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| UFCS > SEC Filings for UFCS > Form 10-K on 2-Mar-2009 | All Recent SEC Filings |
2-Mar-2009
Annual Report
FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements about our operations,
anticipated performance and other similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor under the Securities Act of
1933 and the Securities Exchange Act of 1934 for forward-looking statements. The
forward-looking statements are not historical facts and involve risks and
uncertainties that could cause actual results to differ materially from those
expected and/or projected. Such forward-looking statements are based on current
expectations, estimates, forecasts and projections about our company, the
industry in which we operate, and beliefs and assumptions made by management.
Words such as "expects," "anticipates," "intends," "plans," "believes,"
"continues," "seeks," "estimates," "predicts," "should," "could," "may," "will
continue," "might," "hope," "can" and variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve risks,
uncertainties and assumptions that are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed in such
forward-looking statements. Among the factors that could cause our actual
outcomes and results to differ are:
• The adequacy of our loss reserves established for Hurricane Katrina, which
are based on management estimates.
• Developments in domestic and global financial markets that could affect our investment portfolio and financing plans.
• Additional government and NASDAQ policies relating to corporate governance, and the cost to comply.
• Changing rates of inflation.
• The valuation of invested assets.
• The valuation of pension and other postretirement benefit obligations.
• The calculation and recovery of deferred policy acquisition costs.
• The ability to maintain and safeguard the security of our data.
• The resolution of regulatory issues and litigation pertaining to and arising out of Hurricane Katrina.
• Our relationship with our reinsurers.
• Our relationship with our agents.
• The pricing of our products.
• The adequacy of the reinsurance coverage that we purchase.
These are representative of the risks, uncertainties and assumptions that could
cause actual outcomes and results to differ materially from what is expressed in
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this report
or as of the date they are made. Except as required under the federal securities
laws and the rules and regulations of the SEC, we do not have any intention or
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise.
Additional information concerning factors that could cause actual results to
differ materially from those in the forward-looking statements is contained in
Part I, Item 1A "Risk Factors" of this document.
United Fire & Casualty Company Form 10-K | 2008
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
Consolidated Results of Operations (Dollars in Thousands) % Change
Years ended December 31 2008 2007 2006 2008 vs. 2007 2007 vs. 2006
Revenues
Net premiums earned $ 503,375 $ 505,763 $ 503,122 -0.5 % 0.5 %
Investment income, net 107,577 122,439 121,981 -12.1 0.4
Realized investment gains (losses) (10,383 ) 9,670 9,965 -207.4 -3.0
Other income 880 654 532 34.6 22.9
Total Revenues $ 601,449 $ 638,526 $ 635,600 -5.8 % 0.5 %
Benefits, Losses and Expenses
Loss and loss settlement expenses $ 406,640 $ 260,714 $ 292,789 56.0 % -11.0 %
Increase in liability for future
policy benefits 23,156 15,666 19,737 47.8 -20.6
Amortization of deferred policy
acquisition costs 129,158 136,805 126,898 -5.6 7.8
Other underwriting expenses 28,252 22,918 21,525 23.3 6.5
Disaster charges and other related
expenses 7,202 - - N/A N/A
Interest on policyholders'
accounts 40,177 43,089 49,159 -6.8 -12.3
Total Benefits, Losses and
Expenses $ 634,585 $ 479,192 $ 510,108 32.4 % -6.1 %
Income (loss) before income taxes $ (33,136 ) $ 159,334 $ 125,492 -120.8 % 27.0 %
Federal income tax expense
(benefit) (20,072 ) 47,942 37,407 -141.9 28.2
Net Income (Loss) $ (13,064 ) $ 111,392 $ 88,085 -111.7 % 26.5 %
Basic earnings (loss) per share $ (0.48 ) $ 4.04 $ 3.37 -111.9 % 19.9 %
Diluted earnings (loss) per share (0.48 ) 4.03 3.36 -111.9 19.9
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Executive Summary
We operate property and casualty and life insurance businesses, marketing our
products through independent agents. Although we maintain a broad geographic
presence that includes most of the United States, more than half of our property
and casualty business is generated in Iowa, Texas, Colorado, Louisiana and
Missouri. Approximately three-fourths of our life insurance business is
generated in Iowa, Minnesota, Wisconsin, Nebraska and Illinois.
