10-Q 1 ufcs-2011630x10q2.htm UFCS-2011.6.30-10Q2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-Q
_______________________

 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended June 30, 2011

Commission File Number 001-34257
____________________________

 
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 R NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES R NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o 
 
Accelerated filer R 
 
Non-accelerated filer o 
 
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO R

As of August 1, 2011, 25,880,210 shares of common stock were outstanding.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

United Fire & Casualty Company and Subsidiaries
Index to Quarterly Report on Form 10-Q
June 30, 2011
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


FORWARD-LOOKING INFORMATION
It is important to note that our actual results could differ materially from those projected in our 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 I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A “Risk Factors.”



1


PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

United Fire & Casualty Company and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Per Share Data and Number of Shares)
June 30, 2011
 
December 31, 2010
 
(unaudited)
 
 
ASSETS
 
 
 
Investments
 
 
 
Fixed maturities
 
 
 
Held-to-maturity, at amortized cost (fair value $5,699 in 2011 and $6,422 in 2010)
$
5,664

 
$
6,364

Available-for-sale, at fair value (amortized cost $2,526,183 in 2011 and $2,178,666 in 2010)
2,644,475

 
2,278,429

Equity securities, at fair value (cost $69,858 in 2011 and $54,139 in 2010)
166,315

 
149,706

Trading securities, at fair value (amortized cost $14,763 in 2011 and $12,322 in 2010)
15,058

 
12,886

Mortgage loans
6,423

 
6,497

Policy loans
7,328

 
7,875

Other long-term investments
20,647

 
20,041

Short-term investments
1,500

 
1,100

 
$
2,867,410

 
$
2,482,898

 
 
 
 
Cash and cash equivalents
$
177,414

 
$
180,057

Accrued investment income
32,211

 
28,977

Premiums receivable (net of allowance for doubtful accounts of $715 in 2011 and $1,001 in 2010)
189,582

 
124,459

Deferred policy acquisition costs
111,290

 
87,524

Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $34,962 in 2011 and $33,397 in 2010)
36,929

 
21,554

Reinsurance receivables and recoverables
124,840

 
46,731

Prepaid reinsurance premiums
8,477

 
1,586

Income taxes receivable
24,432

 
17,772

Goodwill and intangible assets
31,681

 

Other assets
17,668

 
15,881

TOTAL ASSETS
$
3,621,934

 
$
3,007,439

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Future policy benefits and losses, claims and loss settlement expenses
 
 
 
Property and casualty insurance
$
949,668

 
$
603,090

Life insurance
1,419,797

 
1,389,331

Unearned premiums
302,133

 
200,341

Accrued expenses and other liabilities
133,217

 
78,439

Deferred income taxes
13,828

 
19,814

Debt
82,900

 

Trust preferred securities
15,618

 

TOTAL LIABILITIES
$
2,917,161

 
$
2,291,015

Stockholders’ Equity
 
 
 
Common stock, $3.33 1/3 par value; authorized 75,000,000 shares; 25,880,210 and 26,195,552 shares issued and outstanding in 2011 and 2010, respectively
$
86,267

 
$
87,318

Additional paid-in capital
132,200

 
136,147

Retained earnings
396,037

 
415,981

Accumulated other comprehensive income, net of tax
90,269

 
76,978

TOTAL STOCKHOLDERS’ EQUITY
$
704,773

 
$
716,424

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
3,621,934

 
$
3,007,439

The Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.


2


United Fire & Casualty Company and Subsidiaries
Consolidated Statements of Income (Unaudited)

(In Thousands, Except Per Share Data
Three Months Ended June 30,
 
Six Months Ended June 30,
   and Number of Shares)
2011
 
2010
 
2011
 
2010
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
Net premiums earned
$
152,210

 
$
117,082

 
$
266,414

 
$
231,390

Investment income, net of investment expenses
27,741

 
28,291

 
54,804

 
56,259

Net realized investment gains
 
 
 
 

 
 
Other-than-temporary impairment charges

 
(117
)
 

 
(459
)
All other net realized gains
1,124

 
2,463

 
3,777

 
5,531

Total net realized investment gains
1,124

 
2,346

 
3,777

 
5,072

Other income
729

 
295

 
885

 
418

 
$
181,804

 
$
148,014

 
$
325,880

 
$
293,139

 
 
 
 
 
 
 
 
Benefits, Losses and Expenses
 
 
 
 
 
 
 
