10-Q 1 ufcs-2015331x10q.htm 10-Q UFCS-2015.3.31-10Q
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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

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

for the quarterly period ended March 31, 2015

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 May 1, 2015, 25,018,898 shares of common stock were outstanding.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



United Fire Group, Inc.
Index to Quarterly Report on Form 10-Q
March 31, 2015
 
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 2014 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 occurrence of catastrophic events, including international events, significant severe weather conditions, climate change, acts of terrorism, acts of war and pandemics;
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;
Developments in general economic conditions, domestic and global financial markets, interest rates and other-than-temporary impairment losses that could affect the performance of our investment portfolio;
Our ability to effectively underwrite and adequately price insured risks;
Changes in industry trends, an increase in competition and significant industry developments;
Litigation or regulatory actions that could require us to pay significant damages, fines or penalties or change the way we do business;
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;
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;
NASDAQ policies or regulations relating to corporate governance and the cost of compliance;
Our relationship with and the financial strength of our reinsurers; and
Competitive, legal, regulatory or tax changes that affect the distribution cost or demand for our products through our independent agent/agency distribution network.

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



1


PART I — FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
United Fire Group, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Data)
March 31,
2015
 
December 31,
2014
 
(unaudited)
 
 
ASSETS
 
 
 
Investments
 
 
 
Fixed maturities
 
 
 
Held-to-maturity, at amortized cost (fair value $370 in 2015 and $404 in 2014)
$
366

 
$
397

Available-for-sale, at fair value (amortized cost $2,727,434 in 2015 and $2,773,566 in 2014)
2,817,955

 
2,843,079

Trading securities, at fair value (amortized cost $14,495 in 2015 and $14,363 in 2014)
16,793

 
16,862

Equity securities
 
 
 
Available-for-sale, at fair value (cost $72,238 in 2015 and $71,651 in 2014)
243,551

 
245,843

Trading securities, at fair value (cost $3,445 in 2015 and $3,708 in 2014)
3,746

 
4,066

Mortgage loans
4,141

 
4,199

Policy loans
5,792

 
5,916

Other long-term investments
47,059

 
50,424

Short-term investments
175

 
175

 
3,139,578

 
3,170,961

Cash and cash equivalents
111,320

 
90,574

Accrued investment income
27,009

 
25,989

Premiums receivable (net of allowance for doubtful accounts of $746 in 2015 and $618 in 2014)
268,956

 
249,030

Deferred policy acquisition costs
139,141

 
139,719

Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $42,811 in 2015 and $41,492 in 2014)
49,705

 
49,247

Reinsurance receivables and recoverables
83,383

 
86,810

Prepaid reinsurance premiums
3,927

 
3,632

Goodwill and intangible assets
26,086

 
26,278

Other assets
15,146

 
14,449

TOTAL ASSETS
$
3,864,251

 
$
3,856,689

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Future policy benefits and losses, claims and loss settlement expenses
 
 
 
Property and casualty insurance
$
975,468

 
$
969,437

Life insurance
1,419,310

 
1,447,764

Unearned premiums
398,260

 
378,725

Accrued expenses and other liabilities
189,791

 
212,577

Income taxes payable
8,802

 
5,012

Deferred income taxes
28,387

 
25,759

TOTAL LIABILITIES
$
3,020,018

 
$
3,039,274

Stockholders’ Equity
 
 
 
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,006,049 and 25,019,415 shares issued and outstanding in 2015 and 2014, respectively
$
25

 
$
25

Additional paid-in capital
202,306

 
202,676

Retained earnings
542,223

 
523,541

Accumulated other comprehensive income, net of tax
99,679

 
91,173

TOTAL STOCKHOLDERS’ EQUITY
$
844,233

 
$
817,415

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
3,864,251

 
$
3,856,689

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


2


United Fire Group, Inc.
Consolidated Statements of Income and Comprehensive Income (Unaudited)
 
Three Months Ended March 31,
(In Thousands, Except Share Data)
2015
 
2014
Revenues
 
 
 
Net premiums earned
$
213,171

 
$
193,341

Investment income, net of investment expenses
24,363

 
26,762

Net realized investment gains (includes reclassifications for net unrealized investment gains on available-for-sale securities of $1,895 in 2015 and $1,482 in 2014; previously included in accumulated other comprehensive income (loss))
887

 
2,194

Other income
63

 
607

Total revenues
$
238,484

 
$
222,904

Benefits, Losses and Expenses
 
 
 