We conduct our operations through two distinct segments: property and casualty
insurance and life insurance. We manage these segments separately because they
generally do not share the same customer base, and they each have different
pricing and expense structures. We evaluate each of our segment's profits based
upon operating and investment results. Segment profit or loss described in the
following sections of Management's Discussion and Analysis is reported on a
pre-tax basis. Additional segment information is presented in Part II, Item 8,
Note 11 "Segment Information" to the Consolidated Financial Statements.
Our revenue is primarily comprised of premiums and investment income. Major
categories of expenses include losses and loss settlement expenses, changes in
reserves for future policy benefits, operating expenses and interest on
policyholders' accounts. Through disciplined underwriting and strong agency
relationships, we have traditionally emphasized writing good business at an
adequate price, preferring quality to volume. Our goal of consistent
profitability is supported by these business strategies.
Our premium written is cyclical in nature and is influenced by many factors,
including price competition, economic conditions, interest rates,
weather-related events and other catastrophes including natural disasters (e.g.
hurricanes and tornados) and man-made disasters, state regulations, court
decisions and changes in the law.
United Fire & Casualty Company Form 10-K | 2008
Over the past three years, our commercial lines of business have accounted for
over 90 percent of premium revenue. We anticipate that our current composition
of commercial lines and personal lines business will not change materially
during the coming year.
In 2008, we had a net loss of $13.1 million, compared to net income of
$111.4 million in 2007 and $88.1 million in 2006. The substantial deterioration
of our underwriting and overall financial results in 2008 can be attributed to a
significant increase in catastrophe losses and the deterioration of the
performance of our core book of business. In 2008, we experienced catastrophe
losses from 34 events totaling $76.1 million, or $1.83 per share, compared to 18
catastrophic loss events in 2007 totaling $14.1 million, or $.33 per share and
16 catastrophic loss events in 2006 totaling $59.8 million or $1.49 per share.
In our core book of business we experienced an increase in loss ratios due to
both an increase in severity and continued premium pressure. The combination of
these factors had a significant impact on our overall performance. In addition,
net investment income declined by $14.9 million to $107.6 million in 2008. This
is attributable to lower market interest rates, primarily in short-term
investments. Also contributing to this decline was a loss in investment income
of $4.5 million due to the performance of our investment in certain limited
liability partnership holdings. Further impacting our net income was the
other-than-temporary impairment of investment securities totaling $9.9 million
in 2008, compared to $.1 in 2007 and $.4 million in 2006.
On June 6, 2008, we received notice of an adverse decision by a Federal Court
jury in New Orleans, Louisiana in a lawsuit related to Hurricane Katrina. We are
appealing the jury's decision, which according to Louisiana law required us to
place $29.0 million on deposit with the State of Louisiana. We recorded a net
loss after reinsurance of $10.8 million ($7.0 million after-tax) related to this
decision. We continue to settle lawsuits related to Hurricane Katrina and, as of
December 31, 2008, we have in excess of 420 individual policyholder cases as
well as 11 class-action lawsuits pending. Refer to Note 1. "Significant
Accounting Policies" under the heading "Contingent Liabilities" contained in
Part II, Item 8, "Financial Statements and Supplementary Data." for a further
discussion of the current status of our ongoing Hurricane Katrina litigation and
its potential impact to our operations.
The performance of our underlying book of property and casualty business
deteriorated some in 2008, driven by an escalation in loss severity and a
continuation of flat or falling premium rates. Excluding catastrophes our
average incurred claim size was $8,444 in 2008, $6,452 in 2007 and $5,503 in
2006. Although we feel well positioned to withstand the current market
conditions, as we have always competed on our products and services rather than
on price, we are making some modifications to our underwriting guidelines in
2009 and expanding the use of our loss control unit, eliminating certain
unprofitable classes of business and enhancing our predictive analysis tools.
On June 11, 2008, our corporate headquarters was forced to close temporarily due
to historic flooding in Cedar Rapids, Iowa, that caused extensive damage to the
first and lower levels of our buildings. Our disaster recovery plan was
effective in allowing us to access and restore all of our major automated
processing systems within 24 hours of the flood. We were also able to have a
temporary office for more than 200 employees up and running within one week.
Other employees were able to remotely access our systems and work from home.
Despite a few minor technical issues, we were able to maintain our book of
business and actively process new business during the 11 weeks that employees
were displaced from our corporate headquarters. Reconstruction of those areas of
our corporate headquarters affected by the flood continues on schedule and we
expect these efforts to be completed during the first quarter of 2009.