Losses and loss settlement expenses
$
135,811

 
$
72,757

 
$
211,993

 
$
141,120

Future policy benefits
7,880

 
7,375

 
16,062

 
13,765

Amortization of deferred policy acquisition costs
43,732

 
27,922

 
69,778

 
54,438

Other underwriting expenses
14,720

 
10,973

 
30,777

 
20,186

Interest on policyholders’ accounts
10,657

 
10,647

 
21,327

 
21,448

 
$
212,800

 
$
129,674

 
$
349,937

 
$
250,957

 
 
 
 
 
 
 
 
Income (loss) before income taxes
$
(30,996
)
 
$
18,340

 
$
(24,057
)
 
$
42,182

Federal income tax expense (benefit)
(13,082
)
 
4,409

 
(11,953
)
 
9,138

Net Income (Loss)
$
(17,914
)
 
$
13,931

 
$
(12,104
)
 
$
33,044

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
26,101,842

 
26,356,353

 
26,148,438

 
26,395,593

Basic earnings (loss) per common share
(0.69
)
 
0.53

 
(0.46
)
 
1.25

Diluted earnings (loss) per common share
(0.69
)
 
0.53

 
(0.46
)
 
1.25

Cash dividends declared per common share
0.15

 
0.15

 
0.30

 
0.30

The Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.



3


United Fire & Casualty Company and Subsidiaries
Consolidated Statement of Stockholders’ Equity (Unaudited)

(In Thousands, Except Per Share Data)
Six Months Ended June 30, 2011
 
 
Common stock
 
Balance, beginning of year
$
87,318

Shares repurchased (323,597 shares)
(1,078
)
Shares issued for stock-based awards (8,255 shares)
27

Balance, end of period
$
86,267

 
 
Additional paid-in capital
 
Balance, beginning of year
$
136,147

Compensation expense and related tax benefit for stock-based award grants
945

Shares repurchased
(5,004
)
Shares issued for stock-based awards
112

Balance, end of period
$
132,200

 
 
Retained earnings
 
Balance, beginning of year
$
415,981

Net income (loss)
(12,104
)
Dividends on common stock ($0.30 per share)
(7,840
)
Balance, end of period
$
396,037

 
 
Accumulated other comprehensive income, net of tax
 
Balance, beginning of year
$
76,978

Change in net unrealized appreciation (1)
12,455

Change in underfunded status of employee benefit plans
836

Balance, end of period
$
90,269

 
 
Summary of changes
 
Balance, beginning of year
$
716,424

Net income (loss)
(12,104
)
All other changes in stockholders’ equity accounts
453

Balance, end of period
$
704,773

(1) The change in net unrealized appreciation is net of reclassification adjustments.

The Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.



4


United Fire & Casualty Company and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
Six Months Ended June 30,
 
2011
 
2010
Cash Flows From Operating Activities
 
 
 
Net income (loss)
$
(12,104
)
 
$
33,044

Adjustments to reconcile net income (loss) to net cash provided by operating activities
 
 
 
Net accretion of bond premium
3,768

 
1,891

Depreciation and amortization
1,708

 
1,455

Stock-based compensation expense
939

 
878

Net realized investment gains
(3,777
)
 
(5,072
)
Net cash flows from trading investments
(2,104
)
 
2,379

Deferred income tax expense (benefit)
(7,571
)
 
2,976

Changes in:
 
 
 
Accrued investment income
507

 
(761
)
Premiums receivable
(29,226
)
 
(16,915
)
Deferred policy acquisition costs
(6,373
)
 
(4,614
)
Reinsurance receivables
(5,883
)
 
(7,374
)
Prepaid reinsurance premiums
(602
)
 
(86
)
Income taxes receivable
(4,029
)
 
11,464

Other assets
(806
)
 
1,859

Future policy benefits and losses, claims and loss settlement expenses
52,813

 
12,659

Unearned premiums
29,542

 
16,881

Accrued expenses and other liabilities
25,493

 
(4,377
)
Deferred income taxes
(1,019
)
 
(2,325
)
Other, net
(486
)
 
(494
)
Total adjustments
$
52,894

 
$
10,424

Net cash provided by operating activities
$
40,790

 
$
43,468

Cash Flows From Investing Activities
 
 
 
Proceeds from sale of available-for-sale investments
$
21,367

 
$
3,402

Proceeds from call and maturity of held-to-maturity investments
709

 
1,603

Proceeds from call and maturity of available-for-sale investments
316,235

 
192,888

Proceeds from short-term and other investments
1,554

 
3,200

Purchase of available-for-sale investments
(292,808
)
 