Losses and loss settlement expenses
$
126,409

 
$
125,237

Increase in liability for future policy benefits
7,623

 
7,821

Amortization of deferred policy acquisition costs
42,472

 
39,534

Other underwriting expenses (includes reclassifications for employee benefit costs of $1,867 in 2015 and $768 in 2014; previously included in accumulated other comprehensive income (loss))
23,534

 
26,428

Interest on policyholders’ accounts
6,615

 
7,987

Total benefits, losses and expenses
$
206,653

 
$
207,007

Income before income taxes
$
31,831

 
$
15,897

Federal income tax expense (includes reclassifications of ($10) in 2015 and ($250) in 2014; previously included in accumulated other comprehensive income (loss))
8,152

 
2,566

Net income
$
23,679

 
$
13,331

Other comprehensive income (loss)
 
 
 
Change in net unrealized appreciation on investments
$
13,114

 
$
24,069

Change in liability for underfunded employee benefit plans

 

Other comprehensive income, before tax and reclassification adjustments
$
13,114

 
$
24,069

Income tax effect
(4,590
)
 
(8,425
)
Other comprehensive income, after tax, before reclassification adjustments
$
8,524

 
$
15,644

Reclassification adjustment for net realized investment gains included in income
$
(1,895
)
 
$
(1,482
)
Reclassification adjustment for employee benefit costs included in expense
1,867

 
768

Total reclassification adjustments, before tax
$
(28
)
 
$
(714
)
Income tax effect
$
10

 
$
250

Total reclassification adjustments, after tax
$
(18
)
 
$
(464
)
Comprehensive income
$
32,185

 
$
28,511

 
 
 
 
Weighted average common shares outstanding
24,990,470

 
25,372,280

Basic earnings per common share
$
0.95

 
$
0.53

Diluted earnings per common share
0.94

 
0.52

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


3


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

(In Thousands, Except Share Data)
Three Months Ended March 31, 2015
 
 
Common stock
 
Balance, beginning of year
$
25

Shares repurchased (37,637 shares)

Shares issued for stock-based awards (24,271 shares)

Balance, end of period
$
25

 
 
Additional paid-in capital
 
Balance, beginning of year
$
202,676

Compensation expense and related tax benefit for stock-based award grants
360

Shares repurchased
(1,083
)
Shares issued for stock-based awards
353

Balance, end of period
$
202,306

 
 
Retained earnings
 
Balance, beginning of year
$
523,541

Net income
23,679

Dividends on common stock ($0.20 per share)
(4,997
)
Balance, end of period
$
542,223

 
 
Accumulated other comprehensive income, net of tax
 
Balance, beginning of year
$
91,173

Change in net unrealized investment appreciation(1)
7,292

Change in liability for underfunded employee benefit plans(2)
1,214

Balance, end of period
$
99,679

 
 
Summary of changes
 
Balance, beginning of year
$
817,415

Net income
23,679

All other changes in stockholders’ equity accounts
3,139

Balance, end of period
$
844,233

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

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



4


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

Three Months Ended March 31,
(In Thousands)
2015
 
2014
Cash Flows From Operating Activities
 
 
 
Net income
$
23,679

 
$
13,331

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Net accretion of bond premium
3,702

 
3,701

Depreciation and amortization
1,618

 
2,295

Stock-based compensation expense
553

 
437

Net realized investment gains
(887
)
 
(2,194
)
Net cash flows from trading investments
510

 
(5,673
)
Deferred income tax benefit
(1,519
)
 
(1,559
)
Changes in:
 
 
 
Accrued investment income
(1,020
)
 
(763
)
Premiums receivable
(19,926
)
 
(17,789
)
Deferred policy acquisition costs
(6,333
)
 
(2,124
)
Reinsurance receivables
3,427

 
2,170

Prepaid reinsurance premiums
(295
)
 
(470
)
Income taxes receivable

 
1,786

Other assets
(697
)
 
2,324

Future policy benefits and losses, claims and loss settlement expenses
8,726

 
19,648

Unearned premiums
19,535

 
20,318

Accrued expenses and other liabilities
(20,919
)
 
(17,785
)
Income taxes payable
3,790

 
1,948

Deferred income taxes
(433
)
 
(72
)
Other, net
342

 
(1,038
)
Total adjustments
$
(9,826
)
 
$
5,160

Net cash provided by operating activities
$
13,853

 
$
18,491

Cash Flows From Investing Activities
 
 
 
Proceeds from sale of available-for-sale investments
$
5,017

 
$

Proceeds from call and maturity of held-to-maturity investments
31

 
11

Proceeds from call and maturity of available-for-sale investments
172,825

 
103,480

Proceeds from short-term and other investments
3,450

 
764

Purchase of available-for-sale investments
(133,920
)
 
