) debt securities and marketable equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from net income and reported as a separate component of stockholders' equity. The Company classifies a majority of its investments in fixed income securities as held-to-maturity. In the fourth quarter of 1995, concurrent with the adoption of its implementation guide on SFAS No. 115, the Financial Accounting Standards Board allowed a one-time reassessment of the SFAS No. 115 classifications of all securities currently held. Any reclassifications would be accounted for at fair value in accordance with SFAS No. 115 and any reclassifications from the held-to-maturity portfolio that resulted from this one-time reassessment would not call into question the intent of the Company to hold other debt securities to maturity in the future. The Company used the opportunity under this one-time reassessment to reclassify $79,131,000 in securities from held-to-maturity to the available-for-sale portfolio. In connection with this reclassification , gross unrealized gains of $5,145,000 and gross unrealized losses of $908,000 were recorded in available-for-sale securities and in stockholders' equity. 7
10 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS A reconciliation of the amortized cost to fair values of investments in held-to-maturity and available-for-sale fixed maturities, marketable equity securities and other long-term investments as of June 30, 1996 is as follows. <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) - -------------------------------------------------------------------------------------------------------------------- JUNE 30, 1996 Gross Gross Amortized Unrealized Unrealized Fair TYPE OF INVESTMENT Cost Appreciation Depreciation Value - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> HELD-TO-MATURITY Fixed Maturities Bonds United States Government, government agencies and authorities Collateralized mortgage obligations ("CMOs")........... $ 25,510 $ -- $1,426 $ 24,084 Mortgage-backed securities............................. 24,865 1,800 2 26,663 All others............................................. 4,093 278 49 4,322 States, municipalities and political subdivisions........ 199,507 7,410 1,803 205,114 Foreign................................................. 6,849 159 51 6,957 Public utilities........................................ 61,065 85 2,405 58,745 Corporate bonds Collateralized mortgage obligations ("CMOs")........... 101,782 2,238 1,669 102,351 All other corporate bonds.............................. 196,009 5,594 2,090 199,513 - -------------------------------------------------------------------------------------------------------------------- Total held-to-maturity....................................... $619,680 $17,564 $9,495 $627,749 ==================================================================================================================== AVAILABLE-FOR-SALE Fixed Maturities Bonds United States Government, government agencies and authorities Collateralized mortgage obligations ("CMOs").......... $ 58,397 $ 406 $3,570 $ 55,233 Mortgage-backed securities............................ 69 5 -- 74 All others............................................ 5,837 21 25 5,833 Public utilities........................................ 206 -- 22 184 Corporate bonds Collateralized mortgage obligations ("CMOs")........... 12,978 90 1,128 11,940 All other corporate bonds.............................. 612 11 15 608 - -------------------------------------------------------------------------------------------------------------------- Total available-for-sale fixed maturities............... $ 78,099 $ 533 $4,760 $ 73,872 - -------------------------------------------------------------------------------------------------------------------- Equity securities Common stocks Public utilities........................................ $ 3,561 $ 5,284 $ -- $ 8,845 Banks, trust and insurance companies.................... 11,965 33,551 77 45,439 All other common stocks................................. 8,672 16,035 180 24,527 Nonredeemable preferred stocks............................ 850 -- 28 822 - -------------------------------------------------------------------------------------------------------------------- Total equity securities................................... $ 25,048 $54,870 $ 285 $ 79,633 - -------------------------------------------------------------------------------------------------------------------- Total available-for-sale..................................... $103,147 $55,403 $5,045 $153,505 ==================================================================================================================== Other long-term investments.................................. $ 8,038 $ 1,281 $ -- $ 9,319 ==================================================================================================================== </TABLE> 8
11 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The amortized cost and fair value of held-to-maturity and available-for-sale fixed maturities at June 30, 1996 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) - -------------------------------------------------------------------------------------------------------------------- JUNE 30, 1996 Held-to-maturity Available-for-sale - -------------------------------------------------------------------------------------------------------------------- Amortized Amortized Cost Fair Value Cost Fair Value - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Due in one year or less.................................. $ 9,457 $ 9,658 $ 48 $ 47 Due after one year through five years.................... 124,836 129,303 1,593 1,585 Due after five years through ten years................... 168,985 170,772 2,516 2,474 Due after ten years...................................... 164,245 164,918 2,497 2,519 Mortgage-backed securities............................... 24,865 26,663 69 74 Collateralized mortgage obligations ("CMOs")............. 127,292 126,435 71,375 67,173 - -------------------------------------------------------------------------------------------------------------------- $619,680 $627,749 $78,098 $73,872 ==================================================================================================================== </TABLE> 9
