10-Q 1 ufcs-2012930x10q3.htm 10-Q UFCS-2012.9.30-10Q3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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, 2012

Commission File Number 001-34257
____________________________

 
UNITED FIRE GROUP, INC.
(Exact name of registrant as specified in its charter)
____________________________
 
 
 
Iowa
 
45-2302834
 
 
 
 
(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 November 5, 2012, 25,417,390 shares of common stock were outstanding.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



United Fire Group, Inc.
Index to Quarterly Report on Form 10-Q
September 30, 2012
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 4. Mine Safety Disclosures
 
 
 
 
 
 
 
 
 
 
 
 



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 Group, Inc.
Consolidated Balance Sheets
(In Thousands, Except Per Share Amounts)
September 30,
2012
 
December 31, 2011
 
(unaudited)
 
 
ASSETS
 
 
 
Investments
 
 
 
Fixed maturities
 
 
 
Held-to-maturity, at amortized cost (fair value $1,883 in 2012 and $4,161 in 2011)
$
1,847

 
$
4,143

Available-for-sale, at fair value (amortized cost $2,667,040 in 2012 and $2,562,786 in 2011)
2,830,707

 
2,697,248

Equity securities, at fair value (amortized cost $68,959 in 2012 and $68,559 in 2011)
179,724

 
159,451

Trading securities, at fair value (amortized cost $13,547 in 2012 and $13,429 in 2011)
14,498

 
13,454

Mortgage loans
4,683

 
4,829

Policy loans
7,308

 
7,209

Other long-term investments
29,499

 
20,574

Short-term investments
800

 
1,100

    Total investments
$
3,069,066

 
$
2,908,008

 
 
 
 
Cash and cash equivalents
$
82,566

 
$
144,527

Accrued investment income
31,229

 
32,219

Premiums receivable (net of allowance for doubtful accounts of $849 in 2012 and $825 in 2011)
203,592

 
172,348

Deferred policy acquisition costs
100,146

 
106,654

Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $34,891 in 2012 and $35,248 in 2011)
43,105

 
45,644

Reinsurance receivables and recoverables
147,625

 
128,574

Prepaid reinsurance premiums
3,162

 
6,191

Income taxes receivable
15,783

 
26,742

Goodwill and intangible assets
28,895

 
30,801

Other assets
12,641

 
17,216

TOTAL ASSETS
$
3,737,810

 
$
3,618,924

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Future policy benefits and losses, claims and loss settlement expenses
 
 
 
Property and casualty insurance
$
965,685

 
$
945,051

Life insurance
1,508,998

 
1,476,281

Unearned premiums
324,338

 
288,991

Accrued expenses and other liabilities
152,503

 
138,210

Deferred income taxes
32,464

 
13,624

Debt

 
45,000

Trust preferred securities

 
15,626

TOTAL LIABILITIES
$
2,983,988

 
$
2,922,783

Stockholders’ Equity
 
 
 
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,417,390 and 25,505,350 shares issued and outstanding in 2012 and 2011, respectively
$
25

 
$
25

Additional paid-in capital
212,281

 
213,045

Retained earnings
431,660

 
400,485

Accumulated other comprehensive income, net of tax
109,856

 
82,586

TOTAL STOCKHOLDERS’ EQUITY
$
753,822

 
$
696,141

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
3,737,810

 
$
3,618,924

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


2


United Fire Group, Inc.
Consolidated Statements of Income and Comprehensive Income (Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In Thousands, Except Per Share Amounts)
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
Net premiums earned
$
176,531

 
$
158,704

 
$
508,124

 
$
425,118

Investment income, net of investment expenses
28,665

 
26,926

 
86,560

 
81,730

Net realized investment gains
 
 
 
 
 
 
 
Other-than-temporary impairment charges

 

 
(4
)
 