(131,989
)
Purchase of short-term and other investments
(1,560
)
 
(1,152
)
Net purchases and sales of property and equipment
(1,881
)
 
(2,860
)
Net cash provided by (used in) investing activities
$
43,962

 
$
(31,746
)
Cash Flows From Financing Activities
 
 
 
Policyholders’ account balances
 
 
 
Deposits to investment and universal life contracts
$
36,099

 
$
49,281

Withdrawals from investment and universal life contracts
(67,248
)
 
(55,882
)
Payment of cash dividends
(4,997
)
 
(4,567
)
Repurchase of common stock
(1,083
)
 

Issuance of common stock
353

 
823

Tax impact from issuance of common stock
(193
)
 
70

Net cash used in financing activities
$
(37,069
)
 
$
(10,275
)
Net Change in Cash and Cash Equivalents
$
20,746

 
$
(23,530
)
Cash and Cash Equivalents at Beginning of Period
90,574

 
92,193

Cash and Cash Equivalents at End of Period
$
111,320

 
$
68,663

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


5



UNITED FIRE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise noted)

NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Business
United Fire Group, Inc. ("United Fire", the "Registrant", the "Company", "we", "us", or "our") and its consolidated subsidiaries and affiliates are engaged in the business of writing property and casualty insurance and life insurance and selling annuities through a network of independent agencies. We report our operations in two business segments: property and casualty insurance and life insurance. Our insurance company subsidiaries are licensed as a property and casualty insurer in 43 states and the District of Columbia, and as a life insurer in 37 states.
Basis of Presentation
The unaudited consolidated interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X promulgated by the SEC. Certain financial information that is included in our Annual Report on Form 10-K, including certain financial statement footnote disclosures, are not required by the rules and regulations of the SEC for interim financial reporting and have been condensed or omitted.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The financial statement categories that are most dependent on management estimates and assumptions include: investments; deferred policy acquisition costs; reinsurance receivables and recoverables (for net realizable value); future policy benefits and losses, claims and loss settlement expenses; and pension and postretirement benefit obligations.
In the preparation of the accompanying unaudited Consolidated Financial Statements, we have evaluated all material subsequent events or transactions that occurred after the balance sheet date through the date on which the financial statements were issued for potential recognition or disclosure.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Management of United Fire believes the accompanying unaudited Consolidated Financial Statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. All significant intercompany transactions have been eliminated in consolidation. The results reported for the interim periods are not necessarily indicative of the results of operations that may be expected for the year. The unaudited Consolidated Financial Statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014. The review report of Ernst & Young LLP as of March 31, 2015 and for the three-month periods ended March 31, 2015 and 2014 accompanies the unaudited Consolidated Financial Statements included in Part I, Item 1 "Financial Statements."
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash, money market accounts, and non-negotiable certificates of deposit with original maturities of three months or less.
For the three-month periods ended March 31, 2015 and 2014, we made payments for income taxes totaling $6,508 and $1,007, respectively. We did not receive a tax refund during the three-month period ended March 31, 2015. We received a tax refund of $615 during the three-month period ended March 31, 2014.


6


For the three-month periods ended March 31, 2015 and 2014, we made no interest payments (excluding interest credited to policyholders’ accounts).
Deferred Policy Acquisition Costs ("DAC")

Certain costs associated with underwriting new business (primarily commissions, premium taxes and variable underwriting and policy issue expenses associated with successful acquisition efforts) are deferred. The following table is a summary of the components of DAC, including the related amortization recognized for the three-month period ended March 31, 2015.
 
 
 
 
 
Property & Casualty Insurance
 
Life Insurance
 
Total
Recorded asset at beginning of period
$
72,861

 
$
66,858

 
$
139,719

Underwriting costs deferred
47,326

 
1,479

 
48,805

Amortization of deferred policy acquisition costs
(40,809
)
 
(1,663
)
 
(42,472
)
Ending unamortized deferred policy acquisition costs
$
79,378

 
$
66,674

 
$
146,052

Change in "shadow" deferred policy acquisition costs

 
(6,911
)
 
(6,911
)
Recorded asset at end of period
$
79,378

 
$
59,763

 
$
139,141


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. With the completion of the Mercer Insurance Group integration, we determined it was the appropriate time to review our DAC models. After reviewing our DAC model at March 31, 2015, we enhanced our property & casualty insurance segment DAC model by updating our aggregation of certain lines of business in a manner consistent with how the policies are currently being marketed and managed. The impact of these updates to the model resulted in a decrease to other underwriting expenses of $48 and an increase to the DAC asset of $728 for the three-month period ended March 31, 2015 as compared to what we would have recognized had we not updated our model.