(277,962
)
Purchase of short-term and other investments
(1,706
)
 
(3,308
)
Change in securities lending collateral

 
(75,013
)
Net purchases and sales of property and equipment
3,486

 
(960
)
Acquisition of property and casualty company, net of cash acquired
(172,619
)
 

Net cash used in investing activities
$
(123,782
)
 
$
(156,150
)
Cash Flows From Financing Activities
 
 
 
Policyholders’ account balances
 
 
 
Deposits to investment and universal life contracts
$
71,489

 
$
70,669

Withdrawals from investment and universal life contracts
(57,263
)
 
(55,437
)
Borrowings of short-term debt
79,900

 

Change in securities lending payable

 
75,013

Payment of cash dividends
(7,840
)
 
(7,910
)
Repurchase of common stock
(6,082
)
 
(3,689
)
Issuance of common stock
139

 
23

Tax benefit from issuance of common stock
6

 
1

Net cash provided by financing activities
$
80,349

 
$
78,670

Net Change in Cash and Cash Equivalents
$
(2,643
)
 
$
(34,012
)
Cash and Cash Equivalents at Beginning of Period
180,057

 
190,852

Cash and Cash Equivalents at End of Period
$
177,414

 
$
156,840

The Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.


5



United Fire & Casualty Company and Subsidiaries
Notes to Unaudited Consolidated Financial Statements

NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Business
The terms “United Fire,” “we,” “us,” or “our” refer to United Fire & Casualty Company or United Fire & Casualty Company and its consolidated subsidiaries and its affiliate, as the context requires. We are engaged in the business of writing property and casualty insurance and life insurance and selling annuities through a network of independent agencies. We report our operations in two business segments: property and casualty insurance and life insurance. We are licensed as a property and casualty insurer in 43 states plus the District of Columbia and as a life insurer in 29 states.
Basis of Presentation
We maintain our records in conformity with the accounting practices prescribed or permitted by the insurance departments of the states in which we are domiciled. To the extent that certain of these practices differ from U.S. generally accepted accounting principles (“GAAP”), we have made adjustments to present the accompanying unaudited Consolidated Financial Statements in conformity with GAAP. Certain financial information that is included in our Annual Report on Form 10-K, including certain financial statement footnote disclosures, are not required by the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting and have been condensed or omitted.
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. The financial statement categories that are most dependent on management estimates and assumptions include: investments; deferred policy acquisition costs; goodwill and intangible assets; and future policy benefits and losses, claims and loss settlement expenses.
In the preparation of the accompanying unaudited Consolidated Financial Statements, we have evaluated all material subsequent events or transactions that occurred after the balance sheet date through the date on which the financial statements were issued for potential recognition or disclosure therein.
Certain prior year amounts have been reclassified to conform to the current year presentation.
In the opinion of the management of United Fire, the accompanying unaudited Consolidated Financial Statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. All significant intercompany transactions have been eliminated in consolidation. The results reported for the interim periods are not necessarily indicative of the results of operations that may be expected for the year. The unaudited Consolidated Financial Statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2010. The review report of Ernst & Young LLP as of and for the three- and six-month periods ended June 30, 2011, accompanies the unaudited Consolidated Financial Statements included in Part I, Item 1 “Financial Statements.”
Acquisition of Mercer Insurance Group
On March 28, 2011, we acquired 100 percent of the outstanding common stock of Mercer Insurance Group for cash consideration of $191.5 million. Accordingly, the results of operations for Mercer Insurance Group have been included in the accompanying unaudited Consolidated Financial Statements from that date forward. After the acquisition, we market through over 1,200 independent property and casualty agencies. In addition, the acquisition allows us to diversify our exposure to weather and other catastrophe risks across our geographic markets.



