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UFCS > SEC Filings for UFCS > Form 10-Q on 7-Nov-2011All Recent SEC Filings

Show all filings for UNITED FIRE & CASUALTY CO

Form 10-Q for UNITED FIRE & CASUALTY CO


7-Nov-2011

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 "expect(s)," "anticipate(s)," "intend(s)," "plan(s)," "believe(s)," "continue(s),"
"seek(s)," "estimate(s)," "goal(s)," "target(s)," "forecast(s)," "project(s)," "predict(s)," "should," "could," "may," "will continue," "might," "hope," "can" and other words and terms of similar meaning or expression in connection with a discussion of future operations, financial performance or financial condition, are intended to identify 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. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in Part II Item 1A, "Risk Factors" of this document. Among the factors that could cause our actual outcomes and results to differ are:

The adequacy of our loss and loss settlement expense reserves established for Hurricane Katrina, which are based on management's estimates.

The frequency and severity of claims, including those related to catastrophe losses, and the impact those claims have on our loss reserve adequacy.

Developments in the domestic and global financial markets that could affect our investment portfolio and financing plans.

The calculation and recovery of deferred policy acquisition costs ("DAC").

The valuation of pension and other postretirement benefit obligations.

Our relationship with our agents.

Our relationship with our reinsurers.

The financial strength rating of our reinsurers.

Changes in industry trends and significant industry developments.

The resolution of regulatory issues and litigation pertaining to and arising out of Hurricane Katrina.

Governmental actions, policies and regulations, including, but not limited to, domestic health care reform, financial services regulatory reform, corporate governance, new laws or regulations or court decisions interpreting existing laws and regulations or policy provisions.

NASDAQ policies or regulations relating to corporate governance and the cost to comply.

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 Securities and


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Exchange Commission, we do not have any intention or obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are defined as those that are representative of significant judgments and uncertainties and that potentially may result in materially different results under different assumptions and conditions. We base our discussion and analysis of our results of operations and financial condition on the amounts reported in our Consolidated Financial Statements, which we have prepared in accordance with GAAP. As we prepare these Consolidated Financial Statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities; the disclosure of contingent assets and liabilities at the date of the financial statements; and the reported amounts of revenues and expenses for the reporting period. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Our critical accounting estimates are: the valuation of investments; the valuation of reserves for losses, claims, and loss settlement expenses and the related valuation of reinsurance recoverable on paid and unpaid losses; the valuation of reserves for future policy benefits; and the calculation of the deferred policy acquisition costs asset. These critical accounting estimates are more fully described in our Management's Discussion and Analysis of Results of Operations and Financial Condition presented in our Annual Report on Form 10-K for the year ended December 31, 2010.

INTRODUCTION

The purpose of the Management's Discussion and Analysis is to provide an understanding of our results of operations and consolidated financial position. Our Management's Discussion and Analysis should be read in conjunction with our consolidated financial statements and related notes, including those in our Annual Report on Form 10-K for the year ended December 31, 2010. When we provide information on a statutory basis, we label it as such, otherwise, all other data is presented in accordance with GAAP.

This discussion and analysis is presented in these sections:

Our Business

Consolidated Financial Highlights

Results of Operations for Property and Casualty Insurance, Life Insurance and Investment Portfolio

Liquidity and Capital Resources

Statutory Financial Measures

OUR BUSINESS

Founded in 1946, United Fire & Casualty Company provides insurance protection for individuals and businesses through several regional companies. We are licensed as a property and casualty insurer in 43 states plus the District of Columbia and are represented by more than 1,200 independent agencies. Our life insurance subsidiary is licensed in 29 states and is represented by more than 900 independent agencies.

We operate two business segments, each with a wide range of products:

property and casualty insurance, which includes commercial insurance, personal insurance, surety bonds and assumed insurance; and

life insurance, which includes deferred and immediate annuities, universal life products and traditional life (primarily single premium whole life insurance) products.


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We manage these business segments separately, as they generally do not share the same customer base, and each has different products, pricing, and expense structures.

For the nine-month period ended September 30, 2011, property and casualty business accounted for 90.5 percent of our net premiums earned, of which 89.6 percent was generated from commercial lines. Life insurance business made up 9.5 percent of our net premiums earned, of which 60.0 percent was generated from traditional life insurance products.

For the nine-month period ended September 30, 2011, more than half of our property and casualty direct premiums were written in Iowa, Texas, California, Missouri, Louisiana, and Illinois, and over three-fourths of our life insurance premiums, excluding annuities, were written in Iowa, Illinois, Wisconsin, Nebraska and Minnesota.

We evaluate segment profit or loss based upon operating and investment results. Segment profit or loss described in the following sections of the Management's Discussion and Analysis is reported on a pre-tax basis. Additional segment information is presented in Part I, Item 1, Note 6 "Segment Information" to the unaudited Consolidated Financial Statements.
Our primary sources of revenue are 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.
The profitability of our company is influenced by many factors, including price, competition, economic conditions, interest rates, catastrophic events and other natural disasters, man-made disasters, state regulations, court decisions, and changes in the law. Unless a connection between future increased extreme weather events and climate change is ultimately proven true, management believes that climate change considerations will not have a material impact on our profitability.
To manage these risks and uncertainties, we seek to achieve consistent profitability through strong agency relationships, exceptional customer service, fair and prompt claims handling, disciplined underwriting, superior loss control services, and effective and efficient use of technology.


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CONSOLIDATED FINANCIAL HIGHLIGHTS
                             Three Months Ended September 30,              Nine Months Ended September 30,
(In Thousands)                2011             2010          %             2011           2010           %
Revenues
Net premiums earned      $    158,704       $ 119,158      33.2  %    $   425,118      $ 350,548        21.3  %
Investment income, net
of investment expenses         26,926          27,084      (0.6 )          81,730         83,343        (1.9 )
Net realized investment
gains
Other-than-temporary
impairment charges                  -               -         -                 -           (459 )         -
All other net realized
gains                           1,219           1,322      (7.8 )           4,996          6,853       (27.1 )
Total net realized
investment gains                1,219           1,322      (7.8 )           4,996          6,394       (21.9 )
Other income                      725             340     113.2             1,610            758       112.4
                         $    187,574       $ 147,904      26.8  %    $   513,454      $ 441,043        16.4  %

Benefits, Losses and
Expenses
Losses and loss
settlement expenses      $    120,861       $  89,312      35.3       $   332,854      $ 230,432        44.4
Future policy benefits          9,167           7,218      27.0            25,229         20,983        20.2
Amortization of deferred
policy acquisition costs       43,022          28,491      51.0           112,800         82,929        36.0
Other underwriting
expenses                       14,101          10,468      34.7            44,878         30,654        46.4
Interest on
policyholders' accounts        10,897          10,923      (0.2 )          32,224         32,371        (0.5 )
                         $    198,048       $ 146,412      35.3  %    $   547,985      $ 397,369        37.9  %

Income (loss) before
income taxes             $    (10,474 )     $   1,492        NM       $   (34,531 )    $  43,674      (179.1 )%
Federal income tax
expense (benefit)              (5,698 )        (1,431 )      NM           (17,651 )        7,707         NM
Net Income (Loss)        $     (4,776 )     $   2,923        NM       $   (16,880 )    $  35,967      (146.9 )%

NM = not meaningful

The following is a summary of our financial performance for the three- and nine-month periods ended September 30, 2011:

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