Attached files

file filename
EX-10.1 - EXHIBIT 10.1 - UNITED FIRE GROUP INCexhibit101directorrsaform.htm
EX-32.2 - EXHIBIT 32.2 - UNITED FIRE GROUP INCexhibit322063016.htm
EX-32.1 - EXHIBIT 32.1 - UNITED FIRE GROUP INCexhibit321063016.htm
EX-31.2 - EXHIBIT 31.2 - UNITED FIRE GROUP INCexhibit312063016.htm
EX-31.1 - EXHIBIT 31.1 - UNITED FIRE GROUP INCexhibit311063016.htm

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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 R 
 
Accelerated filer o 
 
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, 2016, 25,396,185 shares of common stock were outstanding.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



United Fire Group, Inc.
Index to Quarterly Report on Form 10-Q
June 30, 2016
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 4. Mine Safety Disclosures
 
 
 
 
 
 



FORWARD-LOOKING INFORMATION
This report may contain forward-looking statements about our operations, anticipated performance and other similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for forward-looking statements. The forward-looking statements are not historical facts and involve risks and uncertainties that could cause actual results to differ from those expected and/or projected. Such forward-looking statements are based on current expectations, estimates, forecasts and projections about United Fire Group, Inc. ("UFG," the "Registrant," the "Company," "we," "us," or "our"), the industry in which we operate, and beliefs and assumptions made by management. Words such as "expect(s)," "anticipate(s)," "intend(s)," "plan(s)," "believe(s)," "continue(s)," "seek(s)," "estimate(s)," "goal(s)," "target(s)," "forecast(s)," "project(s)," "predict(s)," "should," "could," "may," "will continue," "might," "hope," "can" and other words and terms of similar meaning or expression in connection with a discussion of future operations, financial performance or financial condition, are intended to identify forward-looking statements. See Part I, Item 1A "Risk Factors" in our 2015 Annual Report on Form 10-K and Part II, Item 1A "Risk Factors" of this report for more information concerning factors that could cause actual results to differ materially from those in the forward-looking statements.
Risks and uncertainties that may affect the actual financial condition and results of the Company include, but are not limited, to the following:

The frequency and severity of claims, including those related to catastrophe losses and the impact those claims have on our loss reserve adequacy; the occurrence of catastrophic events, including international events, significant severe weather conditions, climate change, acts of terrorism, acts of war and pandemics;
The adequacy of our reserves for property and casualty insurance losses and loss settlement expenses and our life insurance reserve for future policy benefits;
Geographic concentration risk in both property and casualty insurance and life insurance segments;
The potential disruption of our operations 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.




1


PART I — FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
United Fire Group, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Data)
June 30,
2016
 
December 31,
2015
 
(unaudited)
 
 
ASSETS
 
 
 
Investments
 
 
 
Fixed maturities
 
 
 
Held-to-maturity, at amortized cost (fair value $660 in 2016 and $675 in 2015)
$
658

 
$
672

Available-for-sale, at fair value (amortized cost $2,812,091 in 2016 and $2,793,069 in 2015)
2,942,364

 
2,824,961

Trading securities, at fair value (amortized cost $11,040 in 2016 and $11,475 in 2015)
12,558

 
12,622

Equity securities
 
 
 
Available-for-sale, at fair value (cost $68,747 in 2016 and $68,514 in 2015)
249,180

 
236,247

Trading securities, at fair value (cost $4,764 in 2016 and $4,443 in 2015)
5,004

 
4,353

Mortgage loans
3,836

 
3,961

Policy loans
5,282

 
5,618

Other long-term investments
52,349

 
54,151

Short-term investments
175

 
175

 
3,271,406

 
3,142,760

Cash and cash equivalents
119,700

 
106,449

Accrued investment income
24,901

 
25,136

Premiums receivable (net of allowance for doubtful accounts of $1,210 in 2016 and $867 in 2015)
339,851