We recorded $6.8 million of flood-related expenses, net of insurance, in 2008,
which primarily relates to costs incurred to clean up and restore our buildings
and their contents, and we anticipate incurring additional expenses for
reconstruction and other related costs in 2009. We believe that any additional
costs to be incurred would be minimal and immaterial to our results of
operations. A portion of these costs may be subject to recovery. We have
received insurance reimbursements totaling $3.1 million, which have offset the
expenses incurred through December 31, 2008. Since December 31, 2008 we have
received an additional $1.0 million in insurance recoveries.
On September 1, 2008, Hurricane Gustav made landfall along the Louisiana coast
near Cocodrie, Louisiana. On September 13, 2008, Hurricane Ike made landfall in
Galveston, Texas. Hurricanes Gustav and Ike together were considerable financial
events for us, resulting in more than $36.0 million in incurred losses and loss
settlement expenses during 2008. These hurricanes made fairly direct hits on two
of our three largest Gulf Coast exposures that we monitor - the southeastern
Louisiana and Galveston-Houston areas. We do not expect that further development
on our losses from Hurricane Gustav will require us to utilize our catastrophe
reinsurance coverage, which has a loss retention limit of $20.0 million. We are
encouraged that the losses for Hurricane Ike, which have exceeded our
catastrophe reinsurance loss retention, will not have a material impact on our
future results of operations as any further development will be ceded under our
catastrophe reinsurance coverage.
United Fire & Casualty Company Form 10-K | 2008
We were directly affected by Hurricanes Gustav and Ike. Due to Hurricane Gustav,
our New Orleans claims office in Metairie, Louisiana was closed for three days.
Due to Hurricane Ike, our Gulf Coast regional office in Galveston, Texas closed
for three weeks before reopening in a temporary facility in a suburb of Houston,
Texas. As with the flooding in Cedar Rapids, our disaster recovery plan for
these offices performed as expected, allowing our employees to access our major
automated processing systems quickly and efficiently. We recorded $.4 million of
hurricane-related expenses in 2008, which primarily relates to costs incurred to
remove damaged contents from the affected areas and establish a temporary
facility for our Gulf Coast regional office. We anticipate incurring additional
expenses for the clean-up and restoration of the affected areas and other
related costs in 2009. A portion of these costs will be subject to recovery
under our insurance. As of December 31, 2008, no such recovery has been recorded
against the expenses incurred.
This has been a difficult year for our company, but with the support of our
employees and customers, we have been able to meet the challenges created by
these natural disasters with almost no disruption in service to our agents and
policyholders. Our overall disaster preparedness allowed us to continue to
settle claims, process new business and service existing accounts despite the
temporary office closings. For the most part it was business as usual for our
customers despite these natural disasters.
The stable results and steady income produced by our life insurance segment has
historically helped offset the volatility of our property and casualty insurance
earnings that occurs due to the cyclical nature and weather patterns of the
property and casualty insurance business. In order to maintain profitability
within our life insurance segment we continue to diversify our product offerings
in response to industry needs. Our new universal life product, introduced in
2007, has been well received by those agents accustomed to marketing universal
life policies. Small- to mid-size employer groups have been our target market to
date. In 2009 we plan to expand our target market with the goal of enrolling 100
new small- to mid-size employer groups. During 2008 we continued to see annuity
withdrawals exceed new annuity deposits - although at a slower pace than
experienced during 2007 and 2006. We will continue to monitor annuity
withdrawals closely to determine if future interest rate adjustments are
necessary. The current interest rate environment presents a challenge to
maintaining a profitable interest rate spread for our annuity business. Although
our life insurance segment had a good year operationally, nearly all of its
income was lost to realized investment losses of $12.3 million in 2008
(primarily due to write-downs of Kaupthing Bank and Lehman Brothers fixed
maturity securities), compared to realized investment gains of $2.6 million in
2007 and $3.0 million in 2006.
The global investment markets have experienced extraordinary volatility in 2008,
especially in the last six months of the year. We have been impacted by this
volatility, with our available-for-sale fixed maturity securities and our equity
securities generating an unrealized loss of $128.6 million for 2008 compared to
an unrealized loss of $8.4 million for 2007 and an unrealized gain of $1.7
million for 2006. We are committed to a general buy-and- hold philosophy in
relationship to our investment portfolio, with the ability and intention of
holding our investments to maturity or until a recovery in value occurs. Despite
the calamities of the past year, we remain in a strong capital position, with
less than a 15 percent decline in our stockholders' equity from 2007 to 2008.
