10-Q 1 ufcs-2015630x10q.htm 10-Q UFCS-2015.6.30-10Q
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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

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

for the quarterly period ended June 30, 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 July 31, 2015, 25,058,662 shares of common stock were outstanding.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



United Fire Group, Inc.
Index to Quarterly Report on Form 10-Q
June 30, 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. ("UFG", 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)
June 30,
2015
 
December 31,
2014
 
(unaudited)
 
 
ASSETS
 
 
 
Investments
 
 
 
Fixed maturities
 
 
 
Held-to-maturity, at amortized cost (fair value $359 in 2015 and $404 in 2014)
$
356

 
$
397

Available-for-sale, at fair value (amortized cost $2,770,857 in 2015 and $2,773,566 in 2014)
2,811,361

 
2,843,079

Trading securities, at fair value (amortized cost $14,350 in 2015 and $14,363 in 2014)
16,388

 
16,862

Equity securities
 
 
 
Available-for-sale, at fair value (cost $72,157 in 2015 and $71,651 in 2014)
244,547

 
245,843

Trading securities, at fair value (cost $3,445 in 2015 and $3,708 in 2014)
3,599

 
4,066

Mortgage loans
4,082

 
4,199

Policy loans
5,702

 
5,916

Other long-term investments
50,656

 
50,424

Short-term investments
175

 
175

 
3,136,866

 
3,170,961

Cash and cash equivalents
93,382

 
90,574

Accrued investment income
25,190

 
25,989

Premiums receivable (net of allowance for doubtful accounts of $804 in 2015 and $618 in 2014)
302,806

 
249,030

Deferred policy acquisition costs
159,073

 
139,719

Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $44,202 in 2015 and $41,492 in 2014)
50,112

 
49,247

Reinsurance receivables and recoverables
73,892

 
86,810

Prepaid reinsurance premiums
3,974

 
3,632

Income taxes receivable
6,042

 

Goodwill and intangible assets
25,893

 
26,278

Other assets
14,253

 
14,449

TOTAL ASSETS
$
3,891,483

 
$
3,856,689

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Future policy benefits and losses, claims and loss settlement expenses
 
 
 
Property and casualty insurance
$
999,032

 
$
969,437

Life insurance
1,389,430

 
1,447,764

Unearned premiums
431,773

 
378,725

Accrued expenses and other liabilities
224,523

 
212,577

Income taxes payable

 
5,012

Deferred income taxes
14,785

 
25,759

TOTAL LIABILITIES
$
3,059,543

 
$
3,039,274

Stockholders’ Equity
 
 
 
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,048,114 and 25,019,415 shares issued and outstanding in 2015 and 2014, respectively
$
25

 
$
25

Additional paid-in capital
203,489

 
202,676

Retained earnings
551,735

 
523,541

Accumulated other comprehensive income, net of tax
76,691

 
91,173

TOTAL STOCKHOLDERS’ EQUITY
$
831,940

 
$
817,415

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
3,891,483

 
$
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 June 30,
 
Six Months Ended June 30,
(In Thousands, Except Share Data)
2015
 
2014
 
2015
 
2014
Revenues
 
 
 
 
 
 
 
Net premiums earned
$
229,225

 
$
201,827

 
$
442,396

 
$
395,168

Investment income, net of investment expenses
25,792

 
27,603

 
50,155

 
54,365

Net realized investment gains (includes reclassifications for net unrealized investment gains on available-for-sale securities of $995 and $2,890 in 2015 and $1,606 and $3,088 in 2014; previously included in accumulated other comprehensive income (loss))
769

 
2,708

 
1,656

 
4,902

Other income
132

 
535

 
195

 
1,142

Total revenues
$
255,918

 
$
232,673

 
$
494,402

 
$
455,577

Benefits, Losses and Expenses
 
 
 
 
 
 
 
Losses and loss settlement expenses
$
150,362

 
$
142,716

 
$
276,771

 
$
267,953

Increase in liability for future policy benefits
12,096

 
8,077

 
19,719

 
15,898

Amortization of deferred policy acquisition costs
44,357

 
40,196

 
86,829

 
79,730

Other underwriting expenses (includes reclassifications for employee benefit costs of $1,867 and $3,734 in 2015 and $768 and $1,536 in 2014; previously included in accumulated other comprehensive income (loss))
23,546

