10-Q 1 ufcs-2013331x10q1.htm 10-Q UFCS-2013.3.31-10Q1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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 March 31, 2013

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 May 6, 2013, 25,281,042 shares of common stock were outstanding.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



United Fire Group, Inc.
Index to Quarterly Report on Form 10-Q
March 31, 2013
 
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 Share Data)
March 31,
2013
 
December 31,
2012
 
(unaudited)
 
 
ASSETS
 
 
 
Investments
 
 
 
Fixed maturities
 
 
 
Held-to-maturity, at amortized cost (fair value $1,668 in 2013 and $1,681 in 2012)
$
1,638

 
$
1,655

Available-for-sale, at fair value (amortized cost $2,666,902 in 2013 and $2,657,800 in 2012)
2,807,582

 
2,808,078

Trading securities, at fair value (amortized cost $12,470 in 2013 and $12,645 in 2012)
13,738

 
13,353

Equity securities
 
 
 
Available-for-sale, at fair value (cost $67,464 in 2013 and $66,892 in 2012)
195,677

 
177,127

Trading securities, at fair value (cost $1,772 in 2013 and $1,772 in 2012)
2,131

 
2,018

Mortgage loans
4,581

 
4,633

Policy loans
6,566

 
6,671

Other long-term investments
30,646

 
30,028

Short-term investments
800

 
800

 
3,063,359

 
3,044,363

Cash and cash equivalents
101,948

 
107,466

Accrued investment income
30,079

 
30,375

Premiums receivable (net of allowance for doubtful accounts of $888 in 2013 and $866 in 2012)
207,920

 
188,289

Deferred policy acquisition costs
113,088

 
105,300

Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $34,060 in 2013 and $34,093 in 2012)
42,328

 
43,090

Reinsurance receivables and recoverables
120,140

 
114,399

Prepaid reinsurance premiums
3,218

 
2,963

Income taxes receivable
2,386

 
16,536

Goodwill and intangible assets
27,624

 
28,259

Other assets
12,600

 
13,613

TOTAL ASSETS
$
3,724,690

 
$
3,694,653

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Future policy benefits and losses, claims and loss settlement expenses
 
 
 
Property and casualty insurance
$
971,239

 
$
971,911

Life insurance
1,484,362

 
1,498,176

Unearned premiums
326,320

 
311,650

Accrued expenses and other liabilities
157,801

 
164,111

Deferred income taxes
26,826

 
19,628

TOTAL LIABILITIES
$
2,966,548

 
$
2,965,476

Stockholders’ Equity
 
 
 
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,266,295 and 25,227,463 shares issued and outstanding in 2013 and 2012, respectively
$
25

 
$
25

Additional paid-in capital
209,472

 
208,536

Retained earnings
444,035

 
425,428

Accumulated other comprehensive income, net of tax
104,610

 
95,188

TOTAL STOCKHOLDERS’ EQUITY
$
758,142

 
$
729,177

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
3,724,690

 
$
3,694,653

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 March 31,
(In Thousands, Except Share Data)
2013
 
2012
 
 
 
 
Revenues
 
 
 
Net premiums earned
$
176,817

 
$
161,503

Investment income, net of investment expenses
26,464

 
29,146

Net realized investment gains
 
 
 
Other-than-temporary impairment charges

 

All other net realized gains (includes reclassifications for net unrealized gains on available-for-sale securities of $1,909 in 2013; and $2,794 in 2012; previously included in accumulated other comprehensive income)
1,909

 
2,794

Total net realized investment gains
1,909

 
2,794

Other income
115

 
256

Total revenues
$
205,305

 
$
193,699

Benefits, Losses and Expenses
 
 
 
Losses and loss settlement expenses
$
97,470

 
$
91,484

Future policy benefits
8,236

 
10,138

Amortization of deferred policy acquisition costs
38,081

 
34,551

Other underwriting expenses (includes reclassifications for employee benefit costs of $1,242 in 2013; and $643 in 2012; previously included in accumulated other comprehensive income)
22,348

