10-Q 1 ufcs-2015930x10q.htm 10-Q 10-Q
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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

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

for the quarterly period ended September 30, 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 October 30, 2015, 25,076,389 shares of common stock were outstanding.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



United Fire Group, Inc.
Index to Quarterly Report on Form 10-Q
September 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;
Laws, regulations and stock exchange requirements 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)
September 30,
2015
 
December 31,
2014
 
(unaudited)
 
 
ASSETS
 
 
 
Investments
 
 
 
Fixed maturities
 
 
 
Held-to-maturity, at amortized cost (fair value $291 in 2015 and $404 in 2014)
$
289

 
$
397

Available-for-sale, at fair value (amortized cost $2,733,745 in 2015 and $2,773,566 in 2014)
2,790,417

 
2,843,079

Trading securities, at fair value (amortized cost $11,880 in 2015 and $14,363 in 2014)
12,918

 
16,862

Equity securities
 
 
 
Available-for-sale, at fair value (cost $72,616 in 2015 and $71,651 in 2014)
227,689

 
245,843

Trading securities, at fair value (cost $4,373 in 2015 and $3,708 in 2014)
4,097

 
4,066

Mortgage loans
4,022

 
4,199

Policy loans
5,569

 
5,916

Other long-term investments
51,278

 
50,424

Short-term investments
175

 
175

 
3,096,454

 
3,170,961

Cash and cash equivalents
124,061

 
90,574

Accrued investment income
26,293

 
25,989

Premiums receivable (net of allowance for doubtful accounts of $789 in 2015 and $618 in 2014)
295,658

 
249,030

Deferred policy acquisition costs
158,716

 
139,719

Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $45,188 in 2015 and $41,492 in 2014)
52,882

 
49,247

Reinsurance receivables and recoverables
74,415

 
86,810

Prepaid reinsurance premiums
3,898

 
3,632

Income taxes receivable
1,928

 

Goodwill and intangible assets
25,701

 
26,278

Other assets
16,010

 
14,449

TOTAL ASSETS
$
3,876,016

 
$
3,856,689

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Future policy benefits and losses, claims and loss settlement expenses
 
 
 
Property and casualty insurance
$
1,005,997

 
$
969,437

Life insurance
1,375,029

 
1,447,764

Unearned premiums
428,822

 
378,725

Accrued expenses and other liabilities
207,788

 
212,577

Income taxes payable

 
5,012

Deferred income taxes
12,920

 
25,759

TOTAL LIABILITIES
$
3,030,556

 
$
3,039,274

Stockholders’ Equity
 
 
 
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,064,339 and 25,019,415 shares issued and outstanding in 2015 and 2014, respectively
$
25

 
$
25

Additional paid-in capital
204,274

 
202,676

Retained earnings
565,748

 
523,541

Accumulated other comprehensive income, net of tax
75,413

 
91,173

TOTAL STOCKHOLDERS’ EQUITY
$
845,460

 
$
817,415

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
3,876,016

 
$
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 September 30,
 
Nine Months Ended September 30,
(In Thousands, Except Share Data)
2015
 
2014
 
2015
 
2014
Revenues
 
 
 
 
 
 
 
Net premiums earned
$
239,421

 
$
212,021

 
$
681,817

 
$
607,189

Investment income, net of investment expenses
24,050

 
22,837

 
74,205

 
77,202

Net realized investment gains (includes reclassifications for net unrealized investment gains on available-for-sale securities of $1,825 and $4,715 in 2015 and $985 and $4,073 in 2014; previously included in accumulated other comprehensive income (loss))
966

 
894

 
2,622

 
5,796

Other income
123

 
113

 
318

 
1,255

Total revenues
$
264,560

 
$
235,865

 
$
758,962

 
$
691,442

Benefits, Losses and Expenses
 
 
 
 
 
 
 
Losses and loss settlement expenses
$
144,526

 
$
154,346

 
$
421,297

 
$
422,299

Increase in liability for future policy benefits
12,784

 
10,552

 
32,503

 
26,450

Amortization of deferred policy acquisition costs
48,697

 
44,644

 
135,526

 
124,374

Other underwriting expenses (includes reclassifications for employee benefit costs of $1,867 and $5,601 in 2015 and $768 and $2,304 in 2014; previously included in accumulated other comprehensive income (loss))
26,161

