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EX-32.1 - EXHIBIT 32.1 - UNITED FIRE GROUP INCexhibit321063014.htm
EX-31.2 - EXHIBIT 31.2 - UNITED FIRE GROUP INCexhibit312063014.htm
EX-10.8 - EXHIBIT 10.8 - UNITED FIRE GROUP INCexhibit1080630142.htm
EX-10.7 - EXHIBIT 10.7 - UNITED FIRE GROUP INCexhibit107063014.htm
EX-31.1 - EXHIBIT 31.1 - UNITED FIRE GROUP INCexhibit311063014.htm
EX-32.2 - EXHIBIT 32.2 - UNITED FIRE GROUP INCexhibit322063014.htm
EXCEL - IDEA: XBRL DOCUMENT - UNITED FIRE GROUP INCFinancial_Report.xls

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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

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

for the quarterly period ended June 30, 2014

Commission File Number 001-34257
_____________________________
 UNITED FIRE GROUP, INC.
(Exact name of registrant as specified in its charter)
____________________________
 
 
 
Iowa
 
45-2302834
 
 
 
 
(State of Incorporation)
 
(IRS Employer Identification No.)
 
 

118 Second Avenue, S.E., Cedar Rapids, Iowa 52401
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (319) 399-5700

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES R NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES R NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o 
 
Accelerated filer R 
 
Non-accelerated filer o 
 
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO R
As of August 1, 2014, 25,212,125 shares of common stock were outstanding.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



United Fire Group, Inc.
Index to Quarterly Report on Form 10-Q
June 30, 2014
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 4. Mine Safety Disclosures
 
 
 
 
 
 



FORWARD-LOOKING INFORMATION
This report may contain forward-looking statements about our operations, anticipated performance and other similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor under the Securities Act of 1933 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. (the "Company", "we", "us", or "our"), the industry in which we operate, and beliefs and assumptions made by management. Words such as "expect(s)," "anticipate(s)," "intend(s)," "plan(s)," "believe(s)," "continue(s)," "seek(s)," "estimate(s)," "goal(s)," "target(s)," "forecast(s)," "project(s)," "predict(s)," "should," "could," "may," "will continue," "might," "hope," "can" and other words and terms of similar meaning or expression in connection with a discussion of future operations, financial performance or financial condition, are intended to identify forward-looking statements. See Part I, Item 1A "Risk Factors" in our 2013 Annual Report on Form 10-K and Part II, Item 1A "Risk Factors" of this report for more information concerning factors that could cause actual results to differ materially from those in the forward-looking statements.
Risks and uncertainties that may affect the actual financial condition and results of the Company include but are not limited to the following:

The frequency and severity of claims, including those related to catastrophe losses and the impact those claims have on our loss reserve adequacy;
The 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;
Unauthorized data access, cyber-attacks and other security breaches;
Occurrence of catastrophic events, occurrence of significant severe weather conditions, climate change, acts of terrorism, acts of war and pandemics;
Developments in the domestic and global financial markets and other-than-temporary impairment losses that could affect our investment portfolio;
Our ability to effectively underwrite and adequately price insured risks;
The calculation and recovery of deferred policy acquisition costs ("DAC");
The valuation of pension and other postretirement benefit obligations;
Our relationship with our agencies and agents;
Our relationship with and financial strength of our reinsurers;
Our exposure to international catastrophes through our assumed reinsurance program;
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;
Changes in general economic conditions, interest rates, industry trends, increase in competition and significant industry developments;
Competitive, legal, regulatory or tax changes that affect the distribution cost or demand for our products;
Litigation or regulatory actions that could require us to pay significant damages or change the way we do business;
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; and
NASDAQ policies or regulations relating to corporate governance and the cost to comply.

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


1


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.



2


PART I — FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
United Fire Group, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Data)
June 30,
2014
 
December 31,
2013
 
(unaudited)
 
 
ASSETS
 
 
 
Investments
 
 
 
Fixed maturities
 
 
 
Held-to-maturity, at amortized cost (fair value $640 in 2014 and $669 in 2013)
$
630

 
$
656

Available-for-sale, at fair value (amortized cost $2,749,458 in 2014 and $2,733,557 in 2013)
2,824,018

 
2,751,256

Trading securities, at fair value (amortized cost $15,467 in 2014 and $8,049 in 2013)
18,305

 
9,940

Equity securities
 
 
 
Available-for-sale, at fair value (cost $71,685 in 2014 and $70,957 in 2013)
239,244

