10-K 1 ufcs-20161231x10k.htm 10-K Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 FORM 10-K
☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2016
OR
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______
Commission File Number 001-34257
UNITED FIRE GROUP, INC.
(Exact name of registrant as specified in its charter)
Iowa
 
45-2302834
(State or other jurisdiction of incorporation or organization)
 
(I.R.S Employer Identification No.)
118 Second Avenue SE
Cedar Rapids, Iowa 52401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319) 399-5700
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.001 par value
 
The NASDAQ Global Select Market
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☒ NO ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO ☒
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 ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 ☒ NO ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
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.
Large accelerated filer ☒
 
Accelerated filer ☐
 
Non-accelerated filer ☐
 
Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐ NO ☒
The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2016 was approximately $1.0 billion. For purposes of this calculation, all directors and executive officers of the registrant are considered affiliates. As of February 24, 2017, 25,459,017 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference certain information from the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, for its annual shareholder meeting to be held on May 17, 2017.


FORM 10-K TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Exhibit 12
 Exhibit 21
 Exhibit 23.1
 Exhibit 23.2
 Exhibit 23.3
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2


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" 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 and reputation 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.


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PART I.
ITEM 1. BUSINESS
GENERAL DESCRIPTION
United Fire Group, Inc. ("UFG", "United Fire", the "Registrant", the "Company", "we", "us", or "our") and its consolidated subsidiaries and affiliates are engaged in the business of writing property and casualty insurance and life insurance and selling annuities through a network of independent agencies. Our insurance company subsidiaries are currently licensed as a property and casualty insurer in 46 states, plus the District of Columbia and as a life insurer in 37 states. United Fire & Casualty Company was incorporated in Iowa in January 1946. Our principal executive office is located at 118 Second Avenue SE, Cedar Rapids, Iowa 52401; telephone: 319-399-5700.
United Fire Group, Inc. owns 100 percent of one subsidiary, United Fire & Casualty Company. United Fire & Casualty Company owns 100 percent of eight subsidiaries: (1) United Life Insurance Company; (2) Addison Insurance Company; (3) Lafayette Insurance Company; (4) United Fire & Indemnity Company; (5) Mercer Insurance Company; (6) Financial Pacific Insurance Company; (7) UFG Specialty Insurance Company; and (8) United Real Estate Holdings Company, LLC. Mercer Insurance Company owns 100 percent of two subsidiaries: (1) Franklin Insurance Company; and (2) Mercer Insurance Company of New Jersey, Inc. United Fire Lloyds is an affiliate of United Fire & Indemnity Company.
In 2015, the Company dissolved three of its holding companies in order to flatten our organizational chart. The companies dissolved were American Indemnity Financial Corporation, Mercer Insurance Group, Inc. and Financial Pacific Insurance Group, Inc. In addition, Texas General Indemnity Company was renamed to UFG Specialty Insurance Company on July 1, 2015.
Holding Company Reorganization
On February 1, 2012, we completed a holding company reorganization (the "Reorganization") of United Fire Group, Inc., United Fire & Casualty Company, and UFC MergeCo, Inc., an Iowa corporation formed for the purpose of facilitating the Reorganization. The Reorganization agreement was approved and adopted by United Fire & Casualty Company shareholders at a special meeting of shareholders held on January 24, 2012.
The Reorganization agreement provided for the merger of United Fire & Casualty Company with UFC MergeCo, Inc., with United Fire & Casualty Company surviving the merger as a wholly owned subsidiary of United Fire Group, Inc. Each share of common stock, par value $3.33 1/3 per share, of United Fire & Casualty Company issued and outstanding immediately prior to the effective time of the merger, converted into one duly issued, fully paid and nonassessable share of common stock, par value $0.001 per share, of United Fire Group, Inc. In addition, each outstanding option to purchase or right to acquire shares of United Fire & Casualty Company common stock was automatically converted into an option to purchase or right to acquire, upon the same terms and conditions, an identical number of shares of United Fire Group, Inc. common stock.
Upon completion of the Reorganization, United Fire Group, Inc., an Iowa corporation, replaced United Fire & Casualty Company, an Iowa corporation, as the publicly held corporation, and the holders of United Fire & Casualty Company common stock then held the same number of shares at the same ownership percentage of United Fire Group, Inc. as they held of United Fire & Casualty Company immediately prior to the Reorganization. On February 2, 2012, shares of United Fire Group, Inc. common stock commenced trading on the NASDAQ Global Select Market under the ticker symbol "UFCS."
Employees
As of December 31, 2016, we employed 1,091 full-time employees and 21 part-time employees. We are not a party to any collective bargaining agreement.
Reportable Segments
We report our operations in two business segments: property and casualty insurance and life insurance. Our property and casualty insurance segment is comprised of commercial lines insurance, including surety bonds, personal lines insurance and assumed reinsurance. Our life insurance segment is comprised of deferred and immediate fixed annuities, universal life insurance products and traditional life insurance products. A table reflecting revenues, net


2

income and assets attributable to our operating segments is included in Part II, Item 8, Note 10 "Segment Information." All intercompany transactions have been eliminated in consolidation.
All of our property and casualty insurance subsidiaries and our affiliate belong to an intercompany reinsurance pooling arrangement. On July 1, 2015, UFG Specialty Insurance Company entered the pooling arrangement. Pooling arrangements permit the participating companies to rely on the capacity of the entire pool's capital and surplus, rather than being limited to policy exposures of a size commensurate with each participant's own surplus level. Under such arrangements, the members share substantially all of the insurance business that is written and allocate the combined premiums, losses and expenses based on percentages defined in the arrangement.
Our life insurance segment consists solely of the operations of United Life Insurance Company.
Available Information
We provide free and timely access to all our reports filed with the SEC in the Investor Relations section of our website at www.unitedfiregroup.com. Under the "Investor Relations" tab, select "Financial Information" and then, under the "Investor Relations" tab, select "SEC Filings" to view the list of our SEC filings, which includes annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, beneficial ownership reports on Forms 3, 4 and 5 and amendments to reports filed or furnished pursuant to Section 13(a), 15(d) or 16(a) of the Exchange Act. Such reports are made available as soon as reasonably practicable after they are filed with or furnished to the SEC.
Our Code of Ethics and Business Conduct is also available at www.unitedfiregroup.com in the Investor Relations section. To view it, under the "Investor Relations" tab, select "Corporate Governance" and then "Code of Ethics and Business Conduct."
Free paper copies of any materials that we file with or furnish to the SEC can also be obtained by writing to Investor Relations, United Fire Group, Inc., 118 Second Avenue SE, Cedar Rapids, Iowa 52401.
MARKETING AND DISTRIBUTION
We market our products through our home office in Cedar Rapids, Iowa, and five regional offices: (1) Westminster, Colorado, a suburb of Denver; (2) Webster, Texas, a suburb of Houston; (3) Pennington, New Jersey; (4) Los Angeles, California; and (5) Rocklin, California. We are represented through approximately 1,200 independent property and casualty agencies and by approximately 1,350 independent life agencies.
Property and Casualty Insurance Segment
In 2016, 2015 and 2014 the direct statutory premiums written by our property and casualty insurance operations were distributed as follows:
 
Years Ended December 31,
% of Total
(In Thousands)
2016
2015
2014
2016
2015
2014
Texas
$
156,926

$
142,485

$
122,559

15.6
%
15.4
%
14.6
%
California
117,669

109,420

92,754

11.7

11.8

11.1

Iowa
105,948

99,949

97,790

10.5

10.8

11.7

Missouri
58,964

53,867

50,704

5.9

5.8

6.0

New Jersey
52,232

50,979

51,436

5.2

5.5

6.1

Minnesota
51,033

44,993

39,844

5.1

4.9

4.8

Colorado
47,678

45,805

40,291

4.7

4.9

4.8

Illinois
43,666

43,381

41,760

4.3

4.7

5.0

Louisiana
38,219

36,594

36,733

3.8

3.9

4.4

All Other States
333,788

299,027

264,712

33.2

32.3

31.5

Direct Statutory Premiums Written
$
1,006,123

$
926,500

$
838,583

100.0
%
100.0
%
100.0
%
We staff our regional offices with underwriting, claims and marketing representatives and administrative technicians, all of whom provide support and assistance to the independent agencies. Also, home office staff


3

technicians and specialists provide support to our subsidiaries, regional offices and independent agencies. We use management reports to monitor subsidiary and regional offices for overall results and conformity to our business policies.
Competition
The property and casualty insurance industry is highly competitive. We compete with numerous property and casualty insurance companies in the regional and national market, many of which are substantially larger and have considerably greater financial and other resources. Except for regulatory considerations, there are limited barriers to entry into the insurance industry. Our competitors may be domestic or foreign, as well as licensed or unlicensed. The exact number of competitors within the industry is not known. Insurers compete on the basis of reliability, financial strength and stability, ratings, underwriting consistency, service, business ethics, price, performance, capacity, policy terms and coverage conditions.
In addition, because our products are marketed exclusively through independent insurance agencies, most of which represent more than one company, we face competition within each agency and competition to retain qualified independent agents. Our competitors include companies that market their products through agents, as well as companies that sell insurance directly to their customers.
Because we rely solely on independent agencies, we offer a competitive commissions program and a rewarding profit-sharing plan as incentives for agents to place high-quality property and casualty insurance business with us. Property and casualty insurance agencies will receive profit-sharing payments of $16.1 million in 2017, based on profitable business produced by the agencies in 2016. In 2016 for 2015 business, agencies received $21.2 million in profit-sharing payments and in 2015 for 2014 business, agencies received $17.6 million in payments.
Our competitive advantages include our commitment to:
•
Strong agency relationships —
◦
A stable workforce, with an average duration of employment of approximately 10.2 years, allows our agents to work with the same, highly-experienced personnel each day.
◦
Our organization is relatively flat, allowing our agents to be close to the highest levels of management and ensuring that our agents will receive answers quickly to their questions.
•
Exceptional service — our agents and policyholders always have the option to speak with a real person.
•
Fair and prompt claims handling — we view claims as an opportunity to prove to our customers that they have chosen the right insurance company.
•
Disciplined underwriting — we empower our underwriters with the knowledge and tools needed to make good decisions for the Company.
•
Superior loss control services — our loss control representatives make multiple visits to businesses and job sites each year to ensure safety.
•
Effective and efficient use of technology — we use technology to provide enhanced service to our agents and policyholders, not to replace our personal relationships, but to reinforce them.


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Life Insurance Segment
Our life insurance subsidiary markets its products primarily in the Midwest, East Coast and West. In 2016, 2015 and 2014 the direct statutory premiums written by our life insurance operations were distributed as follows:
 
Years Ended December 31,
% of Total
(In Thousands)
2016
2015
2014
2016
2015
2014
Iowa
$
41,559

$
47,616

$
69,543

30.1
%
32.6
%
34.4
%
Minnesota
14,289

13,269

20,325

10.3

9.1

10.1

Wisconsin
12,578

12,513

22,411

9.1

8.6

11.1

Illinois
12,481

16,128

19,428

9.0

11.0

9.6

Nebraska
10,351

9,334

11,382

7.5

6.4

5.6

All Other States
47,014

47,236

58,887

34.0

32.3

29.2

Direct Statutory Premiums Written
$
138,272

$
146,096

$
201,976

100.0
%
100.0
%
100.0
%

Competition
We encounter significant competition in all lines of our life and fixed annuity business from other life insurance companies and other providers of financial services. Since our products are marketed exclusively through independent life insurance agencies that typically represent more than one company, we face competition within our agencies. Competitors include companies that market their products through agents, as well as companies that sell directly to their customers. The exact number of competitors within the industry is not known.
To attract and maintain relationships with our independent life insurance agencies, we offer competitive commission rates and other sales incentives. Our life insurance segment achieves a competitive advantage by offering products that are simple and straightforward, by providing outstanding customer service, by being accessible to our agents and customers, and by using technology in a variety of ways to assist our agents and improve the delivery of service to our policyholders.
OPERATING SEGMENTS
Information specific to the reportable business segments in our operations, including products, pricing and seasonality of premiums written is incorporated by reference from Note 10 "Segment Information" contained in Part II, Item 8, "Financial Statements and Supplementary Data." Additionally, for a detailed discussion of our operating results by segment, refer to the "Consolidated Results of Operations" section in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
REINSURANCE
Incorporated by reference from Note 4 "Reinsurance" contained in Part II, Item 8, "Financial Statements and Supplementary Data."
RESERVES
Property and Casualty Insurance Segment
Property insurance indemnifies an insured with an interest in physical property for loss of, or damage to, such property or the loss of its income-producing abilities. Casualty insurance primarily covers liability for damage to property of, or injury to, a person or entity other than the insured. In most cases, casualty insurance also obligates the insurance company to provide a defense for the insured in litigation, arising out of events covered by the policy.
Liabilities for loss and loss settlement expenses reflect management's best estimates at a given point in time of what we expect to pay for claims that have been reported and those that have been incurred but not reported ("IBNR"), based on known facts, circumstances, and historical trends.
The determination of reserves (particularly those relating to liability lines of insurance that have relatively longer lag in claim reporting) requires significant work to reasonably project expected future claim reporting and payment patterns. If, during the course of our regular monitoring of reserves, we determine that coverages previously written


5

are incurring higher than expected losses, we will take action that may include, among other things, increasing the related reserves. Any adjustments we make to reserves are reflected in operating results in the year in which we make those adjustments. We engage an independent actuary, Regnier Consulting Group, Inc. ("Regnier"), to render an opinion as to the reasonableness of our statutory reserves annually. The actuarial opinion is filed in those states where we are licensed.
On a quarterly basis, United Fire's internal actuary performs a detailed actuarial review of IBNR reserves. This review includes a comparison of results from the most recent analysis of reserves completed by both our internal and external actuaries. Senior management meets with our internal actuary to review, on a quarterly basis, the adequacy of carried reserves based on results from this actuarial analysis. There are two fundamental types or sources of IBNR reserves. We record IBNR reserves for "normal" types of claims and also specific IBNR reserves related to unique circumstances or events. A major hurricane is an example of an event that might necessitate establishing specific IBNR reserves because an analysis of existing historical data would not provide an appropriate estimate.
We do not discount loss reserves based on the time value of money. 
For a more detailed discussion of our loss reserves, refer to the "Critical Accounting Policies" section in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 5 "Reserves for Losses and Loss Settlement Expenses" contained in Part II, Item 8, "Financial Statements and Supplementary Data."
Life Insurance Segment
We calculate the policy reserves reported in our Consolidated Financial Statements in accordance with GAAP. For our fixed annuities and universal life policies, we establish a benefit reserve at the time of policy issuance in an amount equal to the deposits received. Subsequently, we adjust the benefit reserve for any additional deposits, interest credited and partial or complete withdrawals, as well as insurance and other expense charges. We base policy reserves for other life products on the projected contractual benefits and expenses and interest rates appropriate to those products. We base reserves for accident and health products, which are a minor portion of our reserves, on appropriate morbidity tables.
We determine reserves for statutory purposes based upon mortality rates and interest rates specified by Iowa state law. Our life insurance subsidiary's reserves meet or exceed the minimum statutory requirements. Griffith, Ballard & Company, an independent actuary, assists us in developing and analyzing our reserves on both a GAAP and statutory basis.
For further discussion of our life insurance segment's reserves, refer to the "Critical Accounting Policies" section in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
INVESTMENTS
Incorporated by reference from Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the headings "Investments," "Market Risk" and "Critical Accounting Policies"; and Note 1 "Significant Accounting Policies" under the headings "Investments," Note 2 "Summary of Investments," and Note 3 "Fair Value of Financial Instruments," contained in Part II, Item 8, "Financial Statements and Supplementary Data."
REGULATION
The insurance industry is subject to comprehensive and detailed regulation and supervision. Each jurisdiction in which we operate has established supervisory agencies with broad administrative powers. While we are not aware of any currently proposed or recently enacted state or federal regulation that would have a material impact on our operations, we cannot predict the effect that future regulatory changes might have on us.
State Regulation
We are subject to extensive regulation, primarily at the state level. The method, extent and substance of such regulation varies by state, but generally has its source in National Association of Insurance Commissioners ("NAIC") model laws and regulations that establish standards and requirements for conducting the business of insurance and that delegate regulatory authority to a state regulatory agency. Moreover, the NAIC Accreditation


6

Program requires state regulatory agencies to meet baseline standards of solvency regulation, particularly with respect to regulation of multi-state insurers. In general, such regulation is intended for the protection of those who purchase or use our insurance products, and not our shareholders. These rules have a substantial effect on our business and relate to a wide variety of matters including: insurance company licensing and examination; the licensing of insurance agents and adjusters; price setting or premium rates; trade practices; approval of policy forms; claims practices; restrictions on transactions between our subsidiaries and their affiliates, including the payment of dividends; investments; underwriting standards; advertising and marketing practices; capital adequacy; and the collection, remittance and reporting of certain taxes, licenses and fees.
The state laws and regulations that have the most significant effect on our insurance operations and financial reporting are discussed below.
Insurance Holding Company Regulation
We are regulated as an insurance holding company system in the states of domicile of our property and casualty insurance companies and life insurance subsidiary: Iowa (United Fire & Casualty Company, United Life Insurance Company, UFG Specialty Insurance Company and Addison Insurance Company), California (Financial Pacific Insurance Company), Louisiana (Lafayette Insurance Company), New Jersey (Mercer Insurance Company of New Jersey, Inc.), Pennsylvania (Mercer Insurance Company and Franklin Insurance Company) and Texas (United Fire & Indemnity Company and United Fire Lloyds). These regulations require that we annually furnish financial and other information about the operations of the individual companies within our holding company system. Generally, the insurance laws of these states provide that notice to the state insurance commissioner is required before finalizing any transaction affecting the ownership or control of an insurer and before finalizing certain material transactions between an insurer and any person or entity within its holding company system. In addition, some of those transactions cannot be finalized without the commissioner's prior approval.
Most states have now adopted the version of the Model Insurance Holding Company System Regulation Act and Regulation as amended by the NAIC in December 2010 (the "Amended Model Act") to introduce the concept of "enterprise risk" within an insurance company holding system. Enterprise risk is defined as any activity, circumstance, event or series of events involving one or more affiliates of an insurer that, if not remedied promptly, is likely to have a material adverse effect upon the financial condition or the liquidity of the insurer or its insurance holding company system as a whole. The Amended Model Act imposes more extensive informational requirements on us, including requiring us to prepare an annual enterprise risk report that identifies the material risks within our insurance company holding system that could pose enterprise risk to our licensed insurers. Compliance with new reporting requirements under the Amended Model Act began for us in 2014 for the 2013 fiscal year.
Restrictions on Shareholder Dividends
As an insurance holding company with no independent operations or source of revenue, our capacity to pay dividends to our shareholders is based on the ability of our insurance company subsidiaries to pay dividends to us. The ability of our subsidiaries to pay dividends to us is regulated by the laws of their state of domicile. Under these laws, insurance companies must provide advance informational notice to the domicile state insurance regulatory authority prior to payment of any dividend or distribution to its shareholders. Prior approval from the state insurance regulatory authority must be obtained before payment of an "extraordinary dividend" as defined under the state's insurance code. The amount of ordinary dividends that may be paid to us is subject to certain limitations, the amounts of which change each year. In all cases, we may pay dividends only from our earned surplus. Refer to the "Market Information" section of Part II, Item 5, "Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities," and Note 6 "Statutory Reporting, Capital Requirements and Dividends and Retained Earnings Restrictions," contained in Part II, Item 8, "Financial Statements and Supplementary Data" for additional information about the dividends we paid during 2016.
Price Regulation
Nearly all states have insurance laws requiring us to file rate schedules, policy or coverage forms, and other information with the state's regulatory authority. In certain states, rate schedules, policy forms, or both, must be approved prior to use. While insurance laws vary from state to state, their objectives are generally the same: an insurance rate cannot be excessive, inadequate or unfairly discriminatory. The speed with which we can change our


7

rates in response to competition or in response to increasing costs depends, in part, on the willingness of state regulators to allow adequate rates for the business we write.
Investment Regulation
We are subject to various state regulations requiring investment portfolio diversification and limiting the concentration of investments we may maintain in certain asset categories. Failure to comply with these regulations leads to the treatment of nonconforming investments as nonadmitted assets for purposes of measuring statutory surplus. Further, in some instances, state regulations require us to sell certain nonconforming investments.
Exiting Geographic Markets; Canceling and Nonrenewing Policies
Most states regulate our ability to exit a market. For example, states limit, to varying degrees, our ability to cancel and nonrenew insurance policies. Some states prohibit us from withdrawing one or more types of insurance business from the state, except upon prior regulatory approval. Regulations that limit policy cancellation and nonrenewal may restrict our ability to exit unprofitable markets.
Insurance Guaranty Associations
Each state has insurance guaranty association laws. Membership in a state's insurance guaranty association is generally mandatory for insurers wishing to do business in that state. Under these laws, associations may assess their members for certain obligations that insolvent insurance companies have incurred with regard to their policyholders and claimants.
Typically, states assess each solvent association member with an amount related to that member's proportionate share of business written by all association members within the state. Most state guaranty associations allow solvent insurers to recoup the assessments they are charged through future rate increases, surcharges or premium tax credits. However, there is no assurance that we will ultimately recover these assessments. We cannot predict the amount and timing of any future assessments or refunds under these laws.
Shared Market and Joint Underwriting Plans
State insurance regulations often require insurers to participate in assigned risk plans, reinsurance facilities and joint underwriting associations. These are mechanisms that generally provide applicants with various types of basic insurance coverage that may not otherwise be available to them through voluntary markets. Such mechanisms are most commonly instituted for automobile and workers' compensation insurance, but many states also mandate participation in Fair Access to Insurance Requirements ("FAIR") Plans or Windstorm Plans, which provide basic property coverage. Participation is based upon the amount of a company's voluntary market share in a particular state for the classes of insurance involved. Policies written through these mechanisms may require different underwriting standards and may pose greater risk than those written through our voluntary application process.
Statutory Accounting Rules
For public reporting, insurance companies prepare financial statements in accordance with GAAP. However, state laws require us to calculate and report certain data according to statutory accounting rules as defined in the NAIC Accounting Practices and Procedures Manual. While not a substitute for any GAAP measure of performance, statutory data frequently is used by industry analysts and other recognized reporting sources to facilitate comparisons of the performance of insurance companies.
Insurance Reserves
State insurance laws require that insurance companies analyze the adequacy of their reserves annually. Our appointed actuaries must submit an opinion that our statutory reserves are adequate to meet policy claims-paying obligations and related expenses.
Financial Solvency Ratios
The NAIC annually calculates 13 financial ratios to assist state insurance regulators in monitoring the financial condition of insurance companies. A "usual range" of results for each of these ratios is used by insurance regulators as a benchmark. Departure from the usual range on four or more of the ratios could lead to inquiries from individual state insurance departments as to certain aspects of a company's business. In addition to the financial ratios, states


8

also require us to calculate a minimum capital requirement for each of our insurance companies based on individual company insurance risk factors. These "risk-based capital" results are used by state insurance regulators to identify companies that require regulatory attention or the initiation of regulatory action. At December 31, 2016, all of our insurance companies had capital in excess of the required levels.
Federal Regulation
Although the federal government and its regulatory agencies generally do not directly regulate the business of insurance, federal initiatives and legislation often have an impact on our business. These initiatives and legislation include tort reform proposals, proposals addressing natural catastrophe exposures, terrorism risk mechanisms, federal financial services reforms, various tax proposals affecting insurance companies, and possible regulatory limitations, impositions and restrictions arising from the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), and the Patient Protection and Affordable Care Act.
Various legislative and regulatory efforts to reform the tort liability system have impacted and will continue to impact our industry. Although there has been some tort reform with positive impact to the insurance industry, new causes of action and theories of damages continue to be proposed in state court actions or by federal or state legislatures that continue to expand liability for insurers and their policyholders. For example, some state legislatures have from time to time considered legislation addressing direct actions against insurers related to bad faith claims. As a result of this unpredictability in the law, insurance underwriting is expected to continue to be difficult in commercial lines, professional liability and other specialty coverages.
Dodd-Frank expanded the federal presence in insurance oversight and may increase regulatory requirements that are applicable to us. Dodd-Frank's requirements include streamlining the state-based regulation of reinsurance and non-admitted insurance (property or casualty insurance placed with insurers that are eligible to accept insurance, but are not licensed to write insurance in a particular state). Dodd-Frank also established the Federal Insurance Office within the U.S. Department of the Treasury that is authorized to, among other things, gather data and information to monitor aspects of the insurance industry, identify issues in the regulation of insurers about insurance matters, and preempt state insurance measures under certain circumstances.
Dodd-Frank also contains a number of provisions related to corporate governance and disclosure matters. In response to Dodd-Frank, the SEC has adopted or proposed rules regarding director independence, director and officer hedging activities, executive compensation clawback policies, compensation advisor independence, pay versus performance disclosures, internal pay equity disclosures, and shareholder proxy access. We continue to monitor developments under Dodd-Frank and their impact on us, insurers of similar size and the insurance industry as a whole.
The Patient Protection and Affordable Care Act and the related amendments in the Health Care and Education Reconciliation Act may increase our operating costs and underwriting losses. This landmark legislation continues to result in numerous changes within the health care industry that could create additional operating costs for us, particularly with respect to our workers' compensation products.
FINANCIAL STRENGTH AND ISSUER CREDIT RATING
Our financial strength, as measured by statutory accounting principles, is regularly reviewed by an independent rating agency that assigns a rating based upon criteria such as results of operations, capital resources and minimum policyholders' surplus requirements. An insurer's financial strength rating is one of the primary factors evaluated by those in the market to purchase insurance. A poor rating indicates that there is an increased likelihood that the insurer could become insolvent and therefore not able to fulfill its obligations under the insurance policies it issues. This rating can also affect an insurer's level of premium writings, the lines of business it can write and, for insurers like us that are also public registrants, the market value of its securities.
Our property and casualty insurers are rated by A.M. Best Company ("A.M. Best") on a group basis. Our pooled property and casualty insurers have all received an "A" (Excellent) financial strength rating from A.M. Best. Our life insurance subsidiary has received an "A-" (Excellent) financial strength rating from A.M. Best. According to A.M. Best, companies rated "A" and "A-" have "an excellent ability to meet their ongoing obligations to policyholders."
A.M. Best also assigns issuer credit ratings based on a company's ability to repay its debts. All of our property and casualty insurers have received an issuer credit rating of "a" from A.M. Best. Our life insurance subsidiary has


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received an issuer credit rating of "a-" from A.M. Best. Beginning in 2012, our holding company parent was also rated by A.M. Best, receiving an issuer credit rating of "bbb."
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth information concerning the following executive officers:
Name
Age
Position
Randy A. Ramlo
55
President and Chief Executive Officer
Michael T. Wilkins
53
Executive Vice President and Chief Operating Officer
Dawn M. Jaffray
50
Senior Vice President and Chief Financial Officer
Barrie W. Ernst
62
Vice President and Chief Investment Officer
Neal R. Scharmer
60
Vice President, General Counsel and Corporate Secretary
Michael J. Sheeley
56
Vice President and Chief Operating Officer, United Life Insurance Company

A brief description of the business experience of these officers follows:
Randy A. Ramlo became our President and Chief Executive Officer in May 2007. He previously served as our Chief Operating Officer from May 2006 until May 2007, as Executive Vice President from May 2004 until May 2007, and as Vice President, Fidelity and Surety, from November 2001 until May 2004. He also worked as an underwriting manager in our Great Lakes region. Mr. Ramlo began his employment with us as an underwriter in 1984.
Michael T. Wilkins became our Executive Vice President and Chief Operating Officer in May 2014. He served as our Executive Vice President, Corporate Administration, from May 2007 to May 2014. He was our Senior Vice President, Corporate Administration, from May 2004 until May 2007, our Vice President, Corporate Administration, from August 2002 until May 2004 and the resident Vice President in our Lincoln regional office from 1998 until 2002. Prior to 1998, Mr. Wilkins held various other positions within the Company since joining us in 1985.
Dawn M. Jaffray became our Senior Vice President and Chief Financial Officer in May 2015. Ms. Jaffray previously served as Chief Financial Officer of Soleil Advisory Group, a consulting firm specializing in operational consulting, mergers and acquisitions, investment and strategy from 2009 to 2015. Prior to her service with Soleil Advisory Group, Ms. Jaffray held numerous positions in insurance operations and mergers/acquisition activities, primarily in the role of principal financial officer. Ms. Jaffray's business experience has been focused in particular on insurance, finance and capital management.
Barrie W. Ernst is our Vice President and Chief Investment Officer. He joined us in August 2002. Previously, Mr. Ernst served as Senior Vice President of SCI Financial Group in Cedar Rapids, Iowa, where he worked from 1980 to 2002. SCI Financial Group was a regional financial services firm providing brokerage, insurance and related services to its clients.
Neal R. Scharmer was appointed our Vice President and General Counsel in May 2001 and Corporate Secretary in May 2006. He joined us in 1995.
Michael J. Sheeley was appointed Vice President and Chief Operating Officer of United Life Insurance Company in March 2011. Prior to assuming leadership of United Life Insurance Company, Mr. Sheeley served us as personal lines underwriting manager from 1991 to 2011. He has also served in various capacities including commercial underwriting and claims since joining us in 1985.


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ITEM 1A. RISK FACTORS
We provide readers with the following discussion of risks and uncertainties relevant to our business. These are factors that we believe could cause our actual results to differ materially from our historic or anticipated results. We could also be adversely affected by other factors, in addition to those listed here. Additional information concerning factors that could cause actual results to differ materially from those contained in the forward-looking statements is set forth in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Risks Relating to Our Business
The occurrence, frequency and severity of catastrophe losses are unpredictable and may adversely affect our results of operations, liquidity and financial condition.
Our property and casualty insurance operations expose us to claims arising from catastrophic events affecting multiple policyholders. Such catastrophic events consist of various natural disasters, including, but not limited to, hurricanes, tornadoes, windstorms, hailstorms, fires and wildfires, earthquakes, severe winter weather, tropical storms, volcanic eruptions and man-made disasters such as terrorist acts (including biological, chemical or radiological events), explosions, infrastructure failures and results from political instability. We have exposure to tropical storms and hurricanes along the Gulf Coast, Eastern and Southeastern coasts of the United States. We have exposure to tornadoes, windstorms and hail storms throughout the United States. We have exposure to earthquakes along the West Coast and the New Madrid Fault area. Our automobile and inland marine business also exposes us to losses arising from floods and other perils.
Property damage resulting from catastrophes is the greatest risk of loss we face in the ordinary course of our business. We have exposure to catastrophe losses under both our commercial insurance policies and our personal insurance policies. The losses from catastrophic events are a function of both the extent of our exposure, the frequency and severity of the events themselves and the level of reinsurance assumed and ceded. For example, the losses experienced from a tornado will vary on whether the location of the tornado was in a highly populated or unpopulated area, the concentration of insureds in that area and the severity of the tornado. Increases in the value and geographic concentration of insured property and the effects of inflation could increase the severity of claims from a catastrophic event.
Long-term weather trends may be changing and new types of catastrophe losses may be developing due to climate change, which is a phenomenon that has been associated with extreme weather events linked to rising temperatures, including effects on global weather patterns, greenhouse gases, sea, land and air temperature, sea levels, rain and snow. While the emerging science regarding climate change and its connection to extreme weather events continues to be debated, in recent years there has been an increase in frequency and severity of tornadoes and hailstorms, and hurricanes are now impacting areas further inland than experienced in the recent past. Such changes in climate conditions could cause our underlying modeling data to be less accurate, limiting our ability to evaluate and manage our risk.
In addition, as with catastrophe losses generally, it can take a long time for us to determine our ultimate losses associated with a particular catastrophic event. The inability to access portions of the impacted area, the complexity of the losses, legal and regulatory uncertainty and the nature of the information available for certain catastrophic events may affect our ability to estimate the claims and claim adjustment expense reserves. Such complex factors include, but are not limited to: determining the cause of the damage, evaluating general liability exposures, estimating additional living expenses, the impact of demand surge, infrastructure disruption, fraud, business interruption costs and reinsurance collectability.
The timing of a catastrophic occurrence at the end or near the end of a reporting period may also affect the information available to us when estimating claims and claim adjustment expense reserves for the reporting period. As our claims experience for a particular catastrophe develops, we may be required to adjust our reserves to reflect our revised estimates of the total cost of claims. However, because the occurrence and severity of catastrophes are inherently unpredictable and may vary significantly from year to year and region to region, historical results of operations may not be indicative of future results of operations.


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Catastrophes may reduce our net income, cause substantial volatility in our financial results for any fiscal quarter or year or otherwise adversely affect our financial condition, liquidity or results of operations. Catastrophes may also negatively affect our ability to write new business.
Following catastrophes there are also sometimes legislative, administrative and judicial decisions that seek to expand insurance coverage for claims beyond the original intent of the policies or seek to prevent the application of deductibles. Our ability to manage catastrophic exposure may be limited by public policy considerations, the political environment, changes in the general economic climate and/or social responsibilities.
Our reserves for property and casualty insurance losses and loss settlement expenses and our life insurance reserves for future policy benefits are based on estimates and may be inadequate, adversely impacting our financial results.
We maintain insurance reserves to cover our estimated ultimate unpaid liability for claim and claim adjustment expenses, including the estimated cost of the claims adjustment process, for reported and unreported claims and for future policy benefits. Our reserves may prove to be inadequate, which may result in future charges to earnings and/or a downgrade of our financial strength rating or the financial strength ratings of our insurance company subsidiaries.
Insurance reserves represent our best estimate at a given point in time. They are not an exact calculation of liability but instead are complex estimates, which are a product of actuarial expertise and projection techniques from a number of assumptions and expectations about future events, many of which are highly uncertain.
The process of estimating claims and claims adjustment expense reserves involves a high degree of judgment. These estimates are based on historical data and the impact of various factors such as:
•
actuarial and statistical projections of the cost of settlement and administration of claims reflecting facts and circumstances then known;
•
historical claims information and loss emergence patterns;
•
assessments of currently available data;
•
estimates of future trends in claims severity and frequency;
•
judicial theories of liability;
•
economic factors such as inflation;
•
estimates and assumptions regarding social, judicial and legislative trends, and actions such as class action lawsuits and judicial interpretation of coverages or policy exclusions; and
•
the level of insurance fraud.
Many of these factors are not quantifiable. The inherent uncertainties of estimating reserves are greater for certain types of liabilities, particularly those in which the various considerations affecting the type of claim are subject to change and in which long periods of time may elapse before a definitive determination of liability is made. Reserve estimates are continually refined in a regular and ongoing process as experience develops and further claims are reported and settled.
Along with other insurers, we use internal and external models in assessing our exposure to catastrophe losses that assume various conditions and probability scenarios; however, these models do not necessarily accurately predict future losses or accurately measure losses currently incurred. Models for catastrophes use historical information about various catastrophes and details about our in-force business. While we use this information in our pricing and risk managements, there are limitations with respect to their usefulness in predicting losses in any reporting period. Such limitations lead to questionable predictive capability and post-event measurements that have not been well understood or proven to be sufficiently reliable. In addition, the models are not necessarily reflective of our state-specific policy language, demand surge for labor and materials or loss settlement expenses, all of which are subject to wide variation.
For our life insurance business, we calculate life insurance product reserves based on our assumptions, including estimated premiums we will receive over the assumed life of the policy, the timing of the event covered by the


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insurance policy and the amount of benefits or claims to be paid. The premiums that we charge and the liabilities that we hold for future policy benefits are based on assumptions reflecting a number of factors, including the amount of premiums that we will receive in the future, the rate of return on assets we purchase with premiums received, expected claims, mortality, morbidity, expenses and persistency, which is the measurement of the percentage of insurance policies remaining in force from year to year. However, due to the nature of the underlying risks and the high degree of uncertainty associated with the determination of the liabilities for unpaid policy benefits and claims, we cannot determine precisely the amounts we will ultimately pay to settle these liabilities. To the extent that actual experience is less favorable than our underlying assumptions, we could be required to increase our liabilities, which may harm our financial strength and reduce our profitability.
For example, if mortality rates are higher than our pricing assumptions, we will be required to make greater claims payments on our life insurance policies than we had projected. Our results of operations may also be adversely impacted by an increase in morbidity rates.
Actual loss and loss settlement expenses paid might exceed our reserves. If our loss reserves are insufficient, or if we believe our loss reserves are insufficient to cover our actual loss and loss settlement expenses, we will have to increase our loss reserves and incur charges to our earnings, which could indicate that premium levels were insufficient. As such, deviations from one or more of these assumptions could result in a material adverse impact on our Consolidated Financial Statements and our financial strength rating or the financial strength ratings of our insurance company subsidiaries could be downgraded.
For a detailed discussion of our reserving process and the factors we consider in estimating reserves, refer to the "Critical Accounting Policies" section in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Our geographic concentration in both our property and casualty insurance and life insurance segments ties our performance to the business, economic and regulatory conditions of certain states.
The following states provided 48.9 percent of the direct statutory premiums written for the property and casualty insurance segment in 2016: Texas (15.6 percent), California (11.7 percent), Iowa (10.5 percent), Missouri (5.9 percent) and New Jersey (5.2 percent). The following states provided 66.0 percent of the direct statutory premiums written for the life insurance segment in 2016: Iowa (30.1 percent), Minnesota (10.3 percent), Wisconsin (9.1 percent), Illinois (9.0 percent) and Nebraska (7.5 percent).
Our revenues and profitability are subject to the prevailing regulatory, legal, economic, political, demographic, competitive, weather and other conditions in the principal states in which we do business. With respect to regulatory conditions, the NAIC and state legislators continually reexamine existing laws and regulations, specifically focusing on modifications to holding company regulations, interpretations of existing laws and the development of new laws and regulations. In a time of financial uncertainty or a prolonged economic downturn, regulators may choose to adopt more restrictive insurance laws and regulations. Changes in regulatory or any other of these conditions could make it less attractive for us to do business in such states and would have a more pronounced effect on us compared to companies that are more geographically diversified. In addition, our exposure to severe losses from localized natural perils, such as hurricanes or hailstorms, is increased in those areas where we have written a significant amount of property insurance policies.
Unauthorized data access, cyber attacks and other security breaches could have an adverse impact on our business and reputation.
We rely on computer systems to conduct our business for our customer service, marketing and sales activities, customer relationship management and producing financial statements. Our business and operations rely on secure and efficient processing, storage and transmission of customer and Company data, including personally identifiable information. Our ability to effectively operate our business depends upon our ability, and the ability of certain third party vendors and business partners, to access our computer systems to perform necessary business functions, such as providing quotes and product pricing, billing and processing premiums, administering claims, and reporting our financial results.
We retain confidential information on our computer systems, including customer information and proprietary business information belonging to us and our policyholders. Our business and operations depend upon our ability to


13

safeguard this personally identifiable information. Our systems may be vulnerable to unauthorized access and hackers, computer viruses, and other scenarios in which our data may be compromised.
Cyber attacks involving these systems, or those of our third party vendors, could be carried out remotely and from multiple sources and could interrupt, damage, or otherwise adversely affect the operations of these critical systems. Cyber attacks could result in the modification or theft of data, the distribution of false information, or the denial of service to users. Threats to data security can emerge from a variety of sources and change rapidly, resulting in the ongoing need to expend resources to secure our data in accordance with customer expectations and statutory and regulatory requirements.
Any compromise of the security of our data could expose us to liability and harm our reputation, which could affect our business and results of operations. We continually enhance our operating procedures and internal controls to effectively support our business and comply with our regulatory and financial reporting requirements, but there can be no assurances that we will be able to implement security measures adequate to prevent every security breach.
Although, to date, we do not believe we have experienced any material cyber attacks, the occurrence, scope and effect of any cyber attack may remain undetected for a period of time. We maintain cyber liability insurance coverage that provides both third-party liability and first-party insurance coverages; however, our insurance may be insufficient to cover all losses and expenses related to a cyber attack.
Conditions in the global capital markets and the economy generally may weaken materially and adversely affect our business and results of operations.
Our results of operations, financial position and liquidity are materially affected by conditions in the global capital markets and the economy generally, both in the U.S. and elsewhere around the world. Recently, concerns over the depth and breadth of the economic recovery, overall level of U.S. national debt, extraordinary monetary accommodation by central banks, energy costs and geopolitical issues have contributed to increased uncertainty. These factors, combined with a lack of fiscal policy leadership, reduced business and consumer confidence and continued high unemployment, have negatively impacted the U.S. economy. Although conditions have gradually improved since the financial crisis of 2008-2009, a meaningful deterioration in economic activity and/or capital market liquidity could have an adverse impact on our results of operations.
Factors such as consumer spending, business investment, government spending, the volatility and strength of the capital markets, investor and consumer confidence and inflation levels all affect the business and economic environment and, ultimately, the amount and profitability of our business. In an economic downturn characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment, negative investor sentiment and lower consumer spending, the demand for our insurance products could be adversely affected. Our policyholders may choose to defer paying insurance premiums or stop paying insurance premiums altogether. In addition, we may experience an elevated incidence of claims and lapses or surrenders of policies causing a change in our exposure.
We are subject to certain risks related to our investment portfolio that could negatively affect our profitability.
Investment income is an important component of our net income and overall profitability. We invest premiums received from policyholders and other available cash to generate investment income and capital appreciation, while also maintaining sufficient liquidity to pay covered claims, operating expenses and dividends. As discussed in detail below, general economic conditions, changes in financial markets and many other factors beyond our control can adversely affect the value of our investments and the realization of investment income.
We primarily manage our investment portfolio internally under required statutory guidelines and investment guidelines approved by our Board of Directors and the boards of directors of our subsidiaries. Although these guidelines stress diversification and capital preservation, our investments are subject to a variety of risks, including:
•
Credit Risk - The value of our investment in marketable securities is subject to impairment as a result of deterioration in the creditworthiness of the issuer. Such impairments could reduce our net investment income and result in realized investment losses. The vast majority of our investments (97.8% at December 31, 2016) are made in investment-grade securities. Although we try to manage this risk by diversifying our portfolio and emphasizing credit quality, our investments are subject to losses as a result of a general downturn in the economy.


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•
Interest Rate Risk - A significant portion of our investment portfolio (89.2 percent at December 31, 2016) consists of fixed income securities, primarily corporate and municipal bonds (71.7 percent at December 31, 2016). These securities are sensitive to changes in interest rates. An increase in interest rates typically reduces the fair value of fixed income securities, while a decline in interest rates reduces the investment income earned from future investments in fixed income securities. In recent periods, interest rates have been at or near historic lows. It is possible that this trend may continue for a prolonged period of time. We generally hold our fixed income securities to maturity, so our interest rate exposure does not usually result in realized losses. However, rising interest rates could result in a significant reduction of the book value of our fixed maturity investments. Low interest rates, and low investable yields, could adversely impact our net earnings as reinvested funds produce lower investment income.
Fluctuations in interest rates may cause increased surrenders and withdrawals from our life insurance and annuity products. In periods of rising interest rates, or if long-term interest rates rise dramatically within a very short time period, certain segments of our life insurance and annuities businesses may be exposed to disintermediation risk, which refers to the risk that surrenders and withdrawals of life insurance policies and annuity contracts, along with policy loans, may increase as policyholders seek to buy products with perceived higher rates of return. This may require us to liquidate assets in an unrealized loss position. Due to the long-term nature of the liabilities associated with certain segments of our life insurance business, sustained declines in long-term interest rates may subject us to reinvestment risks and increased hedging costs. In other situations, a sudden change in interest rates may result in an unexpected change in the duration of certain life insurance liabilities, creating asset and liability duration mismatches.
Interest rates are highly sensitive to many factors beyond our control including general economic conditions, changes in governmental regulations and monetary policy, and national and international political conditions.
•
Liquidity Risk - We seek to match the maturities of our investment portfolio with the estimated payment date of our loss and loss adjustment expense reserves to ensure strong liquidity and avoid having to liquidate securities to fund claims. Risk such as inadequate loss and loss adjustment reserves or unfavorable trends in litigation could potentially result in the need to sell investments to fund these liabilities. This could result in significant realized losses depending on the conditions of the general market, interest rates and credit profile of individual securities.
Further, our investment portfolio is subject to increased valuation uncertainties when investment markets are illiquid. The valuation of investments is more subjective when markets are illiquid, thereby increasing the risk that the estimated fair value (i.e., the carrying amount) of the portion of the investment portfolio that is carried at fair value as reflected in our financial statements is not reflective of prices at which actual transactions could occur.
•
Market Risk - Our investments are subject to risks inherent in the global financial system and capital markets. The value and risks of our investments may be adversely affected if the functioning of those markets is disrupted or otherwise affected by local, national or international events, such as: changes in regulation or tax policy; changes in legislation relating to bankruptcy or other proceedings; infrastructure failures; wars or terrorist attacks; the overall health of global economies; a significant change in inflation expectations; a significant devaluation of government or private sector credit and/or currency values; and other factors or events not specifically attributable to changes in interest rates, credit losses, and liquidity needs.
•
Credit Spread Risk - Our exposure to credit spreads primarily relates to market price variability and reinvestment risk associated with changes in credit spreads. Valuations may include assumptions or estimates that may have significant period-to-period changes from market volatility, which could have a material adverse effect on our results of operations or financial condition.
Our fixed maturity investment portfolio is invested substantially in state, municipal and political subdivision bonds. Our fixed maturity investment portfolio could be subject to default or impairment, in particular:


15

•
Due to the impact of the financial crisis that occurred in 2008 and 2009, many states and local governments have been operating under deficits or projected deficits which may have an impact on the valuation of our municipal bond portfolio.
•
There is a risk of widespread defaults which may increase if some issuers chose to voluntarily default instead of implementing fiscal measures such as increasing tax rates or reducing spending. Such risk may also increase if there are changes in legislation permitting states, municipalities and political subdivisions to file for bankruptcy protection where they were not permitted to before. Judicial interpretations in such bankruptcy proceedings may also adversely affect the collectability of principal and interest, and/or valuation of our bonds. Changes in tax laws impacting marginal tax rates, exemptions, deductions, credits and/or the preferred tax treatment of municipal obligations could also adversely affect the market value of municipal obligations. Since a large portion of our investment portfolio (30.8 percent at December 31, 2016) is invested in tax-exempt municipal obligations, any such changes in tax law could adversely affect the value of our investment portfolio.
We exercise prudence and significant judgment in analyzing and validating fair values, which are primarily provided by third parties, for securities in our investment portfolio, including those that are not regularly traded in active markets. We also exercise prudence and significant judgment in determining whether the impairment of particular investments is temporary or other-than-temporary. Due to the inherent uncertainties involved in these judgments, we may incur unrealized losses and subsequently conclude that other-than-temporary write downs of our investments are required.
Our success depends primarily on our ability to underwrite risks effectively and adequately price the risks we underwrite.
The results of our operations and our financial condition depend on our ability to underwrite and set premium rates accurately for a wide variety of determinable and indeterminable risks based on available information. Adequate rates are necessary to generate premiums sufficient to pay losses, loss settlement expenses and underwriting expenses and to earn a profit. To price our products accurately, we must collect and properly analyze a substantial amount of data; develop, test and apply appropriate pricing techniques; closely monitor and timely recognize changes in trends; and project both severity and frequency of losses with reasonable accuracy. We could under price risks which would adversely affect our profit margins. Conversely, we could overprice risks which could reduce our sales volume and competitiveness. Our ability to undertake these efforts successfully, and to price our products accurately, is subject to a number of risks and uncertainties, including but not limited to:
•
the availability of sufficient reliable data and our ability to properly analyze available data;
•
market and competitive conditions;
•
changes in medical care expenses and restoration costs;
•
our selection and application of appropriate pricing techniques; and
•
changes in the regulatory market, applicable legal liability standards and in the civil litigation system generally.
The cyclical nature of the property and casualty insurance industry may affect our financial performance.
The property and casualty insurance industry is cyclical in nature and has historically been characterized by soft markets (periods of relatively high levels of price competition, less restrictive underwriting standards and generally low premium rates) followed by hard markets (periods of capital shortages resulting in a lack of insurance availability, relatively low levels of price competition, more selective underwriting of risks and relatively high premium rates). During soft markets, we may lose business to competitors offering competitive insurance at lower prices. We may reduce our premiums or limit premium increases leading to a reduction in our profit margins and revenues. We expect these cycles to continue.
The demand for property and casualty insurance can also vary significantly, rising as the overall level of economic activity increases and falling as that activity decreases. Fluctuations in demand and competition could produce underwriting results that would have a negative impact on the results of our operations and financial condition.