6


This transaction was accounted for under the purchase method of accounting using Mercer Insurance Group historical financial information and applying fair value estimates to the acquired assets, liabilities and commitments as of the acquisition date. For additional information related to this acquisition, see Note 10, “Business Combinations.”
In connection with this acquisition, we incurred $5.5 million of expense in the first quarter of 2011 related to change in control payments made to the former executive officers of Mercer Insurance Group.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash, money market accounts, and non-negotiable certificates of deposit with original maturities of three months or less.
For the six-month periods ended June 30, 2011 and 2010, we made payments for income taxes of $0.6 million and $10.5 million, respectively. For the six-month period ended June 30, 2011, we received no tax refunds compared to tax refunds of $13.5 million for the same period of 2010, that were received due to the overpayment of prior year tax and operating loss carrybacks.
We made no significant payments of interest for the six-month periods ended June 30, 2011 and 2010, other than for interest credited to policyholders’ accounts.
Income Taxes
Deferred tax assets and liabilities are established 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 year-to-year change in the net deferred tax asset or liability, except for certain changes in deferred tax amounts that affect stockholders’ equity and do not impact federal income tax expense.
We reported a federal income tax benefit of $12.0 million and a federal income tax expense of $9.1 million for the six-month periods ended June 30, 2011 and 2010, respectively. Our effective tax rate is different than the federal statutory rate of 35.0 percent due principally to the effect of tax-exempt municipal bond interest income and non-taxable dividend income.
We have recognized no liability for unrecognized tax benefits at June 30, 2011 or December 31, 2010, or at any time during the six-month period ended June 30, 2011. In addition, we have not accrued for interest and penalties related to unrecognized tax benefits. However, if interest and penalties would need to be accrued related to unrecognized tax benefits, such amounts would be recognized as a component of federal income tax expense.
We file a consolidated federal income tax return. We also file income tax returns in various state jurisdictions. We are no longer subject to federal or state income tax examination for years before 2006. There are ongoing examinations of income tax returns by the Internal Revenue Service of the 2008 tax year, by the State of Illinois of the 2007 and 2008 tax years and by the State of Florida of the 2008 through 2010 tax years.
Recently Issued Accounting Standards
Adopted Accounting Standards
Fair Value Measurements
In January 2010, the Financial Accounting Standards Board ("FASB") issued revised accounting guidance that clarifies and provides additional disclosure requirements related to recurring and non-recurring fair value measurements. The guidance requires separate disclosures for the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements, along with an explanation for the transfers. Additionally, a separate disclosure is required for purchases, sales, issuances and settlements on a gross basis for Level 3 fair value measurements. The guidance also provides additional clarification for both the level of disaggregation reported for


7


each class of assets or liabilities and disclosures of inputs and valuation techniques used to measure fair value for both recurring and non-recurring fair value measurements for assets and liabilities categorized as Level 2 or Level 3.
The new disclosures and clarifications of existing disclosures were effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010. Refer to Note 3 “Fair Value of Financial Instruments” for the information required to be disclosed upon our adoption of the guidance, effective January 1, 2011.
Pending Adoption of Accounting Standards
Policy Acquisition Costs
In October 2010, the FASB issued updated accounting guidance to address the diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts. This guidance modifies the definition of acquisition costs to specify that a cost must be incremental and directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred. Acquisition costs that are not eligible for deferral are to be charged to expense in the period incurred. If application of this guidance would result in the capitalization of acquisition costs that had not previously been capitalized by a reporting entity, the entity may elect not to capitalize those costs. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2011. We are currently evaluating the impact that our adoption of the guidance, effective January 1, 2012, will have on our Consolidated Financial Statements.
Fair Value Measurements
In May 2011, the FASB issued updated accounting guidance that changes the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between GAAP and International Financial Reporting Standards. The guidance also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively. We are currently evaluating the impact that our adoption of the guidance, effective January 1, 2013, will have on the information disclosed in our Consolidated Financial Statements.
Comprehensive Income
In June 2011, the FASB issued revised accounting guidance that eliminates the option to present the components of other comprehensive income as part of the statement of stockholders' equity.  Instead, comprehensive income must be reported in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. The guidance will be effective for public companies during the interim and annual periods beginning after December 15, 2011 with early adoption permitted. This new guidance is to be applied retrospectively. We have not adopted this guidance and currently we are evaluating the impact that our adoption of this guidance will have on the presentation of our Consolidated Financial Statements.

NOTE 2. SUMMARY OF INVESTMENTS
Fair Value of Investments
A reconciliation of the amortized cost (cost for equity securities) to fair value of investments in held-to-maturity and available-for-sale fixed maturity and equity securities as of June 30, 2011 and December 31, 2010, is as follows:


8


June 30, 2011
(Dollars in Thousands)
Type of Investment
Cost or Amortized Cost
 
Gross Unrealized Appreciation
 
Gross Unrealized Depreciation
 
Fair Value
HELD-TO-MATURITY
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
States, municipalities and political subdivisions
 
 
 
 
 
 
 
General obligations
$
733

 
$
8

 
$

 
$
741

Special revenue
 
 
 
 
 
 
 
Midwest
 
 
 
 
 