 
21,994

Interest on policyholders’ accounts
9,320

 
10,656

Total benefits, losses and expenses
$
175,455

 
$
168,823

Income before income taxes
$
29,850

 
$
24,876

Federal income tax expense (includes reclassifications of $234 in 2013; and $752 in 2012; previously included in accumulated other comprehensive income)
7,457

 
5,692

Net income
$
22,393

 
$
19,184

Other comprehensive income
 
 
 
Change in net unrealized appreciation on investments
$
15,161

 
$
13,603

Change in liability for underfunded employee benefit plans

 

Other comprehensive income, before tax and reclassification adjustments
$
15,161

 
$
13,603

Income tax effect
(5,306
)
 
(4,761
)
Other comprehensive income, after tax, before reclassification adjustments
$
9,855

 
$
8,842

Reclassification adjustment for net realized gains included in income
$
(1,909
)
 
$
(2,794
)
Reclassification adjustment for employee benefit costs included in expense
1,242

 
643

Total reclassification adjustments, before tax
$
(667
)
 
$
(2,151
)
Income tax effect
234

 
752

Total reclassification adjustments, after tax
$
(433
)
 
$
(1,399
)
Comprehensive income
$
31,815

 
$
26,627

 
 
 
 
Weighted average common shares outstanding
25,245,497

 
25,505,962

Basic earnings per common share
$
0.89

 
$
0.75

Diluted earnings per common share
0.88

 
0.75

Cash dividends declared per common share
0.15

 
0.15

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)
Three Months Ended March 31, 2013
 
 
Common stock
 
Balance, beginning of year
$
25

Shares issued for stock-based awards (38,832 shares)

Balance, end of period
$
25

 
 
Additional paid-in capital
 
Balance, beginning of year
$
208,536

Compensation expense and related tax benefit for stock-based award grants
333

Shares issued for stock-based awards
603

Balance, end of period
$
209,472

 
 
Retained earnings
 
Balance, beginning of year
$
425,428

Net income
22,393

Dividends on common stock ($0.15 per share)
(3,786
)
Balance, end of period
$
444,035

 
 
Accumulated other comprehensive income, net of tax
 
Balance, beginning of year
$
95,188

Change in net unrealized investment appreciation (1)
8,614

Change in liability for underfunded employee benefit plans(2)
808

Balance, end of period
$
104,610

 
 
Summary of changes
 
Balance, beginning of year
$
729,177

Net income
22,393

All other changes in stockholders’ equity accounts
6,572

Balance, end of period
$
758,142

(1)
The change in net unrealized appreciation is net of reclassification adjustments and income taxes.
(2)
The change in liability for underfunded employee benefit plans is net of income taxes.

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)

Three Months Ended March 31,
(In Thousands)
2013
 
2012
Cash Flows From Operating Activities
 
 
 
Net income
$
22,393

 
$
19,184

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Net accretion of bond premium
3,981

 
3,520

Depreciation and amortization
1,785

 
2,285

Stock-based compensation expense
411

 
396

Net realized investment gains
(1,909
)
 
(2,794
)
Net cash flows from trading investments
46

 
(1,343
)
Deferred income tax expense
460

 
5,011

Changes in:
 
 
 
Accrued investment income
296

 
(344
)
Premiums receivable
(19,631
)
 
(14,560
)
Deferred policy acquisition costs
(2,917
)
 
1,526

Reinsurance receivables
(5,741
)
 
(23,199
)
Prepaid reinsurance premiums
(255
)
 
2,650

Income taxes receivable
14,150

 
3,926

Other assets
1,013

 
2,691

Future policy benefits and losses, claims and loss settlement expenses
6,364

 
20,596

Unearned premiums
14,670

 
15,228

Accrued expenses and other liabilities
(5,068
)
 
5,721

Deferred income taxes
1,665

 
(3,409
)
Other, net
31

 
(1,200
)
Total adjustments
$
9,351

 
$
16,701

Net cash provided by operating activities
$
31,744

 
$
35,885

Cash Flows From Investing Activities
 
 
 
Proceeds from sale of available-for-sale investments
$
2,810

 
$
3,000

Proceeds from call and maturity of held-to-maturity investments
19

 
75

Proceeds from call and maturity of available-for-sale investments
127,514

 
149,285

Proceeds from short-term and other investments
407

 
2,590

Purchase of available-for-sale investments
(142,615
)
 
