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, 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 the definitions 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 August 1, 2014, 25,212,125 shares of common stock were outstanding.

United Fire Group, Inc.

Index to Quarterly Report on Form 10-Q

June 30, 2014

	Page
Forward-Looking Information	1
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013	3
Consolidated Statements of Income and Comprehensive Income (unaudited) for the three- and six-month periods ended June 30, 2014 and 2013	4
Consolidated Statement of Stockholders’ Equity (unaudited) for the six-month period ended June 30, 2014	5
Consolidated Statements of Cash Flows (unaudited) for the six-month periods ended June 30, 2014 and 2013	6
Notes to Unaudited Consolidated Financial Statements	7
Review Report of Independent Registered Public Accounting Firm	31
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3. Quantitative and Qualitative Disclosures about Market Risk	48
Item 4. Controls and Procedures	48
Part II. Other Information
Item 1. Legal Proceedings	49
Item 1A. Risk Factors	49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3. Defaults Upon Senior Securities	49
Item 4. Mine Safety Disclosures	49
Item 5. Other Information	49
Item 6. Exhibits	50
Signatures	51

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;

• The adequacy of our reserves for property and casualty insurance losses and loss settlement expenses and our life insurance reserve for future policy benefits;

• Geographic concentration risk in both property and casualty insurance and life insurance segments;

• Unauthorized data access, cyber-attacks and other security breaches;

• 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;

• Our ability to effectively underwrite and adequately price insured risks;

• 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 and 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

1

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.

2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

United Fire Group, Inc. Consolidated Balance Sheets
(In Thousands, Except Share Data)	June 30, 2014		December 31, 2013
	(unaudited)
ASSETS
Investments
Fixed maturities
Held-to-maturity, at amortized cost (fair value $640 in 2014 and $669 in 2013)	$	630	$	656
Available-for-sale, at fair value (amortized cost $2,749,458 in 2014 and $2,733,557 in 2013)	2,824,018		2,751,256
Trading securities, at fair value (amortized cost $15,467 in 2014 and $8,049 in 2013)	18,305		9,940
Equity securities
Available-for-sale, at fair value (cost $71,685 in 2014 and $70,957 in 2013)	239,244		229,368
Trading securities, at fair value (cost $2,740 in 2014 and $2,367 in 2013)	3,206		2,487
Mortgage loans	4,313		4,423
Policy loans	6,200		6,261
Other long-term investments	48,707		44,946
Short-term investments	475		800
	3,145,098		3,050,137
Cash and cash equivalents	90,276		92,193
Accrued investment income	27,159		27,923
Premiums receivable (net of allowance for doubtful accounts of $993 in 2014 and $896 in 2013)	268,094		218,635
Deferred policy acquisition costs	143,314		150,092
Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $39,109 in 2014 and $36,972 in 2013)	48,001		47,218
Reinsurance receivables and recoverables	81,314		87,451
Prepaid reinsurance premiums	3,770		3,160
Income taxes receivable	3,891		1,786
Goodwill and intangible assets	26,662		27,047
Other assets	14,331		15,030
TOTAL ASSETS	$	3,851,910	$	3,720,672
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Future policy benefits and losses, claims and loss settlement expenses
Property and casualty insurance	$	981,927	$	960,651
Life insurance	1,470,647		1,472,132
Unearned premiums	395,146		340,464
Accrued expenses and other liabilities	140,058		142,677
Deferred income taxes	37,866		21,915
TOTAL LIABILITIES	$	3,025,644	$	2,937,839
Stockholders’ Equity
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,240,105 and 25,360,893 shares issued and outstanding in 2014 and 2013, respectively	$	25	$	25
Additional paid-in capital	208,366		211,574
Retained earnings	498,470		484,084
Accumulated other comprehensive income, net of tax	119,405		87,150
TOTAL STOCKHOLDERS’ EQUITY	$	826,266	$	782,833
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	3,851,910	$	3,720,672

