Edgar Filing: UNITED FIRE GROUP INC

(State of Incorporation)

(IRS Employer Identification No.)

UFCS-2013.9.30-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________

FORM 10-Q

_______________________

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

for the quarterly period ended September 30, 2013

Commission File Number 001-34257

____________________________

UNITED FIRE GROUP, INC.

(Exact name of registrant as specified in its charter)

____________________________

118 Second Avenue, S.E., Cedar Rapids, Iowa 52407

(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 definition 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 Act). YES o NO R

As of November 1, 2013, 25,403,989 shares of common stock were outstanding.

Table of Contents

United Fire Group, Inc.

Index to Quarterly Report on Form 10-Q

September 30, 2013



	Page
Forward-Looking Information	1

Part I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012	2

Consolidated Statements of Income and Comprehensive Income (unaudited) for the three and nine month periods ended September 30, 2013 and 2012	3

Consolidated Statement of Stockholders’ Equity (unaudited) for the nine month period ended September 30, 2013	4

Consolidated Statements of Cash Flows (unaudited) for the nine month periods ended September 30, 2013 and 2012	5

Notes to Unaudited Consolidated Financial Statements	6

Review Report of Independent Registered Public Accounting Firm	30

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3. Quantitative and Qualitative Disclosures about Market Risk	46

Item 4. Controls and Procedures	46

Part II. Other Information

Item 1. Legal Proceedings	47

Item 1A. Risk Factors	47

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3. Defaults Upon Senior Securities	47

Item 4. Mine Safety Disclosures	47

Item 5. Other Information	47

Item 6. Exhibits	48

Signatures	49

Table of Contents

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 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 the Company, 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 2012 Annual Report on Form 10-K and Part II, Item 1A "Risk Factors" of this document 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;


•	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;


•	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 our reinsurers;


•	The 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 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.

Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

United Fire Group, Inc. Consolidated Balance Sheets

(In Thousands, Except Share Data)	September 30, 2013		December 31, 2012
	(unaudited)
ASSETS
Investments
Fixed maturities
Held-to-maturity, at amortized cost (fair value $1,120 in 2013 and $1,681 in 2012)	$	1,102	$	1,655
Available-for-sale, at fair value (amortized cost $2,724,100 in 2013 and $2,657,800 in 2012)	2,769,082		2,808,078
Trading securities, at fair value (amortized cost $8,480 in 2013 and $12,645 in 2012)	9,977		13,353
Equity securities
Available-for-sale, at fair value (cost $70,951 in 2013 and $66,892 in 2012)	208,538		177,127
Trading securities, at fair value (cost $2,335 in 2013 and $1,772 in 2012)	2,464		2,018
Mortgage loans	4,477		4,633
Policy loans	6,361		6,671
Other long-term investments	34,876		30,028
Short-term investments	800		800
	3,037,677		3,044,363
Cash and cash equivalents	86,691		107,466
Accrued investment income	29,064		30,375
Premiums receivable (net of allowance for doubtful accounts of $910 in 2013 and $866 in 2012)	233,747		188,289
Deferred policy acquisition costs	144,038		105,300
Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $35,888 in 2013 and $34,093 in 2012)	44,579		43,090
Reinsurance receivables and recoverables	100,821		114,399
Prepaid reinsurance premiums	3,438		2,963
Income taxes receivable	2,924		16,536
Goodwill and intangible assets	27,239		28,259
Other assets	13,479		13,613
TOTAL ASSETS	$	3,723,697	$	3,694,653
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Future policy benefits and losses, claims and loss settlement expenses
Property and casualty insurance	$	978,174	$	971,911
Life insurance	1,472,209		1,498,176
Unearned premiums	354,136		311,650
Accrued expenses and other liabilities	168,738		164,111
Deferred income taxes	6,213		19,628
TOTAL LIABILITIES	$	2,979,470	$	2,965,476
Stockholders’ Equity
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,401,314 and 25,227,463 shares issued and outstanding in 2013 and 2012, respectively	$	25	$	25
Additional paid-in capital	212,522		208,536
Retained earnings	462,132		425,428
Accumulated other comprehensive income, net of tax	69,548		95,188
TOTAL STOCKHOLDERS’ EQUITY	$	744,227	$	729,177
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	3,723,697	$	3,694,653

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

Table of Contents

United Fire Group, Inc.

Consolidated Statements of Income and Comprehensive Income (Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands, Except Share Data)	2013			2012			2013			2012

Revenues
Net premiums earned	$	194,219		$	176,531		$	557,403		$	508,124
Investment income, net of investment expenses	27,278			28,665			82,761			86,560
Net realized investment gains (losses)
Other-than-temporary impairment charges	(139		)	—			(139		)	(4		)
All other net realized gains (includes reclassifications for net unrealized gains on available-for-sale securities of $617 and $6,270 in 2013; and $91 and $3,111 in 2012; previously included in accumulated other comprehensive income)	1,329			1,300			7,389			4,662
Total net realized investment gains	1,190			1,300			7,250			4,658
Other income	337			85			634			584
Total revenues	$	223,024		$	206,581		$	648,048		$	599,926
Benefits, Losses and Expenses
Losses and loss settlement expenses	$	131,168		$	119,756		$	349,073		$	318,006
Increase in liability for future policy benefits	8,415			9,815			26,520			28,309
Amortization of deferred policy acquisition costs	38,767			36,167			113,556			104,897
Other underwriting expenses (includes reclassifications for employee benefit costs of $1,915 and $4,400 in 2013; and $1,085 and $3,460 in 2012; previously included in accumulated other comprehensive income)	21,654			20,496			67,310			63,031
Interest on policyholders’ accounts	8,625			10,327			27,026			31,610
Total benefits, losses and expenses	$	208,629		$	196,561		$	583,485		$	545,853
Income before income taxes	$	14,395		$	10,020		$	64,563		$	54,073
Federal income tax expense (includes reclassifications of $455 and ($654) in 2013; and $348 and $124 in 2012; previously included in accumulated other comprehensive income)	2,670			1,290			14,949			11,443
Net income	$	11,725		$	8,730		$	49,614		$	42,630
Other comprehensive income (loss)
Change in net unrealized appreciation on investments	$	(282	)	$	19,404		$	(37,576	)	$	41,335
Change in liability for underfunded employee benefit plans	—			—			—			—
Other comprehensive income (loss), before tax and reclassification adjustments	$	(282	)	$	19,404		$	(37,576	)	$	41,335
Income tax effect	107			(6,616		)	13,152			(14,290		)
Other comprehensive income (loss), after tax, before reclassification adjustments	$	(175	)	$	12,788		$	(24,424	)	$	27,045
Reclassification adjustment for net realized gains included in income	$	(617	)	$	(91	)	$	(6,270	)	$	(3,111	)
Reclassification adjustment for employee benefit costs included in expense	1,915			1,085			4,400			3,460
Total reclassification adjustments, before tax	$	1,298		$	994		$	(1,870	)	$	349
Income tax effect	(455		)	(348		)	$	654		$	(124	)
Total reclassification adjustments, after tax	$	843		$	646		$	(1,216	)	$	225
Comprehensive income	$	12,393		$	22,164		$	23,974		$	69,900

Weighted average common shares outstanding	25,359,196			25,423,191			25,301,432			25,468,293
Basic earnings per common share	$	0.46		$	0.34		$	1.96		$	1.67
Diluted earnings per common share	0.45			0.34			1.94			1.67
Cash dividends declared per common share	0.18			0.15			0.51			0.45

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

Table of Contents

United Fire Group, Inc.

Consolidated Statement of Stockholders’ Equity (Unaudited)



(In Thousands, Except Share Data)	Nine Months Ended September 30, 2013

Common stock
Balance, beginning of year	$	25
Shares repurchased (3,577 shares)	—
Shares issued for stock-based awards (177,428 shares)	—
Balance, end of period	$	25

Additional paid-in capital
Balance, beginning of year	$	208,536
Compensation expense and related tax benefit for stock-based award grants	1,010
Shares repurchased	(99		)
Shares issued for stock-based awards	3,075
Balance, end of period	$	212,522

Retained earnings
Balance, beginning of year	$	425,428
Net income	49,614
Dividends on common stock ($0.51 per share)	(12,910		)
Balance, end of period	$	462,132

Accumulated other comprehensive income, net of tax
Balance, beginning of year	$	95,188
Change in net unrealized investment appreciation ⁽¹⁾	(28,500		)
Change in liability for underfunded employee benefit plans⁽²⁾	2,860
Balance, end of period	$	69,548

Summary of changes
Balance, beginning of year	$	729,177
Net income	49,614
All other changes in stockholders’ equity accounts	(34,564		)
Balance, end of period	$	744,227


(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.

Table of Contents

United Fire Group, Inc.