All other net realized gains
1,300

 
1,219

 
4,662

 
4,996

 
1,300

 
1,219

 
4,658

 
4,996

Other income
85

 
725

 
584

 
1,610

        Total revenues
$
206,581

 
$
187,574

 
$
599,926

 
$
513,454

 
 
 
 
 
 
 
 
Benefits, Losses and Expenses
 
 
 
 
 
 
 
Losses and loss settlement expenses
$
119,756

 
$
120,861

 
$
318,006

 
$
332,854

Future policy benefits
9,815

 
9,167

 
28,309

 
25,229

Amortization of deferred policy acquisition costs
36,167

 
43,022

 
104,897

 
112,800

Other underwriting expenses
20,496

 
14,101

 
63,031

 
44,878

Interest on policyholders’ accounts
10,327

 
10,897

 
31,610

 
32,224

        Total expenses
$
196,561

 
$
198,048

 
$
545,853

 
$
547,985

 
 
 
 
 
 
 
 
Income (loss) before income taxes
$
10,020

 
$
(10,474
)
 
$
54,073

 
$
(34,531
)
Federal income tax expense (benefit)
1,290

 
(5,698
)
 
11,443

 
(17,651
)
Net income (loss)
$
8,730

 
$
(4,776
)
 
$
42,630

 
$
(16,880
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
Change in net unrealized appreciation on investments
$
20,613

 
$
(7,048
)
 
$
42,882

 
$
15,891

Adjustment for net realized gains included in income
(1,300
)
 
(1,219
)
 
(4,658
)
 
(4,996
)
Adjustment for employee benefit costs included in expense
1,085

 
643

 
3,460

 
1,929

 
$
20,398

 
$
(7,624
)
 
$
41,684

 
$
12,824

Income tax effect
(6,964
)
 
2,795

 
(14,414
)
 
(4,362
)
 
$
13,434

 
$
(4,829
)
 
$
27,270

 
$
8,462

Comprehensive income (loss)
$
22,164

 
$
(9,605
)
 
$
69,900

 
$
(8,418
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
25,423,191

 
25,722,572

 
25,468,293

 
26,004,923

Basic earnings (loss) per common share
$
0.34

 
$
(0.19
)
 
$
1.67

 
$
(0.65
)
Diluted earnings (loss) per common share
0.34

 
(0.19
)
 
1.67

 
(0.65
)
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 Group, Inc.
Consolidated Statement of Stockholders’ Equity (Unaudited)

(In Thousands, Except Per Share Data)
Nine Months Ended September 30, 2012
 
 
Common stock
 
Balance, beginning of year
$
25

Shares repurchased (137,792 shares)
(1
)
Shares issued for stock-based awards (49,832 shares)
1

Balance, end of period
$
25

 
 
Additional paid-in capital
 
Balance, beginning of year
$
213,045

Compensation expense and related tax benefit for stock-based award grants
1,229

Shares repurchased
(2,899
)
Shares issued for stock-based awards
906

Balance, end of period
$
212,281

 
 
Retained earnings
 
Balance, beginning of year
$
400,485

Net income (loss)
42,630

Dividends on common stock ($0.45 per share)
(11,455
)
Balance, end of period
$
431,660

 
 
Accumulated other comprehensive income, net of tax
 
Balance, beginning of year
$
82,586

Change in net unrealized investment appreciation (1)
24,954

Change in liability for underfunded employee benefit plans
2,316

Balance, end of period
$
109,856

 
 
Summary of changes
 
Balance, beginning of year
$
696,141

Net income
42,630

All other changes in stockholders’ equity accounts
15,051

Balance, end of period
$
753,822

(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 Group, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
Nine Months Ended September 30,
 
2012
 
2011
Cash Flows From Operating Activities
 
 
 
Net income (loss)
$
42,630

 
$
(16,880
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
 
 
 
Net accretion of bond premium
10,909

 
7,710

Depreciation and amortization
5,989

 
2,559

Stock-based compensation expense
1,318

 
1,384

Net realized investment gains
(4,658
)
 