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

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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)	2014			2013			2014			2013
Revenues
Net premiums earned	$	201,827		$	186,367		$	395,168		$	363,184
Investment income, net of investment expenses	27,603			29,019			54,365			55,483
Net realized investment gains (includes reclassifications for net unrealized investment gains on available-for-sale securities of $1,606 and $3,088 in 2014; and $4,417 and $5,653 in 2013; previously included in accumulated other comprehensive income (loss))	2,708			4,151			4,902			6,060
Other income	535			182			1,142			297
Total revenues	$	232,673		$	219,719		$	455,577		$	425,024
Benefits, Losses and Expenses
Losses and loss settlement expenses	$	142,716		$	120,435		$	267,953		$	217,905
Increase in liability for future policy benefits	8,077			9,869			15,898			18,105
Amortization of deferred policy acquisition costs	40,196			36,708			79,730			74,789
Other underwriting expenses (includes reclassifications for employee benefit costs of $768 and $1,536 in 2014; and $1,243 and $2,485 in 2013; previously included in accumulated other comprehensive income (loss))	20,776			23,308			47,204			45,656
Interest on policyholders’ accounts	7,852			9,081			15,839			18,401
Total benefits, losses and expenses	$	219,617		$	199,401		$	426,624		$	374,856
Income before income taxes	$	13,056		$	20,318		$	28,953		$	50,168
Federal income tax expense (includes reclassifications of $293 and $543 in 2014; and $1,111 and $1,109 in 2013; previously included in accumulated other comprehensive income (loss))	2,371			4,822			4,937			12,279
Net income	$	10,685		$	15,496		$	24,016		$	37,889
Other comprehensive income (loss)
Change in net unrealized appreciation on investments	$	27,108		$	(51,782	)	$	51,177		$	(37,294	)
Change in liability for underfunded employee benefit plans	—			—			—			—
Other comprehensive income (loss), before tax and reclassification adjustments	$	27,108		$	(51,782	)	$	51,177		$	(37,294	)
Income tax effect	(9,488		)	18,115			(17,913		)	13,045
Other comprehensive income (loss), after tax, before reclassification adjustments	$	17,620		$	(33,667	)	$	33,264		$	(24,249	)
Reclassification adjustment for net realized investment gains included in income	$	(1,606	)	$	(4,417	)	$	(3,088	)	$	(5,653	)
Reclassification adjustment for employee benefit costs included in expense	768			1,243			1,536			2,485
Total reclassification adjustments, before tax	$	(838	)	$	(3,174	)	$	(1,552	)	$	(3,168	)
Income tax effect	293			1,111			$	543		$	1,109
Total reclassification adjustments, after tax	$	(545	)	$	(2,063	)	$	(1,009	)	$	(2,059	)
Comprehensive income (loss)	$	27,760		$	(20,234	)	$	56,271		$	11,581
Weighted average common shares outstanding	25,330,066			25,297,718			25,351,056			25,271,752
Basic earnings per common share	$	0.42		$	0.61		$	0.95		$	1.50
Diluted earnings per common share	0.42			0.61			0.94			1.49

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

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United Fire Group, Inc.

Consolidated Statement of Stockholders’ Equity (Unaudited)

(In Thousands, Except Share Data)	Six Months Ended June 30, 2014
Common stock
Balance, beginning of year	$	25
Shares repurchased (201,516 shares)	—
Shares issued for stock-based awards (69,050 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	902
Shares repurchased	(5,567		)
Shares issued for stock-based awards	1,457
Balance, end of period	$	208,366
Retained earnings
Balance, beginning of year	$	484,084
Net income	24,016
Dividends on common stock ($0.38 per share)	(9,630		)
Balance, end of period	$	498,470
Accumulated other comprehensive income, net of tax
Balance, beginning of year	$	87,150
Change in net unrealized investment appreciation(1)	31,257
Change in liability for underfunded employee benefit plans(2)	998
Balance, end of period	$	119,405
Summary of changes
Balance, beginning of year	$	782,833
Net income	24,016
All other changes in stockholders’ equity accounts	19,417
Balance, end of period	$	826,266

(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.

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United Fire Group, Inc.