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The effects of emerging claim and coverage issues and class action litigation on our business are uncertain.
We are subject to certain effects of emerging or potential claims and coverage issues that arise as industry practices and legal, judicial, social, economic and other environmental conditions change, including unexpected and unintended issues related to claims and coverage. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number and/or size of claims, resulting in further increases in our reserves. The effects of these and other unforeseen emerging claim and coverage issues are extremely hard to predict. Examples of these issues include:
•
judicial expansion of policy coverage and the impact of new theories of liability;
•
an increase of plaintiffs targeting property and casualty insurers, including us, in purported class action litigation regarding claims handling and other practices;
•
medical developments that link health issues to particular causes, resulting in liability or workers' compensation (for example, cumulative trauma);
•
claims relating to unanticipated consequences of current or new technologies;
•
an increase in the variety, number and size of claims relating to liability losses, which often present complex coverage and damage valuation questions;
•
claims relating to potentially changing climate conditions, including higher frequency and severity of weather-related events; and
•
adverse changes in loss cost trends, including inflationary pressure in medical cost and auto and home repair costs.
A downgrade or a potential downgrade in our financial strength or issuer credit ratings could result in a loss of business and could have a material adverse effect on our financial condition and results of operations.
Ratings are an important factor in establishing the competitive position of insurance companies. Third-party rating agencies assess and rate the claims-paying ability, capital strength and creditworthiness of insurers and reinsurers based on criteria established by the agencies. A.M. Best rates our property and casualty insurance companies on a group basis. Our life insurance subsidiary receives a separate rating. Since 2012, A.M. Best has also given an issuer credit rating to our parent holding company. The table below shows the current ratings assigned to our companies by A.M. Best.
 
Financial Strength Rating
Issuer Credit Rating
Rating Held Since
Property and Casualty Insurers
A
a
1994
Life Insurer
A-
a-
1998
United Fire Group, Inc.
N/A
bbb
2012

Financial strength and issuer credit ratings are used by policyholders, insurers, reinsurers and insurance and reinsurance intermediaries as an important means of assessing the financial strength, creditworthiness and quality of insurers and reinsurers. These ratings are not evaluations directed to potential purchasers of our common stock and are not recommendations to buy, sell or hold our common stock. These ratings are subject to change at any time and could be revised downward or revoked at the sole discretion of the rating agency. Downgrades in our financial strength ratings could adversely affect our ability to access the capital markets or could lead to increased borrowing costs in the future. Perceptions of the Company by investors, producers, other businesses and consumers could also be significantly impaired.
We believe that the ratings assigned by A.M. Best are an important factor in marketing our products. Our ability to retain our existing business and to attract new business in our insurance operations depends on our ratings by this agency. Our failure to maintain our ratings, or any other adverse development with respect to our ratings, could cause our current and future independent agents and policyholders to choose to transact their business with more highly rated competitors. If A.M. Best downgrades our ratings or publicly indicates that our ratings are under review, it is likely that we will not be able to compete as effectively with our competitors and our ability to sell insurance


17

policies could decline, leading to a decrease in our premium revenue and earnings. For example, many of our agencies and policyholders have guidelines that require us to have an A.M. Best financial strength rating of "A-" or higher. A reduction of our A.M. Best ratings below "A-" would prevent us from issuing policies to a portion of our current policyholders or other potential policyholders with ratings requirements. Additionally, a ratings downgrade could materially increase the number of surrenders for all or a portion of the net cash values by the owners of policies and contracts we have issued, and materially increase the number of withdrawals by policyholders of cash values from their policies.
A reduction in our issuer credit rating could limit our ability to access capital markets or significantly increase the cost to us of raising capital. The failure of our insurance company subsidiaries to maintain their current ratings could dissuade a lender or reinsurance company from conducting business with us. A ratings downgrade could also cause some of our existing liabilities to be subject to acceleration, additional collateral support, changes in terms, or creation of additional financial obligations. It might also increase our interest or reinsurance costs.
We are exposed to credit risk in certain areas of our operations.
In addition to exposure to credit risk related to our investment portfolio, we are exposed to credit risk in several other areas of our business operations, including from:
•
our reinsurers, who are obligated to us under our reinsurance agreements. See the risk factor titled "Market conditions may affect our access to and the cost of reinsurance and our reinsurers may not pay losses in a timely manner, or at all," for a discussion of the credit risk associated with our reinsurance program;
•
some of our independent agents, who collect premiums from policyholders on our behalf and are required to remit the collected premiums to us;
•
some of our policyholders, which may be significant; and
•
our surety insurance operations, where we guarantee to a third party that our bonded principal will satisfy certain performance obligations (for example, as in a construction contract) or certain financial obligations. If our policyholder defaults, we may suffer losses and be unable to be reimbursed by our policyholder.
To a large degree, the credit risk we face is a function of the economy; accordingly, we face a greater risk during periods of economic downturn. While we attempt to manage these risks through underwriting and investment guidelines, collateral requirements and other oversight mechanisms, our efforts may not be successful. For example, collateral obtained may subsequently have little or no value. As a result, our exposure to credit risk could materially and adversely affect our results of operation and financial condition.
We are subject to comprehensive laws and regulations, changes to which may have an adverse effect on our financial condition and results of operations.
Insurance is a highly regulated industry. We are subject to extensive supervision and regulation by the states in which we operate. As a public company, we are also subject to increased regulation at the federal level. Our ability to comply with these laws and regulations and obtain necessary and timely regulatory action is, and will continue to be, critical to our success and ability to earn profits.
Examples of regulations that pose particular risks to our ability to earn profits include the following:
•
Required licensing. Our insurance company subsidiaries operate under licenses issued by various state insurance departments. If a regulatory authority were to revoke an existing license or deny or delay granting a new license, our ability to continue to sell insurance or to enter or offer new insurance products in that market would be substantially impaired.
•
Regulation of insurance rates, fees and approval of policy forms. The insurance laws of most states in which we operate require insurance companies to file insurance premium rate schedules and policy forms for review and approval. When our loss ratio compares favorably to that of the industry, state regulatory authorities may resist or delay our efforts to raise premium rates, even if the property and casualty industry generally is not experiencing regulatory resistance to premium rate increases. If premium rate increases we deem necessary are not approved, we may not be able to respond to market developments and increased costs in that state. State regulatory authorities may even impose premium rate rollbacks or require us to pay


18

premium refunds to policyholders, affecting our profitability. If insurance policy forms we seek to use are not approved by state insurance departments, our ability to offer new products and grow our business in that state could be substantially impaired.
•
Restrictions on cancellation, nonrenewal or withdrawal. Many states have laws and regulations restricting an insurance company's ability to cease or significantly reduce its sales of certain types of insurance in that state, except pursuant to a plan that is approved by the state insurance departments. These laws and regulations could limit our ability to exit or reduce our business in unprofitable markets or discontinue unprofitable products. For example, the State of Louisiana has a law prohibiting the nonrenewal of homeowners policies written for longer than three years except under certain circumstances, such as for nonpayment of premium or fraud committed by the insured. Additionally, our ability to adjust terms or increase pricing requires approval of regulatory authorities in certain states.
•
Risk-based capital and capital adequacy requirements. Our insurance company subsidiaries and affiliate are subject to risk-based capital requirements that require us to report our results of risk-based capital calculations to state insurance departments and the NAIC. These standards apply specified risk factors to various asset, premium and reserve components of statutory capital and surplus reported in our statutory basis of accounting financial statements. Any failure to meet applicable risk-based capital requirements or minimum statutory capital requirements could subject us or our subsidiaries and affiliate to further examination or corrective action by state regulators, including limitations on our writing of additional business, state supervision or liquidation.
•
Transactions between insurance companies and their affiliates. Transactions between us, our insurance company subsidiaries and our affiliates generally must be disclosed to, and in some cases approved by, state insurance departments. State insurance departments may refuse to approve or delay their approval of a transaction, which may impact our ability to innovate or operate efficiently.
•
Required participation in guaranty funds and assigned risk pools. Certain states have enacted laws that require a property and casualty insurer conducting business in that state to participate in assigned risk plans, reinsurance facilities, and joint underwriting associations where participating insurers are required to provide coverage for assigned risks. The number of risks assigned to us by these plans is based on our share of total premiums written in the voluntary insurance market for that state. Pricing is controlled by the plan, often restricting our ability to charge the premium rate we might otherwise charge. Wherever possible, we utilize a designated servicing carrier to fulfill our obligations under these plans. Designated servicing carriers charge us fees to issue policies, adjust and settle claims and handle administrative reporting on our behalf. In these markets, we may be compelled to underwrite significant amounts of business at lower than desired premium rates, possibly leading to an unacceptable return on equity. While these facilities are generally designed so that the ultimate cost is borne by policyholders, the exposure to assessments and our ability to recoup these assessments through adequate premium rate increases may not offset each other in our financial statements. Moreover, even if they do offset each other, they may not offset each other in our financial statements for the same fiscal period, due to the ultimate timing of the assessments and recoupments or premium rate increases. Additionally, certain states require insurers to participate in guaranty funds to bear a portion of the unfunded obligations of impaired or insolvent insurance companies. These state funds periodically assess losses against all insurance companies doing business in the state. Our operating results and financial condition could be adversely affected by any of these factors.
•
Restrictions on the amount, type, nature, quality and concentration of investments. The various states in which we are domiciled have certain restrictions on the amount, type, nature, quality and concentration of our investments. Generally speaking, these regulations require us to be conservative in the nature and quality of our investments and restrict our ability to invest in riskier, but often higher yield investments. These restrictions may make it more difficult for us to obtain our desired investment results.
•
State and federal tax laws. Current federal income tax laws generally permit the tax-deferred accumulation of earnings on the premiums paid by the holders of annuities and life insurance products. Taxes, if any, are payable on income attributable to a distribution under the contract for the year in which the distribution is made. The U.S. Congress has, from time to time, considered legislation that would reduce or eliminate the benefit of such deferral of taxation on the accretion of value within life insurance and nonqualified annuity


19

contracts. Enactment of this legislation, including a simplified "flat tax" income structure with an exemption from taxation for investment income, could result in fewer sales of our insurance, annuity and investment products.
In addition, changes in the federal estate tax laws could negatively affect the demand for the types of life insurance used in estate planning. In addition, we benefit from certain tax items, including but not limited to, tax-exempt bond interest, dividends-received deductions, tax credits (such as foreign tax credits) and insurance reserve deductions. From time to time, the U.S. Congress, as well as foreign, state and local governments, considers legislation that could reduce or eliminate the benefits associated with these tax items. If such legislation is adopted, our profitability could be negatively impacted. We continue to evaluate the impact that potential tax reform, which lacks sufficient detail and is relatively uncertain, may have on our future results of operations and financial condition.
•
Terrorism Risk Insurance. The Terrorism Risk Insurance Program Reauthorization Act of 2007 was signed into law on December 27, 2007. In January 2015, The Terrorism Risk Insurance Program Reauthorization Act of 2015 ("TRIPRA") was signed into law. TRIPRA extends the Terrorism Risk Insurance Program until December 31, 2020; gradually increases the coverage trigger for shared terrorism losses between the federal government and the insurance industry to $200 billion per year (up from $100 billion); and gradually increases the industry-wide retention to $37.5 billion per year (up from $27.5 billion). For further information about TRIPRA and its effect on our operations, refer to the information in the "Consolidated Results of Operations" section in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations.
•
Accounting standards. We prepare our consolidated financial statements in conformity with GAAP, which is periodically revised and/or expanded by recognized authoritative bodies, including the Financial Accounting Standards Board ("FASB"). These principles are subject to interpretation by the SEC and various other bodies formed to interpret and create appropriate accounting principles and guidance. The FASB is currently working on several joint projects in conjunction with the International Accounting Standards Board ("IASB") that could result in a convergence of GAAP with International Financial Reporting Standards. These projects may result in significant changes to GAAP. Changes in GAAP and financial reporting requirements, or the interpretation of GAAP or those requirements, may have an impact on the content and presentation of our financial results and could have adverse consequences on our financial results, including lower reported results of operations and shareholders' equity and increased volatility and decreased comparability of our reported results with our historic results and with the results of other insurers. In addition, the required adoption of new accounting standards may result in significant incremental costs associated with initial implementation of and ongoing compliance with those standards. Additional information regarding recently proposed and adopted accounting standards and their potential impact on us is set forth in Note 1 “Summary of Significant Accounting Policies” to Part II, Item 8, “Financial Statements and Supplementary Data.”
•
Corporate Governance and Public Disclosure Regulation. Changing laws, regulations and standards relating to corporate governance and public disclosure, including Dodd-Frank, the Sarbanes-Oxley Act of 2002 and related SEC regulations, as well as the listing standards of the NASDAQ Stock Market, have created and are continuing to create uncertainty for public companies. While the federal government has not historically regulated the insurance business, in 2010 Dodd-Frank established a Federal Insurance Office within the U.S. Department of the Treasury. The Federal Insurance Office has limited regulatory authority and is empowered to gather data and information regarding the insurance industry and insurers, monitor aspects of the insurance industry, identify issues with regulation of insurers that could contribute to a systemic crisis in the insurance industry or the overall financial system, coordinate federal policy on international insurance matters and preempt state insurance measures under certain circumstances. While certain details and much of the impact of Dodd-Frank will not be known for some time, Dodd-Frank and other federal regulation adopted in the future may impose burdens on us, including impacting the ways we conduct our business, increasing compliance costs and duplicating state regulation. Additional regulation under these laws in the area of compensation disclosure, particularly regarding internal pay equity, officer and director hedging activities and compensation clawback policies is still expected.


20

•
U.S. Social Security Administration's Death Master File. We have received regulatory inquiries from certain state insurance regulators relating to compliance with unclaimed property laws and the use of data available on the U.S. Social Security Administration's Death Master File (or a similar database) to identify instances where benefits under life insurance policies, annuities and retained asset accounts are payable. It is possible that other jurisdictions may pursue similar inquiries and that such inquiries may result in payments to beneficiaries, escheatment of funds deemed abandoned under state laws and changes to procedures for the identification and escheatment of abandoned property.
Compliance with these laws and regulations requires us to incur administrative costs that decrease our profits. These laws and regulations may also prevent or limit our ability to underwrite and price risks accurately, obtain timely premium rate increases necessary to cover increased costs, discontinue unprofitable relationships or exit unprofitable markets and otherwise continue to operate our business profitably. In addition, our failure to comply with these laws and regulations could result in actions by state or federal regulators, including the imposition of fines and penalties or, in an extreme case, revocation of our ability to do business in one or more states. Finally, we could face individual, group and class action lawsuits by our policyholders and others for alleged violations of certain state laws and regulations. Each of these regulatory risks could have a negative effect on our profitability.
Market conditions may affect our access to and the cost of reinsurance and our reinsurers may not pay losses in a timely manner, or at all.
As part of our overall risk and capacity management strategy, we purchase reinsurance for significant amounts of the risk that we and our insurance company subsidiaries and affiliates underwrite, by transferring (or ceding) part of the risk we have assumed to a reinsurance company in exchange for part of the premium we receive in connection with the risk. These reinsurance arrangements diversify our business and reduce our exposure to large losses or from hazards of an unusual nature. As of December 31, 2016, we ceded premium written of $58.0 million to our reinsurers.
Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred, it does not eliminate our liability to our policyholders because we remain liable as the direct insurer on all of the reinsured risks. As a result we are subject to credit risk relating to our ability to recover amounts due from our reinsurers.
Our ability to collect reinsurance recoverables may be subject to uncertainty. Our losses must meet the qualifying conditions of the reinsurance agreement. Our reinsurance agreements are subject to specified limits and we would not have reinsurance coverage to the extent that it exceeds those limits. We are also subject to the risk that reinsurers may dispute their obligations to pay our claims. Reinsurers must have the financial capacity and willingness to make payments under the terms of a reinsurance agreement or program. Reinsurers may dispute amounts we believe are due to us. Particularly, following a major catastrophic event, our inability to collect a material recovery from a reinsurer on a timely basis, or at all, could have a material adverse effect on our liquidity, operating results and financial condition.
Market conditions determine the availability and cost of the reinsurance protection we purchase, which affects the level of our business profitability, as well as the level and types of risk we retain. Although we purposely work with several reinsurance intermediaries and reinsurers, we may be unable to maintain our current reinsurance facilities or obtain other reinsurance facilities in adequate amounts and at favorable premium rates. Moreover, there may be a situation in which we have more than two catastrophic events within one policy year. Because our current catastrophe reinsurance program only allows for one automatic reinstatement at an additional reinstatement premium, we would be required to obtain a new catastrophe reinsurance policy to maintain our current level of catastrophe reinsurance coverage. Such coverage may be difficult to obtain, particularly if it is necessary to do so during hurricane season following the second catastrophe. If we are unable to renew our expiring facilities or to obtain new reinsurance facilities, either our net exposure to risk will increase or, if we are unwilling to bear an increase in net risk exposures, we will have to reduce the amount of risk we underwrite.
We face significant competitive pressures in our business that could cause demand for our products to fall or hinder our ability to introduce new products or services and keep pace with advances in technology, reducing our revenue and profitability.
The insurance industry is highly competitive and will likely remain that way for the foreseeable future. In our property and casualty insurance business and in our life insurance business we compete, and will continue to


21

compete, with many major U.S. and non-U.S. insurers and smaller regional companies, as well as mutual companies, specialty insurance companies, underwriting agencies, and diversified financial services companies, including banks, mutual funds, broker-dealers and asset-managers. Except for regulatory considerations, there are few barriers to entry in the insurance market. National banks, with their large existing customer bases, may increasingly compete with insurers as a result of court rulings allowing national banks to sell annuity products in some circumstances, and as a result of new legislation removing restrictions on bank affiliations with insurers. These developments may increase competition, by increasing the number, size and financial strength of competitors who may be able to offer, due to economies of scale, more competitive pricing than we can.
Our competitors may attempt to increase their market share by lowering rates. In that case, we could experience reductions in our underwriting margins or sales of insurance policies. Losing business to competitors offering similar products at lower prices or who have a competitive advantage may adversely affect the results of our operations. Additionally, economic conditions may reduce the total volume of business available to us and our competitors.
We price our insurance products based on estimated profit margins, and we may not be able to react in a timely manner to reprice our insurance products to respond to changes in the market. Some of our competitors may be larger and have far greater financial, technology and marketing resources than we do. If new or existing competitors decide to target our policyholder base by offering similar or enhanced product offerings or technologies at lower prices than we are able to offer, our premium revenue and our profitability could decline.
Our products are marketed exclusively through independent insurance agencies, most of which represent more than one company. We face competition within each agency and competition to retain qualified independent agents. Our competitors include companies that market their products through agents, as well as companies that sell insurance directly to their customers. In personal insurance, the use of comparative rating technologies has impacted our business and may continue to impact the entire industry. This has resulted in an increase in the total level of quote activity but a lower percentage of quotes have resulted in new business from customers. There is also the potential for similar technology to be used to compare rates for small business.
The successful implementation of our business model depends on our ability to adapt to evolving technologies and industry standards and introduce new products and services. There is no guarantee we will be able to introduce new or improved products, or that our products will achieve market acceptance. We may also not be successful in using new technologies effectively or adapting our proprietary technology to evolving customer requirements, causing our products or services to become obsolete.
Technology may be increasingly playing a role in our ability to be competitive. Innovations such as telematics and other usage-based methods of determining premiums may impact product design and pricing and may be an increasingly important factor in our ability to be competitive. Our competitive position may also be impacted by our ability to institute technology that collects and analyzes a wide variety of data points to make underwriting or other decisions.
Our business depends on the uninterrupted operations of our facilities, systems and business functions.
Our business depends on our employees' or vendors' ability to perform necessary business functions, such as processing new and renewal policies, providing customer service, making claims payments, facilitating collections and cancellations and performing actuarial functions necessary for pricing and product development. We increasingly rely on technology and systems to accomplish these business functions in an efficient and uninterrupted fashion. Our inability to access our facilities or a failure of technology, telecommunications or other systems could significantly impair our ability to perform such functions on a timely basis or affect the accuracy of transactions. If sustained or repeated, such a business interruption or system failure could result in a deterioration of our ability to write and process new and renewal business, serve our agents and policyholders or perform other necessary business functions as discussed above.
If a natural disaster or a terrorist act occurs, our company and employees could be directly adversely affected, depending on the nature of the event. We have an emergency preparedness plan that consists of the information and procedures required to enable rapid recovery from an occurrence, such as natural disaster or business disruption, which could potentially disable us for an extended period of time. This plan was successfully tested during 2008, both by the Midwest flooding that affected our corporate headquarters in Cedar Rapids, Iowa, and by Hurricane Ike


22

that affected our Gulf Coast regional office in Galveston, Texas. It was also tested, to a lesser extent, by Super Storm Sandy in 2012 that affected our East Coast regional office in Pennington, New Jersey.
Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs, as well as our access to and the cost of capital.
Although capital market conditions have improved, our results of operations, financial condition, cash flows and statutory capital position could be materially adversely affected by continued volatility, uncertainty and disruptions in the capital and credit markets.
We maintain a level of cash and securities which, combined with expected cash inflows from investments and operations, is believed adequate to meet anticipated short-term and long-term benefit and expense payment obligations. However, withdrawal and surrender levels may differ from anticipated levels for a variety of reasons, such as changes in economic conditions or changes in our claims paying ability and financial strength ratings. In the event our current internal sources of liquidity do not satisfy our needs, we have entered into a $50 million revolving unsecured credit facility that we can access, which also allows the Company to increase the aggregate amount of the commitments thereunder by up to $100 million. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the volume of trading activities, the overall availability of credit to the financial services industry, our credit ratings and credit capacity as well as customers' or lenders' perception of our long- or short-term financial prospects. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us.
Disruptions, uncertainty or volatility in the capital and credit markets may limit our access to capital required to operate our business. Such market conditions may limit our ability to replace, in a timely manner, maturing liabilities; satisfy statutory capital requirements; and access the capital necessary to grow our business. As such, we may be forced to delay raising capital, issue shorter term securities than we prefer, utilize available internal resources or bear an unattractive cost of capital, which could decrease our profitability and significantly reduce our financial flexibility and liquidity.
We may experience difficulty in integrating future acquisitions to our operations.
The successful integration of any newly acquired businesses into our operations will require, among other things:
•
the timely receipt of any required regulatory approvals;
•
the retention and assimilation of their key management, sales and other personnel;
•
the coordination of their lines of insurance products and services;
•
the adaptation of their technology, information systems and other processes; and
•
the retention and transition of their customers.
Unexpected difficulties in integrating any acquisition could result in increased expenses and the diversion of management time and resources. If we do not successfully integrate any acquired business into our operations, we may not realize the anticipated benefits of the acquisition, which could have a material adverse impact on our financial condition and results of operations. Further, any potential acquisitions may require significant capital outlays and, if we issue equity or convertible debt securities to pay for an acquisition, the issuance may be dilutive to our existing shareholders.
The exclusions and limitations in our policies may not be enforceable.
Many of the policies we issue include exclusions and other conditions that define and limit coverage, which exclusions and conditions are designed to manage our exposure to certain types of risks and expanding theories of legal liability. In addition, many of our policies limit the period during which a policyholder may bring a claim under the policy, which period in many cases is shorter than the statutory period under which these claims can be brought by our policyholders. While these exclusions and limitations help us assess and control our loss exposure, it is possible that a court or regulatory authority could nullify or void an exclusion or limitation, or legislation could be enacted which modifies or bars the use of these exclusions and limitations. This could result in higher than anticipated losses by extending coverage beyond the intent of our underwriting. In some instances, these changes may not become apparent until sometime after we have issued the insurance policies that are affected by these


23

changes. As a result, the full extent of liability under our insurance contracts may not be known for many years after a policy is issued.
Our internal controls are not fail-safe.
As a result of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control objectives have been or will be met, and that every instance of error or fraud has been or will be detected. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake.
The determination of the amount of impairments taken on our investments requires estimates and assumptions which are subject to differing interpretations and could materially impact our results of operations or financial position.
The determination of the amount of impairments varies by investment type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. There can be no assurance that our management has accurately assessed the level of impairments taken in our financial statements. Furthermore, additional impairments may need to be taken in the future. Historical trends may not be indicative of future impairments.
Additionally, our management considers a wide range of factors about the instrument issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the instrument and in assessing the prospects for recovery. Inherent in management's evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential.
Risks Relating to Our Common Stock
The ability of our subsidiaries to pay dividends may affect our liquidity and ability to meet our obligations.
As a holding company, we have no significant independent operations of our own. Our principal sources of funds are dividends and other payments received from our subsidiaries. We rely on those dividends for our liquidity and to meet our obligations to pay dividends to shareholders and make share repurchases. Dividends from those subsidiaries depend on their statutory surplus, earnings and regulatory restrictions.
State insurance laws limit the ability of insurance subsidiaries to pay dividends and require our insurance subsidiaries to maintain specified minimum levels of statutory capital and surplus. The actual ability to pay dividends may further be constrained by business and regulatory considerations, such as the impact of dividends on surplus, by our competitive position and by the amount of premiums that we can write. Ordinary dividend payments, or dividends that do not require prior approval by the insurance subsidiaries' domiciliary state insurance regulator are generally limited to amounts determined by a formula which varies by jurisdiction. Extraordinary dividends, on the other hand, require prior regulatory approval by the insurance subsidiaries' domiciliary state insurance regulator before they can be made.
In addition, competitive pressures generally require insurance companies to maintain insurance financial strength ratings. These restrictions and other regulatory requirements affect the ability of our insurance subsidiaries to make dividend payments to us. At times we may not be able to pay dividends on our common stock, or we may be required to seek prior approval from the applicable regulatory authority before we can pay any such dividends. In addition, the payment of dividends by us is within the discretion of our Board of Directors and will depend on numerous factors, including our financial condition, our capital requirements and other factors that our Board of Directors considers relevant.


24

The price of our common stock may be volatile.
The trading price of our common stock may fluctuate substantially due to a variety of factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could be significant and could cause a loss in the amount invested in our shares of common stock. Factors that could cause fluctuations include, but are not limited to, the following:
•
variations in our actual or anticipated operating results or changes in the expectations of financial market analysts with respect to our results;
•
investor perceptions of the insurance industry in general and the Company in particular;
•
market conditions in the insurance industry and any significant volatility in the market;
•
major catastrophic events; and
•
departure of key personnel.
Certain provisions of our organizational documents, as well as applicable insurance laws, could impede an attempt to replace or remove our management or members of our Board of Directors, prevent the sale of the Company or prevent or frustrate any attempt by shareholders to change the direction of the Company, each of which could diminish the value of our common stock.
Our articles of incorporation and bylaws, as well as applicable laws governing corporations and insurance companies, contain provisions that could impede an attempt to replace or remove our management or prevent the sale of the Company that, in either case, shareholders might consider being in their best interests. For example:
•
our Board of Directors is divided into three classes. At any annual meeting of our shareholders, our shareholders have the right to appoint approximately one-third of the directors on our Board of Directors. Consequently, it will take at least two annual shareholder meetings to effect a change in control of our Board of Directors;
•
our articles of incorporation limit the rights of shareholders to call special shareholder meetings;
•
our articles of incorporation set the minimum number of directors constituting the entire Board of Directors at nine and the maximum at 15, and they require approval of holders of 60.0 percent of all outstanding shares to amend these provisions. Within the range, the Board of Directors may increase by one each year the number of directors serving on the Board of Directors;
•
our articles of incorporation require the affirmative vote of 60.0 percent of all outstanding shares to approve any plan of merger, consolidation, or sale or exchange of all, or substantially all, of our assets;
•
our Board of Directors may fill vacancies on the Board of Directors;
•
our Board of Directors has the authority, without further approval of our shareholders, to issue shares of preferred stock having such rights, preferences and privileges as the Board of Directors may determine;
•
Section 490.1110 of the Iowa Business Corporation Act imposes restrictions on mergers and other business combinations between us and any holder of 10.0 percent or more of our common stock; and
•
Section 490.624A of the Iowa Business Corporation Act authorizes the terms and conditions of stock rights or options issued by us to include restrictions or conditions that preclude or limit the exercise, transfer, or receipt of such rights or options by a person, or group of persons, owning or offering to acquire a specified number or percentage of the outstanding common shares or other securities of the corporation.
Further, the insurance laws of Iowa and the states in which our insurance company subsidiaries are domiciled prohibit any person from acquiring direct or indirect control of us or our insurance company subsidiaries, generally defined as owning or having the power to vote 10.0 percent or more of our outstanding voting stock, without the prior written approval of state regulators.
These provisions of our articles of incorporation and bylaws, and these state laws governing corporations and insurance companies, may discourage potential acquisition proposals. These provisions and state laws may also delay, deter or prevent a change of control of the Company, in particular through unsolicited transactions that some


25

or all of our shareholders might consider to be desirable. As a result, efforts by our shareholders to change the direction or the Company's management may be unsuccessful, and the existence of such provisions may adversely affect market prices for our common stock if they are viewed as discouraging takeover attempts.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our headquarters are located in Cedar Rapids, Iowa, where we own approximately 246,000 square feet of office and building space, serving both operating segments. In addition, we own and lease office and building space, including underwriting and claims offices, throughout the U.S. We believe our existing facilities, both owned and leased, are in good condition and suitable for the conduct of our business.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of its business, the Company is a party to a variety of legal proceedings. While the final outcome of these legal proceedings cannot be predicted with certainty, management believes all of the proceedings pending as of December 31, 2016 to be ordinary and routine and does not expect these legal proceedings to have a material adverse effect on the Company's financial position or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.



26

PART II.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Shareholders
United Fire Group, Inc.'s common stock is traded on the NASDAQ stock market under the symbol "UFCS." On February 24, 2017, there were 815 holders of record of United Fire Group, Inc. common stock. The number of record holders does not reflect shareholders who beneficially own common stock in nominee or street name, but does include participants in our employee stock purchase plan.
Dividends
Our practice has been to pay quarterly cash dividends, which we have paid every quarter since March 1968.
As a holding company with no independent operations of its own, United Fire Group, Inc. relies on dividends received from its insurance company subsidiaries in order to pay dividends to its common shareholders. Dividends payable by our insurance subsidiaries are governed by the laws in the states in which they are domiciled. In all cases, these state laws permit the payment of dividends only from earned surplus arising from business operations. For example, under Iowa law, the maximum dividend or distribution that may be paid within a 12-month period without prior approval of the Iowa Insurance Commissioner is generally restricted to the greater of 10 percent of statutory surplus as of the preceding December 31, or net income of the preceding calendar year on a statutory basis, not greater than earned statutory surplus. Other states in which our insurance company subsidiaries are domiciled may impose similar restrictions on dividends and distributions. Based on these restrictions, at December 31, 2016, our insurance company subsidiary, United Fire & Casualty, is able to make a maximum of $53.1 million in dividend payments without prior regulatory approval.
The table in the following section shows the quarterly cash dividends declared in 2016 and 2015. Payments of any future dividends and the amounts of such dividends, however, will depend upon factors such as net income, financial condition, capital requirements, and general business conditions. We will only pay dividends if declared by our Board of Directors out of legally available funds and there can be no assurance that we will continue to pay such dividends or the amount of such dividends.
Additional information about these restrictions is incorporated by reference from Note 6 "Statutory Reporting, Capital Requirements and Dividends and Retained Earnings Restrictions" contained in Part II, Item 8, "Financial Statements and Supplementary Data."












27

Market Information
The following table sets forth the high and low trading price as reported on the NASDAQ stock market for our common stock for the calendar periods indicated, as well as the amount of cash dividends declared on our common stock.
 
Share Price
 
Cash Dividends
Declared per share
 
High
Low
 
2016
 
 
 
 
Quarter Ended:
 
 
 
 
March 31
$
44.43

$
35.16

 
$
0.22

June 30
45.75

39.12

 
0.25

September 30
44.00

40.37

 
0.25

December 31
50.75

37.54

 
0.25

Year-end closing share price: $49.17
 
 
 
 
 
 
 
 
 
2015
 
 
 
 
Quarter Ended:
 
 
 
 
March 31
$
31.94

$
27.57

 
$
0.20

June 30
34.09

29.31

 
0.22

September 30
37.00

31.68

 
0.22

December 31
40.64

33.70

 
0.22

Year-end closing share price: $38.31
 
 
 
 
Issuer Purchases of Equity Securities

Under our share repurchase program, we may purchase our common stock from time to time on the open market or through privately negotiated transactions. The amount and timing of any purchases will be at our discretion and will depend upon a number of factors, including the share price, general economic and market conditions, and corporate and regulatory requirements. Our share repurchase program may be modified or discontinued at any time.






















28

The following table provides information with respect to purchases of shares of common stock made by or on our behalf or by any "affiliated purchaser," as defined in Rule 10b-18(a)(3) under the Exchange Act, during the year ended December 31, 2016:
Period
Total
Number of
Shares Purchased (1)
 
Average Price
Paid per Share
 
Total Number of Shares
Purchased as a Part of
Publicly Announced
Plans or Programs
 
Maximum Number of
Shares that may yet be
Purchased Under the
Plans or Programs
1/1/16 - 1/31/16
—

 
$
—

 
—

 
1,528,886

2/1/16 - 2/28/16
—

 
—

 
—

 
1,528,886

3/1/16 - 3/31/16
—

 
—

 
—

 
1,528,886

4/1/16 - 4/30/16
—

 
—

 
—

 
1,528,886

5/1/16 - 5/31/16
—

 
—

 
—

 
1,528,886

6/1/16 - 6/30/16
—

 
—

 
—

 
1,528,886

7/1/16 - 7/31/16
—

 
—

 
—

 
1,528,886

8/1/16 - 8/31/16
26,564

 
42.74

 
26,564

 
3,002,322

9/1/16 - 9/30/16
40,928

 
42.31

 
40,928

 
2,961,394

10/1/16 - 10/31/16
—

 
—

 
—

 
2,961,394

11/1/16 - 11/30/16
22,923

 
38.32

 
22,923

 
2,938,471

12/1/16 - 12/31/16
—

 
—

 
—

 
2,938,471

Total
90,415

 
 
 
90,415

 
 
(1) Our share repurchase program was originally announced in August 2007. In August 2016, our Board of Directors authorized the repurchase of up to an additional 1,500,000 shares of common stock through the end of August 2018. This is in addition to the 1,528,886 shares of common stock remaining under its previous authorizations. As of December 31, 2016 we remained authorized to repurchase 2,938,471 shares of common stock.
United Fire Group, Inc. Common Stock Performance Graph
The following graph compares the performance of an investment in United Fire Group Inc.'s common stock from December 31, 2011 through December 31, 2016, with the Standard & Poor's 500 Index ("S&P 500 Index"), and the Standard & Poor's 600 Property and Casualty Index ("S&P 600 P&C Index"). The graph assumes $100 was invested on December 31, 2011 in our common stock and each of the below listed indices and that all dividends were reinvested on the date of payment without payment of any commissions. Dollar amounts in the graph are rounded to the nearest whole dollar. The performance shown in the graph represents past performance and should not be considered an indication of future performance.



29

ufcs_chartx29906a03.jpg
The following table shows the data used in the total return performance graph above.
 
Period Ended
Index
12/31/11
 
12/31/12
 
12/31/13
 
12/31/14
 
12/31/15
 
12/31/16
United Fire Group, Inc.
$
100.00

 
$
111.28

 
$
149.69

 
$
159.56

 
$
211.06

 
$
277.08

S&P 500 Index
100.00

 
116.00

 
153.57

 
174.60

 
177.01

 
198.18

S&P 600 P&C Index
100.00

 
108.32

 
138.06

 
145.16

 
166.80

 
208.79

The foregoing performance graph is being furnised as part of this Annual Report on Form 10-K solely in accordance with the requirement under Rule 14a-3(b)(9) to furnish our shareholders with such information, and therefore, shall not be deemed to be filed or incorporated by reference into any filings by the Company under the Securities Act or Exchange Act.

ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data derived from the Consolidated Financial Statements of United Fire Group, Inc. and its subsidiaries and affiliates. The data should be read in conjunction with Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Part II, Item 8, "Financial Statements and Supplementary Data."


30

(In Thousands, Except Per Share Data)
 
 
 
 
 
 
 
 
 
As of and for the years Ended December 31
2016
 
2015
 
2014
 
2013
 
2012
Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Total cash and investments
$
3,376,513

 
$
3,249,209

 
$
3,261,535

 
$
3,142,330

 
$
3,151,829

Total assets
4,054,758

 
3,890,376

 
3,856,689

 
3,720,672

 
3,694,653

 
 
 
 
 
 
 
 
 
 
Future policy benefits and losses, claims and loss settlement expenses
 
 
 
 
 
 
 
 
 
Property and casualty insurance
1,123,896

 
1,003,895

 
969,437

 
960,651

 
971,911

Life insurance
1,350,503

 
1,372,358

 
1,447,764

 
1,472,132

 
1,498,176

Unearned premiums
443,873

 
415,057

 
378,725

 
340,464

 
311,650

Total liabilities
3,112,874

 
3,011,479

 
3,039,274

 
2,937,839

 
2,965,476

 
 
 
 
 
 
 
 
 
 
Net unrealized investment gains, after tax
133,892

 
128,369

 
149,623

 
116,601

 
144,096

Repurchase of United Fire Group, Inc. common stock
(3,746
)
 
(2,423
)
 
(12,942
)
 
(1,644
)
 
(7,301
)
Total stockholders' equity
941,884

 
878,897

 
817,415

 
782,833

 
729,177

 
 
 
 
 
 
 
 
 
 
Book value per share
37.04

 
34.94

 
32.67

 
30.87

 
28.90

 
 
 
 
 
 
 
 
 
 
Consolidated Income Statement Data:
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
Net premiums earned
1,023,401

 
930,890

 
828,330

 
754,846

 
694,994

Investment income, net of investment expenses
106,822

 
100,781

 
104,609

 
112,799

 
111,905

Net realized investment gains
6,103

 
2,846

 
7,270

 
8,695

 
5,453

Other income
621

 
401

 
1,685

 
702

 
891

Consolidated revenues
$
1,136,947

 
$
1,034,918

 
$
941,894

 
$
877,042

 
$
813,243

 
 
 
 
 
 
 
 
 
 
Losses and loss settlement expenses
 
 
 
 
 
 
 
 
 
Property and casualty insurance
652,433

 
520,087

 
509,811

 
437,354

 
439,137

Life insurance
31,365

 
29,001

 
26,432

 
21,461

 
20,569

Amortization of deferred policy acquisition costs
211,013

 
186,817

 
167,449

 
153,677

 
141,834

Other underwriting expenses
103,421

 
102,937

 
94,871

 
89,861

 
81,125

Net income
49,904

 
89,126

 
59,137

 
76,140

 
40,212

 
 
 
 
 
 
 
 
 
 
Property and Casualty Insurance Segment Data:
 
 
 
 
 
 
 
 
 
Net premiums earned
936,131

 
851,695

 
766,939

 
694,192

 
629,411

Net income
49,118

 
85,320

 
52,376

 
67,456

 
33,512

Combined ratio(1)
100.3
%
 
92.0
%
 
97.8
%
 
94.8
%
 
101.2
%
 
 
 
 
 
 
 
 
 
 
Life Insurance Segment Data:
 
 
 
 
 
 
 
 
 
Net premiums earned
87,270

 
79,195

 
61,391

 
60,654

 
65,583

Net income
786

 
3,806

 
6,761

 
8,684

 
6,700

 
 
 
 
 
 
 
 
 
 
Earnings Per Share Data:
 
 
 
 
 
 
 
 
 
Basic earnings per common share
1.97

 
3.56

 
2.34

 
3.01

 
1.58

Diluted earnings per common share
1.93

 
3.53

 
2.32

 
2.98

 
1.58

 
 
 
 
 
 
 
 
 
 
Other Supplemental Data:
 
 
 
 
 
 
 
 
 
Cash dividends declared per common share
0.97

 
0.86

 
0.78

 
0.69

 
0.60

(1)
The combined ratio is a commonly used financial measure of property and casualty underwriting performance. A combined ratio below 100.0 percent generally indicates a profitable book of business.




31

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis should be read in conjunction with Part II, Item 6, "Selected Financial Data" and Part II, Item 8, "Financial Statements and Supplementary Data." Amounts (except per share amounts) are presented in thousands, unless otherwise noted.

FORWARD-LOOKING STATEMENTS

It is important to note that our actual results could differ materially from those projected in any forward-looking statements in this Form 10-K. Please refer to "Forward-Looking Information" and Part I, Item 1A, "Risk Factors" of this report for information concerning factors that could cause actual results to differ materially from the forward-looking statements contained in this Form 10-K.

BUSINESS OVERVIEW
Originally founded in 1946 as United Fire & Casualty Company, United Fire Group, Inc. ("UFG", "United Fire", the "Registrant", the "Company", "we", "us", "our") and its consolidated insurance company subsidiaries provide insurance protection for individuals and businesses through several regional companies. Our property and casualty insurance company subsidiaries are licensed in 46 states plus the District of Columbia and are represented by approximately 1,200 independent agencies. Our life insurance subsidiary is licensed in 37 states and is represented by approximately 1,350 independent agencies.
Segments
We operate two business segments that are comprised of a wide range of products:
•
property and casualty insurance, which includes commercial insurance, personal insurance, surety bonds and assumed reinsurance; and
•
life insurance, which includes deferred and immediate annuities, universal life products and traditional life (primarily single premium whole life insurance) products.
We manage these business segments separately, as they generally do not share the same customer base, and they each have different products, pricing, and expense structures.
For 2016, property and casualty business accounted for approximately 91.5 percent of our net premiums earned, with the majority of which, 92.5 percent, was generated from commercial insurance. Life insurance business made up approximately 8.5 percent of our net premiums earned, of which over 73.0 percent was generated from traditional life insurance products.
Pooling Arrangement

All of our property and casualty insurance subsidiaries are members of an intercompany reinsurance pooling arrangement. On July 1, 2015, UFG Specialty Insurance Company entered the pooling arrangement. The Company's pooling arrangement permits the participating companies to rely on the capacity of the entire pool's capital and surplus, rather than being limited to policy exposures of a size commensurate with each participant’s own surplus level.
Geographic Concentration
For 2016, approximately 48.9 percent of our property and casualty statutory direct premiums written were written in Texas, California, Iowa, Missouri and New Jersey and approximately 68.5 percent of our life insurance premiums were written in Iowa, Minnesota, Illinois, Wisconsin and Nebraska.



32

Sources of Revenue and Expense
We evaluate segment profit or loss based upon operating and investment results. Segment profit or loss described in the following sections of this Management's Discussion and Analysis is reported on a pre-tax basis. Additional segment information is presented in Part II, Item 8, Note 10 "Segment Information" to the Consolidated Financial Statements.
Our primary sources of revenue are premiums and investment income. Major categories of expenses include losses and loss settlement expenses, future policy benefits, underwriting and other operating expenses and interest on policyholders' accounts.
Profit Factors
Our profitability is influenced by many factors, including price, competition, economic conditions, investment returns, interest rates, catastrophic events and other natural disasters, man-made disasters, state regulations, court decisions, and changes in the law. To manage these risks and uncertainties, we seek to achieve consistent profitability through strong agency relationships, exceptional customer service, fair and prompt claims handling, disciplined underwriting, superior loss control services, prudent management of our investments, appropriate matching of assets and liabilities and effective and efficient use of technology.

MEASUREMENT OF RESULTS
Our consolidated financial statements are prepared on the basis of GAAP. We also prepare financial statements for each of our insurance company subsidiaries based on statutory accounting principles and file them with insurance regulatory authorities in the states where they do business.
Management evaluates our operations by monitoring key measures of growth and profitability. We believe that disclosure of certain non-GAAP financial measures enhances investor understanding of our financial performance. The following provides further explanation of the key measures management uses to evaluate our results:
Catastrophe losses is a commonly used non-GAAP financial measure, which utilizes the designations of the Insurance Services Office ("ISO") and are reported with losses and loss settlement expense amounts net of reinsurance recoverables, unless specified otherwise. According to the ISO, a catastrophe loss is defined as a single unpredictable incident or series of closely related incidents that result in $25.0 million or more in U.S. industry-wide direct insured losses to property and that affect a significant number of insureds and insurers ("ISO catastrophe"). In addition to ISO catastrophes, we also include as catastrophes those events ("non-ISO catastrophes"), which may include U.S. or international losses, that we believe are, or will be, material to our operations, either in amount or in number of claims made. Management, at times, may determine for comparison purposes of our financial results that it is more meaningful to exclude extraordinary catastrophe losses and resulting litigation. The frequency and severity of catastrophic losses we experience in any year affect our results of operations and financial position. In analyzing the underwriting performance of our property and casualty insurance segment, we evaluate performance both including and excluding catastrophe losses. Portions of our catastrophe losses may be recoverable under our catastrophe reinsurance agreements. We include a discussion of the impact of catastrophes because we believe it is meaningful for investors to understand the variability in our periodic earnings.
 
Years Ended December 31,
(In Thousands)
2016
 
2015
 
2014
ISO catastrophes
$
57,932

 
$
25,380

 
$
47,351

Non-ISO catastrophes (1)
3,299

 
6,933

 
2,328

Total catastrophes
$
61,231

 
$
32,313

 
$
49,679

(1) Includes international assumed losses.


33

CONSOLIDATED FINANCIAL HIGHLIGHTS
 
Years Ended December 31,
 
% Change
 
 
 
 
 
 
 
2016
 
2015
(In Thousands)
2016
 
2015
 
2014
 
vs. 2015
 
vs. 2014
Revenues
 
 
 
 
 
 
 
 
 
Net premiums earned
$
1,023,401

 
$
930,890

 
$
828,330

 
9.9
 %
 
12.4
 %
Investment income, net of investment expenses
106,822

 
100,781

 
104,609

 
6.0

 
(3.7
)
Net realized investment gains (losses)
 
 
 
 
 
 
 

 
 
Other-than-temporary impairment charges
—

 
(1,300
)
 
—

 
NM

 
NM

All other net realized gains
6,103

 
4,146

 
7,270

 
47.2

 
(43.0
)
Total net realized investment gains
6,103

 
2,846

 
7,270

 
114.4

 
(60.9
)
Other income
621

 
401

 
1,685

 
54.9

 
(76.2
)
Total revenues
$
1,136,947

 
$
1,034,918

 
$
941,894

 
9.9
 %
 
9.9
 %
 
 
 
 
 
 
 
 
 
 
Benefits, losses and expenses
 
 
 
 
 
 
 
 
 
Losses and loss settlement expenses
$
683,798

 
$
549,088

 
$
536,243

 
24.5
 %
 
2.4
 %
Increase in liability for future policy benefits
59,969

 
50,945

 
36,623

 
17.7

 
39.1

Amortization of deferred policy acquisition costs
211,013

 
186,817

 
167,449

 
13.0

 
11.6

Other underwriting expenses
103,421

 
102,937

 
94,871

 
0.5

 
8.5

Interest on policyholders' accounts
20,079

 
23,680

 
30,245

 
(15.2
)
 
(21.7
)
Total benefits, losses and expenses
$
1,078,280

 
$
913,467

 
$
865,431

 
18.0
 %
 
5.6
 %
 
 
 
 
 
 
 
 
 
 
Income before income taxes
$
58,667

 
$
121,451

 
$
76,463

 
(51.7
)%
 
58.8
 %
Federal income tax expense
8,763

 
32,325

 
17,326

 
(72.9
)%
 
86.6
 %
Net income
$
49,904

 
$
89,126

 
$
59,137

 
(44.0
)%
 
50.7
 %
NM = not meaningful
Consolidated Results of Operations
In 2016, the decrease in net income was driven by a 24.5 percent increase in losses and loss settlement expenses due to an increase in catastrophe losses and deterioration of our core loss ratio. A portion of this deterioration was driven by an increase in large losses, which we define as losses greater than $500 thousand, in the commercial automobile and commercial fire & allied lines of business. The increase in losses and loss settlement expenses was partially offset by a 9.9 percent increase in net premiums earned.
In 2015, the increase in net income was driven by a 12.4 percent increase in net premiums earned, which was the result of organic growth from new business and rate increases in the property and casualty segment. This increase in premiums was offset by a decrease in investment income and net realized investment gains and a proportionately lower increase in losses and loss settlement expenses on a better performing underlying book of business.