(4,996
)
Net cash flows from trading investments
(337
)
 
(1,604
)
Deferred income tax expense (benefit)
7,143

 
(11,901
)
Changes in:
 
 
 
Accrued investment income
990

 
899

Premiums receivable
(31,244
)
 
(25,706
)
Deferred policy acquisition costs
(4,345
)
 
(2,239
)
Reinsurance receivables
(19,051
)
 
(7,527
)
Prepaid reinsurance premiums
3,029

 
574

Income taxes receivable
10,959

 
(6,471
)
Other assets
4,575

 
(1,162
)
Future policy benefits and losses, claims and loss settlement expenses
50,429

 
68,139

Unearned premiums
35,347

 
27,701

Accrued expenses and other liabilities
17,856

 
21,795

Deferred income taxes
(2,820
)
 
158

Other, net
(3,373
)
 
2,153

Total adjustments
$
82,716

 
$
71,466

Net cash provided by operating activities
$
125,346

 
$
54,586

Cash Flows From Investing Activities
 
 
 
Proceeds from sale of available-for-sale investments
$
12,003

 
$
21,871

Proceeds from call and maturity of held-to-maturity investments
2,316

 
1,050

Proceeds from call and maturity of available-for-sale investments
433,619

 
438,472

Proceeds from short-term and other investments
3,791

 
4,583

Purchase of available-for-sale investments
(557,257
)
 
(432,892
)
Purchase of short-term and other investments
(9,000
)
 
(2,907
)
Net purchases and sales of property and equipment
(1,391
)
 
(6,766
)
Acquisition of property and casualty company, net of cash acquired

 
(171,394
)
Net cash used in investing activities
$
(115,919
)
 
$
(147,983
)
Cash Flows From Financing Activities
 
 
 
Policyholders’ account balances
 
 
 
Deposits to investment and universal life contracts
$
109,900

 
$
128,257

Withdrawals from investment and universal life contracts
(106,978
)
 
(86,507
)
Borrowings of short-term debt

 
79,900

Repayment of short-term debt
(45,000
)
 
(29,900
)
Repayment of trust preferred securities
(15,626
)
 

Payment of cash dividends
(11,455
)
 
(11,682
)
Repurchase of common stock
(2,900
)
 
(12,396
)
Issuance of common stock
760

 
139

Tax impact from issuance of common stock
(89
)
 
6

Net cash (used in) provided by financing activities
$
(71,388
)
 
$
67,817

Net Change in Cash and Cash Equivalents
$
(61,961
)
 
$
(25,580
)
Cash and Cash Equivalents at Beginning of Period
144,527

 
180,057

Cash and Cash Equivalents at End of Period
$
82,566

 
$
154,477

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


5



United Fire Group, Inc.
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 Group, Inc., and its consolidated subsidiaries and affiliates, 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 36 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.
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, 2011. The review report of Ernst & Young LLP as of and for the three- and nine-month periods ended September 30, 2012, accompanies the unaudited Consolidated Financial Statements included in Part I, Item 1 “Financial Statements.”
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, 2012 and 2011, we made payments for income taxes totaling $11.4 million and $0.6 million, respectively. For the nine-month period ended September 30, 2012, we received a federal tax refund of $15.5 million, that resulted from the utilization of our 2009 net operating losses and net capital losses


6


in the carryback period. No tax refunds were received for the nine-month period ended September 30, 2011.
For the nine-month periods ended September 30, 2012 and 2011, we made interest payments totaling $1.0 million and $1.3 million, respectively. These payments exclude interest credited to policyholders’ accounts.
Deferred Policy Acquisition Costs
The costs associated with underwriting new business – primarily commissions, premium taxes and variable underwriting and policy issue expenses associated with successful acquisition efforts – are deferred and amortized over the terms of the underlying policies. The following table 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, 2012.
(In Thousands)
Property & Casualty
 