 
276,517

Deferred policy acquisition costs
159,050

 
168,264

Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $48,582 in 2016 and $46,590 in 2015)
53,236

 
53,241

Reinsurance receivables and recoverables
80,940

 
73,527

Prepaid reinsurance premiums
4,153

 
3,790

Income taxes receivable
12,341

 

Goodwill and intangible assets
25,124

 
25,509

Other assets
15,136

 
15,183

TOTAL ASSETS
$
4,105,838

 
$
3,890,376

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Future policy benefits and losses, claims and loss settlement expenses
 
 
 
Property and casualty insurance
$
1,054,548

 
$
1,003,895

Life insurance
1,364,307

 
1,372,358

Unearned premiums
475,908

 
415,057

Accrued expenses and other liabilities
204,939

 
200,599

Income taxes payable

 
4,917

Deferred income taxes
45,105

 
14,653

TOTAL LIABILITIES
$
3,144,807

 
$
3,011,479

Stockholders’ Equity
 
 
 
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,390,685 and 25,151,428 shares issued and outstanding in 2016 and 2015, respectively
$
25

 
$
25

Additional paid-in capital
215,075

 
207,426

Retained earnings
604,652

 
591,009

Accumulated other comprehensive income, net of tax
141,279

 
80,437

TOTAL STOCKHOLDERS’ EQUITY
$
961,031

 
$
878,897

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
4,105,838

 
$
3,890,376

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


2


United Fire Group, Inc.
Consolidated Statements of Income and Comprehensive Income (Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In Thousands, Except Share Data)
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
Net premiums earned
$
253,487

 
$
229,225

 
$
494,785

 
$
442,396

Investment income, net of investment expenses
24,507

 
25,792

 
46,731

 
50,155

Net realized investment gains (includes reclassifications for net unrealized investment gains on available-for-sale securities of $700 and $2,346 in 2016 and $995 and $2,890 in 2015; previously included in accumulated other comprehensive income)
1,596


769

 
3,651

 
1,656

Other income
183

 
132

 
291

 
195

Total revenues
$
279,773

 
$
255,918

 
$
545,458

 
$
494,402

Benefits, Losses and Expenses
 
 
 
 
 
 
 
Losses and loss settlement expenses
$
180,412

 
$
150,362

 
$
322,540

 
$
276,771

Increase in liability for future policy benefits
16,002

 
12,096

 
28,554

 
19,719

Amortization of deferred policy acquisition costs
52,585

 
44,357

 
102,816

 
86,829

Other underwriting expenses (includes reclassifications for employee benefit costs of $1,371 and $2,742 in 2016 and $1,867 and $3,734 in 2015; previously included in accumulated other comprehensive income)
24,772

 
23,546

 
51,525

 
47,080

Interest on policyholders’ accounts
5,138

 
6,024

 
10,385

 
12,639

Total benefits, losses and expenses
$
278,909

 
$
236,385

 
$
515,820

 
$
443,038

Income before income taxes
$
864

 
$
19,533

 
$
29,638

 
$
51,364

Federal income tax expense (benefit) (includes reclassifications of ($234) and ($138) in 2016 and ($305) and ($295) in 2015; previously included in accumulated other comprehensive income)
(2,250
)
 
4,515

 
4,097

 
12,667

Net income
$
3,114

 
$
15,018

 
$
25,541

 
$
38,697

Other comprehensive income (loss)
 
 
 
 
 
 
 
Change in net unrealized appreciation on investments
$
49,332

 
$
(36,237
)
 
$
93,208

 
$
(23,123
)
Change in liability for underfunded employee benefit plans

 

 

 

Other comprehensive income (loss), before tax and reclassification adjustments
$
49,332

 
$
(36,237
)
 
$
93,208

 
$
(23,123
)
Income tax effect
(17,267
)
 
12,682

 
(32,624
)
 
8,092

Other comprehensive income (loss), after tax, before reclassification adjustments
$
32,065

