XML 28 R11.htm IDEA: XBRL DOCUMENT v3.8.0.1
FAIR VALUE OF FINANCIAL INSTRUMENTS
12 Months Ended
Dec. 31, 2017
Fair Value Disclosures [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS
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 loan's fair value, which is a Level 3 fair value measurement.
The fair value of our policy loans is equivalent to carrying value, which is a reasonable estimate of fair value and 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.

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, 2017, the cash surrender value of the COLI policies was $4,029, 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.

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.























A summary of the carrying value and estimated fair value of our financial instruments from continuing operations at December 31, 2017 and 2016 is as follows:
 
December 31, 2017
 
December 31, 2016
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Assets
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Held-to-maturity securities
$
150

 
$
150

 
$
150

 
$
150

Available-for-sale securities
1,535,070

 
1,535,070

 
1,453,286

 
1,453,286

Trading securities
16,842

 
16,842

 
14,390

 
14,390

Equity securities:
 
 
 
 
 
 
 
Available-for-sale securities
280,913

 
280,913

 
246,370

 
246,370

Trading securities
6,431

 
6,431

 
5,644

 
5,644

Other long-term investments
49,352

 
49,352

 
51,769

 
51,769

Short-term investments
175

 
175

 
175

 
175

Cash and cash equivalents
95,562

 
95,562

 
89,194

 
89,194

Corporate-owned life insurance
4,029

 
4,029

 
2,592

 
2,592




A summary of the carrying value and estimated fair value of our financial instruments from discontinued operations at December 31, 2017 and 2016 is as follows:
 
December 31, 2017
 
December 31, 2016
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Assets
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Held-to-maturity securities
$
34

 
$
34

 
$
49

 
$
48

Available-for-sale securities
1,430,025

 
1,430,025

 
1,444,840

 
1,444,840

Equity securities:
 
 
 
 
 
 
 
Available-for-sale securities
23,653

 
23,653

 
24,046

 
24,046

Mortgage loans
3,594

 
3,435

 
3,895

 
3,706

Policy loans
5,815

 
5,815

 
5,366

 
5,366

Other long-term investments
16,437

 
16,437

 
15,870

 
15,870

Cash and cash equivalents
15,851

 
15,851

 
21,659

 
21,659

Liabilities
 
 
 
 
 
 
 
Policy reserves
 
 
 
 
 
 
 
Annuity (accumulations) (1)
$
591,702

 
$
611,866

 
$
646,764

 
$
666,711

Annuity (benefit payments)
147,038

 
93,560

 
144,283

 
95,129















The following tables present the categorization for our financial instruments measured at fair value on a recurring basis. The table include financial instruments from both continuing and discontinued operations at December 31, 2017 and 2016:
 
 
 
Fair Value Measurements
Description
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
U.S. Treasury
$
16,891

 
$

 
$
16,891

 
$

U.S. government agency
122,168

 

 
122,168

 

States, municipalities and political subdivisions
 
 
 
 
 
 
 
General obligations
 
 
 
 
 
 
 
   Midwest
109,696

 

 
109,696

 

   Northeast
48,641

 

 
48,641

 

   South
141,519

 

 
141,519

 

   West
113,011

 

 
113,011

 

Special revenue
 
 
 
 
 
 
 
   Midwest
158,744

 

 
158,744

 

   Northeast
79,760

 

 
79,760

 

   South
263,512

 

 
263,512

 

   West
158,307

 

 
158,307

 

Foreign bonds
52,753

 

 
52,753

 

Public utilities
209,144

 

 
209,144

 

Corporate bonds
 
 
 
 
 
 
 
Energy
95,053

 

 
95,053

 

Industrials
221,707

 

 
221,707

 

Consumer goods and services
186,257

 

 
185,589

 
668

Health care
75,408

 

 
75,408

 

Technology, media and telecommunications
148,979

 

 
148,979

 

Financial services
283,151

 

 
275,474

 
7,677

Mortgage-backed securities
13,691

 

 
13,691

 

Collateralized mortgage obligations
 
 
 
 
 
 
 
Government national mortgage association
157,483

 

 
157,483

 

Federal home loan mortgage corporation
199,152

 

 
199,152

 

Federal national mortgage association
105,432

 

 
105,432

 

Asset-backed securities
4,636

 

 
3,989

 
647

Total Available-For-Sale Fixed Maturities
$
2,965,095

 
$

 
$
2,956,103

 
$
8,992

Equity securities
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
Public utilities
$
22,439

 
$
22,439

 
$

 
$

Energy
14,565

 
14,565

 

 

Industrials
66,519

 
66,517

 
2

 

Consumer goods and services
25,688

 
25,688

 

 

Health care
40,103

 
40,103

 

 

Technology, media and telecommunications
17,508

 
17,508

 

 

Financial services
116,447

 
116,447

 

 

Nonredeemable preferred stocks
1,297

 
415

 

 
882

Total Available-for-Sale Equity Securities
$
304,566

 
$
303,682

 
$
2

 
$
882

Total Available-for-Sale Securities
$
3,269,661

 
$
303,682

 
$
2,956,105

 
$
9,874

TRADING
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
Corporate bonds
 
 
 
 
 
 
 
Industrials
$
2,220

 
$

 
$
2,220

 
$

Consumer goods and services
1,535

 

 
1,535

 

Health care
3,741

 

 
3,741

 

Technology, media and telecommunications
1,221

 

 
1,221

 

Financial services
5,566

 

 
5,566

 

Redeemable preferred stocks
2,559

 
2,559

 

 

Equity securities
 
 
 
 
 
 
 
Public utilities
874

 
874

 

 

Energy
190

 
190

 

 

Industrials
989

 
989

 

 

Consumer goods and services
1,314

 
1,314

 