Consolidated Statements of Cash Flows (Unaudited)



	Nine Months Ended September 30,
(In Thousands)	2013			2012
Cash Flows From Operating Activities
Net income	$	49,614		$	42,630
Adjustments to reconcile net income to net cash provided by operating activities
Net accretion of bond premium	11,715			10,909
Depreciation and amortization	4,120			5,989
Stock-based compensation expense	1,436			1,318
Net realized investment gains	(7,250		)	(4,658		)
Net cash flows from trading investments	3,836			(337		)
Deferred income tax expense (benefit)	(4,352		)	7,143
Changes in:
Accrued investment income	1,311			990
Premiums receivable	(45,458		)	(31,244		)
Deferred policy acquisition costs	(4,640		)	(4,345		)
Reinsurance receivables	13,578			(19,051		)
Prepaid reinsurance premiums	(475		)	3,029
Income taxes receivable	13,612			10,959
Other assets	134			4,575
Future policy benefits and losses, claims and loss settlement expenses	28,404			50,429
Unearned premiums	42,486			35,347
Accrued expenses and other liabilities	9,027			17,856
Deferred income taxes	4,743			(2,820		)
Other, net	(3,814		)	(3,373		)
Total adjustments	$	68,413		$	82,716
Net cash provided by operating activities	$	118,027		$	125,346
Cash Flows From Investing Activities
Proceeds from sale of available-for-sale investments	$	23,007		$	12,003
Proceeds from call and maturity of held-to-maturity investments	557			2,316
Proceeds from call and maturity of available-for-sale investments	370,531			433,619
Proceeds from short-term and other investments	2,569			3,791
Purchase of available-for-sale investments	(468,934		)	(557,257		)
Purchase of short-term and other investments	(3,475		)	(9,000		)
Net purchases and sales of property and equipment	(4,589		)	(1,391		)
Net cash used in investing activities	$	(80,334	)	$	(115,919	)
Cash Flows From Financing Activities
Policyholders’ account balances
Deposits to investment and universal life contracts	$	97,893		$	109,900
Withdrawals from investment and universal life contracts	(146,001		)	(106,978		)
Repayment of short-term debt	—			(45,000		)
Repayment of trust preferred securities	—			(15,626		)
Payment of cash dividends	(12,910		)	(11,455		)
Repurchase of common stock	(99		)	(2,900		)
Issuance of common stock	3,075			760
Tax impact from issuance of common stock	(426		)	(89		)
Net cash used in financing activities	$	(58,468	)	$	(71,388	)
Net Change in Cash and Cash Equivalents	$	(20,775	)	$	(61,961	)
Cash and Cash Equivalents at Beginning of Period	107,466			144,527
Cash and Cash Equivalents at End of Period	$	86,691		$	82,566

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

Table of Contents

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, 2012. The review report of Ernst & Young LLP as of September 30, 2013 and for the three- and nine-month periods ended September 30, 2013 and 2012 accompanies the unaudited Consolidated Financial Statements included in Part I, Item 1 "Financial Statements."

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash, money market accounts, and non-negotiable certificates of deposit with original maturities of three months or less.

For the nine-month periods ended September 30, 2013 and 2012, we made payments for income taxes totaling $10,117 and $11,363, respectively. We received tax refunds of $8,744 and $15,508, respectively, during the nine-month periods ended September 30, 2013 and 2012.

Table of Contents

For the nine-month period ended September 30, 2013, we made no interest payments. For the nine-month period ended September 30, 2012, we made interest payments totaling $960. These payments exclude interest credited to policyholders’ accounts.

Deferred Policy Acquisition Costs ("DAC")

Certain costs associated with underwriting new business (primarily commissions, premium taxes and variable underwriting and policy issue expenses associated with successful acquisition efforts) are deferred. The following table is a summary of the components of DAC, including the related amortization recognized for the nine-month period ended September 30, 2013.




	Property & Casualty			Life Insurance			Total
Recorded asset at beginning of period	$	64,947		$	40,353		$	105,300
Underwriting costs deferred	113,812			4,384			118,196
Amortization of deferred policy acquisition costs	(108,591		)	(4,965		)	(113,556		)
Ending unamortized deferred policy acquisition costs	$	70,168		$	39,772		$	109,940
Change in "shadow" deferred policy acquisition costs	—			34,098			34,098
Recorded asset at end of period	$	70,168		$	73,870		$	144,038

Property and casualty policy acquisition costs are deferred and amortized as premium revenue is recognized. The accounting method we follow 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 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. For non-traditional life 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. Expected premium revenue and gross profits are based on the same mortality and withdrawal assumptions used in determining future policy benefits. For non-traditional policies, 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 $4,597 and $38,695 at September 30, 2013 and December 31, 2012, 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 $14,949 and $11,443 for the nine-month periods ended September 30, 2013 and 2012, respectively. Our effective tax rate is different than the federal statutory rate of 35.0% due principally to the effect of tax-exempt municipal bond interest income and non-taxable dividend income.

Table of Contents

We did not recognize any liability for unrecognized tax benefits at September 30, 2013 or December 31, 2012. 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 2013

Comprehensive Income

In February 2013, the Financial Accounting Standards Board ("FASB") issued guidance that requires significant items that are reclassified out of accumulated other comprehensive income ("AOCI") to net income in their entirety in the same reporting period, to be reported to show the effect of the reclassifications on the respective line items of the statement where net income is presented. These reclassifications can be presented either on the face of the statement where net income is presented or in the notes to the financial statements. For items that are not reclassified to net income in their entirety in the same reporting period a cross reference to other disclosures currently required under GAAP is required in the notes to the financial statements. The new guidance also requires companies to report changes in the accumulated balances of each component of AOCI. This new guidance was effective for annual and interim periods beginning after December 15, 2012. The Company adopted the new guidance effective January 1, 2013. The adoption of the new guidance affects presentation only and therefore had no impact on the Company's results of operations or financial position.

Pending Adoption of Accounting Standards

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. This new guidance is effective for annual and interim periods beginning after December 15, 2013. The Company currently does not have any liability for unrecognized tax benefits. Therefore, the adoption of the new guidance in not expected to have an impact on the Company's financial position or results of operations.

NOTE 2. SUMMARY OF INVESTMENTS

Fair Value of Investments

A reconciliation of the amortized cost (cost for equity securities) to fair value of investments in held-to-maturity and available-for-sale fixed maturity and equity securities as of September 30, 2013 and December 31, 2012, is as follows:

Table of Contents



September 30, 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	$	684	$	7	$	—	$	691
Corporate bonds - financial services	200		—		—		200
Mortgage-backed securities	218		11		—		229
Total Held-to-Maturity Fixed Maturities	$	1,102	$	18	$	—	$	1,120
AVAILABLE-FOR-SALE
Fixed maturities
Bonds
U.S. Treasury	$	35,882	$	551	$	86	$	36,347
U.S. government agency	224,953		449		11,844		213,558
States, municipalities and political subdivisions	699,796		36,302		9,138		726,960
Foreign bonds	174,839		6,333		324		180,848
Public utilities	224,874		8,620		947		232,547
Corporate bonds
Energy	154,915		4,802		858		158,859
Industrials	242,348		6,783		2,257		246,874
Consumer goods and services	176,217		4,544		1,099		179,662
Health care	95,424		3,576		1,074		97,926
Technology, media and telecommunications	130,972		2,968		3,203		130,737
Financial services	241,319		8,921		763		249,477
Mortgage-backed securities	23,641		308		269		23,680
Collateralized mortgage obligations	294,759		2,393		10,067		287,085
Asset-backed securities	3,827		358		—		4,185
Redeemable preferred stocks	334		3		—		337
Total Available-for-Sale Fixed Maturities	$	2,724,100	$	86,911	$	41,929	$	2,769,082
Equity securities
Common stocks
Public utilities	$	7,231	$	8,543	$	41	$	15,733
Energy	5,094		8,152		—		13,246
Industrials	13,308		27,741		59		40,990
Consumer goods and services	10,356		9,391		10		19,737
Health care	7,920		13,767		—		21,687
Technology, media and telecommunications	6,204		6,229		64		12,369
Financial services	15,854		64,267		90		80,031
Nonredeemable preferred stocks	4,984		5		244		4,745
Total Available-for-Sale Equity Securities	$	70,951	$	138,095	$	508	$	208,538
Total Available-for-Sale Securities	$	2,795,051	$	225,006	$	42,437	$	2,977,620

Table of Contents



December 31, 2012
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	$	1,185	$	11	$	—	$	1,196
Corporate bonds - financial services	200		—		—		200
Mortgage-backed securities	256		15		—		271
Collateralized mortgage obligations	14		—		—		14
Total Held-to-Maturity Fixed Maturities	$	1,655	$	26	$	—	$	1,681
AVAILABLE-FOR-SALE
Fixed maturities
Bonds
U.S. Treasury	$	37,887	$	939	$	5	$	38,821
U.S. government agency	45,566		429		67		45,928
States, municipalities and political subdivisions	739,752		55,572		819		794,505
Foreign bonds	207,359		11,863		62		219,160
Public utilities	232,550		15,208		32		247,726
Corporate bonds
Energy	169,973		9,758		—		179,731
Industrials	280,185		13,690		212		293,663
Consumer goods and services	193,313		9,813		151		202,975
Health care	115,654		7,111		80		122,685
Technology, media and telecommunications	123,660		6,909		198		130,371
Financial services	271,061		13,858		1,059		283,860
Mortgage-backed securities	27,940		888		21		28,807
Collateralized mortgage obligations	208,042		7,702		1,160		214,584
Asset-backed securities	4,480		406		—		4,886
Redeemable preferred stocks	378		—		2		376
Total Available-for-Sale Fixed Maturities	$	2,657,800	$	154,146	$	3,868	$	2,808,078
Equity securities
Common stocks
Public utilities	$	7,231	$	7,268	$	83	$	14,416
Energy	5,094		6,903		—		11,997
Industrials	13,031		19,827		174		32,684
Consumer goods and services	10,394		8,535		50		18,879
Health care	7,920		10,286		125		18,081
Technology, media and telecommunications	5,367		5,155		95		10,427
Financial services	15,701		52,936		145		68,492
Nonredeemable preferred stocks	2,154		25		28		2,151
Total Available-for-Sale Equity Securities	$	66,892	$	110,935	$	700	$	177,127
Total Available-for-Sale Securities	$	2,724,692	$	265,081	$	4,568	$	2,985,205

Table of Contents

Maturities

The amortized cost and fair value of held-to-maturity, available-for-sale and trading fixed maturity securities at September 30, 2013, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset-backed securities, mortgage-backed securities and collateralized mortgage obligations may be subject to prepayment risk and are therefore not categorized by contractual maturity.



