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.
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
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
$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.
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.
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.
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.
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.
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.
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,
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.
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.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Certain amounts included in the Consolidated Financial Statements for prior years have been reclassified to conform with the 1999 financial statement presentation.
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.
The effect on the amortization of deferred policy acquisition costs for revisions to estimated gross profits is reflected in earnings in the period such
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.
Intangibles, including goodwill and agency relationships, are being amortized by the straight-line method over periods of up to 28 years.
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.
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.
SOP 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk," is effective for financial statements for fiscal years beginning after June 15, 1999. The SOP provides guidance on accounting for insurance and reinsurance contracts that do not transfer insurance risk. All of the Company's reinsurance agreements are risk-transferring arrangements, accounted for according to SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." The impact of adopting SOP 98-7 will not have a material effect on the Company's Consolidated Financial Statements.
A reconciliation of the amortized cost (cost for equity securities) to fair values of investments in held-to-maturity and available-for-sale fixed maturities, equity securities and other long-term investments as of December 31, 1999 and 1998 is as follows.
Proceeds from sales of available-for-sale investments during 1999, 1998 and 1997 were $35,653,000, $78,471,000, and $27,390,000, respectively. Gross gains of $2,920,000, $23,208,000, and $3,242,000, respectively, were realized on those sales. Gross losses of $895,000, $385,000 and $15,000, respectively, were realized on those sales in 1999, 1998 and 1997.
The estimated fair value of mortgage loans was based on the estimated discounted future cash flows using 6.25 percent at December 31, 1998.
The fair value of the liabilities for annuity products, which are in a benefit payment phase, guaranteed investment contracts and structured settlements, are based on a discount rate of 7.0 percent at December 31, 1999 and 6.25 percent at December 31, 1998. The fair value of annuities currently in an accumulation phase is based on the net cash surrender value. The fair value of covered call options is based on a quoted market price.
A summary of the carrying value and estimated fair value of assets and liabilities meeting the definition of financial instruments at December 31, 1999 and 1998 is as follows.
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, and recorded interest expense of $11,000. There was no loan balance outstanding as of December 31, 1998.
The property and casualty insurance companies also assume portions of their insurance business from other insurance companies. Assumed premiums earned for the years ended December 31, 1999, 1998 and 1997 were $34,289,000, $33,571,000 and $40,198,000, respectively.
United Life Insurance Company follows the policy of reinsuring that portion of the risk in excess of $200,000 on the life of any individual. Policy benefit reserves and claims are stated after deduction of reserves and claims applicable to reinsurance ceded to other companies; however, United Life Insurance Company is contingently liable for these amounts in the event such companies are unable to pay their portion of the claims and is contingently liable for ceded insurance in force of $396,382,000 and $358,022,000 at December 31, 1999 and 1998, respectively. Approximately 63 percent of ceded life insurance in force has been ceded to two reinsurers. The Company believes all amounts are collectible with regard to reinsurance receivables.
The table below provides an analysis of changes in losses and loss adjustment expenses ("LAE") reserves for 1999, 1998 and 1997 (net of reinsurance amounts). Changes in the reserves are reflected in the income statement for the year when the changes are made. Loss and LAE development on claims occurring in prior years benefited underwriting profit (before tax) by $25,135,000 in 1999 and $26,615,000 in 1998. These gains are due in part to the effects of settling reported (case) and unreported (IBNR) reserves established in prior years for less than expected.
Statutory stockholders' surplus and net income at December 31, 1999, 1998 and 1997 and for the years then ended are as follows.
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 by the NAIC and state insurance departments 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 State of Iowa Insurance Department governs the amount of dividends that may be paid to stockholders without prior approval by the Insurance Department. Based on these restrictions, the Company could make a maximum of $134,195,000 in dividend distributions to stockholders in 2000. Dividend payments by the insurance subsidiaries to the Company are subject to similar restrictions in the states in which they are domiciled. The Company received no dividends from its subsidiaries in 1999 or 1998.
A reconciliation of income tax expense computed at the applicable Federal tax rate of 35 percent in 1999, 34 percent in 1998, and 35 percent in 1997 to the amount recorded in the Consolidated Financial Statements is as follows.
For measurement purposes, an 8.25 percent pre-65 annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually each year to a rate of 5.25 percent for 2005 and remain at that level thereafter. A 6.75 percent post-65 covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually each year to a rate of 5.25 percent in 2005 and remain at that level thereafter. For dental claims, a 6.0 percent annual rate of increase was assumed for 1999, decreasing gradually to 4.75 percent for 2004 and thereafter.