In August 2007, our Board of Directors authorized a share repurchase program
with an initial authorization of 600,000 shares. This was added to our existing
blanket repurchase authorization of 87,167 shares that remained from a previous
authorization to repurchase shares. Following the program's adoption in 2007,
the Board of Directors increased the repurchase authorization by 500,000 shares
in both February 2008 and August 2008, respectively. Under this share repurchase
program, management may purchase our common stock from time to time through open
market or privately negotiated transactions. In determining the amount and
timing of stock repurchases, management considers many factors including the
price of our common stock, general market and economic conditions, other
corporate uses for capital and regulatory requirements. The share repurchase
program expires on August 17, 2009 unless further extended by the Board of
Directors, but the Board of Directors may modify or discontinue the program at
any time. Since inception, we have repurchased a total of 1,078,292 shares of
our common stock at an average stock price of $28.65 per share. During 2008, we
repurchased 580,792 shares of our common stock at an average stock price of
$25.51 and returned them to the status of authorized but unissued shares. As of
December 31, 2008, our remaining repurchase authorization is 608,875 shares. We
are faced with the challenge of balancing the capital adequacy requirements
established by A.M. Best with market expectations regarding returns on equity
investment. For a more detailed accounting of the shares repurchased under this
program in the fourth quarter of 2008, refer to Part II, Item 5 "Market for
Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities."
United Fire & Casualty Company Form 10-K | 2008 Our policy has been to pay quarterly cash dividends, and we intend to continue that policy. We have paid dividends every quarter since March 1968. Payment of any future dividends, however, will depend upon factors such as net income, financial condition, capital requirements, and general business conditions. For a more detailed accounting of dividends paid during 2008 and 2007, refer to
United Fire & Casualty Company Form 10-K | 2008
Catastrophe modeling requires a significant amount of judgment and a number of
assumptions and relies upon inputs based on experience, science, engineering and
history. As a result, such models may fail to account for risks that are outside
of the range of normal probability or that are otherwise unforeseeable.
Consequently, catastrophe modeling estimates are subject to significant
uncertainty. In addition, more than one such event could occur in any period.
There are no industry-standard methodologies or assumptions for projecting
catastrophe exposure. Accordingly, catastrophe estimates provided by different
insurers may not be comparable.
Property and Casualty Insurance Segment
Property & Casualty Segment Results of Operations
(Dollars in Thousands) % Change Years ended December 31 2008 2007 2006 2008 vs. 2007 2007 vs. 2006 Net premiums written (1) $ 459,571 $ 470,402 $ 476,402 -2.3 % -1.3 % Net premiums earned $ 465,581 $ 473,134 $ 467,031 -1.6 % 1.3 % Loss and loss settlement expenses 393,349 245,845 278,504 60.0 -11.7 Amortization of deferred policy acquisition costs 117,590 123,420 118,756 -4.7 3.9 Other underwriting expenses 19,146 15,378 13,269 24.5 15.9 Underwriting income (loss) $ (64,504 ) $ 88,491 $ 56,502 -172.9 % 56.6 % Investment income, net $ 33,452 $ 43,363 $ 40,225 -22.9 % 7.8 % Realized investment gains 1,879 7,099 6,986 -73.5 1.6 Other income (loss) (55 ) 59 (108 ) N/A N/A Disaster charges and other related expenses 7,202 - - N/A N/A Income (loss) before income taxes $ (36,430 ) $ 139,012 $ 103,605 -126.2 % 34.2 % |
(1) Please refer to the Non-GAAP financial measures section of this report for further explanation of this measure.
United Fire & Casualty Company Form 10-K | 2008
Combined Ratio (GAAP Basis) Increase (Decrease) in Ratios
Years ended December 31 2008 2007 2006 2008 vs. 2007 2007 vs. 2006
Loss ratio 84.5 % 52.0 % 59.6 % 32.5 % -7.6 %
Expense ratio (1) 29.4 29.3 28.3 0.1 1.0
Combined ratio (2) 113.9 % 81.3 % 87.9 % 32.6 % -6.6 %
Combined ratio (without
catastrophes) (2) 97.6 78.3 75.1 19.3 3.2
Combined Ratio (Statutory Basis) Increase (Decrease) in Ratios
Years ended December 31 2008 2007 2006 2008 vs. 2007 2007 vs. 2006
Loss ratio 84.6 % 52.4 % 60.2 % 32.2 % -7.8 %
Expense ratio (1) 28.8 29.7 29.5 -0.9 0.2
Combined ratio (2) 113.4 % 82.1 % 89.7 % 31.3 % -7.6 %
Combined ratio (without
catastrophes) (2) 97.1 79.1 76.9 18.0 2.2
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