10-Q 1 ufcs-2014930x10q.htm 10-Q UFCS-2014.9.30-10Q
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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

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

for the quarterly period ended September 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 October 31, 2014, 25,047,085 shares of common stock were outstanding.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



United Fire Group, Inc.
Index to Quarterly Report on Form 10-Q
September 30, 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 (the "Securities Act") 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. ("United Fire", the "Registrant", 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;
The potential disruption of our operations due to unauthorized data access, cyber-attacks or cyber-terrorism 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, fines or penalties 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)
September 30,
2014
 
December 31,
2013
 
(unaudited)
 
 
ASSETS
 
 
 
Investments
 
 
 
Fixed maturities
 
 
 
Held-to-maturity, at amortized cost (fair value $421 in 2014 and $669 in 2013)
$
413

 
$
656

Available-for-sale, at fair value (amortized cost $2,764,358 in 2014 and $2,733,557 in 2013)
2,826,643

 
2,751,256

Trading securities, at fair value (amortized cost $14,856 in 2014 and $8,049 in 2013)
17,441

 
9,940

Equity securities
 
 
 
Available-for-sale, at fair value (cost $71,685 in 2014 and $70,957 in 2013)
233,968

 
229,368

Trading securities, at fair value (cost $2,803 in 2014 and $2,367 in 2013)
3,252

 
2,487

Mortgage loans
4,257

 
4,423

Policy loans
6,046

 
6,261

Other long-term investments
46,428

 
44,946

Short-term investments
500

 
800

 
3,138,948

 
3,050,137

Cash and cash equivalents
71,932

 
92,193

Accrued investment income
27,525

 
27,923

Premiums receivable (net of allowance for doubtful accounts of $773 in 2014 and $896 in 2013)
258,580

 
218,635

Deferred policy acquisition costs
146,547

 
150,092

Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $40,286 in 2014 and $36,972 in 2013)
48,040

 
47,218

Reinsurance receivables and recoverables
84,067

 
87,451

Prepaid reinsurance premiums
3,712

 
3,160

Income taxes receivable
4,959

 
1,786

Goodwill and intangible assets
26,470

 
27,047

Other assets
14,548

 
15,030

TOTAL ASSETS
$
3,825,328

 
$
3,720,672

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Future policy benefits and losses, claims and loss settlement expenses
 
 
 
Property and casualty insurance
$
1,004,593

 
$
960,651

Life insurance
1,459,748

 
1,472,132

Unearned premiums
390,438

 
340,464

Accrued expenses and other liabilities
131,220

 
142,677

Deferred income taxes
30,895

 
21,915

TOTAL LIABILITIES
$
3,016,894

 
$
2,937,839

Stockholders’ Equity
 
 
 
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,056,402 and 25,360,893 shares issued and outstanding in 2014 and 2013, respectively
$
25

 
$
25

Additional paid-in capital
203,458

 
211,574

Retained earnings
493,753

 
484,084

Accumulated other comprehensive income, net of tax
111,198

 
87,150

TOTAL STOCKHOLDERS’ EQUITY
$
808,434

 
$
782,833

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
3,825,328

 
$
3,720,672

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


3


United Fire Group, Inc.
Consolidated Statements of Income and Comprehensive Income (Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In Thousands, Except Share Data)
2014
 
2013
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
Net premiums earned
$
212,021

 
$
194,219

 
$
607,189

 
$
557,403

Investment income, net of investment expenses
22,837

 
27,278

 
77,202

 
82,761

Net realized investment gains (losses)
 
 
 
 
 
 
 
Other-than-temporary impairment charges

 
(139
)
 

 
(139
)
Net realized investment gains (includes reclassifications for net unrealized investment gains on available-for-sale securities of $985 and $4,073 in 2014; and $617 and $6,270 in 2013; previously included in accumulated other comprehensive income (loss))
894

 
1,329

 
5,796

 
7,389

Total net realized investment gains
894

 
1,190

 
5,796

 
7,250

Other income
113

 
337

 
1,255

 
634

Total revenues
$
235,865

 
$
223,024

 
$
691,442

 
$
648,048

Benefits, Losses and Expenses
 
 
 
 
 
 
 
Losses and loss settlement expenses
$
154,346

 
$
131,168

 
$
422,299

 
$
349,073

Increase in liability for future policy benefits
10,552

 
8,415

 
26,450

 
26,520

Amortization of deferred policy acquisition costs
44,644

 
38,767

 
124,374

 
113,556

Other underwriting expenses (includes reclassifications for employee benefit costs of $768 and $2,304 in 2014; and $1,915 and $4,400 in 2013; previously included in accumulated other comprehensive income (loss))
21,665