 
$
(23,555
)
 
$
60,584

 
$
(15,031
)
Reclassification adjustment for net realized investment gains included in income
$
(700
)
 
$
(995
)
 
$
(2,346
)
 
$
(2,890
)
Reclassification adjustment for employee benefit costs included in expense
1,371

 
1,867

 
2,742

 
3,734

Total reclassification adjustments, before tax
$
671

 
$
872

 
$
396

 
$
844

Income tax effect
(234
)
 
(305
)
 
(138
)
 
(295
)
Total reclassification adjustments, after tax
$
437

 
$
567

 
$
258

 
$
549

Comprehensive income (loss)
$
35,616

 
$
(7,970
)
 
$
86,383

 
$
24,215

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
25,366,283

 
25,023,753

 
25,288,086

 
25,007,204

Basic earnings per common share
$
0.12

 
$
0.60

 
$
1.01

 
$
1.55

Diluted earnings per common share
0.12

 
0.59

 
1.00

 
1.54

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


3


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

(In Thousands, Except Share Data)
Six Months Ended June 30, 2016
 
 
Common stock
 
Balance, beginning of year
$
25

Shares issued for stock-based awards (246,643 shares)

Balance, end of period
$
25

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

Compensation expense and related tax benefit for stock-based award grants
1,511

Shares issued for stock-based awards
6,138

Balance, end of period
$
215,075

 
 
Retained earnings
 
Balance, beginning of year
$
591,009

Net income
25,541

Dividends on common stock ($0.47 per share)
(11,898
)
Balance, end of period
$
604,652

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

Change in net unrealized investment appreciation(1)
59,059

Change in liability for underfunded employee benefit plans(2)
1,783

Balance, end of period
$
141,279

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

Net income
25,541

All other changes in stockholders’ equity accounts
56,593

Balance, end of period
$
961,031

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

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



4


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

Six Months Ended June 30,
(In Thousands)
2016
 
2015
Cash Flows From Operating Activities
 
 
 
Net income
$
25,541

 
$
38,697

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Net accretion of bond premium
7,076

 
7,126

Depreciation and amortization
3,179

 
3,234

Stock-based compensation expense
1,865

 
1,200

Net realized investment gains
(3,651
)
 
(1,656
)
Net cash flows from trading investments
256

 
652

Deferred income tax benefit
(1,761
)
 
(2,742
)
Changes in:
 
 
 
Accrued investment income
235

 
799

Premiums receivable
(63,334
)
 
(53,776
)
Deferred policy acquisition costs
(11,007
)
 
(14,557
)
Reinsurance receivables
(7,413
)
 
12,918

Prepaid reinsurance premiums
(363
)
 
(342
)
Income taxes receivable
(12,341
)
 
(6,042
)
Other assets
47

 
196

Future policy benefits and losses, claims and loss settlement expenses
78,807

 
43,735

Unearned premiums
60,851

 
53,048

Accrued expenses and other liabilities
7,083

 
15,679

Income taxes payable
(4,917
)
 
(5,012
)
Deferred income taxes
(550
)
 
(434
)
Other, net
1,474

 
(1,467
)
Total adjustments
$
55,536

 
$
52,559

Net cash provided by operating activities
$
81,077

 
$
91,256

Cash Flows From Investing Activities
 
 
 
Proceeds from sale of available-for-sale investments
$
3,042

 
$
8,228

Proceeds from call and maturity of held-to-maturity investments
14

 
41

Proceeds from call and maturity of available-for-sale investments
311,478

 
374,173

Proceeds from short-term and other investments
1,412

 
3,833

Purchase of available-for-sale investments
(338,213
)
 
(384,065
)
Purchase of short-term and other investments
(415
)
 
(3,583
)
Net purchases and sales of property and equipment
(2,825
)
 
(3,711
)
Net cash used in investing activities
$
(25,507
)
 
$
(5,084
)
Cash Flows From Financing Activities
 
 
 
