10-Q 1 ufcs-2011930x10q3.htm UFCS-2011.9.30-10Q3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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 September 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 October 31, 2011, 25,502,667 shares of common stock were outstanding.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

United Fire & Casualty Company and Subsidiaries
Index to Quarterly Report on Form 10-Q
September 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)
September 30, 2011
 
December 31, 2010
 
(unaudited)
 
 
ASSETS
 
 
 
Investments
 
 
 
Fixed maturities
 
 
 
Held-to-maturity, at amortized cost (fair value $5,380 in 2011 and $6,422 in 2010)
$
5,330

 
$
6,364

Available-for-sale, at fair value (amortized cost $2,541,736 in 2011 and $2,178,666 in 2010)
2,670,784

 
2,278,429

Equity securities, at fair value (cost $69,833 in 2011 and $54,139 in 2010)
144,483

 
149,706

Trading securities, at fair value (amortized cost $14,079 in 2011 and $12,322 in 2010)
13,916

 
12,886

Mortgage loans
4,876

 
6,497

Policy loans
7,191

 
7,875

Other long-term investments
19,342

 
20,041

Short-term investments
1,500

 
1,100

 
$
2,867,422

 
$
2,482,898

 
 
 
 
Cash and cash equivalents
$
154,477

 
$
180,057

Accrued investment income
31,819

 
28,977

Premiums receivable (net of allowance for doubtful accounts of $976 in 2011 and $1,001 in 2010)
185,987

 
124,459

Deferred policy acquisition costs
109,940

 
87,524

Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $34,147 in 2011 and $33,397 in 2010)
45,044

 
21,554

Reinsurance receivables and recoverables
126,559

 
46,731

Prepaid reinsurance premiums
7,301

 
1,586

Income taxes receivable
26,904

 
17,772

Goodwill and intangible assets
31,531

 

Other assets
17,761

 
15,881

TOTAL ASSETS
$
3,604,745

 
$
3,007,439

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Future policy benefits and losses, claims and loss settlement expenses
 
 
 
Property and casualty insurance
$
952,476

 
$
603,090

Life insurance
1,459,838

 
1,389,331

Unearned premiums
300,291

 
200,341

Accrued expenses and other liabilities
129,773

 
78,439

Deferred income taxes
8,288

 
19,814

Debt
53,000

 

Trust preferred securities
15,622

 

TOTAL LIABILITIES
$
2,919,288

 
$
2,291,015

Stockholders’ Equity
 
 
 
Common stock, $3.33 1/3 par value; authorized 75,000,000 shares; 25,502,667 and 26,195,552 shares issued and outstanding in 2011 and 2010, respectively
$
85,009

 
$
87,318

Additional paid-in capital
127,589

 
136,147

Retained earnings
387,419

 
415,981

Accumulated other comprehensive income, net of tax
85,440

 
76,978

TOTAL STOCKHOLDERS’ EQUITY
$
685,457

 
$
716,424

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
3,604,745

 
$
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 September 30,
 
Nine Months Ended September 30,
   and Number of Shares)
2011
 
2010
 
2011
 
2010
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
Net premiums earned
$
158,704

 
119,158

 
$
425,118

 
$
350,548

Investment income, net of investment expenses
26,926

 
27,084

 
81,730

 
83,343

Net realized investment gains
 
 
 
 
 
 
 
Other-than-temporary impairment charges

 

 

 
(459
)
All other net realized gains
1,219

 
1,322

 
4,996

 
6,853

Total net realized investment gains
1,219

 
1,322

 
4,996

 
6,394

Other income
725

 
340

 
1,610

 
758

 
$
187,574

 
$
147,904

 
$
513,454

 
$
441,043

 
 
 
 
 
 
 
 
Benefits, Losses and Expenses
 
 
 
 
 
 
 