34

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

Property and Casualty Insurance Segment
 
Years Ended December 31,
 
% Change
 
 
 
2016
 
2015
(In Thousands)
2016
 
2015
 
2014
 
vs. 2015
 
vs. 2014
Net premiums earned
$
936,131

 
$
851,695

 
$
766,939

 
9.9

 
11.1

Losses and loss settlement expenses
(652,433
)
 
(520,087
)
 
(509,811
)
 
25.4

 
2.0

Amortization of deferred policy acquisition costs
(202,892
)
 
(180,183
)
 
(161,310
)
 
12.6

 
11.7

Other underwriting expenses
(83,540
)
 
(83,631
)
 
(79,117
)
 
(0.1
)
 
5.7

Underwriting gain (loss)
$
(2,734
)
 
$
67,794

 
$
16,701

 
(104.0
)%
 
305.9
 %
 
 
 
 
 
 
 
 
 
 
Investment income, net of investment expenses
55,284

 
46,559

 
44,236

 
18.7
 %
 
5.3
 %
Net realized investment gains
4,947

 
1,124

 
4,177

 
NM

 
(73.1
)%
Other income (loss)
—

 
(107
)
 
911

 
(100.0
)
 
(111.7
)%
Income before income taxes
$
57,497

 
$
115,370

 
$
66,025

 
(50.2
)%
 
74.7
 %
 
 
 
 
 
 
 
 
 
 
GAAP Ratios:
 
 
 
 
 
 
 
 
 
Net loss ratio (without catastrophes)
63.2
%
 
57.2
%
 
60.0
%
 
10.5
 %
 
(4.7
)%
Catastrophes - effect on net loss ratio
6.5

 
3.8

 
6.5

 
71.1

 
(41.5
)
Net loss ratio(1)
69.7
%
 
61.0
%
 
66.5
%
 
14.3
 %
 
(8.3
)%
Expense ratio (2)
30.6

 
31.0

 
31.3

 
(1.3
)
 
(1.0
)
Combined ratio(3)
100.3
%
 
92.0
%
 
97.8
%
 
9.0
 %
 
(5.9
)%
NM = not meaningful
(1) The net loss ratio is calculated by dividing the sum of losses and loss settlement expenses by net premiums earned. We use the net loss ratio as a measure of the overall underwriting profitability of the insurance business we write and to assess the adequacy of our pricing. Our net loss ratio is meaningful in evaluating our financial results as reported in our Consolidated Financial Statements.
(2) The expense ratio is calculated by dividing nondeferred underwriting expenses and amortization of deferred policy acquisition costs by net premiums earned. The expense ratio measures a company's operational efficiency in producing, underwriting and administering its insurance business.
(3) The combined ratio is a commonly used financial measure of property and casualty underwriting performance. A combined ratio below 100.0 percent generally indicates a profitable book of business. The combined ratio is the sum of the net loss ratio and the underwriting expense ratio.

For the year ended December 31, 2016, our property and casualty insurance segment reported income before income taxes of $57.5 million compared to income before income taxes of $115.4 million in the same period in 2015. The decrease in income before income taxes during 2016 as compared to 2015 was driven by an increase in losses and loss settlement expenses from higher catastrophe losses and deterioration of our core loss ratio, with a portion of this deterioration being driven by an increase in large losses, which we define as losses greater than $500 thousand, in our commercial auto and commercial fire & allied losses, and an increase in deferred acquisition cost amortization from continued organic growth; partially offset by an increase in net premiums earned from organic growth and geographical expansion and an increase in investment income from higher valuation of our investments in limited liability partnerships. Net premiums earned increased 9.9 percent as compared to 2015.

For the year ended December 31, 2015, our property and casualty insurance segment reported income before income taxes of $115.4 million compared to income before income taxes of $66.0 million in the same period in 2014. The increase in income before income taxes during 2015 as compared to 2014 was driven by organic premium growth from new business and rate increases slightly offset by a proportionately lower increase in losses and loss settlement expenses and underwriting expenses on a better performing underlying book of business. Net premiums earned increased 11.1 percent as compared to 2014.





35

Premiums
The following table shows our premiums written and earned for 2016, 2015 and 2014:
 
 
 
 
 
 
 
% Change
(In Thousands)
 
 
 
 
 
 
2016
 
2015
Years ended December 31,
2016
 
2015
 
2014
 
vs. 2015
 
vs. 2014
Direct premiums written
$
1,006,123

 
$
926,500

 
$
838,584

 
8.6
 %
 
10.5
%
Assumed premiums written
16,834

 
18,290

 
16,421

 
(8.0
)
 
11.4

Ceded premiums written
(57,988
)
 
(56,916
)
 
(50,290
)
 
1.9

 
13.2

Net premiums written
$
964,969

 
$
887,874

 
$
804,715

 
8.7
 %
 
10.3
%
Net premiums earned
936,131

 
851,695

 
766,939

 
9.9

 
11.1

Net Premiums Written
Net premiums written comprise direct and assumed premiums written, less ceded premiums written. Direct premiums written are the total policy premiums, net of cancellations, associated with policies issued and underwritten by our property and casualty insurance segment. Assumed premiums written are the total premiums associated with the insurance risk transferred to us by other insurance and reinsurance companies pursuant to reinsurance contracts. Ceded premiums written is the portion of direct premiums written that we cede to our reinsurers under our reinsurance contracts. Net premiums earned are recognized ratably over the life of a policy and differ from net premiums written, which are recognized on the effective date of the policy.
Direct Premiums Written
Direct premiums written increased $79.6 million in 2016 as compared to 2015 due to organic growth from a combination of new business and geographical expansion.
Direct premiums written increased $87.9 million in 2015 as compared to 2014 due to organic growth from a combination of rate increases across most commercial and personal lines and new business writings.
Assumed Premiums Written
Assumed premiums written decreased $1.5 million in 2016 as compared to 2015 is due to a drop in reinsurance rates. In 2016, we renewed our participation in all of our assumed programs.
Assumed premiums written increased $1.9 million in 2015 as compared to 2014 due the addition of one new program to our portfolio. The new assumed program is for international catastrophes (excluding the United States) with the largest exposure to European wind perils. In 2015, we also renewed our participation in all of our assumed programs.
Ceded Premiums Written
Direct and assumed premiums written are reduced by the ceded premiums that we pay to reinsurers. For 2016, we ceded 1.9 percent more premium to reinsurers as a result of continued growth in direct premiums written offset by declining ceded reinsurance rates. For 2015, we ceded 13.2 percent more premium to reinsurers as a result of growth in direct premiums written .
Losses and Loss Settlement Expenses
Catastrophe Exposures
Catastrophe losses are inherent risks of the property and casualty insurance business. Catastrophic events include, without limitation, hurricanes, tornadoes, earthquakes, hailstorms, wildfires, high winds, winter storms and other natural disasters, along with man-made exposures to losses resulting from, without limitation, acts of war, acts of


36

terrorism and political instability. Such events result in insured losses that can be, and may continue to be, a material factor in our results of operations and financial position, as the extent of losses from a catastrophe is a function of both the total amount of insured exposure in an area affected by the event and the severity of the event. Because the level of insured losses that may occur in any one year cannot be accurately predicted, these losses contribute to fluctuations in our year-to-year results of operations and financial position. Some types of catastrophes are more likely to occur at certain times within the year than others, which adds an element of seasonality to our property and casualty insurance claims. Our property and casualty insurance segment experiences some seasonality with regard to premiums written, which are generally highest in January and July and lowest during the fourth quarter. Losses and loss settlement expenses incurred tend to remain consistent throughout the year, with the exception of catastrophe losses, which generally are highest in the second and third quarters. The frequency and severity of catastrophic events are difficult to accurately predict in any year. However, some geographic locations are more susceptible to these events than others.
We control our direct insurance exposures in regions that are prone to naturally occurring catastrophic events through a combination of geographic diversification, restrictions on the amount and location of new business production in such regions, and reinsurance. We regularly assess our concentration of risk exposures in natural catastrophe exposed areas. We have strategies and underwriting standards to manage these exposures through individual risk selection, subject to regulatory constraints, and through the purchase of catastrophe reinsurance coverage. We use catastrophe modeling and a risk concentration management tool to monitor and control our accumulations of potential losses in natural catastrophe exposed areas of the United States, such as the Gulf and East Coasts, as well as in areas of exposure in other countries where we are exposed to a portion of an insurer's underwriting risk under our assumed reinsurance contracts.
Overall, the models indicate increased risk estimates for our exposure to hurricanes in the U.S., but the impact of the models on our book of business varies significantly among the regions that we model for hurricanes. Based on our analysis, we have implemented more targeted underwriting and rate initiatives in some regions. We will continue to take underwriting actions and/or purchase additional reinsurance as necessary to reduce our exposure.
Catastrophe modeling generally relies on multiple inputs based on experience, science, engineering and history, and the selection of those inputs requires a significant amount of judgment. The modeling results may also fail to account for risks that are outside the range of normal probability or are otherwise unforeseen. Because of this, actual results may differ materially from those derived from our modeling assumptions.
Despite our efforts to manage our catastrophe exposure, the occurrence of one or more severe natural catastrophic events in heavily populated areas could have a material effect on our results of operations, financial condition or liquidity.
The process of estimating and establishing reserves for losses incurred from catastrophic events is inherently uncertain and the actual ultimate cost of a claim, net of reinsurance recoveries, may vary materially from the estimated amount reserved. Although we reinsure a portion of our exposure, reinsurance may prove to be inadequate if a major catastrophic event exceeds our reinsurance limits or if we experience a number of small catastrophic events that individually fall below our reinsurance retention level.
Catastrophe Losses
In 2016, our pre-tax catastrophe losses were $61.2 million, an increase as compared to $32.3 million and an increase as compared to $49.7 million in 2015 and 2014, respectively. The increase in catastrophe losses in 2016 is primarily due to the number of catastrophes and an increase in severity. In 2016, our catastrophe losses included 41 catastrophes, where our largest single pre-tax catastrophe loss totaled $10.4 million. Catastrophe losses in 2016 added 6.5 percentage points to the combined ratio, which is slightly below our historical 10-year average of 6.7 percentage points. In 2015, the decrease in catastrophe losses was primarily due to elevated losses in the prior year. In 2015, our catastrophe losses included 37 catastrophes, where our largest single pre-tax catastrophe loss totaled $4.0 million. In 2014, our catastrophe losses included 26 catastrophes, where our largest single pre-tax catastrophe loss totaled $7.7 million. Catastrophe losses in 2015 added 3.8 percentage points to the combined ratio.


37

Catastrophe Reinsurance
In 2016, 2015 and 2014, we did not exceed our catastrophe reinsurance retention level of $20.0 million.
We use many reinsurers, both domestic and foreign, which helps us to avoid concentrations of credit risk associated with our reinsurance. All reinsurers we do business with must meet the following minimum criteria: capital and surplus of at least $250.0 million and an A.M. Best rating or an S&P rating of at least "A-." If a reinsurer is rated by both rating agencies, then both ratings must be at least an "A-."
The following table represents the primary reinsurers we utilize and their financial strength ratings as of December 31, 2016:
Name of Reinsurer
A.M. Best
S&P Rating
Arch Reinsurance Company
A+
A+
FM Global
A+
N/A
Hannover Rueckversicherung AG (1) (2)
A+
AA-
Lloyd's
A
A+
MS Frontier
A
A+
Partner Re(1)(2)
A
A+
QBE Reinsurance Corporation (1)
A
A+
R&V Versicherung AG (2)
N/A
AA-
SCOR Reinsurance Company(1)(2)
A
AA-
Tokio Millennium Re Ltd
A++
A+
(1)
Primary reinsurers participating in the property and casualty excess of loss programs.
(2)
Primary reinsurers participating in the surety excess of loss program.
Refer to Part II, Item 8, Note 4 "Reinsurance" for further discussion of our reinsurance programs.
Terrorism Coverage
The Terrorism Risk Insurance Program Reauthorization Act of 2007 was signed into law on December 27, 2007. In January 2015, TRIPRA was signed into law. TRIPRA extends the Terrorism Risk Insurance Program until December 31, 2020; gradually increases the coverage trigger for shared terrorism losses between the federal government and the insurance industry to $200 billion per year (up from $100 billion); and gradually increases the industry-wide retention to $37.5 billion per year (up from $27.5 billion). TRIPRA coverage includes most direct commercial lines of business, including coverage for losses from nuclear, biological and chemical exposures if coverage was afforded by an insurer, with exclusions for commercial automobile insurance, burglary and theft insurance, surety, professional liability insurance and farm owners multiple peril insurance. Under TRIPRA, each insurer has a deductible amount, which is 20.0 percent of the prior year's direct commercial lines earned premiums for the applicable lines of business, and retention of 15.0 percent above the deductible. No insurer that has met its deductible shall be liable for the payment of any portion of that amount that exceeds the annual aggregate loss cap specified in TRIPRA. TRIPRA provides marketplace stability. As a result, coverage for terrorist events in both the insurance and reinsurance markets is often available. The amount of aggregate losses necessary for an act of terrorism to be certified by the U.S. Secretary of Treasury, the Secretary of State and the Attorney General was $100.0 million for 2016 and remains the same for 2017. Our TRIPRA deductible was $111.1 million for 2016 and our TRIPRA deductible will be $121.5 million for 2017. Our catastrophe and non-catastrophe reinsurance programs provide limited coverage for terrorism exposure excluding nuclear, biological and chemical-related claims.
2016 Results
In 2016, our losses and loss settlement expenses were 25.4 percent higher than 2015 and our net loss ratio increased 8.7 points due to an increase in catastrophe losses, which accounted for 2.7 percentage points of the increase, and an increase in large losses over $500 thousand in our commercial automobile and commercial fire & allied lines of


38

business. Catastrophe losses increased to $61.2 million in both our direct business and assumed reinsurance business as compared to $32.3 million in 2015.
2015 Results
In 2015, although our losses and loss settlement expenses were 2.0 percent higher than 2014, our net loss ratio decreased 5.5 points due to a better performing underlying book of business and a decrease in catastrophe losses. Catastrophe losses decreased to $32.3 million in both our direct business and assumed reinsurance business as compared to $49.7 million in 2014.
2014 Results
In 2014, our losses and loss settlement expenses were affected by catastrophe losses of $49.7 million in both our direct business and assumed reinsurance business and also by an increase in our non-catastrophe results from an increase in frequency and severity in fire-related losses in our commercial property line of business.
Reserve Development

For many liability claims, significant periods of time, ranging up to several years, and for certain construction defect claims, more than a decade, may elapse between the occurrence of the loss, the reporting of the loss to us and the settlement or other disposition of the claim. As a result, loss experience in the more recent accident years for the long-tail liability coverages has limited statistical credibility in our reserving process because a relatively small proportion of losses in these accident years are reported claims and an even smaller proportion are paid losses. In addition, long-tail liability claims are more susceptible to litigation and can be significantly affected by changing contract interpretations and the legal environment. Consequently, the estimation of loss reserves for long-tail coverages is more complex and subject to a higher degree of variability. Reserves for these long-tail coverages represent a significant portion of our overall carried reserves.

When establishing reserves and monitoring reserve adequacy, we analyze historical data and consider the potential impact of various loss development factors and trends including historical loss experience, legislative enactments, judicial decisions, legal developments in imposition of damages, experience with alternative dispute resolution, results of our medical bill review process and changes and trends in general economic conditions, including the effects of inflation. All of these factors influence our estimates of required reserves and for long-tail lines these factors can change over the course of the settlement of the claim. However, there is no precise method for evaluating the specific dollar impact of any individual factor on the development of reserves.

Our reserving philosophy is to reserve claims to their ultimate expected loss amount as soon as practicable after information about a claim becomes available. This approach tends to produce, on average, prudently conservative case reserves, which we expect to result in some level of favorable development over the course of settlement.

2016 Development

The property and casualty insurance segment experienced $31.2 million of favorable development in our net reserves for prior accident years for the year ended December 31, 2016. The majority of favorable development came from two lines: commercial liability with $25.4 million of favorable development and workers compensation with $12.2 million of favorable development. The favorable development was offset by unfavorable development from commercial fire & allied lines with $6.4 million of unfavorable development and commercial automobile with $5.5 million of unfavorable development. During the twelve-month period ended December 31, 2016 all other lines combined development was $5.5 million of favorable development. The favorable development for the year ended December 31, 2016, is attributable to reductions in reserves for loss adjustment expense which continues to benefit from successful management of litigation expenses.





39

2015 Development

The property and casualty insurance segment experienced $40.4 million of favorable development in our net reserves for prior accident years for the year ended December 31, 2015. Three lines in aggregate accounted for a majority of the favorable development. The largest single contributor was long-tail liability with $23.0 million of favorable development followed by workers' compensation with $22.1 million of favorable development and auto physical damage with $4.4 million of favorable development for the year ended December 31, 2015. The favorable development is attributable to reductions in reserves for reported claims as well as reductions in required reserves for incurred but not reported claims combined with continued successful management of litigation expenses. These reserve decreases were more than sufficient to offset claim payments. The favorable development was partially offset by adverse development, the majority coming from three lines which included property with $5.6 million of adverse development from an increase in severity and frequency of losses, assumed reinsurance with $8.1 million of adverse development due to prior year development of catastrophe losses and commercial auto liability with $2.8 million of adverse development due to an increase in frequency of losses in the year ended December 31, 2015. No other single line of business contributed a significant portion of the total development.

2014 Development

The property and casualty insurance segment experienced $56.7 million of favorable development in our net reserves for prior accident years for the year ended December 31, 2014. The significant drivers of the favorable reserve development in 2014 were our long-tail liability lines, workers' compensation, and automobile (both liability and physical damage), which collectively contributed $54.3 million of the total development. Much of the favorable long-tail liability development came from loss adjustment expense and is attributed to our litigation management initiative. Workers' compensation favorable development was due to the combination of claim reserve decreases along with favorable changes affecting loss adjustment expense. Changes in reserve development patterns have shown increased redundancies in reserves for reported claims along with relatively less need for IBNR claim reserves. Loss adjustment expense, closely tied to loss, generally decreases when loss decreases. Commercial auto liability continues to benefit from loss control and re-underwriting initiatives over the past two years as well as favorable changes affecting loss adjustment expense as reserve development patterns also showed a redundancy in reserves along with less need for IBNR claim reserves.

Reserve development amounts can vary significantly from year-to-year depending on a number of factors, including the number of claims settled and the settlement terms, and are subject to reallocation between accident years and lines of business.



40

Net Loss Ratios by Line
The following table depicts our net loss ratios for 2016, 2015 and 2014:
Years ended December 31,
2016
 
2015
 
2014
(In Thousands)
Net Premiums Earned
 
Net Losses and Loss Settlement Expenses Incurred
 
Net Loss Ratio
 
Net Premiums Earned
 
Net Losses and Loss Settlement Expenses Incurred
 
Net Loss Ratio
 
Net Premiums Earned
 
Net Losses and Loss Settlement Expenses Incurred
 
Net Loss Ratio
Commercial lines
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other liability
$
289,982

 
$
130,748

 
45.1
%
 
$
261,303

 
$
130,904

 
50.1
%
 
$
228,426

 
$
106,827

 
46.8
%
Fire and allied lines
221,758

 
176,961

 
79.8

 
202,375

 
128,479

 
63.5

 
181,710

 
148,856

 
81.9

Automobile
214,009

 
211,882

 
99.0

 
185,970

 
152,558

 
82.0

 
164,537

 
122,683

 
74.6

Workers' compensation
103,605

 
74,051

 
71.5

 
95,672

 
47,106

 
49.2

 
88,522

 
63,425

 
71.6

Fidelity and surety
22,507

 
222

 
1.0

 
21,362

 
2,001

 
9.4

 
19,212

 
1,597

 
8.3

Other
1,745

 
498

 
28.5

 
2,158

 
428

 
19.8

 
2,741

 
153

 
5.6

Total commercial lines
$
853,606

 
$
594,362

 
69.6
%
 
$
768,840

 
$
461,476

 
60.0
%
 
$
685,148

 
$
443,541

 
64.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal lines
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fire and allied lines
$
43,463

 
$
27,402

 
63.0
%
 
$
44,075

 
$
28,815

 
65.4
%
 
$
44,376

 
$
38,644

 
87.1
%
Automobile
25,207

 
23,123

 
91.7

 
24,120

 
17,817

 
73.9

 
23,276

 
20,571

 
88.4

Other
1,090

 
260

 
23.9

 
1,021

 
296

 
29.0

 
994

 
1,972

 
198.4

Total personal lines
$
69,760

 
$
50,785

 
72.8
%
 
$
69,216

 
$
46,928

 
67.8
%
 
$
68,646

 
$
61,187

 
89.1
%
Reinsurance assumed
$
12,765

 
$
7,286

 
57.1
%
 
$
13,639

 
$
11,683

 
85.7
%
 
$
13,145

 
$
5,083

 
38.7
%
Total
$
936,131

 
$
652,433

 
69.7
%
 
$
851,695

 
$
520,087

 
61.0
%
 
$
766,939

 
$
509,811

 
66.5
%
NM=Not meaningful







41

Commercial Lines
The net loss ratio in our commercial lines of business, excluding assumed reinsurance, was 69.6 percent in 2016 compared to 60.0 percent in 2015 and 64.7 percent in 2014. The change in 2016 as compared to 2015 was primarily the result of an increase in catastrophe losses and large losses, which we define as losses greater than $500 thousand, in our commercial automobile and commercial fire & allied lines of business.
The improvement in 2015 as compared to 2014 was primarily the result of a decrease in net losses and loss settlement expenses incurred in fire and allied lines and workers' compensation partially offset by an increase in losses in commercial automobile. The prior year results included an increase in catastrophe losses from spring and summer storms in regions of the U.S where we conduct much of our business and an increase in frequency and severity in fire-related losses in our commercial fire & allied line of business.
Other Liability
Other liability is business insurance covering bodily injury and property damage arising from general business operations, accidents on the insured's premises and products manufactured or sold. Because of the long-tail nature of liability claims, significant periods of time, ranging up to several years, may elapse between the occurrence of the loss, the reporting of the loss to us and the settlement of the claim.
In recent years, we began to use our loss control department more extensively in an attempt to return this line of business to a higher level of profitability. For example, our loss control department has representatives who make multiple visits each year to businesses and job sites to ensure safety. We also do not renew accounts that no longer meet our underwriting or pricing guidelines. We avoid accounts that have become too underpriced for the risk.
Construction Defect Losses
Incurred losses from construction defect claims were $10.4 million in 2016 compared to $3.6 million and $10.1 million in 2015 and 2014, respectively. At December 31, 2016, we had $22.3 million in construction defect loss and loss settlement expense reserves (excluding IBNR reserves which are calculated at the overall other liability commercial line), which consisted of 1,382 claims. In comparison, at December 31, 2015, we had reserves of $28.8 million, excluding IBNR reserves, consisting of 1,721 claims. The increase in the incurred losses is due to an increase in paid claims in the current year and acceleration of claims settlement rates. The decrease in reserves at December 31, 2016 is due to a decrease in open claim counts.
Construction defect claims generally relate to allegedly defective work performed in the construction of structures such as apartments, condominiums, single family dwellings or other housing, as well as the sale of defective building materials. Such claims seek recovery due to damage caused by alleged deficient construction techniques or workmanship. The reporting of such claims can be quite delayed due to an extended statute of limitations, sometimes up to ten years. Court decisions have expanded insurers' exposure to construction defect claims as well. Defense costs are also a part of the insured expenses covered by liability policies and can be significant, sometimes greater than the cost of the actual paid claims.

We have exposure to construction defect liabilities in Colorado and surrounding states. We have historically insured small- to medium-sized contractors in this geographic area. In an effort to limit the number of future claims from multi-unit buildings, we implemented policy exclusions in 2009, later revised in 2010, that exclude liability coverage for contractors performing "residential structural" operations on any building project with more than 12 units or on single family homes in any subdivision where the contractor is working on more than 15 homes. The exclusions do not apply to remodeling or repair of an existing structure. We also changed our underwriting guidelines to add a professional liability exclusion when contractors prepare their own design work or blueprints and implemented the multi-family exclusion and tract home building limitation form for the state of Colorado and our other western states as a means to reduce our exposure in future years. When offering commercial umbrella coverage for structural residential contractors, limits of liability are typically limited to a maximum of $2.0 million per occurrence. Requests to provide additional insured status for "developers" are declined.



42

As a result of our acquisition of Mercer Insurance Group in 2011, we added construction defect exposure in the states of California, Nevada and Arizona. Mercer Insurance Group has been writing in these states for more than 20 years. In order to minimize our exposure to construction defect claims in this region, we continually review the coverage we offer and our pricing models. In an effort to limit our exposure from residential multi-unit buildings, we started including condominium and townhouse construction policy exclusions in 2012 for our contracting policies in this region. For the majority of our residential contractors we limit the size of any tracts the contractor is working on to 25 homes or less and do not include a continuous trigger with our designated work exclusion. In a majority of the policies in our small service, repair and remodel contractors program, we have a favorable new residential construction exclusion. We also apply strict guidelines when additional insured forms are required and changed our underwriting guidelines to limit our exposure to large, multi-party construction defect claims. 
Commercial Fire and Allied Lines
Commercial fire and allied lines include fire, allied lines, commercial multiple peril and inland marine. The insurance covers losses to an insured's property, including its contents, from weather, fire, theft or other causes. We provide this coverage through a variety of business policies.
The deterioration in the net loss ratio in 2016 as compared to 2015 was primarily attributable to an increase in severity in commercial fire losses and an increase in catastrophe losses. The improvement in the net loss ratio in 2015 as compared to 2014 was primarily attributable to elevated losses in the prior year. In 2014, there were elevated catastrophe losses from spring and summer storms in regions of the U.S. where we conduct much of our business and an increase in frequency and severity in fire-related losses in our commercial property line of business.
Commercial Automobile
Our commercial automobile insurance covers physical damage to an insured's vehicle, as well as liabilities to third parties. Automobile physical damage insurance covers loss or damage to vehicles from collision, vandalism, fire, theft, flood or other causes. Automobile liability insurance covers bodily injury, damage to property resulting from automobile accidents caused by the insured, uninsured or underinsured motorists and the legal costs of defending the insured against lawsuits. The deterioration in our commercial automobile insurance line in 2016 as compared to 2015 was due to an increase in frequency and severity of claims in 2016 due to an increase in miles driven by commercial vehicles. The deterioration in our commercial automobile insurance line in 2015 as compared to 2014 was due to an increase in severity of claims combined with additional reserves for incurred but not reported claims in 2015 primarily from an adverse development experience trend from an increase in highway roadway use by commercial vehicles.
Workers' Compensation
We consider our workers' compensation business to be a companion product; we rarely write stand-alone workers' compensation policies. Our workers' compensation insurance covers primarily small- to mid-size accounts.
The deterioration in our workers' compensation line of business in 2016 as compared to 2015 was due to an increase in severity of claims of over $0.1 million and a decrease in favorable reserves development on prior year claims. The improvement in our workers' compensation line of business in 2015 as compared to 2014 was due to a decrease in severity and frequency of claims and favorable development in reserves for reported claims.
The challenges faced by workers' compensation insurance providers to attain profitability include the regulatory climates in some states that make it difficult to obtain appropriate premium rate increases and inflationary medical costs. Despite these pricing issues, we continue to believe that we can improve the results of this line of business. Consequently, we have increased the utilization of our loss control unit in the analysis of current risks, with the intention of increasing the quality of our workers' compensation book of business. We are currently using these modeling analytics to assist us in risk selection, and we will continue to evaluate the model results.




43

Fidelity and Surety
Our surety products guarantee performance and payment by our bonded principals. Our contract bonds protect owners from failure to perform on the part of our principals. In addition, our surety bonds protect material suppliers and subcontractors from nonpayment by our contractors. When surety losses occur, our loss is determined by estimating the cost to complete the remaining work and to pay the contractor's unpaid bills, offset by contract funds due to the contractor, reinsurance, and the value of any collateral to which we may have access.

In 2016, the change in the the loss ratio was primarily due to salvage and subrogation received in the second quarter of 2016. In 2015, the loss ratio increased slightly as compared to 2014 due to a single large claim incurred in the first quarter of 2015.

During 2016 and 2014 there were no claims that exceeded our $1.5 million reinsurance retention level. During 2015, there were two claims that exceeded our $1.5 million surety excess of loss reinsurance retention level.
Personal Lines
Our personal lines consist primarily of fire and allied lines (including homeowners) and automobile lines. In 2016, the net loss ratio deteriorated 5.0 percentage points primarily attributable to an increase in claim frequency in our personal automobile line due to an increase in catastrophe losses. In 2015, the net loss ratio improved 21.3 percentage points compared to 2014. The change was primarily due to a decrease in net losses and loss settlement expenses incurred in the fire and allied lines of business due to less catastrophe losses in 2015.
For our personal lines, we use the CATography™ Underwriter tool, which gives us the ability to determine whether the premium we charge for an exposure is adequate in areas where hurricanes and earthquakes occur. We have also implemented predictive analytics and data prefill for our personal automobile line. Data prefill is a data accessing methodology that allows for a more complete profile of our customers at the agent's point of sale during the quotation process.
Assumed Reinsurance
Our assumed reinsurance is the business we choose to write by participating in programs insuring insurance companies. The net loss ratio improved in 2016 due to an increase in favorable reserve development on prior year claims and from a decrease in catastrophe losses assumed. The net loss ratio deterioration in 2015 was due to an increase in catastrophe losses assumed.

In 2016, we renewed our participation in all of our assumed programs. In 2015, we renewed our participation in all of our assumed programs and added one new program to our portfolio. In 2014, we renewed our participation in all but one of our assumed programs and added one new program to our portfolio. We increased participation in one program in our assumed portfolio to replace lost premium from the program not renewed.
Other Underwriting Expenses
Our underwriting expense ratio, which is a percentage of other underwriting expenses over net premiums earned, was 30.6 percent, 31.0 percent and 31.3 percent for 2016, 2015, and 2014, respectively. The underwriting expense ratio improved in 2016 due to a decrease in post-retirement benefit costs and contingent commission expenses.
The underwriting expense ratio improved slightly in 2015 due to the improvement in the profitability in certain lines of business, which led to an increase in the amount of underwriting expenses eligible for deferral, elimination of duplicate costs associated with the previously disclosed Mercer Insurance Group, Inc. integration and completion of technology projects, all partially offset by an increase in post-retirement benefit costs.






44

Life Insurance Segment Results
 
Years Ended December 31,
 
% Change
 
 
 
 
 
 
 
2016
 
2015
(In Thousands)
2016
 
2015
 
2014
 
vs. 2015
 
vs. 2014
Revenues
 
 
 
 
 
 
 
 
 
Net premiums earned
$
87,270

 
$
79,195

 
$
61,391

 
10.2
 %
 
29.0
 %
Investment income, net
51,538

 
54,222

 
60,373

 
(5.0
)%
 
(10.2
)%
Net realized investment gains (losses)
 
 
 
 
 
 
 
 
 
Other-than-temporary impairment charges
—

 
(1,300
)
 
—

 
NM

 
NM

All other net realized gains
1,156

 
3,022

 
3,093

 
(61.7
)%
 
(2.3
)%
Net realized investment gains
1,156

 
1,722

 
3,093

 
(32.9
)%
 
(44.3
)%
Other income
621

 
508

 
774

 
22.2
 %
 
(34.4
)%
Total revenues
$
140,585

 
$
135,647

 
$
125,631

 
3.6
 %
 
8.0
 %
 
 
 
 
 
 
 
 
 
 
Benefits, Losses and Expenses
 
 
 
 
 
 
 
 
 
Losses and loss settlement expenses
$
31,365

 
$
29,001

 
$
26,432

 
8.2
 %
 
9.7
 %
Increase in liability for future policy benefits
59,969

 
50,945

 
36,623

 
17.7
 %
 
39.1
 %
Amortization of deferred policy acquisition costs
8,121

 
6,634

 
6,139

 
22.4
 %
 
8.1
 %
Other underwriting expenses
19,881

 
19,306

 
15,754

 
3.0
 %
 
22.5
 %
Interest on policyholders' accounts
20,079

 
23,680

 
30,245

 
(15.2
)%
 
(21.7
)%
Total benefits, losses and expenses
$
139,415

 
$
129,566

 
$
115,193

 
7.6
 %
 
12.5
 %
 
 
 
 
 
 
 
 
 
 
Income before income taxes
$
1,170

 
$
6,081

 
$
10,438

 
(80.8
)%
 
(41.7
)%
NM =Not meaningful
United Life underwrites all of our life insurance business. Our principal life insurance products are deferred and immediate annuities, universal life products and traditional life (primarily single premium whole life insurance) products. We also underwrite and market other traditional products, including term life insurance and whole life insurance. Deferred and immediate annuities (40.3 percent), traditional life products (47.5 percent), universal life products (10.9 percent), and other life products (1.3 percent) comprised our 2016 life insurance premium revenues, as determined on the basis of statutory accounting principles. We do not write variable annuities or variable insurance products.

Income before income taxes for our life insurance segment totaled $1.2 million in 2016 compared to $6.1 million in 2015 and $10.4 million in 2014. The decrease in net income before income taxes from 2015 to 2016 was primarily a result of a decrease in net investment income, an increase in losses and loss settlement expenses and an increase in the increase in liability for future policy benefits, all partially offset by an increase in net premiums earned from higher sales of single premium whole life ("SPWL") policies and a decrease in interest on policyholders' accounts due to the continued net withdrawals of annuity products.

The decrease in net income before income taxes from 2014 to 2015 was primarily a result of a decrease in net investment income, an increase in losses and loss settlement expenses and an increase in the increase in liability for future policy benefits, all partially offset by an increase in net premiums earned from higher sales of SPWL policies and a decrease in interest on policyholders' accounts due to a decline in the crediting rate paid on continued net withdrawals of annuity products.
In 2016, net investment income decreased 5.0 percent as compared to 2015 and decreased 10.2 percent in 2015 as compared to 2014. The decrease is due to lower asset base from declining annuity deposits and due to a decrease in reinvestment interest rates. For discussion of our consolidated investment results, see the "Investments" section contained in this Item.


45

Net premiums earned increased 10.2 percent in 2016 as compared to 2015 primarily due to an increase in sales of SPWL policies. Net premiums earned increased 29.0 percent in 2015 as compared to 2014 due to an increase in sales of SPWL policies.

Underwriting expenses increased 3.0 percent in 2016 as compared to 2015 due to an increase in SPWL commissions related to the increase in premiums as previously mentioned partially offset by a decrease in our post-retirement benefit plan expenses.

Deferred annuity deposits decreased 24.5 percent in 2016, as compared to 2015 and decreased 55.7 percent in 2015 as compared to 2014. We gradually lowered the credited rate offered on our deferred annuity products in the low interest rate environment, which resulted in the decrease in deferred annuity deposits.

Net cash outflow related to the Company's annuity business was $83.7 million in 2016 compared to a net cash outflow of $129.7 million and $77.7 million, respectively, in 2015 and 2014. This result is attributed to the activity described previously.
The fixed annuity deposits that we collect are not reported as net premiums earned under GAAP. Instead, we invest annuity deposits and record them as a liability for future policy benefits. The revenue that is generated from fixed annuity products consists of policy surrender charges and investment income. The difference between the yield we earn on our investment portfolio and the interest we credit on our fixed annuities is known as the investment spread. The investment spread is a major driver of the profitability for all of our annuity products. As of December 31, 2016, our investment spread on our annuity products was 1.48 percent as compared to 1.34 percent at December 31, 2015.
Federal Income Taxes
We reported a federal income tax expense of $8.8 million, $32.3 million and $17.3 million in 2016, 2015, and 2014, respectively. Our effective federal tax rate varied from the statutory federal income tax expense rate of 35.0 percent in each year, due primarily to our portfolio of tax-exempt securities.
As of December 31, 2016, we had a net operating loss ("NOL") carryforward of $3.1 million, which is due to our purchase of American Indemnity Financial Corporation in 1999. No NOLs will expire in 2017. 
Due to our determination that we may not be able to fully realize the benefits of the NOLs acquired in the purchase of American Indemnity Financial Corporation, which are only available to offset the future taxable income of our property and casualty insurance operations and are further limited as to the amount that can be utilized in any given year, we have recorded a valuation allowance against these NOLs that totaled $0.7 million at December 31, 2016. Based on a yearly review, we determine whether the benefit of the NOLs can be realized, and, if so, the decrease in the valuation allowance is recorded as a reduction to current federal income tax expense. If NOLs expire during the year, the decrease in the valuation allowance is offset with a corresponding decrease to the deferred income tax asset. The valuation allowance was reduced by $0.5 million in 2016 due to the realization of $1.6 million in NOLs.
As of December 31, 2016, we had $1.2 million of alternative minimum tax ("AMT") credit carryforwards.


46

INVESTMENTS
Investment Environment

2016 can be characterized as a year of tepid global economic activity, below trend investment, and increased geopolitical uncertainty. The current year began on a negative tone for risk assets as a severe correction in Chinese stocks, combined with weaker-than-expected economic numbers in the United States, prompted a convincing flight-to-safety trade among portfolio managers. In January and February, U.S. equities declined by almost 10 percent, the price of oil fell below $30 per barrel, and 10-year Treasury yields plummeted almost 60 basis points to 1.66 percent.  However, by spring the sense of panic had transitioned into opportunity, and markets were able to stabilize as the economic outlook improved with more upbeat data, and global central banks reaffirmed their pledge of support. However, investor resolve was tested once again during the summer with Britain’s referendum to leave the European Union causing a spike in volatility, and a second leg down for interest rates with U.S. 10-year treasury rates falling to 1.34 percent. 

Heading into the fall elections, the economy continued to trend positive overall. Immediately following the election, stocks and bond yields rallied substantially, which continued into the end of the year. While the backup in rates since the election was welcomed, the overall level of investment yield still remains historically low. Now that fiscal stimulus seems poised to take over for monetary policy as the driving force for the economy, expectations are that lower taxes, less regulation and increased capital spending will produce above trend growth and productivity, as well as increase the overall level of prices and interest rates. Downside risks include stagnation due to delays in, or lack of, policy implementation caused by government gridlock. In general, the investment environment remains challenging for now given persistently low yields for fixed income investments, uncertainty surrounding a meaningful pivot in U.S. government policy across many fronts and shifting global alliances as a result. 
Investment Philosophy

The Company's assets are invested to preserve capital and maximize after-tax returns while maintaining an appropriate balance of risk. The return on our portfolio is an important component of overall financial results, but quality and safety of principal is the highest priority of our investment program. Our general investment philosophy is to purchase financial instruments with the expectation that we will hold them to their maturity. However, active management of our available-for-sale portfolio is considered necessary to appropriately manage risk, achieve portfolio objectives and maximize investment income as market conditions change. 

We work with our insurance company subsidiaries to develop an appropriate investment strategy that aligns with their business needs and supports United Fire's strategic plan and risk appetite.  The portfolio is structured so as to be in compliance with state insurance laws that prescribe the quality, concentration and type of investments that may be made by insurance companies.  All but a small portion of our investment portfolio is managed internally.
Investment Portfolio
Our invested assets at December 31, 2016 totaled $3.3 billion, compared to $3.1 billion at December 31, 2015, an increase of $122.9 million. At December 31, 2016, fixed maturity securities and equity securities comprised 89.2 percent and 8.5 percent of our investment portfolio, respectively. Because the primary purpose of the investment portfolio is to fund future claims payments, we utilize a conservative investment philosophy, investing in a diversified portfolio of high-quality, intermediate-term taxable corporate bonds, taxable U.S. government and government agency bonds and tax-exempt U.S. municipal bonds. Our overall investment strategy is to stay fully invested (i.e., minimize cash balances). If additional cash is needed we have an ability to borrow funds available under our revolving credit facility.

Composition
We develop our investment strategies based on a number of factors, including estimated duration of reserve liabilities, short- and long-term liquidity needs, projected tax status, general economic conditions, expected rates of inflation and regulatory requirements. We administer our investment portfolio based on investment guidelines


47

approved by management and the investment committee of our Board of Directors that comply with applicable statutory regulations.

The composition of our investment portfolio at December 31, 2016 is presented at carrying value in the following table:
 
Property & Casualty Insurance Segment
 
Life Insurance Segment
 
Total
 
 
 
Percent
 
 
 
Percent
 
 
 
Percent
(In Thousands)
 
 
of Total
 
 
 
of Total
 
 
 
of Total
Fixed maturities: (1)
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity
$
150

 
—
%
 
$
48

 
—
%
 
$
198

 
—
%
Available-for-sale
1,453,286

 
82.1

 
1,444,840

 
96.7

 
2,898,126

 
88.7

Trading securities
14,390

 
0.8

 
—

 
—

 
14,390

 
0.4

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale
246,370

 
13.9

 
24,046

 
1.6

 
270,416

 
8.3

Trading securities
5,644

 
0.3

 
—

 
—

 
5,644

 
0.2

Mortgage loans
—

 
—

 
3,706

 
0.2

 
3,706

 
0.1

Policy loans
—

 
—

 
5,366

 
0.4

 
5,366

 
0.2

Other long-term investments
51,768

 
2.9

 
15,871

 
1.1

 
67,639

 
2.1

Short-term investments
175

 
—

 
—

 
—

 
175

 
—

Total
$
1,771,783

 
100.0
%
 
$
1,493,877

 
100.0
%
 
$
3,265,660

 
100.0
%
(1) Available-for-sale and trading fixed maturities are carried at fair value. Held-to-maturity fixed maturities are carried at amortized cost.

At December 31, 2016, we classified $2.9 billion, or 99.5 percent, of our fixed maturities portfolio as available-for-sale, compared to $2.8 billion, or 99.5 percent, at December 31, 2015. Available-for-sale securities are carried at fair value, with changes in fair value recognized as a component of accumulated other comprehensive income in stockholders' equity. We classify our remaining fixed maturities as held-to-maturity or trading. We record held-to-maturity securities at amortized cost. We record trading securities, primarily convertible redeemable preferred debt securities, at fair value, with any changes in fair value recognized in earnings.

As of December 31, 2016 and 2015, we did not have direct exposure to investments in subprime mortgages or other credit enhancement vehicles.

Credit Quality

The following table shows the composition of fixed maturity securities held in our available-for-sale, held-to-maturity and trading security portfolios by credit rating at December 31, 2016 and 2015. Information contained in the table is generally based upon the issue credit ratings provided by Moody's, unless the rating is unavailable, in which case we obtain it from Standard & Poor's.
(In Thousands)
December 31, 2016
 
December 31, 2015
Rating
Carrying Value

 
% of Total
 
Carrying Value
 
% of Total
AAA
$
782,329

 
26.9
%
 
$
838,318

 
29.6
%
AA
857,946

 
29.4

 
724,023

 
25.5

A
651,696

 
22.4

 
670,098

 
23.6

Baa/BBB
554,475

 
19.0

 
556,667

 
19.6

Other/Not Rated
66,268

 
2.3

 
49,149

 
1.7

 
$
2,912,714

 
100.0
%
 
$
2,838,255

 
100.0
%

Duration
Our investment portfolio is invested primarily in fixed maturity securities whose fair value is susceptible to market risk, specifically interest rate changes. Duration is a measurement used to quantify our inherent interest rate risk and


48

analyze our ability to match our invested assets to our reserve liabilities. If our invested assets and reserve liabilities have similar durations, then any change in interest rates will have an equal effect on these accounts. The primary purpose for matching invested assets and reserve liabilities is liquidity. With appropriate matching, our investments will mature when cash is needed, preventing the need to liquidate other assets prematurely. Mismatches in the duration of assets and liabilities can cause significant fluctuations in our results of operations.

Group

The weighted average effective duration of our portfolio of fixed maturity securities was 5.2 years at December 31, 2016 compared to 5.2 years at December 31, 2015.

Property and Casualty Insurance Segment

The weighted average effective duration of our portfolio of fixed maturity securities was 5.4 years at December 31, 2016 compared to 5.2 years at December 31, 2015.
The amortized cost and fair value of held-to-maturity, available-for-sale and trading fixed maturity securities at December 31, 2016, 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.
(In Thousands)
Held-To-Maturity
 
Available-For-Sale
 
Trading
 
Amortized
 
Fair
 
Amortized
 
Fair
 
Amortized
 
Fair
December 31, 2016
Cost
 
Value
 
Cost
 
Value
 
Cost
 
Value
Due in one year or less
$
150

 
$
150

 
$
55,767

 
$
56,234

 
$
1,753

 
$
1,774

Due after one year through five years
—

 
—

 
302,350

 
310,942

 
7,841

 
8,882

Due after five years through 10 years
—

 
—

 
322,890

 
325,690

 
1,302

 
1,406

Due after 10 years
—

 
—

 
609,923

 
593,937

 
2,158

 
2,328

Asset-backed securities
—

 
—

 
3,127

 
3,008

 
—

 
—

Mortgage-backed securities
—

 
—

 
11,462

 
11,584

 
—

 
—

Collateralized mortgage obligations
—

 
—

 
152,716

 
151,891

 
—

 
—

 
$
150

 
$
150

 
$
1,458,235

 
$
1,453,286

 
$
13,054

 
$
14,390


Life Insurance Segment

The weighted average effective duration of our portfolio of fixed maturity securities at December 31, 2016 was 4.9 years compared to 5.3 years at December 31, 2015.
The amortized cost and fair value of held-to-maturity, available-for-sale and trading fixed maturity securities at December 31, 2016, 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.


49

(In Thousands)
Held-To-Maturity
 
Available-For-Sale
 
Amortized
 
Fair
 
Amortized
 
Fair
December 31, 2016
Cost
 
Value
 
Cost
 
Value
Due in one year or less
$
—

 
$
—

 
$
50,291

 
$
50,846

Due after one year through five years
—

 
—

 
538,253

 
551,111

Due after five years through 10 years
—

 
—

 
484,833

 
489,492

Due after 10 years
—

 
—

 
77,916

 
77,542

Asset-backed securities
—

 
—

 
1,280

 
1,262

Mortgage-backed securities
48

 
49

 
5,826

 
5,664

Collateralized mortgage obligations
—

 
—

 
270,871

 
268,923

 
$
48

 
$
49

 
$
1,429,270

 
$
1,444,840


Investment Results
We invest the premiums received from our policyholders and annuitants in order to generate investment income, which is an important component of our revenues and profitability. The amount of investment income that we are able to generate is affected by many factors, some of which are beyond our control. Some of these factors are volatility in the financial markets, economic growth, inflation, changes in interest rates, world political conditions, terrorist attacks or threats of terrorism, adverse events affecting other companies in our industry or the industries in which we invest and other unpredictable national or world events. Net investment income increased 6.0 percent in 2016, compared with the same period of 2015, primarily due to the change in value of our investments in limited liability partnerships, specifically related to financial institutions. The valuation of these investments in limited liability partnerships varies from period to period due to current equity market conditions. We expect to maintain our investment philosophy of purchasing quality investments rated investment grade or better.
We regularly 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 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 or based on the value calculated using a discounted cash flow model. 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.
Changes in unrealized gains and losses on available-for-sale securities do not affect net income and earnings per share but do impact comprehensive income, stockholders' equity and book value per share. We believe that any unrealized losses on our available-for-sale securities at December 31, 2016 are temporary based upon our current analysis of the issuers of the securities that we hold and current market conditions. It is possible that we could recognize impairment charges in future periods on securities that we own at December 31, 2016 if future events and information cause us to determine that a decline in value is other-than-temporary. However, we endeavor to invest in high quality assets to provide protection from future credit quality issues and corresponding other-than-temporary impairment write-downs.  











50


Our investment results are summarized in the following table:
(In Thousands)
 
 
 
 
 
 
% Change
 
 
 
 
 
 
 
2016
 
2015
As of and for the Years Ended December 31,
2016
 
2015
 
2014
 
vs. 2015
 
vs. 2014
Investment income, net
$
106,822

 
$
100,781

 
$
104,609

 
6.0
%
 
(3.7
)%
Net realized investment gains (losses)
 
 
 
 
 
 
 
 
 
Other-than-temporary impairment charges
$
—

 
$
(1,300
)
 
$
—

 
NM

 
NM

All other net realized gains
6,103

 
4,146

 
7,270

 
47.2

 
(43.0
)
Total net realized investment gains
$
6,103

 
$
2,846

 
$
7,270

 
114.4
%
 
(60.9
)%
Net unrealized investment gains, after tax
$
133,892

 
$
128,369

 
$
149,623

 
4.3
%
 
(14.2
)%
NM=not meaningful
Net Investment Income
In 2016, our investment income, net of investment expenses, increased $6.0 million to $106.8 million as compared to 2015, primarily due to the change in value of our investments in limited liability partnerships, specifically related to financial institutions.
In 2015, our investment income, net of investment expenses, decreased $3.8 million to $100.8 million as compared to 2014, primarily due the decline in invested assets and decline in reinvestment interest rates from the low interest rate environment.
The following table summarizes the components of net investment income:
(In Thousands)
Years Ended December 31,
2016
 
2015
 
2014
Investment income
 
 
 
 
 
Interest on fixed maturities
$
92,362

 
$
92,777

 
$
97,969

Dividends on equity securities
7,050

 
7,208

 
6,602

Income on other long-term investments
 
 
 
 
 
Interest
2,394

 
2,567

 
1,927

Change in value (1)
10,742

 
3,266

 
1,917

Interest on mortgage loans
221

 
237

 
252

Interest on short-term investments
84

 
6

 
5

Interest on cash and cash equivalents
445

 
305

 
255

Other
1,227

 
1,452

 
1,998

Total investment income
$
114,525

 
$
107,818

 
$
110,925

Less investment expenses
7,703

 
7,037

 
6,316

Investment income, net
$
106,822

 
$
100,781

 
$
104,609

(1)
Represents the change in value of our interests in limited liability partnerships that are recorded on the equity method of accounting.

In 2016, 80.6 percent of our gross investment income originated from interest on fixed maturities, compared to 86.0 percent and 88.3 percent in 2015 and 2014, respectively.





