10-Q 1 ufcs-2013630x10q.htm 10-Q UFCS-2013.6.30-10Q
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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

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

for the quarterly period ended June 30, 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 August 2, 2013, 25,328,593 shares of common stock were outstanding.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



United Fire Group, Inc.
Index to Quarterly Report on Form 10-Q
June 30, 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)
June 30, 2013
 
December 31, 2012
 
(unaudited)
 
 
ASSETS
 
 
 
Investments
 
 
 
Fixed maturities
 
 
 
Held-to-maturity, at amortized cost (fair value $1,499 in 2013 and $1,681 in 2012)
$
1,477

 
$
1,655

Available-for-sale, at fair value (amortized cost $2,706,174 in 2013 and $2,657,800 in 2012)
2,764,816

 
2,808,078

Trading securities, at fair value (amortized cost $11,413 in 2013 and $12,645 in 2012)
12,551

 
13,353

Equity securities
 
 
 
Available-for-sale, at fair value (cost $67,455 in 2013 and $66,892 in 2012)
197,157

 
177,127

Trading securities, at fair value (cost $1,754 in 2013 and $1,772 in 2012)
1,981

 
2,018

Mortgage loans
4,529

 
4,633

Policy loans
6,369

 
6,671

Other long-term investments
33,623

 
30,028

Short-term investments
800

 
800

 
3,023,303

 
3,044,363

Cash and cash equivalents
80,789

 
107,466

Accrued investment income
29,381

 
30,375

Premiums receivable (net of allowance for doubtful accounts of $853 in 2013 and $866 in 2012)
237,646

 
188,289

Deferred policy acquisition costs
137,811

 
105,300

Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $34,975 in 2013 and $34,093 in 2012)
43,647

 
43,090

Reinsurance receivables and recoverables
104,774

 
114,399

Prepaid reinsurance premiums
3,536

 
2,963

Income taxes receivable

 
16,536

Goodwill and intangible assets
27,431

 
28,259

Other assets
12,431

 
13,613

TOTAL ASSETS
$
3,700,749

 
$
3,694,653

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Future policy benefits and losses, claims and loss settlement expenses
 
 
 
Property and casualty insurance
$
968,493

 
$
971,911

Life insurance
1,476,569

 
1,498,176

Unearned premiums
354,477

 
311,650

Accrued expenses and other liabilities
159,161

 
164,111

Income taxes payable
1,567

 

Deferred income taxes
6,099

 
19,628

TOTAL LIABILITIES
$
2,966,366

 
$
2,965,476

Stockholders’ Equity
 
 
 
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,323,880 and 25,227,463 shares issued and outstanding in 2013 and 2012, respectively
$
25

 
$
25

Additional paid-in capital
210,503

 
208,536

Retained earnings
454,975

 
425,428

Accumulated other comprehensive income, net of tax
68,880

 
95,188

TOTAL STOCKHOLDERS’ EQUITY
$
734,383

 
$
729,177

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
3,700,749

 
$
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 June 30,
 
Six Months Ended June 30,
(In Thousands, Except Share Data)
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
Net premiums earned
$
186,367

 
$
170,090

 
$
363,184

 
$
331,593

Investment income, net of investment expenses
29,019

 
28,749

 
55,483

 
57,895

Net realized investment gains
 
 
 
 
 
 
 
Other-than-temporary impairment charges

 
(4
)
 

 
(4
)
All other net realized gains (includes reclassifications for net unrealized gains on available-for-sale securities of $4,417 and $5,653 in 2013; and $788 and $3,020 in 2012; previously included in accumulated other comprehensive income)
4,151

 
568

 
6,060

 
3,362

Total net realized investment gains
4,151

 
564

 
6,060

 
3,358

Other income
182

 
243

 
297

 
499

Total revenues
$
219,719

 
$
199,646

 
$
425,024

 
$
393,345

Benefits, Losses and Expenses
 
 
 
 
 
 
 