 
20,776

 
47,080

 
47,204

Interest on policyholders’ accounts
6,024

 
7,852

 
12,639

 
15,839

Total benefits, losses and expenses
$
236,385

 
$
219,617

 
$
443,038

 
$
426,624

Income before income taxes
$
19,533

 
$
13,056

 
$
51,364

 
$
28,953

Federal income tax expense (includes reclassifications of ($305) and ($295) in 2015 and $293 and $543 in 2014; previously included in accumulated other comprehensive income (loss))
4,515

 
2,371

 
12,667

 
4,937

Net income
$
15,018

 
$
10,685

 
$
38,697

 
$
24,016

Other comprehensive income (loss)
 
 
 
 
 
 
 
Change in net unrealized appreciation on investments
$
(36,237
)
 
$
27,108

 
$
(23,123
)
 
$
51,177

Change in liability for underfunded employee benefit plans

 

 

 

Other comprehensive income (loss), before tax and reclassification adjustments
$
(36,237
)
 
$
27,108

 
$
(23,123
)
 
$
51,177

Income tax effect
12,682

 
(9,488
)
 
8,092

 
(17,913
)
Other comprehensive income (loss), after tax, before reclassification adjustments
$
(23,555
)
 
$
17,620

 
$
(15,031
)
 
$
33,264

Reclassification adjustment for net realized investment gains included in income
$
(995
)
 
$
(1,606
)
 
$
(2,890
)
 
$
(3,088
)
Reclassification adjustment for employee benefit costs included in expense
1,867

 
768

 
3,734

 
1,536

Total reclassification adjustments, before tax
$
872

 
$
(838
)
 
$
844

 
$
(1,552
)
Income tax effect
(305
)
 
293

 
$
(295
)
 
$
543

Total reclassification adjustments, after tax
$
567

 
$
(545
)
 
$
549

 
$
(1,009
)
Comprehensive income (loss)
$
(7,970
)
 
$
27,760

 
$
24,215

 
$
56,271

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
25,023,753

 
25,330,066

 
25,007,204

 
25,351,056

Basic earnings per common share
$
0.60

 
$
0.42

 
$
1.55

 
$
0.95

Diluted earnings per common share
0.59

 
0.42

 
1.54

 
0.94

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


3


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

(In Thousands, Except Share Data)
Six Months Ended June 30, 2015
 
 
Common stock
 
Balance, beginning of year
$
25

Shares repurchased (49,705 shares)

Shares issued for stock-based awards (67,582 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
881

Shares repurchased
(1,443
)
Shares issued for stock-based awards
1,375

Balance, end of period
$
203,489

 
 
Retained earnings
 
Balance, beginning of year
$
523,541

Net income
38,697

Dividends on common stock ($0.42 per share)
(10,503
)
Balance, end of period
$
551,735

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

Change in net unrealized investment appreciation(1)
(16,909
)
Change in liability for underfunded employee benefit plans(2)
2,427

Balance, end of period
$
76,691

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

Net income
38,697

All other changes in stockholders’ equity accounts
(24,172
)
Balance, end of period
$
831,940

(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)

Six Months Ended June 30,
(In Thousands)
2015
 
2014
Cash Flows From Operating Activities
 
 
 
Net income
$
38,697

 
$
24,016

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Net accretion of bond premium
7,126

 
7,601

Depreciation and amortization
3,234

 
3,757

Stock-based compensation expense
1,200

 
944

Net realized investment gains
(1,656
)
 
(4,902
)
Net cash flows from trading investments
652

 
(7,481
)
Deferred income tax benefit
(2,742
)
 
(1,346
)
Changes in:
 
 
 
Accrued investment income
799

 
764

Premiums receivable
(53,776
)
 
(49,459
)
Deferred policy acquisition costs
(14,557
)
 
(11,143
)
Reinsurance receivables
12,918

 
6,137

Prepaid reinsurance premiums
(342
)
 