(252,345
)
Purchase of short-term and other investments
(900
)
 
(2,950
)
Net purchases and sales of property and equipment
(386
)
 
(893
)
Net cash used in investing activities
$
(13,151
)
 
$
(101,238
)
Cash Flows From Financing Activities
 
 
 
Policyholders’ account balances
 
 
 
Deposits to investment and universal life contracts
$
25,369

 
$
40,390

Withdrawals from investment and universal life contracts
(46,219
)
 
(33,743
)
Repayment of trust preferred securities

 
(8,047
)
Payment of cash dividends
(3,786
)
 
(3,826
)
Issuance of common stock
603

 
43

Tax impact from issuance of common stock
(78
)
 
9

Net cash used in financing activities
$
(24,111
)
 
$
(5,174
)
Net Change in Cash and Cash Equivalents
$
(5,518
)
 
$
(70,527
)
Cash and Cash Equivalents at Beginning of Period
107,466

 
144,527

Cash and Cash Equivalents at End of Period
$
101,948

 
$
74,000

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
(Amounts in thousands, unless otherwise noted)

NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Business
United Fire Group, Inc. ("United Fire", "Registrant", the "Company", "we", "us", or "our") and its consolidated subsidiaries and affiliates 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); future policy benefits and losses, claims and loss settlement expenses; and pension and postretirement benefit obligations.
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, 2012. The review report of Ernst & Young LLP as of and for the three-month period ended March 31, 2013, 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.


6


For the three-month periods ended March 31, 2013 and 2012, we made payments for income taxes totaling $5 and $151, respectively. We received a tax refund of $8,744 during the three months ended March 31, 2013. We received no tax refunds during the three months ended March 31, 2012.
For the three-month period ended March 31, 2013, we made no interest payments. For the three-month period ended March 31, 2012, we made interest payments totaling $492. These payments exclude interest credited to policyholders’ accounts.
Deferred Policy Acquisition Costs ("DAC")

Certain costs associated with underwriting new business (primarily commissions, premium taxes and variable underwriting and policy issue expenses associated with successful acquisition efforts) are deferred. The following table is a summary of the components of DAC, including the related amortization recognized for the three-month period ended March 31, 2013.
 
 
 
 
 
Property & Casualty
 
Life Insurance
 
Total
Recorded asset at beginning of period
$
64,947

 
$
40,353

 
$
105,300

Underwriting costs deferred
39,835

 
1,163

 
40,998

Amortization of deferred policy acquisition costs
(36,355
)
 
(1,726
)
 
(38,081
)
Ending unamortized deferred policy acquisition costs
$
68,427

 
$
39,790

 
$
108,217

Change in "shadow" deferred policy acquisition costs

 
4,871

 
4,871

Recorded asset at end of period
$
68,427

 
$
44,661

 
$
113,088


Property and casualty policy acquisition costs are deferred and amortized as premium revenue is recognized. The accounting method we follow in computing DAC limits the amount of such deferred costs to their estimated realizable value. This takes into account the premium to be earned, losses and loss settlement expenses to be incurred and certain other costs expected to be incurred as the premium is earned.

For traditional life insurance policies, DAC is amortized to income over the premium-paying period in proportion to the ratio of the expected annual premium revenue to the expected total premium revenue. For non-traditional policies, DAC is amortized over the anticipated terms in proportion to the ratio of the expected annual gross profits to the total expected gross profits. Expected premium revenue and gross profits are based on the same mortality and withdrawal assumptions used in determining future policy benefits. For non-traditional policies, changes in the amount or timing of expected gross profits result in adjustments to the cumulative amortization of these costs. The effect on amortization of DAC for revisions to estimated gross profits is reported in earnings in the period the estimated gross profits are revised.

The effect on DAC that results from the assumed realization of unrealized gains (losses) on investments allocated to non-traditional life insurance business is recognized with an offset, or "shadow" DAC, to net unrealized investment appreciation as of the balance sheet date. The "shadow" DAC adjustment decreased the DAC asset by $33,824 and $38,695 at March 31, 2013 and December 31, 2012, respectively.
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.