Policyholders’ account balances
 
 
 
Deposits to investment and universal life contracts
$
45,467

 
$
57,340

Withdrawals from investment and universal life contracts
(81,672
)
 
(129,814
)
Payment of cash dividends
(11,898
)
 
(10,503
)
Repurchase of common stock

 
(1,443
)
Issuance of common stock
6,138

 
1,375

Tax impact from issuance of common stock
(354
)
 
(319
)
Net cash used in financing activities
$
(42,319
)
 
$
(83,364
)
Net Change in Cash and Cash Equivalents
$
13,251

 
$
2,808

Cash and Cash Equivalents at Beginning of Period
106,449

 
90,574

Cash and Cash Equivalents at End of Period
$
119,700

 
$
93,382

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


5



UNITED FIRE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share amounts or as otherwise noted)

NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Business
United Fire Group, Inc. ("UFG," the "Registrant," the "Company," "we," "us," or "our") and its consolidated subsidiaries and affiliates are engaged in the business of writing property and casualty insurance and life insurance and selling annuities through a network of independent agencies. We report our operations in two business segments: property and casualty insurance and life insurance. Our insurance company subsidiaries are licensed as a property and casualty insurer in 46 states and the District of Columbia, and as a life insurer in 37 states.
Basis of Presentation
The unaudited consolidated interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X promulgated by the SEC. Certain financial information that is included in our Annual Report on Form 10-K, including certain financial statement footnote disclosures, are not required by the rules and regulations of the SEC for interim financial reporting and have been condensed or omitted.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The financial statement categories that are most dependent on management estimates and assumptions include: investments; deferred policy acquisition costs; reinsurance receivables and recoverables; future policy benefits and losses, claims and loss settlement expenses; and pension and postretirement benefit obligations.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Management of UFG believes the accompanying unaudited Consolidated Financial Statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. All significant intercompany transactions have been eliminated in consolidation. The results reported for the interim periods are not necessarily indicative of the results of operations that may be expected for the year. The unaudited Consolidated Financial Statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2015. The review report of Ernst & Young LLP as of June 30, 2016 and for the three- and six-month periods ended June 30, 2016 and 2015 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, 2016 and 2015, we made payments for income taxes totaling $24,017 and $27,216, respectively. We did not receive a tax refund during the six-month periods ended June 30, 2016 and 2015.
For the six-month periods ended June 30, 2016 and 2015, we made no interest payments (excluding interest credited to policyholders’ accounts).




6


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, 2016.
 
 
 
 
 
Property & Casualty Insurance
 
Life Insurance
 
Total
Recorded asset at beginning of period
$
90,547

 
$
77,717

 
$
168,264

Underwriting costs deferred
110,927

 
2,895

 
113,822

Amortization of deferred policy acquisition costs
(98,976
)
 
(3,840
)
 
(102,816
)
Ending unamortized deferred policy acquisition costs
$
102,498

 
$
76,772

 
$
179,270

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

 
(20,220
)
 
(20,220
)
Recorded asset at June 30, 2016
$
102,498

 
$
56,552

 
$
159,050


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 to net unrealized investment appreciation as of the balance sheet date. The impact of unrealized gains and losses on available-for-sale securities decreased the DAC asset by $22,223 and $2,003 at June 30, 2016 and December 31, 2015, respectively.
Income Taxes
Deferred tax assets and liabilities are established based on differences between the financial statement bases of assets and liabilities and the tax bases of those same assets and liabilities, using the currently enacted statutory tax 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 $4,097 and $12,667 for the six-month periods ended June 30, 2016 and 2015, respectively. Our effective tax rate is different than the federal statutory rate of 35.0 percent due principally to the effect of tax-exempt municipal bond interest income and non-taxable dividend income.
The Company performs a quarterly review of its tax positions and makes a determination of whether it is more likely than not that the tax position will be sustained upon examination. If based on review, it appears not more likely than