(610
)
Income taxes receivable
(6,042
)
 
(2,105
)
Other assets
196

 
699

Future policy benefits and losses, claims and loss settlement expenses
43,735

 
37,769

Unearned premiums
53,048

 
54,682

Accrued expenses and other liabilities
15,679

 
(1,083
)
Income taxes payable
(5,012
)
 

Deferred income taxes
(434
)
 
(72
)
Other, net
(1,467
)
 
(2,975
)
Total adjustments
$
52,559

 
$
31,177

Net cash provided by operating activities
$
91,256

 
$
55,193

Cash Flows From Investing Activities
 
 
 
Proceeds from sale of available-for-sale investments
$
8,228

 
$
10

Proceeds from call and maturity of held-to-maturity investments
41

 
26

Proceeds from call and maturity of available-for-sale investments
374,173

 
249,251

Proceeds from short-term and other investments
3,833

 
1,648

Purchase of available-for-sale investments
(384,065
)
 
(270,194
)
Purchase of short-term and other investments
(3,583
)
 
(1,938
)
Net purchases and sales of property and equipment
(3,711
)
 
(4,154
)
Net cash used in investing activities
$
(5,084
)
 
$
(25,351
)
Cash Flows From Financing Activities
 
 
 
Policyholders’ account balances
 
 
 
Deposits to investment and universal life contracts
$
57,340

 
$
96,119

Withdrawals from investment and universal life contracts
(129,814
)
 
(114,096
)
Payment of cash dividends
(10,503
)
 
(9,630
)
Repurchase of common stock
(1,443
)
 
(5,567
)
Issuance of common stock
1,375

 
1,457

Tax impact from issuance of common stock
(319
)
 
(42
)
Net cash used in financing activities
$
(83,364
)
 
$
(31,759
)
Net Change in Cash and Cash Equivalents
$
2,808

 
$
(1,917
)
Cash and Cash Equivalents at Beginning of Period
90,574

 
92,193

Cash and Cash Equivalents at End of Period
$
93,382

 
$
90,276

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, except share amounts or as otherwise noted)

NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Business
United Fire Group, Inc. ("UFG", 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; 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 UFG 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 June 30, 2015 and for the three- and six-month periods ended June 30, 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 six-month periods ended June 30, 2015 and 2014, we made payments for income taxes totaling $27,216 and $9,115, respectively. We did not receive a tax refund during the six-month period ended June 30, 2015. We received a tax refund of $615 during the six-month period ended June 30, 2014.


6


For the six-month periods ended June 30, 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 six-month period ended June 30, 2015.
 
 
 
 
 
Property & Casualty Insurance
 
Life Insurance
 
Total
Recorded asset at beginning of period
$
72,861

 
$
66,858

 
$
139,719

Underwriting costs deferred
98,396

 
2,990

 
101,386

Amortization of deferred policy acquisition costs
(83,458
)
 
(3,371
)
 
(86,829
)
Ending unamortized deferred policy acquisition costs
$
87,799

 
$
66,477

 
$
154,276

Impact of unrealized gains and losses on available-for-sale securities

 
4,797

 
4,797

Recorded asset at June 30, 2015
$
87,799

 
$
71,274

 
$
159,073


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 an increase to other underwriting amortization of $149 and an increase to the DAC asset of $2,709 for the six-month period ended June 30, 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, to net unrealized investment appreciation as of the balance sheet date. The impact of unrealized gains and losses on available-for-sale securities decreased the DAC asset by $8,586 and $13,383 at June 30, 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 $12,667 and $4,937 for the six-month periods ended June 30, 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 June 30, 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
Short Duration Contracts

In May 2015, the Financial Accounting Standards Board ("FASB") issued guidance on disclosure requirements for short-duration contracts. The new guidance requires additional disclosures about the liability for unpaid loss and loss


8


adjustment expenses and requires disclosure of any information about significant changes in methodologies and assumptions used to calculate the liability. The new guidance is effective for annual periods beginning after December 15, 2015 and interim periods beginning the following year. The Company will adopt the new guidance on January 1, 2016 and is currently evaluating its disclosures for short-duration contracts and the impact on the Company's financial statement disclosures.