51

The following table details our annualized yield on average invested assets for 2016, 2015 and 2014, which is based on our invested assets (including money market accounts) at the beginning and end of the year divided by net investment income:
(In Thousands)
 
 
 
 
 

Years ended December 31,
Average
Invested Assets
 
Investment
Income, Net
 
Annualized Yield on
Average Invested Assets
2016
$
3,223,014

 
$
106,822

 
3.3
%
2015
3,181,311

 
100,781

 
3.2
%
2014
3,143,502

 
104,609

 
3.3

Net Realized Investment Gains and Losses
In 2016, 2015 and 2014, we reported net realized investment gains of $6.1 million, $2.8 million and $7.3 million, respectively. The following table summarizes the components of our net realized investment gains or losses:
(In Thousands)
Years Ended December 31,
2016
 
2015
 
2014
Net realized investment gains (losses)
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
Available-for-sale
$
2,160

 
$
3,294

 
$
3,353

Trading securities
 
 
 
 
 
Change in fair value
189

 
(1,353
)
 
609

Sales
931

 
1,381

 
1,339

Equity securities:
 
 
 
 
 
Available-for-sale
2,359

 
2,521

 
1,732

Trading securities
 
 
 
 
 
Change in fair value
301

 
(448
)
 
238

Sales
(6
)
 
66

 
(1
)
Other long-term investments
—

 
(1,315
)
 
—

Other-than-temporary-impairment charges:
 
 
 
 
 
Fixed maturities
—

 
(1,300
)
 
—

Cash equivalents
169

 
—

 
—

Total net realized investment gains
$
6,103

 
$
2,846

 
$
7,270

Net Unrealized Investment Gains and Losses
As of December 31, 2016, net unrealized investment gains, after tax, totaled $133.9 million compared to $128.4 million and $149.6 million as of December 31, 2015 and 2014, respectively. The increase in unrealized gains in 2016 is the result of an increase in the fair value of the equity securities portfolio due to an increase in the financial markets, partially offset by a decline in the fair value of the fixed maturity portfolio due to an increase in interest rates. The decrease in unrealized gains in 2015 is the result of a decrease in the fair value of the fixed maturity portfolio due to an increase in interest rates and the decrease in the equity portfolio due to a decline in the financial markets.
 






52

The following table summarizes the change in our net unrealized investment gains (losses):
(In Thousands)
Years Ended December 31,
2016
 
2015
 
2014
Changes in net unrealized investment gains (losses):
 
 
 
 
 
Available-for-sale fixed maturity securities
$
(21,271
)
 
$
(37,621
)
 
$
51,814

Equity securities
34,179

 
(6,459
)
 
15,781

Deferred policy acquisition costs
(4,410
)
 
11,380

 
(16,789
)
Income tax effect
(2,975
)
 
11,446

 
(17,784
)
Total change in net unrealized investment gains, net of tax
$
5,523

 
$
(21,254
)
 
$
33,022

Market Risk
Our Consolidated Balance Sheets include financial instruments whose fair values are subject to market risk. The active management of market risk is integral to our operations. Market risk is the potential for loss due to a decrease in the fair value of securities resulting from uncontrollable fluctuations, such as: interest rate risk, equity price risk, foreign exchange risk, credit risk, inflation, or geopolitical conditions. Our primary market risk exposures are: changes in interest rates, deterioration of credit quality in specific issuers, sectors or the economy as a whole, and an unforeseen decrease in the liquidity of securities we hold. We have no foreign exchange risk.
Interest Rate Risk
Interest rate risk is the price sensitivity of a fixed income maturity security or portfolio of securities to changes in level of interest rates. Generally, there is an inverse relationship between changes in interest rates and changes in the price of a fixed income/maturity security. Plainly stated, if interest rates go up (down), bond prices go down (up). A vast majority of our holdings are fixed income maturity and other interest rate sensitive securities that will decrease (increase) in value as interest rates increase (decrease). While it is generally our intent to hold our investments in fixed maturity securities to maturity, we have classified a majority of our fixed maturity portfolio as available-for-sale. Available-for-sale fixed income maturity securities are carried at fair value on the Consolidated Balance Sheets with unrealized gains or losses reported net of tax in Accumulated Other Comprehensive Income. A change in the prevailing interest rates generally translates into a change in the fair value of our fixed income/maturity securities, and by extension, our overall book value.
Market Risk and Duration
We analyze potential changes in the value of our investment portfolio due to the market risk factors noted above within the overall context of asset and liability management. A technique we use in the management of our investment portfolio is the calculation of duration. Our actuaries estimate the payout pattern of our reserve liabilities to determine their duration, which is the present value of the weighted average payments expressed in years. We then establish a target duration for our investment portfolio so that at any given time the estimated cash generated by the investment portfolio will closely match the estimated cash required for the payment of the related reserves. We structure the investment portfolio to meet the target duration to achieve the required cash flow, based on liquidity and market risk factors.
Duration relates primarily to our life insurance segment because the long-term nature of these reserve liabilities increases the importance of projecting estimated cash flows over an extended time frame. At December 31, 2016, our life insurance segment had $666.7 million in deferred annuity liabilities for which investments in fixed maturity securities were specifically allocated.
The duration of the life insurance segment's investment portfolio must take into consideration interest rate risk. This is accomplished through the use of sensitivity analysis, which measures the price sensitivity of the fixed maturities to changes in interest rates. The alternative valuations of the investment portfolio, given the various hypothetical interest rate changes utilized by the sensitivity analysis, allow management to revalue the potential cash flow from


53

the investment portfolio under varying market interest rate scenarios. Duration can then be recalculated at the differing levels of projected cash flows.
Impact of Interest Rate Changes
The amounts set forth in the following table detail the impact of hypothetical interest rate changes on the fair value of fixed maturity securities held at December 31, 2016. The sensitivity analysis measures the change in fair values arising from immediate changes in selected interest rate scenarios. We employed hypothetical parallel shifts in the yield curve of plus or minus 100 and 200 basis points in the simulations. Additionally, based upon the yield curve shifts, we employ estimates of prepayment speeds for mortgage-related products and the likelihood of call or put options being exercised within the simulations. According to this analysis, at current levels of interest rates, the duration of the investments supporting the deferred annuity liabilities is 2.01 years longer than the projected duration of the liabilities. If interest rates increase by 100 or 200 basis points, the duration of the investments supporting the deferred annuity liabilities would be 2.46 years and 3.0 years longer, respectively, than the projected duration of the liabilities.
The selection of a 100-basis-point and 200-basis-point increase or decrease in interest rates should not be construed as a prediction by our management of future market events, but rather as an illustration of the potential impact of an event.


54

December 31, 2016
-200 Basis
 
-100 Basis
 
 
 
+100 Basis
 
+ 200 Basis
(In Thousands)
Points
 
Points
 
Base
 
Points
 
 Points
HELD-TO-MATURITY
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
 
 
Corporate bonds - financial services
$
152

 
$
151

 
$
150

 
$
149

 
$
148

Collateralized mortgage obligations
52

 
50

 
49

 
48

 
48

Total Held-to-Maturity Fixed Maturities
$
204

 
$
201

 
$
199

 
$
197

 
$
196

AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
24,308

 
$
23,742

 
$
23,195

 
$
22,668

 
$
22,159

U.S. government agency
82,512

 
80,433

 
77,597

 
72,635

 
67,166

States, municipalities and political subdivisions
 
 
 
 
 
 
 
 
 
  General obligations:
 
 
 
 
 
 
 
 
 
     Midwest
157,961

 
151,289

 
144,143

 
136,583

 
129,365

     Northeast
64,712

 
61,673

 
58,409

 
54,828

 
51,365

     South
144,844

 
137,017

 
128,369

 
119,056

 
110,213

     West
129,913

 
121,984

 
113,731

 
105,350

 
97,501

   Special revenue:
 
 
 
 
 
 
 
 
 
     Midwest
188,881

 
179,040

 
168,310

 
156,987

 
146,379

     Northeast
80,814

 
74,562

 
68,065

 
61,619

 
55,766

     South
281,247

 
260,957

 
239,187

 
217,423

 
197,774

     West
153,649

 
142,994

 
131,744

 
120,453

 
110,105

Foreign bonds
69,084

 
67,125

 
65,234

 
63,411

 
61,656

Public utilities
236,858

 
225,967

 
215,674

 
205,950

 
196,794

Corporate bonds
 
 
 
 
 
 
 
 
 
Energy
117,629

 
113,153

 
108,860

 
104,735

 
100,825

Industrials
252,930

 
241,085

 
229,903

 
219,360

 
209,442

Consumer goods and services
198,885

 
190,065

 
181,687

 
173,713

 
166,154

Health care
91,092

 
86,998

 
83,123

 
79,459

 
75,997

Technology, media and telecommunications
158,450

 
151,329

 
144,612

 
138,283

 
132,324

Financial services
300,656

 
287,006

 
273,951

 
261,576

 
249,983

Mortgage backed securities
17,919

 
17,741

 
17,248

 
16,514

 
15,627

Collateralized mortgage obligations
 
 
 
 
 
 
 
 
 
Government national mortgage association
162,126

 
155,206

 
144,460

 
131,938

 
119,215

Federal home loan mortgage corporation
188,427

 
183,165

 
174,458

 
163,153

 
150,500

Federal national mortgage association
111,770

 
107,965

 
101,896

 
94,325

 
86,206

Asset-backed securities
4,470

 
4,352

 
4,270

 
4,191

 
4,117

Total Available-For-Sale Fixed Maturities
$
3,219,137

 
$
3,064,848

 
$
2,898,126

 
$
2,724,210

 
$
2,556,633

TRADING
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
 
 
Corporate bonds
 
 
 
 
 
 
 
 
 
Industrials
$
4,120

 
$
4,017

 
$
3,919

 
$
3,823

 
$
3,733

Consumer goods and services
137

 
132

 
127

 
123

 
119

Health care
3,771

 
3,571

 
3,410

 
3,279

 
3,173

Financial services
5,005

 
4,930

 
4,842

 
4,670

 
4,468

Technology, media and telecommunications
886

 
833

 
787

 
746

 
709

Redeemable preferred stock
1,304

 
1,304

 
1,305

 
1,304

 
1,304

Total Trading Fixed Maturities
$
15,223

 
$
14,787

 
$
14,390

 
$
13,945

 
$
13,506

Total Fixed Maturity Securities
$
3,234,564

 
$
3,079,836

 
$
2,912,715

 
$
2,738,352

 
$
2,570,335

To the extent actual results differ from the assumptions utilized, our duration and interest rate measures could be significantly affected. As a result, these calculations may not fully capture the impact of nonparallel changes in the relationship between short-term and long-term interest rates.



55

Equity Price Risk
Equity price risk is the potential loss arising from changes in the fair value (i.e., market price) of equity securities held in our portfolio. Changes in the price of an equity security may be due to a change in the future earnings capacity or strategic outlook of the security issuer, and what investors are willing to pay for those future earnings and related strategy. The carrying values of our equity securities are based on quoted market prices, from an independent source, as of the balance sheet date. Market prices of equity securities, in general, are subject to fluctuations that could cause the amount to be realized upon the future sale of the securities to differ significantly from the current reported value. The fluctuations may result from perceived changes in the underlying economic characteristics of the security issuer, the relative price of alternative investments, general market conditions, and supply/demand factors related to a particular security.
Impact of Price Change
The following table details the effect on the fair value of our investments in equity securities for a positive and negative 10 percent price change at December 31, 2016:
(In Thousands)
 
-10%
 
Base
 
+10%
Estimated fair value of equity securities
 
$
248,454

 
$
276,060

 
$
303,666

Foreign Currency Exchange Rate Risk
Foreign currency exchange rate risk arises from the possibility that changes in foreign exchange rates will impact our transactions with foreign reinsurers relating to the settlement of amounts due to or from foreign reinsurers in the normal course of business. We consider this risk to be immaterial to our operations.
Credit Risk
Credit risk is the willingness and ability of a borrower to repay on time and in full any principal and interest due to the lender. Losses related to credit risk are realized through the income statement and have a direct impact on the earnings of UFG. Given the vast majority of our holdings are fixed income maturity securities, we view credit risk as our primary investment risk. Our internal Investment Department has developed and maintains a rigorous underwriting process to analyze and measure the expected frequency and severity of loss (i.e., credit quality) for government, agency, municipal, structured security, and corporate bond issuers. The objective is to maintain the appropriate balance of risk in our portfolio, consistent with our Investment Policy Statement and conservative investment style, and ensure the portfolio is compensated appropriately for the credit risk it holds. We do have within our municipal bond holdings a small number of securities whose ratings were enhanced by third-party insurance for the payment of principal and interest in the event of an issuer default. Of the insured municipal securities in our investment portfolio, 98.9 percent and 99.3 percent were rated "A" or above, and 93.2 percent and 90.9 percent were rated "AA" or above at December 31, 2016 and 2015, respectively, without the benefit of insurance. Due to the underlying financial strength of the issuers of the securities, we believe that the loss of insurance would not have a material impact on our operations, financial position, or liquidity.
We have no direct exposure in any of the guarantors of our investments. Our largest indirect exposure with a single guarantor totaled $32.9 million or 19.1 percent of our insured municipal securities at December 31, 2016, as compared to $68.5 million or 24.9 percent at December 31, 2015. Our five largest indirect exposures to financial guarantors accounted for 63.9 percent and 71.4 percent of our insured municipal securities at December 31, 2016 and 2015, respectively.

LIQUIDITY AND CAPITAL RESOURCES
Liquidity measures our ability to generate sufficient cash flows to meet our short- and long-term cash obligations. Our cash inflows are primarily a result of the receipt of premiums, annuity deposits, reinsurance recoveries, sales or maturities of investments, and investment income. Cash provided from these sources is used to fund the payment of losses and loss settlement expenses, policyholder benefits under life insurance contracts, annuity withdrawals, the


56

purchase of investments, operating expenses, dividends, pension plan contributions, and in recent years, common stock repurchases.
We monitor our capital adequacy to support our business on a regular basis. The future capital requirements of our business will depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. Our ability to underwrite is largely dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. In particular, we require (1) sufficient capital to maintain our financial strength ratings, as issued by various rating agencies, at a level considered necessary by management to enable our insurance company subsidiaries to compete and (2) sufficient capital to enable our insurance company subsidiaries to meet the capital adequacy tests performed by regulatory agencies in the United States.
Cash outflows may be variable because of the uncertainty regarding settlement dates for losses. In addition, the timing and amount of individual catastrophe losses are inherently unpredictable and could increase our liquidity requirements. The timing and amount of reinsurance recoveries may be affected by reinsurer solvency and reinsurance coverage disputes.
Historically, we have generated substantial cash inflows from operations. It is our policy to invest the cash generated from operations in securities with maturities that, in the aggregate, correlate to the anticipated timing of payments for losses and loss settlement expenses and future policyholder benefits of the underlying insurance policies, and annuity withdrawals. The majority of our assets are invested in available-for-sale fixed maturity securities.

The following table displays a summary of cash sources and uses in 2016, 2015 and 2014:
Cash Flow Summary
Years Ended December 31,
(In Thousands)
2016
 
2015
 
2014
Cash provided by (used in)
 
 
 
 
 
Operating activities
$
214,384

 
$
189,998

 
$
151,291

Investing activities
(112,403
)
 
(36,286
)
 
(58,878
)
Financing activities
(97,577
)
 
(137,837
)
 
(94,032
)
Net increase (decrease) in cash and cash equivalents
$
4,404

 
$
15,875

 
$
(1,619
)
Operating Activities
Net cash flows provided by operating activities totaled $214.4 million, $190.0 million and $151.3 million in 2016, 2015 and 2014, respectively. Our cash flows from operations were sufficient to meet our liquidity needs for 2016, 2015 and 2014.
Investing Activities
Cash in excess of operating requirements is generally invested in fixed maturity securities and equity securities. Fixed maturity securities provide regular interest payments and allow us to match the duration of our liabilities. Equity securities provide dividend income, potential dividend income growth and potential appreciation. For further discussion of our investments, including our philosophy and portfolio, see the "Investment Portfolio" section contained in this Item.
In addition to investment income, possible sales of investments and proceeds from calls or maturities of fixed maturity securities also can provide liquidity. During the next five years, $0.9 billion, or 31.7 percent of our fixed maturity portfolio will mature.
We invest funds required for short-term cash needs primarily in money market accounts, which are classified as cash equivalents. At December 31, 2016, our cash and cash equivalents included $16.8 million related to these money market accounts, compared to $20.8 million at December 31, 2015.
Net cash flows used in investing activities totaled $112.4 million, $36.3 million and $58.9 million in 2016, 2015 and 2014, respectively. In 2016, we had cash inflows from scheduled and unscheduled investment maturities,


57

redemptions, prepayments, and sales of investments that totaled $551.1 million compared to $674.9 million and $567.7 million for the same period in 2015 and 2014, respectively. The cash inflows over the last three years primarily relate to redemptions of fixed maturity securities that are reinvested.
Our cash outflows for investment purchases totaled $655.9 million in 2016, compared to $701.0 million and $618.4 million for the same period in 2015 and 2014, respectively.
Financing Activities
Net cash flows used in financing activities totaled $97.6 million, $137.8 million and $94.0 million in 2016, 2015 and 2014, respectively. In 2016, 2015 and 2014 we had $78.3 million, $118.4 million and 63.5 million, respectively, of net annuity withdrawals.
Dividends
Dividends paid to shareholders totaled $24.6 million, $21.7 million and $19.7 million in 2016, 2015 and 2014, respectively. Our practice has been to pay quarterly cash dividends, which we have paid every quarter since March 1968.
Payments of any future dividends and the amounts of such dividends, however, will depend upon factors such as net income, financial condition, capital requirements, and general business conditions. We will only pay dividends if declared by our Board of Directors out of legally available funds.
As a holding company with no independent operations of its own, United Fire Group, Inc. relies on dividends received from its insurance company subsidiaries in order to pay dividends to its common shareholders. Dividends payable by our insurance subsidiaries are governed by the laws in the states in which they are domiciled. In all cases, these state laws permit the payment of dividends only from earned surplus arising from business operations. For example, under Iowa law, the maximum dividend or distribution that may be paid within a 12-month period without prior approval of the Iowa Insurance Commissioner is generally restricted to the greater of 10 percent of statutory surplus as of the preceding December 31, or net income of the preceding calendar year on a statutory basis, not greater than earned statutory surplus. Other states in which our insurance company subsidiaries are domiciled may impose similar restrictions on dividends and distributions. Based on these restrictions, at December 31, 2016, our insurance company subsidiary, United Fire & Casualty, was able to make a maximum of $53.1 million in dividend payments without prior regulatory approval. These restrictions are not expected to have a material impact in meeting our cash obligations.
Share Repurchases
Under our share repurchase program, first announced in August 2007, we may purchase our common stock from time to time on the open market or through privately negotiated transactions. The amount and timing of any purchases will be at our discretion and will depend upon a number of factors, including the share price, economic and general market conditions, and corporate and regulatory requirements. Our share repurchase program may be modified or discontinued at any time.
During 2016, 2015 and 2014, pursuant to authorization by our Board of Directors, we repurchased 90,415, 79,396, and 461,835 shares of our common stock, respectively, which used cash totaling $3.7 million in 2016, $2.4 million in 2015 and $12.9 million in 2014. At December 31, 2016, we were authorized to purchase an additional 2,938,471 shares of our common stock under our share repurchase program, which expires in August 2018.
Credit Facilities
Information specific to our credit facilities is incorporated by reference from Note 14 "Credit Facility" contained in Part II, Item 8, "Financial Statements and Supplementary Data."



58

Stockholders' Equity
Stockholders' equity increased 7.2 percent to $941.9 million at December 31, 2016, from $878.9 million at December 31, 2015. The increase was primarily attributable to net income of $49.9 million along with the change in valuation of our retirement benefit obligations of $23.1 million and an increase in net unrealized investment gains of $5.5 million, net of tax, all partially offset by stockholder dividends of $24.6 million and share repurchases of $3.7 million. As of December 31, 2016, the book value per share of our common stock was $37.04, compared to $34.94 at December 31, 2015.
Risk-Based Capital
The NAIC adopted risk-based capital requirements, which requires us to calculate a minimum capital requirement for each of our insurance companies based on individual company insurance risk factors. These "risk-based capital" results are used by state insurance regulators to identify companies that require regulatory attention or the initiation of regulatory action. At December 31, 2016, all of our insurance companies had capital well in excess of required levels.
Contractual Obligations and Commitments
The following table shows our contractual obligations and commitments, including our estimated payments due by period, at December 31, 2016:
(In Thousands)
Payments Due By Period

Contractual Obligations
Total
 
Less Than
One Year
 
One to
Three Years
 
Three to
Five Years
 
More Than
Five Years
Future policy benefit reserves (1)
$
1,999,202

 
$
197,600

 
$
387,297

 
$
277,538

 
$
1,136,767

Loss and loss settlement expense reserves
1,123,896

 
389,698

 
352,057

 
143,607

 
238,534

Operating leases
25,667

 
6,218

 
11,031

 
8,244

 
174

Profit-sharing commissions
16,053

 
16,053

 
—

 
—

 
—

Pension plan contributions
6,400

 
6,400

 
—

 
—

 
—

Total
$
3,171,218

 
$
615,969

 
$
750,385

 
$
429,389

 
$
1,375,475

(1)
This projection of our obligation for future policy benefits considers only actual future cash outflows. The future policy benefit reserves presented on the Consolidated Balance Sheets is the net present value of the benefits to be paid, less the net present value of future net premiums.
Future Policy Benefits
The amounts presented for future payments to be made to policyholders and beneficiaries must be actuarially estimated and are not determinable from the contract. The projected payments are based on our current assumptions for mortality, morbidity and policy lapse, but are not discounted with respect to interest. Additionally, the projected payments are based on the assumption that the holders of our annuities and life insurance policies will withdraw their account balances upon the expiration of their contracts. Policies must remain in force for the policyholder or beneficiary to receive the benefit under the policy. Depending on the terms of a particular policy, future premiums from the policyholder may be required for the policy to remain in force. In contrast, the future policy benefit reserves for our life insurance segment presented on the Consolidated Balance Sheets are generally based on historical assumptions for mortality and policy lapse rates and are on a discounted basis. Accordingly, the amounts presented above for future policy benefit reserves significantly exceeds the amount of future policy benefit reserves reported on our Consolidated Balance Sheets at December 31, 2016.
Loss and Loss Settlement Expense Reserves
The amounts presented are estimates of the dollar amounts and time periods in which we expect to pay out our gross loss and loss settlement expense reserves. Because the timing of future payments may vary from the stated contractual obligation, these amounts are estimates based upon historical payment patterns and may not represent


59

actual future payments. Refer to "Critical Accounting Policies: Loss and Loss Settlement Expenses — Property and Casualty Insurance Segment" in this section for further discussion.
Operating Leases
Our operating lease obligations are for the rental of office space, vehicles, computer equipment and office equipment. For further discussion of our operating leases, refer to Part II, Item 8, Note 13 "Lease Commitments."
Profit-Sharing Commissions
We offer our agents a profit-sharing plan as an incentive for them to place high-quality property and casualty insurance business with us. Based on business produced by the agencies in 2016, property and casualty agencies will receive profit-sharing payments of $16.1 million in 2017.
Pension Plan Payments
We estimated the pension contribution for 2017 in accordance with the Pension Protection Act of 2006 (the "Act"). Contributions for future years are dependent on a number of factors, including actual performance versus assumptions made at the time of the actuarial valuations and maintaining certain funding levels relative to regulatory requirements. Contributions in 2017, and in future years, are expected to be at least equal to the IRS minimum required contribution in accordance with the Act.
Funding Commitments
At December 31, 2016, pursuant to an agreement with our limited liability partnership investments, we are contractually committed to make capital contributions up to $8.4 million upon request of the partnerships through December 31, 2023.

CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that are representative of significant judgments and uncertainties and that may potentially result in materially different results under different assumptions and conditions. We base our discussion and analysis of our results of operations and financial condition on the amounts reported in our Consolidated Financial Statements, which we have prepared in accordance with GAAP. As we prepare these Consolidated Financial Statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses for the reporting period. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions we believe to be reasonable under the circumstances. Actual results could differ from those estimates. We believe our most critical accounting policies are as follows.
Investment Valuation
Upon acquisition, we classify investments in marketable securities as held-to-maturity, available-for-sale, or trading. We record investments in held-to-maturity fixed maturity securities at amortized cost. We record investments in available-for-sale and trading fixed maturity securities and equity securities at fair value. Other long-term investments consist primarily of our interests in limited liability partnerships that are recorded on the equity method of accounting. We record mortgage loans at their unpaid principal balance and policy loans at the outstanding loan amount due from policyholders.
In general, investment securities are exposed to various risks, such as interest rate risk, credit risk, and overall market volatility risk. Therefore, it is reasonably possible that changes in the fair value of our investment securities that are reported at fair value will occur in the near term and such changes could materially affect the amounts reported in the Consolidated Financial Statements. Also, it is reasonably possible that changes in the value of our


60

investments in trading securities and limited liability partnerships could occur in the future and such changes could materially affect our results of operations as reported in our Consolidated Financial Statements.
Fair Value Measurement
Information specific to the fair value measurement of our financial instruments and disclosures is incorporated by reference from Note 3 "Fair Value of Financial Instruments" contained in Part II, Item 8, "Financial Statements and Supplementary Data."
Other-Than-Temporary Impairment Charges ("OTTI")
We continually monitor the difference between our cost basis and the estimated fair value of our investments. Our accounting policy for impairment recognition requires 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 or based on the value calculated using a discounted cash flow model. 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 determination of the amount of impairments varies by investment type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. Additionally, our management considers a wide range of factors about the instrument issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the instrument and in assessing the prospects for recovery. Inherent in management's evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential.
At December 31, 2016 and 2015, we had a number of securities with fair value less than the cost basis. The total unrealized loss on these securities was $34.8 million at December 31, 2016, compared with $28.1 million at December 31, 2015. At December 31, 2016, the largest pre-tax unrealized loss on an individual equity security was $0.2 million. Our rationale for not recording OTTI charges on these securities is discussed in Part II, Item 8, Note 2 "Summary of Investments."
Deferred Policy Acquisition Costs ("DAC") — Property and Casualty Insurance Segment
We record an asset for certain costs of underwriting new business, primarily commissions, premium taxes and variable underwriting and policy issue expenses that have been deferred. The amount of underwriting compensation expense eligible for deferral is based on time studies and a ratio of success in policy placement. At December 31, 2016 and 2015, our DAC asset was $93.4 million and $90.5 million, respectively.
The DAC asset is amortized over the life of the policies written, generally one year. We assess the recoverability of DAC on a quarterly basis by line of business. This assessment is performed by comparing recorded unearned premium to the sum of unamortized DAC and estimates of expected losses and loss settlement expenses. If the sum of these costs exceeds the amount of recorded unearned premium (i.e., the line of business is expected to generate an operating loss), the excess is recognized in current period other underwriting expenses as an offset against the established DAC asset. We refer to this offset as a premium deficiency charge.
To calculate the premium deficiency charge by line of business, we estimate an expected loss and loss settlement expense ratio which is based on our best estimate of future losses for each line of business. This calculation is performed on a quarterly basis and developed in conjunction with our quarterly reserving process. The expected loss and loss settlement expense ratios are the only assumptions we utilize in our premium deficiency calculation. Changes in these assumptions can have a significant impact on the amount of premium deficiency charge recognized for a line of business. With the completion of the Mercer Insurance Group, Inc. integration, we determined it was the


61

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 $2,144 and an increase to the DAC asset of $3,830 for the period ended December 31, 2015, as compared to what we would have recognized had we not updated our model.
The following table illustrates the hypothetical impact on the premium deficiency charge recorded for the quarter ended December 31, 2016, of reasonably likely changes in the assumed loss and loss settlement expense ratios utilized for purposes of this calculation. The entire impact of these changes would be recognized through income as other underwriting expenses. The following table illustrates the impact of potential changes in the expected loss and loss settlement expense ratios for all lines of business on the premium deficiency charge. The base amount indicated below is the actual premium deficiency charge recorded as an offset against the DAC asset established as of the quarter ended December 31, 2016:
Sensitivity Analysis — Impact of Changes in Projected Loss and Loss Settlement Expense Ratios
(In Thousands)
-10%
 
-5%
 
Base
 
+5%
 
+10%
Premium deficiency charge estimated
$
—

 
$
—

 
$
62

 
$
4,920

 
$
11,862

Actual future results could differ materially from our assumptions used to calculate the recorded DAC asset. Changes in our assumed loss and loss settlement expense ratios in the future would impact the amount of deferred costs in the period such changes in assumptions are made. The premium deficiency charge calculated for the quarter ended December 31, 2016 was $0.1 million compared to the premium deficiency charge of $0.0 million calculated for the same period of 2015.
Deferred Policy Acquisition Costs — Life Insurance Segment
Costs that vary with and relate to the successful acquisition of life insurance and annuity business are deferred. Such costs consist principally of commissions, premium taxes, and related variable underwriting, agency and policy issue expenses. The amount of underwriting and other acquisition related compensation and other internal expense eligible for deferral is based on time studies and a ratio of success in policy placement. At December 31, 2016 and 2015, our DAC asset was $70.7 million and $77.7 million, respectively.
We defer and amortize policy acquisition costs on traditional life insurance policies over the premium-paying period in proportion to the ratio of the expected annual premium revenue to the expected total premium revenue. Expected annual 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.
We defer policy acquisition costs related to non-traditional business and amortize these costs in proportion to the ratio of the expected annual gross profits to the expected total gross profits. The assumptions used to determine expected gross profits include claims, interest rate spread, mortality experience, and expense margins and policy lapse experience. Of these factors, we anticipate that assumptions for claims, investment returns, expenses and persistency are reasonably likely to have a significant impact on the rate of DAC amortization each year. 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.
We periodically review estimates of expected profitability and evaluate the need to "unlock" or revise the assumptions for the amortization of the DAC asset related to our non-traditional business. The primary assumptions utilized when estimating future profitability relate to interest rate spread, operating expenses, mortality and policy lapse experience. The table below illustrates the impact that a reasonably likely change in our assumptions used to estimate expected gross profits would have on the DAC asset for our non-traditional business recorded as of December 31, 2016. The entire impact of the changes illustrated would be recognized through income as an increase or decrease to amortization expense:


62

Sensitivity Analysis — Impact of changes in assumptions on DAC asset
(In Thousands)
 
 
 
Changes in assumptions
-10%
 
+10%
Mortality experience
$
2,965

 
$
(3,154
)
Policy lapse experience
1,731

 
(1,637
)
Changes in assumptions
-1%
 
+1%
Interest rate spread
$
(1,574
)
 
$
1,524

A material change in these assumptions could have a significant negative or positive effect on our reported DAC asset, earnings and stockholders' equity.
The DAC asset recorded in connection with our non-traditional business is also adjusted with respect to estimated expected gross profits as a result of changes in the net unrealized gains or losses on available-for-sale fixed maturity securities allocated to support the block of deferred annuities and universal life policies. That is, because we carry available-for-sale fixed maturity securities at fair value, we make an adjustment to the DAC asset equal to the change in amortization that would have been recorded if we had sold such securities at their stated fair value and reinvested the proceeds at current yields. We include this adjustment, which is called "shadow" DAC, net of tax, as a component of accumulated other comprehensive income. At December 31, 2016 and 2015, the "shadow" DAC adjustment decreased our DAC asset by $6.4 million and $2.0 million, respectively.
Losses and Loss Settlement Expenses — Property and Casualty Insurance Segment
Reserves for losses and loss settlement expenses are reported using our best estimate of ultimate liability for claims that occurred prior to the end of any given reporting period, but have not yet been paid. Before credit for reinsurance recoverables, these reserves were $1,123.9 million and $1,003.9 million at December 31, 2016 and 2015, respectively. We purchase reinsurance to mitigate the impact of large losses and catastrophic events. Loss and loss settlement expense reserves ceded to reinsurers were $59.8 million for 2016 and $54.7 million for 2015. Our reserves, before credit for reinsurance recoverables, by line of business as of December 31, 2016, were as follows:
(In Thousands)
Case Basis
 
IBNR
 
Loss
Settlement
Expense
 
Total Reserves
Commercial lines
 
 
 
 
 
 
 
Fire and allied lines
$
83,984

 
$
12,415

 
$
21,480

 
$
117,879

Other liability
204,109

 
120,596

 
188,888

 
513,593

Automobile
136,750

 
46,917

 
45,409

 
229,076

Workers' compensation
166,332

 
10,500

 
28,581

 
205,413

Fidelity and surety
2,163

 
2,520

 
108

 
4,791

Miscellaneous
185

 
746

 
269

 
1,200

Total commercial lines
$
593,523

 
$
193,694

 
$
284,735

 
$
1,071,952

Personal lines
 
 
 
 
 
 
 
Automobile
$
9,997

 
$
1,023

 
$
1,726

 
$
12,746

Fire and allied lines
8,949

 
3,829

 
2,735

 
15,513

Miscellaneous
1,078

 
174

 
434

 
1,686

Total personal lines
$
20,024

 
$
5,026

 
$
4,895

 
$
29,945

Reinsurance assumed
16,828

 
5,105

 
66

 
21,999

Total
$
630,375

 
$
203,825

 
$
289,696

 
$
1,123,896





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Case-Basis Reserves

For each of our lines of business, with respect to reported claims, we establish reserves on a case-by-case basis. Our experienced claims personnel estimate these case-basis reserves using adjusting guidelines established by management. Our goal is to set the case-basis reserves at the ultimate expected loss amount as soon as possible after information about the claim becomes available.

Establishing the case reserve for an individual claim is subjective and complex, requiring us to estimate future payments and values that will be sufficient to settle an individual claim. Setting a reserve for an individual claim is an inherently uncertain process. When we establish and adjust individual claim reserves, we do so based on our knowledge of the circumstances and facts of the claim. Upon notice of a claim, we establish a preliminary (average claim cost) reserve based on the limited claim information initially reported. Subsequently, we conduct an investigation of each reported claim, which allows us to more fully understand the factors contributing to the loss and our potential exposure. This investigation may extend over a long period of time. As our claim investigation progresses, and as our claims personnel identify trends in claims activity, we may refine and adjust our estimates of case reserves. To evaluate and refine our overall reserving process, we track and monitor all claims until they are settled and paid in full, with all salvage and subrogation claims being resolved.
Most of our insurance policies are written on an occurrence basis that provides coverage if a loss occurs during the policy period, even if the insured reports the loss many years later. For example, some liability claims for construction defect coverage are reported 10 years or more after the policy period, and the workers' compensation coverage provided by our policies pays unlimited medical benefits for the duration of the claimant's injury up to the lifetime of the claimant. In addition, final settlement of certain claims can be delayed for years due to litigation or other reasons. Reserves for these claims require us to estimate future costs, including the effect of judicial actions, litigation trends and medical cost inflation, among others. Reserve development can occur over time as conditions and circumstances change many years after the policy was issued and/or the loss occurred.
Our loss reserves include amounts related to both short-tail and long-tail lines of business. "Tail" refers to the time period between the occurrence of a loss and the ultimate settlement of the claim. A short-tail insurance product is one where ultimate losses are known and settled comparatively quickly. Ultimate losses under a long-tail insurance product are sometimes not known and settled for many years. The longer the time span between the incidence of a loss and the settlement of the claim, the more the ultimate settlement amount can vary from the reserves initially established. Accordingly, long-tail insurance products can have significant implications on the reserving process.
Our short-tail lines of business include fire and allied lines, homeowners, commercial property, auto physical damage and inland marine. The amounts of the case-based reserves that we establish for claims in these lines depend upon various factors, such as individual claim facts (including type of coverage and severity of loss), our historical loss experience and trends in general economic conditions (including changes in replacement costs, medical costs and inflation).
For short-tail lines of business, the estimation of case-basis loss reserves is less complex than for long-tail lines because the claims relate to tangible property. Because of the relatively short time from claim occurrence to settlement, actual losses typically do not vary significantly from reserve estimates.
Our long-tail lines of business include workers' compensation and other liability. In addition, certain product lines such as personal and commercial auto, commercial multi-peril and surety include both long-tail coverages and short-tail coverages. For many long-tail liability claims, significant periods of time, ranging up to several years, may elapse between the occurrence of the loss, the reporting of the loss to us and the settlement of the claim. As a result, loss experience in the more recent accident years for the long-tail liability coverages has limited statistical credibility in our reserving process because a relatively small proportion of losses in these accident years are reported claims and an even smaller proportion are paid losses. In addition, long-tail liability claims are more susceptible to litigation and can be significantly affected by changing contract interpretations and the legal environment. Consequently, the estimation of loss reserves for long-tail coverages is more complex and subject to a higher degree of variability than for short-tail coverages.


64

The amounts of the case-basis loss reserves that we establish for claims in long-tail lines of business depends upon various factors, including individual claim facts (including type of coverage, severity of loss and underlying policy limits), company historical loss experience, changes in underwriting practice, legislative enactments, judicial decisions, legal developments in the awarding of damages, changes in political attitudes and trends in general economic conditions, including inflation. As with our short-tail lines of business, we review and make changes to long-tail case-based reserves based on our review of continually evolving facts as they become available to us during the claims settlement process. Our adjustments to case-based reserves are reported in the financial statements in the period that new information arises about the claim. Examples of facts that become known that could cause us to change our case-based reserves include, but are not limited to: evidence that loss severity is different than previously assessed; new claimants who have presented claims; and the assessment that no coverage exists.
Incurred But Not Reported ("IBNR") Reserves

On a quarterly basis, the Company's internal actuary performs a detailed analysis of IBNR reserves. This analysis uses various loss projection methods (paid and reported loss development) to provide several estimates of ultimate loss (or loss adjustment expense ("LAE")) for each individual year and line of business. The loss projection methods include paid loss development; reported loss development; expected loss emergence based on paid losses; and expected loss emergence based on reported losses. The two methods utilized by our internal actuary to project loss settlement expenses are paid expenses development and development of the ratio of paid expense versus paid loss. Results of the projection methods are compared and a point estimate of ultimate loss (or LAE) is established for each individual year and line of business. The specific projection methods used to establish point estimates vary depending on what is deemed most appropriate for a particular line of business and year. Results of these methods are usually averaged together to provide a final point estimate. Given that there are several inputs depending on the line of business, the methods may be averaged and modified based on changes known to management or trends in the market. IBNR estimates are derived by subtracting reported loss from the final point estimate loss.

Senior management meets with our internal actuary and controller quarterly to review the adequacy of carried IBNR reserves based on results from this actuarial analysis and makes adjustments for changes in business and other factors not completely captured by the data within the actuarial analysis. There are two fundamental types or sources of IBNR reserves. We record IBNR for "normal" types of claims and also specific IBNR reserves related to unique circumstances or events. A major hurricane is an example of an event that might necessitate specific IBNR reserves because an analysis of existing historical data would not provide an appropriate estimate. This method of establishing our IBNR reserves has consistently resulted in aggregate reserve levels that management believes are reasonable in comparison to the reserve estimates indicated by the actuarial analysis.

For our short-tail lines of business, IBNR reserves constitute a small portion of the overall reserves. These claims are generally reported and settled shortly after the loss occurs. In our long-tail lines of business, IBNR reserves constitute a relatively higher proportion of total reserves, because, for many liability claims, significant periods of time may elapse between the initial occurrence of the loss, the reporting of the loss to us, and the ultimate settlement of the claim.
Loss Settlement Expense Reserves
Loss settlement expense reserves include amounts ultimately allocable to individual claims, as well as amounts required for the general overhead of the claims handling operation that are not specifically allocable to individual claims. We do not establish loss settlement expense reserves on a claim-by-claim basis. Instead, on a quarterly basis, our internal actuary performs a detailed statistical analysis (using historical data) to estimate the required reserve for unpaid loss settlement expenses. On a monthly basis, the required reserve estimate is adjusted to reflect additional earned exposure and expense payments that have occurred subsequent to completion of the quarterly analysis.
Generally, the loss settlement expense reserves for long-tail lines of business are a greater portion of the overall reserves, as there are often substantial legal fees and other costs associated with the complex liability claims that are associated with long-tail coverages. Because short-tail lines of business settle much more quickly and the costs are


65

easier to determine, loss settlement expense reserves for such claims constitute a smaller portion of the total reserves.
Reinsurance Reserves
The estimation of assumed and ceded reinsurance loss and loss settlement expense reserves is subject to the same factors as the estimation of loss and loss settlement expense reserves. In addition to those factors, which give rise to inherent uncertainties in establishing loss and loss settlement expense reserves, there exists a delay in our receipt of reported claims for assumed business due to the procedure of having claims first reported through one or more intermediary insurers or reinsurers.
Key Assumptions

Our internal and external actuaries and management use a number of key assumptions in establishing an estimate of loss and loss settlement expense reserves, including the following assumptions: future loss settlement expenses can be estimated based on the Company's historical ratios of loss settlement expenses paid to losses; the Company's case-basis reserves reflect the most up-to-date information available about the unique circumstances of each individual claim; no new judicial decisions or regulatory actions will increase our case-basis obligations; historical aggregate claim reporting and payment patterns will continue into the future consistent with the observable past; significant unique and unusual claim events have been identified and appropriate adjustments have been made; and, to the best of our knowledge, there are no new latent trends that would impact our case-basis reserves.

Our key assumptions are subject to change as actual claims occur and as we gain additional information about the variables that underlie our assumptions. Accordingly, management reviews and updates these assumptions periodically to ensure that the assumptions continue to be valid. If necessary, management makes changes not only in the estimates derived from the use of these assumptions, but also in the assumptions themselves. Due to the inherent uncertainty in the loss reserving process, management believes that there is a reasonable chance that modification to key assumptions could individually, or in aggregate, result in reserve levels that are either significantly above or below the actual amount for which the related claims will eventually settle.
As an example, if our loss and loss settlement expense reserves of $1,123.9 million as of December 31, 2016, is 10.0 percent inadequate, we would experience a reduction in future pre-tax earnings of up to $112.4 million. This reduction could be recorded in one year or multiple years, depending on when we identify the deficiency. The deficiency would also affect our financial position in that our equity would be reduced by an amount equivalent to the reduction in net income. Any deficiency that would be recognized in our loss and loss settlement expense reserves usually does not have a material effect on our liquidity because the claims have not been paid. Conversely, if our estimates of ultimate unpaid loss and loss settlement expense reserves prove to be redundant, our future earnings and financial position would be improved. We believe our reserving philosophy, coupled with what we believe to be aggressive and successful claims management and loss settlement practices, has resulted in year-to-year redundancies in reserves. We believe our approach produces recorded reserves that are reasonable as to their relative position within a range of reasonable reserves from year-to-year.

We are unable to reasonably quantify the impact of changes in our key assumptions utilized to establish individual case-basis reserves on our total reported reserves because the impact of these changes would be unique to each specific case-basis reserve established. However, based on historical experience, we believe that aggregate case-basis reserve volatility levels of 5.0 percent and 10.0 percent can be attributed to the ultimate development of our net case-basis reserves. The impact to pre-tax earnings would be a decrease if the reserves were to be adjusted upwards and an increase if the reserves were to be adjusted downwards. The table below details the impact of this development volatility on our reported net case-basis reserves at December 31, 2016:
(In Thousands)
 
 
 
Change in level of net case-basis reserve development
5%
 
10%
Impact on reported net case-basis reserves
$
28,928

 
$
57,855




66

Due to the formula-based nature of our IBNR and loss settlement expense reserve calculations, changes in the key assumptions utilized to generate these reserves can impact our reported results. It is not possible to isolate and measure the potential impact of just one of these factors, and future loss trends could be partially impacted by all factors concurrently. Nevertheless, it is meaningful to view the sensitivity of the reserves to potential changes in these variables. To demonstrate the sensitivity of reserves to changes in significant assumptions, the following example is presented. The amounts reflect the pre-tax impact on earnings from a hypothetical percentage change in the calculation of IBNR and loss settlement expense reserves at December 31, 2016. The impact to pre-tax earnings would be a decrease if the reserves were to be adjusted upwards and an increase if the reserves were to be adjusted downwards. We believe that the changes presented are reasonably likely based upon an analysis of our historical IBNR and loss settlement expense reserve experience.
(In Thousands)
 
 
 
Change in claim frequency and claim severity assumptions
5%
 
10%
Impact due to change in IBNR reserving assumptions
$
10,800

 
$
20,161


(In Thousands)
 
 
 
Change in LAE paid to losses paid ratio
1%
 
2%
Impact due to change in LAE reserving assumptions
$
2,839

 
$
5,679

In 2016, we did not change the key method through which we develop our assumptions on which we based our reserving calculations. In estimating our 2016 loss and loss settlement expense reserves, we did not anticipate future events or conditions that were inconsistent with past development patterns.
Certain of our lines of business are subject to the potential for greater loss and loss settlement expense development than others, which are discussed below:
Other Liability Reserves
Other liability is considered a long-tail line of business, as it can take a relatively long period of time to settle claims from prior accident years. This is partly due to the lag time between the date a loss or event occurs that triggers coverage and the date when the claim is actually reported. Defense costs are also a part of the insured expenses covered by liability policies and can be significant, sometimes greater than the cost of the actual paid claims. For the majority of our products, defense costs are outside of the policy limit, meaning that the amounts paid for defense costs are not subtracted from the available policy limit.
Factors that can cause reserve uncertainty in estimating reserves in this line include: reporting time lags; the number of parties involved in the underlying tort action; whether the "event" triggering coverage is confined to only one time period or is spread over multiple time periods; the potential dollars involved in the individual claim actions; whether such claims were reasonably foreseeable and intended to be covered at the time the contracts were written (i.e., coverage disputes); and the potential for mass claim actions.
Claims with longer reporting time lags may result in greater inherent risk. This is especially true for alleged claims with a latency feature, particularly where courts have ruled that coverage is spread over multiple policy years, hence involving multiple defendants (and their insurers and reinsurers) and multiple policies (thereby increasing the potential dollars involved and the underlying settlement complexity). Claims with long latencies also increase the potential time lag between writing a policy in a certain market and the recognition that such policy has potential mass tort and/or latent claim exposure.
Our reserve for other liability claims at December 31, 2016, was $513.6 million and consisted of 5,634 claims, compared with $495.9 million, consisting of 5,553 claims at December 31, 2015. Of the $513.6 million total reserve for other liability claims, $151.9 million is identified as defense costs and $34.3 million is identified as general overhead required in the settlement of claims.


67

Included in the other liability line of business are gross reserves for construction defect losses and loss settlement expenses. Construction defect is a liability allegation relating to defective work performed in the construction of structures such as commercial buildings, apartments, condominiums, single family dwellings or other housing, as well as the sale of defective building materials. These claims seek recovery due to damage caused by alleged deficient construction techniques or workmanship. At December 31, 2016, we had $22.3 million in construction defect loss and loss settlement expense reserves, excluding IBNR reserves that are calculated for the overall other liability commercial line, which consisted of 1,382 claims. At December 31, 2015, our reserves, excluding IBNR reserves, totaled $28.8 million, which consisted of 1,721 claims. The reporting of such claims can be delayed, as the statute of limitations can be up to 10 years. Court decisions in recent years have expanded insurers' exposure to construction defect claims. As a result, claims may be reported more than 10 years after a project has been completed, as litigation can proceed for several years before an insurance company is identified as a potential contributor. Claims have also emerged from parties claiming additional insured status on policies issued to other parties, such as contractors seeking coverage from a subcontractor's policy.
In addition to these issues, other variables also contribute to a high degree of uncertainty in establishing reserves for construction defect claims. These variables include: whether coverage exists; when losses occur; the size of each loss; expectations for future interpretive rulings concerning contract provisions; and the extent to which the assertion of these claims will expand geographically. In recent years, we have implemented various underwriting measures that we anticipate will mitigate the amount of construction defect losses experienced. These initiatives include increased care regarding additional insured endorsements; stricter underwriting guidelines on the writing of residential contractors; and an increased utilization of loss control.
Asbestos and Environmental Reserves
Included in the other liability and assumed reinsurance lines of business are reserves for asbestos and other environmental losses and loss settlement expenses. At December 31, 2016 and 2015, we had $3.7 million and $4.8 million, respectively, in direct and assumed asbestos and environmental loss reserves. The estimation of loss reserves for environmental claims and claims related to long-term exposure to asbestos and other substances is one of the most difficult aspects of establishing reserves, especially given the inherent uncertainties surrounding such claims. Although we record our best estimate of loss and loss settlement expense reserves, the ultimate amounts paid upon settlement of such claims may be more or less than the amount of the reserves, because of the significant uncertainties involved and the likelihood that these uncertainties will not be resolved for many years.
Workers' Compensation Reserves
Like the other liability line of business, workers' compensation losses and loss settlement expense reserves are based upon variables that create imprecision in estimating the ultimate reserve. Estimates for workers' compensation are particularly sensitive to assumptions about medical cost inflation, which has been steadily increasing over the past few years. Other variables that we consider and that contribute to the uncertainty in establishing reserves for workers' compensation claims include: state legislative and regulatory environments; trends in jury awards; and mortality rates. Because of these variables, the process of reserving for the ultimate loss and loss settlement expense to be incurred requires the use of informed judgment and is inherently uncertain. Consequently, actual loss and loss settlement expense reserves may deviate from our estimates. Such deviations may be significant. Our reserve for workers' compensation claims at December 31, 2016 was $205.4 million and consisted of 2,299 claims, compared with $192.9 million, consisting of 2,211 claims, at December 31, 2015.
Reserve Development

The following reserve development section should be read in conjunction with the "Consolidated Results of Operations" section of this Item 7.