Losses and loss settlement expenses
$
120,435

 
$
106,766

 
$
217,905

 
$
198,250

Future policy benefits
9,869

 
8,356

 
18,105

 
18,494

Amortization of deferred policy acquisition costs
36,708

 
34,179

 
74,789

 
68,730

Other underwriting expenses (includes reclassifications for employee benefit costs of $1,243 and $2,485 in 2013; and $1,732 and $2,375 in 2012; previously included in accumulated other comprehensive income)
23,308

 
20,541

 
45,656

 
42,535

Interest on policyholders’ accounts
9,081

 
10,627

 
18,401

 
21,283

Total benefits, losses and expenses
$
199,401

 
$
180,469

 
$
374,856

 
$
349,292

Income before income taxes
$
20,318

 
$
19,177

 
$
50,168

 
$
44,053

Federal income tax expense (includes reclassifications of $1,111 and $1,109 in 2013; and ($331) and $224 in 2012; previously included in accumulated other comprehensive income)
4,822

 
4,461

 
12,279

 
10,153

Net income
$
15,496

 
$
14,716

 
$
37,889

 
$
33,900

Other comprehensive income (loss)
 
 
 
 
 
 
 
Change in net unrealized appreciation on investments
$
(51,782
)
 
$
8,891

 
$
(37,294
)
 
$
21,932

Change in liability for underfunded employee benefit plans

 

 

 

Other comprehensive income (loss), before tax and reclassification adjustments
$
(51,782
)
 
$
8,891

 
$
(37,294
)
 
$
21,932

Income tax effect
18,115

 
(3,111
)
 
13,045

 
(7,675
)
Other comprehensive income (loss), after tax, before reclassification adjustments
$
(33,667
)
 
$
5,780

 
$
(24,249
)
 
$
14,257

Reclassification adjustment for net realized gains included in income
$
(4,417
)
 
$
(788
)
 
$
(5,653
)
 
$
(3,020
)
Reclassification adjustment for employee benefit costs included in expense
1,243

 
1,732

 
2,485

 
2,375

Total reclassification adjustments, before tax
$
(3,174
)
 
$
944

 
$
(3,168
)
 
$
(645
)
Income tax effect
1,111

 
(331
)
 
$
1,109

 
$
224

Total reclassification adjustments, after tax
$
(2,063
)
 
$
613

 
$
(2,059
)
 
$
(421
)
Comprehensive income (loss)
$
(20,234
)
 
$
21,109

 
$
11,581

 
$
47,736

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
25,297,718

 
25,476,220

 
25,271,752

 
25,491,091

Basic earnings per common share
$
0.61

 
$
0.58

 
$
1.50

 
$
1.33

Diluted earnings per common share
0.61

 
0.58

 
1.49

 
1.33

Cash dividends declared per common share
0.18

 
0.15

 
0.33

 
0.30

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 Share Data)
Six Months Ended June 30, 2013
 
 
Common stock
 
Balance, beginning of year
$
25

Shares repurchased (3,577 shares)

Shares issued for stock-based awards (99,994 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
601

Shares repurchased
(99
)
Shares issued for stock-based awards
1,465

Balance, end of period
$
210,503

 
 
Retained earnings
 
Balance, beginning of year
$
425,428

Net income
37,889

Dividends on common stock ($0.33 per share)
(8,342
)
Balance, end of period
$
454,975

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

Change in net unrealized investment appreciation (1)
(27,923
)
Change in liability for underfunded employee benefit plans(2)
1,615

Balance, end of period
$
68,880

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

Net income
37,889

All other changes in stockholders’ equity accounts
(32,683
)
Balance, end of period
$
734,383

(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)

Six Months Ended June 30,
(In Thousands)
2013
 
2012
Cash Flows From Operating Activities
 
 
 
Net income
$
37,889

 
$
33,900

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Net accretion of bond premium
7,989

 
7,127

Depreciation and amortization
2,930

 
3,671

Stock-based compensation expense
818

 
916

Net realized investment gains
(6,060
)
 
(3,358
)
Net cash flows from trading investments
1,285

 
(748
)
Deferred income tax expense
(2,096
)
 
6,626

Changes in:
 
 
 
Accrued investment income
994

 
(531
)
Premiums receivable
(49,357
)
 
(38,857
)
Deferred policy acquisition costs
(3,288
)
 