Other Internal Use Software

In April 2015, the FASB issued guidance which clarifies customers' accounting for fees paid for cloud computing arrangements. The new guidance provides guidance to customers 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. At this point in time, Management does not expect the adoption of the new guidance to have an impact on the Company's financial position or 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, 2015 and interim periods within annual periods beginning after December 15, 2015. 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.


9


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, 2017. The Company will adopt the guidance on January 1, 2018 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 June 30, 2015 and December 31, 2014, is as follows:
June 30, 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
 
 
 
 
 
 
 
Special revenue:
 
 
 
 
 
 
 
Midwest
$
55

 
$

 
$

 
$
55

Corporate bonds - financial services
200

 

 

 
200

Mortgage-backed securities
101

 
3

 

 
104

Total Held-to-Maturity Fixed Maturities
$
356

 
$
3

 
$

 
$
359

AVAILABLE-FOR-SALE

 

 

 

Fixed maturities:

 

 

 

Bonds

 

 

 

U.S. Treasury
$
20,723

 
$
199

 
$
7

 
$
20,915

U.S. government agency
268,120

 
2,468

 
3,275

 
267,313

States, municipalities and political subdivisions
 
 
 
 
 
 
 
General obligations:
 
 
 
 
 
 
 
Midwest
161,011

 
4,801

 
684

 
165,128

Northeast
55,662

 
1,276

 
293

 
56,645

South
126,404

 
2,988

 
1,077

 
128,315

West
95,579

 
2,363

 
789

 
97,153

Special revenue:
 
 
 
 
 
 
 
Midwest
145,486

 
4,239

 
911

 
148,814

Northeast
19,515

 
633

 
242

 
19,906

South
103,185

 
3,423

 
556

 
106,052

West
77,401

 
2,518

 
388

 
79,531



10


Foreign bonds
101,857

 
3,504

 
167

 
105,194

Public utilities
199,769

 
4,903

 
936

 
203,736

Corporate bonds

 

 

 

Energy
113,766

 
2,545

 
721

 
115,590

Industrials
220,379

 
5,247

 
3,022

 
222,604

Consumer goods and services
180,165

 
4,007

 
664

 
183,508

Health care
93,333

 
2,602

 
964

 
94,971

Technology, media and telecommunications
144,328

 
2,345

 
1,339

 
145,334

Financial services
255,165

 
7,071

 
1,069

 
261,167

Mortgage-backed securities
15,096

 
485

 
60

 
15,521

Collateralized mortgage obligations
368,182

 
5,493

 
5,667

 
368,008

Asset-backed securities
5,731

 
239

 
14

 
5,956

Total Available-for-Sale Fixed Maturities
$
2,770,857

 
$
63,349

 
$
22,845

 
$
2,811,361

Equity securities:

 

 

 

Common stocks

 

 

 

Public utilities
$
7,231

 
$
10,365

 
$
84

 
$
17,512

Energy
5,625

 
7,494

 
15

 
13,104

Industrials
13,252

 
33,571

 
153

 
46,670

Consumer goods and services
10,308

 
12,445

 
3

 
22,750

Health care
7,920

 
24,433

 

 
32,353

Technology, media and telecommunications
6,151

 
7,086

 
30

 
13,207

Financial services
17,302

 
77,254

 
61

 
94,495

Nonredeemable preferred stocks
4,368

 
88

 

 
4,456

Total Available-for-Sale Equity Securities
$
72,157

 
$
172,736

 
$
346

 
$
244,547

Total Available-for-Sale Securities
$
2,843,014

 
$
236,085

 
$
23,191

 
$
3,055,908



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
 
 
 
 
 
 
 
Special revenue:
 
 
 
 
 
 
 
Midwest
$
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
 
 
 
 
 
 
 
General obligations:
 
 
 
 
 
 
 
Midwest
179,491

 
6,599

 
170

 
185,920

Northeast
59,084

 
2,120

 
50

 
61,154

South
122,055

 
4,453

 
288

 
126,220

West
75,102

 
3,350

 
19

 
78,433

Special revenue:
 
