10-Q 1 ufcs-2014331x10q.htm 10-Q UFCS-2014.3.31-10Q
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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 March 31, 2014

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 52401
(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 Exchange Act). YES o NO R
As of May 2, 2014, 25,399,846 shares of common stock were outstanding.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



United Fire Group, Inc.
Index to Quarterly Report on Form 10-Q
March 31, 2014
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 4. Mine Safety Disclosures
 
 
 
 
 
 



FORWARD-LOOKING INFORMATION
This report may contain forward-looking statements about our operations, anticipated performance and other similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor under the Securities Act of 1933 and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for forward-looking statements. The forward-looking statements are not historical facts and involve risks and uncertainties that could cause actual results to differ from those expected and/or projected. Such forward-looking statements are based on current expectations, estimates, forecasts and projections about United Fire Group, Inc. (the "Company", "we", "us", or "our"), the industry in which we operate, and beliefs and assumptions made by management. Words such as "expect(s)," "anticipate(s)," "intend(s)," "plan(s)," "believe(s)," "continue(s)," "seek(s)," "estimate(s)," "goal(s)," "target(s)," "forecast(s)," "project(s)," "predict(s)," "should," "could," "may," "will continue," "might," "hope," "can" and other words and terms of similar meaning or expression in connection with a discussion of future operations, financial performance or financial condition, are intended to identify forward-looking statements. See Part I, Item 1A "Risk Factors" in our 2013 Annual Report on Form 10-K and Part II, Item 1A "Risk Factors" of this report for more information concerning factors that could cause actual results to differ materially from those in the forward-looking statements.
Risks and uncertainties that may affect the actual financial condition and results of the Company include but are not limited to the following:

The frequency and severity of claims, including those related to catastrophe losses and the impact those claims have on our loss reserve adequacy;
Occurrence of catastrophic events, occurrence of significant severe weather conditions, climate change, acts of terrorism, acts of war and pandemics;
Developments in the domestic and global financial markets and "other-than-temporary" impairment losses that could affect our investment portfolio;
The calculation and recovery of deferred policy acquisition costs ("DAC");
The valuation of pension and other postretirement benefit obligations;
Our relationship with our agencies and agents;
Our relationship with our reinsurers;
The financial strength of our reinsurers;
Our exposure to international catastrophes through our assumed reinsurance program;
Lowering of one or more of the financial strength ratings of our operating subsidiaries or our issuer credit ratings and the adverse impact such action may have on our premium writings, policy retention, profitability and liquidity;
Changes in general economic conditions, interest rates, industry trends, increase in competition and significant industry developments;
Competitive, legal, regulatory or tax changes that affect the distribution cost or demand for our products;
Litigation or regulatory actions that could require us to pay significant damages or change the way we do business;
Governmental actions, policies and regulations, including, but not limited to, domestic health care reform, financial services regulatory reform, corporate governance, new laws or regulations or court decisions interpreting existing laws and regulations or policy provisions; and
NASDAQ policies or regulations relating to corporate governance and the cost to comply.

These are representative of the risks, uncertainties, and assumptions that could cause actual outcomes and results to differ materially from what is expressed in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report or as of the date they are made. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission ("SEC"), we do not have any intention or obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.



1


PART I — FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
United Fire Group, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Data)
March 31,
2014
 
December 31,
2013
 
(unaudited)
 
 
ASSETS
 
 
 
Investments
 
 
 
Fixed maturities
 
 
 
Held-to-maturity, at amortized cost (fair value $656 in 2014 and $669 in 2013)
$
644

 
$
656

Available-for-sale, at fair value (amortized cost $2,759,461 in 2014 and $2,733,557 in 2013)
2,805,723

 
2,751,256

Trading securities, at fair value (amortized cost $13,904 in 2014 and $8,049 in 2013)
16,095

 
9,940

Equity securities
 
 
 
Available-for-sale, at fair value (cost $71,021 in 2014 and $70,957 in 2013)
232,377

 
229,368

Trading securities, at fair value (cost $2,704 in 2014 and $2,367 in 2013)
3,037

 
2,487

Mortgage loans
4,368

 
4,423

Policy loans
6,177

 
6,261

Other long-term investments
46,513

 
44,946

Short-term investments
800

 
800

 
3,115,734

 
3,050,137

Cash and cash equivalents
68,663

 
92,193

Accrued investment income
28,686

 
27,923

Premiums receivable (net of allowance for doubtful accounts of $970 in 2014 and $896 in 2013)
236,424