 
21,665

 
73,241

 
68,869

Interest on policyholders’ accounts
5,568

 
7,503

 
18,207

 
23,342

Total benefits, losses and expenses
$
237,736

 
$
238,710

 
$
680,774

 
$
665,334

Income (loss) before income taxes
$
26,824

 
$
(2,845
)
 
$
78,188

 
$
26,108

Federal income tax expense (benefit) (includes reclassifications of $15 and $310 in 2015 and ($76) and ($619) in 2014; previously included in accumulated other comprehensive income (loss))
7,290

 
(3,170
)
 
19,957

 
1,767

Net income
$
19,534

 
$
325

 
$
58,231

 
$
24,341

Other comprehensive income (loss)
 
 
 
 
 
 
 
Change in net unrealized appreciation on investments
$
(2,008
)
 
$
(12,410
)
 
$
(25,131
)
 
$
38,767

Change in liability for underfunded employee benefit plans

 

 

 

Other comprehensive income (loss), before tax and reclassification adjustments
$
(2,008
)
 
$
(12,410
)
 
$
(25,131
)
 
$
38,767

Income tax effect
703

 
4,344

 
8,795

 
(13,569
)
Other comprehensive income (loss), after tax, before reclassification adjustments
$
(1,305
)
 
$
(8,066
)
 
$
(16,336
)
 
$
25,198

Reclassification adjustment for net realized investment gains included in income
$
(1,825
)
 
$
(985
)
 
$
(4,715
)
 
$
(4,073
)
Reclassification adjustment for employee benefit costs included in expense
1,867

 
768

 
5,601

 
2,304

Total reclassification adjustments, before tax
$
42

 
$
(217
)
 
$
886

 
$
(1,769
)
Income tax effect
(15
)
 
76

 
(310
)
 
619

Total reclassification adjustments, after tax
$
27

 
$
(141
)
 
$
576

 
$
(1,150
)
Comprehensive income (loss)
$
18,256

 
$
(7,882
)
 
$
42,471

 
$
48,389

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
25,067,080

 
25,188,381

 
25,027,382

 
25,295,842

Basic earnings per common share
$
0.78

 
$
0.01

 
$
2.33

 
$
0.96

Diluted earnings per common share
0.77

 
0.01

 
2.31

 
0.95

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)
Nine Months Ended September 30, 2015
 
 
Common stock
 
Balance, beginning of year
$
25

Shares repurchased (79,396 shares)

Shares issued for stock-based awards (113,498 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
1,342

Shares repurchased
(2,423
)
Shares issued for stock-based awards
2,679

Balance, end of period
$
204,274

 
 
Retained earnings
 
Balance, beginning of year
$
523,541

Net income
58,231

Dividends on common stock ($0.64 per share)
(16,024
)
Balance, end of period
$
565,748

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

Change in net unrealized investment appreciation(1)
(19,400
)
Change in liability for underfunded employee benefit plans(2)
3,640

Balance, end of period
$
75,413

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

Net income
58,231

All other changes in stockholders’ equity accounts
(30,186
)
Balance, end of period
$
845,460

(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)

Nine Months Ended September 30,
(In Thousands)
2015
 
2014
Cash Flows From Operating Activities
 
 
 
Net income
$
58,231

 
$
24,341

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Net accretion of bond premium
10,534

 
10,985

Depreciation and amortization
7,706

 
5,449

Stock-based compensation expense
1,817

 
1,445

Net realized investment gains
(2,622
)
 
(5,796
)
Net cash flows from trading investments
2,663

 
(6,933
)
Deferred income tax benefit
(3,854
)
 
(2,639
)
Changes in:
 
 
 
Accrued investment income
(304
)
 
398

Premiums receivable
(46,628
)
 
(39,945
)
Deferred policy acquisition costs
(16,884
)
 
(10,219
)
Reinsurance receivables
12,395

 
3,384

Prepaid reinsurance premiums
(266
)
 
(552
)
Income taxes receivable
(1,928
)
 
(3,173
)
Other assets
(1,561
)
 
482

Future policy benefits and losses, claims and loss settlement expenses
60,932

 
70,994

Unearned premiums
50,097

 
49,974

Accrued expenses and other liabilities
811

 
(9,153
)
Income taxes payable
(5,012
)
 

Deferred income taxes
(499
)
 
(1,330
)
Other, net
(1,221
)
 