 
 
 
 
 
 
Midwest
126,192

 
5,356

 
146

 
131,402

Northeast
11,767

 
864

 

 
12,631

South
106,917

 
4,368

 
63

 
111,222

West
68,024

 
3,285

 
6

 
71,303

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



12


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

Maturities
The amortized cost and fair value of held-to-maturity, available-for-sale and trading fixed maturity securities at June 30, 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
June 30, 2015
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
55

 
$
55

 
$
178,468

 
$
180,117

 
$
2,765

 
$
3,667

Due after one year through five years
200

 
200

 
793,496

 
826,094

 
6,629

 
6,733

Due after five years through 10 years

 

 
930,136

 
937,879

 
2,081

 
2,611

Due after 10 years

 

 
479,748

 
477,786

 
2,875

 
3,377

Asset-backed securities

 

 
5,731

 
5,956

 

 

Mortgage-backed securities
101

 
104

 
15,096

 
15,521

 

 

Collateralized mortgage obligations

 

 
368,182

 
368,008

 

 

 
$
356

 
$
359

 
$
2,770,857

 
$
2,811,361

 
$
14,350

 
$
16,388













13


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 (losses) is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net realized investment gains (losses)
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale
$
965

 
$
705

 
$
1,956

 
$
1,352

Trading securities
 
 
 
 
 
 
 
Change in fair value
(261
)
 
648

 
(462
)
 
948

Sales
183

 
285

 
699

 
520

Equity securities:
 
 
 
 
 
 
 
Available-for-sale
30

 
901

 
934

 
1,736

Trading securities
 
 
 
 
 
 
 
Change in fair value
(148
)
 
169

 
(204
)
 
346

Sales

 

 
46

 

Other long-term investments

 

 
(1,313
)
 

Total net realized investment gains
$
769

 
$
2,708

 
$
1,656

 
$
4,902

The proceeds and gross realized gains (losses) on the sale of available-for-sale securities are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Proceeds from sales
$
3,211

 
$
10

 
$
8,228

 
$
10

Gross realized gains
57

 

 
1,030

 

Gross realized losses

 
(56
)
 

 
(56
)
There were no sales of held-to-maturity securities during the three- and six-month periods ended June 30, 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 trading securities, is recognized currently in earnings as a component of net realized investment gains. Our portfolio of trading securities had a fair value of $19,987 and $20,928 at June 30, 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 $9,360 at June 30, 2015.








14


Unrealized Appreciation
A summary of the changes in net unrealized investment appreciation during the reporting period is as follows:
 
Six Months Ended June 30,
 
2015
 
2014
Change in net unrealized investment appreciation
 
 
 
Available-for-sale fixed maturities
$
(29,009
)
 
$
56,861

Available-for-sale equity securities
(1,802
)
 
9,148

Deferred policy acquisition costs
4,797

 
(17,921
)
Income tax effect
9,105

 
(16,831
)
Total change in net unrealized investment appreciation, net of tax
$
(16,909
)
 
$
31,257

We continually monitor the difference between our cost basis and the estimated fair value of our investments. Our accounting policy for impairment recognition requires other-than-temporary impairment ("OTTI") charges to be recorded when we determine that it is more likely than not that we will be unable to collect all amounts due according to the contractual terms of the fixed maturity security or that the anticipated recovery in fair value of the equity security will not occur in a reasonable amount of time. Impairment charges on investments are recorded based on the fair value of the investments at the measurement date. Factors considered in evaluating whether a decline in value is other-than-temporary include: the length of time and the extent to which fair value has been less than cost; the financial condition and near-term prospects of the issuer; our intention to hold the investment; and the likelihood that we will be required to sell the investment.
The tables on the following pages summarize our fixed maturity and equity securities that were in an unrealized loss position at June 30, 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 June 30, 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 June 30, 2015 or at June 30, 2014. We believe the unrealized depreciation in value of other securities in our fixed maturity portfolio is primarily attributable to changes in market interest rates and not the credit quality of the issuer. We have no intent to sell, and it is more likely than not that we will not be required to sell, these securities until the fair value recovers to at least equal to our cost basis or the securities mature.
We have evaluated the near-term prospects of the issuers of our equity securities in relation to the severity and duration of the unrealized loss, and unless otherwise noted, these losses do not warrant the recognition of an OTTI charge at June 30, 2015. Our largest unrealized loss greater than 12 months on an individual equity security at June 30, 2015 was $32. 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.