In 2016, 2015 and 2014, we recognized a favorable development in our net reserves for prior accident years totaling $31.2 million, $40.9 million and $56.7 million, respectively.


68

The factors contributing to our year-to-year redundancy include: establishing reserves at their ultimate expected loss amount as soon as practicable after information becomes available, which produces, on average, prudently conservative case reserves; using claims negotiation to control the size of settlements; assuming that we have liability for all claims, even though the issue of liability may, in some cases, be resolved in our favor; promoting claims management services to encourage return-to-work programs; case management by nurses for serious injuries and management of medical provider services and billings; and using programs and services to help prevent fraud and to assist in favorably resolving cases.
Based upon our comparison of carried reserves to actual claims experience over the last several years, we believe that using our Company's historical premium and claims data to establish reserves for losses and loss settlement expenses results in adequate and reasonable reserves. Reserve development is discussed in more detail under the heading "Reserve Development" in the "Property and Casualty Insurance Segment" of the "Consolidated Results of Operations" section in this Item.

The following table details the pre-tax impact on our property and casualty insurance segment's financial results and financial condition of reasonably likely reserve development. Our lines of business that have historically been most susceptible to significant volatility in reserve development have been shown separately and utilize hypothetical levels of volatility of 5.0 percent and 10.0 percent. Our other, less volatile, lines of business have been aggregated and utilize hypothetical levels of volatility of 3.0 percent and 5.0 percent.
(In Thousands)
 
 
 
 
 
 
 
Hypothetical Reserve Development Volatility Levels
-10%
 
-5%
 
+5%
 
+10%
Impact on loss and loss settlement expenses
 
 
 
 
 
 
 
Other liability
$
(51,359
)
 
$
(25,680
)
 
$
25,680

 
$
51,359

Workers' compensation
(20,541
)
 
(10,271
)
 
10,271

 
20,541

Automobile
(24,182
)
 
(12,091
)
 
12,091

 
24,182

 
 
 
 
 
 
 
 
Hypothetical Reserve Development Volatility Levels
-5%
 
-3%
 
+3%
 
+5%
Impact on loss and loss settlement expenses
 
 
 
 
 
 
 
All other lines
$
(8,153
)
 
$
(4,892
)
 
$
4,892

 
$
8,153

Independent Actuary
We engage an independent actuarial firm to render an opinion as to the reasonableness of the statutory reserves internal management establishes. During 2016 and 2015, we engaged the services of Regnier Consulting Group, Inc. ("Regnier") as our independent actuarial firm for the property and casualty insurance segment. We anticipate that this engagement will continue in 2017.
It is management's policy to utilize staff adjusters to develop our estimate of case-basis loss reserves. IBNR and loss settlement expense reserves are established through various formulae that utilize pertinent, recent Company historical data. The calculations are supplemented with knowledge of current trends and events that could result in adjustments to the level of IBNR and loss settlement expense reserves. On a quarterly basis, we compare our estimate of total reserves to the estimates prepared by Regnier by line of business to ensure that our estimates are within the actuary's acceptable range. Regnier performs a review of loss and loss settlement expense reserves at each year end using generally accepted actuarial guidelines to ensure that the recorded reserves appear reasonable. Our net reserves for losses and loss settlement expenses as of December 31, 2016 and 2015 were $1,064.1 million and $949.2 million, respectively. In 2016 and 2015, after considering the independent actuary's range of reasonable estimates, management believes that carried reserves were reasonable and therefore did not adjust the recorded amount.
Regnier uses four projection methods in its actuarial analysis of our loss reserves and uses two projection methods in its actuarial analysis of our loss settlement expense reserves. Based on the results of the projection methods, the actuaries select an actuarial point estimate of the reserves, which is compared to our carried reserves to evaluate the


69

reasonableness of the carried reserves. The four methods utilized by Regnier to project losses are: paid loss development; reported loss development; expected loss emergence based on paid losses; and expected loss emergence based on reported losses. The two methods utilized by Regnier to project loss expenses are: paid expenses-to-paid loss and paid expense-to-ultimate loss.
Future Policy Benefits and Losses, Claims and Loss Settlement Expenses — Life Insurance Segment
We establish reserves for amounts that are payable under traditional insurance policies, including traditional life products, disability income and income annuities. Reserves are calculated as the present value of future benefits expected to be paid, reduced by the present value of future expected premiums. Our estimates use methods and underlying assumptions that are in accordance with GAAP and applicable actuarial standards. The key assumptions that we utilize in establishing reserves are mortality, morbidity, policy lapse, renewal, retirement, investment returns, inflation and expenses. Future investment return assumptions are determined based upon prevailing investment yields as well as estimated reinvestment yields. Mortality, morbidity and policy lapse assumptions are based on our experience. Expense assumptions include the estimated effects of inflation and expenses to be incurred beyond the premium-paying period. These assumptions are established at the time the policy is issued, are consistent with the assumptions for determining DAC amortization for these contracts, and are generally not changed during the policy coverage period. However, if actual experience emerges in a manner that is significantly adverse relative to the original assumptions, adjustments to reserves (or DAC) may be required resulting in a charge to earnings which could have a material adverse effect on our operating results and financial condition.
For limited pay traditional life products, we periodically determine if any profit occurs at the issuance of a contract that should be deferred over the life of that contract. To the extent that this occurs, we establish an unearned revenue liability at issuance that is amortized over the anticipated life of the contract.
Liabilities for future policy benefits for disability claims are estimated using the present value of benefits method and experience assumptions as to claim terminations, expenses and interest.
Other reserves include claims that have been reported but not settled and IBNR reserves for claims on life and disability income insurance. We use our own historical experience and other assumptions such as any known or anticipated developments or trends to establish reserves for these unsettled or unreported claims. The effects of changes in our estimated reserves are included in our results of operations in the period in which the changes occur.
We periodically review the adequacy of traditional life product reserves and recoverability of DAC for these contracts on an aggregate basis using actual experience. In the event that actual experience is significantly adverse compared to the original assumptions, any remaining unamortized DAC asset must be expensed to the extent not recoverable and the establishment of a premium deficiency reserve may be required. The effects of changes in reserve estimates are reported in the results of operations in the period in which the changes are determined. We have made no changes in our methods in the past three years, other than minor changes in assumptions for new issues in each of the past three years, mostly relating to anticipated mortality rates and investment yields. These assumption changes were made due to corresponding changes in the interest rate environment and the historical mortality of these products. We anticipate that changes in mortality, investment and reinvestment yields, and policy termination assumptions are the factors that would most likely require an adjustment to these reserves or related DAC asset.
Our reserves for universal life and deferred annuity contracts are based upon the policyholders' current account value. Acquisition expenses are amortized in relation to expected gross profits forecasted based upon current best estimates of anticipated premium income, investment earnings, benefits and expenses. Annually, we review our estimates of reserves and the related DAC asset and compare them with actual experience. Differences between actual experience and the assumptions that we used in the pricing of these policies, guarantees and riders, and in the establishment of the related reserves will result in variances in profit for the underlying contract. The effects of the changes in such estimated reserves are included in our results of operations in the period in which the changes occur.
The following table reflects the estimated pre-tax impact to DAC, net of unearned revenue liabilities to our universal life and fixed annuity products that could occur in a twelve-month period because of an unlocking adjustment due to


70

reasonably likely changes in significant assumptions. Changes in assumptions of the same magnitude in the opposite direction would have an impact of a similar magnitude but opposite direction of the examples provided.
Assumption
Determination Methodology
Potential One-Time Effect on DAC Asset, Net of Unearned Revenue Liabilities
Mortality Experience
Based on our mortality experience with consideration given to industry experience and trends
A 10.0% increase in expected mortality experience for all future years would result in a reduction in DAC and an increase in current period amortization expense of $3.2 million.
Surrender Rates
Based on our policy surrender experience with consideration given to industry experience and trends
A 10.0% increase in expected surrender rates for all future years would result in a reduction in DAC and an increase in current period amortization expense of $1.6 million.
Interest Spreads
Based on our expected future investment returns and expected future crediting rates applied to policyholder account balances; future crediting rates include constraints imposed by policy guarantees
A 10-basis-point reduction in future interest rate spreads would result in a reduction in DAC and an increase in current period amortization expense of $1.6 million.
Maintenance Expenses
Based on our experience using an internal expense allocation methodology
A 10.0% increase in future maintenance expenses would result in a reduction in DAC and an increase in current period amortization expense of $0.5 million.
Independent Actuary
We engage an independent actuarial firm to assist us in establishing our future policy benefit reserves for statutory and GAAP reporting and our DAC asset and related amortization for GAAP reporting and to render an opinion as to the reasonableness of the statutory reserves we establish. Statutory reserves are established using prescribed assumptions which are considerably more conservative assumptions regarding future investment earnings and contractual benefit payments than are used for GAAP reserves. During 2016 and 2015, we engaged the services of Griffith, Ballard and Company as our independent actuarial firm for the life insurance segment. We anticipate that this engagement will continue in 2017.
Pension and Post-retirement Benefit Obligations
The process of estimating our pension and post-retirement benefit obligations and related benefit expense is inherently uncertain, and the actual cost of benefits may vary materially from the estimates recorded. These liabilities are particularly volatile due to their long-term nature and are based on several assumptions. The main assumptions used in the valuation of our benefit obligations are: estimated mortality of the employees and retirees eligible for benefits; estimated expected long-term rates of return on investments; estimated compensation increases; estimated employee turnover; estimated medical trend rate; and estimated rate used to discount the ultimate estimated liability to a present value. We engage a consulting actuary from Principal Financial Group, an independent firm, to assist in evaluating and establishing assumptions used in the valuation of our benefit obligations.
A change in any one or more of these assumptions is likely to result in an ultimate liability different from the original actuarial estimate. Such changes in estimates may be material. For example, a 100 basis point decrease in our estimated discount rate would increase the pension and post-retirement benefit obligation at December 31, 2016, by $29.5 million and $8.4 million, respectively, while a 100 basis point increase in the rate would decrease the benefit obligation at December 31, 2016, by $23.3 million and $6.6 million, respectively.
In addition, for the post-retirement benefit plan, a 100 basis point decrease in the medical trend rate would decrease the post-retirement benefit obligation at December 31, 2016, by $6.4 million, while a 100 basis point increase in the medical trend rate would increase the benefit obligation at December 31, 2016, by $8.0 million.


71

A 100 basis point decrease in our estimated long-term rate of return on pension plan assets would increase the benefit expense for the year ended December 31, 2016, by $1.3 million, while a 100 basis point increase in the rate would decrease benefit expense by $1.3 million, for the same period.
For the post-retirement benefit plan, a 100 basis point increase in our estimated medical trend rate would increase the benefit expense for the year ended December 31, 2016, by $0.8 million, while a 100 basis point decrease in the rate would decrease benefit expense by $0.7 million, for the same period.
Recently Issued Accounting Standards
Information specific to accounting standards that we adopted in 2016 or pending accounting standards that we expect to adopt in the future is incorporated by reference from Note 1 "Summary of Significant Accounting Policies" contained in Part II, Item 8, "Financial Statements and Supplementary Data."

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information required by this Item 7A is incorporated by reference from Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the headings "Investments" and "Market Risk."




72

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

United Fire Group, Inc.
Consolidated Balance Sheets
 
December 31,
(In Thousands, Except Share Data)
2016
 
2015
 
 
 
 
Assets
 
 
 
Investments
 
 
 
Fixed maturities
 
 
 
Held-to-maturity, at amortized cost (fair value $199 in 2016 and $675 in 2015)
$
198

 
$
672

Available-for-sale, at fair value (amortized cost $2,887,505 in 2016 and $2,793,069 in 2015)
2,898,126

 
2,824,961

Trading securities, at fair value (amortized cost $13,054 in 2016 and $11,475 in 2015)
14,390


12,622

Equity securities
 
 
 
Available-for-sale, at fair value (cost $68,504 in 2016 and $68,514 in 2015)
270,416

 
236,247

Trading securities, at fair value (cost $5,434 in 2016 and $4,443 in 2015)
5,644

 
4,353

Mortgage loans
3,706

 
3,961

Policy loans
5,366

 
5,618

Other long-term investments
67,639

 
54,151

Short-term investments
175

 
175

 
3,265,660

 
3,142,760

Cash and cash equivalents
110,853

 
106,449

Accrued investment income
25,056

 
25,136

Premiums receivable (net of allowance for doubtful accounts of $1,255 in 2016 and $867 in 2015)
306,202

 
276,517

Deferred policy acquisition costs
164,112

 
168,264

Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $50,925 in 2016 and $46,590 in 2015)
55,524

 
53,241

Reinsurance receivables and recoverables
69,413

 
73,527

Prepaid reinsurance premiums
3,782

 
3,790

Income taxes receivable
15,061

 
—

Goodwill and net intangible assets
24,740

 
25,509

Other assets
14,355

 
15,183

Total assets
$
4,054,758

 
$
3,890,376

Liabilities and stockholders' equity
 
 
 
Liabilities
 
 
 
Future policy benefits and losses, claims and loss settlement expenses
 
 
 
Property and casualty insurance
$
1,123,896

 
$
1,003,895

Life insurance
1,350,503

 
1,372,358

Unearned premiums
443,873

 
415,057

Accrued expenses and other liabilities
159,014

 
200,599

Income taxes payable
—

 
4,917

Deferred income taxes
35,588

 
14,653

Total liabilities
$
3,112,874

 
$
3,011,479

Stockholders' equity
 
 
 
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,429,769 and 25,151,428 shares issued and outstanding in 2016 and 2015, respectively
$
25

 
$
25

Additional paid-in capital
216,482

 
207,426

Retained earnings
616,322

 
591,009

Accumulated other comprehensive income, net of tax
109,055

 
80,437

Total stockholders' equity
$
941,884

 
$
878,897

Total liabilities and stockholders' equity
$
4,054,758

 
$
3,890,376

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


73

United Fire Group, Inc.
Consolidated Statements of Income and Comprehensive Income

 
For the Years Ended December 31,
(In Thousands, Except Share Data)
2016
 
2015
 
2014
 
 
 
 
 
 
Revenues
 
 
 
 
 
Net premiums earned
$
1,023,401

 
$
930,890

 
$
828,330

Investment income, net of investment expenses
106,822

 
100,781

 
104,609

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

 
(1,300
)
 
—

All other net realized gains (includes reclassifications for net unrealized gains on available-for-sale securities of $4,520 in 2016; $4,513 in 2015; and $5,085 in 2014 previously included in accumulated other comprehensive income)
6,103

 
4,146

 
7,270

Total net realized investment gains
6,103

 
2,846

 
7,270

Other income
621

 
401

 
1,685

Total revenues
$
1,136,947

 
$
1,034,918

 
$
941,894

 
 
 
 
 
 
Benefits, losses and expenses
 
 
 
 
 
Losses and loss settlement expenses
$
683,798

 
$
549,088

 
$
536,243

Increase in liability for future policy benefits
59,969

 
50,945

 
36,623

Amortization of deferred policy acquisition costs
211,013

 
186,817

 
167,449

Other underwriting expenses (includes reclassifications for employee benefit costs of $5,486 in 2016; $7,468 in 2015; and $3,072 in 2014 previously included in accumulated other comprehensive income)
103,421

 
102,937

 
94,871

Interest on policyholders' accounts
20,079

 
23,680

 
30,245

Total benefits, losses and expenses
$
1,078,280

 
$
913,467

 
$
865,431

 
 
 
 
 
 
Income before income taxes
$
58,667

 
$
121,451

 
$
76,463

Federal income tax expense (includes reclassifications of $338 in 2016; $1,034 in 2015; and ($704) in 2014 previously included in accumulated other comprehensive income)
8,763

 
32,325

 
17,326

Net income
$
49,904

 
$
89,126

 
$
59,137

 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
Change in net unrealized appreciation on investments
$
13,017

 
$
(28,185
)
 
$
55,888

Change in liability for underfunded employee benefit plans
30,045

 
8,714

 
(47,685
)
Other comprehensive income (loss), before tax and reclassification adjustments
43,062

 
(19,471
)
 
8,203

Income tax effect
(15,072
)
 
6,814

 
(2,871
)
Other comprehensive income (loss), after tax, before reclassification adjustments
27,990

 
(12,657
)
 
5,332

Reclassification adjustment for net realized gains included in income
(4,520
)
 
(4,513
)
 
(5,085
)
Reclassification adjustment for employee benefit costs included in expense
5,486

 
7,468

 
3,072

Total reclassification adjustments, before tax
966

 
2,955

 
(2,013
)
Income tax effect
(338
)
 
(1,034
)
 
704

Total reclassification adjustments, after tax
628

 
1,921

 
(1,309
)
Comprehensive income
$
78,522

 
$
78,390

 
$
63,160

 
 
 
 
 
 
Weighted average common shares outstanding
25,335,706

 
25,047,405

 
25,230,854

Basic earnings per common share
$
1.97

 
$
3.56

 
$
2.34

Diluted earnings per common share
1.93

 
3.53

 
2.32


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


74

United Fire Group, Inc.
Consolidated Statement of Stockholders' Equity

 
For the Years Ended December 31,
(In Thousands, Except Share Data)
2016
2015
2014
 
 
 
 
Common stock
 
 
 
Balance, beginning of year
$
25

$
25

$
25

Shares repurchased (90,415 in 2016; 79,396 in 2015; and 461,835 in 2014)
—

—

—

Shares issued for stock-based awards (376,142 in 2016; 202,882 in 2015; and 108,679 in 2014)
—

—

—

Balance, end of year
$
25

$
25

$
25

 
 
 
 
Additional paid-in capital
 
 
 
Balance, beginning of year
$
207,426

$
202,676

$
211,574

Compensation expense and related tax benefit for stock-based award grants
2,880

1,677

1,784

Shares repurchased
(3,746
)
(2,423
)
(12,942
)
Shares issued for stock-based awards
9,922

5,496

2,260

Balance, end of year
$
216,482

$
207,426

$
202,676

 
 
 
 
Retained earnings
 
 
 
Balance, beginning of year
$
591,009

$
523,541

$
484,084

Net income
49,904

89,126

59,137

Dividends on common stock ($0.97 per share in 2016; $0.86 per share in 2015; $0.78 per share in 2014)
(24,591
)
(21,658
)
(19,680
)
Balance, end of year
$
616,322

$
591,009

$
523,541

 
 
 
 
Accumulated other comprehensive income, net of tax
 
 
 
Balance, beginning of year
$
80,437

$
91,173

$
87,150

Change in net unrealized investment appreciation (1)
5,523

(21,254
)
33,022

Change in liability for underfunded employee benefit plans (2)
23,095

10,518

(28,999
)
Balance, end of year
$
109,055

$
80,437

$
91,173

 
 
 
 
Summary of changes
 
 
 
Balance, beginning of year
$
878,897

$
817,415

$
782,833

Net income
49,904

89,126

59,137

All other changes in stockholders' equity accounts
13,083

(27,644
)
(24,555
)
Balance, end of year
$
941,884

$
878,897

$
817,415

(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 income taxes.

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



75

United Fire Group, Inc.
Consolidated Statements of Cash Flows

For the Years Ended December 31,
(In Thousands)
2016
 
2015
 
2014
Cash Flows From Operating Activities
 
 
 
 
 
Net income
$
49,904

 
$
89,126

 
$
59,137

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
 
Net accretion of bond premium
14,097

 
13,745

 
14,434

Depreciation and amortization
6,035

 
6,473

 
6,891

Stock-based compensation expense
3,696

 
2,510

 
1,944

Net realized investment gains
(6,103
)
 
(2,846
)
 
(7,270
)
Net cash flows from trading investments
(2,390
)
 
3,080

 
(6,855
)
Deferred income tax expense (benefit)
4,482

 
(4,496
)
 
1,926

Changes in:
 
 
 
 
 
Accrued investment income
80

 
853

 
1,934

Premiums receivable
(29,685
)
 
(27,487
)
 
(30,395
)
Deferred policy acquisition costs
(258
)
 
(17,165
)
 
(6,417
)
Reinsurance receivables
4,114

 
13,283

 
641

Prepaid reinsurance premiums
8

 
(158
)
 
(472
)
Income taxes receivable
(15,061
)
 
—

 
1,786

Other assets
828

 
(734
)
 
581

Future policy benefits and losses, claims and loss settlement expenses
176,492

 
77,471

 
47,928

Unearned premiums
28,816

 
36,332

 
38,261

Accrued expenses and other liabilities
(6,054
)
 
4,095

 
25,287

Income taxes payable
(4,917
)
 
(95
)
 
5,012

Deferred income taxes
1,043

 
(829
)
 
(249
)
Other, net
(10,743
)
 
(3,160
)
 
(2,813
)
Total adjustments
$
164,480

 
$
100,872

 
$
92,154

Net cash provided by operating activities
$
214,384

 
$
189,998

 
$
151,291

Cash Flows From Investing Activities
 
 
 
 
 
Proceeds from sale of available-for-sale investments
$
14,322

 
$
11,543

 
$
3,091

Proceeds from call and maturity of held-to-maturity investments
516

 
175

 
260

Proceeds from call and maturity of available-for-sale investments
533,784

 
658,728

 
561,434

Proceeds from short-term and other investments
2,456

 
4,421

 
2,883

Purchase of held-to-maturity investments
(42
)
 
(450
)
 
—

Purchase of available-for-sale investments
(651,365
)
 
(695,351
)
 
(614,044
)
Purchase of short-term and other investments
(4,474
)
 
(5,656
)
 
(4,351
)
Net purchases and sales of property and equipment
(7,600
)
 
(9,696
)
 
(8,151
)
Net cash used in investing activities
$
(112,403
)
 
$
(36,286
)
 
$
(58,878
)
Cash Flows From Financing Activities
 
 
 
 
 
Policyholders' account balances
 
 
 
 
 
Deposits to investment and universal life contracts
$
79,815

 
$
99,486

 
$
180,487

Withdrawals from investment and universal life contracts
(158,161
)
 
(217,905
)
 
(243,997
)
Payment of cash dividends
(24,591
)
 
(21,658
)
 
(19,680
)
Repurchase of common stock
(3,746
)
 
(2,423
)
 
(12,942
)
Issuance of common stock
9,922

 
5,496

 
2,260

Tax impact from issuance of common stock
(816
)
 
(833
)
 
(160
)
Net cash used in financing activities
$
(97,577
)
 
$
(137,837
)
 
$
(94,032
)
Net Change in Cash and Cash Equivalents
$
4,404

 
$
15,875

 
$
(1,619
)
Cash and Cash Equivalents at Beginning of Year
106,449

 
90,574

 
92,193

Cash and Cash Equivalents at End of Year
$
110,853

 
$
106,449

 
$
90,574


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


76






77

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

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
United Fire Group, Inc. ("UFG", "United Fire", the "Registrant", the "Company","we", "us", or "our") and its consolidated subsidiaries and affiliates are engaged in the business of writing property and casualty insurance and life insurance and selling annuities through a network of independent agencies. We report our operations in two business segments: property and casualty insurance and life insurance. Our insurance company subsidiaries are licensed as a property and casualty insurer in 46 states, plus the District of Columbia, and as a life insurer in 37 states.
Principles of Consolidation
The accompanying Consolidated Financial Statements include United Fire and its wholly owned subsidiaries: United Fire & Casualty Company, United Real Estate Holdings Company, LLC, United Life Insurance Company ("United Life"), Addison Insurance Company, Lafayette Insurance Company, United Fire & Indemnity Company, United Fire Lloyds, UFG Specialty Insurance Company, Financial Pacific Insurance Company, Franklin Insurance Company, Mercer Insurance Company, and Mercer Insurance Company of New Jersey, Inc.
United Fire Lloyds, an affiliate of United Fire & Indemnity Company, is organized as a Texas Lloyds plan, which is an aggregation of underwriters who, under a common name, engage in the business of insurance through a corporate attorney-in-fact. United Fire Lloyds is financially and operationally controlled by United Fire & Indemnity Company, its corporate attorney-in-fact, pursuant to three types of agreements: trust agreements between United Fire & Indemnity Company and certain individuals who agree to serve as trustees; articles of agreement among the trustees who agree to act as underwriters to establish how the Lloyds plan will be operated; and powers of attorney from each of the underwriters appointing a corporate attorney-in-fact, who is authorized to operate the Lloyds plan. Because United Fire & Indemnity Company can name the trustees, the Lloyds plan is perpetual, subject only to United Fire & Indemnity Company's desire to terminate it.
United Fire & Indemnity Company provides all of the statutory capital necessary for the formation of the Lloyds plan by contributing capital to each of the trustees. The trust agreements require the trustees to become underwriters of the Lloyds plan, to contribute the capital to the Lloyds plan, to sign the articles of agreement and to appoint the attorney-in-fact. The trust agreements also require the trustees to pay to United Fire & Indemnity Company all of the profits and benefits received by the trustees as underwriters of the Lloyds plan, which means that United Fire & Indemnity Company has the right to receive 100 percent of the gains and profits from the Lloyds plan. The trustees serve at the pleasure of United Fire & Indemnity Company, which may remove a trustee and replace that trustee at any time. Termination of a trustee must be accompanied by the resignation of the trustee as an underwriter, so that the trustee can obtain the capital contribution from the Lloyds plan to reimburse United Fire & Indemnity Company. By retaining the ability to terminate trustees, United Fire & Indemnity Company possesses the ability to name and remove the underwriters.
United Real Estate Holdings, LLC, formed in 2013, is a wholly owned subsidiary of United Fire & Casualty Company and is organized as an Iowa limited liability corporation, an unincorporated association formed for the purpose of holding United Fire & Casualty Company's ownership in commercial real estate.
In 2015, the Company dissolved three of its holding companies in order to flatten our organizational chart. The companies dissolved were American Indemnity Financial Corporation, Mercer Insurance Group, Inc. and Financial Pacific Insurance Group, Inc. In addition, Texas General Indemnity Company was renamed UFG Specialty Insurance Company on July 1, 2015.



78

Basis of Presentation

The accompanying Consolidated Financial Statements have been prepared on the basis of U.S. generally accepted accounting principles ("GAAP"), which differ in some respects from those followed in preparing our statutory reports to insurance regulatory authorities. Our stand-alone subsidiary financial statements submitted to insurance regulatory authorities are presented on the basis of accounting practices prescribed or permitted by the insurance departments of the states in which we are domiciled ("statutory accounting principles").
Use of Estimates
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 post-retirement benefit obligations.
Property and Casualty Insurance Business
Premiums written are deferred and recorded as earned premium on a daily pro rata basis over the terms of the respective policies. Unearned premium reserves are established for the portion of premiums written applicable to the unexpired term of insurance policies in force. Premiums receivable are presented net of an estimated allowance for doubtful accounts, which is based on a periodic evaluation of the aging and collectability of amounts due from agents and policyholders.
To establish loss and loss settlement expense reserves, we make estimates and assumptions about the future development of claims. Actual results could differ materially from those estimates, which are subjective, complex and inherently uncertain. When we establish and adjust reserves, we do so given our knowledge at the time of the circumstances and facts of known claims. To the extent that we have overestimated or underestimated our loss and loss settlement expense reserves, we adjust the reserves in the period in which such adjustment is determined.
We record our best estimate of reserves for claim litigation that arises in the ordinary course of business. We consider all of our pending litigation as of December 31, 2016 to be ordinary, routine and incidental to our business.
Life Insurance Business
Our whole life and term insurance (i.e., traditional business) premiums are reported as earned when due and benefits and expenses are associated with premium income in order to result in the recognition of profits over the lives of the related contracts. Premiums receivable are presented net of an estimated allowance for doubtful accounts. Income annuities with life contingencies (single premium immediate annuities and supplementary contracts) have premium recorded and any related expense charge fees recorded as income and expense when the contract is issued. On universal life and deferred annuity policies (i.e., non-traditional business), income and expenses are reported when charged and credited to policyholder account balances in order to result in recognition of profits over the lives of the related contracts. We accomplish this by means of a provision for future policy benefits and the deferral and subsequent amortization of policy acquisition costs.
Liabilities for future policy benefits for traditional products are computed by the net level premium method, using interest assumptions ranging from 3.7 percent to 6.0 percent and withdrawal, mortality and morbidity assumptions appropriate at the time the policies were issued. Liabilities for non-traditional business are stated at policyholder account values before surrender charges. Liabilities for traditional immediate annuities are based primarily upon future anticipated cash flows using assumptions for mortality and interest rates. Liabilities for deferred annuities are carried at the account value.



79

Reinsurance
Premiums earned and losses and loss settlement expenses incurred are reported net of reinsurance ceded. Ceded insurance business is accounted for on a basis consistent with the original policies issued and the terms of the reinsurance contracts. Refer to Note 4 "Reinsurance" for a discussion of our reinsurance activities.
Investments
Investments in fixed maturities include bonds and redeemable preferred stocks. Our investments in held-to-maturity fixed maturities are recorded at amortized cost. Our investments in available-for-sale fixed maturities and trading securities are recorded at fair value.
Investments in equity securities, which include common and non-redeemable preferred stocks, are classified as available-for-sale or trading and are recorded at fair value.
Changes in unrealized appreciation and depreciation, with respect to available-for-sale fixed maturities and equity securities, are reported as a component of accumulated other comprehensive income, net of applicable deferred income taxes, in stockholders' equity. Changes in unrealized appreciation and depreciation, with respect to trading securities, are reported as a component of income.
Other long-term investments consist primarily of our interests in limited liability partnerships that are recorded on the equity method of accounting. Mortgage loans are recorded at their unpaid principal balance. Policy loans are recorded at the outstanding loan amount due from policyholders. Included in investments at December 31, 2016 and 2015, are securities on deposit with, or available to, various regulatory authorities as required by law, with fair values of $1,509,339 and $1,515,193, respectively.
In 2016 and 2014, we did not record any other-than-temporary impairment ("OTTI") charges in our investment portfolio. In 2015 we recorded a pre-tax realized loss of $1,300 as a result of the recognition of OTTI charges on a certain holding in our investment portfolio. The OTTI charge did not have a noncredit related loss component. We review all of our investment holdings for appropriate valuation on an ongoing basis. Refer to Note 2 "Summary of Investments" for a discussion of our accounting policy for impairment recognition.
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.
In 2016, 2015, and 2014, we made cash payments for income taxes of $24,034, $39,497 and $9,626, respectively. In addition, we received federal tax refunds of $919 and $615 in 2015 and 2014, respectively, that resulted from the utilization of our 2011 net operating losses and net capital losses in the carryforward period. In 2016, we did not receive any federal tax refunds. We made no interest payments in 2016, 2015 and 2014. These payments exclude 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 that are reported in the accompanying Consolidated Financial Statements.


80

Property and Casualty Insurance
2016
 
2015
 
2014
Recorded asset at beginning of year
$
90,547

 
$
72,861

 
$
67,663

Underwriting costs deferred
205,707

 
197,869

 
166,508

Amortization of deferred policy acquisition costs
(202,892
)
 
(180,183
)
 
(161,310
)
Recorded asset at end of year
$
93,362

 
$
90,547

 
$
72,861

 
 
 
 
 
 
Life Insurance
 
 
 
 
 
Recorded asset at beginning of year
$
77,717

 
$
66,858

 
$
82,429

Underwriting costs deferred
5,564

 
6,113

 
7,357

Amortization of deferred policy acquisition costs
(8,121
)
 
(6,634
)
 
(6,139
)
 
$
75,160

 
$
66,337

 
$
83,647

Change in "shadow" deferred policy acquisition costs
(4,410
)
 
11,380

 
(16,789
)
Recorded asset at end of year
$
70,750

 
$
77,717

 
$
66,858

 
 
 
 
 
 
Total
 
 
 
 
 
Recorded asset at beginning of year
$
168,264

 
$
139,719

 
$
150,092

Underwriting costs deferred
211,271

 
203,982

 
173,865

Amortization of deferred policy acquisition costs
(211,013
)
 
(186,817
)
 
(167,449
)
 
$
168,522

 
$
156,884

 
$
156,508

Change in "shadow" deferred policy acquisition costs
(4,410
)
 
11,380

 
(16,789
)
Recorded asset at end of year
$
164,112

 
$
168,264

 
$
139,719


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. After reviewing our DAC model at March 31, 2015, we enhanced our property and 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. With the completion of the Mercer Insurance Group, Inc. integration, we determined it was the appropriate time to review our DAC models. The impact of these updates to the model resulted in an increase to DAC amortization of $2,144 and an increase to the DAC asset of $3,830 for the period ended December 31, 2015, as compared to what we would have recognized had we not updated our model.

For traditional life insurance policies, DAC is amortized to income over the premium-paying period in proportion to the ratio of the expected annual premium revenue to the expected total premium revenue. Expected premium revenue and gross profits are based on the same mortality and withdrawal assumptions used in determining future policy benefits. These assumptions are not revised after policy issuance unless the recorded DAC asset is deemed to be unrecoverable from future expected profits.

For non-traditional life insurance policies, DAC is amortized over the anticipated terms in proportion to the ratio of the expected annual gross profits to the total expected gross profits. Changes in the amount or timing of expected gross profits result in adjustments to the cumulative amortization of these costs. The effect on amortization of DAC for revisions to estimated gross profits is reported in earnings in the period the estimated gross profits are revised.

The effect on DAC that results from the assumed realization of unrealized gains (losses) on investments allocated to non-traditional life insurance business is recognized with an offset to net unrealized investment appreciation as of the balance sheet date. The impact of unrealized gains (losses) on available-for-sale securities decreased the DAC asset by $6,413, $2,003 and $13,383 at December 31, 2016, 2015 and 2014, respectively.


81

Property, Equipment and Depreciation
Property and equipment is presented at cost less accumulated depreciation. The following table is a summary of the components of the property and equipment that are reported in the accompanying Consolidated Financial Statements.
 
2016
2015
Real estate:
 
 
Land
$
8,231

$
7,999

Buildings
41,119

37,451

Furniture and fixtures
4,711

3,954

Computer equipment and software
1,463

2,452

Airplane
—

1,385

Total property and equipment
$
55,524

$
53,241

Expenditures for maintenance and repairs on property and equipment are generally expensed as incurred. We periodically review these assets for impairment whenever events or changes in business circumstances indicate that the carrying value of the underlying asset may not be recoverable. A loss would be recognized if the estimated fair value of the asset were less than its carrying value.
Depreciation is computed primarily by the straight-line method over the following estimated useful lives:
 
Useful Life
Computer equipment and software
Three years
Furniture and fixtures
Seven years
Leasehold improvements
Shorter of the lease term or useful life of the asset
Real estate
Seven to thirty-nine years
Airplane
Five years
Depreciation expense totaled $5,266, $5,704 and $6,122 for 2016, 2015 and 2014, respectively.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets arise as a result of business combinations and consist of the excess of the fair value of consideration paid over the tangible assets acquired and liabilities assumed. All of our goodwill and the majority of our intangible assets relate to the Mercer acquisition in 2011. We evaluate goodwill and other intangible assets for impairment at least on an annual basis or whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount of goodwill and other intangible assets may exceed its implied fair value. Goodwill is evaluated at the reporting unit level. Any impairment is charged to operations in the period that the impairment is identified. In 2016 and 2015, we performed a quantitative impairment assessment of our goodwill and in 2014, we performed a qualitative impairment assessment of our goodwill. As a result of these assessments, we did not recognize an impairment charge on our goodwill in 2016, 2015 or 2014.
Our other intangible assets, which consist primarily of agency relationships, trade names, state insurance licenses, and software, are being amortized by the straight-line method over periods ranging from 2 years to 15 years, with the exception of state insurance licenses, which are indefinite-lived and not amortized. In 2016 and 2014, we performed a qualitative impairment assessment of our indefinite lived intangible assets and, in 2015, we performed a quantitative impairment assessment of our indefinite lived intangible assets. As a result of these assessments, we did not recognize an impairment charge on our intangible assets in 2016, 2015 and 2014. Amortization expense, which is allocated to the property and casualty insurance segment, totaled $769 for each of 2016, 2015 and 2014, respectively.


82

Income Taxes
Deferred tax assets and liabilities are established based on differences between the financial statement bases of assets and liabilities and the tax bases of those same assets and liabilities, using the currently enacted statutory tax rates. Deferred income tax expense is measured by the year-to-year change in the net deferred tax asset or liability, except for certain changes in deferred tax amounts that affect stockholders' equity and do not impact federal income tax expense.

The Company performs a quarterly review of its tax positions and makes a determination whether it is more likely than not that the tax position will be sustained upon examination. If based on this review, it appears not more likely than not that the position will be sustained, the Company will calculate any unrecognized tax benefits and calculate any interest and penalties. At December 31, 2016, 2015, and 2014 the Company did not recognize any liability for unrecognized tax benefits. 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.
Stock-Based Compensation
We currently have two equity compensation plans. One plan allows us to grant restricted and unrestricted stock, stock appreciation rights, incentive stock options, and non-qualified stock options to employees. The other plan allows us to grant restricted and non-qualified stock options to non-employee directors.
We utilize the Black-Scholes option pricing method to establish the fair value of non-qualified stock options granted under our equity compensation plans. Our determination of the fair value of stock options on the date of grant using this option-pricing model is affected by our stock price, as well as assumptions regarding a number of complex and subjective variables, which include the expected volatility in our stock price, the expected term of the award, the expected dividends to be paid over the term of the award and the expected risk-free interest rate. Any changes in these assumptions may materially affect the estimated fair value of the award. For our restricted and unrestricted stock awards, we utilize the fair value of our common stock on the date of grant to establish the fair value of the award. Refer to Note 9 "Stock-Based Compensation" for further discussion.
Comprehensive Income
Comprehensive income includes all changes in stockholders' equity during a period except those resulting from investments by and dividends to stockholders.
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 2016

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 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


83

December 15, 2015 and interim periods beginning the following year. The Company has included the new annual disclosures beginning with the December 31, 2016 annual financial statements. The adoption of the new guidance changed disclosures in Note 5 "Reserves for Losses and Loss Settlement Expenses," of this section regarding short- duration contracts, but had no impact on the Company's financial position or results of operations.

Other Internal Use Software

In April 2015, the FASB issued guidance which clarifies customers' accounting for fees paid for cloud computing arrangements. The new standard 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 adopted the new guidance as of January 1, 2016. The adoption of the new guidance had no impact on the Company's financial position or results of operations as we have no material cloud computing arrangements.

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 adopted the new guidance as of January 1, 2016. The adoption of the new guidance had no impact on the Company's financial position or results of operations in 2016 as we did not issue any debt.

Consolidation

In February 2015, the FASB issued amendments to the consolidation guidance that a reporting entity follows 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 adopted the guidance as of January 1, 2016. The adoption of the new guidance had no 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 that fact and what the entity's plans are to alleviate that doubt. The guidance is effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. The Company adopted the guidance as of January 1, 2016. The adoption of the new guidance had no 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 adopted the guidance as of January 1, 2016. The adoption of the new guidance had no impact on the Company's financial position or results of operations.


84

Pending Adoption of Accounting Standards
Share-Based Payments
In March 2016, the FASB issued new guidance on the accounting for share-based payments. The new guidance was issued to simplify the accounting of share-based payments, specifically in the areas of income taxes, classification on the balance sheets as liabilities or equity and classification in the cash flow statement. The new guidance is effective for annual periods beginning after December 15, 2016 and interim periods within those years. The Company adopted the new guidance as of January 1, 2017. The new guidance will result in classification changes between the financing and operating section of the Statement of Cash Flow. The new guidance will also result in additional tax expense or net income, but will vary depending on the number of stock options granted and exercised.
Income Taxes
In December 2015, the FASB issued guidance on the balance sheet classification of deferred taxes. The new guidance eliminates the requirement to split deferred tax liabilities and assets between current and non-current in a classified balance sheet. The new guidance allows deferred tax liabilities and assets to be included in non-current accounts. The Company adopted the new guidance as of January 1, 2017. The adoption will have no impact on the Company's financial position and results of operations since we do not currently report deferred taxes in classified balance sheets.
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 as of January 1, 2018. The adoption of the new guidance will have no impact on the Company's reporting and disclosure of net premiums earned, net investment income or net realized gains and losses, as these items are not within the scope of this new guidance. The Company is currently evaluating the impact on the Company's financial position and results of operations with other revenue streams under this new guidance. These other revenue streams, currently reported in other income in the Consolidated Statements of Income and Comprehensive Income, are not a material amount of the Company's total revenue.
Financial Instruments
In January 2016, the FASB issued guidance updating certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments in this update supersede the guidance to classify equity securities with readily determinable fair values into different categories (for example, trading or available-for-sale) and require equity securities to be measured at fair value with changes in the fair value recognized through net income. The new guidance also simplifies the impairment process for equity investments without readily determinable fair values. The new guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those years. The Company will adopt the new guidance as of January 1, 2018 and is currently evaluating the impact on the Company's financial position, results of operations and key processes. If the new guidance were adopted as of December 31, 2016, there would be a reclassification from accumulated other comprehensive income to retained earnings equal to the amount of net unrealized gains and losses on available-for-sale equity securities at December 31, 2015 disclosed in Note 2 "Summary of Investments," of this section. The impact to net realized gains (losses) would equal the change in net unrealized gains and losses on available-for-sale equity securities between December 31, 2016 and December 31, 2015, in the same tables.



85

Statement of Cash Flows - Classification of Certain Cash Receipts and Payments
In August 2016, the FASB issued an update that clarifies the classification of certain cash receipts and payments in the Statement of Cash Flows. The update addresses eight existing cash flow issues by clarifying the correct classification to establish uniformity in practice. The updated guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those years. The Company will adopt the new guidance as of January 1, 2018 and is currently reviewing the updates to the eight existing cash flow issues. Currently, management believes that one existing cash flow issue will be impacted by these updates. Management believes the update will have no impact on the Company's financial position and results of operations but may effect the current classification of the cash flow in the Statement of Cash Flows.
Leases
In February 2016, the FASB issued guidance on the accounting for leases. The new guidance requires lessees to place most leases on their balance sheets with expenses recognized on the income statement in a similar manner as previous methods. The new guidance is effective for annual periods beginning after December 15, 2018 and interim periods within those years. The Company will adopt the new guidance as of January 1, 2019. The Company has created an inventory of its leases and has calculated the current minimum future lease payment which is disclosed in Note 13 "Lease Commitments."
Financial Instruments - Credit Losses
In June 2016, the FASB issued new guidance on the measurement of credit losses for most financial instruments. The new guidance replaces the current incurred loss model for recognizing credit losses with an expected loss model for instruments measured at amortized cost and requires allowances to be recorded for available-for-sale debt securities rather than reduce the carrying amount. These allowances will be remeasured each reporting period. The new guidance is effective for annual periods beginning after December 15, 2020 and interim periods within those years. The Company will adopt the new guidance as of January 1, 2021 and is currently evaluating the impact on the Company's financial position, results of operations and key processes.
Income Taxes - Intra-entity Transfers
In October 2016, the FASB issued new guidance on the income tax treatment of intra-entity transfers. The new guidance replaces the current guidance which prohibits the recognition of current and deferred income taxes of intra-entity transfers until the asset is sold externally. Under the new guidance, the exemption is eliminated and income taxes will be recognized on transfers of intra-entity assets. The new guidance is effective for annual periods beginning after December 15, 2018 and interim periods beginning after December 15, 2019. The Company will adopt the new guidance as of January 1, 2019 and is currently evaluating the impact on the Company's financial position and results of operations.
Goodwill
In January 2017, the FASB issued new guidance which simplifies the test for goodwill impairment. The new guidance eliminates the implied fair value calculation when measuring a goodwill impairment charge. Under the new guidance, impairment charges will be based on the excess of the carrying value over fair value of goodwill. The new guidance is effective for annual and interim periods beginning after December 15, 2019. The Company will adopt the new guidance as of January 1, 2020 and is currently evaluating the impact on the Company's financial position and results of operations.








86

NOTE 2. SUMMARY OF INVESTMENTS
Fair Value of Investments

The table that follows is 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 available-for-sale equity securities as of December 31, 2016 and 2015.







87

December 31, 2016
 
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
$
150

 
$
—

 
$
—

 
$
150

Mortgage-backed securities
48

 
1

 
—

 
49

Total Held-to-Maturity Fixed Maturities
$
198

 
$
1

 
$
—

 
$
199

AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
U.S. Treasury
$
23,216

 
$
87

 
$
108

 
$
23,195

U.S. government agency
76,692

 
1,445

 
540

 
77,597

States, municipalities and political subdivisions
 
 
 
 
 
 
 
  General obligations:
 
 
 
 
 
 
 
     Midwest
143,747

 
1,808

 
1,412

 
144,143

     Northeast
57,731

 
909

 
231

 
58,409

     South
129,475

 
1,249

 
2,355

 
128,369

     West
114,524

 
1,380

 
2,173

 
113,731

   Special revenue:
 
 
 
 
 
 
 
     Midwest
167,430

 
2,313

 
1,433

 
168,310

     Northeast
70,202

 
487

 
2,624

 
68,065

     South
244,225

 
1,753

 
6,791

 
239,187

     West
134,287

 
1,509

 
4,052

 
131,744

Foreign bonds
62,995

 
2,239

 
—

 
65,234

Public utilities
212,360

 
3,761

 
447

 
215,674

Corporate bonds
 
 
 
 
 
 
 
Energy
107,084

 
2,195

 
419

 
108,860

Industrials
225,526

 
5,359

 
982

 
229,903

Consumer goods and services
178,135

 
3,847

 
295

 
181,687

Health care
81,211

 
2,063

 
151

 
83,123

Technology, media and telecommunications
143,402

 
2,029

 
819

 
144,612

Financial services
269,981

 
5,328

 
1,358

 
273,951

Mortgage-backed securities
17,288

 
201

 
241

 
17,248

Collateralized mortgage obligations
 
 
 
 
 
 
 
Government national mortgage association
145,947

 
1,279

 
2,766

 
144,460

Federal home loan mortgage corporation
176,226

 
1,638

 
3,406

 
174,458

Federal national mortgage association
101,414

 
1,816

 
1,334

 
101,896

Asset-backed securities
4,407

 
145

 
282

 
4,270

Total Available-For-Sale Fixed Maturities
$
2,887,505

 
$
44,840

 
$
34,219

 
$
2,898,126

Equity securities
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
Public utilities
$
6,394

 
$
13,465

 
$
188

 
$
19,671

Energy
6,514

 
8,555

 
22

 
15,047

Industrials
13,252

 
38,715

 
173

 
51,794

Consumer goods and services
10,324

 
13,851

 
58

 
24,117

Health care
7,763

 
19,657

 
—

 
27,420

Technology, media and telecommunications
5,931

 
9,476

 
38

 
15,369

Financial services
17,289

 
98,728

 
67

 
115,950

Nonredeemable preferred stocks
1,037

 
11

 
—

 
1,048

Total Available-for-Sale Equity Securities
$
68,504

 
$
202,458

 
$
546

 
$
270,416

Total Available-for-Sale Securities
$
2,956,009

 
$
247,298

 
$
34,765

 
$
3,168,542



88

December 31, 2015
 
Type of Investment
Cost or Amortized Cost
 
Gross Unrealized Appreciation
 
Gross Unrealized Depreciation
 
Fair Value
HELD-TO-MATURITY
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
Corporate bonds
 
 
 
 
 
 
 
Technology, media and telecommunications
$
450

 
$
1

 
$
—

 
$
451

Financial services
150

 
—

 
—

 
150

Mortgage-backed securities
72

 
2

 
—

 
74

Total Held-to-Maturity Fixed Maturities
$
672

 
$
3

 
$
—

 
$
675

AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
U.S. Treasury
$
21,587

 
$
100

 
$
38

 
$
21,649

U.S. government agency
232,808

 
2,622

 
2,400

 
233,030

States, municipalities and political subdivisions
 
 
 
 
 
 
 
   General obligations:
 
 
 
 
 
 
 
      Midwest
160,484

 
4,990

 
18

 
165,456

      Northeast
56,449

 
1,996

 
—

 
58,445

      South
125,565

 
3,358

 
134

 
128,789

      West
103,721

 
3,160

 
67

 
106,814

   Special revenue:
 
 
 
 
 
 
 
      Midwest
152,780

 
4,956

 
30

 
157,706

      Northeast
23,892

 
919

 
212

 
24,599

      South
144,183

 
4,281

 
27

 
148,437

      West
78,935

 
3,150

 
44

 
82,041

Foreign bonds
82,580

 
2,405

 
2,457

 
82,528

Public utilities
213,233

 
3,701

 
1,251

 
215,683

Corporate bonds
 
 
 
 
 
 
 
Energy
116,800

 
1,032

 
4,713

 
113,119

Industrials
227,589

 
3,329

 
6,663

 
224,255

Consumer goods and services
172,529

 
2,844

 
776

 
174,597

Health care
92,132

 
2,168

 
791

 
93,509

Technology, media and telecommunications
142,431

 
1,972

 
2,003

 
142,400

Financial services
259,382

 
5,246

 
1,143

 
263,485

Mortgage-backed securities
16,413

 
376

 
51

 
16,738

Collateralized mortgage obligations
 
 
 
 
 
 
 
Government national mortgage association
120,220

 
1,391

 
1,985

 
119,626

Federal home loan mortgage corporation
137,874

 
2,377

 
1,342

 
138,909

Federal national mortgage association
106,021

 
2,400

 
941

 
107,480

Asset-backed securities
5,461

 
221

 
16

 
5,666

Total Available-For-Sale Fixed Maturities
$
2,793,069

 
$
58,994

 
$
27,102

 
$
2,824,961

Equity securities
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
Public utilities
$
7,231

 
$
12,022

 
$
193

 
$
19,060

Energy
6,103

 
5,374

 
266

 
11,211

Industrials
13,251

 
31,872

 
313

 
44,810

Consumer goods and services
10,301

 
13,017

 
3

 
23,315

Health care
7,763

 
20,454

 
—

 
28,217

Technology, media and telecommunications
5,931

 
7,538

 
105

 
13,364

Financial services
17,392

 
78,411

 
109

 
95,694

Nonredeemable preferred stocks
542

 
34

 
—

 
576

Total Available-for-Sale Equity Securities
$
68,514

 
$
168,722

 
$
989

 
$
236,247

Total Available-for-Sale Securities
$
2,861,583

 
$
227,716

 
$
28,091

 
$
3,061,208



89

Maturities
The amortized cost and fair value of held-to-maturity, available-for-sale and trading fixed maturity securities at December 31, 2016, 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
December 31, 2016
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
150

 
$
150

 
$
106,058

 
$
107,080

 
$
1,753

 
$
1,774

Due after one year through five years
—

 
—

 
840,603

 
862,053

 
7,841

 
8,882

Due after five years through 10 years
—

 
—

 
807,723

 
815,182

 
1,302

 
1,406

Due after 10 years
—

 
—

 
687,839

 
671,479

 
2,158

 
2,328

Asset-backed securities
—

 
—

 
4,407

 
4,270

 
—

 
—

Mortgage-backed securities
48

 
49

 
17,288

 
17,248

 
—

 
—

Collateralized mortgage obligations
—

 
—

 
423,587

 
420,814

 
—

 
—

 
$
198

 
$
199

 
$
2,887,505

 
$
2,898,126

 
$
13,054

 
$
14,390

Net Realized Investment Gains and Losses
Net realized gains (losses) on disposition of investments are computed using the specific identification method and are included in the computation of net income. A summary of net realized investment gains (losses) for 2016, 2015 and 2014, is as follows:
 
2016
 
2015
 
2014
Net realized investment gains (losses)
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
Available-for-sale
$
2,160

 
$
3,294

 
$
3,353

Trading securities
 
 
 
 
 
Change in fair value
189

 
(1,353
)
 
609

Sales
931

 
1,381

 
1,339

Equity securities:
 
 
 
 
 
Available-for-sale
2,359

 
2,521

 
1,732

Trading securities
 
 
 
 
 
Change in fair value
301

 
(448
)
 
238

Sales
(6
)
 
66

 
(1
)
Other long-term investments
—

 
(1,315
)
 
—

Other-than-temporary-impairment charges:
 
 
 
 
 
Fixed maturities
—

 
(1,300
)
 
—

Cash equivalents
169

 
—

 
—

Total net realized investment gains
$
6,103

 
$
2,846

 
$
7,270

The proceeds and gross realized gains (losses) on the sale of available-for-sale securities for 2016, 2015 and 2014, were as follows:
 
2016
 
2015
 
2014
Proceeds from sales
$
14,322

 
$
11,543

 
$
3,091

Gross realized gains
985

 
1,134

 
900

Gross realized losses
(639
)
 
—

 
(56
)
There were no sales of held-to-maturity securities in 2016, 2015 and 2014.