 
 
North central - East
353

 
20

 

 
373

North central - West
268

 
19

 

 
287

Northeast
230

 
6

 

 
236

South
793

 
2

 
94

 
701

West
2,838

 
30

 

 
2,868

Collaterialized mortgage obligations
64


3




67

Mortgage-backed securities
385


41




426

Total Held-to-Maturity Fixed Maturities
$
5,664

 
$
129

 
$
94

 
$
5,699

AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
U.S. government and government- sponsored enterprises
 
 
 
 
 
 
 
U.S. Treasury
$
40,100

 
$
1,163

 
$

 
$
41,263

Agency
107,197

 
195

 
433

 
106,959

States, municipalities and political subdivisions
 
 
 
 
 
 
 
General obligations

 

 

 

Midwest
 
 
 
 
 
 
 
North central - East
123,304

 
8,439

 
84

 
131,659

North central - West
74,823

 
5,612

 

 
80,435

Northeast
38,952

 
2,343

 

 
41,295

South
104,747

 
8,136

 
12

 
112,871

West
67,618

 
4,241

 
20

 
71,839

Special revenue
 
 
 
 
 
 
 
Midwest
 
 
 
 
 
 
 
North central - East
69,969

 
3,526

 
44

 
73,451

North central - West
51,540

 
2,620

 
96

 
54,064

Northeast
13,907

 
470

 
2

 
14,375

South
95,604

 
4,622

 
40

 
100,186

West
55,804

 
3,090

 
3

 
58,891

Foreign bonds
 
 
 
 
 
 
 
Canadian
63,569

 
3,596

 
159

 
67,006

Other foreign
98,242

 
4,940

 
217

 
102,965

Public utilities
 
 
 
 
 
 
 
Electric
218,289

 
12,012

 
327

 
229,974

Oil and gas
27,430

 
1,584

 
106

 
28,908

Other
9,044

 
343

 

 
9,387

Corporate bonds
 
 
 
 
 
 
 
Oil and gas
179,621

 
6,665

 
306

 
185,980

Chemicals
66,191

 
3,159

 
160

 
69,190

Basic resources
18,609

 
564

 
182

 
18,991

Construction and materials
20,409

 
737

 

 
21,146

Industrial goods and services
162,890

 
7,318

 
370

 
169,838



9


Auto and parts
12,680

 
611

 
41

 
13,250

Food and beverage
73,454

 
2,708

 
39

 
76,123

Personal and household goods
64,197

 
3,053

 
127

 
67,123

Health care
109,703

 
6,050

 
45

 
115,708

Retail
49,796

 
2,290

 
31

 
52,055

Media
40,239

 
1,980

 
99

 
42,120

Travel and leisure
5,867

 
12

 
50

 
5,829

Telecommunications
42,250

 
1,851

 
7

 
44,094

Utilities
10,500

 
619

 

 
11,119

Banks
142,485

 
6,814

 
929

 
148,370

Insurance
28,926

 
1,031

 

 
29,957

Real estate
21,732

 
2,811

 
202

 
24,341

Financial services
109,912

 
3,766

 
756

 
112,922

Technology
29,857

 
1,174

 
196

 
30,835

Collaterialized mortgage obligations
 
 
 
 
 
 
 
Government
30,339

 
2,360

 
8

 
32,691

Other
302

 
2

 

 
304

Mortgage-backed securities
39,108

 
570

 
2

 
39,676

Asset-backed securities
6,572

 
524

 
220

 
6,876

Redeemable preferred stocks
405

 
4

 

 
409

Total Available-For-Sale Fixed Maturities
$
2,526,183

 
$
123,605

 
$
5,313

 
$
2,644,475

Equity securities
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
Public utilities
 
 
 
 
 
 
 
Electric
$
5,921

 
$
4,945

 
$
1

 
$
10,865

Oil and gas
928

 
2,004

 

 
2,932

Other
76

 
4

 

 
80

Corporate
 
 
 
 
 
 
 
Oil and gas
5,094

 
7,126

 

 
12,220

Chemicals
2,734

 
3,649

 

 
6,383

Industrial good and services
9,427

 
15,158

 
55

 
24,530

Auto and parts
257

 
621

 

 
878

Food and beverage
2,124

 
3,861

 

 
5,985

Personal and household goods
6,857

 
3,729

 

 
10,586

Health care
7,612

 
7,365

 
134

 
14,843

Retail
2,609

 
491

 
63

 
3,037

Media
147

 