(368
)
Total adjustments
$
66,176

 
$
63,003

Net cash provided by operating activities
$
124,407

 
$
87,344

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

 
$
3,091

Proceeds from call and maturity of held-to-maturity investments
108

 
243

Proceeds from call and maturity of available-for-sale investments
527,365

 
390,967

Proceeds from short-term and other investments
4,221

 
2,370

Purchase of available-for-sale investments
(502,086
)
 
(432,112
)
Purchase of short-term and other investments
(4,643
)
 
(2,803
)
Net purchases and sales of property and equipment
(10,763
)
 
(5,692
)
Net cash provided by (used in) investing activities
$
22,430

 
$
(43,936
)
Cash Flows From Financing Activities
 
 
 
Policyholders’ account balances
 
 
 
Deposits to investment and universal life contracts
$
78,733

 
$
131,134

Withdrawals from investment and universal life contracts
(175,840
)
 
(170,570
)
Payment of cash dividends
(16,024
)
 
(14,672
)
Repurchase of common stock
(2,423
)
 
(11,249
)
Issuance of common stock
2,679

 
1,782

Tax impact from issuance of common stock
(475
)
 
(94
)
Net cash used in financing activities
$
(113,350
)
 
$
(63,669
)
Net Change in Cash and Cash Equivalents
$
33,487

 
$
(20,261
)
Cash and Cash Equivalents at Beginning of Period
90,574

 
92,193

Cash and Cash Equivalents at End of Period
$
124,061

 
$
71,932

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 45 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 September 30, 2015 and for the three- and nine-month periods ended September 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 nine-month periods ended September 30, 2015 and 2014, we made payments for income taxes totaling $31,724 and $9,619, respectively. We did not receive a tax refund during the nine-month period ended September 30, 2015. We received a tax refund of $615 during the nine-month period ended September 30, 2014.


6


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

 
$
66,858

 
$
139,719

Underwriting costs deferred
147,980

 
4,430

 
152,410

Amortization of deferred policy acquisition costs
(130,305
)
 
(5,221
)
 
(135,526
)
Ending unamortized deferred policy acquisition costs
$
90,536

 
$
66,067

 
$
156,603

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

 
2,113

 
2,113

Recorded asset at September 30, 2015
$
90,536

 
$
68,180

 
$
158,716


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, Inc. 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 DAC amortization of $994 and an increase to the DAC asset of $3,586 for the nine-month period ended September 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 $11,270 and $13,383 at September 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 $19,957 and $1,767 for the nine-month periods ended September 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 September 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. The Company concluded there are no material subsequent events or transactions that have occurred after the balance sheet date through the date on which the financial statements were issued.
Recently Issued Accounting Standards
Accounting Standards Adopted in 2015

Troubled Debt Restructuring

In August 2014, the Financial Accounting Standards Board ("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.




8


Pending Adoption of Accounting Standards
Short Duration Contracts

In May 2015, the FASB issued guidance on disclosure requirements for short-duration contracts. The new guidance requires additional disclosures about the liability for unpaid loss and loss 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 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.

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


9


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, 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 September 30, 2015 and December 31, 2014, is as follows:
September 30, 2015
 
Type of Investment
Cost or Amortized Cost
 
Gross Unrealized Appreciation
 
Gross Unrealized Depreciation
 
Fair Value
HELD-TO-MATURITY
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
Corporate bonds - financial services
$
200

 
$

 
$

 
$
200

Mortgage-backed securities
89

 
2

 

 
91

Total Held-to-Maturity Fixed Maturities
$
289

 
$
2

 
$

 
$
291

AVAILABLE-FOR-SALE

 

 

 

Fixed maturities:

 

 

 

Bonds

 

 

 

U.S. Treasury
$
21,654

 
$
270

 
$
2

 
$
21,922

U.S. government agency
235,045

 
3,410

 
1,208

 
237,247

States, municipalities and political subdivisions
 
 
 
 
 
 
 
General obligations:
 
 
 
 
 
 
 
Midwest
165,797

 
5,107

 
94

 
170,810

Northeast
56,812

 
1,674

 
19

 
58,467

South
124,580

 
3,328

 
370

 
127,538

West
98,780

 
2,775

 
259

 
101,296

Special revenue:
 
 
 
 
 
 
 