	Held-To-Maturity				Available-For-Sale				Trading
September 30, 2013	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	570	$	572	$	257,096	$	261,686	$	1,828	$	1,972
Due after one year through five years	314		319		989,457		1,039,814		3,965		4,918
Due after five years through 10 years	—		—		830,883		844,061		—		—
Due after 10 years	—		—		324,437		308,571		2,687		3,087
Asset-backed securities	—		—		3,827		4,185		—		—
Mortgage-backed securities	218		229		23,641		23,680		—		—
Collateralized mortgage obligations	—		—		294,759		287,085		—		—
	$	1,102	$	1,120	$	2,724,100	$	2,769,082	$	8,480	$	9,977

Net Realized Investment Gains and Losses

Net realized gains (losses) on disposition of investments are computed using the specific identification method and are included in the computation of net income. A summary of the components of net realized investment gains (losses) is as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Net realized investment gains (losses)
Fixed maturities:
Held-to-maturity	$	—		$	11		$	—		$	11
Available-for-sale	626			91			2,531			2,414
Trading securities
Change in fair value	360			966			790			927
Sales	310			(64		)	608			313
Equity securities
Available-for-sale	(9		)	—			3,739			697
Trading securities
Change in fair value	(97		)	296			(116		)	296
Sales	—			—			38			—
Other long-term investments	—			—			(340		)	—
Total net realized investment gains	$	1,190		$	1,300		$	7,250		$	4,658

The proceeds and gross realized gains (losses) on the sale of available-for-sale securities are as follows:



	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013			2012
Proceeds from sales	$	17,036		$	—	$	23,007		$	12,003
Gross realized gains	213			—		451			472
Gross realized losses	(139		)	—		(139		)	(25		)

There were no sales of held-to-maturity securities during the three- and nine-month periods ended September 30, 2013 and 2012.

Table of Contents

Our investment portfolio includes trading securities with embedded derivatives. These securities, which are primarily convertible redeemable preferred debt securities, are recorded at fair value. Income or loss, including the change in the fair value of these trading securities, is recognized currently in earnings as a component of net realized investment gains and losses. Our portfolio of trading securities had a fair value of $12,441 and $15,371 at September 30, 2013 and December 31, 2012, respectively.

Off-Balance Sheet Arrangements

Pursuant to an agreement with one of our limited liability partnership investments, we are contractually committed through December 31, 2017 to make capital contributions upon request of the partnership. Our remaining potential contractual obligation was $1,950 at September 30, 2013.

Unrealized Appreciation

A summary of the changes in net unrealized investment appreciation during the reporting period is as follows:



	Nine Months Ended September 30,
	2013			2012
Change in net unrealized investment appreciation
Available-for-sale fixed maturities	$	(105,296	)	$	29,205
Equity securities	27,352			19,873
Deferred policy acquisition costs	34,098			(10,854		)
Income tax effect	15,346			(13,270		)
Total change in net unrealized investment appreciation, net of tax	$	(28,500	)	$	24,954

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

The tables on the following pages summarize our fixed maturity and equity securities that were in an unrealized loss position at September 30, 2013 and December 31, 2012. The securities are presented by the length of time they have been continuously in an unrealized loss position. It is possible that we could recognize OTTI charges in future periods on securities held at September 30, 2013, 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 which resulted in the recognition of a $139 credit loss OTTI in our unaudited Consolidated Statements of Income and Comprehensive Income for the three- and nine-month periods ended September 30, 2013. 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 our cost basis or the securities mature.

We have evaluated the near-term prospects of the issuers of our equity securities in relation to the severity and duration of the unrealized loss, and unless otherwise noted, these losses do not warrant the recognition of an OTTI charge at September 30, 2013. Our largest unrealized loss greater than 12 months on an individual equity security at September 30, 2013 was $42. 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.

Table of Contents




September 30, 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	8	$	7,493	$	86	—	$	—	$	—	$	7,493	$	86
U.S. government agency	61	170,795		11,844		—	—		—		170,795		11,844
States, municipalities and political subdivisions	156	119,047		8,255		2	5,867		883		124,914		9,138
Foreign bonds	9	23,867		324		—	—		—		23,867		324
Public utilities	27	52,241		947		—	—		—		52,241		947
Corporate bonds
Energy	10	25,104		858		—	—		—		25,104		858
Industrials	27	71,118		2,257		—	—		—		71,118		2,257
Consumer goods and services	19	38,968		983		6	3,256		116		42,224		1,099
Health care	9	25,008		963		1	1,181		111		26,189		1,074
Technology, media and telecommunications	16	55,331		3,203		—	—		—		55,331		3,203
Financial services	6	17,773		699		2	6,513		64		24,286		763
Mortgage-backed securities	37	10,620		250		5	333		19		10,953		269
Collateralized mortgage obligations	100	198,380		8,637		13	26,367		1,430		224,747		10,067
Total Available-for-Sale Fixed Maturities	485	$	815,745	$	39,306	29	$	43,517	$	2,623	$	859,262	$	41,929
Equity securities
Common stocks
Public utilities	3	$	267	$	41	—	$	—	$	—	$	267	$	41
Industrials	—	—		—		3	140		59		140		59
Consumer goods and services	—	—		—		2	66		10		66		10
Technology, media and telecommunications	4	245		2		6	227		62		472		64
Financial services	1	47		19		3	206		71		253		90
Nonredeemable preferred stocks	3	3,425		183		2	1,170		61		4,595		244
Total Available-for-Sale Equity Securities	11	$	3,984	$	245	16	$	1,809	$	263	$	5,793	$	508
Total Available-for-Sale Securities	496	$	819,729	$	39,551	45	$	45,326	$	2,886	$	865,055	$	42,437

Table of Contents




December 31, 2012	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	$	1,724	$	5	—	$	—	$	—	$	1,724	$	5
U.S. government agency	5	17,654		67		—	—		—		17,654		67
States, municipalities and political subdivisions	31	41,775		819		—	—		—		41,775		819
Foreign bonds	1	3,323		48		1	558		14		3,881		62
Public utilities	2	3,155		32		—	—		—		3,155		32
Corporate bonds
Industrials	4	12,194		109		1	2,897		103		15,091		212
Consumer goods and services	—	—		—		7	4,606		151		4,606		151
Health care	3	7,416		80		—	—		—		7,416		80
Technology, media and telecommunications	5	13,402		198		—	—		—		13,402		198
Financial services	2	1,005		1		24	24,693		1,058		25,698		1,059
Mortgage-backed securities	7	4,472		21		—	—		—		4,472		21
Collateralized mortgage obligations	27	74,702		1,004		1	29		156		74,731		1,160
Redeemable preferred stocks	2	376		2		—	—		—		376		2
Total Available-for-Sale Fixed Maturities	91	$	181,198	$	2,386	34	$	32,783	$	1,482	$	213,981	$	3,868
Equity securities
Common stocks
Public utilities	3	$	225	$	83	—	$	—	$	—	$	225	$	83
Industrials	4	482		52		9	621		122		1,103		174
Consumer goods and services	2	280		19		4	372		31		652		50
Health care	1	31		2		3	896		123		927		125
Technology, media and telecommunications	5	241		7		7	581		88		822		95
Financial services	1	47		19		7	1,109		126		1,156		145
Nonredeemable preferred stocks	—	—		—		2	1,203		28		1,203		28
Total Available-for-Sale Equity Securities	16	$	1,306	$	182	32	$	4,782	$	518	$	6,088	$	700
Total Available-for-Sale Securities	107	$	182,504	$	2,568	66	$	37,565	$	2,000	$	220,069	$	4,568

Table of Contents

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.

In most cases, we use quoted market prices to determine the fair value of fixed maturities, equity securities, trading securities and short-term investments. When quoted market prices do not exist, we base estimates of fair values on pricing or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management’s own assumptions about the assumptions a market participant would use in pricing the financial instrument.

The fair value of our mortgage loans is determined by modeling performed by us based on the stated principal and coupon payments provided for in the loan agreement. These cash flows are then discounted using an appropriate risk-adjusted discount rate to determine the security's fair value, which is a Level 3 fair value measurement.

The fair value of our policy loans is equivalent to carrying value, which is a reasonable estimate of fair value. We do not make policy loans for amounts in excess of the cash surrender value of the related policy. In all instances, the policy loans are fully collateralized by the related liability for future policy benefits for traditional insurance policies or by the policyholders’ account balance for non-traditional policies.

Our other long-term investments consist primarily of our interests in limited liability partnerships that are recorded on the equity method of accounting. The values of the partnerships are determined by the fund managers primarily based on the fair value of the underlying investments held. In management’s opinion, these values represent a reasonable estimate of fair value.

For cash and cash equivalents and accrued investment income, carrying value is a reasonable estimate of fair value due to the short-term nature of these financial instruments.

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

Table of Contents

A summary of the carrying value and estimated fair value of our financial instruments at September 30, 2013 and December 31, 2012 is as follows:



	September 30, 2013				December 31, 2012
	Fair Value		Carrying Value		Fair Value		Carrying Value
Assets
Investments
Fixed maturities:
Held-to-maturity securities	$	1,120	$	1,102	$	1,681	$	1,655
Available-for-sale securities	2,769,082		2,769,082		2,808,078		2,808,078
Trading securities	9,977		9,977		13,353		13,353
Equity securities:
Available-for-sale securities	208,538		208,538		177,127		177,127
Trading securities	2,464		2,464		2,018		2,018
Mortgage loans	4,278		4,477		5,037		4,633
Policy loans	6,361		6,361		6,671		6,671
Other long-term investments	34,876		34,876		30,028		30,028
Short-term investments	800		800		800		800
Cash and cash equivalents	86,691		86,691		107,466		107,466
Accrued investment income	29,064		29,064		30,375		30,375
Liabilities
Policy reserves
Annuity (accumulations) ⁽¹⁾	$	965,177	$	935,869	$	1,043,866	$	983,579
Annuity (benefit payments)	137,358		93,695		139,213		93,701

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

Current accounting guidance on fair value measurements includes the application of a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Our financial instruments that are recorded at fair value are categorized into a three-level hierarchy, which is based upon the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets (i.e., Level 1) and the lowest priority to unobservable inputs (i.e., Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the financial instrument.

Financial instruments recorded at fair value are categorized in the fair value hierarchy as follows:


•	Level 1: Valuations are based on unadjusted quoted prices in active markets for identical financial instruments that we have the ability to access.


•	Level 2: Valuations are based on quoted prices for similar financial instruments, other than quoted prices included in Level 1, in markets that are not active or on inputs that are observable either directly or indirectly for the full term of the financial instrument.