Life Insurance
 
Total
Recorded asset at December 31, 2011
$
60,668

 
$
45,986

 
$
106,654

Amortization of value of business acquired
(1,674
)
 

 
(1,674
)
Underwriting costs deferred
104,225

 
5,018

 
109,243

Amortization of deferred policy acquisition costs
(96,681
)
 
(6,542
)
 
(103,223
)
 
$
66,538

 
$
44,462

 
$
111,000

Change in "shadow" deferred policy acquisition costs

 
(10,854
)
 
(10,854
)
Recorded asset at September 30, 2012
$
66,538

 
$
33,608

 
$
100,146


In October 2010, the Financial Accounting Standards Board ("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.
Effective January 1, 2012, we elected to adopt the updated accounting guidance on a prospective basis. As a result of the adoption, the amount of underwriting expenses eligible for deferral has decreased. After consideration of our normal recoverability assessment, which we refer to as a premium deficiency charge, and the amortization pattern of our deferred policy acquisition costs, we recognized approximately $9.9 million of pretax expense in the nine-month period ended September 30, 2012 that we would not have recognized had the guidance remained the same. The impact of the adoption on the amounts reported in the Consolidated Statements of Income and Comprehensive Income for the nine-month period ended September 30, 2012 was an increase to other underwriting expenses of $20.3 million, a decrease to deferred policy acquisition cost amortization of $10.4 million and a decrease to net income of $6.5 million. This represents a reduction to net income of $0.25 per share.

The impact of the updated accounting guidance on our results for the full year will be influenced by a number of factors including: the volume of premiums written; our assessment of successful acquisition efforts; the profitability of our lines of property and casualty business, which impacts the level of premium deficiency charge recorded; and the normal amortization pattern of these deferred policy acquisition costs, which is generally over one year. The greatest impact will be experienced in the most current quarter as the recorded deferred policy acquisitions costs would amortize to expense in succeeding quarters to offset a portion of the initial impact when assessed on an annual basis. Accordingly, the impact of the updated accounting guidance on our results reported for the nine-month period ended September 30, 2012 should not be considered to be representative of the impact for the full year.




7


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 expense of $11.4 million and a federal income tax benefit of $17.7 million for the nine-month periods ended September 30, 2012 and 2011, 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 September 30, 2012 or December 31, 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 2009.
Recently Issued Accounting Standards
Adopted Accounting Standards

Comprehensive Income

In June and December 2011, the FASB issued guidance amending the presentation of comprehensive income and its components. Under the new guidance, a reporting entity has the option to present comprehensive income in a single continuous statement or in two separate but consecutive statements. This new guidance is to be applied retrospectively. We adopted the new guidance in the first quarter of 2012 by electing to report comprehensive income in a single continuous statement as shown in the accompanying Consolidated Statements of Income and Comprehensive Income. The adoption of the new guidance affects presentation only and therefore had no impact on our results of operations or financial position.
Fair Value Measurements
In May 2011, the FASB issued updated accounting guidance that changed 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 requires additional disclosures for fair value measurements that are estimated using significant unobservable (i.e., Level 3) inputs. We adopted the updated guidance on a prospective basis effective January 1, 2012, and we have provided the additional disclosures required in "Note 3. Fair Value of Financial Instruments". The adoption of the new guidance did not have any impact on our financial position or results of operations.
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, 2012 and December 31, 2011, is as follows:


8


September 30, 2012
(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
$
1,559

 
$
20

 
$

 
$
1,579

Mortgage-backed securities
267

 
16

 

 
283

Collateralized mortgage obligations
21

 

 

 
21

Total Held-to-Maturity Fixed Maturities
$
1,847

 
$
36

 
$

 
$
1,883

AVAILABLE-FOR-SALE

 

 

 

Fixed maturities

 

 

 

Bonds

 

 

 