7


We reported a federal income tax expense of $7,457 and $5,692 for the three-month periods ended March 31, 2013 and 2012, 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 did not recognize any liability for unrecognized tax benefits at March 31, 2013 or December 31, 2012. 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. The Internal Revenue Service is conducting an examination of our income tax return for the 2011 tax year.
Recently Issued Accounting Standards
Adopted Accounting Standards

Comprehensive Income
In February 2013, the Financial Accounting Standards Board ("FASB") issued guidance (Accounting Standards Update ("ASU") 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income). The new guidance requires significant items that are reclassified out of accumulated other comprehensive income ("AOCI") to net income in their entirety in the same reporting period, to be reported to show the effect of the reclassifications on the respective line items of the statement where net income is presented. These reclassifications can be presented either on the face of the statement where net income is presented or in the notes to the financial statements. For items that are not reclassified to net income in their entirety in the same reporting period a cross reference to other disclosures currently required under GAAP is required in the notes to the financial statements. The new guidance also requires companies to report changes in the accumulated balances of each component of AOCI. This new guidance is effective for annual and interim periods beginning after December 15, 2012. The Company adopted the new guidance effective January 1, 2013. The adoption of the new guidance affects presentation only and therefore had no impact on the Company's results of operations or financial position.
Adopted Accounting Standards in 2012

Comprehensive Income

In June and December 2011, the FASB issued guidance (ASU 2011-05, Presentation of Comprehensive Income and ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05) 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. The Company 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 the Company's results of operations or financial position.
Fair Value Measurements
In May 2011, the FASB issued updated accounting guidance (ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("IFRS")) 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 IFRS. The guidance also requires additional disclosures for fair value measurements that are estimated using significant unobservable (i.e., Level 3) inputs. The Company adopted the updated guidance on a prospective basis effective


8


January 1, 2012, and has 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 the Company's financial position or results of operations.
Indefinite-Lived Intangible Assets
In July 2012, the FASB issued guidance (ASU 2012-02, Intangibles - Goodwill and Other) for the testing of indefinite-lived intangible assets for impairment. The new guidance provides an option to perform a qualitative approach to test indefinite-lived intangible assets for impairment. If an entity concludes that it is more likely than not that the indefinite-lived intangible asset is impaired, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. However, if an entity concludes otherwise, then the entity is not required to take further action. This new guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, and early adoption is permitted. The Company early adopted the updated guidance for purposes of the impairment test performed for 2012. The adoption of the new guidance did not have any impact on the Company's 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 March 31, 2013 and December 31, 2012, is as follows:


9


March 31, 2013
 
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
$
1,187

 
$
18

 
$

 
$
1,205

Corporate bonds - financial services
200

 

 

 
200

Mortgage-backed securities
242

 
12

 

 
254

Collateralized mortgage obligations
9

 

 

 
9

Total Held-to-Maturity Fixed Maturities
$
1,638

 
$
30

 
$

 
$
1,668

AVAILABLE-FOR-SALE

 

 

 

Fixed maturities

 

 

 

Bonds

 

 

 

U.S. Treasury
$
36,845

 
$
845

 
$
4

 
$
37,686

U.S. government agency
84,527

 
440

 
243

 
84,724

States, municipalities and political subdivisions
731,004

 
52,291

 
1,662

 
781,633

Foreign bonds
200,286

 
11,035

 
31

 
211,290

Public utilities
231,379

 
14,804

 
7

 
246,176

Corporate bonds

 

 

 

Energy
167,556

 
8,717

 

 
176,273

Industrials
260,157

 
13,345

 
101

 
273,401

Consumer goods and services
190,279

 
9,015

 
99

 
199,195

Health care
106,528

 
6,151

 
133

 
112,546

Technology, media and telecommunications
122,922

 
5,792

 
701

 
128,013

Financial services
252,334

 
14,759

 
377

 
266,716

Mortgage-backed securities
24,808

 
756

 
26

 
25,538

Collateralized mortgage obligations
253,855

 
7,130

 
1,450

 
259,535

Asset-backed securities
4,044

 
430

 