 
229,368

Trading securities, at fair value (cost $2,740 in 2014 and $2,367 in 2013)
3,206

 
2,487

Mortgage loans
4,313

 
4,423

Policy loans
6,200

 
6,261

Other long-term investments
48,707

 
44,946

Short-term investments
475

 
800

 
3,145,098

 
3,050,137

Cash and cash equivalents
90,276

 
92,193

Accrued investment income
27,159

 
27,923

Premiums receivable (net of allowance for doubtful accounts of $993 in 2014 and $896 in 2013)
268,094

 
218,635

Deferred policy acquisition costs
143,314

 
150,092

Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $39,109 in 2014 and $36,972 in 2013)
48,001

 
47,218

Reinsurance receivables and recoverables
81,314

 
87,451

Prepaid reinsurance premiums
3,770

 
3,160

Income taxes receivable
3,891

 
1,786

Goodwill and intangible assets
26,662

 
27,047

Other assets
14,331

 
15,030

TOTAL ASSETS
$
3,851,910

 
$
3,720,672

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Future policy benefits and losses, claims and loss settlement expenses
 
 
 
Property and casualty insurance
$
981,927

 
$
960,651

Life insurance
1,470,647

 
1,472,132

Unearned premiums
395,146

 
340,464

Accrued expenses and other liabilities
140,058

 
142,677

Deferred income taxes
37,866

 
21,915

TOTAL LIABILITIES
$
3,025,644

 
$
2,937,839

Stockholders’ Equity
 
 
 
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,240,105 and 25,360,893 shares issued and outstanding in 2014 and 2013, respectively
$
25

 
$
25

Additional paid-in capital
208,366

 
211,574

Retained earnings
498,470

 
484,084

Accumulated other comprehensive income, net of tax
119,405

 
87,150

TOTAL STOCKHOLDERS’ EQUITY
$
826,266

 
$
782,833

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
3,851,910

 
$
3,720,672

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


3


United Fire Group, Inc.
Consolidated Statements of Income and Comprehensive Income (Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In Thousands, Except Share Data)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
Net premiums earned
$
201,827

 
$
186,367

 
$
395,168

 
$
363,184

Investment income, net of investment expenses
27,603

 
29,019

 
54,365

 
55,483

Net realized investment gains (includes reclassifications for net unrealized investment gains on available-for-sale securities of $1,606 and $3,088 in 2014; and $4,417 and $5,653 in 2013; previously included in accumulated other comprehensive income (loss))
2,708

 
4,151

 
4,902

 
6,060

Other income
535

 
182

 
1,142

 
297

Total revenues
$
232,673

 
$
219,719

 
$
455,577

 
$
425,024

Benefits, Losses and Expenses
 
 
 
 
 
 
 
Losses and loss settlement expenses
$
142,716

 
$
120,435

 
$
267,953

 
$
217,905

Increase in liability for future policy benefits
8,077

 
9,869

 
15,898

 
18,105

Amortization of deferred policy acquisition costs
40,196

 
36,708

 
79,730

 
74,789

Other underwriting expenses (includes reclassifications for employee benefit costs of $768 and $1,536 in 2014; and $1,243 and $2,485 in 2013; previously included in accumulated other comprehensive income (loss))
20,776

 
23,308

 
47,204

 
45,656

Interest on policyholders’ accounts
7,852

 
9,081

 
15,839

 
18,401

Total benefits, losses and expenses
$
219,617

 
$
199,401

 
$
426,624

 
$
374,856

Income before income taxes
$
13,056

 
$
20,318

 
$
28,953

 
$
50,168

Federal income tax expense (includes reclassifications of $293 and $543 in 2014; and $1,111 and $1,109 in 2013; previously included in accumulated other comprehensive income (loss))
2,371

 
4,822

 
4,937

 
12,279

Net income
$
10,685

 
$
15,496

 
$
24,016

 
$
37,889

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

 
$
(51,782
)
 
$
51,177

 
$
(37,294
)
Change in liability for underfunded employee benefit plans

 

 

 

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

 
$
(51,782
)
 
$
51,177

 
$
(37,294
)
Income tax effect
(9,488
)
 
18,115

 
(17,913
)
 
13,045

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

 
$
(33,667
)
 
$
33,264

 
$
(24,249
)
Reclassification adjustment for net realized investment gains included in income
$
(1,606
)
 
$
(4,417
)
 
$
(3,088
)
 
$
(5,653
)
Reclassification adjustment for employee benefit costs included in expense
768