U.S. Treasury
$
44,776

 
$
1,096

 
$

 
$
45,872

U.S. government agency
27,864

 
462

 
29

 
28,297

States, municipalities and political subdivisions
714,000

 
60,739

 
63

 
774,676

Foreign bonds
209,772

 
12,301

 
209

 
221,864

Public utilities
245,161

 
16,045

 
59

 
261,147

Corporate bonds

 

 

 

Energy
173,486

 
9,949

 

 
183,435

Industrials
300,958

 
15,233

 
277

 
315,914

Consumer goods and services
197,861

 
10,868

 
147

 
208,582

Health care
117,779

 
7,684

 
39

 
125,424

Technology, media and telecommunications
126,996

 
7,895

 
21

 
134,870

Financial services
284,895

 
15,571

 
1,260

 
299,206

Mortgage-backed securities
30,752

 
1,144

 
1

 
31,895

Collateralized mortgage obligations
187,788

 
6,990

 
621

 
194,157

Asset-backed securities
4,574

 
412

 

 
4,986

Redeemable preferred stocks
378

 
4

 

 
382

Total Available-For-Sale Fixed Maturities
$
2,667,040

 
$
166,393

 
$
2,726

 
$
2,830,707

Equity securities

 

 

 

Common stocks

 

 

 

Public utilities
$
7,231

 
$
7,376

 
$
105

 
$
14,502

Energy
5,094

 
7,346

 

 
12,440

Industrials
13,030

 
17,870

 
217

 
30,683

Consumer goods and services
10,394

 
8,548

 
47

 
18,895

Health care
8,255

 
10,996

 
109

 
19,142

Technology, media and telecommunications
5,367

 
5,913

 
124

 
11,156

Financial services
15,701

 
53,588

 
219

 
69,070

Nonredeemable preferred stocks
3,887

 
34

 
85

 
3,836

Total Available-for-Sale Equity Securities
$
68,959

 
$
111,671

 
$
906

 
$
179,724

Total Available-for-Sale Securities
$
2,735,999

 
$
278,064

 
$
3,632

 
$
3,010,431




9


December 31, 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
$
3,739

 
$
52

 
$
61

 
$
3,730

Mortgage-backed securities
356

 
25

 

 
381

Collateralized mortgage obligations
48

 
2

 

 
50

Total Held-to-Maturity Fixed Maturities
$
4,143

 
$
79

 
$
61

 
$
4,161

AVAILABLE-FOR-SALE

 

 

 

Fixed maturities

 

 

 

Bonds

 

 

 

U.S. Treasury
$
42,530

 
$
1,421

 
$

 
$
43,951

U.S. government agency
95,813

 
582

 

 
96,395

States, municipalities and political subdivisions
687,039

 
61,076

 
8

 
748,107

Foreign bonds
206,872

 
8,766

 
823

 
214,815

Public utilities
254,822

 
15,562

 
313

 
270,071

Corporate bonds

 


 

 

Energy
189,902

 
7,567

 
277

 
197,192

Industrials
285,696

 
10,631

 
650

 
295,677

Consumer goods and services
203,948

 
8,872

 
646

 
212,174

Health care
109,219

 
6,497

 
45

 
115,671

Technology, media and telecommunications
108,315

 
4,951

 
318

 
112,948

Financial services
258,526

 
9,075

 
2,300

 
265,301

Mortgage-backed securities
34,353

 
1,041

 
4

 
35,390

Collateralized mortgage obligations
79,545

 
3,490

 
184

 
82,851

Asset-backed securities
5,801

 
495

 

 
6,296

Redeemable preferred stocks
405

 
4

 

 
409

Total Available-For-Sale Fixed Maturities
$
2,562,786

 
$
140,030

 
$
5,568

 
$
2,697,248

Equity securities

 

 

 

Common stocks

 

 

 