Midwest
148,385

 
4,544

 
166

 
152,763



10


Northeast
21,197

 
742

 
153

 
21,786

South
103,539

 
3,814

 
112

 
107,241

West
74,463

 
2,852

 
24

 
77,291

Foreign bonds
89,473

 
3,343

 
1,628

 
91,188

Public utilities
201,218

 
5,661

 
688

 
206,191

Corporate bonds

 

 

 

Energy
113,692

 
2,056

 
1,391

 
114,357

Industrials
226,222

 
5,379

 
4,397

 
227,204

Consumer goods and services
179,716

 
4,315

 
651

 
183,380

Health care
96,149

 
2,697

 
590

 
98,256

Technology, media and telecommunications
145,531

 
2,560

 
1,348

 
146,743

Financial services
249,063

 
7,531

 
633

 
255,961

Mortgage-backed securities
14,102

 
438

 
25

 
14,515

Collateralized mortgage obligations
362,732

 
10,064

 
2,180

 
370,616

Asset-backed securities
5,595

 
219

 
169

 
5,645

Total Available-for-Sale Fixed Maturities
$
2,733,745

 
$
72,779

 
$
16,107

 
$
2,790,417

Equity securities:

 

 

 

Common stocks

 

 

 

Public utilities
$
7,231

 
$
11,430

 
$
163

 
$
18,498

Energy
6,103

 
5,428

 
159

 
11,372

Industrials
13,252

 
28,415

 
250

 
41,417

Consumer goods and services
10,315

 
11,474

 
5

 
21,784

Health care
7,763

 
17,932

 

 
25,695

Technology, media and telecommunications
6,151

 
6,673

 
85

 
12,739

Financial services
17,433

 
74,451

 
131

 
91,753

Nonredeemable preferred stocks
4,368

 
65

 
2

 
4,431

Total Available-for-Sale Equity Securities
$
72,616

 
$
155,868

 
$
795

 
$
227,689

Total Available-for-Sale Securities
$
2,806,361

 
$
228,647

 
$
16,902

 
$
3,018,106



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 September 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
September 30, 2015
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$

 
$

 
$
129,230

 
$
130,254

 
$
1,181

 
$
1,659

Due after one year through five years
200

 
200

 
789,739

 
820,780

 
6,865

 
6,955

Due after five years through 10 years

 

 
988,569

 
998,254

 
1,610

 
1,818

Due after 10 years

 

 
443,778

 
450,353

 
2,224

 
2,486

Asset-backed securities

 

 
5,595

 
5,645

 

 

Mortgage-backed securities
89

 
91

 
14,102

 
14,515

 

 

Collateralized mortgage obligations

 

 
362,732

 
370,616

 

 

 
$
289

 
$
291

 
$
2,733,745

 
$
2,790,417

 
$
11,880

 
$
12,918













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 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net realized investment gains (losses)
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale
$
407

 
$
984

 
$
2,363

 
$
2,336

Trading securities
 
 
 
 
 
 
 
Change in fair value
(999
)
 
(253
)
 
(1,461
)
 
695

Sales
531

 
181

 
1,230

 
701

Equity securities:
 
 
 
 
 
 
 
Available-for-sale
1,418

 

 
2,352

 
1,736

Trading securities
 
 
 
 
 
 
 
Change in fair value
(430
)
 
(17
)
 
(634
)
 
329

Sales
39

 
(1
)
 
85

 
(1
)
Other long-term investments

 

 
(1,313
)
 

Total net realized investment gains
$
966

 
$
894

 
$
2,622

 
$
5,796

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

 
$
3,081

 
$
8,228

 
$
3,091

Gross realized gains

 
900

 
1,030

 
900

Gross realized losses

 

 

 
(56
)
There were no sales of held-to-maturity securities during the three- and nine-month periods ended September 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 $17,015 and $20,928 at September 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 $8,450 at September 30, 2015.