Losses and loss settlement expenses
$
120,861

 
$
89,312

 
$
332,854

 
$
230,432

Future policy benefits
9,167

 
7,218

 
25,229

 
20,983

Amortization of deferred policy acquisition costs
43,022

 
28,491

 
112,800

 
82,929

Other underwriting expenses
14,101

 
10,468

 
44,878

 
30,654

Interest on policyholders’ accounts
10,897

 
10,923

 
32,224

 
32,371

 
$
198,048

 
$
146,412

 
$
547,985

 
$
397,369

 
 
 
 
 
 
 
 
Income (loss) before income taxes
$
(10,474
)
 
$
1,492

 
$
(34,531
)
 
$
43,674

Federal income tax expense (benefit)
(5,698
)
 
(1,431
)
 
(17,651
)
 
7,707

Net Income (Loss)
$
(4,776
)
 
$
2,923

 
$
(16,880
)
 
$
35,967

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
25,722,572

 
26,279,382

 
26,004,923

 
26,356,431

Basic earnings (loss) per common share
(0.19
)
 
0.11

 
(0.65
)
 
1.36

Diluted earnings (loss) per common share
(0.19
)
 
0.11

 
(0.65
)
 
1.36

Cash dividends declared per common share
0.15

 
0.15

 
0.45

 
0.45

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)
Nine Months Ended September 30, 2011
 
 
Common stock
 
Balance, beginning of year
$
87,318

Shares repurchased (701,140 shares)
(2,336
)
Shares issued for stock-based awards (8,255 shares)
27

Balance, end of period
$
85,009

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

Compensation expense and related tax benefit for stock-based award grants
1,390

Shares repurchased
(10,060
)
Shares issued for stock-based awards
112

Balance, end of period
$
127,589

 
 
Retained earnings
 
Balance, beginning of year
$
415,981

Net loss
(16,880
)
Dividends on common stock ($0.45 per share)
(11,682
)
Balance, end of period
$
387,419

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

Change in net unrealized appreciation (1)
7,208

Change in underfunded status of employee benefit plans
1,254

Balance, end of period
$
85,440

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

Net loss
(16,880
)
All other changes in stockholders’ equity accounts
(14,087
)
Balance, end of period
$
685,457

(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)
Nine Months Ended September 30,
 
2011
 
2010
Cash Flows From Operating Activities
 
 
 
Net income (loss)
$
(16,880
)
 
$
35,967

Adjustments to reconcile net income (loss) to net cash provided by operating activities
 
 
 
Net accretion of bond premium
7,710

 
3,500

Depreciation and amortization
2,559

 
2,163

Stock-based compensation expense
1,384

 
1,295

Net realized investment gains
(4,996
)
 
(6,394
)
Net cash flows from trading investments
(1,604
)
 
(835
)
Deferred income tax expense (benefit)
(11,901
)
 
2,424

Changes in:
 
 
 
Accrued investment income
899

 
(824
)
Premiums receivable
(25,706
)
 
(10,202
)
Deferred policy acquisition costs
(2,239
)
 
(2,572
)
Reinsurance receivables
(7,527
)
 
(12,061
)
Prepaid reinsurance premiums
574

 
(4
)
Income taxes receivable
(6,471
)
 
7,772

Other assets
(1,162
)
 
3,729

Future policy benefits and losses, claims and loss settlement expenses
68,139

 
31,014

Unearned premiums
27,701

 
10,552

Accrued expenses and other liabilities
21,795

 
(6,174
)
Deferred income taxes
158

 
(3,119
)
Other, net
2,153

 
110

Total adjustments
$
71,466

 
$
20,374

Net cash provided by operating activities
$
54,586

 
$
56,341

Cash Flows From Investing Activities
 
 
 
Proceeds from sale of available-for-sale investments
$
21,871

 
$
3,402

Proceeds from call and maturity of held-to-maturity investments
1,050

 
2,553

Proceeds from call and maturity of available-for-sale investments
438,472

 
323,859

Proceeds from short-term and other investments
4,583

 
4,385

Purchase of available-for-sale investments
(432,892
)
 