 

Health care
325

 
325

 

 

     Financial Services
198

 
198

 

 

Nonredeemable preferred stocks
2,541

 
2,541

 

 

Total Trading Securities
$
23,273

 
$
8,990

 
$
14,283

 
$

Short-Term Investments
$
175

 
$
175

 
$

 
$

Money Market Accounts
$
16,824

 
$
16,824

 
$

 
$

Corporate-Owned Life Insurance
$
4,029

 
$

 
$
4,029

 
$

Total Assets Measured at Fair Value
$
3,313,962

 
$
329,671

 
$
2,974,417

 
$
9,874


 
 
 
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

 

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






































The following tables are a reconciliation for both continuing and discontinued operations of the presentation of the categorization for our financial instruments measured at fair value on a recurring basis at December 31, 2017 and 2016:
December 31, 2017
 
 
Fair Value Measurements
Description
Total
 
Level 1
 
Level 2
 
Level 3
AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Continuing operations
$
1,535,070

 
$

 
$
1,534,323

 
$
747

Discontinued operations
1,430,025

 

 
1,421,780

 
8,245

Total Available-for-Sale Fixed Maturities
$
2,965,095

 
$


$
2,956,103


$
8,992

Equity securities:

 
 
 
 
 
 
Continuing operations
$
280,913

 
$
280,031

 
$

 
$
882

Discontinued operations
23,653

 
23,651

 
2

 

Total Available-for-Sale Equity Securities
$
304,566

 
$
303,682


$
2


$
882

Total Available-for-Sale Securities
$
3,269,661

 
$
303,682


$
2,956,105


$
9,874

TRADING

 
 
 
 
 
 
Fixed maturities:

 
 
 
 
 
 
Continuing operations
$
16,842

 
$
2,559

 
$
14,283

 
$

Discontinued operations

 

 

 

Equity securities:

 
 
 
 
 
 
Continuing operations
6,431

 
6,431

 

 

Discontinued operations

 

 

 

Total Trading Securities
$
23,273

 
$
8,990


$
14,283


$

SHORT-TERM INVESTMENTS

 
 
 
 
 
 
Continuing operations
$
175

 
$
175

 
$

 
$

Discontinued operations

 

 

 

Short-Term Investments
$
175

 
$
175


$


$

MONEY MARKET ACCOUNTS

 
 
 
 
 
 
Continuing operations
$
6,147

 
$
6,147

 
$

 
$

Discontinued operations
10,677

 
10,677

 

 

Money Market Accounts
$
16,824

 
$
16,824


$


$

CORPORATE-OWNED LIFE INSURANCE

 
 
 
 
 
 
Continuing operations
$
4,029

 
$

 
$
4,029

 
$

Discontinued operations

 

 

 

Corporate-Owned Life Insurance
$
4,029

 
$


$
4,029


$

Total Assets Measured at Fair Value
$
3,313,962

 
$
329,671


$
2,974,417


$
9,874

December 31, 2016
 
 
Fair Value Measurements
Description
Total
 
Level 1
 
Level 2
 
Level 3
AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Continuing operations
$
1,453,286

 
$

 
$
1,452,737

 
$
549

Discontinued operations
1,444,840

 

 
1,434,878

 
9,962

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

 
$


$
2,887,615


$
10,511

Equity securities:

 
 
 
 
 
 
Continuing operations
$
246,370

 
$
243,627

 
$

 
$
2,743

Discontinued operations
24,046

 
22,202

 

 
1,844

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:

 
 
 
 
 
 
Continuing operations
$
14,390

 
$
1,305

 
$
13,085

 
$

Discontinued operations

 

 

 

Equity securities:

 
 
 
 
 
 
Continuing operations
5,644

 
5,644

 

 

Discontinued operations

 

 

 

Total Trading Securities
$
20,034

 
$
6,949


$
13,085


$

SHORT-TERM INVESTMENTS

 
 
 
 
 
 
Continuing operations
$
175

 
$
175

 
$

 
$

Discontinued operations

 

 

 

Short-Term Investments
$
175

 
$
175


$


$

MONEY MARKET ACCOUNTS

 
 
 
 
 
 
Continuing operations
$
4,810

 
$
4,810

 
$

 
$

Discontinued operations
11,992

 
11,992

 

 

Money Market Accounts
$
16,802

 
$
16,802


$


$

CORPORATE-OWNED LIFE INSURANCE

 
 
 
 
 
 
Continuing operations
$
2,592

 
$

 
$
2,592

 
$

Discontinued operations

 

 

 

Corporate-Owned Life Insurance
$
2,592

 
$


$
2,592


$

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

 
$
289,755


$
2,903,292


$
15,098


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 receive them primarily from 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 for pricing. 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, 2017 and 2016 was reasonable.

For the year ended December 31, 2017, 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, 2017, 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 underlying security to estimate fair value. During the twelve month period ended December 31, 2017, 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, from both continuing and discontinued operations for 2017:
 
States, municipalities and political subdivisions
 
Corporate bonds
 
Asset-backed securities
 
Equities
 
Total
Balance at January 1, 2017
$
168

 
$
9,894

 
$
449

 
$
4,587

 
$
15,098

Unrealized gains (losses) (1)
(8
)
 
(129
)
 
198

 
287

 
348

Purchases

 
100

 

 
145

 
245

Disposals
(160
)
 
(1,520
)
 

 
(4,137
)
 
(5,817
)
Balance at December 31, 2017
$

 
$
8,345

 
$
647

 
$
882

 
$
9,874


(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, from both continuing and discontinued operations 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

Realized gains (losses) (1)

 

 

 

 

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 fixed maturities reported as disposals relate to the receipt of principal on calls or sinking fund bonds, in accordance with the indentures.