7


not that the positions will be sustained, the Company will calculate any unrecognized tax benefits and, if necessary, calculate and accrue any related interest and penalties. We did not recognize any liability for unrecognized tax benefits at June 30, 2016 or December 31, 2015. In addition, we have not accrued for interest and penalties related to unrecognized tax benefits. However, if interest and penalties would need to be accrued related to unrecognized tax benefits, such amounts would be recognized as a component of federal income tax expense.
We file a consolidated federal income tax return. We also file income tax returns in various state jurisdictions. We are no longer subject to federal or state income tax examination for years before 2009. The Internal Revenue Service is conducting a routine examination of our income tax return for the 2011 tax year.

Subsequent Events

In the preparation of the accompanying financial statements, the Company has evaluated all material subsequent events or transactions that occurred after the balance sheet date through the date on which the financial statements were issued for potential recognition or disclosure in the Company's financial statements. The Company concluded there are no material subsequent events or transactions that have occurred after the balance sheet date through the date on which the financial statements were issued.
Recently Issued Accounting Standards
Accounting Standards Adopted in 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 December 15, 2015 and interim periods beginning the following year. The Company will include the new annual disclosures beginning with the December 31, 2016 annual financial statements. The adoption of the new guidance will change disclosures regarding short- duration contracts, but management currently does not expect the adoption of the new guidance to have an impact on the Company's financial position or results of operations.

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.

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.

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


8


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 the 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.
Pending Adoption of Accounting Standards
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 and results of operations.
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 payment, 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 will adopt the new guidance as of January 1, 2017 and is currently evaluating the impact on the Company's financial position and results of operations.
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 and is currently evaluating the impact on the Company's financial position and results of operations.


9


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 and results of operations.
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 will adopt the new guidance as of January 1, 2017, the adoption will have no impact on the Company's financial position and results of operations.
Revenue Recognition
In May 2014, the FASB issued comprehensive new guidance on revenue recognition which supersedes nearly all existing revenue recognition guidance under GAAP. The new guidance requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard creates a five-step model that requires companies to exercise judgment when considering the terms of the contract(s) and all relevant facts and circumstances. Insurance contracts are not within the scope of this new guidance. The new guidance is effective for annual and interim periods beginning after December 15, 2017. The Company will adopt the guidance as of January 1, 2018 and is currently evaluating the impact on the Company's financial position and results of operations and considering which portions of the guidance, if any, applies to the Company.


10


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, 2016 and December 31, 2015, is as follows:
June 30, 2016
 
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
58

 
1

 

 
59

Total Held-to-Maturity Fixed Maturities
$
658

 
$
2

 
$

 
$
660

AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
U.S. Treasury
$
22,831

 
$
386

 
$

 
$
23,217

U.S. government agency
102,445

 
3,899

 

 
106,344

States, municipalities and political subdivisions
 
 
 
 
 
 
 
General obligations:
 
 
 
 
 
 
 
Midwest
145,607

 
6,500

 

 
152,107

Northeast
61,256

 
3,386

 

 
64,642

South
133,105

 
5,652

 

 
138,757

West
114,463

 
5,871

 

 
120,334

Special revenue:
 
 
 
 
 
 
 
Midwest
163,531

 
8,733

 

 
172,264

Northeast
46,855

 
2,442

 

 
49,297

South
193,752

 
10,043

 
14

 
203,781

West
93,041

 
5,090

 

 
98,131

Foreign bonds
79,744

 
3,428

 
1,012

 
82,160

Public utilities
218,538

 
11,156

 
281

 
229,413

Corporate bonds

 

 

 

Energy
110,618

 
3,361

 
754

 
113,225

Industrials
240,772

 
12,143

 
1,821

 
251,094

Consumer goods and services
180,924

 
9,191

 
1

 
190,114

Health care
84,390

 
4,975

 