Public utilities
$
7,231

 
$
7,602

 
$
98

 
$
14,735

Energy
5,094

 
7,116

 

 
12,210

Industrials
12,678

 
16,153

 
275

 
28,556

Consumer goods and services
10,750

 
7,982

 
168

 
18,564

Health care
8,212

 
8,008

 
232

 
15,988

Technology, media and telecommunications
5,368

 
4,796

 
146

 
10,018

Financial services
15,592

 
41,041

 
543

 
56,090

Nonredeemable preferred stocks
3,634

 
40

 
384

 
3,290

Total Available-for-Sale Equity Securities
$
68,559

 
$
92,738

 
$
1,846

 
$
159,451

Total Available-for-Sale Securities
$
2,631,345

 
$
232,768

 
$
7,414

 
$
2,856,699




10


Maturities
The amortized cost and fair value of held-to-maturity, available-for-sale and trading securities at September 30, 2012, 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, 2012
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
271

 
$
276

 
$
261,755

 
$
267,088

 
$
2,821

 
$
2,713

Due after one year through five years
1,288

 
1,303

 
1,028,748

 
1,091,315

 
6,649

 
7,412

Due after five years through 10 years

 

 
1,000,318

 
1,079,653

 

 

Due after 10 years

 

 
153,105

 
161,613

 
4,077

 
4,373

Asset-backed securities

 

 
4,574

 
4,986

 

 

Mortgage-backed securities
267

 
283

 
30,752

 
31,895

 

 

Collateralized mortgage obligations
21

 
21

 
187,788

 
194,157

 

 

 
$
1,847

 
$
1,883

 
$
2,667,040

 
$
2,830,707

 
$
13,547

 
$
14,498

Net Realized Investment Gains and Losses
Net realized gains (losses) on disposition of investments are computed using the specific identification method and recognized as a component of earnings for the current period. A summary of net realized investment gains (losses) is as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In Thousands)
2012
 
2011
 
2012
 
2011
Net realized investment gains (losses)
 
 
 
 
 
 
 
Fixed maturities
$
102

 
$
813

 
$
2,425

 
$
3,247

Equity securities

 
792

 
697

 
2,126

Trading securities
1,198

 
(457
)
 
1,536

 
(179
)
Other long-term investments

 
(78
)
 

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

 
149

 

 
149

Total net realized investment gains
$
1,300

 
$
1,219

 
$
4,658

 
$
4,996

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)
2012
 
2011
 
2012
 
2011
Proceeds from sales
$

 
$
830

 
$
12,003

 
$
21,871

Gross realized gains

 
793

 
472

 
1,144

Gross realized losses

 

 
25

 
688

There were no sales of held-to-maturity securities during the nine-month periods ended September 30, 2012 and 2011.

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 $14.5 million and $13.5 million at September 30, 2012 and December 31, 2011, respectively.



11


Off-Balance Sheet Arrangements
Pursuant to an agreement with one of our limited liability partnership investments, 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 $6.5 million at September 30, 2012.
Unrealized Appreciation and Depreciation
A summary of changes in net unrealized investment appreciation (depreciation) during the reporting period is as follows:
 
Nine Months Ended September 30,
(In Thousands)
2012
 
2011
Change in net unrealized investment appreciation
 
 
 
Available-for-sale fixed maturities and equity securities
$
49,078

 
$
8,368

Deferred policy acquisition costs
(10,854
)
 
2,527

Income tax effect
(13,270
)
 
(3,687
)
Total change in net unrealized investment appreciation, net of tax
$
24,954

 
$
7,208

In the above table, the amount reported as changes in deferred policy acquisition costs pertains to certain investments of our life insurance segment and represents the impact of fluctuations that 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 other-than-temporary impairment ("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, 2012 and December 31, 2011. 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, 2012, 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, 2012, and have concluded that the duration and severity of these losses do not warrant the recognition of an OTTI charge at September 30, 2012. Our largest unrealized loss greater than 12 months on an individual security at September 30, 2012 was $0.4 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.