90

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 and losses. Our portfolio of trading securities had a fair value of $20,034 and $16,975 at December 31, 2016 and 2015, respectively.
Net Investment Income
Net investment income for the years ended December 31, 2016, 2015 and 2014, is comprised of the following:
Years Ended December 31,
2016
 
2015
 
2014
Investment income
 
 
 
 
 
Interest on fixed maturities
$
92,362

 
$
92,777

 
$
97,969

Dividends on equity securities
7,050

 
7,208

 
6,602

Income on other long-term investments
 
 
 
 
 
Investment income
2,394

 
2,567

 
1,927

Change in value (1)
10,742

 
3,266

 
1,917

Interest on mortgage loans
221

 
237

 
252

Interest on short-term investments
84

 
6

 
5

Interest on cash and cash equivalents
445

 
305

 
255

Other
1,227

 
1,452

 
1,998

Total investment income
$
114,525

 
$
107,818

 
$
110,925

Less investment expenses
7,703

 
7,037

 
6,316

Net investment income
$
106,822

 
$
100,781

 
$
104,609

(1)
Represents the change in value of our interests in limited liability partnerships that are recorded on the equity method of accounting.
Funding Commitment
At December 31, 2016, pursuant to an agreement with our limited liability partnership investments, we are contractually committed to make capital contributions up to $8,428 upon request of the partnerships through December 31, 2023.
Unrealized Appreciation and Depreciation
A summary of changes in net unrealized investment appreciation for 2016, 2015 and 2014, is as follows:
 
2016
 
2015
 
2014
Change in net unrealized investment appreciation
 
 
 
 
 
Available-for-sale fixed maturities
$
(21,271
)

$
(37,621
)
 
$
51,814

Available-for-sale equity securities
34,179

 
(6,459
)
 
15,781

Deferred policy acquisition costs
(4,410
)
 
11,380

 
(16,789
)
Income tax effect
(2,975
)
 
11,446

 
(17,784
)
Total change in net unrealized investment appreciation, net of tax
$
5,523

 
$
(21,254
)

$
33,022

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 or based on the value calculated using a discounted cash flow model. Credit-related impairments on fixed maturity securities that we do not plan to sell, and for which we are not more likely than not to be required to sell, are recognized in net income. Any non-credit related impairment is recognized as a component of other comprehensive income. Factors considered in evaluating whether


91

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 December 31, 2016 and 2015. 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 December 31, 2016 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 determined that these losses did not warrant the recognition of an OTTI charge in 2016 or 2014. In 2015, we recognized a $1,300 credit loss OTTI on an energy sector fixed maturity security in our Consolidated Statements of Income and Comprehensive Income. All fixed maturity securities in the investment portfolio continue to pay the expected coupon payments under the contractual terms of the securities. 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 intention 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 December 31, 2016. There were no OTTI losses on equity securities recognized in 2016, 2015 or 2014. Our largest unrealized loss greater than 12 months on an individual equity security at December 31, 2016, 2015 and 2014 was $188, $225 and $54, respectively. 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.


















92

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
Less than 12 months
 
12 months or longer
 
Total
Type of Investment
Number
of Issues
 
Fair
Value
 
Gross Unrealized
Depreciation
 
Number
of Issues
 
Fair
Value
 
Gross Unrealized Depreciation
 
Fair
Value
 
Gross Unrealized Depreciation
AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
9

 
$
10,800

 
$
108

 
—

 
$
—

 
$
—

 
$
10,800

 
$
108

U.S. government agency
10

 
36,593

 
540

 
—

 
—

 
—

 
36,593

 
540

States, municipalities and political subdivisions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   General obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
      Midwest
27

 
40,545

 
1,412

 
—

 
—

 
—

 
40,545

 
1,412

      Northeast
9

 
9,874

 
231

 
—

 
—

 
—

 
9,874

 
231

      South
37

 
53,699

 
2,355

 
—

 
—

 
—

 
53,699

 
2,355

      West
30

 
55,265

 
2,173

 
—

 
—

 
—

 
55,265

 
2,173

   Special revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
      Midwest
41

 
62,937

 
1,433

 
—

 
—

 
—

 
62,937

 
1,433

      Northeast
22

 
54,993

 
2,624

 
—

 
—

 
—

 
54,993

 
2,624

      South
79

 
152,979

 
6,791

 
—

 
—

 
—

 
152,979

 
6,791

      West
44

 
81,676

 
4,052

 
—

 
—

 
—

 
81,676

 
4,052

Public utilities
20

 
38,511

 
423

 
2

 
2,122

 
24

 
40,633

 
447

Corporate bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
8

 
15,938

 
313

 
3

 
8,232

 
106

 
24,170

 
419

Industrials
24

 
42,854

 
596

 
3

 
5,641

 
386

 
48,495

 
982

Consumer goods and services
11

 
21,059

 
295

 
—

 
—

 
—

 
21,059

 
295

Health care
9

 
20,918

 
151

 
—

 
—

 
—

 
20,918

 
151

Technology, media and telecommunications
16

 
41,230

 
516

 
3

 
10,241

 
303

 
51,471

 
819

Financial services
37

 
75,286

 
1,358

 
—

 
—

 
—

 
75,286

 
1,358

Mortgage-backed securities
16

 
9,611

 
187

 
5

 
1,198

 
54

 
10,809

 
241

Collateralized mortgage obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government national mortgage association
36

 
82,430

 
2,261

 
9

 
13,603

 
505

 
96,033

 
2,766

Federal home loan mortgage corporation
41

 
105,775

 
3,165

 
3

 
5,141

 
241

 
110,916

 
3,406

Federal national mortgage association
27

 
46,633

 
1,091

 
4

 
4,341

 
243

 
50,974

 
1,334

Asset-backed securities
1

 
971

 
29

 
1

 
2,559

 
253

 
3,530

 
282

Total Available-for-Sale Fixed Maturities
554

 
$
1,060,577

 
$
32,104

 
33

 
$
53,078

 
$
2,115

 
$
1,113,655

 
$
34,219

Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Public utilities
—

 
$
—

 
$
—

 
3

 
$
120

 
$
188

 
$
120

 
$
188

Energy
—

 
—

 
—

 
1

 
163

 
22

 
163

 
22

Industrials
—

 
—

 
—

 
6

 
239

 
173

 
239

 
173

Consumer goods and services
3

 
282

 
55

 
2

 
15

 
3

 
297

 
58

Technology, media and telecommunications
7

 
26

 
5

 
8

 
33

 
33

 
59

 
38

Financial services
3

 
53

 
3

 
2

 
150

 
64

 
203

 
67

Total Available-for-Sale Equity Securities
13

 
$
361

 
$
63

 
22

 
$
720

 
$
483

 
$
1,081

 
$
546

Total Available-for-Sale Securities
567

 
$
1,060,938

 
$
32,167

 
55

 
$
53,798

 
$
2,598

 
$
1,114,736

 
$
34,765



93


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
Less than 12 months
 
12 months or longer
 
Total
Type of Investment
Number
of Issues
 
Fair
Value
 
Gross Unrealized Depreciation
 
Number
of Issues
 
Fair
Value
 
Gross Unrealized Depreciation
 
Fair
Value
 
Gross Unrealized Depreciation
AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
6

 
$
6,408

 
$
26

 
2

 
$
1,634

 
$
12

 
$
8,042

 
$
38

U.S. government agency
38

 
104,621

 
1,771

 
6

 
18,821

 
629

 
123,442

 
2,400

States, municipalities and political subdivisions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   General obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
      Midwest
4

 
2,417

 
12

 
1

 
528

 
6

 
2,945

 
18

      South
3

 
4,805

 
55

 
8

 
3,743

 
79

 
8,548

 
134

      West
4

 
8,927

 
23

 
2

 
2,274

 
44

 
11,201

 
67

   Special revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
      Midwest
—

 
—

 
—

 
1

 
2,494

 
30

 
2,494

 
30

      Northeast
1

 
4,755

 
212

 
—

 
—

 
—

 
4,755

 
212

      South
4

 
7,445

 
26

 
2

 
1,851

 
1

 
9,296

 
27

      West
4

 
6,851

 
44

 
—

 
—

 
—

 
6,851

 
44

Foreign bonds
9

 
16,991

 
1,289

 
2

 
4,036

 
1,168

 
21,027

 
2,457

Public utilities
35

 
72,680

 
880

 
5

 
2,840

 
371

 
75,520

 
1,251

Corporate bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
29

 
61,496

 
3,286

 
4

 
7,991

 
1,427

 
69,487

 
4,713

Industrials
38

 
78,588

 
3,631

 
3

 
6,649

 
3,032

 
85,237

 
6,663

Consumer goods and services
24

 
64,661

 
770

 
4

 
2,491

 
6

 
67,152

 
776

Health care
18

 
43,992

 
652

 
2

 
3,737

 
139

 
47,729

 
791

Technology, media and telecommunications
22

 
59,503

 
1,478

 
2

 
8,940

 
525

 
68,443

 
2,003

Financial services
49

 
92,814

 
1,143

 
—

 
—

 
—

 
92,814

 
1,143

Mortgage-backed securities
9

 
7,423

 
43

 
4

 
183

 
8

 
7,606

 
51

Collateralized mortgage obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government national mortgage association
17

 
29,769

 
437

 
14

 
40,027

 
1,548

 
69,796

 
1,985

Federal home loan mortgage corporation
20

 
35,343

 
644

 
6

 
19,887

 
698

 
55,230

 
1,342

Federal national mortgage association
15

 
32,800

 
524

 
11

 
11,962

 
417

 
44,762

 
941

Asset-backed securities
1

 
985

 
16

 
—

 
—

 
—

 
985

 
16

Total Available-for-Sale Fixed Maturities
350

 
$
743,274

 
$
16,962

 
79

 
$
140,088

 
$
10,140

 
$
883,362

 
$
27,102

Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Public utilities
—

 
$
—

 
$
—

 
3

 
$
115

 
$
193

 
$
115

 
$
193

Energy
10

 
2,868

 
266

 
—

 
—

 
—

 
2,868

 
266

Industrials
3

 
177

 
44

 
5

 
193

 
269

 
370

 
313

Consumer goods and services
—

 
—

 
—

 
2

 
14

 
3

 
14

 
3

Technology, media and telecommunications
9

 
438

 
91

 
2

 
12

 
14

 
450

 
105

Financial services
6

 
326

 
51

 
1

 
136

 
58

 
462

 
109

Total Available-for-Sale Equity Securities
28

 
$
3,809

 
$
452

 
13

 
$
470

 
$
537

 
$
4,279

 
$
989

Total Available-for-Sale Securities
378

 
$
747,083

 
$
17,414

 
92

 
$
140,558

 
$
10,677

 
$
887,641

 
$
28,091



94

NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS

Current accounting guidance on fair value measurements includes the application of a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Our financial instruments that are recorded at fair value are categorized into a three-level hierarchy, which is based upon the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets (i.e., Level 1) and the lowest priority to unobservable inputs (i.e., Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the financial instrument.
Financial instruments recorded at fair value are categorized in the fair value hierarchy as follows:
•
Level 1: Valuations are based on unadjusted quoted prices in active markets for identical financial instruments that we have the ability to access.
•
Level 2: Valuations are based on quoted prices for similar financial instruments, other than quoted prices included in Level 1, in markets that are not active or on inputs that are observable either directly or indirectly for the full term of the financial instrument.
•
Level 3: Valuations are based on pricing or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management's own assumptions about the assumptions a market participant would use in pricing the financial instrument.
We review our fair value hierarchy categorizations on a quarterly basis at which time the classification of certain financial instruments may change if the input observations have changed. Transfers between levels, if any, are recorded as of the beginning of the reporting period.
To determine the fair value of the majority of our investments, we utilize prices obtained from independent, nationally recognized pricing services. We obtain one price for each security. When the pricing services cannot provide a determination of fair value for a specific security, we obtain non-binding price quotes from broker-dealers with whom we have had several years experience and who have demonstrated knowledge of the subject security. We request and utilize one broker quote per security.
In order to determine the proper classification in the fair value hierarchy for each security where the price is obtained from an independent pricing service, we obtain and evaluate the vendors' pricing procedures and inputs used to price the security, which include unadjusted quoted market prices for identical securities, such as a New York Stock Exchange closing price, and quoted prices for identical securities in markets that are not active. For fixed maturity securities, an evaluation of interest rates and yield curves observable at commonly quoted intervals, volatility, prepayment speeds, credit risks and default rates may also be performed. We have determined that these processes and inputs result in fair values and classifications consistent with the applicable accounting guidance on fair value measurements.
When possible, we use quoted market prices to determine the fair value of fixed maturities, equity securities, trading securities and short-term investments. When quoted market prices do not exist, we base estimates of fair value on market information obtained from independent pricing services and brokers or on valuation techniques that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management's own assumptions about the assumptions a market participant would use in pricing the financial instrument. Our valuation techniques are discussed in more detail throughout this section.
The fair value of our mortgage loans is determined by modeling performed by us based on the stated principal and coupon payments provided for in the loan agreements. These cash flows are then discounted using an appropriate risk-adjusted discount rate to determine the security's fair value, which is a Level 3 fair value measurement.


95

The fair value of our policy loans is equivalent to carrying value, which is a reasonable estimate of fair value and is classified as Level 2. We do not make policy loans for amounts in excess of the cash surrender value of the related policy. In all instances, the policy loans are fully collateralized by the related liability for future policy benefits for traditional insurance policies or by the policyholders' account balance for non-traditional policies.
Our other long-term investments consist primarily of our interests in limited liability partnerships that are recorded on the equity method of accounting. The fair value of the partnerships is obtained from the fund managers, which is based on the fair value of the underlying investments held in the partnerships. In management's opinion, these values represent a reasonable estimate of fair value. We have not adjusted the net asset value provided by the fund managers.
For cash and cash equivalents and accrued investment income, carrying value is a reasonable estimate of fair value due to the short-term nature of these financial instruments.

Policy reserves are developed and recorded for deferred annuities, which is an interest-sensitive product, and income annuities. The fair value of the reserve liability for these annuity products is based upon an estimate of the discounted pretax cash flows that are forecast for the underlying business, which is a Level 3 fair value measurement. We base the discount rate on the current U.S. Treasury spot yield curve, which is then risk-adjusted for nonperformance risk and, for interest-sensitive business and market risk factors. The risk-adjusted discount rate is developed using interest rates that are available in the market and representative of the risks applicable to the underlying business.

The Company formed a rabbi trust in 2014 to fund obligations under the United Fire & Casualty Company Non-qualified Deferred Compensation Plan and United Fire Group Supplemental Executive Retirement and Deferral Plan (collectively the "Executive Retirement Plans"). Within the rabbi trust, corporate-owned life insurance ("COLI") policies are utilized as an investment vehicle and source of funding for the Company's Executive Retirement Plans. The COLI policies invest in mutual funds, which are priced daily by independent sources. As of December 31, 2016, the cash surrender value of the COLI policies was $2,592, which is equal to the fair value measured using Level 2 inputs, based on the underlying assets of the COLI policies, and is included in other assets in the Consolidated Balance Sheets.


























96

A summary of the carrying value and estimated fair value of our financial instruments at December 31, 2016 and 2015 is as follows:
 
December 31, 2016
 
December 31, 2015
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Assets
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Held-to-maturity securities
$
199

 
$
198

 
$
675

 
$
672

Available-for-sale securities
2,898,126

 
2,898,126

 
2,824,961

 
2,824,961

Trading securities
14,390

 
14,390

 
12,622

 
12,622

Equity securities:
 
 
 
 
 
 
 
Available-for-sale securities
270,416

 
270,416

 
236,247

 
236,247

Trading securities
5,644

 
5,644

 
4,353

 
4,353

Mortgage loans
3,895

 
3,706

 
4,237

 
3,961

Policy loans
5,366

 
5,366

 
5,618

 
5,618

Other long-term investments
67,639

 
67,639

 
54,151

 
54,151

Short-term investments
175

 
175

 
175

 
175

Cash and cash equivalents
110,853

 
110,853

 
106,449

 
106,449

Corporate-owned life insurance
2,592

 
2,592

 
1,716

 
1,716

Liabilities
 
 
 
 
 
 
 
Policy reserves
 
 
 
 
 
 
 
Annuity (accumulations) (1)
$
646,764

 
$
666,711

 
$
707,190

 
$
744,931

Annuity (benefit payments)
144,283

 
95,129

 
131,899

 
95,467

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

The following tables present the categorization for our financial instruments measured at fair value on a recurring basis in our Consolidated Balance Sheets at December 31, 2016 and 2015:
 
 
 
Fair Value Measurements
Description
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
U.S. Treasury
$
23,195

 
$
—

 
$
23,195

 
$
—

U.S. government agency
77,597

 
—

 
77,597

 
—

States, municipalities and political subdivisions
 
 
 
 
 
 
 
General obligations
 
 
 
 
 
 
 
   Midwest
144,143

 
—

 
144,143

 
—

   Northeast
58,409

 
—

 
58,409

 
—

   South
128,369

 
—

 
128,369

 
—

   West
113,731

 
—

 
113,731

 
—

Special revenue
 
 
 
 
 
 
 
   Midwest
168,310

 
—

 
168,142

 
168

   Northeast
68,065

 
—

 
68,065

 
—

   South
239,187

 
—

 
239,187

 
—

   West
131,744

 
—

 
131,744

 
—

Foreign bonds
65,234

 
—

 
65,234

 
—

Public utilities
215,674

 
—

 
215,674

 
—

Corporate bonds
 
 
 
 
 
 
 
Energy
108,860

 
—

 
108,860

 
—

Industrials
229,903

 
—

 
229,903

 
—

Consumer goods and services
181,687

 
—

 
180,590

 
1,097

Health care
83,123

 
—

 
83,123

 
—

Technology, media and telecommunications
144,612

 
—

 
144,612

 
—



97

Financial services
273,951

 
—

 
265,154

 
8,797

Mortgage-backed securities
17,248

 
—

 
17,248

 
—

Collateralized mortgage obligations
 
 
 
 
 
 
 
Government national mortgage association
144,460

 
—

 
144,460

 
—

Federal home loan mortgage corporation
174,458

 
—

 
174,458

 
—

Federal national mortgage association
101,896

 
—

 
101,896

 
—

Asset-backed securities
4,270

 
—

 
3,821

 
449

Total Available-For-Sale Fixed Maturities
$
2,898,126

 
$
—

 
$
2,887,615

 
$
10,511

Equity securities
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
Public utilities
$
19,671

 
$
19,671

 
$
—

 
$
—

Energy
15,047

 
15,047

 
—

 
—

Industrials
51,794

 
51,794

 
—

 
—

Consumer goods and services
24,117

 
24,117

 
—

 
—

Health care
27,420

 
27,420

 
—

 
—

Technology, media and telecommunications
15,369

 
15,369

 
—

 
—

Financial services
115,950

 
111,958

 
—

 
3,992

Nonredeemable preferred stocks
1,048

 
453

 
—

 
595

Total Available-for-Sale Equity Securities
$
270,416

 
$
265,829

 
$
—

 
$
4,587

Total Available-for-Sale Securities
$
3,168,542

 
$
265,829

 
$
2,887,615

 
$
15,098

TRADING
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
Corporate bonds
 
 
 
 
 
 
 
Industrials
$
3,919

 
$
—

 
$
3,919

 
$
—

Consumer goods and services
127

 
—

 
127

 
—

Health care
3,410

 
—

 
3,410

 
—

Technology, media and telecommunications
787

 
—

 
787

 
—

Financial services
4,842

 
—

 
4,842

 
—

Redeemable preferred stocks
1,305

 
1,305

 
—

 
—

Equity securities
 
 
 
 
 
 
 
Public utilities
613

 
613

 
—

 
—

Energy
286

 
286

 
—

 
—

Industrials
877

 
877

 
—

 
—

Consumer goods and services
1,202

 
1,202

 
—

 
—

Health care
339

 
339

 
—

 
—

     Financial Services
206

 
206

 
—

 
—

Nonredeemable preferred stocks
2,121

 
2,121

 
—

 
—

Total Trading Securities
$
20,034

 
$
6,949

 
$
13,085

 
$
—

Short-Term Investments
$
175

 
$
175

 
$
—

 
$
—

Money Market Accounts
$
16,802

 
$
16,802

 
$
—

 
$
—

Corporate-Owned Life Insurance
$
2,592

 
$
—

 
$
2,592

 
$
—

Total Assets Measured at Fair Value
$
3,208,145

 
$
289,755

 
$
2,903,292

 
$
15,098




98

 
 
 
Fair Value Measurements
Description
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
U.S. Treasury
$
21,649

 
$
—

 
$
21,649

 
$
—

U.S. government agency
233,030

 
—

 
233,030

 
—

States, municipalities and political subdivisions
 
 
 
 
 
 
 
General obligations
 
 
 
 
 
 
 
   Midwest
165,456

 
—

 
165,456

 
—

   Northeast
58,445

 
—

 
58,445

 
—

   South
128,789

 
—

 
128,789

 
—

   West
106,814

 
—

 
106,814

 
—

Special revenue
 
 
 
 
 
 
 
   Midwest
157,706

 
—

 
157,363

 
343

   Northeast
24,599

 
—

 
24,599

 
—

   South
148,437

 
—

 
148,437

 
—

   West
82,041

 
—

 
82,041

 
—

Foreign bonds
82,528

 
—

 
82,528

 
—

Public utilities
215,683

 
—

 
215,683

 
—

Corporate bonds
 
 
 
 
 
 
 
Energy
113,119

 
—

 
113,119

 
—

Industrials
224,255

 
—

 
224,255

 
—

Consumer goods and services
174,597

 
—

 
173,364

 
1,233

Health care
93,509

 
—

 
93,509

 
—

Technology, media and telecommunications
142,400

 
—

 
142,400

 
—

Financial services
263,485

 
—

 
253,823

 
9,662

Mortgage-backed securities
16,738

 
—

 
16,738

 
—

Collateralized mortgage obligations
 
 
 
 
 
 
 
Government national mortgage association
119,626

 
—

 
119,626

 
—

Federal home loan mortgage corporation
138,909

 
—

 
138,909

 
—

Federal national mortgage association
107,480

 
—

 
107,480

 
—

Asset-backed securities
5,666

 
—

 
4,630

 
1,036

Total Available-For-Sale Fixed Maturities
$
2,824,961

 
$
—

 
$
2,812,687

 
$
12,274

Equity securities
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
Public utilities
$
19,060

 
$
19,060

 
$
—

 
$
—

Energy
11,211

 
11,211

 
—

 
—

Industrials
44,810

 
44,810

 
—

 
—

Consumer goods and services
23,315

 
23,315

 
—

 
—

Health care
28,217

 
28,217

 
—

 
—

Technology, media and telecommunications
13,364

 
13,364

 
—

 
—

Financial services
95,694

 
91,588

 
128

 
3,978

Nonredeemable preferred stocks
576

 
576

 
—

 
—

Total Available-for-Sale Equity Securities
$
236,247

 
$
232,141

 
$
128

 
$
3,978

Total Available-for-Sale Securities
$
3,061,208

 
$
232,141

 
$
2,812,815

 
$
16,252

TRADING
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
Corporate bonds
 
 
 
 
 
 
 
Industrials
$
3,558

 
$
—

 
$
3,558

 
$
—

Consumer goods and services
118

 
—

 
118

 
—

Health care
2,032

 
—

 
2,032

 
—

Technology, media and telecommunications
335

 
—

 
335

 
—



99

Financial services
4,094

 
—

 
4,094

 
—

Redeemable preferred stocks
2,485

 
2,485

 
—

 
—

Equity securities
 
 
 
 
 
 
 
Energy
267

 
267

 
—

 
—

Industrials
986

 
986

 
—

 
—

Consumer goods and services
942

 
942

 
—

 
—

Health care
304

 
304

 
—

 
—

Financial Services
229

 
229

 
—

 
—

Nonredeemable preferred stocks
1,625

 
1,625

 
—

 
—

Total Trading Securities
$
16,975

 
$
6,838

 
$
10,137

 
$
—

Short-Term Investments
$
175

 
$
175

 
$
—

 
$
—

Money Market Accounts
$
20,805

 
$
20,805

 
$
—

 
$
—

Corporate-Owned Life Insurance
$
1,716

 
$
—

 
$
1,716

 
$
—

Total Assets Measured at Fair Value
$
3,100,879

 
$
259,959

 
$
2,824,668

 
$
16,252

The fair value of securities that are categorized as Level 1 is based on quoted market prices that are readily and regularly available.

We use a market-based approach for valuing all of our Level 2 securities and submit them primarily to a third-party valuation service provider. Any of these securities not valued by this service provider are submitted to another third-party valuation service provider. Both service providers use a market approach to find pricing of similar financial instruments. The market inputs our service providers normally seek to value our securities include the following, listed in approximate order of priority: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. The method and inputs for these securities classified as Level 2 are the same regardless of industry category, credit quality, duration, geographical concentration or economic characteristics. For our mortgage-backed securities, collateralized mortgage obligations and asset-backed securities, our service providers use additional market inputs to value these securities, including the following: new issue data, periodic payment information, monthly payment information, collateral performance and real estate analysis from third parties. Our service providers prioritize inputs based on market conditions, and not all inputs listed are available for use in the valuation process for each security on any given day.
At least annually, we review the methodologies and assumptions used by our valuation service providers and verify that they are reasonable and representative of the fair value of the underlying securities held in the investment portfolio. We validate the prices obtained from independent pricing services and brokers prior to their use for reporting purposes by evaluating their reasonableness on a monthly basis. Our validation process includes a review for unusual fluctuations. Unusual fluctuations outside of our expectations are independently corroborated with additional third-party sources that use similar valuation techniques as discussed above. In addition, we also randomly select securities and independently corroborate the valuations obtained from our third-party valuation service providers. In our opinion, the pricing obtained at December 31, 2016 and 2015 was reasonable.

For the year ended December 31, 2016, the change in our available-for-sale securities categorized as Level 1 and Level 2 is the result of investment purchases that were made using funds held in our money market accounts, disposals and the change in unrealized gains on both fixed maturities and equity securities. During the twelve month period ended December 31, 2016, there were no securities transferred between Level 1 and Level 2.
Securities categorized as Level 3 include holdings in certain private placement fixed maturity and equity securities for which an active market does not currently exist. The fair value of our Level 3 private placement securities is determined by management relying on pricing received from our independent pricing services and brokers consistent with the process to estimate fair value for Level 2 securities. However, securities are categorized as Level 3 if these quotes cannot be corroborated by other market observable data due to the unobservable nature of the brokers’ valuation processes. If pricing cannot be obtained from these sources, which occurs on a limited basis, management will perform a discounted cash flow analysis, using an appropriate risk-adjusted discount rate, on the


100

underlying security to estimate fair value. During the twelve month period ended December 31, 2016, there were no securities transferred in or out of Level 3.

The following table provides a summary of the changes in fair value of our Level 3 securities for 2016:
 
States, municipalities and political subdivisions
 
Corporate bonds
 
Asset-backed securities
 
Equities
 
Total
Balance at January 1, 2016
$
343

 
$
10,895

 
$
1,036

 
$
3,978

 
$
16,252

Unrealized gains (losses) (1)
(15
)
 
134

 
(39
)
 
—

 
80

Purchases
—

 
—

 
—

 
727

 
727

Disposals
(160
)
 
(1,135
)
 
(548
)
 
(118
)
 
(1,961
)
Balance at December 31, 2016
$
168

 
$
9,894

 
$
449

 
$
4,587

 
$
15,098

(1) Realized gains (losses) are recorded as a component of earnings, whereas unrealized gains (losses) are recorded as a component of comprehensive income.

The following table provides a summary of the changes in fair value of our Level 3 securities for 2015:
 
States, municipalities and political subdivisions
 
Corporate bonds
 
Asset-backed securities
 
Equities
 
Total
Balance at January 1, 2015
$
519

 
$
12,312

 
$
1,612

 
$
3,872

 
$
18,315

Realized gains (losses) (1)
—

 
(142
)
 
—

 
—

 
(142
)
Unrealized gains (losses) (1)
(26
)
 
—

 
(39
)
 
—

 
(65
)
Purchases
—

 
100

 
—

 
121

 
221

Disposals
(150
)
 
(1,375
)
 
(537
)
 
(15
)
 
(2,077
)
Balance at December 31, 2015
$
343

 
$
10,895

 
$
1,036

 
$
3,978

 
$
16,252

(1) Realized gains (losses) are recorded as a component of earnings, whereas unrealized gains (losses) are recorded as a component of comprehensive income.
The fixed maturities reported as disposals relate to the receipt of principal on calls or sinking fund bonds, in accordance with the indentures.
NOTE 4. REINSURANCE
Property and Casualty Insurance Segment
Ceded and Assumed Reinsurance
Reinsurance is a contract by which one insurer, called the reinsurer, agrees to cover, under certain defined circumstances, a portion of the losses incurred by a primary insurer if a claim is made under a policy issued by the primary insurer. Our property and casualty insurance companies follow the industry practice of reinsuring a portion of their exposure by ceding to reinsurers a portion of the premium received and a portion of the risk under the policies written. We purchase reinsurance to reduce the net liability on individual risks to predetermined limits and to protect us against catastrophic losses, such as a hurricane or tornado. We do not engage in any reinsurance transactions classified as finite risk reinsurance.
We account for premiums, written and earned, and losses incurred net of reinsurance ceded. The ceding of insurance does not legally discharge us from primary liability under our policies, and we must pay the loss if the reinsurer fails to meet its obligation. We periodically monitor the financial condition of our reinsurers to confirm that they are financially stable. We believe that all of our reinsurers are in an acceptable financial condition and there were no reinsurance balances at December 31, 2016 for which collection is at risk that would result in a material impact on


101

our Consolidated Financial Statements. The amount of reinsurance recoverable on paid losses totaled $2,447 and $11,887 at December 31, 2016 and 2015, respectively.
We also assume both property and casualty insurance from other insurance or reinsurance companies. Most of the business we have assumed is property insurance, with an emphasis on catastrophe coverage.
Premiums and losses and loss settlement expenses related to our ceded and assumed business are as follows:
 
 
 
 
 
 
Years Ended December 31,
2016
 
2015
 
2014
Ceded Business
 
 
 
 
 
Ceded premiums written
$
57,988

 
$
56,916

 
$
50,290

Ceded premiums earned
57,996

 
56,758

 
49,818

Loss and loss settlement expenses ceded
13,278

 
3,868

 
9,728

 
 
 
 
 
 
Assumed Business
 
 
 
 
 
Assumed premiums written
$
16,834

 
$
18,290

 
$
16,421

Assumed premiums earned
17,037

 
18,396

 
16,265

Loss and loss settlement expenses assumed
9,814

 
14,415

 
7,727


In 2016, we renewed our participation in all of our assumed programs. Loss and loss settlement expenses ceded increased in 2016 as compared to 2015, primarily due to an increase in significant large losses and catastrophe losses.

In 2015, we renewed our participation in all of our assumed programs and added one new program to our portfolio. The new assumed program is for international catastrophes excluding the United States with the largest exposure to European wind perils. Loss and loss settlement expenses ceded decreased in 2015 as compared to 2014 primarily due to a decrease in significant large losses and catastrophe losses.

In 2014, we renewed our participation in all but one of our assumed programs and added one new program to our portfolio. We increased participation in one program in our assumed portfolio to replace lost premium from the program not renewed.
Refer to Note 5 "Reserves for Losses and Loss Settlement Expenses" for an analysis of changes in our overall property and casualty insurance reserves.
Reinsurance Programs and Retentions
We have several programs that provide reinsurance coverage. This reinsurance coverage limits the risk of loss that we retain by reinsuring direct risks in excess of our retention limits. The following table provides a summary of our primary reinsurance programs. Retention amounts reflect the accumulated retentions and co-participation of all layers within a program. For 2016, there was an all lines annual aggregate excess of loss program with a variable retention of 7.73 percent of gross net earned premium with a minimum retention of $52.0 million and a maximum of $65.0 million. Our all line aggregate recovery is also limited to a maximum of $30.0 million. For 2014 and 2015, there was a $4,000 aggregate annual deductible on our multi-line core program (casualty excess and property excess).


102

 
2016 Reinsurance Programs
Type of Reinsurance
Stated Retention
 
Limits
 
Coverage
Casualty excess of loss
$
2,500

 
$
40,000

 
100
%
of
$
37,500

Property excess of loss
2,500

 
25,000

 
100
%
of
$
22,500

Surety excess of loss
1,500

 
36,000

 
100
%
of
$
34,500

Property catastrophe, excess
20,000

 
250,000

 
100
%
of
$
230,000

Boiler and machinery
N/A

 
50,000

 
100
%
of
$
50,000

 
2015 Reinsurance Programs
Type of Reinsurance
Stated Retention
 
Limits
 
Coverage
Casualty excess of loss
$
2,000

 
$
40,000

 
100
%
of
$
38,000

Property excess of loss
2,000

 
25,000

 
100
%
of
$
23,000

Surety excess of loss
1,500

 
36,000

 
96
%
of
$
34,500

Property catastrophe, excess
20,000

 
200,000

 
100
%
of
$
180,000

Property catastrophe, excess
200,000

 
250,000

 
90.5
%
of
$
50,000

Boiler and machinery
N/A

 
50,000

 
100
%
of
$
50,000


 
2014 Reinsurance Programs
Type of Reinsurance
Stated Retention
 
Limits
 
Coverage
Casualty excess of loss
$
2,000

 
$
40,000

 
100
%
of
$
38,000

Property excess of loss
2,000

 
15,000

 
100
%
of
$
13,000

Surety excess of loss
1,500

 
28,000

 
91
%
of
$
26,500

Property catastrophe, excess
20,000

 
200,000

 
100
%
of
$
180,000

Property catastrophe, excess
200,000

 
250,000

 
90.5
%
of
$
50,000

Boiler and machinery
N/A

 
50,000

 
100
%
of
$
50,000

If we incur catastrophe losses and loss settlement expenses that exceed the coverage limits of our reinsurance program, our property catastrophe program provides one guaranteed reinstatement. In such an instance, we are required to pay the reinsurers a reinstatement premium equal to the full amount of the original premium, which will reinstate the full amount of reinsurance available under the property catastrophe program.
Life Insurance Segment
Ceded Reinsurance
United Life purchases reinsurance to limit the dollar amount of any one risk of loss. Our retention on standard individual life cases is $300. Our accidental death benefit rider on an individual policy is reinsured at 100 percent, up to a maximum benefit of $250. Our group coverage, both life and accidental death and dismemberment, is reinsured at 50.0 percent. Catastrophe excess reinsurance coverage applies when three or more insureds die in a catastrophic accident. For catastrophe excess claims, we retain the first $1,000 of ultimate net loss and the reinsurer agrees to indemnify us for the excess up to a maximum of $5,000. We supplement this coverage when appropriate with "known concentration" coverage. Known concentration coverage is typically tied to a specific event and time period, with a threshold of a minimum number of lives involved in the event, minimum event deductible (stated retention limit) and a maximum payout.





103

Premiums and losses and loss settlement expenses related to our ceded business are as follows:
 
 
 
 
 
 
Years Ended December 31,
2016
 
2015
 
2014
Ceded Business
 
 
 
 
 
Ceded insurance in-force
$
1,023,197

 
$
1,165,868

 
$
1,130,059

Ceded premiums earned
2,768

 
3,161

 
2,959

Loss and loss settlement expenses ceded
3,359

 
2,113

 
3,467

The ceding of insurance does not legally discharge United Life from primary liability under its policies. United Life must pay the loss if the reinsurer fails to meet its obligations. We periodically monitor the financial condition of our reinsurers to confirm that they are financially stable and have strong credit ratings. We believe that all of our reinsurers are in an acceptable financial condition. Approximately 99 percent of ceded life insurance in force as of December 31, 2016 was ceded to five reinsurers.

NOTE 5. RESERVES FOR LOSSES AND LOSS SETTLEMENT EXPENSES
Property insurance indemnifies an insured with an interest in physical property for loss of, or damage to, such property or the loss of its income-producing abilities. Casualty insurance primarily covers liability for damage to property of, or injury to, a person or entity other than the insured. In most cases, casualty insurance also obligates the insurance company to provide a defense for the insured in litigation, arising out of events covered by the policy.

Liabilities for losses and loss settlement expenses reflect management's best estimates at a given point in time of what we expect to pay for claims that have been reported and those that have been incurred but not reported ("IBNR"), based on known facts, circumstances, and historical trends. Because property and casualty insurance reserves are estimates of the unpaid portions of incurred losses that have been reported to us, as well as losses that have been incurred but not reported, the establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain and complex process. The ultimate cost of losses and related loss settlement expenses may vary materially from recorded amounts. We regularly update our reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in prior year reserve estimates, which may be material, are reported as a component of losses and loss settlement expenses incurred in the period such changes are determined.

The determination of reserves (particularly those relating to liability lines of insurance that have relatively longer lag in claim reporting) requires significant work to reasonably project expected future claim reporting and payment patterns. If, during the course of our regular monitoring of reserves, we determine that coverages previously written are incurring higher than expected losses, we will take action that may include, among other things, increasing the related reserves. Any adjustments we make to reserves are reflected in operating results in the year in which we make those adjustments. We engage an independent actuary, Regnier Consulting Group, Inc. ("Regnier"), to render an opinion as to the reasonableness of our statutory reserves annually. The actuarial opinion is filed in those states where we are licensed.

On a quarterly basis, United Fire's internal actuary performs a detailed actuarial review of IBNR reserves. This review includes a comparison of results from the most recent analysis of reserves completed by both our internal and external actuaries. Senior management meets with our internal actuary to review, on a regular and quarterly basis, the adequacy of carried reserves based on results from this actuarial analysis. There are two fundamental types or sources of IBNR reserves. We record IBNR reserves for "normal" types of claims and also specific IBNR reserves related to unique circumstances or events. A major hurricane is an example of an event that might necessitate establishing specific IBNR reserves because an analysis of existing historical data would not provide an appropriate estimate.

Our IBNR methodologies and assumptions are reviewed periodically, but changes are infrequent. Between calendar year 2015 and 2016, in response to an increase in miles driven by commercial vehicles, we revised our commercial


104

automobile frequency and severity assumptions, resulting in an increase to our carried loss IBNR. We also reviewed our methodology and assumptions in our product liability line, associated with our construction defects business, and decreased our frequency and severity assumptions due to improvement in development patterns related to the statute of limitations on accident years that have matured 13 to 15 years which haven't developed to the extent we initially expected. These assumption changes resulted in a release of IBNR in 2016 in our product liability line. Beside the changes to our assumptions used for our commercial automobile line and product liability line, we did not make any other significant methodology or assumption changes in 2016.

We do not discount loss reserves based on the time value of money. 
The following table provides an analysis of changes in our property and casualty losses and loss settlement expense reserves for 2016, 2015 and 2014 (net of reinsurance amounts):
 
 
 
 
 
 
Years Ended December 31,
2016
 
2015
 
2014
Gross liability for losses and loss settlement expenses
at beginning of year
$
1,003,895

 
$
969,437

 
$
960,651

Ceded losses and loss settlement expenses
(54,653
)
 
(63,757
)
 
(75,150
)
Net liability for losses and loss settlement expenses
at beginning of year
$
949,242

 
$
905,680

 
$
885,501

Losses and loss settlement expenses incurred
for claims occurring during
 
 
 
 
 
   Current year
$
683,662

 
$
560,482

 
$
566,555

   Prior years
(31,229
)
 
(40,395
)
 
(56,744
)
Total incurred
$
652,433

 
$
520,087

 
$
509,811

Losses and loss settlement expense payments
for claims occurring during
 
 
 
 
 
   Current year
$
277,053

 
$
225,022

 
$
247,651

   Prior years
260,520

 
251,503

 
241,981

Total paid
$
537,573

 
$
476,525

 
$
489,632

Net liability for losses and loss settlement expenses
at end of year
$
1,064,102

 
$
949,242

 
$
905,680

Ceded loss and loss settlement expenses
59,794

 
54,653

 
63,757

Gross liability for losses and loss settlement expenses
at end of year
$
1,123,896

 
$
1,003,895

 
$
969,437


There are a multitude of factors that can impact loss reserve development. Those factors include, but are not limited to: historical data, the potential impact of various loss reserve development factors and trends including historical loss experience, legislative enactments, judicial decisions, legal developments in imposition of damages, experience with alternative dispute resolution, results of our medical bill review process, the potential impact of salvage and subrogation and changes and trends in general economic conditions, including the effects of inflation. All of these factors influence our estimates of required reserves and for long tail lines these factors can change over the course of the settlement of the claim. However, there is no precise method for evaluating the specific dollar impact of any individual factor on the development of reserves.

The significant drivers of the favorable reserve development in 2016 were our commercial liability and workers compensation. Much of the favorable commercial liability development came from loss adjustment expense and is attributed to our continued litigation management efforts. Workers compensation favorable development was due to the combined effects of decreases in claim reserves along with favorable changes affecting loss adjustment expense. Loss adjustment expense, closely tied to loss, generally decreases when loss decreases. Commercial property, commercial automobile and assumed reinsurance exhibited adverse development which provided a partial offset to the favorable development previously noted. The adverse development for all three lines is due to paid loss which


105

was greater than reductions in reported loss reserves and reserves for claims incurred but not reported. No other single line of business contributed a significant portion of the total development.

The significant drivers of the favorable reserve development in 2015 were our long-tail liability lines, workers compensation, and automobile (physical damage). The favorable development is attributable to reductions in reserves for reported claims as well as reductions in required reserves for IBNR claims combined with continued successful management of litigation expenses. These reserve decreases were more than sufficient to offset claim payments. The favorable development was partially offset by adverse development, the majority coming from three lines which included property, assumed reinsurance and commercial auto liability. No other single line of business contributed a significant portion of the total development.

The significant drivers of the favorable reserve development in 2014 were our long-tail liability lines, workers compensation, and automobile (both liability and physical damage). Much of the favorable long-tail liability development came from loss adjustment expense and is attributed to our litigation management initiative. Workers' compensation favorable development was due to the combination of claim reserve decreases along with favorable changes affecting loss adjustment expense. Changes in reserve development patterns have shown increased redundancies in reserves for reported claims along with relatively less need for IBNR claim reserves. Loss adjustment expense, closely tied to loss, generally decreases when loss decreases. Commercial auto liability continues to benefit from loss control and re-underwriting initiatives over the past two years as well as favorable changes affecting loss adjustment expense as reserve development patterns also showed a redundancy in reserves along with less need for IBNR claim reserves.
Generally, we base reserves for each claim on the estimated ultimate exposure for that claim. We believe that it is appropriate and reasonable to establish a best estimate for reserves within a range of reasonable estimates, especially when we are reserving for claims for bodily injury, disabilities and similar claims, for which settlements and verdicts can vary widely. Our reserving philosophy may result in favorable reserve development in future years that will decrease losses and loss settlement expenses for prior year claims in the year of adjustment. We realize that this philosophy, coupled with what we believe to be aggressive and successful claims management and loss settlement practices, has resulted in year-to-year redundancies in reserves. We believe our approach produces recorded reserves that are reasonably consistent as to their relative position within a range of reasonable reserves from year-to-year. However, conditions and trends that have affected the reserve development for a given year do change. Therefore, such development cannot be used to project future reserve redundancies or deficiencies.
We are not aware of any significant contingent liabilities related to environmental issues. Because of the type of property coverage we write, we have potential exposure to environmental pollution, mold and asbestos claims. Our underwriters are aware of these exposures and use riders or endorsements to limit exposure.


106

The following tables provide information about incurred and paid losses and loss settlement expense development as of December 31, 2016, net of reinsurance, as well as cumulative development, cumulative claim frequency and IBNR liabilities. Claim data for Mercer Insurance Group, which was acquired on March 28, 2011, is presented retrospectively.
The cumulative number of reported claims, for calendar year 2016, are counted for all lines of business on a per claimant per coverage basis and a single event may result in multiple claims due to the involvement of multiple individual claimants and / or multiple independent coverages. Claim counts for calendar years 2015 and prior are counted on a per claim and per coverage basis. Claim counts include open claims, claims that have been paid and closed, and reported claims that have been closed without the need for any payment.