 
3

 
144

Telecommunications
2,399

 
3,741

 
3

 
6,137

Utilities
1,502

 
138

 

 
1,640

Banks
12,971

 
31,708

 
178

 
44,501

Insurance
3,209

 
10,025

 
8

 
13,226

Real estate
393

 
782

 
43

 
1,132

Financial services
300

 
241

 

 
541

Technology
1,664

 
1,436

 
17

 
3,083

Nonredeemable preferred stocks
3,634

 
19

 
81

 
3,572

Total Available-for-Sale Equity Securities
$
69,858

 
$
97,043

 
$
586

 
$
166,315

Total Available-for-Sale Securities
$
2,596,041

 
$
220,648

 
$
5,899

 
$
2,810,790



10


December 31, 2010
(Dollars in Thousands)
Type of Investment
Cost or Amortized Cost
 
Gross Unrealized Appreciation
 
Gross Unrealized Depreciation
 
Fair Value
HELD-TO-MATURITY
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
States, municipalities and political subdivisions
 
 
 
 
 
 
 
General obligations
731

 
10

 

 
741

Special revenue
 
 
 
 
 
 
 
Midwest
 
 
 
 
 
 
 
North central - East
364

 
27

 

 
391

North central - West
488

 
23

 

 
511

Northeast
230

 
12

 

 
242

South
1,067

 
4

 
108

 
963

West
2,957

 
36

 

 
2,993

Collateralized mortgage obligations
83

 
4

 

 
87

Mortgage-backed securities
444

 
50

 

 
494

Total Held-to-Maturity Fixed Maturities
$
6,364

 
$
166

 
$
108

 
$
6,422

AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
U.S. government and government- sponsored enterprises
 
 
 
 
 
 
 
U.S. Treasury
38,133

 
943

 

 
39,076

Agency
104,049

 
96

 
1,014

 
103,131

States, municipalities and political subdivisions
 
 
 
 
 
 
 
General obligations
 
 
 
 
 
 
 
Midwest
 
 
 
 
 
 
 
North central - East
121,273

 
6,634

 
137

 
127,770

North central - West
76,699

 
4,491

 
58

 
81,132

Northeast
27,861

 
1,664

 

 
29,525

South
92,795

 
6,555

 
53

 
99,297

West
53,160

 
2,983

 
90

 
56,053

Special revenue
 
 
 
 
 
 
 
Midwest
 
 
 
 
 
 
 
North central - East
59,063

 
2,205

 
175

 
61,093

North central - West
38,827

 
1,744

 
266

 
40,305

Northeast
4,505

 
247

 
9

 
4,743

South
71,486

 
3,405

 
144

 
74,747

West
42,363

 
2,182

 

 
44,545

Foreign bonds
 
 
 
 
 
 
 
Canadian
69,209

 
3,908

 
194

 
72,923

Other foreign
85,434

 
4,588

 
268

 
89,754

Public utilities
 
 
 
 
 
 
 
Electric
207,047

 
12,179

 
519

 
218,707

Oil and gas
53,919

 
1,724

 
359

 
55,284

Corporate bonds
 
 
 
 
 
 
 
Oil and gas
150,692

 
6,957

 
138

 
157,511

Chemicals
58,570

 
2,808

 
35

 
61,343

Basic resources
8,043

 
582

 

 
8,625

Construction and materials
19,385

 
873

 

 
20,258

Industrial goods and services
141,509

 
7,102

 
481

 
148,130

Auto and parts
13,453

 
1,003

 

 
14,456



11


Food and beverage
70,613

 
3,531

 
111

 
74,033

Personal and household goods
65,525

 
2,953

 
289

 
68,189

Health care
78,595

 
4,933

 
186

 
83,342

Retail
42,150

 
2,139

 
329

 
43,960

Media
33,276

 
1,786

 

 
35,062

Travel and leisure
5,882

 
61

 
77

 
5,866

Telecommunications
33,131

 
2,094

 
51

 
35,174

Utilities
13,620

 
521

 

 
14,141

Banks
117,506

 
5,817

 
1,689

 
121,634

Insurance
25,682

 
799

 
14

 
26,467

Real estate
20,903

 
1,101

 
267

 
21,737

Financial services
94,036

 
3,770

 
983

 
96,823

Technology
15,952

 
1,070

 
334

 
16,688

Collateralized mortgage obligations
17,564

 
2,013



 
19,577

Mortgage-backed securities
2

 