 
1,243

 
1,536

 
2,485

Total reclassification adjustments, before tax
$
(838
)
 
$
(3,174
)
 
$
(1,552
)
 
$
(3,168
)
Income tax effect
293

 
1,111

 
$
543

 
$
1,109

Total reclassification adjustments, after tax
$
(545
)
 
$
(2,063
)
 
$
(1,009
)
 
$
(2,059
)
Comprehensive income (loss)
$
27,760

 
$
(20,234
)
 
$
56,271

 
$
11,581

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
25,330,066

 
25,297,718

 
25,351,056

 
25,271,752

Basic earnings per common share
$
0.42

 
$
0.61

 
$
0.95

 
$
1.50

Diluted earnings per common share
0.42

 
0.61

 
0.94

 
1.49

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


4


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

(In Thousands, Except Share Data)
Six Months Ended June 30, 2014
 
 
Common stock
 
Balance, beginning of year
$
25

Shares repurchased (201,516 shares)

Shares issued for stock-based awards (69,050 shares)

Balance, end of period
$
25

 
 
Additional paid-in capital
 
Balance, beginning of year
$
211,574

Compensation expense and related tax benefit for stock-based award grants
902

Shares repurchased
(5,567
)
Shares issued for stock-based awards
1,457

Balance, end of period
$
208,366

 
 
Retained earnings
 
Balance, beginning of year
$
484,084

Net income
24,016

Dividends on common stock ($0.38 per share)
(9,630
)
Balance, end of period
$
498,470

 
 
Accumulated other comprehensive income, net of tax
 
Balance, beginning of year
$
87,150

Change in net unrealized investment appreciation(1)
31,257

Change in liability for underfunded employee benefit plans(2)
998

Balance, end of period
$
119,405

 
 
Summary of changes
 
Balance, beginning of year
$
782,833

Net income
24,016

All other changes in stockholders’ equity accounts
19,417

Balance, end of period
$
826,266

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

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



5


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

Six Months Ended June 30,
(In Thousands)
2014
 
2013
Cash Flows From Operating Activities
 
 
 
Net income
$
24,016

 
$
37,889

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Net accretion of bond premium
7,601

 
7,989

Depreciation and amortization
3,757

 
2,930

Stock-based compensation expense
944

 
818

Net realized investment gains
(4,902
)
 
(6,060
)
Net cash flows from trading investments
(7,481
)
 
1,285

Deferred income tax benefit
(1,346
)
 
(2,096
)
Changes in:
 
 
 
Accrued investment income
764

 
994

Premiums receivable
(49,459
)
 
(49,357
)
Deferred policy acquisition costs
(11,143
)
 
(3,288
)
Reinsurance receivables
6,137

 
9,625

Prepaid reinsurance premiums
(610
)
 
(573
)
Income taxes receivable
(2,105
)
 
16,536

Other assets
699

 
1,182

Future policy benefits and losses, claims and loss settlement expenses
37,769

 
10,716

Unearned premiums
54,682

 
42,827

Accrued expenses and other liabilities
(1,083
)
 
(2,465
)
Income taxes payable

 
1,567

Deferred income taxes
(72
)
 
2,720

Other, net
(2,975
)
 
(2,834
)
Total adjustments
$
31,177

 
$
32,516

Net cash provided by operating activities
$
55,193

 
$
70,405

Cash Flows From Investing Activities
 
 
 
Proceeds from sale of available-for-sale investments
$
10

 
$
5,971

Proceeds from call and maturity of held-to-maturity investments
26

 
180

Proceeds from call and maturity of available-for-sale investments
249,251

 
238,639

Proceeds from short-term and other investments
1,648

 
1,882

Purchase of available-for-sale investments
(270,194
)
 
(295,586
)
Purchase of short-term and other investments
(1,938
)
 
(2,575
)
Net purchases and sales of property and equipment
(4,154
)
 
(2,659
)
Net cash used in investing activities
$
(25,351
)
 
$
(54,148
)
Cash Flows From Financing Activities
 
 
 
Policyholders’ account balances
 
 
 
Deposits to investment and universal life contracts
$
96,119

 
$
52,086

Withdrawals from investment and universal life contracts
(114,096
)
 
(87,827
)
Payment of cash dividends
(9,630
)
 
(8,342
)
Repurchase of common stock
(5,567
)
 
(99
)
Issuance of common stock
1,457

 
1,465

Tax impact from issuance of common stock
(42
)
 
(217
)
Net cash used in financing activities
$
(31,759
)
 