Line of business: Commercial other liability
 
 
 
 
 
Incurred losses and allocated loss settlement expenses, net of reinsurance
 
As of December 31, 2016
 
For the years ended December 31,
 
Total of incurred but not reported liabilities plus expected development on reported claims
Cumulative development
Cumulative number of reported claims
Accident Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
 
 
(Unaudited)
 
 
 
 
 
2007
$
64,793

$
64,117

$
71,032

$
72,407

$
67,115

$
61,811

$
76,740

$
76,130

$
74,956

$
76,049

 
$
12,056

11,256

6,948

2008
 
79,455

84,944

81,963

73,892

63,231

78,152

75,178

74,115

74,915

 
14,050

(4,540
)
6,506

2009
 
 
88,298

85,991

73,545

65,831

84,286

83,660

85,761

86,757

 
15,018

(1,541
)
5,915

2010
 
 
 
88,987

69,533

65,299

82,865

78,564

77,948

78,291

 
15,154

(10,696
)
5,060

2011
 
 
 
 
81,522

64,738

88,371

88,200

79,591

80,801

 
17,772

(721
)
5,193

2012
 
 
 
 
 
100,389

96,158

94,195

91,980

92,537

 
21,130

(7,852
)
5,426

2013
 
 
 
 
 
 
104,982

91,460

90,502

86,119

 
16,331

(18,863
)
5,787

2014
 
 
 
 
 
 
 
118,928

117,958

106,486

 
26,590

(12,442
)
5,769

2015
 
 
 
 
 
 
 
 
137,386

125,307

 
43,435

(12,079
)
6,309

2016
 
 
 
 
 
 
 
 
 
139,144

 
71,618


5,279

 
 
 
 
 
 
 
 
 
Total
$
946,406

 
 
 
 





107

Line of business: Commercial other liability
 
Cumulative paid losses and allocated loss settlement expenses, net of reinsurance
 
For the years ended December 31,
Accident Year
2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

 
(Unaudited)
 
2007
$
6,054

$
17,542

$
31,120

$
41,306

$
51,337

$
53,663

$
56,838

$
59,085

$
60,429

$
61,499

2008
 
9,220

24,096

34,482

42,545

47,112

50,143

52,659

55,843

59,052

2009
 
 
8,375

21,151

32,073

41,696

50,098

56,789

63,149

67,733

2010
 
 
 
7,103

15,230

24,577

35,043

51,336

56,761

60,116

2011
 
 
 
 
6,236

13,670

26,260

40,595

50,146

56,150

2012
 
 
 
 
 
6,875

24,620

39,948

55,316

64,574

2013
 
 
 
 
 
 
9,835

25,228

39,953

54,559

2014
 
 
 
 
 
 
 
10,207

29,679

50,211

2015
 
 
 
 
 
 
 
 
11,185

27,182

2016
 
 
 
 
 
 
 
 
 
13,782

 
 
 
 
 
 
 
 
 
Total
$
514,858

 
 
 
All outstanding liabilities for unpaid losses and loss settlement expenses before 2007, net of reinsurance
 
26,712

 
 
 
Liabilities for unpaid losses and loss settlement expenses, net of reinsurance
 
$
458,261






108

Line of business: Commercial fire & allied
 
 
 
 
 
Incurred losses and allocated loss settlement expenses, net of reinsurance
 
As of December 31, 2016
 
For the years ended December 31,
 
Total of incurred but not reported liabilities plus expected development on reported claims
Cumulative development
Cumulative number of reported claims
Accident Year
2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

 
 
(Unaudited)
 
 
 
 
 
2007
$
94,762

$
90,694

$
89,790

$
88,746

$
89,160

$
87,407

$
71,495

$
71,454

$
71,542

$
71,569

 
$
14

(23,193
)
18,351

2008
 
157,303

141,384

138,602

140,321

134,821

116,940

118,115

118,376

118,329

 
64

(38,974
)
21,086

2009
 
 
113,754

106,085

105,031

105,614

87,751

87,845

87,932

88,891

 
188

(24,863
)
18,017

2010
 
 
 
113,139

106,152

108,246

83,836

83,932

83,767

83,981

 
205

(29,158
)
16,647

2011
 
 
 
 
148,220

142,330

117,082

120,492

119,820

120,219

 
519

(28,001
)
15,989

2012
 
 
 
 
 
138,602

110,448

108,774

108,047

107,958

 
735

(30,644
)
6,361

2013
 
 
 
 
 
 
91,521

88,550

91,498

92,212

 
1,142

691

6,484

2014
 
 
 
 
 
 
 
126,216

131,198

128,762

 
2,178

2,546

7,650

2015
 
 
 
 
 
 
 
 
103,177

108,293

 
3,577

5,116

6,976

2016
 
 
 
 
 
 
 
 
 
147,473

 
14,476

 
7,142

 
 
 
 
 
 
 
 
 
Total
$
1,067,687

 
 
 
 





109

Line of business: Commercial fire & allied
 
Cumulative paid losses and allocated loss settlement expenses, net of reinsurance
 
For the years ended December 31,
Accident Year
2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

 
(Unaudited)
 
2007
$
40,578

$
56,759

$
59,322

$
63,329

$
68,928

$
70,960

$
71,178

$
71,360

$
71,376

$
71,406

2008
 
80,005

102,804

107,480

112,678

115,804

115,897

117,553

117,690

118,003

2009
 
 
53,219

72,181

77,732

82,809

86,930

87,544

87,721

88,037

2010
 
 
 
52,660

72,271

78,284

80,352

82,037

83,000

83,374

2011
 
 
 
 
85,585

104,800

109,429

112,497

116,614

118,183

2012
 
 
 
 
 
71,008

94,380

100,078

103,197

105,250

2013
 
 
 
 
 
 
59,331

78,226

82,853

86,115

2014
 
 
 
 
 
 
 
84,456

113,663

116,750

2015
 
 
 
 
 
 
 
 
67,217

90,454

2016
 
 
 
 
 
 
 
 
 
92,895

 
 
 
 
 
 
 
 
 
Total
$
970,467

 
 
 
All outstanding liabilities for unpaid losses and loss settlement expenses before 2007, net of reinsurance
 
564

 
 
 
Liabilities for unpaid losses and loss settlement expenses, net of reinsurance
 
$
97,785








110

Line of business: Commercial automobile
 
 
 
 
 
Incurred losses and allocated loss settlement expenses, net of reinsurance
 
As of December 31, 2016
 
For the years ended December 31,
 
Total of incurred but not reported liabilities plus expected development on reported claims
Cumulative development
Cumulative number of reported claims
Accident Year
2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

 
 
(Unaudited)
 
 
 
 
 
2007
$
71,186

$
68,864

$
67,566

$
69,968

$
69,802

$
69,368

$
68,986

$
68,756

$
68,900

$
68,872

 
$
5

(2,314
)
15,851

2008
 
80,461

78,391

76,051

76,527

75,070

75,021

73,506

73,431

73,463

 
68

(6,998
)
18,113

2009
 
 
80,021

69,328

68,569

64,121

64,516

63,605

63,560

63,567

 
38

(16,454
)
15,018

2010
 
 
 
75,781

68,068

65,860

67,015

67,563

67,296

68,086

 
121

(7,695
)
16,239

2011
 
 
 
 
84,887

87,299

90,750

92,519

92,379

91,336

 
647

6,449

15,224

2012
 
 
 
 
 
100,039

90,848

94,755

95,321

96,594

 
1,127

(3,445
)
14,335

2013
 
 
 
 
 
 
104,356

98,037

102,943

103,726

 
2,647

(630
)
15,462

2014
 
 
 
 
 
 
 
107,723

106,076

113,720

 
6,443

5,997

17,045

2015
 
 
 
 
 
 
 
 
125,506

129,816

 
15,837

4,310

19,302

2016
 
 
 
 
 
 
 
 
 
174,018

 
47,509

 
22,910

 
 
 
 
 
 
 
 
 
Total
$
983,198

 
 
 
 





111

Line of business: Commercial automobile
 
Cumulative paid losses and allocated loss settlement expenses, net of reinsurance
 
For the years ended December 31,
Accident Year
2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

 
(Unaudited)
 
2007
$
27,058

$
42,688

$
53,231

$
62,272

$
65,798

$
67,634

$
68,074

$
68,439

$
68,794

$
68,834

2008
 
30,527

47,271

58,926

68,629

70,459

72,122

72,984

72,990

73,018

2009
 
 
27,674

44,867

53,451

58,087

61,398

62,732

63,495

63,503

2010
 
 
 
29,329

41,141

52,953

57,947

62,231

65,169

67,622

2011
 
 
 
 
34,332

50,931

65,021

79,383

85,348

87,475

2012
 
 
 
 
 
39,247

57,201

71,469

82,944

90,292

2013
 
 
 
 
 
 
43,592

67,630

79,663

90,780

2014
 
 
 
 
 
 
 
45,704

68,033

87,590

2015
 
 
 
 
 
 
 
 
50,782

78,225

2016
 
 
 
 
 
 
 
 
 
66,013

 
 
 
 
 
 
 
 
 
Total
$
773,352

 
 
 
All outstanding liabilities for unpaid losses and loss settlement expenses before 2007, net of reinsurance
 
137

 
 
 
Liabilities for unpaid losses and loss settlement expenses, net of reinsurance
 
$
209,984






112

Line of business: Workers' compensation
 
 
 
 
 
Incurred losses and allocated loss settlement expenses, net of reinsurance
 
As of December 31, 2016
 
For the years ended December 31,
 
Total of incurred but not reported liabilities plus expected development on reported claims
Cumulative development
Cumulative number of reported claims
Accident Year
2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

 
 
(Unaudited)
 
 
 
 
 
2007
$
36,494

$
35,972

$
33,430

$
32,986

$
31,933

$
31,945

$
32,276

$
31,200

$
31,095

$
31,255

 
$
261

(5,239
)
4,660

2008
 
42,739

42,301

39,895

41,278

40,474

40,010

39,386

39,680

39,768

 
564

(2,971
)
5,035

2009
 
 
43,560

39,009

36,294

36,837

36,823

36,158

36,014

35,026

 
392

(8,534
)
4,243

2010
 
 
 
38,210

42,531

41,180

41,167

40,647

41,422

41,468

 
745

3,258

3,923

2011
 
 
 
 
39,967

38,481

35,352

34,309

33,585

33,314

 
640

(6,653
)
3,799

2012
 
 
 
 
 
48,848

46,279

42,158

38,423

38,553

 
716

(10,295
)
3,687

2013
 
 
 
 
 
 
64,048

62,579

56,369

54,584

 
1,252

(9,464
)
3,949

2014
 
 
 
 
 
 
 
64,051

60,729

58,284

 
1,921

(5,767
)
4,105

2015
 
 
 
 
 
 
 
 
53,788

55,578

 
2,818

1,790

4,366

2016
 
 
 
 
 
 
 
 
 
70,419

 
10,858

 
3,847

 
 
 
 
 
 
 
 
 
Total
$
458,249

 
 
 
 





113

Line of business: Workers' compensation
 
Cumulative paid losses and allocated loss settlement expenses, net of reinsurance
 
For the years ended December 31,
Accident Year
2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

 
(Unaudited)
 
2007
$
8,246

$
18,220

$
22,444

$
24,768

$
26,284

$
27,330

$
27,922

$
29,212

$
29,444

$
29,577

2008
 
10,082

21,227

25,736

30,123

31,980

33,770

34,319

34,862

35,292

2009
 
 
10,478

20,292

24,189

27,747

29,898

31,003

31,886

32,911

2010
 
 
 
11,821

22,606

28,765

31,887

33,119

34,143

35,052

2011
 
 
 
 
10,322

21,678

26,033

27,497

28,247

29,022

2012
 
 
 
 
 
11,802

23,023

28,397

30,933

33,063

2013
 
 
 
 
 
 
14,136

30,209

38,023

42,941

2014
 
 
 
 
 
 
 
13,965

30,289

38,441

2015
 
 
 
 
 
 
 
 
12,063

27,304

2016
 
 
 
 
 
 
 
 
 
14,413

 
 
 
 
 
 
 
 
 
Total
$
318,016

 
 
 
All outstanding liabilities for unpaid losses and loss settlement expenses before 2007, net of reinsurance
 
20,072

 
 
 
Liabilities for unpaid losses and loss settlement expenses, net of reinsurance
 
$
160,303





114

Line of business: Personal
 
 
 
 
 
Incurred losses and allocated loss settlement expenses, net of reinsurance
 
As of December 31, 2016
 
For the years ended December 31,
 
Total of incurred but not reported liabilities plus expected development on reported claims
Cumulative development
Cumulative number of reported claims
Accident Year
2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

 
 
(Unaudited)
 
 
 
 
 
2007
$
29,005

$
28,358

$
28,074

$
27,837

$
27,521

$
27,427

$
27,376

$
27,384

$
27,368

$
27,345

 
$
34

(1,660
)
12,703

2008
 
49,961

44,686

43,408

43,672

43,577

43,535

43,515

43,482

42,882

 
70

(7,079
)
15,821

2009
 
 
34,597

33,519

31,945

32,026

32,134

32,029

32,085

32,070

 
140

(2,527
)
13,501

2010
 
 
 
36,686

34,347

33,928

33,865

33,403

33,413

33,432

 
201

(3,254
)
13,312

2011
 
 
 
 
50,014

48,534

47,090

47,035

46,968

47,013

 
300

(3,001
)
14,839

2012
 
 
 
 
 
47,924

46,199

46,403

46,150

44,715

 
427

(3,209
)
10,749

2013
 
 
 
 
 
 
39,232

38,525

37,262

37,086

 
628

(2,146
)
9,213

2014
 
 
 
 
 
 
 
53,910

52,661

52,944

 
796

(966
)
10,843

2015
 
 
 
 
 
 
 
 
42,848

41,088

 
989

(1,760
)
9,313

2016
 
 
 
 
 
 
 
 
 
48,072

 
3,928

 
10,291

 
 
 
 
 
 
 
 
 
Total
$
406,647

 
 
 
 




115

Line of business: Personal
 
Cumulative paid losses and allocated loss settlement expenses, net of reinsurance
 
For the years ended December 31,
Accident Year
2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

 
(Unaudited)
 
2007
$
19,900

$
25,024

$
26,073

$
26,840

$
27,214

$
27,257

$
27,260

$
27,259

$
27,311

$
27,311

2008
 
32,032

40,114

41,735

42,414

42,613

42,627

42,748

42,748

42,787

2009
 
 
22,086

27,926

29,801

30,829

31,564

31,644

31,718

31,804

2010
 
 
 
24,499

29,867

31,340

32,076

32,771

32,997

33,165

2011
 
 
 
 
36,489

43,801

45,306

45,949

46,487

46,573

2012
 
 
 
 
 
30,415

41,979

43,375

44,448

43,569

2013
 
 
 
 
 
 
25,505

32,788

34,297

35,306

2014
 
 
 
 
 
 
 
37,055

47,912

49,710

2015
 
 
 
 
 
 
 
 
29,551

37,431

2016
 
 
 
 
 
 
 
 
 
32,999

 
 
 
 
 
 
 
 
 
Total
$
380,655

 
 
 
All outstanding liabilities for unpaid losses and loss settlement expenses before 2007, net of reinsurance
 
1,800

 
 
 
Liabilities for unpaid losses and loss settlement expenses, net of reinsurance
 
$
27,793






116

The reconciliation of the net incurred and loss development tables to the liability for unpaid losses and loss settlement expenses in the consolidated statement of financial position is as follows.

 
 
December 31, 2016
Net outstanding liabilities for unpaid losses and allocated loss settlement expenses:
 
 
Commercial other liability
 
$
458,261

Commercial fire and allied
 
97,785

Commercial automobile
 
209,984

Commercial workers' compensation
 
160,303

Personal
 
27,793

All other lines
 
26,510

Net outstanding liabilities for unpaid losses and allocated loss settlement expenses
 
980,636

Net outstanding liabilities for unpaid unallocated loss settlement expenses
 
79,751

Fair value adjustment (purchase accounting adjustment for Mercer acquisition)
 
3,715

Liabilities for unpaid losses and loss settlement expenses, net of reinsurance
 
1,064,102

 
 
 
Reinsurance recoverable on unpaid losses and allocated loss settlement expenses:
 
 
Commercial other liability
 
21,173

Commercial fire and allied
 
9,748

Commercial automobile
 
1,544

Commercial workers' compensation
 
29,686

Personal
 
41

All other lines
 
1,155

Reinsurance recoverable on unpaid losses and allocated loss settlement expenses
 
63,347

Reinsurance fair value amortization (purchase accounting adjustment for Mercer acquisition)
 
(3,553
)
Total reinsurance recoverable on unpaid losses and loss settlement expenses
 
59,794

Total gross liability for unpaid losses and loss settlement expenses
 
$
1,123,896




117

The following is supplementary information about average historical claims duration as of December 31, 2016.

 
Average annual percentage payout of incurred claims by age, net of reinsurance
 
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
 
(Unaudited)
Commercial other liability
9.4
%
15.3
%
15.6
%
14.3
%
11.9
%
5.8
%
4.8
%
4.2
%
3.0
%
1.4
%
Commercial fire and allied
63.9
%
21.0
%
4.7
%
3.9
%
3.7
%
1.2
%
0.6
%
0.2
%
0.1
%
—
%
Commercial automobile
40.5
%
21.2
%
15.1
%
11.3
%
5.5
%
2.7
%
1.7
%
0.2
%
0.3
%
0.1
%
Commercial workers' compensation
26.4
%
29.1
%
13.3
%
8.0
%
4.4
%
3.2
%
2.0
%
2.8
%
0.9
%
0.4
%
Personal
71.5
%
19.2
%
4.0
%
2.3
%
0.9
%
0.3
%
0.3
%
0.1
%
0.1
%
—
%



118

NOTE 6. STATUTORY REPORTING, CAPITAL REQUIREMENTS AND DIVIDENDS AND RETAINED EARNINGS RESTRICTIONS
Statutory capital and surplus in regards to policyholders at December 31, 2016, 2015 and 2014 and statutory net income for the years then ended are as follows:
 
Statutory Capital and Surplus
 
Statutory Net Income (Loss)
2016
 
 
 
Property and casualty (1)
$
770,908

 
$
39,087

Life, accident and health
139,806

 
(3,177
)
2015
 
 
 
Property and casualty (1)
$
722,404

 
$
75,554

Life, accident and health
138,855

 
(1,524
)
2014
 
 
 
Property and casualty (1)
$
685,866

 
$
54,233

Life, accident and health
155,667

 
3,517

(1)
Because United Fire & Casualty Company owns United Life Insurance Company, the property and casualty statutory capital and surplus includes life, accident and health statutory capital and surplus, and therefore represents our total consolidated statutory capital and surplus.

State insurance holding company laws and regulations generally require approval from the insurer's domicile state insurance Commissioner for any material transaction or extraordinary dividend. For property and casualty insurers, a material transaction is defined as any sale, loan, exchange, transfer or guarantee with an affiliate where the aggregate value of the transaction exceeds 25 percent of the insurer's policyholders' surplus or three percent of its admitted assets (measured at December 31 of the preceding year), whichever is less. For life insurers, a material transaction with an affiliate is defined as a transaction with an aggregate value exceeding three percent of the life insurer's admitted assets (measured at December 31 of the preceding year).
State laws and regulations generally limit the amount of funds that an insurance company may distribute to a parent as a dividend without Commissioner approval. As a holding company with no independent operations of its own, United Fire Group, Inc. relies on dividends received from its insurance company subsidiaries in order to pay dividends to its common shareholders. Dividends payable by our insurance subsidiaries are governed by the laws in the states in which they are domiciled. In all cases, these state laws permit the payment of dividends only from earned surplus arising from business operations. For example, under Iowa law, the maximum dividend or distribution that may be paid within a 12-month period without prior approval of the Iowa Insurance Commissioner is generally restricted to the greater of 10 percent of statutory surplus as of the preceding December 31, or net income of the preceding calendar year on a statutory basis, not greater than earned statutory surplus. Other states in which our insurance company subsidiaries are domiciled may impose similar restrictions on dividends and distributions. Based on these restrictions, at December 31, 2016, our insurance company subsidiary, United Fire & Casualty Company, is able to make a maximum of $53,091 in dividend payments without prior approval. At December 31, 2016, we were in compliance with applicable state laws and regulations. These restrictions will not have a material impact in meeting our cash obligations. In addition, United Fire Group, Inc. maintains a credit agreement, as discussed in Part II, Note 14 "Credit Facility," which permits us to borrow up to an aggregate principal amount of $50,000 and allows the Company to increase the aggregate amount of the commitments thereunder by up to $100,000.
We paid dividends to our common shareholders of $24,591, $21,658 and $19,680 in 2016, 2015 and 2014, respectively. Payments of any future dividends and the amounts of such dividends, however, will depend upon factors such as net income, financial condition, capital requirements, and general business conditions. We will only pay dividends if declared by our Board of Directors, out of funds legally available, and subject to any other restrictions that may be applicable to us.


119

In 2016, 2015 and 2014, United Fire & Casualty Company received dividends from its wholly owned subsidiaries of $26,000, $16,500 and $13,500, respectively. In 2016, 2015 and 2014, United Fire & Casualty Company paid dividends to United Fire Group, Inc. totaling $24,000, $22,500 and $29,000, respectively. These intercompany dividend payments are eliminated for reporting in our Consolidated Financial Statements.
A majority of our custodial assets are subject to a tri-party agreement between one of our subsidiary companies, United Life, the custodian, and the Iowa Insurance Commissioner. Under this agreement, as long as United Life maintains the minimum aggregate value of securities in the account (based on its legal reserve requirements), it is free to invest, withdraw or loan these funds or pay dividends using these funds without approval from the Commissioner. Investment of these funds is subject to the same limitations on asset class and credit quality imposed by the Commissioner on all insurance company invested assets. Investment income derived from these custodied funds is available for general corporate purposes and to satisfy corporate obligations without approval from the Commissioner.
At December 31, 2016, United Life had net admitted assets, on a statutory basis, of $1,524,559, $200,238 in excess of its legal reserve requirement. Therefore, any restriction on funds deposited by United Life with the Iowa Insurance Commissioner would not materially affect its financial position or results of operations and its cash flows are sufficient to meet its operational requirements. Under the material transaction and dividend standards described above, United Life currently is not able to enter into an affiliate transaction and/or pay a dividend without approval from the Commissioner.
Our property and casualty and life insurance subsidiaries are required to prepare and file statutory-basis financial statements in conformity with the National Association of Insurance Commissioners ("NAIC") Accounting Practices and Procedures Manual, subject to any deviations prescribed or permitted by the applicable insurance commissioner and/or director. The accounting principles used to prepare these statutory-basis financial statements follow prescribed or permitted accounting practices that differ from GAAP. Prescribed statutory accounting principles include state laws, regulations and general administrative rules issued by the state of domicile, as well as a variety of publications and manuals of the NAIC. Permitted accounting practices encompass all accounting practices not prescribed, but allowed by the state of domicile. No material permitted accounting practices were used to prepare our statutory-basis financial statements during 2016, 2015 and 2014. Statutory accounting principles primarily differ from GAAP in that policy acquisition and certain sales inducement costs are charged to expense as incurred, goodwill is amortized, life insurance reserves are established based on different actuarial assumptions and the values reported for investments, pension obligations and deferred taxes are established on a different basis.
We are directed by the state insurance departments' solvency regulations to calculate a required minimum level of statutory capital and surplus based on insurance risk factors. The risk-based capital results are used by the NAIC and state insurance departments to identify companies that merit regulatory attention or the initiation of regulatory action. Both United Life and United Fire & Casualty Company and its property and casualty insurance subsidiaries and affiliates had statutory capital and surplus in regards to policyholders well in excess of their required levels at December 31, 2016.

NOTE 7. FEDERAL INCOME TAX
Federal income tax expense (benefit) is composed of the following:
 
 
 
 
 
 
Years Ended December 31,
2016
 
2015
 
2014
Current
$
3,239

 
$
37,649

 
$
15,649

Deferred
5,524

 
(5,324
)
 
1,677

Total
$
8,763

 
$
32,325

 
$
17,326




120

A reconciliation of income tax expense computed at the applicable federal tax rate of 35.0 percent to the amount recorded in the accompanying Consolidated Statements of Income and Comprehensive Income is as follows:
 
 
 
 
 
 
Years Ended December 31,
2016
 
2015
 
2014
Computed expected income tax expense
$
20,533

 
$
42,508

 
$
26,762

Tax-exempt municipal bond interest income
(8,330
)
 
(7,669
)
 
(7,417
)
Nontaxable dividend income
(1,317
)
 
(1,337
)
 
(1,232
)
Valuation allowance reduction
(547
)
 
(548
)
 
(548
)
Other, net
(1,576
)
 
(629
)
 
(239
)
Federal income tax expense
$
8,763

 
$
32,325

 
$
17,326

The significant components of our net deferred tax liability at December 31, 2016 and 2015 are as follows:
 
 
 
 
December 31,
2016
 
2015
Deferred tax liabilities
 
 
 
Net unrealized appreciation on investment securities:
 
 
 
  Equity securities
$
70,640

 
$
58,674

  All other securities
3,711

 
11,159

Deferred policy acquisition costs
52,031

 
53,960

Prepaid pension cost
4,449

 
1,920

Net bond discount accretion
1,134

 
1,430

Depreciation
854

 
1,791

Revaluation of investment basis (1)
1,342

 
1,824

Identifiable intangible assets (1)
3,311

 
3,560

Other
10,943

 
7,627

Gross deferred tax liability
$
148,415

 
$
141,945

Deferred tax assets
 
 
 
Financial statement reserves in excess of income tax reserves
$
29,174

 
$
34,535

Unearned premium adjustment
30,697

 
28,679

Net operating loss carryforwards
718

 
1,265

Underfunded benefit plan obligation
13,374

 
25,810

Post-retirement benefits other than pensions
20,221

 
17,838

Other-than-temporary impairment of investments
4,658

 
5,609

Contingent ceding commission accrual
2,769

 
3,342

Compensation expense related to stock options
4,578

 
4,627

Other
7,356

 
6,852

Gross deferred tax asset
$
113,545

 
$
128,557

Valuation allowance
(718
)
 
(1,265
)
Deferred tax asset
$
112,827

 
$
127,292

Net deferred tax liability
$
35,588

 
$
14,653

(1) Related to our acquisition of Mercer Insurance Group.
Due to our determination that we may not be able to fully realize the benefits of the net operating losses ("NOLs") acquired in the purchase of American Indemnity Financial Corporation in 1999, which are only available to offset the future taxable income of our property and casualty insurance operations and are further limited as to the amount that can be utilized in any given year, we have recorded a valuation allowance against these NOLs that totaled $718 and $1,265, respectively, at December 31, 2016 and 2015. Based on a yearly review, we determine whether the benefit of the NOLs can be realized, and, if so, the decrease in the valuation allowance is recorded as a reduction to current federal income tax expense. If NOLs expire during the year, the decrease in the valuation allowance is offset


121

with a corresponding decrease to the deferred income tax asset. The valuation allowance was reduced by $547 and $548 during 2016 and 2015, respectively, due to the realization of $1,565 in NOLs. No portion of the NOLs expired in 2015 or 2016 or will expire in 2017. At December 31, 2016, we had $1,194 of alternative minimum tax ("AMT") credit carryforwards.

NOTE 8. EMPLOYEE BENEFITS
We offer various benefits to our employees including a noncontributory defined benefit pension plan, an employee/retiree health and dental benefit plan, a profit-sharing plan and an employee stock ownership plan.
Pension and Post-retirement Benefit Plans
We offer a noncontributory defined benefit pension plan in which all of our employees are eligible to participate after they have completed one year of service, attained 21 years of age and have met the hourly service requirements. Retirement benefits under our pension plan are based on the number of years of service and level of compensation. Our policy to fund the pension plan on a current basis to not less than the minimum amounts required by the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code of 1986, as amended, is to assure that plan assets will be adequate to provide retirement benefits. We estimate that we will contribute approximately $6,400 to the pension plan in 2017.
We also offer a health and dental benefit plan to all of our eligible employees and retirees that consists of two programs: (1) the self-funded employee health and dental benefit plan and (2) the self-funded (pre-65) and fully-funded (post-65) retiree health and dental benefit plan (the "post-retirement benefit plan"). Effective January 1, 2017, there was a plan amendment, which included the following changes: eliminated the pre-65 retirement plan with a $500 hundred dollar deductible; for retirements after January 1, 2017, the retiree will pay 50 percent of the lower cost supplemental plan if they are 65 or older and 100 percent of the premium if less than 65; and removed spousal coverage after the death of the participant. The financial impact of these changes are reflected in accumulated other comprehensive income at December 31, 2016.
The post-retirement benefit plan provides health and dental benefits to our retirees (and covered dependents) who have met the service and participation requirements stipulated by the post-retirement benefit plan. The third party administrators for the post-retirement benefit plan are responsible for making medical and dental care benefit payments. Participants are required to submit claims for reimbursement or payment to the claims administrator within twelve months after the end of the calendar year in which the charges were incurred. An unfunded benefit obligation is reported for the post-retirement benefit plan in the accompanying Consolidated Balance Sheets.
Investment Policies and Strategies
Our investment policy and objective for the pension plan is to generate long-term capital growth and income by way of a diversified investment portfolio along with appropriate employer contributions, which will allow us to provide for the pension plan's benefit obligation.
The investments held by the pension plan at December 31, 2016 include the following asset categories:
•
Fixed income securities, which may include bonds, and convertible securities;
•
Equity securities, which may include various types of stock, such as large-cap, mid-cap, small-cap, and international stocks;
•
Pooled separate accounts, which includes two separate funds, a core plus bond separate account and a real estate separate account;
•
An arbitrage fund, which is a fund that takes advantage of price discrepancies, primarily equity securities, for the same asset in different markets;
•
A group annuity contract that is administered by United Life, a subsidiary of United Fire; and


122

•
Cash and cash equivalents, which include money market funds.
We have an internal investment/retirement committee, which includes our Chief Executive Officer, Chief Investment Officer, and Chief Operating Officer, all of whom receive monthly information on the value of the pension plan assets and their performance. Quarterly, the committee meets to review and discuss the performance of the pension plan assets as well as the allocation of investments within the pension plan.
As of December 31, 2016, we had six external investment managers that are allowed to exercise investment discretion, subject to limitations, if any, established by the investment/retirement committee. We utilize multiple investment managers in order to maximize the pension plan's investment return while mitigating risk. None of our investment managers uses leverage in managing the pension plan. Annually, the investment/retirement committee meets with each investment manager to review the investment manager's goals, objectives and the performance of the assets they manage. The decision to establish or terminate a relationship with an investment manager is at the discretion of our investment/retirement committee.
We consider historical experience for comparable investments and the target allocations we have established for the various asset categories of the pension plan to determine the expected long-term rate of return, which is an assumption as to the average rate of earnings expected on the pension plan funds invested, or to be invested, by the pension plan, to provide for the settlement of benefits included in the projected pension benefit obligation. Investment securities, in general, are exposed to various risks, such as fluctuating interest rates, credit standing of the issuer of the security and overall market volatility. Annually, we perform an analysis of expected long-term rates of return based on the composition and allocation of our pension plan assets and recent economic conditions.
The following is a summary of the pension plan's actual and target asset allocations at December 31, 2016 and 2015 by asset category:
 
 
 
 
 
 
 
 
 
Target
Pension Plan Assets
2016
 
% of Total
 
2015
 
% of Total
 
Allocation
Fixed maturity securities - corporate bonds
$
9,451

 
7.4
%
 
$
6,894

 
6.5
%
 
0
%
-
15
%
Redeemable preferred stock
3,144

 
2.4

 
3,744

 
3.5

 
0
%
-
10
%
Equity securities
69,770

 
54.3

 
58,613

 
55.0

 
50
%
-
70
%
Pooled separate accounts
 
 
 
 
 
 
 
 
 
 
 
Core plus bond separate account fund
10,401

 
8.1

 
6,605

 
6.2

 
0
%
-
40
%
U.S. property separate account fund
14,330

 
11.1

 
11,252

 
10.5

 
0
%
-
25
%
Arbitrage fund
8,292

 
6.5

 
7,856

 
7.4

 
0
%
-
10
%
United Life annuity
9,377

 
7.3

 
8,931

 
8.4

 
5
%
-
10
%
Cash and cash equivalents
3,665

 
2.9

 
2,705

 
2.5

 
0
%
-
10
%
Total plan assets
$
128,430

 
100.0
%
 
$
106,600

 
100.0
%
 
 
 
 

The investment return expectations for the pension plan are used to develop the asset allocation based on the specific needs of the pension plan. Accordingly, equity securities comprise the largest portion of our pension plan assets, as they yield the highest rate of return. The United Life annuity, which is the third largest asset category and was originally written by our life insurance subsidiary in 1976, provides a guaranteed rate of return. The interest rate on the group annuity contract is determined annually.
The availability of assets held in cash and cash equivalents enables the pension plan to mitigate market risk that is associated with other types of investments and allows the pension plan to maintain liquidity both for the purpose of making future benefit payments to participants and their beneficiaries and for future investment opportunities.




123


Valuation of Investments
Fixed Maturity and Equity Securities
Investments in fixed maturity and equity securities are stated at fair value based upon quoted market prices reported on recognized securities exchanges on the last business day of the year. Purchases and sales of securities are recorded as of the trade date.
Pooled Separate Accounts
The pension plan invests in two pooled separate account funds, a core plus bond separate account fund and a U.S. property separate account fund. Investments in the core plus bond separate account fund are stated at fair value as provided by the administrator of the fund based on the fair value of the underlying assets owned by the fund. The fair value measurement is classified within Level 2 of the fair value hierarchy. The fair value of the investments in the U.S. property separate account fund is provided by the administrator of the fund based on the net asset value of the fund. The net asset value is based on the fair value of the underlying properties included in the fund. The fair value of the underlying properties are based on property appraisals conducted by an independent third party. The fair value measurement is classified within Level 3 of the fair value hierarchy. We have not adjusted the net asset value provided by the custodian for either fund.
Arbitrage Fund
The fair value of the arbitrage fund is determined based on its net asset value, which is obtained from the custodian and determined monthly with issuances and redemptions of units of the fund made, based on the net asset value per unit as determined on the valuation date. We have not adjusted the net asset value provided by the custodian.
United Life Annuity
The United Life group annuity contract, which is a deposit administration contract, is stated at contract value as determined by United Life. Under the group annuity contract, the plan's investment account is credited with compound interest on the average account balance for the year. The interest rate is equivalent to the ratio of net investment income to mean assets of United Life, net of investment expenses.
Cash and Cash Equivalents
Cash and cash equivalents primarily consist of insured cash and money market funds held with various financial institutions. Interest is earned on a daily basis. The fair value of these funds approximates their cost basis due to their short-term nature.
Fair Value Measurement
The following tables present the categorization of the pension plan's assets measured at fair value on a recurring basis at December 31, 2016 and 2015:


124

 
 
 
Fair Value Measurements
Description
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
Fixed maturity securities - corporate bonds
$
9,451

 
$
—

 
$
9,451

 
$
—

Redeemable preferred stock
3,144

 
3,144

 
—

 
—

Equity securities
69,770

 
69,770

 
—

 
—

Pooled separate accounts
 
 
 
 
 
 
 
Core plus bond separate account fund
10,401

 
—

 
10,401

 
—

U.S. property separate account fund
14,330

 
—

 
—

 
14,330

Arbitrage fund
8,292

 
—

 
8,292

 
—

Money market funds
3,659

 
3,659

 
—

 
—

Total assets measured at fair value
$
119,047

 
$
76,573

 
$
28,144

 
$
14,330


 
 
 
Fair Value Measurements
Description
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
Fixed maturity securities - corporate bonds
$
6,894

 
$
—

 
$
6,894

 
$
—

Redeemable preferred stock
3,744

 
3,744

 
—

 
—

Equity securities
58,613

 
58,613

 
—

 
—

Pooled separate accounts
 
 
 
 
 
 
 
Core plus bond separate account fund
6,605

 
—

 
6,605

 
—

U.S. property separate account fund
11,252

 
—

 
—

 
11,252

Arbitrage fund
7,856

 
—

 
7,856

 
—

Money market funds
2,619

 
2,619

 
—

 
—

Total assets measured at fair value
$
97,583

 
$
64,976

 
$
21,355

 
$
11,252

There were no transfers of assets in or out of Level 1 or Level 2 during the period.
The fair value of investments categorized as Level 1 is based on quoted market prices that are readily and regularly available.
The fair value of fixed maturity securities categorized as Level 2 is determined by management based on fair value information reported in the custodial statements, which is derived from recent trading activity of the underlying security in the financial markets. These securities represent various taxable bonds held by the pension plan. These securities categorized as Level 2 are valued in the same manner as described in Part II, Item 8, Note 3 and have the same controls in place.
The fair value of the arbitrage fund and bond and mortgage pooled separate account fund are categorized as Level 2 since there are no restrictions as to the pension plan's ability to redeem its investment at the net asset value of the fund as of the reporting date.  

The following tables provide a summary of the changes in fair value of the pension plan's Level 3 securities:
 
U.S. property separate account fund
Balance at January 1, 2016
$
11,252

Unrealized gains
1,078

Purchases
2,000

Balance at December 31, 2016
$
14,330



125


 
U.S. property separate account fund
Balance at January 1, 2015
$
9,895

Unrealized gains
1,357

Balance at December 31, 2015
$
11,252

Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires us to make various estimates and assumptions that affect the reporting of net periodic benefit cost, plan assets and plan obligations for each plan at the date of the financial statements. Actual results could differ from these estimates. One significant estimate relates to the calculation of the benefit obligation for each plan. We annually establish the discount rate, which is an estimate of the interest rate at which these benefits could be effectively settled, that is used to determine the present value of the respective plan's benefit obligations as of December 31. In estimating the discount rate, we look to rates of return on high-quality, fixed-income investments currently available and expected to be available during the period to maturity of the respective plan's benefit obligations.

In October 2014, the Society of Actuaries finalized a new mortality table and a new mortality improvement scale. The mortality improvement scale was further refined by the Society of Actuaries in 2015 and 2016. These updated tables reflect improved life expectancies and an expectation that the trend will continue. We have reviewed these updated tables and have updated the mortality assumptions based on this information and also based on research provided by our external actuaries. We will continue to monitor mortality assumptions and make changes as appropriate to reflect additional research and our resulting best estimate of future mortality rates.
Assumptions Used to Determine Benefit Obligations
The following actuarial assumptions were used to determine the reported plan benefit obligations at December 31:
Weighted-average assumptions as of
Pension Benefits
 
Post-retirement Benefits
December 31,
2016
 
2015
 
2016
 
2015
Discount rate
4.17
%
 
4.21
%
 
4.17
%
 
4.21
%
Rate of compensation increase
3.00

 
3.00

 
N/A

 
N/A

Decreasing interest rates resulted in a decrease in the discount rates we use to value our respective plan's benefit obligations at December 31, 2016 compared to December 31, 2015.
Assumptions Used to Determine Net Periodic Benefit Cost
The following actuarial assumptions were used at January 1 to determine our reported net periodic benefit costs for the year ended December 31:
Weighted-average assumptions as of
Pension Benefits
 
Post-retirement Benefits
January 1,
2016
 
2015
 
2014
 
2016
 
2015
 
2014
Discount rate
4.21
%
 
3.86
%
 
4.84
%
 
4.21
%
 
3.86
%
 
4.84
%
Expected long-term rate of return on plan assets
7.50

 
7.50

 
7.50

 
N/A

 
N/A

 
N/A

Rate of compensation increase
3.00

 
3.00

 
3.50

 
N/A

 
N/A

 
N/A






126

Assumed Health Care Cost Trend Rates
 
Health Care Benefits
 
Dental Claims
Years Ended December 31,
2016
 
2015
 
2016
 
2015
Health care cost trend rates assumed for next year
7.00
%
 
7.00
%
 
4.00
%
 
4.00
%
Rate to which the health care trend rate is assumed to decline (ultimate trend rate)
4.50
%
 
4.50
%
 
N/A

 
N/A

Year that the rate reaches the ultimate trend rate
2025

 
2024

 
N/A

 
N/A

Assumed health care cost trend rates have a significant effect on the amounts reported for the post-retirement benefit plan. A 1.0 percent change in assumed health care cost trend rates would have the following effects:
 
 
1% Increase
 
1% Decrease
Effect on the net periodic post-retirement health care benefit cost
 
$
839

 
$
(663
)
Effect on the accumulated post-retirement benefit obligation
 
7,922

 
(6,429
)

Benefit Obligation and Funded Status
The following table provides a reconciliation of benefit obligations, plan assets and funded status of our plans:
 
Pension Benefits
 
Post-retirement Benefits
Years Ended December 31,
2016
 
2015
 
2016
 
2015
Reconciliation of benefit obligation
 
 
 
 
 
 
 
Benefit obligation at beginning of year
$
160,390

 
$
157,600

 
$
72,175

 
$
74,552

Service cost
6,490

 
6,675

 
3,728

 
5,220

Interest cost
6,654

 
5,999

 
3,015

 
2,856

Actuarial (gain) loss
2,215

 
(5,678
)
 
1,468

 
(9,253
)
Adjustment for plan amendment
—

 
—

 
(32,289
)
 
—

Benefit payments
(3,873
)
 
(4,206
)
 
(1,312
)
 
(1,200
)
Benefit obligation at end of year (1)
$
171,876

 
$
160,390

 
$
46,785

 
$
72,175

Reconciliation of fair value of plan assets
 
 
 
 
 
 
 
Fair value of plan assets at beginning of year
$
106,600

 
$
102,800

 
$
—

 
$
—

Actual return on plan assets
9,320

 
1,654

 
—

 
—

Employer contributions
16,383

 
6,352

 
1,311

 
1,200

Benefit payments and adjustments
(3,873
)
 
(4,206
)
 
(1,311
)
 
(1,200
)
Fair value of plan assets at end of year
$
128,430

 
$
106,600

 
$
—

 
$
—

Funded status at end of year
$
(43,446
)
 
$
(53,790
)
 
$
(46,785
)
 
$
(72,175
)
(1)
For the pension plan, the benefit obligation is the projected benefit obligation. For the post-retirement benefit plan, the benefit obligation is the accumulated post-retirement benefit obligation.
Our accumulated pension benefit obligation was $152,620 and $141,550 at December 31, 2016 and 2015, respectively.






127

The following table displays the effect that the unrecognized prior service cost and unrecognized actuarial loss of our plans had on accumulated other comprehensive income ("AOCI"), as reported in the accompanying Consolidated Balance Sheets:
 
 
Pension Benefits
 
Post-retirement Benefits
Years Ended December 31
 
2016
 
2015
 
2016
 
2015
Amounts recognized in AOCI
 
 
 
 
 
 
 
 
Unrecognized prior service cost
 
$
—

 
$
—

 
$
(32,289
)
 
$
—

Unrecognized actuarial (gain) loss
 
49,745

 
52,936

 
20,756

 
20,806

Total amounts recognized in AOCI
 
$
49,745

 
$
52,936

 
$
(11,533
)
 
$
20,806

We anticipate amortization of the net actuarial losses for our pension plan in 2017 to be $3,562. We anticipate amortization of the net actuarial losses for our post-retirement benefit plan in 2017 to be $1,846.

Net Periodic Benefit Cost

The components of the net periodic benefit cost for our pension and post-retirement benefit plans are as follows:
 
Pension Plan
 
Post-retirement Benefit Plan
Years Ended December 31,
2016
 
2015
 
2014
 
2016
 
2015
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
Net periodic benefit cost
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
6,490

 
$
6,675

 
$
5,210

 
$
3,728

 
$
5,220

 
$
3,696

Interest cost
6,654

 
5,999

 
5,874

 
3,015

 
2,856

 
2,342

Expected return on plan assets
(7,952
)
 
(7,800
)
 
(6,956
)
 
—

 
—

 
—

Amortization of net loss
3,968

 
4,546

 
2,174

 
1,518

 
2,920

 
898

Net periodic benefit cost
$
9,160

 
$
9,420

 
$
6,302

 
$
8,261

 
$
10,996

 
$
6,936

Projected Benefit Payments
The following table summarizes the expected benefits to be paid from our plans over the next 10 years:
 
 
2017
 
2018
 
2019
 
2020
 
2021
 
2022 - 2026
Pension benefits
 
$
5,120

 
$
5,500

 
$
6,010

 
$
6,600

 
$
7,300

 
$
47,540

Post-retirement benefits
 
$
1,150

 
$
1,290

 
$
1,450

 
$
1,600

 
$
1,750

 
$
11,700

Profit-Sharing Plan and Employee Stock Ownership Plan
We have a profit-sharing plan in which employees who meet service requirements are eligible to participate. The amount of our contribution is discretionary and is determined annually, but cannot exceed the amount deductible for federal income tax purposes. Our contribution to the profit-sharing plan for 2016, 2015 and 2014, was $2,904, $7,706 and $3,847, respectively.
Prior to October 31, 2015 we had an employee stock ownership plan (the "ESOP") for the benefit of eligible employees and their beneficiaries. In June 2015, the plan administrator decided to merge the ESOP into the United Fire Group, Inc. 401K Plan effective October 31, 2015. Participant ESOP account balances were transferred to each participant’s 401K Plan.







128

NOTE 9. STOCK-BASED COMPENSATION
Non-Qualified Employee Stock Award Plan
The United Fire Group, Inc. 2008 Stock Plan (the "2008 Stock Plan") authorized the issuance of restricted and unrestricted stock awards, stock appreciation rights, incentive stock options, and non-qualified stock options for up to 1,900,000 shares of United Fire common stock to employees. In May 2014, the Registrant's shareholders approved an additional 1,500,000 shares of United Fire common stock issuable at any time and from time to time pursuant to the 2008 Stock Plan, among other amendments, and renamed such plan as the United Fire Group, Inc. Stock Plan, (as amended, the "Stock Plan"). At December 31, 2016, there were 1,248,651 authorized shares remaining available for future issuance. The Stock Plan is administered by the Board of Directors, which determines those employees who will receive awards, when awards will be granted, and the terms and conditions of the awards. The Board of Directors may also take any action it deems necessary and appropriate for the administration of the Stock Plan. Pursuant to the Stock Plan, the Board of Directors may, at its sole discretion, grant awards to our employees who are in positions of substantial responsibility with United Fire.
Options granted pursuant to the Stock Plan are granted to buy shares of United Fire's common stock at the market value of the stock on the date of grant. All outstanding option awards vest and are exercisable in installments of 20.0 percent of the number of shares covered by the option award each year from the grant date, unless the Board of Directors authorizes the acceleration of vesting. To the extent not exercised, vested option awards accumulate and are exercisable by the awardee, in whole or in part, in any subsequent year included in the option period, but not later than 10 years from the grant date. Restricted and unrestricted stock awards granted pursuant to the Stock Plan are granted at the market value of our common stock on the date of the grant. Restricted stock awards fully vest after 3 years or 5 years from the date of issuance, unless accelerated upon the approval of the Board of Directors, at which time United Fire common stock will be issued to the awardee. All awards are generally granted free of charge to the eligible employees of United Fire as designated by the Board of Directors.

The activity in the Stock Plan is displayed in the following table:
Authorized Shares Available for Future Award Grants
Year Ended December 31, 2016
 
From Inception to December 31, 2016
Beginning balance
1,394,578

 
1,900,000

Additional shares authorized
—

 
1,500,000

Number of awards granted
(249,638
)
 
(2,612,566
)
Number of awards forfeited or expired
103,711

 
461,217

Ending balance
1,248,651

 
1,248,651

Number of option awards exercised
298,549

 
949,068

Number of unrestricted stock awards granted
980

 
7,325

Number of restricted stock awards vested
18,394

 
36,970


Non-Qualified Non-Employee Director Stock Option and Restricted Stock Plan
The United Fire Group, Inc. 2005 Non-Qualified Non-Employee Director Stock Option and Restricted Stock Plan (the "Director Plan") authorizes the issuance of restricted stock awards and non-qualified stock options to purchase shares of United Fire's common stock to non-employee directors. At December 31, 2016, we had 74,771 authorized shares available for future issuance.
The Board of Directors has the authority to determine which non-employee directors receive awards, when options and restricted stock shall be granted, the option price, the option expiration date, the date of grant, the vesting schedule of options or whether the options shall be immediately vested, the terms and conditions of options and restricted stock (other than those terms and conditions set forth in the plan) and the number of shares of common stock to be issued pursuant to an option agreement or restricted stock agreement (subject to limits set forth in the plan). The Board of Directors may also take any action it deems necessary and appropriate for the administration of the Director Plan.



129

The activity in the Director Plan is displayed in the following table:
Authorized Shares Available for Future Award Grants
Year Ended December 31, 2016
 
From Inception to December 31, 2016
Beginning balance
69,938

 
300,000

Number of awards granted
(13,167
)
 
(249,232
)
Number of awards forfeited or expired
18,000

 
24,003

Ending balance
74,771

 
74,771

Number of option awards exercised
37,666

 
52,473

Number of restricted stock awards vested
11,385

 
31,556


Stock-Based Compensation Expense

In 2016, 2015 and 2014, we recognized stock-based compensation expense of $3,696, $2,510 and $1,944, respectively. Stock-based compensation expense is recognized over the vesting period of the stock options.