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 $20,294 and $13,383 at March 31, 2015 and December 31, 2014, respectively.
Income Taxes
Deferred tax assets and liabilities are established based on differences between the financial statement bases of assets and liabilities and the tax bases of those same assets and liabilities, using the currently enacted statutory tax


7


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 $8,152 and $2,566 for the three-month periods ended March 31, 2015 and 2014, 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.
The Company performs a quarterly review of its tax position and makes a determination of whether it is more likely than not that the tax position will be sustained upon examination. If based on review, it appears not more likely than not that the position will be sustained, the Company will calculate any unrecognized tax benefits and, if necessary, calculate and accrue any related interest and penalties. We did not recognize any liability for unrecognized tax benefits at March 31, 2015 or December 31, 2014. 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.
Recently Issued Accounting Standards
Accounting Standards Adopted in 2015

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 adopted the guidance on January 1, 2015. The adoption of the new guidance had no impact on the Company's financial position or results of operations.
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. The Company adopted the guidance on January 1, 2015. The adoption of the new guidance had no impact on the Company's financial position or results of operations.
Pending Adoption of Accounting Standards
Other Internal Use Software

In April 2015, the Financial Accounting Standards Board ("FASB") issued guidance which clarifies customer's accounting for fees paid for cloud computing arrangements. The new guidance provides guidance to customers


8


about whether a cloud computing arrangement includes a software license or whether the arrangement is considered a service contract. The new guidance is effective for annual and interim periods beginning after December 15, 2015. The Company will adopt the new guidance on January 1, 2016 and is currently evaluating its accounting for cloud computing arrangements and the impact on the Company's financial position and results of operations.

Debt Issuance Costs

In April 2015, the FASB issued new guidance on the presentation of debt issuance costs. The new guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability. The new guidance is effective for annual and interim periods beginning after December 15, 2015. The Company will adopt the new guidance on January 1, 2016 and is currently evaluating the impact on the Company's financial position and results of operations.

Consolidation

In February 2015, the FASB issued amendments to the consolidation analysis that a reporting entity performs to determine whether it should consolidate certain legal entities. Specifically, the new guidance modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIE"), eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that have VIE's, particularly those with fee arrangements and related party relationships. The new guidance is effective for annual and interim periods beginning after December 15, 2015. The Company will adopt the new guidance on January 1, 2016 and is currently evaluating the impact on the Company's financial position and results of operations.

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, to 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 currently does not expect the adoption of the new guidance to have an impact on the Company's financial position or results of operations.

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. Insurance contracts are not within the scope of this new guidance. The new guidance is effective for annual and interim periods beginning after December 15, 2016. The Company will adopt the guidance on January 1,


9


2017 and is currently evaluating the impact on the Company's financial position and results of operations and considering which transition method it will use in implementing the new guidance.

NOTE 2. SUMMARY OF INVESTMENTS
Fair Value of Investments
A reconciliation of the amortized cost (cost for equity securities) to fair value of investments in held-to-maturity and available-for-sale fixed maturity and equity securities as of March 31, 2015 and December 31, 2014, is as follows:


10


March 31, 2015
 
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
111

 
3

 

 
114

Total Held-to-Maturity Fixed Maturities
$
366

 
$
4

 
$

 
$
370

AVAILABLE-FOR-SALE

 

 

 

Fixed maturities:

 

 

 

Bonds

 

 

 

U.S. Treasury
$
20,790

 
$
287

 
$
6

 
$
21,071

U.S. government agency
301,686

 
5,287

 
582

 
306,391

States, municipalities and political subdivisions
765,100

 
30,327

 
722

 
794,705

Foreign bonds
125,431

 
4,724

 
468

 
129,687

Public utilities
210,251

 
8,490

 
228

 
218,513

Corporate bonds

 

 

 

Energy
117,526

 
3,554

 
467

 
120,613

Industrials
205,678

 
7,967

 
1,656

 
211,989

Consumer goods and services
172,644

 
6,253

 
175

 
178,722

Health care
89,689

 
4,025

 
29

 
93,685

Technology, media and telecommunications
130,242

 
4,650

 
345

 
134,547

Financial services
221,491

 
10,252

 
1

 
231,742

Mortgage-backed securities
16,243

 
610

 
11

 
16,842

Collateralized mortgage obligations
345,805

 
10,813

 
2,321

 
354,297

Asset-backed securities
4,858

 
293

 