12


(In Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2012
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
AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agency
4

 
$
9,971

 
$
29

 

 
$

 
$

 
$
9,971

 
$
29

States, municipalities and political subdivisions
18

 
13,965

 
63

 

 

 

 
13,965

 
63

Foreign bonds
4

 
7,224

 
188

 
1

 
836

 
21

 
8,060

 
209

Public utilities
5

 
7,366

 
59

 

 

 

 
7,366

 
59

Corporate bonds
 
 
 
 
 
 
 
 
 
 
 
 


 


Industrials
3

 
9,076

 
174

 
1

 
2,897

 
103

 
11,973

 
277

Consumer goods and services
4

 
2,579

 
27

 
3

 
2,058

 
120

 
4,637

 
147

Health care
3

 
9,022

 
39

 

 

 

 
9,022

 
39

Technology, media and telecommunications
2

 
6,839

 
21

 

 

 

 
6,839

 
21

Financial services
4

 
3,072

 
162

 
23

 
22,157

 
1,098

 
25,229

 
1,260

Mortgage-backed securities
5

 
668

 
1

 

 

 

 
668

 
1

Collateralized mortgage obligations
17

 
42,084

 
414

 
4

 
85

 
207

 
42,169

 
621

Total Available-For-Sale Fixed Maturities
69

 
$
111,866

 
$
1,177

 
32

 
$
28,033

 
$
1,549

 
$
139,899

 
$
2,726

Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Public utilities

 
$

 
$

 
3

 
$
203

 
$
105

 
$
203

 
$
105

Industrials
7

 
716

 
103

 
7

 
508

 
114

 
1,224

 
217

Consumer goods and services
1

 
73

 
4

 
10

 
428

 
43

 
501

 
47

Health care
3

 
325

 
13

 
3

 
922

 
96

 
1,247

 
109

Technology, media and telecommunications
2

 
205

 
8

 
7

 
552

 
116

 
757

 
124

Financial services
4

 
744

 
44

 
7

 
1,060

 
175

 
1,804

 
219

Nonredeemable preferred stocks

 

 

 
2

 
1,146

 
85

 
1,146

 
85

Total Available-for-Sale Equity Securities
17

 
$
2,063

 
$
172

 
39

 
$
4,819

 
$
734

 
$
6,882

 
$
906

Total Available-for-Sale Securities
86

 
$
113,929

 
$
1,349

 
71

 
$
32,852

 
$
2,283

 
$
146,781

 
$
3,632



13



(In Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 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

 
$

 
$

 
1

 
$
473

 
$
61

 
$
473

 
$
61

Total Held-to-Maturity Fixed Maturities

 
$

 
$

 
1

 
$
473

 
$
61

 
$
473

 
$
61

AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
States, municipalities and political subdivisions
6

 
$
3,555

 
$
6

 
1

 
$
619

 
$
2

 
$
4,174

 
$
8

Foreign bonds
13

 
18,001

 
488

 
6

 
14,123

 
335

 
32,124

 
823

Public utilities
6

 
9,579

 
160

 
1

 
1,068

 
153

 
10,647

 
313

Corporate bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
2

 
5,436

 
53

 
1

 
5,223

 
224

 
10,659

 
277

Industrials
9

 
25,664

 
359

 
3

 
8,135

 
291

 
33,799

 
650

Consumer goods and services
5

 
5,360

 
514

 
5

 
3,932

 
132

 
9,292

 
646

Health care
2

 
5,027

 
45

 

 

 

 
5,027

 
45

Technology, media and telecommunications
13

 
14,148

 
318

 

 

 

 
14,148

 
318

Financial services
23

 
20,073

 
292

 
26

 
28,892

 
2,008

 
48,965

 
2,300

Mortgage-backed securities
5

 
684

 
4

 

 

 