(439,755
)
Purchase of short-term and other investments
(2,907
)
 
(4,708
)
Change in securities lending collateral

 
(77,845
)
Net purchases and sales of property and equipment
(6,766
)
 
(1,509
)
Acquisition of property and casualty company, net of cash acquired
(171,394
)
 

Net cash used in investing activities
$
(147,983
)
 
$
(189,618
)
Cash Flows From Financing Activities
 
 
 
Policyholders’ account balances
 
 
 
Deposits to investment and universal life contracts
$
128,257

 
$
111,621

Withdrawals from investment and universal life contracts
(86,507
)
 
(81,936
)
Borrowings of short-term debt
79,900

 

Repayment of short-term debt
(29,900
)
 

Change in securities lending payable

 
77,845

Payment of cash dividends
(11,682
)
 
(11,845
)
Repurchase of common stock
(12,396
)
 
(5,507
)
Issuance of common stock
139

 
54

Tax benefit from issuance of common stock
6

 
5

Net cash provided by financing activities
$
67,817

 
$
90,237

Net Change in Cash and Cash Equivalents
$
(25,580
)
 
$
(43,040
)
Cash and Cash Equivalents at Beginning of Period
180,057

 
190,852

Cash and Cash Equivalents at End of Period
$
154,477

 
$
147,812

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; reinsurance receivables and recoverables (for net realizable value); goodwill and intangible assets (for recoverability); 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 nine-month periods ended September 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 $191.5 million, which was funded through a combination of cash and $79.9 million of short-term debt. 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 our products through over 1,200 independent property and casualty agencies. In addition, the acquisition allows us to diversify our


6


exposure to weather and other catastrophe risks across our geographic markets.
This transaction was accounted for under the acquisition method 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 nine-month periods ended September 30, 2011 and 2010, we made payments for income taxes of $0.6 million and $14.1 million, respectively. For the nine-month period ended September 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.
For the nine-month period ended September 30, 2011, we made interest payments totaling $1.3 million, compared to no payments for interest for the same period of 2010, other than for interest credited to policyholders’ accounts.
Deferred Policy Acquisition Costs
The expenses associated with issuing insurance policies – primarily commissions, premium taxes and underwriting costs – are deferred and amortized over the terms of the underlying policies. The table below shows the reconciliation of the components of our deferred policy acquisition costs asset, including the related amortization recognized for the nine-month period ended September 30, 2011.
(In Thousands)
Property & Casualty
 
Life Insurance
 
Total
Deferred policy acquisition costs at December 31, 2010
$
44,681

 
$
42,843

 
$
87,524

Value of business acquired (see Note 10)
27,436

 

 
27,436

Amortization of value of business acquired
(21,702
)
 

 
(21,702
)
Current deferred costs
98,802

 
6,451

 
105,253

Current amortization
(83,961
)
 
(7,137
)
 
(91,098
)
Ending unamortized deferred policy acquisition costs
$
65,256

 
$
42,157

 
$
107,413

Change in "shadow" deferred policy acquisition costs

 
2,527

 
2,527

Recorded deferred policy acquisition costs at September 30, 2011
$
65,256

 
$
44,684

 
$
109,940

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 $17.7 million and a federal income tax expense of $7.7 million for the nine-month periods ended September 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.


7


We have recognized no liability for unrecognized tax benefits at September 30, 2011 or December 31, 2010, or at any time during the nine-month period ended September 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 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 (i.e., 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.