 
5,151

Total Available-for-Sale Fixed Maturities
$
2,727,434

 
$
97,532

 
$
7,011

 
$
2,817,955

Equity securities:

 

 

 

Common stocks

 

 

 

Public utilities
$
7,231

 
$
11,913

 
$
62

 
$
19,082

Energy
5,625

 
7,949

 
7

 
13,567

Industrials
13,284

 
33,888

 
162

 
47,010

Consumer goods and services
10,308

 
13,189

 
1

 
23,496

Health care
7,920

 
22,039

 

 
29,959

Technology, media and telecommunications
6,207

 
6,931

 
28

 
13,110

Financial services
16,679

 
75,500

 
43

 
92,136

Nonredeemable preferred stocks
4,984

 
207

 

 
5,191

Total Available-for-Sale Equity Securities
$
72,238

 
$
171,616

 
$
303

 
$
243,551

Total Available-for-Sale Securities
$
2,799,672

 
$
269,148

 
$
7,314

 
$
3,061,506



11


December 31, 2014
 
Type of Investment
Cost or Amortized Cost
 
Gross Unrealized Appreciation
 
Gross Unrealized Depreciation
 
Fair Value
HELD-TO-MATURITY
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
States, municipalities and political subdivisions
$
55

 
$

 
$

 
$
55

Corporate bonds - financial services
200

 

 

 
200

Mortgage-backed securities
142

 
7

 

 
149

Total Held-to-Maturity Fixed Maturities
$
397

 
$
7

 
$

 
$
404

AVAILABLE-FOR-SALE

 

 

 

Fixed maturities:

 

 

 

Bonds

 

 

 

U.S. Treasury
$
25,856

 
$
168

 
$
52

 
$
25,972

U.S. government agency
349,747

 
4,347

 
2,422

 
351,672

States, municipalities and political subdivisions
748,632

 
30,395

 
742

 
778,285

Foreign bonds
136,487

 
4,132

 
446

 
140,173

Public utilities
206,366

 
6,479

 
488

 
212,357

Corporate bonds

 


 

 

Energy
135,068

 
2,858

 
793

 
137,133

Industrials
211,256

 
6,373

 
2,154

 
215,475

Consumer goods and services
172,623

 
4,702

 
324

 
177,001

Health care
86,017

 
3,228

 
210

 
89,035

Technology, media and telecommunications
131,465

 
3,863

 
799

 
134,529

Financial services
215,095

 
8,574

 
87

 
223,582

Mortgage-backed securities
17,121

 
483

 
46

 
17,558

Collateralized mortgage obligations
335,092

 
7,003

 
4,806

 
337,289

Asset-backed securities
2,741

 
277

 

 
3,018

Total Available-for-Sale Fixed Maturities
$
2,773,566

 
$
82,882

 
$
13,369

 
$
2,843,079

Equity securities:

 

 

 

Common stocks

 

 

 

Public utilities
$
7,231

 
$
13,103

 
$
44

 
$
20,290

Energy
5,094

 
8,623

 

 
13,717

Industrials
13,284

 
32,299

 
124

 
45,459

Consumer goods and services
10,294

 
13,295

 
275

 
23,314

Health care
7,920

 
22,436

 

 
30,356

Technology, media and telecommunications
6,207

 
7,846

 
58

 
13,995

Financial services
16,637

 
77,077

 
51

 
93,663

Nonredeemable preferred stocks
4,984

 
72

 
7

 
5,049

Total Available-for-Sale Equity Securities
$
71,651

 
$
174,751

 
$
559

 
$
245,843

Total Available-for-Sale Securities
$
2,845,217

 
$
257,633

 
$
13,928

 
$
3,088,922




12


Maturities
The amortized cost and fair value of held-to-maturity, available-for-sale and trading fixed maturity securities at March 31, 2015, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset-backed securities, mortgage-backed securities and collateralized mortgage obligations may be subject to prepayment risk and are therefore not categorized by contractual maturity.
 