 
4,474

Redeemable preferred stocks
378

 
4

 

 
382

Total Available-for-Sale Fixed Maturities
$
2,666,902

 
$
145,514

 
$
4,834

 
$
2,807,582

Equity securities

 

 

 

Common stocks

 

 

 

Public utilities
$
7,231

 
$
9,119

 
$
49

 
$
16,301

Energy
5,094

 
7,552

 

 
12,646

Industrials
13,015

 
22,253

 
124

 
35,144

Consumer goods and services
10,394

 
11,509

 
42

 
21,861

Health care
7,920

 
13,045

 
25

 
20,940

Technology, media and telecommunications
6,204

 
6,255

 
80

 
12,379

Financial services
15,681

 
58,902

 
103

 
74,480

Nonredeemable preferred stocks
1,925

 
21

 
20

 
1,926

Total Available-for-Sale Equity Securities
$
67,464

 
$
128,656

 
$
443

 
$
195,677

Total Available-for-Sale Securities
$
2,734,366

 
$
274,170

 
$
5,277

 
$
3,003,259



10


December 31, 2012
 
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
$
1,185

 
$
11

 
$

 
$
1,196

Corporate bonds - financial services
200

 

 

 
200

Mortgage-backed securities
256

 
15

 

 
271

Collateralized mortgage obligations
14

 

 

 
14

Total Held-to-Maturity Fixed Maturities
$
1,655

 
$
26

 
$

 
$
1,681

AVAILABLE-FOR-SALE

 

 

 

Fixed maturities

 

 

 

Bonds

 

 

 

U.S. Treasury
$
37,887

 
$
939

 
$
5

 
$
38,821

U.S. government agency
45,566

 
429

 
67

 
45,928

States, municipalities and political subdivisions
739,752

 
55,572

 
819

 
794,505

Foreign bonds
207,359

 
11,863

 
62

 
219,160

Public utilities
232,550

 
15,208

 
32

 
247,726

Corporate bonds

 


 

 

Energy
169,973

 
9,758

 

 
179,731

Industrials
280,185

 
13,690

 
212

 
293,663

Consumer goods and services
193,313

 
9,813

 
151

 
202,975

Health care
115,654

 
7,111

 
80

 
122,685

Technology, media and telecommunications
123,660

 
6,909

 
198

 
130,371

Financial services
271,061

 
13,858

 
1,059

 
283,860

Mortgage-backed securities
27,940

 
888

 
21

 
28,807

Collateralized mortgage obligations
208,042

 
7,702

 
1,160

 
214,584

Asset-backed securities
4,480

 
406

 

 
4,886

Redeemable preferred stocks
378

 

 
2

 
376

Total Available-for-Sale Fixed Maturities
$
2,657,800

 
$
154,146

 
$
3,868

 
$
2,808,078

Equity securities

 

 

 

Common stocks

 

 

 

Public utilities
$
7,231

 
$
7,268

 
$
83

 
$
14,416

Energy
5,094

 
6,903

 

 
11,997

Industrials
13,031

 
19,827

 
174

 
32,684

Consumer goods and services
10,394

 
8,535

 
50

 
18,879

Health care
7,920

 
10,286

 
125

 
18,081

Technology, media and telecommunications
5,367

 
5,155

 
95

 
10,427

Financial services
15,701

 
52,936

 
145

 
68,492

Nonredeemable preferred stocks
2,154

 
25

 
28

 
2,151

Total Available-for-Sale Equity Securities
$
66,892

 
$
110,935

 
$
700

 
$
177,127

Total Available-for-Sale Securities
$
2,724,692

 
$
265,081

 
$
4,568

 
$
2,985,205



11


Maturities
The amortized cost and fair value of held-to-maturity, available-for-sale and trading securities at March 31, 2013, 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.
 