 
218,635

Deferred policy acquisition costs
143,296

 
150,092

Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $38,058 in 2014 and $36,972 in 2013)
47,974

 
47,218

Reinsurance receivables and recoverables
85,281

 
87,451

Prepaid reinsurance premiums
3,630

 
3,160

Income taxes receivable

 
1,786

Goodwill and intangible assets
26,855

 
27,047

Other assets
12,706

 
15,030

TOTAL ASSETS
$
3,769,249

 
$
3,720,672

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Future policy benefits and losses, claims and loss settlement expenses
 
 
 
Property and casualty insurance
$
974,246

 
$
960,651

Life insurance
1,471,584

 
1,472,132

Unearned premiums
360,782

 
340,464

Accrued expenses and other liabilities
124,124

 
142,677

Income taxes payable
1,948

 

Deferred income taxes
28,458

 
21,915

TOTAL LIABILITIES
$
2,961,142

 
$
2,937,839

Stockholders’ Equity
 
 
 
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,396,845 and 25,360,893 shares issued and outstanding in 2014 and 2013, respectively
$
25

 
$
25

Additional paid-in capital
212,904

 
211,574

Retained earnings
492,848

 
484,084

Accumulated other comprehensive income, net of tax
102,330

 
87,150

TOTAL STOCKHOLDERS’ EQUITY
$
808,107

 
$
782,833

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
3,769,249

 
$
3,720,672

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)
2014
 
2013
 
 
 
 
Revenues
 
 
 
Net premiums earned
$
193,341

 
$
176,817

Investment income, net of investment expenses
26,762

 
26,464

Net realized investment gains (includes reclassifications for net unrealized investment gains on available-for-sale securities of $1,482 in 2014; and $1,236 in 2013; previously included in accumulated other comprehensive income)
2,194

 
1,909

Other income
607

 
115

Total revenues
$
222,904

 
$
205,305

Benefits, Losses and Expenses
 
 
 
Losses and loss settlement expenses
$
125,237

 
$
97,470

Increase in liability for future policy benefits
7,821

 
8,236

Amortization of deferred policy acquisition costs
39,534

 
38,081

Other underwriting expenses (includes reclassifications for employee benefit costs of $768 in 2014; and $1,242 in 2013; previously included in accumulated other comprehensive income)
26,428

 
22,348

Interest on policyholders’ accounts
7,987

 
9,320

Total benefits, losses and expenses
$
207,007

 
$
175,455

Income before income taxes
$
15,897

 
$
29,850

Federal income tax expense (includes reclassifications of ($250) in 2014; and $2 in 2013; previously included in accumulated other comprehensive income)
2,566

 
7,457

Net income
$
13,331

 
$
22,393

Other comprehensive income
 
 
 
Change in net unrealized appreciation on investments
$
24,069

 
$
14,488

Change in liability for underfunded employee benefit plans

 

Other comprehensive income, before tax and reclassification adjustments
$
24,069

 
$
14,488

Income tax effect
(8,425
)
 
(5,070
)
Other comprehensive income, after tax, before reclassification adjustments
$
15,644

 
$
9,418

Reclassification adjustment for net realized investment gains included in income
$
(1,482
)
 
$
(1,236
)
Reclassification adjustment for employee benefit costs included in expense
768

 
1,242

Total reclassification adjustments, before tax
$
(714
)
 
$
6

Income tax effect
250

 
(2
)
Total reclassification adjustments, after tax
$
(464
)
 
$
4

Comprehensive income
$
28,511

 
$
31,815

 
 
 
 
Weighted average common shares outstanding
25,372,280

 
25,245,497

Basic earnings per common share
$
0.53

 
$
0.89

Diluted earnings per common share
0.52

 
0.88

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)
Three Months Ended March 31, 2014
 
 
Common stock
 
Balance, beginning of year
$
25

Shares issued for stock-based awards (35,952 shares)

Balance, end of period
$
25

 
 
Additional paid-in capital
 
Balance, beginning of year
$
211,574

Compensation expense and related tax benefit for stock-based award grants
507

Shares issued for stock-based awards
823

Balance, end of period
$
212,904

 
 
Retained earnings
 
Balance, beginning of year
$
484,084

Net income
13,331

Dividends on common stock ($0.18 per share)
(4,567
)
Balance, end of period
$
492,848