•	Level 3: Valuations are based on pricing or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management’s own assumptions about the assumptions a market participant would use in pricing the financial instrument.

Transfers between levels, if any, are recorded as of the beginning of the reporting period.

To determine the fair value of the majority of our investments, we utilize prices obtained from independent, nationally recognized pricing services. We obtain one price for each security. When the pricing services cannot provide a determination of fair value for a specific security, we obtain non-binding price quotes from broker-dealers

Table of Contents

with whom we have had several years experience and who have demonstrated knowledge of the subject security. We request and utilize one broker quote per security.

We validate the prices obtained from independent pricing services and brokers prior to their use for reporting purposes by evaluating their reasonableness on a monthly basis. Our validation process includes a review for unusual fluctuations. In our opinion, the pricing obtained at September 30, 2013 and December 31, 2012 was reasonable.

In order to determine the proper classification in the fair value hierarchy for each security where the price is obtained from an independent pricing service, we obtain and evaluate the vendors’ pricing procedures and inputs used to price the security, which include unadjusted quoted market prices for identical securities, such as a New York Stock Exchange closing price, and quoted prices for identical securities in markets that are not active. For fixed maturity securities, an evaluation of interest rates and yield curves observable at commonly quoted intervals, volatility, prepayment speeds, credit risks and default rates may also be performed. We have determined that these processes and inputs result in fair values and classifications consistent with the applicable accounting guidance on fair value measurements.

We review our fair value hierarchy categorizations on a quarterly basis at which time the classification of certain financial instruments may change if the input observations have changed.

The following tables present the categorization for our financial instruments measured at fair value on a recurring basis in our Consolidated Balance Sheets at September 30, 2013 and December 31, 2012:

Table of Contents



			Fair Value Measurements
Description	September 30, 2013		Level 1		Level 2		Level 3
AVAILABLE-FOR-SALE
Fixed maturities
Bonds
U.S. Treasury	$	36,347	$	—	$	36,347	$	—
U.S. government agency	213,558		—		213,558		—
States, municipalities and political subdivisions	726,960		—		726,172		788
Foreign bonds	180,848		—		180,848		—
Public utilities	232,547		—		232,547		—
Corporate bonds
Energy	158,859		—		158,859		—
Industrials	246,874		—		243,778		3,096
Consumer goods and services	179,662		—		178,171		1,491
Health care	97,926		—		97,926		—
Technology, media and telecommunications	130,737		—		130,737		—
Financial services	249,477		—		237,113		12,364
Mortgage-backed securities	23,680		—		23,680		—
Collateralized mortgage obligations	287,085		—		287,085		—
Asset-backed securities	4,185		—		1,979		2,206
Redeemable preferred stocks	337		337		—		—
Total Available-for-Sale Fixed Maturities	$	2,769,082	$	337	$	2,748,800	$	19,945
Equity securities
Common stocks
Public utilities	$	15,733	$	15,733	$	—	$	—
Energy	13,246		13,246		—		—
Industrials	40,990		40,969		21		—
Consumer goods and services	19,737		19,737		—		—
Health care	21,687		21,687		—		—
Technology, media and telecommunications	12,369		12,369		—		—
Financial services	80,031		76,161		61		3,809
Nonredeemable preferred stocks	4,745		1,715		3,030		—
Total Available-for-Sale Equity Securities	$	208,538	$	201,617	$	3,112	$	3,809
Total Available-for-Sale Securities	$	2,977,620	$	201,954	$	2,751,912	$	23,754
TRADING
Bonds
Foreign bonds	$	1,262	$	—	$	1,262	$	—
Corporate bonds
Industrials	1,213		—		1,213		—
Consumer goods and services	111		—		111		—

Table of Contents



Health care	969		—		969		—
Technology, media and telecommunications	2,595		—		2,595		—
Financial services	1,572		—		1,572		—
Redeemable preferred stocks	2,255		2,255		—		—
Equity securities
Energy	556		556		—		—
Health care	315		315		—		—
Nonredeemable preferred stocks	1,593		1,593		—		—
Total Trading Securities	$	12,441	$	4,719	$	7,722	$	—
Short-Term Investments	$	800	$	800	$	—	$	—
Money Market Accounts	$	26,652	$	26,652	$	—	$	—
Total Assets Measured at Fair Value	$	3,017,513	$	234,125	$	2,759,634	$	23,754

Table of Contents



			Fair Value Measurements
Description	December 31, 2012		Level 1		Level 2		Level 3
AVAILABLE-FOR-SALE
Fixed maturities
Bonds
U.S. Treasury	$	38,821	$	—	$	38,821	$	—
U.S. government agency	45,928		—		45,928		—
States, municipalities and political subdivisions	794,505		—		793,755		750
Foreign bonds	219,160		—		218,602		558
Public utilities	247,726		—		247,726		—
Corporate bonds
Energy	179,731		—		179,731		—
Industrials	293,663		—		290,766		2,897
Consumer goods and services	202,975		—		201,633		1,342
Health care	122,685		—		122,685		—
Technology, media and telecommunications	130,371		—		130,371		—
Financial services	283,860		—		271,991		11,869
Mortgage-backed securities	28,807		—		28,807		—
Collateralized mortgage obligations	214,584		—		214,584		—
Asset-backed securities	4,886		—		2,398		2,488
Redeemable preferred stocks	376		376		—		—
Total Available-for-Sale Fixed Maturities	$	2,808,078	$	376	$	2,787,798	$	19,904
Equity securities
Common stocks
Public utilities	$	14,416	$	14,416	$	—	$	—
Energy	11,997		11,997		—		—
Industrials	32,684		32,658		26		—
Consumer goods and services	18,879		18,879		—		—
Health care	18,081		18,081		—		—
Technology, media and telecommunications	10,427		10,427		—		—
Financial services	68,492		64,800		56		3,636
Nonredeemable preferred stocks	2,151		1,906		245		—
Total Available-for-Sale Equity Securities	$	177,127	$	173,164	$	327	$	3,636
Total Available-for-Sale Securities	$	2,985,205	$	173,540	$	2,788,125	$	23,540
TRADING
Bonds
Foreign bonds	$	1,379	$	—	$	1,379	$	—
Corporate bonds
Industrials	1,299		—		1,299		—
Consumer goods and services	1,532		—		1,532		—
Health care	1,824		—		1,824		—
Technology, media and telecommunications	2,250		—		2,250		—

Table of Contents



Financial services	1,486		—		1,486		—
Redeemable preferred stocks	3,583		3,583		—		—
Equity securities - health care	303		303		—		—
Nonredeemable preferred stocks	1,715		1,715		—		—
Total Trading Securities	$	15,371	$	5,601	$	9,770	$	—
Short-Term Investments	$	800	$	800	$	—	$	—
Money Market Accounts	$	45,613	$	45,613	$	—	$	—
Total Assets Measured at Fair Value	$	3,046,989	$	225,554	$	2,797,895	$	23,540

Table of Contents

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

The fair value of securities that are categorized as Level 2 is determined by management after reviewing market prices obtained from independent pricing services and brokers. Such estimated fair values do not necessarily represent the values for which these securities could have been sold at the reporting date. Our independent pricing services and brokers obtain prices from reputable pricing vendors in the marketplace. They continually monitor and review the external pricing sources, while actively participating to resolve any pricing issues that may arise.

For the three- and nine-month periods ended September 30, 2013, the change in our available-for-sale securities categorized as Level 1 and Level 2 is the result of investment purchases, which were made using funds held in our money market accounts, disposals and the change in unrealized gains on both fixed maturities and equity securities. There were no significant transfers of securities between Level 1 and Level 2 during the period.

Securities categorized as Level 3 include holdings in certain private placement fixed maturity and equity securities and certain other securities that were determined to be other-than-temporarily impaired in a prior period and for which an active market does not currently exist.

The fair value of our Level 3 private placement securities is determined by management relying on pricing received from our independent pricing services and brokers consistent with the process to estimate fair value for Level 2 securities. If we cannot obtain pricing from these sources, which occurs on a limited basis, management will perform an analysis of the contractual cash flows of the underlying security to estimate fair value.

The fair value of our Level 3 impaired securities was determined primarily based upon management’s assumptions regarding the timing and amount of future cash inflows. If a security has been written down or the issuer is in bankruptcy, management relies in part on outside opinions from rating agencies, our lien position on the security, general economic conditions and management’s expertise to determine fair value. We have the ability and the positive intent to hold securities until such time that we are able to recover all or a portion of our original investment. If there is no market for the impaired security at the balance sheet date, management will estimate the security’s fair value based on other securities in the market. Management will continue to monitor securities after the balance sheet date to confirm that their estimated fair value is reasonable.

The following table provides a summary of the changes in fair value of our Level 3 securities for the three-month period ended September 30, 2013:



	States, municipalities and political subdivisions		Foreign bonds		Corporate bonds			Asset-backed securities			Equities		Total
Balance at June 30, 2013	$	788	$	—	$	17,746		$	2,311		$	3,809	$	24,654
Realized gains ⁽¹⁾	—		—		—			18			—		18
Unrealized losses⁽¹⁾	—		—		(533		)	(20		)	—		(553		)
Purchases	—		—		105			—			—		105
Disposals	—		—		(367		)	(103		)	—		(470		)
Balance at September 30, 2013	$	788	$	—	$	16,951		$	2,206		$	3,809	$	23,754

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

Table of Contents

The following table provides a summary of the changes in fair value of our Level 3 securities for the nine-month period ended September 30, 2013:



	States, municipalities and political subdivisions			Foreign bonds			Corporate bonds			Asset-backed securities			Equities		Total
Balance at December 31, 2012	$	750		$	558		$	16,108		$	2,488		$	3,636	$	23,540
Realized gains ⁽¹⁾	—			35			—			18			—		53
Unrealized gains⁽¹⁾	103			13			1,554			—			—		1,670
Purchases	—			—			105			—			173		278
Disposals	(65		)	(606		)	(816		)	(300		)	—		(1,787		)
Balance at September 30, 2013	$	788		$	—		$	16,951		$	2,206		$	3,809	$	23,754

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

The fixed maturities reported as disposals for the three- and nine-month periods ended September 30, 2013 relate to the receipt of principal on calls or sinking fund bonds, in accordance with the applicable indentures.