Held-To-Maturity
 
Available-For-Sale
 
Trading
March 31, 2013
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
594

 
$
597

 
$
275,551

 
$
281,662

 
$
2,838

 
$
2,803

Due after one year through five years
793

 
808

 
1,005,859

 
1,067,382

 
6,439

 
7,374

Due after five years through 10 years

 

 
860,281

 
921,673

 
508

 
533

Due after 10 years

 

 
242,504

 
247,318

 
2,685

 
3,028

Asset-backed securities

 

 
4,044

 
4,474

 

 

Mortgage-backed securities
242

 
254

 
24,808

 
25,538

 

 

Collateralized mortgage obligations
9

 
9

 
253,855

 
259,535

 

 

 
$
1,638

 
$
1,668

 
$
2,666,902

 
$
2,807,582

 
$
12,470

 
$
13,738

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. The following table is a summary of net realized investment gains (losses).
 
Three Months Ended March 31,
 
2013
 
2012
Net realized investment gains (losses)
 
 
 
Fixed maturities:
 
 
 
Available-for-sale
$
720

 
$
1,531

Trading securities
 
 
 
Change in fair value
560

 
191

Sales

 
371

Equity securities
 
 
 
Available-for-sale
516

 
701

Trading securities
 
 
 
Change in fair value
113

 

Total net realized investment gains
$
1,909

 
$
2,794

The proceeds and gross realized gains (losses) on the sale of available-for-sale securities are as follows:
 
Three Months Ended March 31,
 
2013
 
2012
Proceeds from sales
$
2,810

 
$
3,000

Gross realized gains
142

 
470

Gross realized losses

 
(25
)
There were no sales of held-to-maturity securities during the three-month periods ended March 31, 2013 and 2012.

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


12


investment gains and losses. Our portfolio of trading securities had a fair value of $15,869 and $15,371 at March 31, 2013 and December 31, 2012, respectively.
Off-Balance Sheet Arrangements
Pursuant to an agreement with one of our limited liability partnership investments, we are contractually committed through December 31, 2017 to make capital contributions upon request of the partnership. Our obligation was $4,200 at March 31, 2013.
Unrealized Appreciation
The following table is a summary of changes in net unrealized investment appreciation during the reporting period.
 
Three Months Ended March 31,
 
2013
 
2012
Change in net unrealized investment appreciation
 
 
 
Available-for-sale fixed maturities
$
(9,598
)
 
$
(4,401
)
Equity securities
17,978

 
15,106

Deferred policy acquisition costs
4,871

 
104

Income tax effect
(4,637
)
 
(3,784
)
Total change in net unrealized investment appreciation, net of tax
$
8,614

 
$
7,025

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 March 31, 2013 and December 31, 2012. 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 March 31, 2013, 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 the fair value recovers to at least equal our cost basis or the securities mature.
We have evaluated the near-term prospects of the issuers of our equity securities in relation to the severity and duration of the unrealized loss, and unless otherwise noted, these losses do not warrant the recognition of an OTTI charge at March 31, 2013. Our largest unrealized loss greater than 12 months on an individual security at March 31, 2013 was $212. 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.


13


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2013
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. Treasury
2

 
$
1,717

 
$
4

 

 
$

 
$

 
$
1,717

 
$
4

U.S. government agency
14

 
45,452

 
243

 

 

 

 
45,452

 
243

States, municipalities and political subdivisions
82

 
83,557

 
1,662

 

 

 

 
83,557

 
1,662

Foreign bonds
1

 
3,327

 
31

 

 

 

 
3,327

 
31

Public utilities
2

 
3,277

 
7

 

 

 

 
3,277

 
7

Corporate bonds
 
 
 
 
 
 
 
 
 
 
 
 


 


Industrials
2

 
6,069

 
101

 

 

 

 
6,069

 
101

Consumer goods and services
1

 
2,344

 
11

 
6

 
3,301

 
88

 
5,645

 
99

Health care
3

 
7,336

 
133

 

 

 

 
7,336

 
133

Technology, media and telecommunications
5

 
18,271

 
701

 

 

 

 
18,271

 
701

Financial services
2

 
3,883

 
4

 
3

 
11,139

 
373

 
15,022

 
377

Mortgage-backed securities
7

 
4,244

 
25

 
2

 
22

 
1

 
4,266

 
26

Collateralized mortgage obligations
46

 
109,284

 
1,318

 
1

 
21

 
132

 
109,305

 
1,450

Total Available-for-Sale Fixed Maturities
167

 
$
288,761

 
$
4,240

 
12

 
$
14,483

 
$
594

 
$
303,244

 
$
4,834

Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Public utilities
3

 
$
259

 
$
49

 