 
 
Accumulated other comprehensive income, net of tax
 
Balance, beginning of year
$
87,150

Change in net unrealized investment appreciation(1)
14,681

Change in liability for underfunded employee benefit plans(2)
499

Balance, end of period
$
102,330

 
 
Summary of changes
 
Balance, beginning of year
$
782,833

Net income
13,331

All other changes in stockholders’ equity accounts
11,943

Balance, end of period
$
808,107

(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 reclassification adjustments and 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)
2014
 
2013
Cash Flows From Operating Activities
 
 
 
Net income
$
13,331

 
$
22,393

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Net accretion of bond premium
3,701

 
3,981

Depreciation and amortization
2,295

 
1,785

Stock-based compensation expense
437

 
411

Net realized investment gains
(2,194
)
 
(1,909
)
Net cash flows from trading investments
(5,673
)
 
46

Deferred income tax expense (benefit)
(1,559
)
 
460

Changes in:
 
 
 
Accrued investment income
(763
)
 
296

Premiums receivable
(17,789
)
 
(19,631
)
Deferred policy acquisition costs
(2,124
)
 
(2,917
)
Reinsurance receivables
2,170

 
(5,741
)
Prepaid reinsurance premiums
(470
)
 
(255
)
Income taxes receivable
1,786

 
14,150

Other assets
2,324

 
1,013

Future policy benefits and losses, claims and loss settlement expenses
19,648

 
6,364

Unearned premiums
20,318

 
14,670

Accrued expenses and other liabilities
(17,785
)
 
(5,068
)
Income taxes payable
1,948

 

Deferred income taxes
(72
)
 
1,665

Other, net
(1,038
)
 
31

Total adjustments
$
5,160

 
$
9,351

Net cash provided by operating activities
$
18,491

 
$
31,744

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

 
$
2,810

Proceeds from call and maturity of held-to-maturity investments
11

 
19

Proceeds from call and maturity of available-for-sale investments
103,480

 
127,514

Proceeds from short-term and other investments
764

 
407

Purchase of available-for-sale investments
(131,989
)
 
(142,615
)
Purchase of short-term and other investments
(1,152
)
 
(900
)
Net purchases and sales of property and equipment
(2,860
)
 
(386
)
Net cash used in investing activities
$
(31,746
)
 
$
(13,151
)
Cash Flows From Financing Activities
 
 
 
Policyholders’ account balances
 
 
 
Deposits to investment and universal life contracts
$
49,281

 
$
25,369

Withdrawals from investment and universal life contracts
(55,882
)
 
(46,219
)
Payment of cash dividends
(4,567
)
 
(3,786
)
Issuance of common stock
823

 
603

Tax impact from issuance of common stock
70

 
(78
)
Net cash used in financing activities
$
(10,275
)
 
$
(24,111
)
Net Change in Cash and Cash Equivalents
$
(23,530
)
 
$
(5,518
)
Cash and Cash Equivalents at Beginning of Period
92,193

 
107,466

Cash and Cash Equivalents at End of Period
$
68,663

 
$
101,948

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", the "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. Our insurance company subsidiaries are licensed as a property and casualty insurer in 43 states and the District of Columbia, and as a life insurer in 37 states.
Basis of Presentation
The unaudited consolidated interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X promulgated by the SEC. 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 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.
Management of United Fire believes 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, 2013. The review report of Ernst & Young LLP as of March 31, 2014 and for the three-month periods ended March 31, 2014 and 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.
For the three-month periods ended March 31, 2014 and 2013, we made payments for income taxes totaling $1,007 and $5, respectively. We received tax refunds of $615 and $8,744, respectively, during the three-month periods ended March 31, 2014 and 2013.


6


For the three-month periods ended March 31, 2014 and 2013, we made no interest payments (excluding 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, 2014.
 
 
 
 
 
Property & Casualty
 
Life Insurance
 
Total
Recorded asset at beginning of period
$
67,663

 
$
82,429

 
$
150,092

Underwriting costs deferred
39,822

 
1,836

 
41,658

Amortization of deferred policy acquisition costs
(37,876
)
 
(1,658
)
 
(39,534
)
Ending unamortized deferred policy acquisition costs
$
69,609

 
$
82,607

 
$
152,216

Change in "shadow" deferred policy acquisition costs

 
(8,920
)
 
(8,920
)
Recorded asset at end of period
$
69,609

 
$
73,687

 
$
143,296


Property and casualty policy acquisition costs deferred are amortized as premium revenue is recognized. The method followed 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 expected 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. Expected premium revenue and gross profits are based on the same mortality and withdrawal assumptions used in determining future policy benefits. These assumptions are not revised after policy issuance unless the recorded DAC asset is deemed to be unrecoverable from future expected profits.