NOTE 4. EMPLOYEE BENEFITS

Net Periodic Benefit Cost

The components of the net periodic benefit cost for our pension and postretirement benefit plans are as follows:



	Pension Plan						Postretirement Benefit Plan
Three Months Ended September 30,	2013			2012			2013		2012

Net periodic benefit cost
Service cost	$	1,575		$	1,777		$	1,401	$	496
Interest cost	1,295			1,263			472		398
Expected return on plan assets	(1,443		)	(1,341		)	—		—
Amortization of prior service cost	—			2			—		(8		)
Amortization of net loss	1,530			1,035			385		56
Net periodic benefit cost	$	2,957		$	2,736		$	2,258	$	942



	Pension Plan						Postretirement Benefit Plan
Nine Months Ended September 30,	2013			2012			2013		2012

Net periodic benefit cost
Service cost	$	4,725		$	3,846		$	2,906	$	1,488
Interest cost	3,882			3,787			1,319		1,194
Expected return on plan assets	(4,329		)	(4,023		)	—		—
Amortization of prior service cost	—			5			—		(24		)
Amortization of net loss	3,741			3,311			659		168
Net periodic benefit cost	$	8,019		$	6,926		$	4,884	$	2,826

Employer Contributions

We previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012 that we expected to contribute $7,000 to the pension plan in 2013. For the nine-month period ended September 30, 2013, we contributed $7,000 to the pension plan. We anticipate that the total contribution in 2013 will not vary significantly from our expected contribution.

Table of Contents

NOTE 5. STOCK-BASED COMPENSATION

Non-qualified Employee Stock Award Plan

The United Fire Group, Inc. 2008 Stock Plan (the “2008 Stock Plan”) authorized the issuance of restricted and unrestricted stock awards, stock appreciation rights, incentive stock options, and non-qualified stock options for up to 1,900,000 shares of United Fire common stock to employees, with 345,056 authorized shares remaining available for future issuance at September 30, 2013. The 2008 Stock Plan is administered by the Board of Directors, which determines those employees who will receive awards, when awards will be granted, and the terms and conditions of the awards. The Board of Directors may also take any action it deems necessary and appropriate for the administration of the 2008 Stock Plan. Pursuant to the 2008 Stock Plan, the Board of Directors may, at its sole discretion, grant awards to our employees.

Options granted pursuant to the 2008 Stock Plan are granted to buy shares of United Fire's common stock at the market value of the stock on the date of grant. All outstanding option awards vest and are exercisable in installments of 20.0 percent of the number of shares covered by the option award each year from the grant date, unless the Board of Directors authorizes the acceleration of vesting. To the extent not exercised, vested option awards accumulate and are exercisable by the awardee, in whole or in part, in any subsequent year included in the option period, but not later than 10 years from the grant date. Restricted and unrestricted stock awards granted pursuant to the 2008 Stock Plan are granted at the market value of our common stock on the date of the grant. Restricted stock awards fully vest after five years from the date of issuance, unless accelerated upon the approval of the Board of Directors, at which time United Fire common stock will be issued to the awardee. All awards are generally granted free of charge to the eligible employees of United Fire as designated by the Board of Directors.

The activity in the 2008 Stock Plan is displayed in the following table:



Authorized Shares Available for Future Award Grants	Nine Months Ended September 30, 2013		From Inception to September 30, 2013
Beginning balance	568,746		1,900,000
Number of awards granted	(238,517	)	(1,682,341	)
Number of awards forfeited or expired	14,827		127,397
Ending balance	345,056		345,056
Number of option awards exercised	139,476		366,318
Number of unrestricted stock awards granted	780		4,400
Number of restricted stock awards vested	18,576		18,576

Non-qualified Non-employee Director Stock Option and Restricted Stock Plan

The United Fire Group, Inc. 2005 Non-qualified Non-Employee Director Stock Option and Restricted Stock Plan (the "Director Plan") authorizes the issuance of restricted stock awards and non-qualified stock options to purchase shares of United Fire’s common stock to non-employee directors. At September 30, 2013, we had 103,912 authorized shares available for future issuance.

The Board of Directors has the authority to determine which non-employee directors receive awards, when options and restricted stock shall be granted, the option price, the option expiration date, the date of grant, the vesting schedule of options or whether the options shall be immediately vested, the terms and conditions of options and restricted stock (other than those terms and conditions set forth in the plan) and the number of shares of common stock to be issued pursuant to an option agreement or restricted stock agreement. The Board of Directors may also take any action it deems necessary and appropriate for the administration of the Director Plan.

Table of Contents

The activity in the Director Plan is displayed in the following table:



Authorized Shares Available for Future Award Grants	Nine Months Ended September 30, 2013		From Inception to September 30, 2013
Beginning balance	130,012		300,000
Number of awards granted	(26,100	)	(202,091	)
Number of awards forfeited or expired	—		6,003
Ending balance	103,912		103,912
Number of option awards exercised	3,156		3,156
Number of restricted stock awards vested	6,402		6,402

Stock-Based Compensation Expense

For the three-month periods ended September 30, 2013 and 2012, we recognized stock-based compensation expense of $618 and $402, respectively. For the nine-month periods ended September 30, 2013 and 2012, we recognized stock-based compensation expense of $1,436 and $1,318, respectively.

As of September 30, 2013, we had $3,613 in stock-based compensation expense that has yet to be recognized through our results of operations. We expect this compensation to be recognized over the remainder of 2013 and subsequent years according to the following table, except with respect to awards that are accelerated by the Board of Directors, in which case we will recognize any remaining compensation expense in the period in which the awards are accelerated.



2013	$	346
2014	1,224
2015	993
2016	569
2017	423
2018	58
Total	$	3,613

NOTE 6. SEGMENT INFORMATION

We have two reportable business segments in our operations: property and casualty insurance and life insurance. The property and casualty insurance segment has six domestic locations from which it conducts its business. The life insurance segment operates from our home office. Because all of our insurance is sold domestically, we have no revenues allocable to foreign operations.

We evaluate the two segments on the basis of both statutory accounting practices prescribed or permitted by our states of domicile and GAAP. We analyze results based on profitability (i.e., loss ratios), expenses, and return on equity. The basis we use to determine and analyze segments and to measure segment profit or loss have not changed from that reported in our Annual Report on Form 10-K for the year ended December 31, 2012.

Table of Contents

We have reconciled the following table for the three-month periods ended September 30, 2013 and 2012 to the amounts reported in our unaudited Consolidated Financial Statements to adjust for intersegment eliminations.



	Property and Casualty Insurance			Life Insurance			Total
Three Months Ended September 30, 2013
Net premiums earned	$	178,553		$	15,789		$	194,342
Investment income, net of investment expenses	11,679			15,587			27,266
Net realized investment gains	816			374			1,190
Other income	145			192			337
Total reportable segment	$	191,193		$	31,942		$	223,135
Intersegment eliminations	12			(123		)	(111		)
Total revenues	$	191,205		$	31,819		$	223,024
Net income	$	10,282		$	1,443		$	11,725
Assets	$	1,977,120		$	1,746,577		$	3,723,697
Invested assets	$	1,401,982		$	1,635,695		$	3,037,677
Three Months Ended September 30, 2012
Net premiums earned	$	161,232		$	15,412		$	176,644
Investment income, net of investment expenses	11,093			17,614			28,707
Net realized investment gains	1,214			86			1,300
Other income (losses)	(19		)	104			85
Total reportable segment	$	173,520		$	33,216		$	206,736
Intersegment eliminations	(42		)	(113		)	(155		)
Total revenues	$	173,478		$	33,103		$	206,581
Net income	$	7,616		$	1,114		$	8,730
Assets	$	1,923,407		$	1,814,403		$	3,737,810
Invested assets	$	1,334,278		$	1,734,788		$	3,069,066

Table of Contents

We have reconciled the following table for the nine-month periods ended September 30, 2013 and 2012 to the amounts reported in our unaudited Consolidated Financial Statements to adjust for intersegment eliminations.



	Property and Casualty Insurance			Life Insurance			Total
Nine Months Ended September 30, 2013
Net premiums earned	$	511,781		$	45,991		$	557,772
Investment income, net of investment expenses	34,379			48,297			82,676
Net realized investment gains	5,405			1,845			7,250
Other income	229			405			634
Total reportable segment	$	551,794		$	96,538		$	648,332
Intersegment eliminations	85			(369		)	(284		)
Total revenues	$	551,879		$	96,169		$	648,048
Net income	$	44,207		$	5,407		$	49,614
Assets	$	1,977,120		$	1,746,577		$	3,723,697
Invested assets	$	1,401,982		$	1,635,695		$	3,037,677

Nine Months Ended September 30, 2012
Net premiums earned	$	461,902		$	46,557		$	508,459
Investment income, net of investment expenses	33,533			53,151			86,684
Net realized investment gains	1,765			2,893			4,658
Other income	177			407			584
Total reportable segment	$	497,377		$	103,008		$	600,385
Intersegment eliminations	(124		)	(335		)	(459		)
Total revenues	$	497,253		$	102,673		$	599,926
Net income	$	37,607		$	5,023		$	42,630
Assets	$	1,923,407		$	1,814,403		$	3,737,810
Invested assets	$	1,334,278		$	1,734,788		$	3,069,066

NOTE 7. EARNINGS PER COMMON SHARE

Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per share gives effect to all dilutive common shares outstanding during the reporting period. The dilutive shares we consider in our diluted earnings per share calculation relate to our outstanding stock options and restricted stock awards.

We determine the dilutive effect of our outstanding stock options using the “treasury stock” method. Under this method, we assume the exercise of all of the outstanding stock options whose exercise price is less than the weighted-average market value of our common stock during the reporting period. This method also assumes that the proceeds from the hypothetical stock option exercises are used to repurchase shares of our common stock at the weighted-average market value of the stock during the reporting period. The net of the assumed stock options exercised and assumed common shares repurchased represents the number of dilutive common shares, which we add to the denominator of the earnings per share calculation.