(4,520
)
Reinsurance receivables
9,625

 
(24,324
)
Prepaid reinsurance premiums
(573
)
 
2,876

Income taxes receivable
16,536

 
12,288

Other assets
1,182

 
3,959

Future policy benefits and losses, claims and loss settlement expenses
10,716

 
34,345

Unearned premiums
42,827

 
41,306

Accrued expenses and other liabilities
(2,465
)
 
5,048

Income taxes payable
1,567

 

Deferred income benefit (taxes)
2,720

 
(2,448
)
Other, net
(2,834
)
 
(2,131
)
Total adjustments
$
32,516

 
$
41,245

Net cash provided by operating activities
$
70,405

 
$
75,145

Cash Flows From Investing Activities
 
 
 
Proceeds from sale of available-for-sale investments
$
5,971

 
$
13,412

Proceeds from call and maturity of held-to-maturity investments
180

 
285

Proceeds from call and maturity of available-for-sale investments
238,639

 
302,334

Proceeds from short-term and other investments
1,882

 
2,875

Purchase of available-for-sale investments
(295,586
)
 
(414,828
)
Purchase of short-term and other investments
(2,575
)
 
(4,650
)
Net purchases and sales of property and equipment
(2,659
)
 
(857
)
Net cash used in investing activities
$
(54,148
)
 
$
(101,429
)
Cash Flows From Financing Activities
 
 
 
Policyholders’ account balances
 
 
 
Deposits to investment and universal life contracts
$
52,086

 
$
78,313

Withdrawals from investment and universal life contracts
(87,827
)
 
(69,521
)
Repayment of trust preferred securities

 
(15,626
)
Payment of cash dividends
(8,342
)
 
(7,641
)
Repurchase of common stock
(99
)
 
(2,134
)
Issuance of common stock
1,465

 
401

Tax impact from issuance of common stock
(217
)
 
(57
)
Net cash used in financing activities
$
(42,934
)
 
$
(16,265
)
Net Change in Cash and Cash Equivalents
$
(26,677
)
 
$
(42,549
)
Cash and Cash Equivalents at Beginning of Period
107,466

 
144,527

Cash and Cash Equivalents at End of Period
$
80,789

 
$
101,978

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 and 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- and six-month periods ended June 30, 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 six-month periods ended June 30, 2013 and 2012, we made payments for income taxes totaling $2,512 and $8,857, respectively. We received tax refunds of $8,744 and $15,508, respectively, during the six-month periods ended June 30, 2013 and 2012.
For the six-month period ended June 30, 2013, we made no interest payments. For the six-month period ended June 30, 2012, we made interest payments totaling $756. 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 six-month period ended June 30, 2013.
 
 
 
 
 
Property & Casualty
 
Life Insurance
 
Total
Recorded asset at beginning of period
$
64,947

 
$
40,353

 
$
105,300

Underwriting costs deferred
75,432

 
2,645

 
78,077

Amortization of deferred policy acquisition costs
(71,349
)
 
(3,440
)
 
(74,789
)
Ending unamortized deferred policy acquisition costs
$
69,030

 
$
39,558

 
$
108,588

Change in "shadow" deferred policy acquisition costs

 
29,223

 
29,223

Recorded asset at end of period
$
69,030

 
$
68,781

 
$
137,811


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 $9,472 and $38,695 at June 30, 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 $12,279 and $10,153 for the six-month periods ended June 30, 2013 and 2012, respectively. Our effective tax rate is different than the federal statutory rate of 35.0% 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 June 30, 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 in 2013

Comprehensive Income
In February 2013, the Financial Accounting Standards Board ("FASB") issued guidance that 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.
Pending Adoption of Accounting Standards
In July 2013, the FASB issued guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This new guidance is effective for annual and interim periods beginning after December 15, 2013. The Company currently does not have any liability for unrecognized tax benefits. Therefore, the adoption of the new guidance in not expected to have an impact on the Company's financial position or results of operations.
Adopted Accounting Standards in 2012

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. 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 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


8


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 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 that 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 June 30, 2013 and December 31, 2012, is as follows:


9


June 30, 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
$
1,042

 
$
11

 
$

 
$
1,053

Corporate bonds - financial services
200

 

 

 
200

Mortgage-backed securities
230

 
11

 

 
241

Collateralized mortgage obligations
5

 

 

 
5

Total Held-to-Maturity Fixed Maturities
$
1,477

 
$
22

 
$

 
$
1,499

AVAILABLE-FOR-SALE

 

 

 

Fixed maturities

 

 

 

Bonds

 

 

 

U.S. Treasury
$
35,785

 
$
626

 
$
117

 
$
36,294

U.S. government agency
158,029

 
236

 
8,085

 
150,180

States, municipalities and political subdivisions
722,826

 
38,639

 
9,413

 
752,052

Foreign bonds
191,145

 
6,722

 
234

 
197,633

Public utilities
228,355

 
9,623

 
827

 
237,151

Corporate bonds

 

 

 

Energy
161,682

 
5,219

 
820

 
166,081

Industrials
246,363

 
7,269

 
2,275

 
251,357

Consumer goods and services
182,015

 
5,200

 
1,036

 
186,179

Health care
106,273

 
3,844

 
1,128

 
108,989

Technology, media and telecommunications
130,789

 
3,249

 
2,352

 
131,686

Financial services
250,945

 
9,542

 
1,032

 
259,455

Mortgage-backed securities
25,959

 
496

 
148

 
26,307

Collateralized mortgage obligations
261,692

 
3,084

 
8,029

 
256,747

Asset-backed securities
3,938

 
385

 

 
4,323

Redeemable preferred stocks
378

 
4

 

 
382

Total Available-for-Sale Fixed Maturities
$
2,706,174

 
$
94,138

 
$
35,496

 
$
2,764,816

Equity securities

 

 

 

Common stocks

 

 

 

Public utilities
$
7,231

 
$
8,673

 
$
47

 
$
15,857

Energy
5,094

 
7,704

 

 
12,798

Industrials
13,015

 
23,150

 
71

 
36,094

Consumer goods and services
10,363

 
8,860

 
14

 
19,209

Health care
7,920

 
13,238

 

 
21,158

Technology, media and telecommunications
6,204

 
6,554

 
104

 
12,654

Financial services
15,854

 
61,912

 
103

 
77,663

Nonredeemable preferred stocks
1,774

 
17

 
67

 
1,724

Total Available-for-Sale Equity Securities
$
67,455

 
$
130,108

 
$
406

 
$
197,157

Total Available-for-Sale Securities
$
2,773,629

 
$
224,246

 
$
35,902

 
$
2,961,973



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 June 30, 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
June 30, 2013
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
449

 
$
451

 
$
298,828

 
$
304,189

 
$
2,684

 
$
2,831

Due after one year through five years
793

 
802

 
996,401

 
1,046,833

 
6,043

 
6,598

Due after five years through 10 years

 

 
819,748

 
839,103

 

 

Due after 10 years

 

 
299,608

 
287,314

 
2,686

 
3,122

Asset-backed securities

 

 
3,938

 
4,323

 

 

Mortgage-backed securities
230

 
241

 
25,959

 
26,307

 

 

Collateralized mortgage obligations
5

 
5

 
261,692

 
256,747

 

 

 
$
1,477

 
$
1,499

 
$
2,706,174

 
$
2,764,816

 
$
11,413

 
$
12,551

Net Realized Investment Gains and Losses
Net realized gains (losses) on disposition of investments are computed using the specific identification method and are included in the computation of net income. A summary of the components of net realized investment gains (losses) is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Net realized investment gains (losses)
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale
$
1,185

 
$
792

 
$
1,905

 
$
2,323

Trading securities
 
 
 
 
 
 
 
Change in fair value
(130
)
 
(230
)
 
430

 
(39
)
Sales
298

 
6

 
298

 
377

Equity securities
 
 
 
 
 
 
 
Available-for-sale
3,232

 
(4
)
 
3,748

 
697

Trading securities
 
 
 
 
 
 
 
Change in fair value
(132
)
 

 
(19
)
 

Sales
38

 

 
38

 

Other long-term investments
(340
)
 

 
(340
)
 

Total net realized investment gains
$
4,151

 
$
564

 
$
6,060

 
$
3,358

The proceeds and gross realized gains (losses) on the sale of available-for-sale securities are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Proceeds from sales
$
3,161

 
$
10,412

 
$
5,971

 
$
13,412

Gross realized gains
96

 
8

 
238

 
478

Gross realized losses

 

 

 
(25
)
There were no sales of held-to-maturity securities during the three- and six-month periods ended June 30, 2013 and 2012.