 
684

 
4

Collateralized mortgage obligations
7

 
4,466

 
141

 
3

 
5,209

 
43

 
9,675

 
184

Total Available-For-Sale Fixed Maturities
91

 
$
111,993

 
$
2,380

 
46

 
$
67,201

 
$
3,188

 
$
179,194

 
$
5,568

Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Public utilities
3

 
$
210

 
$
98

 

 
$

 
$

 
$
210

 
$
98

Industrials
7

 
975

 
155

 
8

 
577

 
120

 
1,552

 
275

Consumer goods and services
12

 
625

 
150

 
3

 
431

 
18

 
1,056

 
168

Health care
5

 
768

 
94

 
4

 
455

 
138

 
1,223

 
232

Technology, media and telecommunications
7

 
571

 
124

 
2

 
144

 
22

 
715

 
146

Financial services
16

 
1,876

 
319

 
6

 
746

 
224

 
2,622

 
543

Nonredeemable preferred stocks
3

 
1,171

 
31

 
2

 
878

 
353

 
2,049

 
384

Total Available-for-Sale Equity Securities
53

 
$
6,196

 
$
971

 
25

 
$
3,231

 
$
875

 
$
9,427

 
$
1,846

Total Available-for-Sale Securities
144

 
$
118,189

 
$
3,351

 
71

 
$
70,432

 
$
4,063

 
$
188,621

 
$
7,414



14


NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS
We estimate the fair value of our financial instruments based on relevant market information or by discounting estimated future cash flows at estimated current market discount rates appropriate to the specific asset or liability.
In most cases, we use quoted market prices to determine the fair value of fixed maturities, equity securities, trading securities and short-term investments. When quoted market prices do not exist, we base fair values on pricing or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management’s own assumptions about the assumptions a market participant would use in pricing the financial instrument.
The fair value of our mortgage loans is determined by modeling performed by us based on the stated principal and coupon payments provided for in the loan agreement. These cash flows are then discounted using an appropriate risk-adjusted discount rate to determine the security's fair value, which is a Level 3 fair value measurement.
The estimated fair value of policy loans is equivalent to carrying value. We do not make policy loans for amounts in excess of the cash surrender value of the related policy. In all instances, the policy loans are fully collateralized by the related liability for future policy benefits for traditional insurance policies or by the policyholders’ account balance for non-traditional policies.
Our other long-term investments consist primarily of holdings in limited liability partnership funds that are valued by the various fund managers and are recorded on the equity method of accounting. In management’s opinion, these values represent fair value.
For cash and cash equivalents and accrued investment income, carrying value is a reasonable estimate of fair value due to the short-term nature of these financial instruments.

Policy reserves are developed and recorded for deferred annuities, which is an interest-sensitive product, and income annuities. The fair value of the reserve liability for these annuity products is based upon an estimate of the discounted pretax cash flows that are forecast for the underlying business, which is a Level 3 fair value measurement. We base the discount rate on the current U.S. Treasury spot yield curve, which is then risk-adjusted for nonperformance risk and, for interest-sensitive business, market risk factors. The risk-adjusted discount rate is developed using interest rates that are available in the market and representative of the risks applicable to the underlying business.

The fair value of our debt approximates carrying value due to the variable interest rates and short-term nature of the outstanding amounts.



15


A summary of the carrying value and estimated fair value of our financial instruments at September 30, 2012 and December 31, 2011 is as follows:
 
September 30, 2012
 
December 31, 2011
(In Thousands)
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Assets
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
Held-to-maturity fixed maturities
$
1,883

 
$
1,847

 
$
4,161

 
$
4,143

Available-for-sale fixed maturities
2,830,707

 
2,830,707

 
2,697,248

 
2,697,248

Equity securities
179,724

 
179,724

 
159,451

 
159,451

Trading securities
14,498

 
14,498

 
13,454

 
13,454

Mortgage loans
5,157

 
4,683