 
21,654

 
68,869

 
67,310

Interest on policyholders’ accounts
7,503

 
8,625

 
23,342

 
27,026

Total benefits, losses and expenses
$
238,710

 
$
208,629

 
$
665,334

 
$
583,485

Income (loss) before income taxes
$
(2,845
)
 
$
14,395

 
$
26,108

 
$
64,563

Federal income tax expense (benefit) (includes reclassifications of ($76) and ($619) in 2014; and $455 and ($654) in 2013; previously included in accumulated other comprehensive income (loss))
(3,170
)
 
2,670

 
1,767

 
14,949

Net income
$
325

 
$
11,725

 
$
24,341

 
$
49,614

Other comprehensive income (loss)
 
 
 
 
 
 
 
Change in net unrealized appreciation on investments
$
(12,410
)
 
$
(282
)
 
$
38,767

 
$
(37,576
)
Change in liability for underfunded employee benefit plans

 

 

 

Other comprehensive income (loss), before tax and reclassification adjustments
$
(12,410
)
 
$
(282
)
 
$
38,767

 
$
(37,576
)
Income tax effect
4,344

 
107

 
(13,569
)
 
13,152

Other comprehensive income (loss), after tax, before reclassification adjustments
$
(8,066
)
 
$
(175
)
 
$
25,198

 
$
(24,424
)
Reclassification adjustment for net realized investment gains included in income
$
(985
)
 
$
(617
)
 
$
(4,073
)
 
$
(6,270
)
Reclassification adjustment for employee benefit costs included in expense
768

 
1,915

 
2,304

 
4,400

Total reclassification adjustments, before tax
$
(217
)
 
$
1,298

 
$
(1,769
)
 
$
(1,870
)
Income tax effect
76

 
(455
)
 
$
619

 
$
654

Total reclassification adjustments, after tax
$
(141
)
 
$
843

 
$
(1,150
)
 
$
(1,216
)
Comprehensive income (loss)
$
(7,882
)
 
$
12,393

 
$
48,389

 
$
23,974

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
25,188,381

 
25,359,196

 
25,295,842

 
25,301,432

Basic earnings per common share
$
0.01

 
$
0.46

 
$
0.96

 
$
1.96

Diluted earnings per common share
0.01

 
0.45

 
0.95

 
1.94

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


4


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

(In Thousands, Except Share Data)
Nine Months Ended September 30, 2014
 
 
Common stock
 
Balance, beginning of year
$
25

Shares repurchased (401,519 shares)

Shares issued for stock-based awards (85,350 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
1,351

Shares repurchased
(11,249
)
Shares issued for stock-based awards
1,782

Balance, end of period
$
203,458

 
 
Retained earnings
 
Balance, beginning of year
$
484,084

Net income
24,341

Dividends on common stock ($0.58 per share)
(14,672
)
Balance, end of period
$
493,753

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

Change in net unrealized investment appreciation(1)
22,551

Change in liability for underfunded employee benefit plans(2)
1,497

Balance, end of period
$
111,198

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

Net income
24,341

All other changes in stockholders’ equity accounts
1,260

Balance, end of period
$
808,434

(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.



5


United Fire Group, Inc.
Consolidated Statements of Cash Flows (Unaudited)

Nine Months Ended September 30,
(In Thousands)
2014
 
2013
Cash Flows From Operating Activities
 
 
 
Net income
$
24,341

 
$
49,614

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Net accretion of bond premium
10,985

 
11,715

Depreciation and amortization
5,449

 
4,120

Stock-based compensation expense
1,445

 
1,436

Net realized investment gains
(5,796
)
 
(7,250
)
Net cash flows from trading investments
(6,933
)
 
3,836

Deferred income tax benefit
(2,639
)
 
(4,352
)
Changes in:
 
 
 
Accrued investment income
398

 
1,311

Premiums receivable
(39,945
)
 
(45,458
)
Deferred policy acquisition costs
(10,219
)
 
(4,640
)
Reinsurance receivables
3,384

 
13,578

Prepaid reinsurance premiums
(552
)
 
(475
)
Income taxes receivable
(3,173
)
 
13,612

Other assets
482

 
134

Future policy benefits and losses, claims and loss settlement expenses
70,994

 
28,404

Unearned premiums
49,974

 
42,486

Accrued expenses and other liabilities
(9,153
)
 
9,027

Deferred income taxes
(1,330
)
 
4,743

Other, net
(368
)
 
(3,814
)
Total adjustments
$
63,003

 
$
68,413

Net cash provided by operating activities
$
87,344

 
$
118,027

Cash Flows From Investing Activities
 
 
 