 
$

 
$

 
$
259

 
$
49

Industrials
1

 
278

 
36

 
7

 
529

 
88

 
807

 
124

Consumer goods and services
4

 
243

 
25

 
3

 
62

 
17

 
305

 
42

Health care
1

 
33

 
1

 
1

 
470

 
24

 
503

 
25

Technology, media and telecommunications
5

 
299

 
16

 
5

 
197

 
64

 
496

 
80

Financial services
1

 
47

 
19

 
5

 
538

 
84

 
585

 
103

Nonredeemable preferred stocks

 

 

 
2

 
1,211

 
20

 
1,211

 
20

Total Available-for-Sale Equity Securities
15

 
$
1,159

 
$
146

 
23

 
$
3,007

 
$
297

 
$
4,166

 
$
443

Total Available-for-Sale Securities
182

 
$
289,920

 
$
4,386

 
35

 
$
17,490

 
$
891

 
$
307,410

 
$
5,277



14


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 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. Treasury
2

 
$
1,724

 
$
5

 

 
$

 
$

 
$
1,724

 
$
5

U.S. government agency
5

 
17,654

 
67

 

 

 

 
17,654

 
67

States, municipalities and political subdivisions
31

 
41,775

 
819

 

 

 

 
41,775

 
819

Foreign bonds
1

 
3,323

 
48

 
1

 
558

 
14

 
3,881

 
62

Public utilities
2

 
3,155

 
32

 

 

 

 
3,155

 
32

Corporate bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Industrials
4

 
12,194

 
109

 
1

 
2,897

 
103

 
15,091

 
212

Consumer goods and services

 

 

 
7

 
4,606

 
151

 
4,606

 
151

Health care
3

 
7,416

 
80

 

 

 

 
7,416

 
80

Technology, media and telecommunications
5

 
13,402

 
198

 

 

 

 
13,402

 
198

Financial services
2

 
1,005

 
1

 
24

 
24,693

 
1,058

 
25,698

 
1,059

Mortgage-backed securities
7

 
4,472

 
21

 

 

 

 
4,472

 
21

Collateralized mortgage obligations
27

 
74,702

 
1,004

 
1

 
29

 
156

 
74,731

 
1,160

Redeemable preferred stocks
2

 
376

 
2

 

 

 

 
376

 
2

Total Available-for-Sale Fixed Maturities
91

 
$
181,198

 
$
2,386

 
34

 
$
32,783

 
$
1,482

 
$
213,981

 
$
3,868

Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Public utilities
3

 
$
225

 
$
83

 

 
$

 
$

 
$
225

 
$
83

Industrials
4

 
482

 
52

 
9

 
621

 
122

 
1,103

 
174

Consumer goods and services
2

 
280

 
19

 
4

 
372

 
31

 
652

 
50

Health care
1

 
31

 
2

 
3

 
896

 
123

 
927

 
125

Technology, media and telecommunications
5

 
241

 
7

 
7

 
581

 
88

 
822

 
95

Financial services
1

 
47

 
19

 
7

 
1,109

 
126

 
1,156

 
145

Nonredeemable preferred stocks

 

 

 
2

 
1,203

 
28

 
1,203

 
28

Total Available-for-Sale Equity Securities
16

 
$
1,306

 
$
182

 
32

 
$
4,782

 
$
518

 
$
6,088

 
$
700

Total Available-for-Sale Securities
107

 
$
182,504

 
$
2,568

 
66

 
$
37,565

 
$
2,000

 
$
220,069

 
$
4,568



15


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 estimates of 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 fair value of our policy loans is equivalent to carrying value, which is a reasonable estimate of fair 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 our interests in limited liability partnerships that are valued by 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.