14


Unrealized Appreciation
A summary of the changes in net unrealized investment appreciation during the reporting period is as follows:
 
Nine Months Ended September 30,
 
2015
 
2014
Change in net unrealized investment appreciation
 
 
 
Available-for-sale fixed maturities
$
(12,841
)
 
$
44,586

Available-for-sale equity securities
(19,119
)
 
3,872

Deferred policy acquisition costs
2,113

 
(13,764
)
Income tax effect
10,447

 
(12,143
)
Total change in net unrealized investment appreciation, net of tax
$
(19,400
)
 
$
22,551

We continually monitor the difference between our cost basis and the estimated fair value of our investments. Our accounting policy for impairment recognition requires other-than-temporary impairment ("OTTI") charges to be recorded when we determine that it is more likely than not that we will be unable to collect all amounts due according to the contractual terms of the fixed maturity security or that the anticipated recovery in fair value of the equity security will not occur in a reasonable amount of time. Impairment charges on investments are recorded based on the fair value of the investments at the measurement date. Factors considered in evaluating whether a decline in value is other-than-temporary include: the length of time and the extent to which fair value has been less than cost; the financial condition and near-term prospects of the issuer; our intention to hold the investment; and the likelihood that we will be required to sell the investment.
The tables on the following pages summarize our fixed maturity and equity securities that were in an unrealized loss position at September 30, 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 September 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 September 30, 2015 or at September 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 September 30, 2015. Our largest unrealized loss greater than 12 months on an individual equity security at September 30, 2015 was $163. 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


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 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

 
$
1,652

 
$
2

 
$
1,652

 
$
2

U.S. government agency
26

 
70,261

 
814

 
7

 
22,056

 
394

 
92,317

 
1,208

States, municipalities and political subdivisions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Midwest
11

 
11,332

 
94

 

 

 

 
11,332

 
94

Northeast
7

 
6,031

 
19

 

 

 

 
6,031

 
19

South
11

 
14,767

 
188

 
12

 
6,549

 
182

 
21,316

 
370

West
13

 
19,733

 
259

 

 

 

 
19,733

 
259

Special revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Midwest
17

 
20,088

 
122

 
1

 
2,483

 
44

 
22,571

 
166

Northeast
1

 
4,814

 
153

 

 

 

 
4,814

 
153

South
8

 
12,527

 
84

 
2

 
1,828

 
28

 
14,355

 
112

West
8

 
8,447

 
24

 

 

 

 
8,447

 
24

Foreign bonds
9

 
15,153

 
1,628

 

 

 

 
15,153

 
1,628

Public utilities
13

 
28,383

 
376

 
5

 
2,926

 
312

 
31,309

 
688

Corporate bonds
 
 
 
 
 
 
 
 
 
 
 
 


 


Energy
7

 
14,922

 
884

 
3

 
6,876

 
507

 
21,798

 
1,391

Industrials
20

 
35,955

 
1,282

 
3

 
7,878

 
3,115

 
43,833

 
4,397

Consumer goods and services
17

 
46,527

 
647

 
4

 
2,502

 
4

 
49,029

 
651

Health care
13

 
31,567

 
505

 
2

 
3,806

 
85

 
35,373

 
590

Technology, media and telecommunications
19

 
53,402

 
850

 
2

 
8,987

 
498

 
62,389

 
1,348

Financial services
21

 
42,848

 
633

 

 

 

 
42,848

 
633

Mortgage-backed securities
2

 
1,503

 
15

 
4

 
198

 
10

 
1,701

 
25

Collateralized mortgage obligations
23

 
35,007

 
472

 
31

 
73,973

 
1,708

 
108,980

 
2,180

Asset-backed securities
1

 
2,598

 
169

 

 

 

 
2,598

 
169

Total Available-for-Sale Fixed Maturities
247

 
$
475,865

 
$
9,218

 
78

 
$
141,714

 
$
6,889

 
$
617,579

 
$
16,107

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Public utilities

 
$

 
$

 
3

 
$
145

 
$
163

 
$
145

 
$
163

Energy
8

 
1,934

 
159

 

 

 

 
1,934

 
159

Industrials
5

 
301

 
11

 
4

 
219

 
239

 
520

 
250

Consumer goods and services

 

 

 
2

 
13

 
5

 
13

 
5

Technology, media and telecommunications
10

 
478

 
71

 
2

 
12

 
14

 
490

 
85

Financial services
6

 
311

 
67

 
1

 
172

 
64

 
483

 
131

Nonredeemable preferred stocks
1

 
351

 
2

 

 

 

 
351

 
2

Total Available-for-Sale Equity Securities
30

 
$
3,375

 
$
310

 
12

 
$
561

 
$
485

 
$
3,936

 
$
795

Total Available-for-Sale Securities
277

 
$
479,240

 
$
9,528

 
90

 
$
142,275

 
$
7,374

 
$
621,515

 
$
16,902



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

 
10,219