$
(42,934
)
Net Change in Cash and Cash Equivalents
$
(1,917
)
 
$
(26,677
)
Cash and Cash Equivalents at Beginning of Period
92,193

 
107,466

Cash and Cash Equivalents at End of Period
$
90,276

 
$
80,789

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


6



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

NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Business
United Fire Group, Inc. ("United Fire", the "Registrant", the "Company", "we", "us", or "our") and its consolidated subsidiaries and affiliates are engaged in the business of writing property and casualty insurance and life insurance and selling annuities through a network of independent agencies. We report our operations in two business segments: property and casualty insurance and life insurance. Our insurance company subsidiaries are licensed as a property and casualty insurer in 43 states and the District of Columbia, and as a life insurer in 37 states.
Basis of Presentation
The unaudited consolidated interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X promulgated by the SEC. Certain financial information that is included in our Annual Report on Form 10-K, including certain financial statement footnote disclosures, are not required by the rules and regulations of the SEC for interim financial reporting and have been condensed or omitted.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The financial statement categories that are most dependent on management estimates and assumptions include: investments; deferred policy acquisition costs; reinsurance receivables and recoverables (for net realizable value); future policy benefits and losses, claims and loss settlement expenses; and pension and postretirement benefit obligations.
In the preparation of the accompanying unaudited Consolidated Financial Statements, we have evaluated all material subsequent events or transactions that occurred after the balance sheet date through the date on which the financial statements were issued for potential recognition or disclosure.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Management of United Fire believes the accompanying unaudited Consolidated Financial Statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. All significant intercompany transactions have been eliminated in consolidation. The results reported for the interim periods are not necessarily indicative of the results of operations that may be expected for the year. The unaudited Consolidated Financial Statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013. The review report of Ernst & Young LLP as of June 30, 2014 and for the three- and six-month periods ended June 30, 2014 and 2013 accompanies the unaudited Consolidated Financial Statements included in Part I, Item 1 "Financial Statements."
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash, money market accounts, and non-negotiable certificates of deposit with original maturities of three months or less.
For the six-month periods ended June 30, 2014 and 2013, we made payments for income taxes totaling $9,115 and $2,512, respectively. We received tax refunds of $615 and $8,744, respectively, during the six-month periods ended June 30, 2014 and 2013.


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For the six-month periods ended June 30, 2014 and 2013, we made no interest payments (excluding interest credited to policyholders’ accounts).
Deferred Policy Acquisition Costs ("DAC")

Certain costs associated with underwriting new business (primarily commissions, premium taxes and variable underwriting and policy issue expenses associated with successful acquisition efforts) are deferred. The following table is a summary of the components of DAC, including the related amortization recognized for the six-month period ended June 30, 2014.
 
 
 
 
 
Property & Casualty Insurance
 
Life Insurance
 
Total
Recorded asset at beginning of period
$
67,663

 
$
82,429

 
$
150,092

Underwriting costs deferred
87,193

 
3,680

 
90,873

Amortization of deferred policy acquisition costs
(76,378
)
 
(3,352
)
 
(79,730
)
Ending unamortized deferred policy acquisition costs
$
78,478

 
$
82,757

 
$
161,235

Change in "shadow" deferred policy acquisition costs

 
(17,921
)
 
(17,921
)
Recorded asset at end of period
$
78,478

 
$
64,836

 
$
143,314


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.

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

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

The effect on DAC that results from the assumed realization of unrealized gains (losses) on investments allocated to non-traditional life insurance business is recognized with an offset, or "shadow" DAC, to net unrealized investment appreciation as of the balance sheet date. The "shadow" DAC adjustment decreased the DAC asset by $14,514 at June 30, 2014 and increased the DAC asset by $3,407 at December 31, 2013.
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.
We reported a federal income tax expense of $4,937 and $12,279 for the six-month periods ended June 30, 2014 and 2013, respectively. Our effective tax rate is different than the federal statutory rate of 35.0 percent due principally to the effect of tax-exempt municipal bond interest income and non-taxable dividend income.