Proceeds from sale of available-for-sale investments
$
3,091

 
$
23,007

Proceeds from call and maturity of held-to-maturity investments
243

 
557

Proceeds from call and maturity of available-for-sale investments
390,967

 
370,531

Proceeds from short-term and other investments
2,370

 
2,569

Purchase of available-for-sale investments
(432,112
)
 
(468,934
)
Purchase of short-term and other investments
(2,803
)
 
(3,475
)
Net purchases and sales of property and equipment
(5,692
)
 
(4,589
)
Net cash used in investing activities
$
(43,936
)
 
$
(80,334
)
Cash Flows From Financing Activities
 
 
 
Policyholders’ account balances
 
 
 
Deposits to investment and universal life contracts
$
131,134

 
$
97,893

Withdrawals from investment and universal life contracts
(170,570
)
 
(146,001
)
Payment of cash dividends
(14,672
)
 
(12,910
)
Repurchase of common stock
(11,249
)
 
(99
)
Issuance of common stock
1,782

 
3,075

Tax impact from issuance of common stock
(94
)
 
(426
)
Net cash used in financing activities
$
(63,669
)
 
$
(58,468
)
Net Change in Cash and Cash Equivalents
$
(20,261
)
 
$
(20,775
)
Cash and Cash Equivalents at Beginning of Period
92,193

 
107,466

Cash and Cash Equivalents at End of Period
$
71,932

 
$
86,691

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


6



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 September 30, 2014 and for the three- and nine-month periods ended September 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 nine-month periods ended September 30, 2014 and 2013, we made payments for income taxes totaling $9,619 and $10,117, respectively. We received tax refunds of $615 and $8,744, respectively, during the nine-month periods ended September 30, 2014 and 2013.


7


For the nine-month periods ended September 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 nine-month period ended September 30, 2014.
 
 
 
 
 
Property & Casualty Insurance
 
Life Insurance
 
Total
Recorded asset at beginning of period
$
67,663

 
$
82,429

 
$
150,092

Underwriting costs deferred
129,266

 
5,327

 
134,593

Amortization of deferred policy acquisition costs
(119,280
)
 
(5,094
)
 
(124,374
)
Ending unamortized deferred policy acquisition costs
$
77,649

 
$
82,662

 
$
160,311

Change in "shadow" deferred policy acquisition costs

 
(13,764
)
 
(13,764
)
Recorded asset at end of period
$
77,649

 
$
68,898

 
$
146,547


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 $10,357 at September 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 $1,767 and $14,949 for the nine-month periods ended September 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.


8


We did not recognize any liability for unrecognized tax benefits at September 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.

Subsequent Events

In the preparation of the accompanying financial statements, the Company has 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 in the Company's financial statements. In October 2014, the Society of Actuaries finalized new mortality tables and a new mortality improvement scale that could potentially impact our contributions and our benefit obligation to our defined benefit Pension Plan. The Company will consider using the new mortality tables in our 2014 year-end assumptions and is evaluating the impact on the Company's financial position and results of operations.
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
Going Concern

In August 2014, the FASB issued new guidance on the disclosure of uncertainties about an entity's ability to continue as a going concern. The new guidance requires management to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern and, if so, disclose the fact and what the entity's plans are to alleviate that doubt. The guidance is effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. The Company will adopt the guidance on January 1, 2016. Management does not expect the adoption of the new guidance to have an impact on the Company's financial position or results of operations.

Troubled Debt Restructuring

In August 2014, the FASB issued updated guidance on the accounting for creditors who are holding receivables with troubled debt restructuring, specifically related to the classification of certain government guaranteed mortgage loans that are in foreclosure. The objective of this update is to provide greater consistency and transparency by addressing the classification of certain foreclosed mortgage loans guaranteed through government programs. The guidance is effective for interim and annual periods beginning after December 15, 2014. The Company will adopt the guidance on January 1, 2015. Management does not expect the adoption of the new guidance to have an impact on the Company's financial position or results of operations.