As of December 31, 2016, we had $7,120 in stock-based compensation expense that has yet to be recognized through our results of operations. We expect this compensation to be recognized in subsequent years according to the following table, except with respect to awards that are accelerated by the Board of Directors, in which case we will recognize any remaining compensation expense in the period in which the awards are accelerated.
2017
 
$
2,958

2018
 
2,259

2019
 
1,191

2020
 
640

2021
 
72

Total
 
$
7,120

Analysis of Award Activity
The analysis below details the award activity for 2016 and the awards outstanding at December 31, 2016, for both of our plans and ad hoc options, which were granted prior to the adoption of the other plans:
Options
Shares
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Life (in years)
 
Aggregate Intrinsic Value
Outstanding at January 1, 2016
1,383,880

 
$
28.66

 
 
 
 
Granted
180,912

 
39.91

 
 
 
 
Exercised
(336,215
)
 
30.26

 
 
 
 
Forfeited or expired
(107,900
)
 
38.24

 
 
 
 
Outstanding at December 31, 2016
1,120,677

 
$
29.08

 
6.63
 
$
22,519

Exercisable at December 31, 2016
462,639

 
$
25.85

 
2.83
 
$
10,789

Intrinsic value is the difference between our share price on the last day of trading (i.e., December 31, 2016) and the price of the options when granted and represents the value that would have been received by option holders had they exercised their options on that date. These values change based on the fair market value of our shares. The intrinsic value of options exercised totaled $4,339, $1,546 and $790 in 2016, 2015 and 2014, respectively.





130

The analysis below details the award activity for the restricted stock awards outstanding at December 31, 2016:
Restricted stock awards
Shares
 
Weighted-Average Grant Date Fair Value
Non-vested at January 1, 2016
144,763

 
$
27.81

Granted
80,913

 
40.22

Vested
(29,779
)
 
23.94

Forfeited
(13,811
)
 
26.16

Non-vested at December 31, 2016
182,086

 
$
34.08

In 2016, 2015 and 2014 we recognized $1,766, $924 and $588, respectively, in compensation expense related to the restricted stock awards. At December 31, 2016, we had $3,674 in compensation expense that has yet to be recognized through our results of operations related to the restricted stock awards. The intrinsic value of the non-vested restricted stock awards outstanding totaled $2,747, $1,520 and $459 at December 31, 2016, 2015 and 2014, respectively.
Assumptions
The weighted-average grant-date fair value of the options granted under our plans has been estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:
December 31,
2016
 
2015
 
2014
Risk-free interest rate
1.53
%
 
1.94
%
 
2.19
%
Expected volatility
25.44
%
 
21.92
%
 
36.58
%
Expected option life (in years)
7

 
7

 
7

Expected dividends (in dollars)
$
0.88

 
$
0.80

 
$
0.78

Weighted-average grant-date fair value of options granted during the year (in dollars)
$
8.42

 
$
4.98

 
$
9.15


The following table summarizes information regarding the stock options outstanding and exercisable at December 31, 2016:
 
 
 
Options Outstanding
Options Exercisable
Range of Exercise Prices
Number Outstanding (in shares)
Weighted-Average Remaining Contractual Life (in years)
Weighted-Average Exercise Price
Number Exercisable (in shares)
Weighted-Average Exercise Price
$
15.01

-
21.00
144,163

4.27
$
20.25

129,463

$
20.18

21.01

-
28.00
194,025

5.48
23.37

122,391

23.11

28.01

-
35.00
595,544

6.95
29.77

200,285

30.70

35.01

-
41.00
186,945

8.62
39.60

10,500

35.23

$
15.01

-
41.00
1,120,677

6.63
$
29.08

462,639

$
25.85


NOTE 10. SEGMENT INFORMATION

We have two reportable business segments in our operations: property and casualty insurance and life insurance. The property and casualty insurance segment has seven domestic locations from which it conducts its business. The life insurance segment operates from our home office. Because all of our insurance is sold domestically, we have no revenues allocable to foreign operations. The accounting policies of the segments are the same as those described in Note 1 to our Consolidated Financial Statements. We analyze results based on profitability (i.e., loss ratios), expenses and return on equity.


131

Property and Casualty Insurance Segment
We write both commercial and personal lines of property and casualty insurance. We focus on our commercial lines, which represented 92.5% of our property and casualty insurance premiums earned for 2016. Our personal lines represented 7.5% of our property and casualty insurance premiums earned for 2016.
Products
Our primary commercial policies are tailored business packages that include the following coverages: fire and allied lines, other liability, automobile, workers' compensation and surety. Our personal lines consist primarily of automobile and fire and allied lines coverage, including homeowners.
Pricing
Pricing levels for our property and casualty insurance products are influenced by many factors, including an estimation of expected losses, the expenses of producing, issuing and servicing business and managing claims, the time value of money associated with such loss and expense cash flows, and a reasonable allowance for profit. We have a disciplined approach to underwriting and risk management that emphasizes profitable growth rather than premium volume or market share. Our insurance company subsidiaries are subject to state laws and regulations regarding rate and policy form approvals. The applicable state laws and regulations establish standards in certain lines of business to ensure that rates are not excessive, inadequate, unfairly discriminatory, or used to engage in unfair price competition. Our ability to increase rates and the relative timing of the process are dependent upon each respective state's requirements, as well as the competitive market environment.
Seasonality
Our property and casualty insurance segment experiences some seasonality with regard to premiums written, which are generally highest in January and July and lowest during the fourth quarter. Although we experience some seasonality in our premiums written, premiums are earned ratably over the period of coverage. Losses and loss settlement expenses incurred tend to remain consistent throughout the year, with the exception of catastrophe losses which generally are highest in the second and third quarters. Catastrophes inherently are unpredictable and can occur at any time during the year from man-made or natural disaster events that include, but are not limited to, hail, tornadoes, hurricanes and windstorms.
Life Insurance Segment
Products
United Life underwrites all of our life insurance business and sells annuities. Our principal products are single premium annuities, universal life products and traditional life (primarily single premium whole life insurance) products. We also underwrite and market other traditional products, including term life insurance and whole life insurance. We do not write variable annuities or variable insurance products.
Life insurance in force, before ceded reinsurance, totaled $5,314,548 and $5,491,932 as of December 31, 2016 and 2015, respectively. Traditional life insurance products represented 73.0 percent and 68.5 percent of our insurance in-force at December 31, 2016 and 2015, respectively. Universal life insurance represented 26.6 percent and 26.3 percent of insurance in force at December 31, 2016 and 2015, respectively.
Pricing
Premiums for our life and health insurance products are based on assumptions with respect to mortality, morbidity, investment yields, expenses, and lapses and are also affected by state laws and regulations, as well as competition. Pricing assumptions are based on our experience, as well as the industry in general, depending upon the factor being considered. The actual profit or loss produced by a product will vary from the anticipated profit if the actual experience differs from the assumptions used in pricing the product.


132

Premiums Earned by Segment
The following table sets forth our net premiums earned by segment before intersegment eliminations:
 
 
 
 
 
 
Years Ended December 31,
2016
 
2015
 
2014
Property and casualty insurance segment
 
 
 
 
 
Net premiums earned
 
 
 
 
 
Other liability
$
289,982

 
$
261,303

 
$
228,426

Fire and allied lines
265,221

 
246,450

 
226,086

Automobile
239,216

 
210,090

 
187,813

Workers' compensation
103,605

 
95,672

 
88,522

Fidelity and surety
22,507

 
21,362

 
19,212

Reinsurance assumed
12,765

 
13,639

 
13,145

Other
2,835

 
3,179

 
3,735

Total net premiums earned
$
936,131

 
$
851,695

 
$
766,939

Life insurance segment
 
 
 
 
 
Net premiums earned
 
 
 
 
 
Ordinary life (excluding universal life)
$
63,668

 
$
53,114

 
$
35,557

Universal life policy fees
11,577

 
12,834

 
13,190

Immediate annuities with life contingencies
10,533

 
12,223

 
11,639

Accident and health
1,434

 
1,425

 
1,274

Other
58

 
388

 
261

Total net premiums earned
$
87,270

 
$
79,984

 
$
61,921

Total revenue by segment includes sales to external customers and intersegment sales that are eliminated to arrive at the total revenues as reported in the accompanying Consolidated Statements of Income and Comprehensive Income. We account for intersegment sales on the same basis as sales to external customers.
The following table sets forth certain data for each of our business segments and is reconciled to our Consolidated Financial Statements. Depreciation and amortization expense and property and equipment acquisitions for 2016, 2015 and 2014 are reported in the property and casualty insurance segment.



133

 
2016
 
2015
 
2014
Property and casualty insurance:
 
 
 
 
 
Revenues:
 
 
 
 
 
Net premiums earned
$
936,131

 
$
851,695

 
$
766,939

Investment income, net of investment expenses
55,441

 
46,606

 
44,219

Net realized investment gains
4,947

 
1,124

 
4,177

Other income (loss)
—

 
(107
)
 
910

Total revenues before eliminations
$
996,519

 
$
899,318

 
$
816,245

Intersegment eliminations
(157
)
 
(47
)
 
18

Total revenues
$
996,362

 
$
899,271

 
$
816,263

Net income before income taxes:
 
 
 
 
 
Revenues
$
996,519

 
$
899,318

 
$
816,245

Benefit, losses and expenses
938,864

 
784,691

 
750,768

Total net income before eliminations
$
57,655

 
$
114,627

 
$
65,477

Intersegment eliminations
(158
)
 
743

 
548

Income before income taxes
$
57,497

 
$
115,370

 
$
66,025

Income tax expense
8,379

 
30,050

 
13,649

Net income
$
49,118

 
$
85,320

 
$
52,376

Assets
 
 
 
 
 
Total segment
$
2,662,272

 
$
2,490,138

 
$
2,360,764

Intersegment eliminations
(213,132
)
 
(209,464
)
 
(233,141
)
Total assets
$
2,449,140

 
$
2,280,674

 
$
2,127,623

 
 
 
 
 
 
Life insurance:
 
 
 
 
 
Revenues:
 
 
 
 
 
Net premiums earned
$
87,270

 
$
79,984

 
$
61,921

Investment income, net of investment expenses
51,538

 
54,222

 
60,373

Net realized investment gains
1,156

 
1,722

 
3,093

Other income
621

 
508

 
774

Total revenues before eliminations
$
140,585

 
$
136,436

 
$
126,161

Intersegment eliminations
—

 
(789
)
 
(530
)
Total revenues
$
140,585

 
$
135,647

 
$
125,631

Net income before income taxes:
 
 
 
 
 
Revenues
$
140,585

 
$
136,436

 
$
126,161

Benefit, losses and expenses
139,671

 
129,771

 
115,361

Total net income before eliminations
$
914

 
$
6,665

 
$
10,800

Intersegment eliminations
256

 
(584
)
 
(362
)
Income before income taxes
$
1,170

 
$
6,081

 
$
10,438

Income tax expense
384

 
2,275

 
3,677

Net income
$
786

 
$
3,806

 
$
6,761

Assets
$
1,605,618

 
$
1,609,702

 
$
1,729,066

Consolidated totals:
 
 
 
 
 
Total revenues
$
1,136,947

 
$
1,034,918

 
$
941,894

Total net income
$
49,904

 
$
89,126

 
$
59,137

Total assets
$
4,054,758

 
$
3,890,376

 
$
3,856,689





134

NOTE 11. QUARTERLY SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth our selected unaudited quarterly financial information:
(In Thousands Except Share Data)
 
 
 
 
 
 
 
 
 
Quarters
First
 
Second
 
Third
 
Fourth
 
Total
Year Ended December 31, 2016
 
 
 
 
 
 
 
 
 
Total revenues
$
265,685

 
$
279,773

 
$
289,494

 
$
301,995

 
$
1,136,947

Income before income taxes
28,774

 
864

 
15,175

 
13,854

 
58,667

Net income
$
22,427

 
$
3,114

 
$
12,368

 
$
11,995

 
$
49,904

Basic earnings per share (1)
$
0.89

 
$
0.12

 
$
0.49

 
$
0.47

 
$
1.97

Diluted earnings per share (1)
0.88

 
0.12

 
0.48

 
0.46

 
1.93

Year Ended December 31, 2015
 
 
 
 
 
 
 
 
 
Total revenues
$
238,484

 
$
255,918

 
$
264,560

 
$
275,956

 
$
1,034,918

Income before income taxes
31,831

 
19,533

 
26,824

 
43,263

 
121,451

Net income
$
23,679

 
$
15,018

 
$
19,534

 
$
30,895

 
$
89,126

Basic earnings per share (1)
$
0.95

 
$
0.60

 
$
0.78

 
$
1.23

 
$
3.56

Diluted earnings per share (1)
0.94

 
0.59

 
0.77

 
1.21

 
3.53

(1)
The sum of the quarterly reported amounts may not equal the full year, as each is computed independently.

NOTE 12. EARNINGS PER COMMON SHARE
Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per share gives effect to all dilutive common shares outstanding during the reporting period. The dilutive shares we consider in our diluted earnings per share calculation relate to our outstanding stock options and restricted stock awards.
We determine the dilutive effect of our outstanding stock options using the "treasury stock" method. Under this method, we assume the exercise of all of the outstanding stock options whose exercise price is less than the weighted-average market value of our common stock during the reporting period. This method also assumes that the proceeds from the hypothetical stock option exercises are used to repurchase shares of our common stock at the weighted-average market value of the stock during the reporting period. The net of the assumed stock options exercised and assumed common shares repurchased represents the number of dilutive common shares, which we add to the denominator of the earnings per share calculation.

The components of basic and diluted earnings per share were as follows:
 
Years Ended December 31,
 
2016
 
2015
 
2014
(In Thousands Except Share and Per Share Data)
Basic
 
Diluted
 
Basic
 
Diluted
 
Basic
 
Diluted
Net income
$
49,904

 
$
49,904

 
$
89,126

 
$
89,126

 
$
59,137

 
$
59,137

Weighted-average common shares outstanding
25,335,706

 
25,335,706

 
25,047,405

 
25,047,405

 
25,230,854

 
25,230,854

Add dilutive effect of restricted stock awards
—

 
155,059

 
—

 
122,840

 
—

 
114,313

Add dilutive effect of stock options
—

 
313,913

 
—

 
65,751

 
—

 
148,496

Weighted-average common shares
25,335,706

 
25,804,678

 
25,047,405

 
25,235,996

 
25,230,854

 
25,493,663

Earnings per common share
$
1.97

 
$
1.93

 
$
3.56

 
$
3.53

 
$
2.34

 
$
2.32

Awards excluded from diluted calculation(1)
—

 
—

 
—

 
343,390

 
—

 
835,610

(1)
Outstanding awards that are not "in-the-money" are excluded from the diluted earnings per share calculation because the effect of including them would have been anti-dilutive.


135

NOTE 13. LEASE COMMITMENTS
At December 31, 2016, we were obligated under noncancelable operating lease agreements for office space, vehicles, computer equipment and office equipment. Most of our leases include renewal options, purchase options or both. These provisions may be exercised by us upon the expiration of the related lease agreements. Rental expense under our operating lease agreements was $6,908, $6,256 and $7,040 for 2016, 2015 and 2014, respectively. Our most significant lease commitment is for mainframe computer equipment. This lease was signed in November 2016 and has a term of 5 years. The monthly lease payments for this lease are $154.
At December 31, 2016, our future minimum rental payments were as follows:
2017
$
6,218

2018
5,761

2019
5,270

2020
4,715

2021
3,529

Thereafter
174

Total
$
25,667


NOTE 14. CREDIT FACILITY
On February 2, 2016, the Company, as borrower, entered into a Credit Agreement (the "New Credit Agreement") by and among the Company, with the lenders from time to time party thereto and KeyBank National Association ("Key Bank"), as administrative agent, swingline lender and letter of credit issuer. The New Credit Agreement provides for a $50,000 four-year unsecured revolving credit facility that includes a $20,000 letter of credit subfacility and a swingline subfacility in the amount up to $5,000. The New Credit Agreement allows the Company to increase the aggregate amount of the commitments thereunder by up to $100,000, provided that no event of default has occurred and is continuing and certain other conditions are satisfied.
The New Credit Agreement is available for the Company's general corporate purposes, including liquidity, acquisitions and working capital. All unpaid principal and accrued interest under the New Credit Agreement is due and payable in full at maturity on February 2, 2020. Based on the type of loan, advances under the New Credit Agreement would bear interest on either the London interbank offered rate ("LIBOR") or a base rate plus, in each case, a calculated margin amount.
The unused commitments under the New Credit Agreement will be subject to a commitment fee that will be calculated at a per annum rate. The applicable margins for borrowings under the New Credit Agreement and the commitment fee thereunder will be determined by reference to a pricing grid based on the Company’s issuer credit rating by A.M. Best Company, Inc.
The New Credit Agreement contains customary representations, conditions to borrowing, covenants and events of default, including certain covenants that limit or restrict, subject to certain exceptions, the ability of the Company and its subsidiaries to sell or transfer assets, enter into a merger or consolidate with another company, create liens, impose restrictions on subsidiary dividends, enter into sale-leaseback transactions, make investments or acquisitions, enter into certain reinsurance agreements, pay dividends during any period of default, enter into transactions with affiliates, change the nature of its business, or incur indebtedness. The New Credit Agreement also includes financial covenants that require the Company to (i) maintain a minimum consolidated net worth, (ii) maintain a minimum consolidated statutory surplus and (iii) not exceed a 0.35 to 1.0 debt to total capitalization ratio. As of December 31, 2016 we were in compliance with all covenants of the New Credit Agreement.
In December 2011, United Fire & Casualty Company entered into a credit agreement with a syndicate of financial institutions as lenders, which terminated by expiration on its stated termination date of December 22, 2015. KeyBank National Association was the administrative agent, lead arranger, sole book runner, swingline lender, and letter of credit issuer, and Bankers Trust Company was the syndication agent. The four-year credit agreement


136

provided for a $100,000 unsecured revolving credit facility that included a $20,000 letter of credit subfacility and a swing line subfacility in the amount of up to $5,000.
On June 4, 2013, United Fire & Casualty Company, United Fire Group, Inc. and the syndicated lenders entered into an Assignment, Joinder, Assumption, and Release Agreement (the "Joinder Agreement") transferring the obligations under the credit agreement from United Fire & Casualty Company to United Fire Group, Inc. Effective with the execution of the Joinder Agreement, United Fire & Casualty Company was released from any further obligations under the credit agreement.
During the term of this credit agreement, we had the right to increase the total credit facility from $100,000 up to $125,000 if no event of default has occurred and is continuing and certain other conditions are satisfied. The credit facility was available for general corporate purposes, including working capital, acquisitions and liquidity purposes. Any principal outstanding under the credit facility was due in full at maturity, on December 22, 2015. The interest rate was based on our monthly choice of either a base rate or the LIBOR plus, in each case, a calculated margin amount. A commitment fee on each lender's unused commitment under the credit facility was also payable quarterly.
The credit agreement contained customary representations, covenants and events of default, including certain covenants that limit or restrict our ability to engage in certain activities. Subject to certain exceptions, those activities included restricting our ability to sell or transfer assets or enter into a merger or consolidate with another company, grant certain types of security interests, incur certain types of liens, impose restrictions on subsidiary dividends, enter into leaseback transactions, or incur certain indebtedness. The credit agreement contained certain financial covenants including covenants that required us to maintain a minimum consolidated net worth, a debt to capitalization ratio and minimum stockholders' equity.
There was no outstanding balance on the credit facility at December 31, 2016 or 2015. We did not incur any interest expense related to these credit facilities in 2016, 2015 or 2014. We were in compliance with all covenants of the credit agreement on its stated termination date of December 22, 2015.

NOTE 15. INTANGIBLE ASSETS
The carrying value of our goodwill was $15,091 at both December 31, 2016 and 2015, respectively. The goodwill is fully allocated to our property and casualty insurance segment.
Our major classes of intangible assets are presented in the following table:
 
Year Ended December 31,
 
2016
 
2015
Agency relationships
$
10,338

 
$
10,338

Accumulated amortization - agency relationships
(4,929
)
 
(4,292
)
 
$
5,409

 
$
6,046

 
 
 
 
Software
$
3,260

 
$
3,260

Accumulated amortization - software
(3,260
)
 
(3,260
)
 
$
—

 
$
—

 
 
 
 
Trade names
$
1,978

 
$
1,978

Accumulated amortization - trade names
(758
)
 
(626
)
 
$
1,220

 
$
1,352

 
 
 
 
Favorable contract
$
286

 
$
286

Accumulated amortization - favorable contract
(286
)
 
(286
)
 
$
—

 
$
—

 
 
 
 
State insurance licenses (1)
$
3,020

 
$
3,020

 
 
 
 
Net intangible assets
$
9,649

 
$
10,418

(1) The intangible asset for licenses has an indefinite life and therefore is not amortized.


137

The estimated useful lives assigned to our major classes of amortizable intangible assets are as follows:
 
Useful Life
Agency relationships
Fifteen years
Software
Two years
Trade names
Fifteen years
Favorable contract
Two years
Our estimated aggregate amortization expense for each of the next five years is as follows:
2017
$
769

2018
719

2019
709

2020
709

2021
709



NOTE 16. ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table shows the changes in the components of our accumulated other comprehensive income (loss), net of tax, for the years ended December 31, 2016, 2015 and 2014:

 
 
 
Liability for
 
 
 
Net unrealized
 
underfunded
 
 
 
appreciation
 
employee
 
 
 
on investments
 
benefit costs
 
Total
Balance as of January 1, 2014
$
116,601

 
$
(29,451
)
 
$
87,150

Change in accumulated other comprehensive income before reclassifications
36,328

 
(30,996
)
 
5,332

Reclassification adjustments from accumulated other comprehensive income
(3,306
)
 
1,997

 
(1,309
)
Balance as of December 31, 2014
$
149,623

 
$
(58,450
)
 
$
91,173

Change in accumulated other comprehensive income before reclassifications
(18,321
)
 
5,664

 
(12,657
)
Reclassification adjustments from accumulated other comprehensive income
(2,933
)
 
4,854

 
1,921

Balance as of December 31, 2015
$
128,369

 
$
(47,932
)
 
$
80,437

Change in accumulated other comprehensive income before reclassifications
8,461

 
19,529

 
27,990

Reclassification adjustments from accumulated other comprehensive income
(2,938
)
 
3,566

 
628

Balance as of December 31, 2016
$
133,892

 
$
(24,837
)
 
$
109,055





138

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
United Fire Group, Inc.

We have audited the accompanying consolidated balance sheets of United Fire Group, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of income and comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedules listed in the Index at Item 15(a)(2). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Fire Group, Inc. at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), United Fire Group, Inc.'s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report, dated February 28, 2017, expressed an unqualified opinion thereon.


 
/s/ Ernst & Young LLP  
 
 
Ernst & Young LLP 
 

Des Moines, Iowa
February 28, 2017



139

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this report, were designed and functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of United Fire Group, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. United Fire Group, Inc.'s internal control over financial reporting is a process designed under the supervision of its Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of its Consolidated Financial Statements for external purposes in accordance with U.S. generally accepted accounting principles.
As of December 31, 2016, United Fire Group, Inc.'s management assessed the effectiveness of United Fire Group Inc.'s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in "Internal Control — Integrated Framework," issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on the assessment, United Fire Group, Inc.'s management determined that effective internal control over financial reporting was maintained as of December 31, 2016, based on those criteria.
Ernst & Young LLP, the independent registered public accounting firm that audited the Consolidated Financial Statements of United Fire Group, Inc. included in this Annual Report on Form 10-K, has audited the effectiveness of internal control over financial reporting as of December 31, 2016. Their attestation report, which expresses an unqualified opinion on the effectiveness of United Fire Group, Inc.'s internal control over financial reporting as of December 31, 2016, is included in this Item under the heading "Report of Independent Registered Public Accounting Firm."













140


Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
United Fire Group, Inc.
We have audited United Fire Group, Inc.'s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). United Fire Group, Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, United Fire Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2016 and 2015 and the related consolidated statements of income and comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2016 of United Fire Group, Inc. and our report dated February 28, 2017 expressed an unqualified opinion thereon.
 
/s/ Ernst & Young LLP
 
 
Ernst & Young LLP
 
 
 
 
Des Moines, Iowa
 
 
February 28, 2017
 
 


141

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15 and 15d-15) that occurred during the fiscal quarter ended December 31, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




142

ITEM 9B. OTHER INFORMATION
None.

PART III.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 regarding the Company’s executive officers is included in '"Executive Officers of the Company" under Part I, Item 1 of this report.
The information required by this Item regarding our directors and corporate governance matters is included under the captions "Board of Directors," subheading "Corporate Governance" and "Proposal One-Election of Directors," in our definitive Proxy Statement for our annual meeting of shareholders to be held on May 17, 2017 (the "2017 Proxy Statement") and is incorporated herein by reference.
The information required by this Item regarding our Code of Ethics is included under the caption "Board of Directors," subheading "Corporate Governance," subpart "Code of Ethics" in our 2017 Proxy Statement and is incorporated herein by reference.
The information required by this Item regarding compliance with Section 16(a) of the Exchange Act is included under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in our 2017 Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this Item regarding our executive compensation and our Compensation Committee Report is included under the caption "Executive Compensation" and the subheading "Report of the Compensation Committee" in our 2017 Proxy Statement and is incorporated herein by reference. The information required by this Item regarding Compensation Committee interlocks and insider participation is included under the caption "Board of Directors," subheading "Committees of the Board," subheading "Compensation Committee," subpart "Compensation Committee Interlocks and Insider Participation" in our 2017 Proxy Statement and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The information required under this Item is included under the captions "Security Ownership of Certain Beneficial Owners," "Security Ownership of Management" and "Securities Authorized for Issuance under Equity Compensation Plans" in our 2017 Proxy Statement and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required under this Item is included under the captions "Board of Directors" and "Transactions with Related Persons" in our 2017 Proxy Statement and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required under this Item is included under the caption "Proposal Two - Ratification of the Audit Committee's Appointment of Independent Registered Public Accounting Firm," subheading "Information About Our Independent Registered Public Accounting Firm" in our 2017 Proxy Statement and is incorporated herein by reference.


143

PART IV.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
We have filed the following documents as part of this Annual Report on Form 10-K:
 
Page
 
 
 
 
All other schedules have been omitted as not required, not applicable, not deemed material or because the information is included in the Consolidated Financial Statements.
(a) 3. See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K.
 




144

Schedule I. Summary of Investments — Other than Investments in Related Parties
December 31, 2016
(In thousands)
 
Cost or Amortized Cost
 
 
 
Amounts at Which Shown in Balance Sheet
Type of Investment
 
Fair Value
 
Fixed maturities
 
 
 
 
 
Bonds
 
 
 
 
 
United States Government and government agencies and authorities
$
99,908

 
$
100,792

 
$
100,792

States, municipalities and political subdivisions
1,061,621

 
1,051,958

 
1,051,958

Foreign governments
62,995

 
65,234

 
65,234

Public utilities
212,360

 
215,674

 
215,674

All other bonds
1,462,594

 
1,477,753

 
1,477,752

Redeemable preferred stock
1,279

 
1,304

 
1,304

Total fixed maturities
$
2,900,757

 
$
2,912,715

 
$
2,912,714

Equity securities
 
 
 
 
 
Common stocks
 
 
 
 
 
Public utilities
$
6,995

 
$
20,284

 
$
20,284

Banks, trusts and insurance companies
17,493

 
116,156

 
116,156

Industrial, miscellaneous and all other
46,431

 
136,451

 
136,451

Nonredeemable preferred stocks
3,019

 
3,169

 
3,169

Total equity securities
$
73,938

 
$
276,060

 
$
276,060

Mortgage loans on real estate
$
3,706

 
$
3,895

 
$
3,706

Policy loans
5,366

 
5,366

 
5,366

Other long-term investments
48,908

 
67,639

 
67,639

Short-term investments
175

 
175

 
175

Total investments
$
3,032,850

 
$
3,265,850

 
$
3,265,660





145

Schedule II. Condensed Financial Statements of Parent Company

United Fire Group, Inc. (parent company only)
Condensed Balance Sheets
 
December 31,
(In thousands, except share data)
2016
2015
 
 
 
Assets
 
 
Fixed maturities, held-to-maturity, at amortized cost (fair value $150 in 2016 and $150 in 2015)
$
150

$
150

Investment in subsidiary
925,887

871,590

Cash and cash equivalents
14,325

6,565

Federal income tax receivable
1,521

591

Accrued investment income
1

1

Total assets
$
941,884

$
878,897

 
 
 
Liabilities and stockholders' equity
 
 
Liabilities
$
—

$
—

 
 
 
Stockholders' equity
 
 
Common stock, $0.001 par value, authorized 75,000,000 shares; 25,429,769 and 25,151,428 issued and outstanding in 2016 and 2015, respectively
$
25

$
25

Additional paid-in capital
216,482

207,426

Retained earnings
616,322

591,009

Accumulated other comprehensive income, net of tax
109,055

80,437

Total stockholders' equity
$
941,884

$
878,897

 
 
 
Total liabilities and stockholders' equity
$
941,884

$
878,897


This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included in Part II, Item 8 of this Annual Report on Form 10-K.























146

Schedule II. Condensed Financial Statements of Parent Company (continued)

United Fire Group, Inc. (parent company only)
Condensed Statements of Income and Comprehensive Income

 
For the Years Ended December 31,
(In thousands)
2016
2015
2014
 
 
 
 
Revenues
 
 
 
Investment income
$
66

$
25

$
22

Total revenues
66

25

22

 
 
 
 
Expenses
 
 
 
Other operating expenses
$
73

$
116

$
297

Total expenses
73

116

297

 
 
 
 
Loss before income taxes and equity in net income of subsidiary
(7
)
(91
)
(275
)
Federal income tax benefit
(3
)
(42
)
(107
)
Net loss before equity in net income of subsidiary
$
(4
)
$
(49
)
$
(168
)
Equity in net income of subsidiary
49,908

89,175

59,305

Net income
$
49,904

$
89,126

$
59,137

 
 
 
 
Other comprehensive income (loss)
 
 
 
Change in unrealized appreciation on investments held by subsidiary
$
13,017

$
(28,185
)
$
55,888

Change in liability for underfunded employee benefit plans of subsidiary
30,045

8,714

(47,685
)
Other comprehensive income (loss), before tax and reclassification adjustments
$
43,062

$
(19,471
)
$
8,203

Income tax effect
(15,072
)
6,814

(2,871
)
Other comprehensive income (loss), after tax, before reclassification adjustments
$
27,990

$
(12,657
)
$
5,332

Reclassification adjustment for net realized gains of the subsidiary included in income
(4,520
)
(4,513
)
(5,085
)
Reclassification adjustment for employee benefit costs of the subsidiary included in expense
5,486

7,468

3,072

Total reclassification adjustments, before tax
$
966

$
2,955

$
(2,013
)
Income tax effect
(338
)
(1,034
)
704

Total reclassification adjustments, after tax
$
628

$
1,921

$
(1,309
)
 
 
 
 
Comprehensive income
$
78,522

$
78,390

$
63,160


United Fire Group, Inc. and its subsidiaries file a consolidated federal income tax return. The federal income tax provision represents an allocation under it's tax allocation agreements.

This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included in Part II, Item 8 of this Annual Report on Form 10-K.








147

Schedule II. Condensed Financial Statements of Parent Company (continued)

United Fire Group, Inc. (parent company only)
Condensed Statements of Cash Flows

 
For the Years Ended December 31,
(In thousands)
2016
2015
2014
 
 
 
 
Cash flows from operating activities
 
 
 
Net income
$
49,904

$
89,126

$
59,137

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Equity in net income of subsidiary
(49,908
)
(89,175
)
(59,305
)
Dividends received from subsidiary
24,000

22,500

29,000

Other, net
2,995

1,269

700

Total adjustments
$
(22,913
)
$
(65,406
)
$
(29,605
)
Net cash provided by operating activities
$
26,991

$
23,720

$
29,532

 
 
 
 
Cash flows from investing activities
 
 
 
Purchase of held-to-maturity investments
$
—

$
—

$
—

Net cash used in investing activities
$
—

$
—

$
—

 
 
 
 
Cash flows from financing activities
 
 
 
Repurchase of common stock
$
(3,746
)
$
(2,423
)
$
(12,942
)
Issuance of common stock
9,922

5,496

2,260

Tax impact from issuance of common stock
(816
)
(833
)
(160
)
Payment of cash dividends
(24,591
)
(21,658
)
(19,680
)
Net cash used in financing activities
$
(19,231
)
$
(19,418
)
$
(30,522
)
 
 
 
 
Net change in cash and cash equivalents
$
7,760

$
4,302

$
(990
)
Cash and cash equivalents at beginning of period
6,565

2,263

3,253

Cash and cash equivalents at end of year
$
14,325

$
6,565

$
2,263


This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included in Part II, Item 8 of this Form 10-K.



148

Schedule III. Supplementary Insurance Information
(In thousands)
Deferred Policy Acquisition Costs
 
Future Policy Benefits, Losses, Claims and Loss Expenses
 
Unearned Premiums
 
Earned Premium Revenue
 
Investment Income, Net
 
Benefits, Claims, Losses and Settlement Expenses
 
Amortization of Deferred Policy Acquisition Costs
 
Other Underwriting Expenses
 
Interest on Policyholders' Accounts
 
Premiums Written (2)
Year Ended December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property and casualty
$
93,362

 
$
1,123,896

 
$
443,802

 
$
936,131

 
$
55,284

 
$
652,433

 
$
202,892

 
$
83,540

 
$
—

 
$
964,970

Life, accident and health (1)
70,750

 
1,350,503

 
71

 
87,270

 
51,538

 
91,334

 
8,121

 
19,881

 
20,079

 
—

Total
$
164,112

 
$
2,474,399

 
$
443,873

 
$
1,023,401

 
$
106,822

 
$
743,767

 
$
211,013

 
$
103,421

 
$
20,079

 
$
964,970

Year Ended December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property and casualty
$
90,547

 
$
1,003,895

 
$
414,971

 
$
851,695

 
$
46,559

 
$
520,087

 
$
180,183

 
$
83,631

 
$
—

 
$
887,874

Life, accident and health (1)
77,717

 
1,372,358

 
86

 
79,195

 
54,222

 
79,946

 
6,634

 
19,306

 
23,680

 
—

Total
$
168,264

 
$
2,376,253

 
$
415,057

 
$
930,890

 
$
100,781

 
$
600,033

 
$
186,817

 
$
102,937

 
$
23,680

 
$
887,874

Year Ended December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property and casualty
$
72,861

 
$
969,437

 
$
378,635

 
$
766,939

 
$
44,236

 
$
509,811

 
$
161,310

 
$
79,117

 
$
—

 
$
804,715

Life, accident and health (1)
66,858

 
1,447,764

 
90

 
61,391

 
60,373

 
63,055

 
6,139

 
15,754

 
30,245

 
—

Total
$
139,719

 
$
2,417,201

 
$
378,725

 
$
828,330

 
$
104,609

 
$
572,866

 
$
167,449

 
$
94,871

 
$
30,245

 
$
804,715

(1)
Annuity deposits are included in future policy benefits, losses, claims and loss expenses.
(2)
Pursuant to Regulation S-X, premiums written does not apply to life insurance companies.






149

Schedule IV. Reinsurance
(In thousands)
Gross Amount
 
Ceded to Other Companies
 
Assumed From Other Companies
 
Net Amount
 
Percentage of Amount Assumed to Net Earned
Year Ended December 31, 2016
 

 
 

 
 

 
 

 
 
Life insurance in force
$
5,314,548

 
$
1,023,197

 
$
—

 
$
4,291,351

 
 
Premiums earned
 
 
 
 
 
 
 
 
 
Property and casualty insurance
$
977,090

 
$
57,996

 
$
17,037

 
$
936,131

 
1.82
%
Life, accident and health insurance
90,038

 
2,768

 
—

 
87,270

 
—
%
Total
$
1,067,128

 
$
60,764

 
$
17,037

 
$
1,023,401

 
1.66
%
Year Ended December 31, 2015
 
 
 
 
 
 
 
 
 
Life insurance in force
$
5,491,932

 
$
1,165,868

 
$
—

 
$
4,326,064

 
 
Premiums earned
 
 
 
 
 
 
 
 
 
Property and casualty insurance
$
890,057

 
$
56,758

 
$
18,396

 
$
851,695

 
2.16
%
Life, accident and health insurance
82,356

 
3,161

 
—

 
79,195

 
—
%
Total
$
972,413

 
$
59,919

 
$
18,396

 
$
930,890

 
1.98
%
Year Ended December 31, 2014
 
 
 
 
 
 
 
 
 
Life insurance in force
$
5,366,061

 
$
1,130,059

 
$
—

 
$
4,236,002

 
 
Premiums earned
 
 
 
 
 
 
 
 
 
Property and casualty insurance
$
800,492

 
$
49,818

 
$
16,265

 
$
766,939

 
2.12
%
Life, accident and health insurance
64,350

 
2,959

 
—

 
61,391

 
—
%
Total
$
864,842

 
$
52,777

 
$
16,265

 
$
828,330

 
1.96
%




150

Schedule V. Valuation And Qualifying Accounts
(In thousands)
Balance at beginning of period
 
Charged to costs and expenses
 
Deductions
 
Balance at end of period
Description
 
 
 
Allowance for bad debts
 
 
 
 
 
 
 
Year Ended December 31, 2016
$
867

 
$
388

 
$
—

 
$
1,255

Year Ended December 31, 2015
618

 
249

 
—

 
867

Year Ended December 31, 2014
896

 
—

 
278

 
618

 
 
 
 
 
 
 
 
Deferred tax asset valuation allowance (1)
 
 
 
 
 
 
 
Year Ended December 31, 2016
$
1,265

 
$
—

 
$
547

 
$
718

Year Ended December 31, 2015
1,813

 
—

 
548

 
1,265

Year Ended December 31, 2014
2,361

 
—

 
548

 
1,813

(1)
Recorded in connection with the purchase of American Indemnity Financial Corporation in 1999.




151

Schedule VI. Supplemental Information Concerning Property and Casualty Insurance Operations
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Affiliation with Registrant: United Fire & Casualty Company and consolidated property and casualty subsidiaries
 
 
 
 
 
 
 
 
 
 
 
 
Claims and Claim Adjustment Expenses Incurred Related to:
 
Amortization of Deferred Policy Acquisition Costs (1)
 
 
 
 
 
 
Reserves for Unpaid Claims and Claim Adjustment Expenses
 
 
 
 
 
Net Realized Investment Gains
 
 
 
 
 
 
 
 
Deferred Policy Acquisition Costs
 
 
 
 
 
 
 
Net Investment Income
 
 
 
Paid Claims and Claim Adjustment Expenses
 
 
 
 
Unearned Premiums
 
Earned Premiums
 
 
 
Current Year
 
Prior Years
 
 
 
Premiums Written
2016
$
93,362

 
$
1,123,896

 
$
443,802

 
$
936,131

 
$
4,947

 
$
55,284

 
$
683,662

 
$
(31,229
)
 
$
202,892

 
$
537,573

 
$
964,970

2015
$
90,547

 
$
1,003,895

 
$
414,971

 
$
851,695

 
$
1,124

 
$
46,559

 
$
560,482

 
$
(40,395
)
 
$
180,183

 
$
476,525

 
$
887,874

2014
$
72,861

 
$
969,437

 
$
378,635

 
$
766,939

 
$
4,177

 
$
44,236

 
$
566,555

 
$
(56,744
)
 
$
161,310

 
$
489,631

 
$
804,715




152

ITEM 16. FORM 10-K SUMMARY
None.



153

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNITED FIRE GROUP, INC.
By:
/s/ Randy A. Ramlo
 
Randy A. Ramlo, Chief Executive Officer, Director and Principal Executive Officer
 
 
Date:
2/28/2017
 
 
By:
/s/ Dawn M. Jaffray
 
Dawn M. Jaffray, Senior Vice President, Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer
 
 
Date:
2/28/2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
By
/s/ Jack B. Evans
 
By
/s/ John P. Besong
 
Jack B. Evans, Chairman and Director
 
 
John P. Besong, Director
Date
2/28/2017
 
Date
2/28/2017
 
 
 
 
 
By
/s/ Scott L. Carlton
 
By:
/s/ Brenda K. Clancy
 
Scott L. Carlton, Director
 
 
Brenda K. Clancy, Director
Date
2/28/2017
 
Date
2/28/2017
 
 
 
 
 
By
/s/ Christopher R. Drahozal
 
By
/s/ Sarah Fisher Gardial
 
Christopher R. Drahozal, Director
 
 
Sarah Fisher Gardial, Director
Date
2/28/2017
 
Date
2/28/2017
 
 
 
 
 
By
/s/ Dawn M. Jaffray
 
By
/s/ Casey D. Mahon
 
Dawn M. Jaffray, Senior Vice President, Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer
 
 
Casey D. Mahon, Director
Date
2/28/2017
 
Date
2/28/2017
 
 
 
 
 
By
/s/ George D. Milligan
 
By
/s/ James W. Noyce
 
George D. Milligan, Director
 
 
James W. Noyce, Vice Chairman and Director
Date
2/28/2017
 
Date
2/28/2017
 
 
 
 
 
By
/s/ Mary K. Quass
 
By
/s/ Randy A. Ramlo
 
Mary K. Quass, Director
 
 
Randy A. Ramlo, Chief Executive Officer, Director and Principal Executive Officer
Date
2/28/2017
 
Date
2/28/2017
 
 
 
 
 
By
/s/ Kyle D. Skogman
 
By
/s/ Susan E. Voss
 
Kyle D. Skogman, Director
 
 
Susan E. Voss, Director
Date
2/28/2017
 
Date
2/28/2017



154

Exhibit Index
 
 
 
 
 
Incorporated by reference
Exhibit number
Exhibit description
Filed herewith
 
Form
 
Period ending
 
Exhibit
 
Filing date
2.1

 
Agreement and Plan of Reorganization among United Fire & Casualty Company, United Fire Group, Inc. and UFC MergeCo, Inc.
 
 
8-K
 
 
 
2.1

 
5/25/2011
3.1

 
Articles of Incorporation of United Fire Group, Inc.
 
 
S-4
 
 
 
Annex II

 
5/25/2011
3.2

 
Articles of Amendment to Articles of Incorporation of United Fire Group, Inc.
 
 
8-K
 
 
 
3.1

 
5/26/2015
3.3

 
Bylaws of United Fire Group, Inc.
 
 
S-4
 
 
 
Annex III

 
5/25/2011
10.1

 
Employee Stock Purchase Plan
 
 
10-K
 
12/31/2007
 
10.2

 
2/27/2008
10.2

*
2005 Non-qualified Non-employee Director Stock Option and Restricted Stock Plan (as amended)
 
 
DEF14A
 
 
 
Exhibit A

 
4/18/2011
10.4

*
United Fire Group, Inc. Amended and Restated Annual Incentive Plan (Amended February 24, 2012)
 
 
10-K
 
12/31/2011
 
10.4

 
3/15/2012
10.5

*
Non-qualified Deferred Compensation Plan
 
 
10-Q
 
9/30/2007
 
10.3

 
10/25/2007
10.6

*
United Fire Group, Inc. Stock Plan, amended as of February 21, 2014 (amending and restating the United Fire & Casualty Company 2008 Stock Plan) (the "Stock Plan")
 
 
DEF14A
 
 
 
App A

 
4/8/2014
10.7

*
Form of Non-qualified Employee Stock Option Agreement under the Stock Plan
 
 
10-K
 
12/31/2007
 
10.7

 
2/27/2008
10.8

*
Form of Option Issued Pursuant to the 2005 Non-qualified Non-employee Director Stock Option and Restricted Stock Plan
 
 
10-K
 
12/31/2007
 
10.8

 
2/27/2008
10.9

*
Form of Stock Award Agreement under the Stock Plan
 
 
8-K
 
 
 
99.2

 
5/22/2008
10.10

*
Form of Non-qualified Stock Option Agreement for the Purchase of Stock under the Stock Plan
 
 
8-K
 
 
 
99.3

 
5/22/2008
10.11

*
Form of Incentive Stock Option Agreement for the Purchase of Stock under the Stock Plan
 
 
8-K
 
 
 
99.4

 
5/22/2008
10.12

*
Amendment to Non-qualified Stock Option Agreements for John A. Rife
 
 
8-K/A
 
 
 
99.1

 
2/24/2009
10.13

*
Form of Restricted Stock Agreement under the 2005 Non-qualified Non-employee Director Stock Option and Restricted Stock Plan
 
 
10-K
 
12/31/2011
 
10.14

 
3/15/2012
10.14

*
Director’s Restricted Stock Agreement amended
 
 
10-Q
 
6/30/2016
 
10.1

 
8/3/2016
10.14

*
United Fire Group, Inc. Plan for Allocation of Equity Compensation to Management Team
 
 
10-K
 
12/31/2011
 
10.15

 
3/15/2012
10.15

*
Deferred Compensation Plan for United Fire Group, Inc. Non-Employee Directors
 
 
8-K
 
 
 
10.1

 
11/19/2012
10.16

*
United Fire Group, Inc. Executive Nonqualified Excess Plan
 
 
8-K
 
 
 
0.0101

 
5/22/2014
10.17

*
United Fire & Casualty Company Executive Nonqualified Excess Plan Adoption Agreement
 
 
8-K
 
 
 
0.0102

 
5/22/2014
10.18

*
United Fire & Casualty Company Rabbi Directed Trust Agreement
 
 
8-K
 
 
 
0.0103

 
5/22/2014
10.19

*
United Fire Group, Inc. Template Change in Control Severance Agreement
 
 
8-K
 
 
 
0.0104

 
5/22/2014
*Indicates a management contract or compensatory plan or arrangement.


155

Exhibit Index
 
 
 
 
 
Incorporated by reference
Exhibit number
Exhibit description
Filed herewith
 
Form
 
Period ending
 
Exhibit
 
Filing date
10.20

*
Amendment Number One to United Fire & Casualty Company Nonqualified Deferred Compensation Plan
 
 
8-K
 
 
 
0.0105

 
5/22/2014
10.21

*
Form of Non-Qualified Employee Stock Option Agreement under the United Fire Group, Inc. Stock Plan
 
 
10-Q
 
6/30/14
 
10.7

 
8/5/2014
10.22

*
Form of Stock Award Agreement under the United Fire Group, Inc. Stock Plan
 
 
10-Q
 
6/30/14
 
10.8

 
8/5/2014
10.24

 
Credit Agreement between United Fire & Casualty Company and syndicated lenders
 
 
8-K
 
 
 
10.1

 
12/23/2011
10.25

 
First Amendment to Credit Agreement between United Fire & Casualty Company and syndicated lenders
 
 
8-K
 
 
 
10.1

 
1/30/2012
10.26

 
Second Amendment to Credit Agreement between United Fire & Casualty Company and syndicated lenders
 
 
8-K
 
 
 
10.1

 
12/21/2012
10.27

 
Assignment, Joinder, Assumption, and Release Agreement, between and among United Fire Group, Inc., United Fire & Casualty Company, a syndicate of financial institutions, as lenders party thereto, and KeyBank National Association, as Administrative Agent, Lead Arranger, Sole Book Runner, Swingline Lender, and Letter of Credit Issuer
 
 
8-K
 
 
 
10.1

 
6/5/2013
10.28

 
Credit Agreement dated as of February 2, 2016, by and among United Fire Group, Inc., as borrower, the lenders from time to time party thereto, and KeyBank National Association, as administrative agent, swingline lender and letter of credit issuer.
 
 
8-K
 
 
 
10.1

 
2/5/2016
11

 
Statement Re Computation of Per Share Earnings. All information required by Exhibit 11 is presented within Note 12 of the Notes to Consolidated Financial Statements
X
 
 
 
 
 
 

 
 
12

 
Statement Re Computation of Ratios
X
 
 
 
 
 
 
 
 
14

 
Code of Ethics
 
 
8-K/A
 
 
 
14.1

 
1/31/2013
21

 
Subsidiaries of the Registrant
X
 
 
 
 
 
 

 
 
23.1

 
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
X
 
 
 
 
 
 

 
 
23.2

 
Consent of Griffith, Ballard & Company, Independent Actuary
X
 
 
 
 
 
 

 
 
23.3

 
Consent of Regnier Consulting Group, Inc., Independent Actuary
X
 
 
 
 
 
 

 
 
31.1

 
Certification of Randy A. Ramlo Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
 
 
 
 
 
 

 
 
*Indicates a management contract or compensatory plan or arrangement.


156

Exhibit Index
 

 
 
 
 
Incorporated by reference
Exhibit number
Exhibit description
Filed herewith
 
Form
 
Period ending
 
Exhibit
 
Filing date
31.2

 
Certification of Dawn M. Jaffray Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
 
 
 
 
 
 
 
 
32.1

 
Certification of Randy A. Ramlo Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
 
 
 
 
 
 
 
 
32.2

 
Certification of Dawn M. Jaffray Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
 
 
 
 
 
 
 
 
101.1

 
The following financial information from United Fire Group, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2016 formatted in XBRL: (i) Consolidated Balance Sheets at December 31, 2016 and 2015; (ii) Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2016, 2015 and 2014; (iii) Consolidated Statement of Stockholders' Equity for the years ended December 31, 2016, 2015 and 2014; (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014; and (v) Notes to Consolidated Financial Statements.
X
 
 
 
 
 
 
 
 



157