8


We did not recognize any liability for unrecognized tax benefits at June 30, 2014 or December 31, 2013. 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.
Recently Issued Accounting Standards
Adopted Accounting Standards in 2014

Unrecognized tax benefit
In July 2013, the FASB issued guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The new guidance was effective for annual and interim periods beginning after December 15, 2013. The Company currently does not have any liability for unrecognized tax benefits. The Company adopted the new guidance effective January 1, 2014. The adoption of the new guidance had no impact on the Company's financial position or results of operations.
Pending Adoption of Accounting Standards
Share Based Payments

In June 2014, the FASB issued new guidance on the accounting for share based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The new guidance requires a performance target that affects vesting and that could be achieved after the service period, be treated as a performance condition. The guidance is effective for interim and annual periods beginning after December 15, 2015. The amendments can be applied prospectively or retrospectively and early adoption is permitted. The Company will adopt the guidance on January 1, 2016 and is currently evaluating the impact on the Company's financial position and results of operations.
Revenue Recognition
In May 2014, the FASB issued comprehensive new guidance on revenue recognition which supersedes nearly all existing revenue recognition guidance under GAAP. The new guidance requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard creates a five-step model that requires companies to exercise judgment when considering the terms of the contract(s) and all relevant facts and circumstances. The new guidance is effective for annual and interim periods beginning after December 15, 2016. The Company will adopt the guidance on January 1, 2017 and is currently evaluating the impact on the Company's financial position and results of operations. Management does not expect insurance contracts to be in the scope of this new guidance.
Discontinued Operations
In April 2014, the FASB issued new guidance on reporting discontinued operations and disclosures of disposals of components of an entity. The new guidance raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. It is effective for annual periods beginning after December 15, 2014. Early adoption is permitted but only for disposals that have not been reported in financial statements previously issued. The Company will adopt the guidance on January 1, 2015 and is currently evaluating the impact on the Company's financial position and results of operations.



9



NOTE 2. SUMMARY OF INVESTMENTS
Fair Value of Investments
A reconciliation of the amortized cost (cost for equity securities) to fair value of investments in held-to-maturity and available-for-sale fixed maturity and equity securities as of June 30, 2014 and December 31, 2013, is as follows:


10


June 30, 2014
 
Type of Investment
Cost or Amortized Cost
 
Gross Unrealized Appreciation
 
Gross Unrealized Depreciation
 
Fair Value
HELD-TO-MATURITY
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
States, municipalities and political subdivisions
$
249

 
$
2

 
$

 
$
251

Corporate bonds - financial services
200

 

 

 
200

Mortgage-backed securities
181

 
8

 

 
189

Total Held-to-Maturity Fixed Maturities
$
630

 
$
10

 
$

 
$
640

AVAILABLE-FOR-SALE

 

 

 

Fixed maturities:

 

 

 

Bonds

 

 

 

U.S. Treasury
$
30,468

 
$
298

 
$
63

 
$
30,703

U.S. government agency
360,249

 
3,018

 
6,586

 
356,681

States, municipalities and political subdivisions
705,556

 
33,895

 
2,683

 
736,768

Foreign bonds
143,172

 
7,054

 
1

 
150,225

Public utilities
212,385

 
8,114

 
155

 
220,344

Corporate bonds

 

 

 

Energy
149,380

 
5,593

 
373

 
154,600

Industrials
216,342

 
7,888

 
429

 
223,801

Consumer goods and services
159,084

 
5,455

 
213

 
164,326

Health care
78,429

 
3,679

 
148

 
81,960

Technology, media and telecommunications
128,124

 
4,485

 
785

 
131,824

Financial services
223,412

 
10,199

 
68

 
233,543

Mortgage-backed securities
19,654

 
610

 
76

 
20,188

Collateralized mortgage obligations
320,180

 
3,559

 
8,003

 
315,736

Asset-backed securities
3,023

 
296

 

 
3,319

Total Available-for-Sale Fixed Maturities
$
2,749,458

 
$
94,143

 
$
19,583

 
$
2,824,018

Equity securities:

 

 

 

Common stocks

 

 

 

Public utilities
$
7,231

 
$
11,435

 
$

 
$
18,666

Energy
5,094

 
11,391

 

 
16,485

Industrials
13,286

 
33,378

 
40

 
46,624

Consumer goods and services
10,287

 
11,492

 
2

 
21,777

Health care
7,920

 
18,846

 

 
26,766

Technology, media and telecommunications
6,205

 
7,779

 
61

 
13,923

Financial services
16,678

 
73,260

 
54

 
89,884

Nonredeemable preferred stocks
4,984

 
140

 
5

 
5,119

Total Available-for-Sale Equity Securities
$
71,685

 
$
167,721

 
$
162

 
$
239,244

Total Available-for-Sale Securities
$
2,821,143

 
$
261,864

 
$
19,745

 
$
3,063,262



11


December 31, 2013
 
Type of Investment
Cost or Amortized Cost
 
Gross Unrealized Appreciation
 
Gross Unrealized Depreciation
 
Fair Value
HELD-TO-MATURITY
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
States, municipalities and political subdivisions
$
250