Held-To-Maturity
 
Available-For-Sale
 
Trading
March 31, 2015
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
55

 
$
56

 
$
242,924

 
$
245,549

 
$
2,246

 
$
2,846

Due after one year through five years
200

 
200

 
815,499

 
854,281

 
7,361

 
7,914

Due after five years through 10 years

 

 
853,096

 
882,432

 
1,998

 
2,499

Due after 10 years

 

 
449,009

 
459,403

 
2,890

 
3,534

Asset-backed securities

 

 
4,858

 
5,151

 

 

Mortgage-backed securities
111

 
114

 
16,243

 
16,842

 

 

Collateralized mortgage obligations

 

 
345,805

 
354,297

 

 

 
$
366

 
$
370

 
$
2,727,434

 
$
2,817,955

 
$
14,495

 
$
16,793

Net Realized Investment Gains and Losses
Net realized gains on disposition of investments are computed using the specific identification method and are included in the computation of net income. A summary of the components of net realized investment gains is as follows:
 
Three Months Ended March 31,
 
2015
 
2014
Net realized investment gains (losses)
 
 
 
Fixed maturities:
 
 
 
Available-for-sale
$
991

 
$
647

Trading securities
 
 
 
Change in fair value
(201
)
 
300

Sales
516

 
235

Equity securities:
 
 
 
Available-for-sale
904

 
835

Trading securities
 
 
 
Change in fair value
(56
)
 
177

Sales
46

 

Other long-term investments
(1,313
)
 

Total net realized investment gains
$
887

 
$
2,194

The proceeds and gross realized gains on the sale of available-for-sale securities are as follows:
 
Three Months Ended March 31,
 
2015
 
2014
Proceeds from sales
$
5,017

 
$

Gross realized gains
973

 

Gross realized losses

 

There were no sales of held-to-maturity securities during the three-month periods ended March 31, 2015 and 2014.

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


13


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 $20,539 and $20,928 at March 31, 2015 and December 31, 2014, 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 $10,270 at March 31, 2015.
Unrealized Appreciation
A summary of the changes in net unrealized investment appreciation during the reporting period is as follows:
 
Three Months Ended March 31,
 
2015
 
2014
Change in net unrealized investment appreciation
 
 
 
Available-for-sale fixed maturities
$
21,008

 
$
28,563

Available-for-sale equity securities
(2,879
)
 
2,945

Deferred policy acquisition costs
(6,911
)
 
(8,920
)
Income tax effect
(3,926
)
 
(7,907
)
Total change in net unrealized investment appreciation, net of tax
$
7,292

 
$
14,681

We continually monitor the difference between our cost basis and the estimated fair value of our investments. Our accounting policy for impairment recognition requires other-than-temporary impairment ("OTTI") charges to be recorded when we determine that it is more likely than not that we will be unable to collect all amounts due according to the contractual terms of the fixed maturity security or that the anticipated recovery in fair value of the equity security will not occur in a reasonable amount of time. Impairment charges on investments are recorded based on the fair value of the investments at the measurement date. Factors considered in evaluating whether a decline in value is other-than-temporary include: the length of time and the extent to which fair value has been less than cost; the financial condition and near-term prospects of the issuer; our intention to hold the investment; and the likelihood that we will be required to sell the investment.
The tables on the following pages summarize our fixed maturity and equity securities that were in an unrealized loss position at March 31, 2015 and December 31, 2014. The securities are presented by the length of time they have been continuously in an unrealized loss position. It is possible that we could recognize OTTI charges in future periods on securities held at March 31, 2015, 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 did not warrant the recognition of an OTTI charge at March 31, 2015 or at March 31, 2014. We believe the unrealized depreciation in value of other securities in our fixed maturity portfolio is primarily attributable to changes in market interest rates and not the credit quality of the issuer. We have no intent to sell, and it is more likely than not that we will not be required to sell, these securities until the fair value recovers to at least equal to our cost basis or the securities mature.
We have evaluated the near-term prospects of the issuers of our equity securities in relation to the severity and duration of the unrealized loss, and unless otherwise noted, these losses do not warrant the recognition of an OTTI charge at March 31, 2015. Our largest unrealized loss greater than 12 months on an individual equity security at March 31, 2015 was $49. 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.


14


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2015
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

 
$
3,428

 
$
1

 
2

 
$
1,663

 
$
5

 
$
5,091

 
$
6

U.S. government agency
16

 
40,258

 
216

 
7

 
22,085

 
366

 
62,343

 
582

States, municipalities and political subdivisions
49

 
55,259

 
510

 
15

 
10,927

 
212

 
66,186

 
722

Foreign bonds
6

 
13,685

 
468

 

 

 

 
13,685

 
468

Public utilities
5

 
8,581

 
81

 
3

 
2,111

 
147

 
10,692

 
228

Corporate bonds
 
 
 
 
 
 
 
 
 
 
 
 


 