For non-traditional life insurance 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. 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 $5,513 at March 31, 2014 and increased the DAC asset by $3,407 at December 31, 2013, 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.
We reported a federal income tax expense of $2,566 and $7,457 for the three-month periods ended March 31, 2014 and 2013, respectively. Our effective tax rate is different than the federal statutory rate of 35.0 percent due principally to the effect of tax-exempt municipal bond interest income and non-taxable dividend income.


7


We did not recognize any liability for unrecognized tax benefits at March 31, 2014 or December 31, 2013. 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 a routine examination of our income tax return for the 2011 tax year.
Recently Issued Accounting Standards
Adopted Accounting Standards in 2014

Unrecognized tax benefit
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. The Company adopted the new guidance effective January 1, 2014. The adoption of the new guidance had no 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, 2014 and December 31, 2013, is as follows:


8


March 31, 2014
 
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
$
249

 
$
4

 
$

 
$
253

Corporate bonds - financial services
200

 

 

 
200

Mortgage-backed securities
195

 
8

 

 
203

Total Held-to-Maturity Fixed Maturities
$
644

 
$
12

 
$

 
$
656

AVAILABLE-FOR-SALE

 

 

 

Fixed maturities

 

 

 

Bonds

 

 

 

U.S. Treasury
$
32,539

 
$
346

 
$
130

 
$
32,755

U.S. government agency
319,146

 
1,175

 
11,641

 
308,680

States, municipalities and political subdivisions
699,631

 
33,156

 
5,191

 
727,596

Foreign bonds
157,747

 
6,096

 
104

 
163,739

Public utilities
209,721

 
6,719

 
764

 
215,676

Corporate bonds

 

 

 

Energy
156,177

 
4,667

 
682

 
160,162

Industrials
227,612

 
6,220

 
1,209

 
232,623

Consumer goods and services
171,884

 
4,454

 
597

 
175,741

Health care
82,693

 
3,400

 
552

 
85,541

Technology, media and telecommunications
119,579

 
3,198

 
1,516

 
121,261

Financial services
241,936

 
8,780

 
272

 
250,444

Mortgage-backed securities
20,919

 
401

 
215

 
21,105

Collateralized mortgage obligations
316,736

 
2,224

 
11,941

 
307,019

Asset-backed securities
3,141

 
240

 

 
3,381

Total Available-for-Sale Fixed Maturities
$
2,759,461

 
$
81,076

 
$
34,814

 
$
2,805,723

Equity securities

 

 

 

Common stocks

 

 

 

Public utilities
$
7,231

 
$
10,231

 
$

 
$
17,462

Energy
5,094

 
9,562

 

 
14,656

Industrials
13,286

 
32,197

 
34

 
45,449

Consumer goods and services
10,363

 
10,933

 
3

 
21,293

Health care
7,920

 
17,025

 

 
24,945

Technology, media and telecommunications
6,204

 
7,176

 
58

 
13,322

Financial services
15,939

 
74,451

 
113

 
90,277

Nonredeemable preferred stocks
4,984

 
11

 
22

 
4,973

Total Available-for-Sale Equity Securities
$
71,021

 
$
161,586

 
$
230

 
$
232,377

Total Available-for-Sale Securities
$
2,830,482

 
$
242,662

 
$
35,044

 
$
3,038,100



9


December 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
$
250

 
$
4

 
$

 
$
254

Corporate bonds - financial services
200

 

 

 
200

Mortgage-backed securities
206

 
9

 

 
215

Total Held-to-Maturity Fixed Maturities
$
656

 
$
13

 
$

 
$
669

AVAILABLE-FOR-SALE

 

 

 

Fixed maturities

 

 

 

Bonds

 

 

 

U.S. Treasury
$
33,612

 
$
423

 
$
140

 
$
33,895

U.S. government agency
287,988

 
258

 
18,663

 
269,583

States, municipalities and political subdivisions
690,461

 
34,151

 
10,705

 
713,907

Foreign bonds
167,390

 
5,863

 
397

 
172,856

Public utilities
213,479

 
6,873

 
1,776

 
218,576

Corporate bonds

 