Table of Contents

The components of basic and diluted earnings per share were as follows for the three-month periods ended September 30, 2013 and 2012:



	Three Months Ended September 30,
(In Thousands Except Share Data)	2013				2012
	Basic		Diluted		Basic		Diluted
Net income	$	11,725	$	11,725	$	8,730	$	8,730
Weighted-average common shares outstanding	25,359,196		25,359,196		25,423,191		25,423,191
Add dilutive effect of restricted stock awards	—		59,849		—		56,608
Add dilutive effect of stock options	—		152,576		—		46,863
Weighted-average common shares for EPS calculation	25,359,196		25,571,621		25,423,191		25,526,662
Earnings per common share	$	0.46	$	0.45	$	0.34	$	0.34
Awards excluded from diluted EPS calculation⁽¹⁾	—		646,226		—		719,563


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

The components of basic and diluted earnings per share were as follows for the nine-month periods ended September 30, 2013 and 2012:



	Nine Months Ended September 30,
(In Thousands Except Share Data)	2013				2012
	Basic		Diluted		Basic		Diluted
Net income	$	49,614	$	49,614	$	42,630	$	42,630
Weighted-average common shares outstanding	25,301,432		25,301,432		25,468,293		25,468,293
Add dilutive effect of restricted stock awards	—		59,849		—		56,608
Add dilutive effect of stock options	—		152,930		—		41,745
Weighted-average common shares for EPS calculation	25,301,432		25,514,211		25,468,293		25,566,646
Earnings per common share	$	1.96	$	1.94	$	1.67	$	1.67
Awards excluded from diluted EPS calculation⁽¹⁾	—		661,826		—		1,098,292


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

NOTE 8. DEBT

In December 2011, United Fire entered into a credit agreement with a syndicate of financial institutions as lenders. KeyBank National Association is the administrative agent, lead arranger, sole book runner, swingline lender, and letter of credit issuer, and Bankers Trust Company is the syndication agent. The four-year credit agreement provides for a $100,000 unsecured revolving credit facility that includes a $20,000 letter of credit subfacility and a swing line subfacility of up to $5,000.

During the term of this credit agreement, we have the right to increase the total credit facility from $100,000 up to $125,000 if no event of default has occurred and is continuing and certain other conditions are satisfied. The credit facility is available for general corporate purposes, including working capital, acquisitions and liquidity purposes. Any principal outstanding under the credit facility is due in full at maturity, on December 22, 2015. The interest rate is based on our monthly choice of either a base rate or the London Interbank Offered Rate (“LIBOR”) plus, in each case, a calculated margin amount. A commitment fee on each lender's unused commitment under the credit facility is also payable quarterly.

Table of Contents

The credit agreement contains customary representations, covenants and events of default, including certain covenants that limit or restrict our ability to engage in certain activities. Subject to certain exceptions, these activities include restricting our ability to sell or transfer assets or enter into a merger or consolidate with another company, grant certain types of security interests, incur certain types of liens, impose restrictions on subsidiary dividends, enter into leaseback transactions, or incur certain indebtedness. The credit agreement contains certain financial covenants including covenants that require us to maintain a minimum consolidated net worth, a debt to capitalization ratio and minimum stockholders' equity.

There was no outstanding balance on the credit facility at September 30, 2013 and 2012. For the nine-month period ended September 30, 2013, we did not incur any interest expense related to this credit facility. For the nine-month period ended September 30, 2012, we incurred $780 in interest expense related to this credit facility. We were in compliance with all covenants for the credit agreement at September 30, 2013.

In connection with our acquisition of Mercer Insurance Group on March 28, 2011, we acquired three statutory trusts with outstanding issuances of trust preferred securities with a balance as of the acquisition date of $15,614. We redeemed two of the issuances totaling $8,035 during the three-month period ended March 31, 2012 and the remaining issuance in full in April 2012. We incurred $509 of interest expense related to these trust preferred securities for the nine-month period ended September 30, 2012.

NOTE 9. ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table shows the changes in the components of our accumulated other comprehensive income (loss), net of tax, for the three-month period ended September 30, 2013:



				Liability for
	Net unrealized			underfunded
	appreciation			employee
	on investments			benefit costs			Total
Balance as of June 30, 2013	$	116,173		$	(47,293	)	$	68,880
Change in accumulated other comprehensive income before reclassifications	(175		)	—			(175		)
Reclassification adjustments from accumulated other comprehensive income	(402		)	1,245			843
Balance as of September 30, 2013	$	115,596		$	(46,048	)	$	69,548

The following table shows the changes in the components of our accumulated other comprehensive income (loss), net of tax, for the nine-month period ended September 30, 2013:



				Liability for
	Net unrealized			underfunded
	appreciation			employee
	on investments			benefit costs			Total
Balance as of December 31, 2012	$	144,096		$	(48,908	)	$	95,188
Change in accumulated other comprehensive income before reclassifications	(24,424		)	—			(24,424		)
Reclassification adjustments from accumulated other comprehensive income	(4,076		)	2,860			(1,216		)
Balance as of September 30, 2013	$	115,596		$	(46,048	)	$	69,548

Table of Contents

Review Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

United Fire Group, Inc.

We have reviewed the consolidated balance sheet of United Fire Group, Inc. as of September 30, 2013, and the related consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2013 and 2012, the consolidated statements of cash flows for the nine-month periods ended September 30, 2013 and 2012, and the consolidated statement of stockholders' equity for the nine-month period ended September 30, 2013. These financial statements are the responsibility of the Company's management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of United Fire Group, Inc. as of December 31, 2012, and the related consolidated statements of income and comprehensive income, stockholders' equity, and cash flows for the year then ended (not presented herein) and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated March 4, 2013. In our opinion, the accompanying consolidated balance sheet of United Fire Group, Inc. as of December 31, 2012, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.



	/s/ Ernst & Young LLP
	Ernst & Young LLP

Chicago, Illinois

November 5, 2013

Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Part I, Item 1 "Financial Statements."

CRITICAL ACCOUNTING POLICIES

Critical accounting policies are defined as those that are representative of significant judgments and uncertainties and that potentially may result in materially different results under different assumptions and conditions. We base our discussion and analysis of our results of operations and financial condition on the amounts reported in our Consolidated Financial Statements, which we have prepared in accordance with GAAP. As we prepare these Consolidated Financial Statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses for the reporting period. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Our critical accounting policies are more fully described in our Management's Discussion and Analysis of Results of Operations and Financial Condition presented in our Annual Report on Form 10-K for the year ended December 31, 2012. There have been no changes in our critical accounting policies from December 31, 2012.

INTRODUCTION

The purpose of the Management's Discussion and Analysis is to provide an understanding of our results of operations and consolidated financial position. Our Management's Discussion and Analysis should be read in conjunction with our consolidated financial statements and related notes, including those in our Annual Report on Form 10-K for the year ended December 31, 2012. When we provide information on a statutory basis, we label it as such, otherwise, all other data is presented in accordance with GAAP.

OUR BUSINESS

Founded in 1946 as United Fire & Casualty Company, United Fire Group, Inc. ("United Fire", the "Registrant", the "Company", "we", "us", or "our") and its consolidated insurance subsidiaries provide insurance protection for individuals and businesses through several regional offices. Our property and casualty insurance company subsidiaries are licensed in 43 states plus the District of Columbia and are represented by approximately 1,200 independent agencies. Our life insurance subsidiary is licensed in 37 states and is represented by more than 900 independent agencies.

Segments

We operate two business segments, each with a wide range of products:


•	property and casualty insurance, which includes commercial insurance, personal insurance, surety bonds and assumed reinsurance; and


•	life insurance, which includes deferred and immediate annuities, universal life products and traditional life (primarily single premium whole life) insurance products.

We manage these business segments separately, as they generally do not share the same customer base, and each has different products, pricing, and expense structures.

For the nine-month period ended September 30, 2013, property and casualty insurance business accounted for approximately 92.0 percent of our net premiums earned, of which 90.4 percent was generated from commercial

Table of Contents

lines. Life insurance business accounted for approximately 8.0 percent of our net premiums earned, of which 69.4 percent was generated from traditional life insurance products.

Pooling Arrangement

All of our property and casualty insurance subsidiaries, with the exception of Texas General Indemnity Company, which is in runoff, are members of an intercompany reinsurance pooling arrangement. Pooling arrangements permit the participating companies to rely on the capacity of the entire pool’s capital and surplus, rather than being limited to policy exposures of a size commensurate with each participant’s own surplus level.

Geographic Concentration

For the nine-month period ended September 30, 2013, approximately 50.0 percent of our property and casualty premiums were written in Texas, Iowa, California, New Jersey, and Missouri; approximately 84.0 percent of our life insurance premiums were written in Iowa, Wisconsin, Minnesota, Nebraska and Illinois.

Segment Revenue and Expense

We evaluate segment profit or loss based upon operating and investment results. Segment profit or loss described in the following sections of the Management's Discussion and Analysis is reported on a pre-tax basis. Additional segment information is presented in Part I, Item 1, Note 6 “Segment Information” to the unaudited Consolidated Financial Statements.

Our primary sources of revenue are premiums and investment income. Major categories of expenses include losses and loss settlement expenses, future policy benefits, underwriting and other operating expenses and interest on policyholders’ accounts.

Profit Factors

Our profitability is influenced by many factors, including price, competition, economic conditions, investment returns, interest rates, catastrophic events and other natural disasters, man-made disasters, state regulations, court decisions, and changes in the law. To manage these risks and uncertainties, we seek to achieve consistent profitability through strong agency relationships, exceptional customer service, fair and prompt claims handling, disciplined underwriting, superior loss control services, prudent management of our investments, appropriate matching of assets and liabilities and effective and efficient use of technology.