8


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 for interim and annual periods beginning after December 15, 2011 with early adoption permitted. This new guidance is to be applied retrospectively. We are currently evaluating the impact that our adoption of this guidance, effective January 1, 2012, will have on the presentation of our Consolidated Financial Statements.
Goodwill Impairment
In September 2011, the FASB issued updated accounting guidance that is intended to reduce complexity and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The updated guidance also improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. In addition, the updated guidance improves the examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to measure an impairment loss, if any, under the second step of the goodwill impairment test. The updated guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted. We are currently evaluating the impact that our adoption of the guidance, effective January 1, 2012, will have on 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 September 30, 2011 and December 31, 2010, is as follows:


9


September 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
$
734

 
$
8

 
$

 
$
742

Special revenue
 
 
 
 
 
 
 
Midwest
 
 
 
 
 
 
 
North central - East
353

 
16

 

 
369

North central - West
218

 
14

 

 
232

Northeast
230

 
2

 

 
232

South
632

 
2

 
66

 
568

West
2,737

 
36

 

 
2,773

Collaterialized mortgage obligations
56


2




58

Mortgage-backed securities
370


36




406

Total Held-to-Maturity Fixed Maturities
$
5,330

 
$
116

 
$
66

 
$
5,380

AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
U.S. government and government-sponsored enterprises
 
 
 
 
 
 
 
U.S. Treasury
$
39,628

 
$
1,494

 
$

 
$
41,122

Agency
98,928

 
585

 
11

 
99,502

States, municipalities and political subdivisions
 
 
 
 
 
 
 
General obligations

 

 

 

Midwest
 
 
 
 
 
 
 
North central - East
123,825

 
9,970

 
11

 
133,784

North central - West
76,991

 
6,577

 

 
83,568

Northeast
37,502

 
2,982

 

 
40,484

South
103,670

 
9,702

 

 
113,372

West
67,550

 
5,362

 

 
72,912

Special revenue
 
 
 
 
 
 
 
Midwest
 
 
 
 
 
 
 
North central - East
69,649

 
4,458

 
3

 
74,104

North central - West
50,718

 
3,795

 

 
54,513

Northeast
13,844

 
744

 

 
14,588

South
97,058

 
6,534

 

 
103,592

West
53,824

 
4,209

 

 
58,033

Foreign bonds
 
 
 
 
 
 
 
Canadian
69,233

 
3,577

 
171

 
72,639

Other foreign
138,084

 
5,465

 
668

 
142,881

Public utilities
 
 
 
 
 
 
 
Electric
226,302

 
13,043

 
313

 
239,032

Gas distribution
17,606

 
1,538

 
58

 
19,086

Other
10,115

 
820

 

 
10,935

Corporate bonds
 
 
 
 
 
 
 
Oil and gas
194,730

 
7,625

 
440

 
201,915

Chemicals
55,333

 
2,980

 

 
58,313

Basic resources
24,485

 
244

 
645

 
24,084

Construction and materials
20,381

 
405

 
172

 
20,614

Industrial goods and services
173,176

 
7,824

 
186

 
180,814



10


Auto and parts
16,640

 
790

 
345

 
17,085

Food and beverage
64,834

 
2,664

 
177

 
67,321

Personal and household goods
67,130

 
2,987

 
302

 
69,815

Health care
101,002

 
7,038

 

 
108,040

Retail
51,865

 
2,571

 

 
54,436

Media
40,430

 
1,636

 
214

 
41,852

Travel and leisure
2,859

 

 
87

 
2,772

Telecommunications
45,562

 
1,890

 

 
47,452

Banks
130,510

 
4,254

 
1,367

 
133,397

Insurance
28,902

 
794

 
10

 
29,686

Real estate
20,848

 
2,468

 
224

 
23,092

Financial services
97,909

 
2,790

 
1,054

 
99,645

Technology
29,811

 
1,499

 
55

 
31,255

Collaterialized mortgage obligations
 
 
 
 
 
 
 
Government
36,791

 
3,028

 
22

 
39,797

Other
278

 

 
36

 
242

Mortgage-backed securities
36,973

 
1,046

 
12

 
38,007

Asset-backed securities
6,355

 
528

 
286

 
6,597

Redeemable preferred stocks
405

 
1

 

 
406

Total Available-For-Sale Fixed Maturities
$
2,541,736

 
$
135,917

 
$
6,869

 
$
2,670,784

Equity securities
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
Public utilities
 
 
 