The figures do not include amounts for the American Indemnity plan, as the annual per capita contributions for the benefits provided to retired employees are capped. As a result, increases in the assumed health care cost trend rate will have no significant effect on the accumulated postretirement benefit obligation or on the net periodic postretirement benefit cost as of December 31, 1999.
The Company also has an Employee Stock Ownership Plan ("ESOP") for the benefit of eligible employees and their beneficiaries. All employees are eligible to participate in the plan upon completion of one year of service and attaining age 21. Contributions to this plan are made at the discretion of the Board of Directors. These contributions are based upon a percentage of total payroll and are allocated to participants on the basis of compensation. Contributions are made in stock or cash, which is used by the Trustee to acquire shares of the Company stock to allocate to participants' accounts. As of December 31, 1999, 1998 and 1997, the ESOP owned 123,733, 120,333 and 93,127 shares of Company stock, respectively. Shares owned by the ESOP are included in shares issued and outstanding for purposes of calculating earnings per share and dividends paid on the shares are charged to retained earnings. The Company made contributions to the plan of $60,000, $1,050,000 and zero in 1999, 1998 and 1997 respectively.
On August 21, 1998, the Company adopted a nonqualified employee stock option plan which authorizes the issuance of up to 500,000 shares of the Company's common stock to employees. Pursuant to the plan, the granting of stock options is made at the discretion of the Board of Directors. Certain employees have been granted options to buy shares of the Company's stock at the market value of the stock on the date of grant. The options are exercisable in installments of 20 percent of the number of shares covered by the option each year from the date the option is granted. To the extent not exercised, installments shall accumulate and be exercisable by the optionee, in whole or in part, in any subsequent year included in the option period but not later than ten years from the grant date. The Company has elected to account for its stock options under APB No. 25, and as such, no compensation cost is recognized since the exercise price of the Company's stock options is equal to, or greater than, the market price of the underlying stock on the date of grant.
The Company has two reportable business segments in its operations; property and casualty insurance and life insurance. The property and casualty segment has five locations from which it conducts its business. All offices target a similar customer base and market the same products, using the same marketing strategies, and are therefore aggregated. The life insurance segment operates from the Company's home office. The accounting policies of the segments are the same as those described in Significant Accounting Policies in Note 1. The two segments are evaluated by management, based on both a statutory and a GAAP basis. Results are analyzed, based on profitability, expenses and return on equity. The Company's selling location is used in allocating revenues between foreign and domestic and, as such, the Company has no revenues allocated to foreign countries. The analysis that follows is reported on a GAAP basis and is reconciled to the Company's Consolidated Financial Statements.
The property and casualty segment markets most forms of commercial and personal property and casualty insurance products, including fidelity and surety bonds and reinsurance. The business is generated through approximately 2,150 independent agencies and brokers in 43 states, with 55 percent of the Company's direct premiums originating in nine Midwestern states in 1999.
In connection with the purchase, the Company developed a plan (the "exit plan") to close certain branches and involuntarily terminate certain employees of American Indemnity. A liability of $972,000 to reflect employee termination benefits and future contractual lease payments related to abandoned facilities was included in the allocation of the purchase price. The exit plan was completed by December 31, 1999.
The following table presents the unaudited proforma results of operations for 1999, 1998 and 1997, had the acquisition occurred on January 1, 1997. - - - - - - ---------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data) - - - - - - ---------------------------------------------------------------------------- December 31, 1999 December 31, 1998 December 31, 1997 (Unaudited) (Unaudited) (Unaudited) - - - - - - ---------------------------------------------------------------------------- Revenues $390,574 $407,555 $381,755 Net income 11,748 17,831 22,851 Basic and diluted earnings per share 1.17 1.72 2.13 - - - - - - ----------------------------------------------------------------------------
We have audited the accompanying consolidated balance sheets of UNITED FIRE & CASUALTY COMPANY (an Iowa corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These consolidated financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of United Fire & Casualty Company and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary data (Schedule III - Supplementary Insurance Information, Schedule IV - Reinsurance, and Schedule VI - - - - - - - Supplemental Information Concerning Property and Casualty Insurance Operations) are presented for purposes of additional analysis and are not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
VI - Supplemental Information Concerning Property and Casualty Insurance Operations 44