Table of Contents

CONSOLIDATED FINANCIAL HIGHLIGHTS



	Three Months Ended September 30,							Nine Months Ended September 30,
(In Thousands)	2013			2012		%		2013			2012			%
Revenues
Net premiums earned	$	194,219		$	176,531	10.0	%	$	557,403		$	508,124		9.7	%
Investment income, net of investment expenses	27,278			28,665		(4.8	)	82,761			86,560			(4.4	)
Net realized investment gains (losses)
Other-than-temporary impairment charges	(139		)	—		NM		(139		)	(4		)	NM
All other net realized gains	1,329			1,300		2.2		7,389			4,662			58.5
Net realized investment gains	1,190			1,300		(8.5	)	7,250			4,658			55.6
Other income	337			85		NM		634			584			8.6
Total revenues	$	223,024		$	206,581	8.0	%	$	648,048		$	599,926		8.0	%

Benefits, Losses and Expenses
Losses and loss settlement expenses	$	131,168		$	119,756	9.5	%	$	349,073		$	318,006		9.8	%
Increase in liability for future policy benefits	8,415			9,815		(14.3	)	26,520			28,309			(6.3	)
Amortization of deferred policy acquisition costs	38,767			36,167		7.2		113,556			104,897			8.3
Other underwriting expenses	21,654			20,496		5.6		67,310			63,031			6.8
Interest on policyholders' accounts	8,625			10,327		(16.5	)	27,026			31,610			(14.5	)
Total benefits, losses and expenses	$	208,629		$	196,561	6.1	%	$	583,485		$	545,853		6.9	%

Income before income taxes	$	14,395		$	10,020	43.7	%	$	64,563		$	54,073		19.4	%
Federal income tax expense	2,670			1,290		107.0		14,949			11,443			30.6	%
Net income	$	11,725		$	8,730	34.3	%	$	49,614		$	42,630		16.4	%

NM=Not meaningful

The following is a summary of our financial performance for the three- and nine-month periods ended September 30, 2013:

Consolidated Results of Operations

For the three-month period ended September 30, 2013, net income was $11.7 million compared to $8.7 million for the same period of 2012, driven primarily by growth in property and casualty premium revenue, which was partially offset by an increase in loss and loss settlement expenses. Consolidated net premiums earned increased to $194.2 million, compared to $176.5 million for the same period of 2012. This increase represents organic growth and is the result of a combination of rate increases across most commercial and personal lines and new business writings.

Losses and loss settlement expenses increased by $11.4 million during the third quarter of 2013 compared to the same period of 2012, primarily due to growth in our overall business and an increase in loss severity.

For the nine-month period ended September 30, 2013, net income was $49.6 million compared to $42.6 million for the same period of 2012, driven primarily by growth in property and casualty premium revenue, which was partially offset by an increase in loss and loss settlement expenses. Consolidated net premiums earned increased to $557.4 million, compared to $508.1 million for the same period of 2012. This increase represents organic growth and is the result of a combination of rate increases across most commercial and personal lines and new business writings.

Losses and loss settlement expenses increased by $31.1 million during the first nine months of 2013 compared to the same period of 2012, primarily due to the overall growth in our business and an increase in loss severity in the

Table of Contents

commercial automobile and workers compensation lines of business, partially offset by a decrease in catastrophe loss experience. Pre-tax catastrophe losses totaled $27.2 million compared to $34.5 million in the same period of 2012, which was impacted by losses from storms in the Midwest.

Consolidated Financial Condition

At September 30, 2013, the book value per share of our common stock was $29.30. We repurchased 3,577 shares of our common stock in the nine-month period ended September 30, 2013. Under our share repurchase program, which is scheduled to expire in August 2014, we are authorized to repurchase an additional 1,126,143 shares of our common stock.

Net unrealized investment gains totaled $115.6 million as of September 30, 2013, a decrease of $28.5 million, net of tax, or 19.8 percent, since December 31, 2012. The decrease in net unrealized gains resulted from a decrease in our fair value of the fixed maturity investment portfolio due to rising interest rates, partially offset by an increase in the fair value of our equity investment portfolio.

Our stockholders' equity increased to $744.2 million at September 30, 2013, from $729.2 million at December 31, 2012. The increase was primarily attributable to net income of $49.6 million, which was offset by a decrease in net unrealized investment gains of $28.5 million, net of tax, and stockholder dividends of $12.9 million.

Table of Contents

RESULTS OF OPERATIONS

Property and Casualty Insurance Segment Results



	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands Except Ratios)	2013			2012			2013			2012
Net premiums written	$	178,313		$	155,433		$	553,795		$	500,303
Net premiums earned	$	178,553		$	161,232		$	511,781		$	461,902
Losses and loss settlement expenses	(124,643		)	(114,846		)	(332,264		)	(302,376		)
Amortization of deferred policy acquisition costs	(37,243		)	(34,060		)	(108,591		)	(98,355		)
Other underwriting expenses	(17,219		)	(16,332		)	(54,854		)	(50,353		)
Underwriting gain (loss)	$	(552	)	$	(4,006	)	$	16,072		$	10,818

Investment income, net of investment expenses	11,691			11,051			34,464			33,409
Net realized investment gains (losses)
Other-than-temporary impairment charges	(139		)	—			(139		)	—
All other net realized gains	955			1,214			5,544			1,765
Net realized investment gains	816			1,214			5,405			1,765
Other income (loss)	145			(19		)	229			177
Income before income taxes	$	12,100		$	8,240		$	56,170		$	46,169

GAAP Ratios:
Net loss ratio	65.1		%	65.9		%	59.6		%	58.0		%
Catastrophes - effect on net loss ratio	4.7			5.3			5.3			7.5
Net loss ratio ⁽¹⁾	69.8		%	71.2		%	64.9		%	65.5		%
Expense ratio ⁽²⁾	30.5			31.3			31.9			32.2
Combined ratio ⁽³⁾	100.3		%	102.5		%	96.8		%	97.7		%

(1) The net loss ratio is calculated by dividing the sum of losses and loss settlement expenses by net premiums earned. We use the net loss ratio as a measure of the overall underwriting profitability of the insurance business we write and to assess the adequacy of our pricing. Our net loss ratio is meaningful in evaluating our financial results as reported in our unaudited Consolidated Financial Statements.

(2) The expense ratio is calculated by dividing nondeferred underwriting expenses and amortization of deferred policy acquisition costs by net premiums earned. The expense ratio measures a company's operational efficiency in producing, underwriting and administering its insurance business.

(3) The combined ratio is a commonly used financial measure of property and casualty underwriting performance. A combined ratio below 100.0 percent generally indicates a profitable book of business. The combined ratio is the sum of two separately calculated ratios, the loss and loss settlement expense ratio (the “net loss ratio”) and the underwriting expense ratio (the “expense ratio”).

For the three- and nine-month periods ended September 30, 2013, our property and casualty segment reported income before taxes of $12.1 million and $56.2 million, respectively, or an increase of $3.9 million and $10.0 million, respectively, compared to the same periods of 2012. The increase in the nine months ended September 30, 2013 is primarily due to an increase in net premiums earned partially offset by an increase in loss and loss settlement expenses.

Net premiums earned increased 10.7 percent to $178.6 million in the three-month period ended September 30, 2013, compared to $161.2 million in the same period of 2012. In the nine months ended September 30, 2013, net premiums earned also increased 10.8 percent to $511.8 million, compared to $461.9 million in the same period of 2012.

The GAAP combined ratio decreased 2.2 percentage points to 100.3 percent for the three-month period ended September 30, 2013, compared to 102.5 percent for the same period of 2012. For the nine-month period ended September 30, 2013, the GAAP combined ratio was 96.8 percent, compared to 97.7 percent for the same period of 2012.

Table of Contents

The net loss ratio, a component of the combined ratio, decreased by 1.4 percentage points to 69.8 percentage points in the three-month period ended September 30, 2013, as compared to the same period in 2012. The decrease is primarily due to increased premiums and improvement in underwriting results. Pre-tax catastrophe losses totaled $8.5 million for the three-month period ended September 30, 2013, which is consistent with the same period of 2012.

The net loss ratio in the nine-month period ended September 30, 2013 decreased 0.6 percentage points as compared with the same period of 2012. The decrease is due to increased premiums and lower catastrophe losses in 2013 as compared with the same period of 2012.

The expense ratio, a component of the combined ratio, of 30.5 percentage points for the quarter ended September 30, 2013 decreased by 0.8 percentage points as compared with the same period of 2012, due to an increase in net earned premiums.

For a detailed discussion of our consolidated investment results, refer to the “Investment Portfolio” section of this item.

Reserve Development

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

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

Our reserving philosophy is to reserve claims to their ultimate expected loss amount as soon as practicable after information about a claim becomes available.

2013 Development

The property and casualty insurance segment experienced $8.6 million of favorable development in our net reserves for prior accident years during the three-month period ended September 30, 2013 and $49.0 million for the nine months ended September 30, 2013. Year-to-date, favorable development remains consistent with our 2012 nine-month experience.

The favorable development on prior year reserves was primarily related to our long-tail lines of commercial business including other liability, workers compensation and auto liability. The favorable development is generally caused by changes in loss development patterns due to many factors discussed previously. Specifically, we observed a continuation of a trend, started in 2011, reducing the overall number of reported new construction defect claims and lower than expected emergence on known claims. In addition, in 2009 management began an initiative to control legal defense costs. As these costs are a significant component of the carried reserves for the other liability line,

Table of Contents

management believes this initiative is also contributing to the favorable development trends.

Development amounts can vary significantly from quarter-to-quarter and year-to-year depending on a number of factors, including the number of claims settled and the settlement terms, and are subject to reallocation between accident years and lines of business. At September 30, 2013, our total reserves remained relatively flat compared to June 30, 2013.