 
 
 
 
Electric
$
6,229

 
$
4,981

 
$
86

 
$
11,124

Gas distribution
90

 
632

 

 
722

Other
76

 
9

 

 
85

Corporate
 
 
 
 
 
 
 
Oil and gas
5,932

 
6,563

 
14

 
12,481

Chemicals
2,734

 
1,184

 

 
3,918

Industrial good and services
9,427

 
10,570

 
454

 
19,543

Auto and parts
269

 
310

 
4

 
575

Food and beverage
2,124

 
3,579

 
15

 
5,688

Personal and household goods
6,030

 
3,011

 

 
9,041

Health care
8,212

 
6,708

 
322

 
14,598

Retail
2,836

 
356

 
292

 
2,900

Media
147

 

 
37

 
110

Telecommunications
2,399

 
3,364

 
14

 
5,749

Banks
12,970

 
25,967

 
388

 
38,549

Insurance
3,209

 
8,452

 
136

 
11,525

Real estate
393

 
646

 
70

 
969

Financial services
300

 
131

 
45

 
386

Technology
2,822

 
692

 
184

 
3,330

Nonredeemable preferred stocks
3,634

 
32

 
476

 
3,190

Total Available-for-Sale Equity Securities
$
69,833

 
$
77,187

 
$
2,537

 
$
144,483

Total Available-for-Sale Securities
$
2,611,569

 
$
213,104

 
$
9,406

 
$
2,815,267



11


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
213,636

 
12,207

 
519

 
225,324

Gas distribution
21,131

 
1,124

 
70

 
22,185

Other
21,029

 
551

 

 
21,580

Corporate bonds
 
 
 
 
 
 
 
Oil and gas
177,973

 
7,890

 
427

 
185,436

Chemicals
52,561

 
2,445

 
35

 
54,971

Basic resources
6,971

 
456

 

 
7,427

Construction and materials
19,385

 
873

 

 
20,258

Industrial goods and services
148,212

 
7,208

 
362

 
155,058



12


Auto and parts
17,500

 
1,003

 
119

 
18,384

Food and beverage
70,613

 
3,531

 
111

 
74,033

Personal and household goods
66,597

 
3,079

 
289

 
69,387

Health care
78,595

 
4,933

 
186

 
83,342

Retail
42,150

 
2,139

 
329

 
43,960

Media
31,702

 
1,552

 

 
33,254

Travel and leisure
5,882

 
61

 
77

 
5,866

Telecommunications
34,706

 
2,329

 
51

 
36,984

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
80,803

 
3,635

 
983

 
83,455

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
$
6,229

 
$
4,164

 
$
3

 
$
10,390

Gas distribution
90

 
586

 

 
676

Corporate
 
 
 
 
 
 
 
Oil and gas
5,740

 
7,394

 

 
13,134

Chemicals
2,734

 
3,345

 

 
6,079

Industrial goods and services
8,112

 
15,185

 

 
23,297

Auto and parts
257

 
537

 

 
794

Food and beverage
682

 
3,792

 

 
4,474

Personal and household goods
5,233

 
3,370

 

 
8,603

Health care
6,367

 
6,367

 
186

 
12,548

Retail
380

 
348

 

 
728

Travel and leisure
1

 

 

 
1

Telecommunications
2,376

 
3,438

 

 
5,814

Banks
9,498

 
34,363

 
101

 
43,760

Insurance
3,129

 
11,320

 
41

 
14,408

Real estate
393

 
667

 
40

 
1,020

Financial services
300

 
274

 
15

 
559

Technology
1,157

 
874

 

 
2,031

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




13


Maturities
The amortized cost and fair value of held-to-maturity, available-for-sale and trading securities at September 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
September 30, 2011
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
245

 
$
247

 
$
274,007

 
$
279,734

 
$
2,626

 
$
2,905

Due after one year through five years
4,659

 
4,669

 
1,119,740

 
1,176,492

 
4,563

 
4,274

Due after five years through 10 years

 