9


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. Insurance contracts are not within 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. Management does not expect the adoption of the new guidance to have an 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 September 30, 2014 and December 31, 2013, is as follows:


10


September 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
$
55

 
$
1

 
$

 
$
56

Corporate bonds - financial services
200

 

 

 
200

Mortgage-backed securities
158

 
7

 

 
165

Total Held-to-Maturity Fixed Maturities
$
413

 
$
8

 
$

 
$
421

AVAILABLE-FOR-SALE

 

 

 

Fixed maturities:

 

 

 

Bonds

 

 

 

U.S. Treasury
$
31,168

 
$
198

 
$
129

 
$
31,237

U.S. government agency
380,763

 
2,872

 
6,247

 
377,388

States, municipalities and political subdivisions
727,929

 
32,731

 
1,302

 
759,358

Foreign bonds
139,849

 
5,709

 

 
145,558

Public utilities
212,716

 
6,623

 
295

 
219,044

Corporate bonds

 

 

 

Energy
135,428

 
4,360

 
314

 
139,474

Industrials
203,976

 
6,460

 
1,222

 
209,214

Consumer goods and services
157,073

 
4,293

 
395

 
160,971

Health care
78,257

 
3,270

 
281

 
81,246

Technology, media and telecommunications
131,910

 
3,562

 
1,063

 
134,409

Financial services
218,530

 
8,515

 
224

 
226,821

Mortgage-backed securities
18,343

 
493

 
120

 
18,716

Collateralized mortgage obligations
325,551

 
3,150

 
8,630

 
320,071

Asset-backed securities
2,865

 
271

 

 
3,136

Total Available-for-Sale Fixed Maturities
$
2,764,358

 
$
82,507

 
$
20,222

 
$
2,826,643

Equity securities:

 

 

 

Common stocks

 

 

 

Public utilities
$
7,231

 
$
10,393

 
$
10

 
$
17,614

Energy
5,094

 
9,990

 

 
15,084

Industrials
13,284

 
31,614

 
55

 
44,843

Consumer goods and services
10,287

 
11,982

 
4

 
22,265

Health care
7,920

 
19,254

 

 
27,174

Technology, media and telecommunications
6,207

 
7,925

 
51

 
14,081

Financial services
16,678

 
71,272

 
55

 
87,895

Nonredeemable preferred stocks
4,984

 
34

 
6

 
5,012

Total Available-for-Sale Equity Securities
$
71,685

 
$
162,464

 
$
181

 
$
233,968

Total Available-for-Sale Securities
$
2,836,043

 
$
244,971

 
$
20,403

 
$
3,060,611



11


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




12


Maturities
The amortized cost and fair value of held-to-maturity, available-for-sale and trading fixed maturity securities at September 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
September 30, 2014
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
55

 
$
56

 
$
252,688

 
$
256,818

 
$
2,173

 
$
2,428

Due after one year through five years
200

 
200

 
853,979

 
896,360

 
6,107

 
7,107

Due after five years through 10 years

 

 
798,893

 
818,023

 
1,903

 
2,199

Due after 10 years

 

 
512,039

 
513,519

 
4,673

 
5,707

Asset-backed securities

 

 
2,865

 
3,136

 

 

Mortgage-backed securities
158

 
165

 
18,343

 
18,716

 

 

Collateralized mortgage obligations

 

 
325,551

 
320,071

 

 

 
$
413

 
$
421

 
$
2,764,358

 
$
2,826,643

 
$
14,856

 
$
17,441

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 September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net realized investment gains (losses)
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale
$
984

 
$
765

 
$
2,336

 
$
2,670

Trading securities
 
 
 
 
 
 
 
Change in fair value
(253
)
 
360

 
695

 
790

Sales
181

 
310

 
701

 
608

Equity securities:
 
 
 
 
 
 
 
Available-for-sale

 
(9
)
 
1,736

 
3,739

Trading securities
 
 
 
 
 
 
 
Change in fair value
(17
)
 
(97
)
 
329

 
(116
)
Sales
(1
)
 

 
(1
)
 
38

Other long-term investments

 

 

 
(340
)
Other-than-temporary-impairment charges - fixed maturities

 
(139
)
 

 
(139
)
Total net realized investment gains
$
894

 
$
1,190

 
$
5,796

 
$
7,250

The proceeds and gross realized gains on the sale of available-for-sale securities are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Proceeds from sales
$
3,081

 
$
17,036

 
$
3,091

 
$
23,007

Gross realized gains
900

 
213

 
900

 
451

Gross realized losses

 

 
(56
)
 

There were no sales of held-to-maturity securities during the three- and nine-month periods ended September 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 $20,693 and $12,427 at September 30, 2014 and December 31, 2013, respectively.