 

 

Energy
157,620

 
4,398

 
1,008

 
161,010

Industrials
234,221

 
5,626

 
2,819

 
237,028

Consumer goods and services
165,565

 
3,770

 
1,421

 
167,914

Health care
91,008

 
3,138

 
1,200

 
92,946

Technology, media and telecommunications
121,746

 
2,541

 
3,321

 
120,966

Financial services
234,739

 
7,735

 
723

 
241,751

Mortgage-backed securities
22,034

 
323

 
291

 
22,066

Collateralized mortgage obligations
309,975

 
1,707

 
16,919

 
294,763

Asset-backed securities
3,719

 
276

 

 
3,995

Total Available-for-Sale Fixed Maturities
$
2,733,557

 
$
77,082

 
$
59,383

 
$
2,751,256

Equity securities

 

 

 

Common stocks

 

 

 

Public utilities
$
7,231

 
$
9,068

 
$
27

 
$
16,272

Energy
5,094

 
9,269

 

 
14,363

Industrials
13,308

 
32,823

 
32

 
46,099

Consumer goods and services
10,363

 
10,895

 

 
21,258

Health care
7,920

 
17,078

 

 
24,998

Technology, media and telecommunications
6,204

 
7,183

 
83

 
13,304

Financial services
15,853

 
72,537

 
128

 
88,262

Nonredeemable preferred stocks
4,984

 
5

 
177

 
4,812

Total Available-for-Sale Equity Securities
$
70,957

 
$
158,858

 
$
447

 
$
229,368

Total Available-for-Sale Securities
$
2,804,514

 
$
235,940

 
$
59,830

 
$
2,980,624




10


Maturities
The amortized cost and fair value of held-to-maturity, available-for-sale and trading fixed maturity securities at March 31, 2014, 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, 2014
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
135

 
$
136

 
$
247,860

 
$
251,533

 
$
1,527

 
$
1,527

Due after one year through five years
314

 
317

 
928,808

 
976,157

 
6,926

 
8,174

Due after five years through 10 years

 

 
826,150

 
841,995

 
550

 
684

Due after 10 years

 

 
415,847

 
404,533

 
4,901

 
5,710

Asset-backed securities

 

 
3,141

 
3,381

 

 

Mortgage-backed securities
195

 
203

 
20,919

 
21,105

 

 

Collateralized mortgage obligations

 

 
316,736

 
307,019

 

 

 
$
644

 
$
656

 
$
2,759,461

 
$
2,805,723

 
$
13,904

 
$
16,095

Net Realized Investment Gains and Losses
Net realized gains 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 is as follows:
 
Three Months Ended March 31,
 
2014
 
2013
Net realized investment gains
 
 
 
Fixed maturities:
 
 
 
Available-for-sale
$
647

 
$
720

Trading securities
 
 
 
Change in fair value
300

 
560

Sales
235

 

Equity securities
 
 
 
Available-for-sale
835

 
516

Trading securities - change in fair value
177

 
113

Total net realized investment gains
$
2,194

 
$
1,909

The proceeds and gross realized gains on the sale of available-for-sale securities are as follows:
 
Three Months Ended March 31,
 
2014
 
2013
Proceeds from sales
$

 
$
2,810

Gross realized gains

 
142

Gross realized losses

 

There were no sales of held-to-maturity securities during the three-month periods ended March 31, 2014 and 2013.

Our investment portfolio includes trading securities with embedded derivatives. These securities are primarily convertible securities which 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. Our portfolio of trading securities had a fair value of $19,132 and $12,427 at March 31, 2014 and December 31, 2013, respectively.


11


Unrealized Appreciation
A summary of the changes in net unrealized investment appreciation during the reporting period is as follows:
 
Three Months Ended March 31,
 
2014
 
2013
Change in net unrealized investment appreciation
 
 
 
Available-for-sale fixed maturities
$
28,563

 
$
(9,598
)
Available-for-sale equity securities
2,945

 
17,978

Deferred policy acquisition costs
(8,920
)
 
4,871

Income tax effect
(7,907
)
 
(4,637
)
Total change in net unrealized investment appreciation, net of tax
$
14,681

 
$
8,614

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, 2014 and December 31, 2013. 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, 2014, if future events or information cause us to determine that a decline in fair value is other-than-temporary.
We have evaluated the near-term prospects of the issuers of our fixed maturity 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, 2014. We believe the unrealized depreciation in value of other 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 to 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, 2014. Our largest unrealized loss greater than 12 months on an individual equity security at March 31, 2014 was $66. We have no intention to sell any of these securities prior to a recovery in value, but will continue to monitor the fair value reported for these securities as part of our overall process to evaluate investments for OTTI recognition.