 
89,365

Technology, media and telecommunications
139,573

 
6,186

 
438

 
145,321

Financial services
269,290

 
12,751

 
60

 
281,981

Mortgage-backed securities
19,609

 
484

 
21

 
20,072

Collateralized mortgage obligations
 
 
 
 
 
 
 


11


Government national mortgage association
132,500

 
5,667

 
173

 
137,994

Federal home loan mortgage corporation
144,224

 
7,012

 
49

 
151,187

Federal national mortgage association
110,380

 
6,457

 
85

 
116,752

Asset-backed securities
4,643

 
266

 
97

 
4,812

Total Available-for-Sale Fixed Maturities
$
2,812,091

 
$
135,079

 
$
4,806

 
$
2,942,364

Equity securities:

 

 

 

Common stocks

 

 

 

Public utilities
$
7,231

 
$
16,213

 
$
161

 
$
23,283

Energy
6,514

 
7,914

 
46

 
14,382

Industrials
13,252

 
33,200

 
207

 
46,245

Consumer goods and services
10,324

 
15,210

 
45

 
25,489

Health care
7,763

 
20,205

 

 
27,968

Technology, media and telecommunications
5,931

 
9,049

 
55

 
14,925

Financial services
17,289

 
79,203

 
73

 
96,419

Nonredeemable preferred stocks
443

 
26

 

 
469

Total Available-for-Sale Equity Securities
$
68,747

 
$
181,020

 
$
587

 
$
249,180

Total Available-for-Sale Securities
$
2,880,838

 
$
316,099

 
$
5,393

 
$
3,191,544



































12


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



13


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

Maturities
The amortized cost and fair value of held-to-maturity, available-for-sale and trading fixed maturity securities at June 30, 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
June 30, 2016
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$

 
$

 
$
94,578

 
$
95,444

 
$
1,186

 
$
1,341

Due after one year through five years
600

 
601

 
839,695

 
870,386

 
7,158

 
8,174

Due after five years through 10 years

 

 
910,131

 
958,551

 
850

 
1,065

Due after 10 years

 

 
556,331

 
587,166

 
1,846

 
1,978

Asset-backed securities

 

 
4,643

 
4,812

 

 

Mortgage-backed securities
58

 
59

 
19,609

 
20,072

 

 

Collateralized mortgage obligations

 

 
387,104

 
405,933

 

 

 
$
658

 
$
660

 
$
2,812,091

 
$
2,942,364

 
$
11,040

 
$
12,558













14


Net Realized Investment Gains and Losses
Net realized gains on disposition of investments are computed using the specific identification method and are included in the computation of net income. A summary of the components of net realized investment gains (losses) is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net realized investment gains (losses)
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale
$
846

 
$
965

 
$
1,362

 
$
1,956

Trading securities
 
 
 
 
 
 
 
Change in fair value
98

 
(261
)
 
371

 
(462
)
Sales
461

 
183

 
461

 
699

Equity securities:
 
 
 
 
 
 
 
Available-for-sale

 
30

 
984

 
934

Trading securities
 
 
 
 
 
 
 
Change in fair value
237

 
(148
)
 
330

 
(204
)
Sales
(26
)
 

 
(26
)
 
46

Other long-term investments

 

 

 
(1,313
)
Short-term investments
(43
)
 

 

 

Cash equivalents
23

 

 
169

 

Total net realized investment gains
$
1,596

 
$
769

 
$
3,651

 
$
1,656

The proceeds and gross realized gains (losses) on the sale of available-for-sale securities are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Proceeds from sales
$
1,074

 
$
3,211

 
$
3,042

 
$
8,228

Gross realized gains
54

 
57

 
975

 
1,030

There were no sales of held-to-maturity securities during the three- and six-month periods ended June 30, 2016 and 2015.

Our investment portfolio includes trading securities with embedded derivatives. These securities are primarily convertible securities which are recorded at fair value. Income or loss, including the change in the fair value of these trading securities, is recognized currently in earnings as a component of net realized investment gains. Our portfolio of trading securities had a fair value of $17,562 and $16,975 at June 30, 2016 and December 31, 2015, respectively.