 
$
4

 
$

 
$
254

Corporate bonds - financial services
200

 

 

 
200

Mortgage-backed securities
206

 
9

 

 
215

Total Held-to-Maturity Fixed Maturities
$
656

 
$
13

 
$

 
$
669

AVAILABLE-FOR-SALE

 

 

 

Fixed maturities:

 

 

 

Bonds

 

 

 

U.S. Treasury
$
33,612

 
$
423

 
$
140

 
$
33,895

U.S. government agency
287,988

 
258

 
18,663

 
269,583

States, municipalities and political subdivisions
690,461

 
34,151

 
10,705

 
713,907

Foreign bonds
167,390

 
5,863

 
397

 
172,856

Public utilities
213,479

 
6,873

 
1,776

 
218,576

Corporate bonds

 


 

 

Energy
157,620

 
4,398

 
1,008

 
161,010

Industrials
234,221

 
5,626

 
2,819

 
237,028

Consumer goods and services
165,565

 
3,770

 
1,421

 
167,914

Health care
91,008

 
3,138

 
1,200

 
92,946

Technology, media and telecommunications
121,746

 
2,541

 
3,321

 
120,966

Financial services
234,739

 
7,735

 
723

 
241,751

Mortgage-backed securities
22,034

 
323

 
291

 
22,066

Collateralized mortgage obligations
309,975

 
1,707

 
16,919

 
294,763

Asset-backed securities
3,719

 
276

 

 
3,995

Total Available-for-Sale Fixed Maturities
$
2,733,557

 
$
77,082

 
$
59,383

 
$
2,751,256

Equity securities:

 

 

 

Common stocks

 

 

 

Public utilities
$
7,231

 
$
9,068

 
$
27

 
$
16,272

Energy
5,094

 
9,269

 

 
14,363

Industrials
13,308

 
32,823

 
32

 
46,099

Consumer goods and services
10,363

 
10,895

 

 
21,258

Health care
7,920

 
17,078

 

 
24,998

Technology, media and telecommunications
6,204

 
7,183

 
83

 
13,304

Financial services
15,853

 
72,537

 
128

 
88,262

Nonredeemable preferred stocks
4,984

 
5

 
177

 
4,812

Total Available-for-Sale Equity Securities
$
70,957

 
$
158,858

 
$
447

 
$
229,368

Total Available-for-Sale Securities
$
2,804,514

 
$
235,940

 
$
59,830

 
$
2,980,624




12


Maturities
The amortized cost and fair value of held-to-maturity, available-for-sale and trading fixed maturity securities at June 30, 2014, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset-backed securities, mortgage-backed securities and collateralized mortgage obligations may be subject to prepayment risk and are therefore not categorized by contractual maturity.
 
Held-To-Maturity
 
Available-For-Sale
 
Trading
June 30, 2014
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
135

 
$
136

 
$
234,849

 
$
238,774

 
$
1,701

 
$
1,699

Due after one year through five years
314

 
315

 
886,016

 
934,018

 
7,416

 
8,715

Due after five years through 10 years

 

 
818,255

 
845,767

 
1,139

 
1,563

Due after 10 years

 

 
467,481

 
466,216

 
5,211

 
6,328

Asset-backed securities

 

 
3,023

 
3,319

 

 

Mortgage-backed securities
181

 
189

 
19,654

 
20,188

 

 

Collateralized mortgage obligations

 

 
320,180

 
315,736

 

 

 
$
630

 
$
640

 
$
2,749,458

 
$
2,824,018

 
$
15,467

 
$
18,305

Net Realized Investment Gains and Losses
Net realized gains on disposition of investments are computed using the specific identification method and are included in the computation of net income. A summary of the components of net realized investment gains is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Net realized investment gains
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale
$
705

 
$
1,185

 
1,352

 
1,905

Trading securities
 
 
 
 
 
 
 
Change in fair value
648

 
(130
)
 
948

 
430

Sales
285

 
298

 
520

 
298

Equity securities:
 
 
 
 
 
 
 
Available-for-sale
901

 
3,232

 
1,736

 
3,748

Trading securities
 
 
 
 
 
 
 
Change in fair value
169

 
(132
)
 
346

 
(19
)
Sales

 
38

 

 
38

Other long-term investments

 
(340
)
 

 
(340
)
Total net realized investment gains
$
2,708

 
$
4,151

 
$
4,902

 
$
6,060

The proceeds and gross realized gains on the sale of available-for-sale securities are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Proceeds from sales
$
10

 
$
3,161

 
$
10

 
$
5,971

Gross realized gains

 
96

 

 
238

Gross realized losses
56

 

 
56

 

There were no sales of held-to-maturity securities during the three- and six-month periods ended June 30, 2014 and 2013.