 
2

Asset-backed securities
6,754

 
572



 
7,326

Total Available-For-Sale Fixed Maturities
$
2,178,666

 
$
108,033

 
$
8,270

 
$
2,278,429

Equity securities
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
Public utilities
 
 
 
 
 
 
 
Electric
$
5,921

 
$
4,164

 
$
1

 
$
10,084

Oil and gas
928

 
1,746

 

 
2,674

Corporate
 
 
 
 
 
 
 
Oil and gas
4,903

 
6,235

 

 
11,138

Chemicals
2,734

 
3,345

 

 
6,079

Industrical goods and services
8,112

 
15,185

 

 
23,297

Auto and parts
704

 
922

 

 
1,626

Food and beverage
682

 
3,792

 

 
4,474

Personal and household goods
4,785

 
2,985

 

 
7,770

Health care
6,366

 
6,368

 
187

 
12,547

Retail
380

 
348

 

 
728

Travel and leisure
1

 

 

 
1

Telecommunications
2,150

 
3,138

 

 
5,288

Utilities
1,102

 
47

 
2

 
1,147

Banks
9,517

 
34,636

 
100

 
44,053

Insurance
3,129

 
11,320

 
41

 
14,408

Real estate
619

 
967

 
40

 
1,546

Financial services
282

 

 
15

 
267

Technology
363

 
826

 

 
1,189

Nonredeemable preferred stocks
1,461

 
3

 
74

 
1,390

Total Available-for-Sale Equity Securities
$
54,139

 
$
96,027

 
$
460

 
$
149,706

Total Available-for-Sale Securities
$
2,232,805

 
$
204,060

 
$
8,730

 
$
2,428,135





12


Maturities
The amortized cost and fair value of held-to-maturity, available-for-sale and trading securities at June 30, 2011, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset-backed securities, mortgage-backed securities and collateralized mortgage obligations may be subject to prepayment risk and are therefore not categorized by contractual maturity.
(In Thousands)
Held-To-Maturity
 
Available-For-Sale
 
Trading
June 30, 2011
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
245

 
$
251

 
$
261,784

 
$
268,500

 
$
2,712

 
$
2,798

Due after one year through five years
4,967

 
4,952

 
1,173,647

 
1,240,235

 
4,645

 
4,681

Due after five years through 10 years
3

 
3

 
950,562

 
990,505

 
496

 
495

Due after 10 years

 

 
63,869

 
65,688

 
6,910

 
7,084

Asset-backed securities

 

 
6,572

 
6,876

 

 

Mortgage-backed securities
385

 
426

 
39,108

 
39,676

 

 

Collateralized mortgage obligations
64

 
67

 
30,641

 
32,995

 

 

 
$
5,664

 
$
5,699

 
$
2,526,183

 
$
2,644,475

 
$
14,763

 
$
15,058

Net Realized Investment Gains and Losses
Net realized gains (losses) on disposition of investments are computed using the specific identification method and are included in the computation of net income. A summary of net realized investment gains resulting from investment sales, calls and other-than-temporary impairment (“OTTI”) charges is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In Thousands)
2011
 
2010
 
2011
 
2010
Net realized investment gains (losses)
 
 
 
 
 
 
 
Fixed maturities
$
1,048

 
$
373

 
$
2,434

 
$
862

Equity securities
218

 
2,565

 
1,334

 
4,909

Trading securities
(38
)
 
(592
)
 
278

 
(684
)
Other long-term investments
(104
)
 

 
(269
)
 
(15
)
Total net realized investment gains
$
1,124

 
$
2,346

 
$
3,777

 
$
5,072

The proceeds and gross realized gains and losses on the sale of available-for-sale securities are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In Thousands)
2011
 
2010
 
2011
 
2010
Proceeds from sales
$
16,520

 
$
2,800

 
$
21,367

 
$
3,402

Gross realized gains
261

 
1,513

 
351

 
1,915

Gross realized losses
172

 

 
688

 

There were no sales of held-to-maturity securities during the six-month periods ended June 30, 2011 and 2010.
Our investment portfolio includes trading securities with embedded derivatives. These securities, which are primarily convertible redeemable preferred debt securities, are recorded at fair value. Income or loss, including the change in the fair value of these trading securities, is recognized currently in earnings as a component of net realized investment gains and losses. Our portfolio of trading securities had a fair value of $15.1 million and $12.9 million at June 30, 2011 and December 31, 2010, respectively.