15


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 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

 
$
3,415

 
$
2

 
2

 
$
1,656

 
$
5

 
$
5,071

 
$
7

U.S. government agency
43

 
124,251

 
2,360

 
7

 
21,534

 
915

 
145,785

 
3,275

States, municipalities and political subdivisions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Midwest
28

 
27,667

 
684

 

 

 

 
27,667

 
684

Northeast
15

 
21,479

 
293

 

 

 

 
21,479

 
293

South
25

 
33,704

 
769

 
12

 
6,429

 
308

 
40,133

 
1,077

West
25

 
36,157

 
789

 

 

 

 
36,157

 
789

Special revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Midwest
36

 
39,349

 
823

 
1

 
2,443

 
88

 
41,792

 
911

Northeast
3

 
7,540

 
242

 

 

 

 
7,540

 
242

South
18

 
25,118

 
495

 
2

 
1,798

 
61

 
26,916

 
556

West
24

 
23,266

 
388

 

 

 

 
23,266

 
388

Foreign bonds
5

 
12,206

 
167

 

 

 

 
12,206

 
167

Public utilities
28

 
52,883

 
824

 
3

 
2,121

 
112

 
55,004

 
936

Corporate bonds
 
 
 
 
 
 
 
 
 
 
 
 


 


Energy
8

 
22,313

 
341

 
3

 
7,021

 
380

 
29,334

 
721

Industrials
29

 
60,462

 
1,189

 
2

 
6,197

 
1,833

 
66,659

 
3,022

Consumer goods and services
17

 
44,538

 
655

 
4

 
2,505

 
9

 
47,043

 
664

Health care
13

 
34,156

 
849

 
2

 
3,790

 
115

 
37,946

 
964

Technology, media and telecommunications
21

 
60,661

 
996

 
2

 
9,162

 
343

 
69,823

 
1,339

Financial services
29

 
58,901

 
1,069

 

 

 

 
58,901

 
1,069

Mortgage-backed securities
8

 
4,748

 
59

 
1

 
80

 
1

 
4,828

 
60

Collateralized mortgage obligations
58

 
106,085

 
2,113

 
37

 
75,457

 
3,554

 
181,542

 
5,667

Asset-backed securities
1

 
986

 
14

 

 

 

 
986

 
14

Total Available-for-Sale Fixed Maturities
436

 
$
799,885

 
$
15,121

 
78

 
$
140,193

 
$
7,724

 
$
940,078

 
$
22,845

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Public utilities

 
$

 
$

 
3

 
$
223

 
$
84

 
$
223

 
$
84

Energy
1

 
171

 
15

 

 

 

 
171

 
15

Industrials
4

 
229

 
121

 
2

 
80

 
32

 
309

 
153

Consumer goods and services

 

 

 
2

 
14

 
3

 
14

 
3

Technology, media and telecommunications
11

 
536

 
20

 
1

 
10

 
10

 
546

 
30

Financial services
5

 
252

 
61

 

 

 

 
252

 
61

Total Available-for-Sale Equity Securities
21

 
$
1,188

 
$
217

 
8

 
$
327

 
$
129

 
$
1,515

 
$
346

Total Available-for-Sale Securities
457

 
$
801,073

 
$
15,338

 
86

 
$
140,520

 
$
7,853

 
$
941,593

 
$
23,191



16


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Midwest
1

 
3,650

 
74

 
14

 
9,856

 
96

 
13,506

 
170

Northeast

 

 

 
9

 
7,377

 
50

 
7,377

 
50

South
1

 
3,085

 
58

 
19

 
13,475

 
230

 
16,560

 
288

West
1

 
1,023

 
1

 
5

 
2,700

 
18

 
3,723

 
19

Special revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Midwest
9