16


A summary of the carrying value and estimated fair value of our financial instruments at March 31, 2013 and December 31, 2012 is as follows:
 
March 31, 2013
 
December 31, 2012
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Assets
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Held-to-maturity securities
$
1,668

 
$
1,638

 
$
1,681

 
$
1,655

Available-for-sale securities
2,807,582

 
2,807,582

 
2,808,078

 
2,808,078

Trading securities
13,738

 
13,738

 
13,353

 
13,353

Equity securities:
 
 
 
 
 
 
 
Available-for-sale securities
195,677

 
195,677

 
177,127

 
177,127

Trading securities
2,131

 
2,131

 
2,018

 
2,018

Mortgage loans
4,800

 
4,581

 
5,037

 
4,633

Policy loans
6,566

 
6,566

 
6,671

 
6,671

Other long-term investments
30,646

 
30,646

 
30,028

 
30,028

Short-term investments
800

 
800

 
800

 
800

Cash and cash equivalents
101,948

 
101,948

 
107,466

 
107,466

Accrued investment income
30,079

 
30,079

 
30,375

 
30,375

Liabilities
 
 
 
 
 
 
 
Policy reserves
 
 
 
 
 
 
 
Annuity (accumulations) (1)
$
1,022,644

 
$
963,017

 
$
1,043,866

 
$
983,579

Annuity (benefit payments)
139,757

 
93,170

 
139,213

 
93,701

(1) Annuity accumulations represent deferred annuity contracts that are currently earning interest.

Current accounting guidance on fair value measurements includes the application of a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Our financial instruments that are recorded at fair value are categorized into a three-level hierarchy, which is based upon the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets (i.e., Level 1) and the lowest priority to unobservable inputs (i.e., Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the financial instrument.
Financial instruments recorded at fair value are categorized in the fair value hierarchy as follows:
Level 1: Valuations are based on unadjusted quoted prices in active markets for identical financial instruments that we have the ability to access.
Level 2: Valuations are based on quoted prices for similar financial instruments, other than quoted prices included in Level 1, in markets that are not active or on inputs that are observable either directly or indirectly for the full term of the financial instrument.
Level 3: Valuations are based 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.
Transfers between levels, if any, are recorded as of the beginning of the reporting period.
To determine the fair value of the majority of our investments, we utilize prices obtained from independent, nationally recognized pricing services. We obtain one price for each security. When the pricing services cannot provide a determination of fair value for a specific security, we obtain non-binding price quotes from broker-dealers


17


with whom we have had several years experience and who have demonstrated knowledge of the subject security. We request and utilize one broker quote per security.
We validate the prices obtained from independent pricing services and brokers prior to their use for reporting purposes by evaluating their reasonableness on a monthly basis. Our validation process includes a review for unusual fluctuations. In our opinion, the pricing obtained at March 31, 2013 was reasonable.
In order to determine the proper classification in the fair value hierarchy for each security where the price is obtained from an independent pricing service, we obtain and evaluate the vendors’ pricing procedures and inputs used to price the security, which include unadjusted quoted market prices for identical securities, such as a New York Stock Exchange closing price, and quoted prices for identical securities in markets that are not active. For fixed maturity securities, an evaluation of interest rates and yield curves observable at commonly quoted intervals, volatility, prepayment speeds, credit risks and default rates may also be performed. We have determined that these processes and inputs result in fair values and classifications consistent with the applicable accounting guidance on fair value measurements.
We review our fair value hierarchy categorizations on a quarterly basis at which time the classification of certain financial instruments may change if the input observations have changed.

The following tables present the categorization for our financial instruments measured at fair value on a recurring basis in our Consolidated Balance Sheets at March 31, 2013 and December 31, 2012:


18


 
 
 
Fair Value Measurements
Description
March 31, 2013
 
Level 1
 
Level 2
 
Level 3
AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
U.S. Treasury
$
37,686

 
$

 
$
37,686

 
$

U.S. government agency
84,724

 

 
84,724

 

States, municipalities and political subdivisions
781,633

 

 
780,758

 
875

Foreign bonds
211,290

 

 
210,669

 
621

Public utilities
246,176

 

 
246,176

 

Corporate bonds


 


 


 


Energy
176,273

 

 
176,273

 

Industrials
273,401

 

 
270,210

 
3,191

Consumer goods and services
199,195

 

 
197,632

 
1,563

Health care
112,546

 

 
112,546

 

Technology, media and telecommunications
128,013

 

 
128,013