12


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 $14,532 and $15,371 at June 30, 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 $2,850 at June 30, 2013.
Unrealized Appreciation
A summary of the changes in net unrealized investment appreciation during the reporting period is as follows:
 
Six Months Ended June 30,
 
2013
 
2012
Change in net unrealized investment appreciation
 
 
 
Available-for-sale fixed maturities
$
(91,636
)
 
$
8,223

Equity securities
19,467

 
14,805

Deferred policy acquisition costs
29,223

 
(4,116
)
Income tax effect
15,023

 
(6,620
)
Total change in net unrealized investment appreciation, net of tax
$
(27,923
)
 
$
12,292

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 June 30, 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 June 30, 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 June 30, 2013. Our largest unrealized loss greater than 12 months on an individual security at June 30, 2013 was $129. 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


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 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
7

 
$
7,235

 
$
117

 

 
$

 
$

 
$
7,235

 
$
117

U.S. government agency
52

 
145,139

 
8,085

 

 

 

 
145,139

 
8,085

States, municipalities and political subdivisions
156

 
123,895

 
9,413

 

 

 

 
123,895

 
9,413

Foreign bonds
8

 
18,809

 
234

 

 

 

 
18,809

 
234

Public utilities
18

 
37,306

 
827

 

 

 

 
37,306

 
827

Corporate bonds
 
 
 
 
 
 
 
 
 
 
 
 


 


Energy
10

 
25,195

 
820

 

 

 

 
25,195

 
820

Industrials
24

 
65,130

 
2,275

 

 

 

 
65,130

 
2,275

Consumer goods and services
17

 
34,666

 
869

 
6

 
3,213

 
167

 
37,879

 
1,036

Health care
10

 
26,997

 
1,010

 
1

 
1,177

 
118

 
28,174

 
1,128

Technology, media and telecommunications
13

 
41,673

 
2,352

 

 

 

 
41,673

 
2,352

Financial services
9

 
28,521

 
856

 
2

 
6,443

 
176

 
34,964

 
1,032

Mortgage-backed securities
22

 
9,411

 
147

 
2

 
20

 
1

 
9,431

 
148

Collateralized mortgage obligations
91

 
178,023

 
7,874

 
2

 
2,061

 
155

 
180,084

 
8,029

Total Available-for-Sale Fixed Maturities
437

 
$
742,000

 
$
34,879

 
13

 
$
12,914

 
$
617

 
$
754,914

 
$
35,496

Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Public utilities
3

 
$
261

 
$
47

 

 
$

 
$

 
$
261

 
$
47

Industrials
2

 
218

 
2

 
5

 
480

 
69

 
698

 
71

Consumer goods and services

 

 

 
2

 
62

 
14

 
62

 
14

Technology, media and telecommunications
4

 
227

 
20

 
6

 
205

 
84

 
432

 
104

Financial services
3

 
352

 
35

 
3

 
209

 
68

 
561

 
103

Nonredeemable preferred stocks

 

 

 
2

 
1,164

 
67

 
1,164

 
67

Total Available-for-Sale Equity Securities
12

 
$
1,058

 
$
104

 
18

 
$
2,120

 
$
302

 
$
3,178

 
$
406

Total Available-for-Sale Securities
449

 
$
743,058

 
$
34,983

 
31

 
$
15,034

 
$
919

 
$
758,092

 
$
35,902



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 a reasonable estimate of 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 June 30, 2013 and December 31, 2012 is as follows:
 
June 30, 2013
 
December 31, 2012
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Assets
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Held-to-maturity securities
$
1,499