12 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION AND LIQUIDITY ASSETS The Company's fixed income portfolio increased $19,158,000 between June 30, 1996 and December 31, 1995. Net unrealized losses of $4,226,000 were recorded on the available-for-sale fixed maturity securities, compared to an unrealized gain of $4,243,000 at December 31, 1995. Approximately 28% of the Company's fixed maturities are collateralized mortgage obligations ("CMOs"), compared to 31% at December 31, 1995. The Company minimizes its prepayment risk by buying mostly issues priced at a slight discount. While buying at a discount does not prevent prepayment, the yield is not penalized as is the case when a premium is paid. In addition, although the stated maturity is longer than the average life of the issues, the Company is concentrating on buying issues with expected maturity in the seven- to- twelve- year range. The Company also monitors the FLUX ratios of the CMOs it is purchasing, looking to add less volatile positions to its portfolio. FLUX measures cashflow variability about a predefined set of interest rate scenarios. The Company also invests in readily marketable common and preferred stocks, all of which are classified as available-for-sale. Other long-term investments are primarily holdings in limited partnership funds investing in banks. Unrealized appreciation on stocks and other long-term investments, net of applicable income taxes, increased between 1996 and 1995 by $4,683,000 or 9%. The Company's short-term investments, comprised of money market accounts, overnight repurchase agreements and fixed maturities are utilized to meet anticipated short-term cash requirements. The decrease in this asset of $12,445,000 was due primarily to the life insurance segment's withdrawal of a block of single premium business during the first quarter of 1996. The Company's accounts receivable are balances due from property and casualty insurance agents and brokers for premiums written, net of commissions. In 1996, this asset grew by $13,221,000 or 34%. Premium writings are increasing, as is utilization of the Company's deferred billing plan. The balance in the Company's deferred acquisition costs asset increased $3,952,000 or 8% between June 30, 1996 and December 31, 1995. Increased property and casualty premium writings and associated expenses contributed to this increase. Reinsurance receivables are loss and expense payments and ceded reserves that are due the Company from reinsurers. The balance in this asset increased $2,173,000 or 14%. The Company does not anticipate collection problems with regard to any of its reinsurance receivables. LIABILITIES The property and casualty segment's gross reserves before ceded reinsurance for losses and settlement expenses increased a moderate $10,472,000 or 5% between 1996 and 1995. The largest catastrophe reserve continues to be the Northridge earthquake, with gross reserves remaining of $5,360,000, compared to $3,733,000 at December 31, 1995. 10
13 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION AND LIQUIDITY The Company is not aware of any significant environmental liabilities. Because the Company writes property coverage, there does exist the potential for exposure to environmental pollution and asbestos claims. The Company's underwriters are aware of these exposures and use limited riders or endorsements to limit exposure. The liability for future policy benefits and interest on policyholders' accounts saw a slight decrease of $2,116,000 due to the full fund withdrawal of one block of universal life business totaling $15,600,000 during the first quarter of 1996. MATERIAL CHANGES IN RESULTS OF OPERATIONS PROPERTY AND CASUALTY OPERATIONS Property and casualty premiums earned increased 13%, or $12,061,000 through June 30, 1996, when compared to June 30, 1995. Much of the growth came from our direct business and was concentrated in four midwestern states. In addition, ceded premium rates remain flat, which has the effect of increasing net premium writings. Loss and settlement expenses incurred by the property and casualty segment increased 23% or $13,406,000 over the first half of 1995 due to general growth and winter storms that occurred during the first two months of 1996. The second quarter for 1996 results were adversely affected by an increase in storm activity, particularly in Illinois. The second quarter of 1995 was unusual in that there was relatively little storm activity in the midwest that year. The increase in the property and casualty segments' other underwriting expenses, (including amortization of deferred acquisition costs) of $4,768,000 or 16%, resulted primarily from an increase in commissions incurred. LIFE OPERATIONS A decrease of $1,535,000 in premiums earned is attributable to a decrease in collected traditional life products. Interest credited increased by only $263,000 compared to $1,743,000 at June 30, 1995. This is a result of the withdrawal of one block of universal life business totaling $15,600,000 during the first quarter. The Company anticipates a similar comparison throughout 1996. INVESTMENT RESULTS Investment income rose 9% in 1996, over 1995, which is largely attributable to a growing fixed income portfolio. In the first half of 1996, the Company took advantage of market conditions and sold a few of its available-for-sale fixed income securities, contributing to the realized gain increase of $3,936,000. In addition, the settlement of a Federal income tax Revenue Agent Review for previous tax years resulted in the receipt of $2,057,000 in interest, which is included in realized gains and other income. 11
14 UNITED FIRE & CASUALTY COMPANY AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits-Exhibit 11 - Computation of Net Income Per Common Share (Page 13). SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED FIRE & CASUALTY COMPANY - -------------------------------------------------------------------------------- (REGISTRANT) JULY 31, 1996 - -------------------------------------------------------------------------------- (DATE) /s/ Scott McIntyre, Jr. - -------------------------------------------------------------------------------- SCOTT MCINTYRE, JR. CHAIRMAN AND CHIEF EXECUTIVE OFFICER /s/ K.G. Baker - -------------------------------------------------------------------------------- K.G. BAKER, VICE PRESIDENT CHIEF FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER 12