Consolidated Statements of Cash Flows (Unaudited)

	Six Months Ended June 30,
(In Thousands)	2014			2013
Cash Flows From Operating Activities
Net income	$	24,016		$	37,889
Adjustments to reconcile net income to net cash provided by operating activities
Net accretion of bond premium	7,601			7,989
Depreciation and amortization	3,757			2,930
Stock-based compensation expense	944			818
Net realized investment gains	(4,902		)	(6,060		)
Net cash flows from trading investments	(7,481		)	1,285
Deferred income tax benefit	(1,346		)	(2,096		)
Changes in:
Accrued investment income	764			994
Premiums receivable	(49,459		)	(49,357		)
Deferred policy acquisition costs	(11,143		)	(3,288		)
Reinsurance receivables	6,137			9,625
Prepaid reinsurance premiums	(610		)	(573		)
Income taxes receivable	(2,105		)	16,536
Other assets	699			1,182
Future policy benefits and losses, claims and loss settlement expenses	37,769			10,716
Unearned premiums	54,682			42,827
Accrued expenses and other liabilities	(1,083		)	(2,465		)
Income taxes payable	—			1,567
Deferred income taxes	(72		)	2,720
Other, net	(2,975		)	(2,834		)
Total adjustments	$	31,177		$	32,516
Net cash provided by operating activities	$	55,193		$	70,405
Cash Flows From Investing Activities
Proceeds from sale of available-for-sale investments	$	10		$	5,971
Proceeds from call and maturity of held-to-maturity investments	26			180
Proceeds from call and maturity of available-for-sale investments	249,251			238,639
Proceeds from short-term and other investments	1,648			1,882
Purchase of available-for-sale investments	(270,194		)	(295,586		)
Purchase of short-term and other investments	(1,938		)	(2,575		)
Net purchases and sales of property and equipment	(4,154		)	(2,659		)
Net cash used in investing activities	$	(25,351	)	$	(54,148	)
Cash Flows From Financing Activities
Policyholders’ account balances
Deposits to investment and universal life contracts	$	96,119		$	52,086
Withdrawals from investment and universal life contracts	(114,096		)	(87,827		)
Payment of cash dividends	(9,630		)	(8,342		)
Repurchase of common stock	(5,567		)	(99		)
Issuance of common stock	1,457			1,465
Tax impact from issuance of common stock	(42		)	(217		)
Net cash used in financing activities	$	(31,759	)	$	(42,934	)
Net Change in Cash and Cash Equivalents	$	(1,917	)	$	(26,677	)
Cash and Cash Equivalents at Beginning of Period	92,193			107,466
Cash and Cash Equivalents at End of Period	$	90,276		$	80,789

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

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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 June 30, 2014 and for the three- and six-month periods ended June 30, 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 six-month periods ended June 30, 2014 and 2013, we made payments for income taxes totaling $9,115 and $2,512, respectively. We received tax refunds of $615 and $8,744, respectively, during the six-month periods ended June 30, 2014 and 2013.

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For the six-month periods ended June 30, 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 six-month period ended June 30, 2014.

	Property & Casualty Insurance			Life Insurance			Total
Recorded asset at beginning of period	$	67,663		$	82,429		$	150,092
Underwriting costs deferred	87,193			3,680			90,873
Amortization of deferred policy acquisition costs	(76,378		)	(3,352		)	(79,730		)
Ending unamortized deferred policy acquisition costs	$	78,478		$	82,757		$	161,235
Change in "shadow" deferred policy acquisition costs	—			(17,921		)	(17,921		)
Recorded asset at end of period	$	78,478		$	64,836		$	143,314

Property and casualty insurance 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 $14,514 at June 30, 2014 and increased the DAC asset by $3,407 at December 31, 2013.

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 $4,937 and $12,279 for the six-month periods ended June 30, 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.

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We did not recognize any liability for unrecognized tax benefits at June 30, 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. The new guidance was 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.

Pending Adoption of Accounting Standards

Share Based Payments

In June 2014, the FASB issued new guidance on the accounting for share based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The new guidance requires a performance target that affects vesting and that could be achieved after the service period, be treated as a performance condition. The guidance is effective for interim and annual periods beginning after December 15, 2015. The amendments can be applied prospectively or retrospectively and early adoption is permitted. The Company will adopt the guidance on January 1, 2016 and is currently evaluating the impact on the Company's financial position and results of operations.