Energy
6

 
12,156

 
261

 
3

 
7,211

 
206

 
19,367

 
467

Industrials
8

 
18,037

 
161

 
2

 
6,536

 
1,495

 
24,573

 
1,656

Consumer goods and services
4

 
12,273

 
170

 
4

 
2,517

 
5

 
14,790

 
175

Health care
2

 
7,052

 
4

 
2

 
3,895

 
25

 
10,947

 
29

Technology, media and telecommunications
1

 
3,194

 
8

 
2

 
9,187

 
337

 
12,381

 
345

Financial services
1

 
2,204

 
1

 

 

 

 
2,204

 
1

Mortgage-backed securities
4

 
168

 
11

 

 

 

 
168

 
11

Collateralized mortgage obligations
14

 
20,680

 
268

 
39

 
83,994

 
2,053

 
104,674

 
2,321

Total Available-for-Sale Fixed Maturities
118

 
$
196,975

 
$
2,160

 
79

 
$
150,126

 
$
4,851

 
$
347,101

 
$
7,011

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Public utilities
3

 
$
246

 
$
62

 

 
$

 
$

 
$
246

 
$
62

Energy
1

 
179

 
7

 

 

 

 
179

 
7

Industrials
3

 
237

 
112

 
2

 
63

 
50

 
300

 
162

Consumer goods and services

 

 

 
2

 
16

 
1

 
16

 
1

Technology, media and telecommunications
7

 
521

 
17

 
2

 
229

 
11

 
750

 
28

Financial services
1

 
194

 
43

 

 

 

 
194

 
43

Total Available-for-Sale Equity Securities
15

 
$
1,377

 
$
241

 
6

 
$
308

 
$
62

 
$
1,685

 
$
303

Total Available-for-Sale Securities
133

 
$
198,352

 
$
2,401

 
85

 
$
150,434

 
$
4,913

 
$
348,786

 
$
7,314



15


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
Less than 12 months
 
12 months or longer
 
Total
Type of Investment
Number
of Issues
 
Fair
Value
 
Gross Unrealized Depreciation
 
Number
of Issues
 
Fair
Value
 
Gross Unrealized Depreciation
 
Fair
Value
 
Gross Unrealized Depreciation
AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
4

 
$
2,343

 
$
6

 
4

 
$
5,069

 
$
46

 
$
7,412

 
$
52

U.S. government agency
11

 
41,064

 
70

 
35

 
95,198

 
2,352

 
136,262

 
2,422

States, municipalities and political subdivisions
18

 
30,859

 
185

 
62

 
50,847

 
557

 
81,706

 
742

Foreign bonds
6

 
17,158

 
446

 

 

 

 
17,158

 
446

Public utilities
10

 
21,839

 
194

 
4

 
3,611

 
294

 
25,450

 
488

Corporate bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
8

 
17,416

 
420

 
3

 
7,061

 
373

 
24,477

 
793

Industrials
8

 
17,103

 
362

 
3

 
9,592

 
1,792

 
26,695

 
2,154

Consumer goods and services
11

 
28,344

 
258

 
7

 
10,064

 
66

 
38,408

 
324

Health care
3

 
8,244

 
36

 
3

 
7,104

 
174

 
15,348

 
210

Technology, media and telecommunications
4

 
8,860

 
68

 
4

 
15,742

 
731

 
24,602

 
799

Financial services
3

 
5,908

 
31

 
2

 
6,131

 
56

 
12,039

 
87

Mortgage-backed securities
9

 
425

 
21

 
2

 
1,991

 
25

 
2,416

 
46

Collateralized mortgage obligations
10

 
20,746

 
112

 
56

 
122,550

 
4,694

 
143,296

 
4,806

Total Available-for-Sale Fixed Maturities
105

 
$
220,309

 
$
2,209

 
185

 
$
334,960

 
$
11,160

 
$
555,269

 
$
13,369

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Public utilities
3

 
$
263

 
$
44

 

 
$

 
$

 
$
263

 
$
44

Industrials
3

 
280

 
70

 
2

 
58

 
54

 
338

 
124

Consumer goods and services
1

 
129

 
272

 
2

 
15

 
3

 
144

 
275

Technology, media and telecommunications
4

 
503

 
14

 
5

 
218

 
44

 
721

 
58

Financial services
1

 
186

 
51

 

 

 

 
186

 
51

Nonredeemable preferred stocks

 

 