13


Our investment portfolio includes trading securities with embedded derivatives. These securities are primarily convertible securities which are recorded at fair value. Income or loss, including the change in the fair value of these trading securities, is recognized currently in earnings as a component of net realized investment gains. Our portfolio of trading securities had a fair value of $21,511 and $12,427 at June 30, 2014 and December 31, 2013, respectively.
Unrealized Appreciation
A summary of the changes in net unrealized investment appreciation during the reporting period is as follows:
 
Six Months Ended June 30,
 
2014
 
2013
Change in net unrealized investment appreciation
 
 
 
Available-for-sale fixed maturities
$
56,861

 
$
(91,636
)
Available-for-sale equity securities
9,148

 
19,467

Deferred policy acquisition costs
(17,921
)
 
29,223

Income tax effect
(16,831
)
 
15,023

Total change in net unrealized investment appreciation, net of tax
$
31,257

 
$
(27,923
)
We continually monitor the difference between our cost basis and the estimated fair value of our investments. Our accounting policy for impairment recognition requires other-than-temporary impairment ("OTTI") charges to be recorded when we determine that it is more likely than not that we will be unable to collect all amounts due according to the contractual terms of the fixed maturity security or that the anticipated recovery in fair value of the equity security will not occur in a reasonable amount of time. Impairment charges on investments are recorded based on the fair value of the investments at the measurement date. Factors considered in evaluating whether a decline in value is other-than-temporary include: the length of time and the extent to which fair value has been less than cost; the financial condition and near-term prospects of the issuer; our intention to hold the investment; and the likelihood that we will be required to sell the investment.
The tables on the following pages summarize our fixed maturity and equity securities that were in an unrealized loss position at June 30, 2014 and December 31, 2013. The securities are presented by the length of time they have been continuously in an unrealized loss position. It is possible that we could recognize OTTI charges in future periods on securities held at June 30, 2014, if future events or information cause us to determine that a decline in fair value is other-than-temporary.
We have evaluated the near-term prospects of the issuers of our fixed maturity securities in relation to the severity and duration of the unrealized loss, and unless otherwise noted, these losses do not warrant the recognition of an OTTI charge at June 30, 2014. We believe the unrealized depreciation in value of other securities in our fixed maturity portfolio is primarily attributable to changes in market interest rates and not the credit quality of the issuer. We have no intent to sell and it is more likely than not that we will not be required to sell these securities until the fair value recovers to at least equal to our cost basis or the securities mature.
We have evaluated the near-term prospects of the issuers of our equity securities in relation to the severity and duration of the unrealized loss, and unless otherwise noted, these losses do not warrant the recognition of an OTTI charge at June 30, 2014. Our largest unrealized loss greater than 12 months on an individual equity security at June 30, 2014 was $54. We have no intention to sell any of these securities prior to a recovery in value, but will continue to monitor the fair value reported for these securities as part of our overall process to evaluate investments for OTTI recognition.


14


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2014
Less than 12 months
 
12 months or longer
 
Total
Type of Investment
Number
of Issues
 
Fair
Value
 
Gross Unrealized
Depreciation
 
Number
of Issues
 
Fair
Value
 
Gross Unrealized Depreciation
 
Fair
Value
 
Gross Unrealized Depreciation
AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
2

 
$
1,326

 
$
4

 
6

 
$
6,125

 
$
59

 
$
7,451

 
$
63

U.S. government agency
11

 
28,268

 
188

 
46

 
131,825

 
6,398

 
160,093

 
6,586

States, municipalities and political subdivisions
22

 
23,311

 
108

 
101

 
90,012

 
2,575

 
113,323

 
2,683

Foreign bonds
1

 
3,285

 
1

 

 

 

 
3,285

 
1

Public utilities
2

 
252

 
3

 
10

 
19,883

 
152

 
20,135

 
155

Corporate bonds
 
 
 
 
 
 
 
 
 
 
 
 


 


Energy

 

 