Funding Commitment

Pursuant to an agreement with one of our limited liability partnership investments, we are contractually committed through December 31, 2023 to make capital contributions upon request of the partnership. Our remaining potential contractual obligation was $12,610 at September 30, 2014.
Unrealized Appreciation
A summary of the changes in net unrealized investment appreciation during the reporting period is as follows:
 
Nine Months Ended September 30,
 
2014
 
2013
Change in net unrealized investment appreciation
 
 
 
Available-for-sale fixed maturities
$
44,586

 
$
(105,296
)
Available-for-sale equity securities
3,872

 
27,352

Deferred policy acquisition costs
(13,764
)
 
34,098

Income tax effect
(12,143
)
 
15,346

Total change in net unrealized investment appreciation, net of tax
$
22,551

 
$
(28,500
)
We continually monitor the difference between our cost basis and the estimated fair value of our investments. Our accounting policy for impairment recognition requires other-than-temporary impairment ("OTTI") charges to be recorded when we determine that it is more likely than not that we will be unable to collect all amounts due according to the contractual terms of the fixed maturity security or that the anticipated recovery in fair value of the equity security will not occur in a reasonable amount of time. Impairment charges on investments are recorded based on the fair value of the investments at the measurement date. Factors considered in evaluating whether a decline in value is other-than-temporary include: the length of time and the extent to which fair value has been less than cost; the financial condition and near-term prospects of the issuer; our intention to hold the investment; and the likelihood that we will be required to sell the investment.
The tables on the following pages summarize our fixed maturity and equity securities that were in an unrealized loss position at September 30, 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 September 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 September 30, 2014. For the three- and nine-month periods ended September 30, 2013, we recognized a $139 credit loss OTTI in our unaudited Consolidated Statements of Income and Comprehensive Income. 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 September 30, 2014. Our largest unrealized loss greater than 12 months on an individual equity security at September 30, 2014 was $52. We have no intention to sell any of these securities prior to a recovery in value, but


14


will continue to monitor the fair value reported for these securities as part of our overall process to evaluate investments for OTTI recognition.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 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
9

 
$
9,269

 
$
52

 
6

 
$
6,086

 
$
77

 
$
15,355

 
$
129

U.S. government agency
34

 
89,312

 
532

 
44

 
126,509

 
5,715

 
215,821

 
6,247

States, municipalities and political subdivisions
20

 
21,590

 
107

 
71

 
60,745

 
1,195

 
82,335

 
1,302

Public utilities
14

 
25,296

 
159

 
5

 
5,261

 
136

 
30,557

 
295

Corporate bonds
 
 
 
 
 
 
 
 
 
 
 
 


 


Energy
5

 
10,680

 
32

 
3

 
7,170

 
282

 
17,850

 
314

Industrials
5

 
10,977

 
69

 
4

 
13,347

 
1,153

 
24,324

 
1,222

Consumer goods and services
4

 
12,349

 
200

 
8

 
15,447

 
195

 
27,796

 
395

Health care
3

 
7,489

 
85

 
3

 
7,110

 
196

 
14,599

 
281

Technology, media and telecommunications
6

 
17,577

 
174

 
5

 
18,942

 
889

 
36,519

 
1,063

Financial services
8

 
15,185

 
79

 
2

 
6,047

 
145

 
21,232

 
224

Mortgage-backed securities
5

 
217

 
15

 
5

 
5,496

 
105

 
5,713

 
120

Collateralized mortgage obligations
24

 
47,272

 
521

 
64

 
136,875

 
8,109

 
184,147

 
8,630

Total Available-for-Sale Fixed Maturities
137

 
$
267,213

 
$
2,025

 
220

 
$
409,035

 
$
18,197

 
$
676,248

 
$
20,222

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Public utilities
3

 
$
298

 
$
10

 

 
$

 
$

 
$
298

 
$
10

Industrials
1

 
49

 
3

 
2

 
61

 
52

 
110

 
55

Consumer goods and services
1

 
14

 
4

 

 

 

 
14

 
4

Technology, media and telecommunications

 

 

 
5

 
211

 
51

 
211

 
51

Financial services
1

 
223

 
55

 

 

 

 
223

 
55

Nonredeemable preferred stocks

 

 

 
1

 
701

 
6

 
701

 
6

Total Available-for-Sale Equity Securities
6

 
$
584

 
$
72

 
8

 
$
973

 
$
109

 
$
1,557

 
$
181

Total Available-for-Sale Securities
143

 
$
267,797

 
$
2,097

 
228

 
$
410,008

 
$
18,306

 
$
677,805

 
$
20,403



15


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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



16


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 information 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 and are classified as Level 2. 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 September 30, 2014 and December 31, 2013 is as follows:
 
September 30, 2014
 
December 31, 2013
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Assets
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Held-to-maturity securities
$
421

 
$
413

 
$
669

 
$
656

Available-for-sale securities
2,826,643

 
2,826,643

 
2,751,256

 
2,751,256

Trading securities
17,441

 
17,441

 
9,940

 
9,940

Equity securities:
 
 
 
 
 
 
 
Available-for-sale securities
233,968

 
233,968

 
229,368

 
229,368
<