 
1

 
700

 
7

 
700

 
7

Total Available-for-Sale Equity Securities
12

 
$
1,361

 
$
451

 
10

 
$
991

 
$
108

 
$
2,352

 
$
559

Total Available-for-Sale Securities
117

 
$
221,670

 
$
2,660

 
195

 
$
335,951

 
$
11,268

 
$
557,621

 
$
13,928



16


NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS

Current accounting guidance on fair value measurements includes the application of a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Our financial instruments that are recorded at fair value are categorized into a three-level hierarchy, which is based upon the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets (i.e., Level 1) and the lowest priority to unobservable inputs (i.e., Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the financial instrument.
Financial instruments recorded at fair value are categorized in the fair value hierarchy as follows:
Level 1: Valuations are based on unadjusted quoted prices in active markets for identical financial instruments that we have the ability to access.
Level 2: Valuations are based on quoted prices for similar financial instruments, other than quoted prices included in Level 1, in markets that are not active or on inputs that are observable either directly or indirectly for the full term of the financial instrument.
Level 3: Valuations are based on pricing or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management's own assumptions about the assumptions a market participant would use in pricing the financial instrument.
We review our fair value hierarchy categorizations on a quarterly basis at which time the classification of certain financial instruments may change if the input observations have changed. Transfers between levels, if any, are recorded as of the beginning of the reporting period.
To determine the fair value of the majority of our investments, we utilize prices obtained from independent, nationally recognized pricing services. We obtain one price for each security. When the pricing services cannot provide a determination of fair value for a specific security, we obtain non-binding price quotes from broker-dealers with whom we have had several years experience and who have demonstrated knowledge of the subject security. We request and utilize one broker quote per security.
We validate the prices obtained from independent pricing services and brokers prior to their use for reporting purposes by evaluating their reasonableness on a monthly basis. Our validation process includes a review for unusual fluctuations. In our opinion, the pricing obtained at March 31, 2015 and December 31, 2014 was reasonable.
In order to determine the proper classification in the fair value hierarchy for each security where the price is obtained from an independent pricing service, we obtain and evaluate the vendors' pricing procedures and inputs used to price the security, which include unadjusted quoted market prices for identical securities, such as a New York Stock Exchange closing price, and quoted prices for identical securities in markets that are not active. For fixed maturity securities, an evaluation of interest rates and yield curves observable at commonly quoted intervals, volatility, prepayment speeds, credit risks and default rates may also be performed. We have determined that these processes and inputs result in fair values and classifications consistent with the applicable accounting guidance on fair value measurements.
We 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


17


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 throughout 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.

A summary of the carrying value and estimated fair value of our financial instruments at March 31, 2015 and December 31, 2014 is as follows:
 
March 31, 2015
 
December 31, 2014
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Assets
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Held-to-maturity securities
$
370

 
$
366

 
$
404

 
$
397

Available-for-sale securities
2,817,955

 
2,817,955

 
2,843,079

 
2,843,079

Trading securities
16,793

 
16,793

 
16,862

 
16,862

Equity securities:
 
 
 
 
 
 
 
Available-for-sale securities
243,551

 
243,551

 
245,843

 
245,843

Trading securities
3,746

 
3,746

 
4,066

 
4,066

Mortgage loans
4,500

 
4,141

 
4,559

 
4,199

Policy loans
5,792

 
5,792

 
5,916

 
5,916

Other long-term investments
47,059

 
47,059

 
50,424

 
50,424

Short-term investments
175

 
175

 
175

 
175

Cash and cash equivalents
111,320

 
111,320

 
90,574

 
90,574

Corporate-owned life insurance
1,072

 
1,072

 
918

 
918

Liabilities
 
 
 
 
 
 
 
Policy reserves
 
 
 
 
 
 
 
Annuity (accumulations) (1)
$
848,649

 
$
832,330

 
$
865,802

 
$
863,606

Annuity (benefit payments)
133,182

 
95,780

 
176,592

 
99,121

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



18


The following tables present the categorization for our financial instruments measured at fair value on a recurring basis in our Consolidated Balance Sheets at March 31, 2015 and December 31, 2014:
March 31, 2015
 
 
Fair Value Measurements
Description
Total
 
Level 1
 
Level 2
 
Level 3
AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
U.S. Treasury
$
21,071

 
$

 
$
21,071

 
$

U.S. government agency
306,391

 

 
306,391

 

States, municipalities and political subdivisions
794,705

 

 
794,186

 
519

Foreign bonds
129,687

 

 
129,687

 

Public utilities
218,513

 

 
218,513

 

Corporate bonds
 
 
 
 
 
 
 
Energy
120,613

 

 
120,613

 

Industrials
211,989

 

 
211,989

 

Consumer goods and services
178,722

 

 
177,354

 
1,368

Health care
93,685

 

 
93,685

 

Technology, media and telecommunications
134,547