12


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2014
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
12

 
$
11,663

 
$
130

 

 
$

 
$

 
$
11,663

 
$
130

U.S. government agency
75

 
194,814

 
11,330

 
2

 
4,689

 
311

 
199,503

 
11,641

States, municipalities and political subdivisions
108

 
89,654

 
3,227

 
37

 
32,844

 
1,964

 
122,498

 
5,191

Foreign bonds
3

 
6,231

 
104

 

 

 

 
6,231

 
104

Public utilities
23

 
46,900

 
764

 

 

 

 
46,900

 
764

Corporate bonds
 
 
 
 
 
 
 
 
 
 
 
 


 


Energy
7

 
17,647

 
395

 
1

 
4,053

 
287

 
21,700

 
682

Industrials
14

 
34,997

 
655

 
2

 
7,482

 
554

 
42,479

 
1,209

Consumer goods and services
10

 
28,316

 
363

 
7

 
5,115

 
234

 
33,431

 
597

Health care
5

 
15,026

 
362

 
2

 
4,480

 
190

 
19,506

 
552

Technology, media and telecommunications
7

 
25,434

 
675

 
2

 
7,782

 
841

 
33,216

 
1,516

Financial services
5

 
12,252

 
239

 
1

 
505

 
33

 
12,757

 
272

Mortgage-backed securities
11

 
3,707

 
120

 
7

 
3,086

 
95

 
6,793

 
215

Collateralized mortgage obligations
75

 
143,390

 
6,319

 
34

 
69,064

 
5,622

 
212,454

 
11,941

Total Available-for-Sale Fixed Maturities
355

 
$
630,031

 
$
24,683

 
95

 
$
139,100

 
$
10,131

 
$
769,131

 
$
34,814

Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Industrials

 
$

 
$

 
2

 
$
78

 
$
34

 
$
78

 
$
34

Consumer goods and services
1

 
15

 
3

 

 

 

 
15

 
3

Technology, media and telecommunications

 

 

 
6

 
231

 
58

 
231

 
58

Financial services

 

 

 
4

 
230

 
113

 
230

 
113

Nonredeemable preferred stocks

 

 

 
2

 
1,210

 
22

 
1,210

 
22

Total Available-for-Sale Equity Securities
1

 
$
15

 
$
3

 
14

 
$
1,749

 
$
227

 
$
1,764

 
$
230

Total Available-for-Sale Securities
356

 
$
630,046

 
$
24,686

 
109

 
$
140,849

 
$
10,358

 
$
770,895

 
$
35,044



13


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 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
10

 
$
9,196

 
$
140

 

 
$

 
$

 
$
9,196

 
$
140

U.S. government agency
101

 
256,203

 
18,019

 
2

 
4,356

 
644

 
260,559

 
18,663

States, municipalities and political subdivisions
136

 
97,950

 
7,423

 
29

 
29,670

 
3,282

 
127,620

 
10,705

Foreign bonds
10

 
20,832

 
397

 

 

 

 
20,832

 
397

Public utilities
31

 
61,582

 
1,776

 

 

 

 
61,582

 
1,776

Corporate bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
9

 
23,735

 
1,008

 

 

 

 
23,735

 
1,008

Industrials
34

 
77,788

 
2,819

 

 

 

 
77,788

 
2,819

Consumer goods and services
31

 
58,833

 
1,276

 
6

 
3,218

 
145

 
62,051

 
1,421

Health care
10

 
25,888

 
942

 
2

 
4,427

 
258

 
30,315

 
1,200

Technology, media and telecommunications
18

 
58,105

 
2,147

 
2

 
7,468

 
1,174

 
65,573

 
3,321

Financial services
7

 
15,191

 
720

 
1

 
1,525

 
3

 
16,716

 
723

Mortgage-backed securities
16

 
4,476

 
177

 
6

 
3,113

 
114

 
7,589

 
291

Collateralized mortgage obligations
111

 
208,855

 
11,062

 
23

 
55,184

 
5,857

 
264,039

 
16,919

Total Available-for-Sale Fixed Maturities
524

 
$
918,634

 
$
47,906

 
71

 
$
108,961

 
$
11,477

 
$
1,027,595

 
$
59,383

Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Public utilities

 
$

 
$

 
3

 
$
281

 
$
27

 
$
281

 
$
27

Industrials
1

 
1

 
1

 
2

 
81

 
31

 
82

 
32

Technology, media and telecommunications

 