Funding Commitment

Pursuant to an agreement with one of our limited liability partnership investments, we are contractually committed through December 31, 2023 to make capital contributions upon request of the partnership. Our remaining potential contractual obligation was $9,917 at June 30, 2016.








15


Unrealized Appreciation
A summary of the changes in net unrealized investment appreciation during the reporting period is as follows:
 
Six Months Ended June 30,
 
2016
 
2015
Change in net unrealized investment appreciation
 
 
 
Available-for-sale fixed maturities
$
98,381

 
$
(29,009
)
Available-for-sale equity securities
12,700

 
(1,802
)
Deferred policy acquisition costs
(20,220
)
 
4,797

Income tax effect
(31,802
)
 
9,105

Total change in net unrealized investment appreciation, net of tax
$
59,059

 
$
(16,909
)
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 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, 2016 and December 31, 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 June 30, 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 unless otherwise noted, these losses did not warrant the recognition of an OTTI charge at June 30, 2016 or at June 30, 2015. 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, 2016. Our largest unrealized loss greater than 12 months on an individual equity security at June 30, 2016 was $181. 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.








16


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
States, municipalities and political subdivisions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Special revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
South
2

 
$
5,524

 
14

 

 
$

 

 
$
5,524

 
14

Foreign bonds

 

 

 
5

 
9,834

 
1,012

 
9,834

 
1,012

Public utilities
1

 
852

 
6

 
6

 
6,540

 
275

 
7,392

 
281

Corporate bonds
 
 
 
 
 
 
 
 
 
 
 
 


 


Energy
7

 
13,989

 
145

 
6

 
12,315

 
609

 
26,304

 
754

Industrials
2

 
4,869

 
246

 
5

 
8,642

 
1,575

 
13,511

 
1,821

Consumer goods and services

 

 

 
4

 
2,480

 
1

 
2,480

 
1

Technology, media and telecommunications
2

 
4,837

 
15

 
3

 
10,158

 
423

 
14,995

 
438

Financial services
1

 
4,961

 
36

 
1

 
3,066

 
24

 
8,027

 
60

Mortgage-backed securities
2

 
5,279

 
10

 
5

 
1,267

 
11

 
6,546

 
21

Collateralized mortgage obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government national mortgage association
2

 
5,142

 
28

 
8

 
14,372

 
145

 
19,514

 
173

Federal home loan mortgage corporation
2

 
6,249

 
3

 
3

 
6,398

 
46

 
12,647

 
49

Federal national mortgage association
3

 
3,287

 
9

 
4

 
4,967

 
76

 
8,254

 
85

Asset-backed securities
1

 
2,696

 
97

 

 

 

 
2,696

 
97

Total Available-for-Sale Fixed Maturities
25

 
$
57,685

 
$
609

 
50

 
$
80,039

 
$
4,197

 
$
137,724

 
$
4,806

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Public utilities

 
$

 
$

 
3

 
$
146

 
$
161

 
$
146

 
$
161

Energy
1

 
165

 
26

 
1

 
166

 
20

 
331

 
46

Industrials

 

 

 
6

 
256

 
207

 
256

 
207

Consumer goods and services
4

 
306

 
40

 
2

 
12

 
5

 
318

 
45

Technology, media and telecommunications

 

 

 
11

 
500

 
55

 
500

 
55

Financial services
3

 
363

 
19

 
2

 
160

 
54

 
523

 
73

Total Available-for-Sale Equity Securities
8

 
$
834

 
$
85

 
25

 
$
1,240

 
$
502

 
$
2,074

 
$
587

Total Available-for-Sale Securities
33

 
$
58,519

 
$
694

 
75

 
$
81,279

 
$
4,699

 
$
139,798

 
$
5,393












17


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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