Revenue Recognition

In May 2014, the FASB issued comprehensive new guidance on revenue recognition which supersedes nearly all existing revenue recognition guidance under GAAP. The new guidance requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard creates a five-step model that requires companies to exercise judgment when considering the terms of the contract(s) and all relevant facts and circumstances. The new guidance is effective for annual and interim periods beginning after December 15, 2016. The Company will adopt the guidance on January 1, 2017 and is currently evaluating the impact on the Company's financial position and results of operations. Management does not expect insurance contracts to be in the scope of this new guidance.

Discontinued Operations

In April 2014, the FASB issued new guidance on reporting discontinued operations and disclosures of disposals of components of an entity. The new guidance raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. It is effective for annual periods beginning after December 15, 2014. Early adoption is permitted but only for disposals that have not been reported in financial statements previously issued. The Company will adopt the guidance on January 1, 2015 and is currently evaluating the impact on the Company's financial position and results of operations.

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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, 2014 and December 31, 2013, is as follows:

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June 30, 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	$	2	$	—	$	251
Corporate bonds - financial services	200		—		—		200
Mortgage-backed securities	181		8		—		189
Total Held-to-Maturity Fixed Maturities	$	630	$	10	$	—	$	640
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury	$	30,468	$	298	$	63	$	30,703
U.S. government agency	360,249		3,018		6,586		356,681
States, municipalities and political subdivisions	705,556		33,895		2,683		736,768
Foreign bonds	143,172		7,054		1		150,225
Public utilities	212,385		8,114		155		220,344
Corporate bonds
Energy	149,380		5,593		373		154,600
Industrials	216,342		7,888		429		223,801
Consumer goods and services	159,084		5,455		213		164,326
Health care	78,429		3,679		148		81,960
Technology, media and telecommunications	128,124		4,485		785		131,824
Financial services	223,412		10,199		68		233,543
Mortgage-backed securities	19,654		610		76		20,188
Collateralized mortgage obligations	320,180		3,559		8,003		315,736
Asset-backed securities	3,023		296		—		3,319
Total Available-for-Sale Fixed Maturities	$	2,749,458	$	94,143	$	19,583	$	2,824,018
Equity securities:
Common stocks
Public utilities	$	7,231	$	11,435	$	—	$	18,666
Energy	5,094		11,391		—		16,485
Industrials	13,286		33,378		40		46,624
Consumer goods and services	10,287		11,492		2		21,777
Health care	7,920		18,846		—		26,766
Technology, media and telecommunications	6,205		7,779		61		13,923
Financial services	16,678		73,260		54		89,884
Nonredeemable preferred stocks	4,984		140		5		5,119
Total Available-for-Sale Equity Securities	$	71,685	$	167,721	$	162	$	239,244
Total Available-for-Sale Securities	$	2,821,143	$	261,864	$	19,745	$	3,063,262

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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

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Maturities

The amortized cost and fair value of held-to-maturity, available-for-sale and trading fixed maturity securities at June 30, 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
June 30, 2014	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	135	$	136	$	234,849	$	238,774	$	1,701	$	1,699
Due after one year through five years	314		315		886,016		934,018		7,416		8,715
Due after five years through 10 years	—		—		818,255		845,767		1,139		1,563
Due after 10 years	—		—		467,481		466,216		5,211		6,328
Asset-backed securities	—		—		3,023		3,319		—		—
Mortgage-backed securities	181		189		19,654		20,188		—		—
Collateralized mortgage obligations	—		—		320,180		315,736		—		—
	$	630	$	640	$	2,749,458	$	2,824,018	$	15,467	$	18,305