13


The realized gains and losses attributable to the change in fair value during the reporting period of trading securities held at June 30, 2011 and 2010 are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In Thousands)
2011
 
2010
 
2011
 
2010
Trading
 
 
 
 
 
 
 
Realized gains
$
(164
)
 
$

 
$
31

 
$

Realized losses
273

 
609

 
300

 
896

Off-Balance Sheet Arrangements
Pursuant to an agreement with one of our limited liability partnership holdings, we are contractually committed to make capital contributions up to $15.0 million, upon request by the partnership, through December 31, 2017. Our remaining potential contractual obligation was $10.1 million at June 30, 2011.
Unrealized Appreciation and Depreciation
A summary of changes in net unrealized investment appreciation during the reporting period is as follows:
 
Six Months Ended June 30,
(In Thousands)
2011
 
2010
Change in net unrealized investment appreciation
 
 
 
Available-for-sale fixed maturities and equity securities
$
19,419

 
$
24,526

Deferred policy acquisition costs
(257
)
 
(11,576
)
Income tax effect
(6,707
)
 
(4,533
)
Total change in net unrealized appreciation, net of tax
$
12,455

 
$
8,417

In the above table, changes in deferred policy acquisition costs for our life insurance segment are affected by fluctuations that may occur in the interest rate environment from time to time.
We continually monitor the difference between our cost basis and the estimated fair value of our investments. Our accounting policy for impairment recognition requires OTTI charges to be recorded when we determine that it is more likely than not that we will be unable to collect all amounts due according to the contractual terms of the fixed maturity security or that the anticipated recovery in fair value of the equity security will not occur in a reasonable amount of time. Impairment charges on investments are recorded based on the fair value of the investments at the measurement date. Factors considered in evaluating whether a decline in value is other-than-temporary include: the length of time and the extent to which fair value has been less than cost; the financial condition and near-term prospects of the issuer; our intention to hold the investment; and the likelihood that we will be required to sell the investment.
The tables on the following pages summarize our fixed maturity and equity securities that were in an unrealized loss position at June 30, 2011 and December 31, 2010. The securities are presented by the length of time they have been continuously in an unrealized loss position. It is possible that we could recognize OTTI charges in future periods on securities held at June 30, 2011, if future events or information cause us to determine that a decline in fair value is other-than-temporary.
We believe the unrealized depreciation in value of securities in our fixed maturity portfolio is primarily attributable to changes in market interest rates and not the credit quality of the issuer. We have no intent to sell and it is more likely than not that we will not be required to sell these securities until such time as the fair value recovers to at least equal our cost basis or the securities mature.
We have evaluated the unrealized losses reported for all of our equity securities at June 30, 2011, and have concluded that the duration and severity of these losses do not warrant the recognition of an OTTI charge at June 30, 2011. Our largest unrealized loss greater than 12 months on an individual equity security at June 30, 2011 was $0.1 million. We have no intention to sell any of these securities prior to a recovery in value, but will continue to monitor the fair value reported for these securities as part of our overall process to evaluate investments for OTTI recognition.


14


(In Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2011
Less than 12 months
 
12 months or longer
 
Total
Type of Investment
Number of Issues
 
Fair Value
 
Gross Unrealized Depreciation
 
Number of Issues
 
Fair Value
 
Gross Unrealized Depreciation
 
Fair Value
 
Gross Unrealized Depreciation
HELD-TO-MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
States, municipalities and political subdivisions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Special revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
South

 
$

 
$

 
1

 
$
601

 
$
94

 
$
601

 
$
94

Total Held-to-Maturity Fixed Maturities

 
$

 
$

 
1

 
$
601

 
$
94

 
$
601

 
$
94

AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and government-sponsored enterprises
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
13

 
52,606

 
433

 

 

 

 
52,606

 
433

States, municipalities and political subdivisions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Midwest
5

 
2,688

 
84

 

 

 

 
2,688

 
84

South
3

 
1,992

 
12

 

 

 

 
1,992

 
12

West
1

 
771

 
20

 

 

 

 
771

 
20

Special revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Midwest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North central - East

 

 

 
1

 
866

 
44

 
866

 
44

North central - West
3

 
1,637

 
29

 
2

 
2,647

 
67

 
4,284

 
96

Northeast

 

 

 
1

 
618

 
2

 
618

 
2

South
6

 
4,461

 
40

 

 

 

 
4,461

 
40

West
1

 
245

 
3

 

 

 

 
245

 
3

Foreign bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Canadian
2

 
7,403

 
159

 

 

 

 
7,403

 
159

Other foreign
5

 
14,658

 
190

 
1