 

 
6

 
206

 
83

 
206

 
83

Financial services

 

 

 
4

 
215

 
128

 
215

 
128

Nonredeemable preferred stocks
3

 
3,493

 
116

 
2

 
1,170

 
61

 
4,663

 
177

Total Available-for-Sale Equity Securities
4

 
$
3,494

 
$
117

 
17

 
$
1,953

 
$
330

 
$
5,447

 
$
447

Total Available-for-Sale Securities
528

 
$
922,128

 
$
48,023

 
88

 
$
110,914

 
$
11,807

 
$
1,033,042

 
$
59,830



14


NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS
We estimate the fair value of our financial instruments based on relevant market information or by discounting estimated future cash flows at estimated current market discount rates appropriate to the specific asset or liability.
When possible, 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 value on market prices obtained from independent pricing services and brokers or on valuation techniques 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. Our valuation techniques are discussed in more detail later in this section.
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 recorded on the equity method of accounting. The fair value of the partnerships is obtained from the fund managers, which is based on the fair value of the underlying investments held in the partnerships. In management’s opinion, these values represent a reasonable estimate of fair value. We have not adjusted the net asset value provided by the fund managers.
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.





15


A summary of the carrying value and estimated fair value of our financial instruments at March 31, 2014 and December 31, 2013 is as follows:
 
March 31, 2014
 
December 31, 2013
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Assets
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Held-to-maturity securities
$
656

 
$
644

 
$
669

 
$
656

Available-for-sale securities
2,805,723

 
2,805,723

 
2,751,256

 
2,751,256

Trading securities
16,095

 
16,095

 
9,940

 
9,940

Equity securities:
 
 
 
 
 
 
 
Available-for-sale securities
232,377

 
232,377

 
229,368

 
229,368

Trading securities
3,037

 
3,037

 
2,487

 
2,487

Mortgage loans
4,724

 
4,368

 
4,724

 
4,423

Policy loans
6,177

 
6,177

 
6,261

 
6,261

Other long-term investments
46,513

 
46,513

 
44,946

 
44,946

Short-term investments
800

 
800

 
800

 
800

Cash and cash equivalents
68,663

 
68,663

 
92,193

 
92,193

Liabilities
 
 
 
 
 
 
 
Policy reserves
 
 
 
 
 
 
 
Annuity (accumulations) (1)
$
954,214

 
$
920,038

 
$
941,636

 
$
925,832

Annuity (benefit payments)
142,900

 
94,163

 
140,276

 
94,805

(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 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.


16


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, 2014 and December 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, 2014 and December 31, 2013:


17


March 31, 2014
 
 
Fair Value Measurements
Description
Total
 
Level 1
 
Level 2
 
Level 3
AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
U.S. Treasury
$
32,755

 
$

 
$
32,755

 
$

U.S. government agency
308,680

 

 
308,680

 

States, municipalities and political subdivisions
727,596

 

 
726,898

 
698

Foreign bonds
163,739

 

 
163,739

 

Public utilities
215,676

 

 
215,676

 

Corporate bonds


 


 


 


Energy
160,162

 

 
160,162

 

Industrials
232,623

 

 
232,623

 

Consumer goods and services
175,741

 

 
174,322

 
1,419

Health care
85,541

 

 
85,541

 

Technology, media and telecommunications
121,261

 

 
121,261

 

Financial services
250,444

 

 
238,741

 
11,703

Mortgage-backed securities
21,105

 

 
21,105

 

Collateralized mortgage obligations
307,019

 

 
307,019

 

Asset-backed securities
3,381

 

 
1,468

 
1,913

Total Available-for-Sale Fixed Maturities
$
2,805,723

 
$

 
$
2,789,990

 
$
15,733

Equity securities
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
Public utilities
$
17,462

 
$
17,462

 
$

 
$

Energy
14,656

 
14,656

 

 

Industrials
45,449

 
45,430

 
19

 

Consumer goods and services
21,293