 
971,535

 
1,030,764

 
496

 
452

Due after 10 years

 

 
96,057

 
99,151

 
6,394

 
6,285

Asset-backed securities

 

 
6,355

 
6,597

 

 

Mortgage-backed securities
370

 
406

 
36,973

 
38,007

 

 

Collateralized mortgage obligations
56

 
58

 
37,069

 
40,039

 

 

 
$
5,330

 
$
5,380

 
$
2,541,736

 
$
2,670,784

 
$
14,079

 
$
13,916

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 September 30,
 
Nine Months Ended September 30,
(In Thousands)
2011
 
2010
 
2011
 
2010
Net realized investment gains (losses)
 
 
 
 
 
 
 
Fixed maturities
$
813

 
$
897

 
$
3,247

 
$
1,759

Equity securities
792

 
121

 
2,126

 
5,030

Trading securities
(457
)
 
665

 
(179
)
 
(19
)
Mortgage loans

 
(361
)
 

 
(361
)
Other long-term investments
(78
)
 

 
(347
)
 
(15
)
Mark-to-market valuation gain for interest rate swaps
149

 

 
149

 

Total net realized investment gains
$
1,219

 
$
1,322

 
$
4,996

 
$
6,394

The proceeds and gross realized gains and losses on the sale of available-for-sale securities are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In Thousands)
2011
 
2010
 
2011
 
2010
Proceeds from sales
$
830

 
$

 
$
21,871

 
$
3,402

Gross realized gains
793

 

 
1,144

 
1,915

Gross realized losses

 

 
688

 

There were no sales of held-to-maturity securities during the nine-month periods ended September 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 $13.9 million and $12.9 million at September 30, 2011 and December 31, 2010, respectively.


14


The realized gains and losses attributable to the change in fair value during the reporting period of trading securities held at September 30, 2011 and 2010 are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In Thousands)
2011
 
2010
 
2011
 
2010
Trading
 
 
 
 
 
 
 
Realized gains
$
(3
)
 
$
681

 
$
28

 
$

Realized losses
455

 

 
755

 
215

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 $9.6 million at September 30, 2011.
Unrealized Appreciation and Depreciation
A summary of changes in net unrealized investment appreciation during the reporting period is as follows:
 
Nine Months Ended September 30,
(In Thousands)
2011
 
2010
Change in net unrealized investment appreciation
 
 
 
Available-for-sale fixed maturities and equity securities
$
8,368

 
$
67,113

Deferred policy acquisition costs
2,527

 
(19,133
)
Income tax effect
(3,687
)
 
(16,793
)
Total change in net unrealized appreciation, net of tax
$
7,208

 
$
31,187

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 September 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 September 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 September 30, 2011, and have concluded that the duration and severity of these losses do not warrant the recognition of an OTTI charge at September 30, 2011. Our largest unrealized loss greater than 12 months on an individual equity security at September 30, 2011 was $0.2 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.


15


(In Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 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

 
$
467

 
$
66

 

 
$

 
$

 
$
467

 
$
66

Total Held-to-Maturity Fixed Maturities
1

 
$
467

 
$
66

 

 
$

 
$

 
$
467

 
$
66

AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and government-sponsored enterprises
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
1

 
4,996

 
4

 
1

 
4,993

 
7

 
9,989

 
11

States, municipalities and political subdivisions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Midwest
4

 
2,438

 
11

 

 

 

 
2,438

 
11

Special revenue
 
 
 
 
 
 
 
 

 
 
 
 
 
 
Midwest
3

 
1,557

 
3

 

 

 

 
1,557

 
3

Foreign bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Canadian
3

 
8,657

 
171

 

 

 

 
8,657

 
171

Other foreign
19

 
15,802

 
358

 
4

 
10,749

 
310

 
26,551

 
668

Public utilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Electric
4

 
7,413

 
272

 
3

 
7,265

 
41

 
14,678

 
313

Gas distribution
1