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 June 30,					Six Months Ended June 30,
	2014		2013			2014		2013
Net realized investment gains
Fixed maturities:
Available-for-sale	$	705	$	1,185		1,352		1,905
Trading securities
Change in fair value	648		(130		)	948		430
Sales	285		298			520		298
Equity securities:
Available-for-sale	901		3,232			1,736		3,748
Trading securities
Change in fair value	169		(132		)	346		(19		)
Sales	—		38			—		38
Other long-term investments	—		(340		)	—		(340		)
Total net realized investment gains	$	2,708	$	4,151		$	4,902	$	6,060

The proceeds and gross realized gains on the sale of available-for-sale securities are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Proceeds from sales	$	10	$	3,161	$	10	$	5,971
Gross realized gains	—		96		—		238
Gross realized losses	56		—		56		—

There were no sales of held-to-maturity securities during the three- and six-month periods ended June 30, 2014 and 2013.

13

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 $21,511 and $12,427 at June 30, 2014 and December 31, 2013, respectively.

Unrealized Appreciation

A summary of the changes in net unrealized investment appreciation during the reporting period is as follows:

	Six Months Ended June 30,
	2014			2013
Change in net unrealized investment appreciation
Available-for-sale fixed maturities	$	56,861		$	(91,636	)
Available-for-sale equity securities	9,148			19,467
Deferred policy acquisition costs	(17,921		)	29,223
Income tax effect	(16,831		)	15,023
Total change in net unrealized investment appreciation, net of tax	$	31,257		$	(27,923	)

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, 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 June 30, 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 June 30, 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 June 30, 2014. Our largest unrealized loss greater than 12 months on an individual equity security at June 30, 2014 was $54. 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.

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June 30, 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	2	$	1,326	$	4	6	$	6,125	$	59	$	7,451	$	63
U.S. government agency	11	28,268		188		46	131,825		6,398		160,093		6,586
States, municipalities and political subdivisions	22	23,311		108		101	90,012		2,575		113,323		2,683
Foreign bonds	1	3,285		1		—	—		—		3,285		1
Public utilities	2	252		3		10	19,883		152		20,135		155
Corporate bonds
Energy	—	—		—		5	10,266		373		10,266		373
Industrials	—	—		—		4	14,088		429		14,088		429
Consumer goods and services	2	4,274		28		8	15,497		185		19,771		213
Health care	2	7,214		9		3	7,194		139		14,408		148
Technology, media and telecommunications	2	4,591		25		7	27,169		760		31,760		785
Financial services	2	2,264		8		2	6,137		60		8,401		68
Mortgage-backed securities	3	47		1		5	5,868		75		5,915		76
Collateralized mortgage obligations	21	43,158		489		72	144,536		7,514		187,694		8,003
Total Available-for-Sale Fixed Maturities	70	$	117,990	$	864	269	$	478,600	$	18,719	$	596,590	$	19,583
Equity securities:
Common stocks
Industrials	—	$	—	$	—	2	$	73	$	40	$	73	$	40
Consumer goods and services	1	15		2		—	—		—		15		2
Technology, media and telecommunications	—	—		—		6	229		61		229		61
Financial services	—	—		—		3	223		54		223		54
Nonredeemable preferred stocks	—	—		—		1	702		5		702		5
Total Available-for-Sale Equity Securities	1	$	15	$	2	12	$	1,227	$	160	$	1,242	$	162
Total Available-for-Sale Securities	71	$	118,005	$	866	281	$	479,827	$	18,879	$	597,832	$	19,745

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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

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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 agreements. 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.

17

A summary of the carrying value and estimated fair value of our financial instruments at June 30, 2014 and December 31, 2013 is as follows:

	June 30, 2014				December 31, 2013
	Fair Value		Carrying Value		Fair Value		Carrying Value
Assets
Investments
Fixed maturities:
Held-to-maturity securities	$	640	$	630	$	669	$	656
Available-for-sale securities	2,824,018		2,824,018		2,751,256		2,751,256
Trading securities	18,305		18,305		9,940		9,940
Equity securities:
Available-for-sale securities	239,244		239,244		229,368		229,368
Trading securities	3,206		3,206		2,487		2,487
Mortgage loans	4,724		4,313		4,724		4,423
Policy loans	6,200		6,200		6,261		6,261
Other long-term investments	48,707		48,707		44,946		44,946
Short-term investments	475		475