 
5

 
10,266

 
373

 
10,266

 
373

Industrials

 

 

 
4

 
14,088

 
429

 
14,088

 
429

Consumer goods and services
2

 
4,274

 
28

 
8

 
15,497

 
185

 
19,771

 
213

Health care
2

 
7,214

 
9

 
3

 
7,194

 
139

 
14,408

 
148

Technology, media and telecommunications
2

 
4,591

 
25

 
7

 
27,169

 
760

 
31,760

 
785

Financial services
2

 
2,264

 
8

 
2

 
6,137

 
60

 
8,401

 
68

Mortgage-backed securities
3

 
47

 
1

 
5

 
5,868

 
75

 
5,915

 
76

Collateralized mortgage obligations
21

 
43,158

 
489

 
72

 
144,536

 
7,514

 
187,694

 
8,003

Total Available-for-Sale Fixed Maturities
70

 
$
117,990

 
$
864

 
269

 
$
478,600

 
$
18,719

 
$
596,590

 
$
19,583

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Industrials

 
$

 
$

 
2

 
$
73

 
$
40

 
$
73

 
$
40

Consumer goods and services
1

 
15

 
2

 

 

 

 
15

 
2

Technology, media and telecommunications

 

 

 
6

 
229

 
61

 
229

 
61

Financial services

 

 

 
3

 
223

 
54

 
223

 
54

Nonredeemable preferred stocks

 

 

 
1

 
702

 
5

 
702

 
5

Total Available-for-Sale Equity Securities
1

 
$
15

 
$
2

 
12

 
$
1,227

 
$
160

 
$
1,242

 
$
162

Total Available-for-Sale Securities
71

 
$
118,005

 
$
866

 
281

 
$
479,827

 
$
18,879

 
$
597,832

 
$
19,745



15


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
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
10

 
$
9,196

 
$
140

 

 
$

 
$

 
$
9,196

 
$
140

U.S. government agency
101

 
256,203

 
18,019

 
2

 
4,356

 
644

 
260,559

 
18,663

States, municipalities and political subdivisions
136

 
97,950

 
7,423

 
29

 
29,670

 
3,282

 
127,620

 
10,705

Foreign bonds
10

 
20,832

 
397

 

 

 

 
20,832

 
397

Public utilities
31

 
61,582

 
1,776

 

 

 

 
61,582

 
1,776

Corporate bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
9

 
23,735

 
1,008

 

 

 

 
23,735

 
1,008

Industrials
34

 
77,788

 
2,819

 

 

 

 
77,788

 
2,819

Consumer goods and services
31

 
58,833

 
1,276

 
6

 
3,218

 
145

 
62,051

 
1,421

Health care
10

 
25,888

 
942

 
2

 
4,427

 
258

 
30,315

 
1,200

Technology, media and telecommunications
18

 
58,105

 
2,147

 
2

 
7,468

 
1,174

 
65,573

 
3,321

Financial services
7

 
15,191

 
720

 
1

 
1,525

 
3

 
16,716

 
723

Mortgage-backed securities
16

 
4,476

 
177

 
6

 
3,113

 
114

 
7,589

 
291

Collateralized mortgage obligations
111

 
208,855

 
11,062

 
23

 
55,184

 
5,857

 
264,039

 
16,919

Total Available-for-Sale Fixed Maturities
524

 
$
918,634

 
$
47,906

 
71

 
$
108,961

 
$
11,477

 
$
1,027,595

 
$
59,383

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Public utilities

 
$

 
$

 
3

 
$
281

 
$
27

 
$
281

 
$
27

Industrials
1

 
1

 
1

 
2

 
81

 
31

 
82

 
32

Technology, media and telecommunications

 

 

 
6

 
206

 
83

 
206

 
83

Financial services

 

 

 
4

 
215

 
128

 
215

 
128

Nonredeemable preferred stocks
3

 
3,493

 
116

 
2

 
1,170

 
61

 
4,663

 
177

Total Available-for-Sale Equity Securities
4

 
$
3,494

 
$
117

 
17

 
$
1,953

 
$
330

 
$
5,447

 
$
447

Total Available-for-Sale Securities
528

 
$
922,128

 
$
48,023

 
88

 
$
110,914

 
$
11,807

 
$
1,033,042

 
$
59,830



16


NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS
We estimate the fair value of our financial instruments based on relevant market information or by discounting estimated future cash flows at estimated current market discount rates appropriate to the specific asset or liability.
When possible, we use quoted market prices to determine the fair value of fixed maturities, equity se