The following tables display our net premiums earned, net losses and loss settlement expenses and net loss ratio by line of business:




Three Months Ended September 30,	2013							2012
			Net Losses							Net Losses
			and Loss							and Loss
	Net		Settlement			Net		Net		Settlement		Net
(In Thousands)	Premiums		Expenses			Loss		Premiums		Expenses		Loss
Unaudited	Earned		Incurred			Ratio		Earned		Incurred		Ratio
Commercial lines
Other liability	$	52,251	$	28,406		54.4	%	$	50,887	$	28,579	56.2	%
Fire and allied lines	41,717		27,260			65.3		33,574		24,637		73.4
Automobile	37,646		36,140			96.0		34,087		24,703		72.5
Workers' compensation	21,519		20,524			95.4		17,606		16,933		96.2
Fidelity and surety	4,877		(163		)	(3.3	)	4,365		1,962		44.9
Miscellaneous	628		(104		)	(16.6	)	258		214		82.9
Total commercial lines	$	158,638	$	112,063		70.6	%	$	140,777	$	97,028	68.9	%

Personal lines
Fire and allied lines	$	10,786	$	8,307		77.0	%	$	10,247	$	11,758	114.7	%
Automobile	5,624		3,615			64.3		5,711		3,562		62.4
Miscellaneous	240		1,068			NM		235		42		17.9
Total personal lines	$	16,650	$	12,990		78.0	%	$	16,193	$	15,362	94.9	%
Reinsurance assumed	$	3,265	$	(410	)	(12.6	)%	$	4,262	$	2,456	57.6	%
Total	$	178,553	$	124,643		69.8	%	$	161,232	$	114,846	71.2	%

NM=Not meaningful

Table of Contents



Nine Months Ended September 30,	2013							2012
			Net Losses							Net Losses
			and Loss							and Loss
	Net		Settlement			Net		Net		Settlement		Net
(In Thousands)	Premiums		Expenses			Loss		Premiums		Expenses		Loss
Unaudited	Earned		Incurred			Ratio		Earned		Incurred		Ratio
Commercial lines
Other liability	$	146,755	$	77,721		53.0	%	$	145,604	$	70,793	48.6	%
Fire and allied lines	122,107		71,954			58.9		97,365		81,968		84.2
Automobile	108,629		91,090			83.9		98,785		75,891		76.8
Workers' compensation	60,786		51,364			84.5		50,068		30,260		60.4
Fidelity and surety	13,684		(843		)	(6.2	)	12,780		1,607		12.6
Miscellaneous	1,190		555			46.6		735		278		37.8
Total commercial lines	$	453,151	$	291,841		64.4	%	$	405,337	$	260,797	64.3	%

Personal lines
Fire and allied lines	$	31,911	$	25,273		79.2	%	$	30,479	$	22,633	74.3	%
Automobile	16,485		11,177			67.8		15,896		10,999		69.2
Miscellaneous	528		1,969			NM		691		158		22.9
Total personal lines	$	48,924	$	38,419		78.5	%	$	47,066	$	33,790	71.8	%
Reinsurance assumed	$	9,706	$	2,004		20.6	%	$	9,499	$	7,789	82.0	%
Total	$	511,781	$	332,264		64.9	%	$	461,902	$	302,376	65.5	%

NM=Not meaningful


•	Commercial fire and allied lines - The net loss ratio improved 8.1 percentage points and 25.3 percentage points in the three- and nine-month periods ended September 30, 2013, respectively, compared to the same periods of 2012. The loss ratio improvement was due to the combination of a reduction in our catastrophe loss experience and premium growth.


•	Commercial automobile - The net loss ratio deteriorated 23.5 percentage points and 7.1 percentage points in the three- and nine-month periods ended September 30, 2013, respectively, compared to the same periods of 2012. The change was primarily due to an increase in claim activity and loss severity in 2013.

•

Workers' compensation - The net loss ratio improved 0.8 percentage points and deteriorated 24.1 percentage points in the three- and nine-month periods ended September 30, 2013, respectively, compared to the same periods of 2012. The change was primarily due to increased loss severity and generally increased claim activity in 2013, especially when compared to the same period in 2012 when we experienced particularly low net loss ratios.


•	Fidelity and surety - The net loss ratio improved 48.2 percentage points and 18.8 percentage points in the three- and nine-month periods ended September 30, 2013, respectively, compared to the same periods of 2012 primarily due to an increase in salvage and subrogation and low claim activity in 2013.

•

Personal fire and allied lines - The net loss ratio improved 37.7 percentage points and deteriorated 4.9 percentage points in the three- and nine-month periods ended September 30, 2013, respectively, compared to the same periods of 2012. The improvement in the three-month period ended September 30, 2013 was primarily due to lower claim activity in 2013 compared to the same period in 2012. For the nine-month period ended September 30, 2013, the deterioration was due to unfavorable development on prior year claims.

Table of Contents

Life Insurance Segment Results



	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2013		2012		2013		2012
Revenues
Net premiums earned	$	15,666	$	15,299	$	45,622	$	46,222
Investment income, net	15,587		17,614		48,297		53,151
Net realized investment gains (losses)
Other-than-temporary impairment charges	—		—		—		(4		)
All other net realized gains	374		86		1,845		2,897
Net realized investment gains	374		86		1,845		2,893
Other income	192		104		405		407
Total revenues	$	31,819	$	33,103	$	96,169	$	102,673

Benefits, Losses and Expenses
Losses and loss settlement expenses	$	6,525	$	4,910	$	16,809	$	15,630
Increase in liability for future policy benefits	8,415		9,815		26,520		28,309
Amortization of deferred policy acquisition costs	1,524		2,107		4,965		6,542
Other underwriting expenses	4,435		4,164		12,456		12,678
Interest on policyholders' accounts	8,625		10,327		27,026		31,610
Total benefits, losses and expenses	$	29,524	$	31,323	$	87,776	$	94,769

Income before income taxes	$	2,295	$	1,780	$	8,393	$	7,904

Income before income taxes increased $0.5 million in both the three- and nine-month periods ended September 30, 2013, as compared to the same periods of 2012 due to a decrease in interest on policyholders' accounts and future policy benefits partially offset by a decrease in net investment income.

Net premiums earned increased 2.4 percent to $15.7 million for the three-month period ended September 30, 2013, compared to $15.3 million in the same period of 2012. In the nine months ended September 30, 2013, net premiums earned decreased 1.3 percent to $45.6 million, compared to $46.2 million in the same period of 2012. The increase in net premiums earned in the three-month period ended September 30, 2013 was due to a slight increase in the guaranteed interest rate for sales of annuity products with life contingencies.; however, the increase in guaranteed interest rates has not been sufficient to offset the overall decline in net premiums earned year-to-date.

Net investment income decreased 11.5 percent to $15.6 million for the three-month period ended September 30, 2013, compared to $17.6 million for the same period of 2012. In the nine months ended September 30, 2013, net investment income decreased 9.1 percent to $48.3 million, compared to $53.2 million for the same period of 2012, due to the decrease in invested assets, resulting from negative cash flows on annuity products, and a decrease in the reinvestment interest rates from the continued low interest rate environment.

Loss and loss settlement expenses increased $1.6 million for three-month period ended September 30, 2013 compared to the same period of 2012. For the nine-month period ended September 30, 2012, loss and loss settlement expenses increased $1.2 million, compared to the same period of 2012, due to an increase in policy claims.

The increase in the liability for future policy benefits decreased in both the three- and nine-month periods ended September 30, 2013 compared to the same periods of 2012, due to the increase in net withdrawals of annuity products as we continue to reflect a more equal balance between fixed annuity products and life insurance products.

Deferred annuity deposits increased 93.2 percent and decreased 11.0 percent for the three- and nine-month periods ended September 30, 2013, respectively, compared with the same periods of 2012. The increase in guaranteed interest rates had a favorable effect in the three-month period ended September 30, 2013; however, the increase in

Table of Contents

guaranteed interest rates was not sufficient to offset the decrease in the nine-month period ended September 30, 2012.

Net cash outflow related to our annuity business was $17.1 million and $63.2 million in the three- and nine-month periods ended September 30, 2013, respectively, compared to a net cash outflow of $13.2 million and $18.8 million in the same periods of 2012. We attribute this to the activity described above.

For a detailed discussion of our consolidated investment results, refer to the “Investment Portfolio” section of this item.

Investment Portfolio

Our invested assets totaled $3,037.7 million at September 30, 2013, compared to $3,044.4 million at December 31, 2012, a decrease of $6.7 million. At September 30, 2013, fixed maturity securities and equity securities made up 91.5 percent and 6.9 percent of the value of our investment portfolio, respectively. Because the primary purpose of our investment portfolio is to fund future claims payments, we use a conservative investment philosophy, investing in a diversified portfolio of high-quality, intermediate-term taxable corporate bonds, taxable U.S. government bonds and tax-exempt U.S. municipal bonds. Our overall investment strategy is to keep our cash on hand low in the current interest rate environment. If additional cash is needed, we can borrow funds available under our revolving credit facility.

Composition

We develop our investment strategies based on a number of factors, including estimated duration of reserve liabilities, short- and long-term liquidity needs, projected tax status, general economic conditions, expected rates of inflation, regulatory requirements, interest rates and credit quality of assets. We administer our investment portfolio based on investment guidelines approved by management and the investment committee of our Board of Directors that comply with applicable statutory regulations.

The composition of our investment portfolio at September 30, 2013, is presented at carrying value in the following table:



	Property & Casualty Insurance Segment				Life Insurance Segment				Total
			Percent				Percent				Percent
(In Thousands)			of Total				of Total				of Total
Fixed maturities ⁽¹⁾
Held-to-maturity	$	750	—	%	$	352	—	%	$	1,102	—	%
Available-for-sale	1,174,236		83.7		1,594,846		97.5		2,769,082		91.2
Trading securities	9,977		0.7		—		—		9,977		0.3
Equity securities
Available-for-sale	183,205		13.1		25,333		1.5		208,538		6.9
Trading securities	2,464		0.2		—		—		2,464		0.1
Mortgage loans	—		—		4,477		0.3		4,477		0.1
Policy loans	—		—		6,361		0.4		6,361		0.2
Other long-term investments	30,550		2.2		4,326		0.3		34,876		1.2
Short-term investments	800		0.1		—		—		800		—
Total	$	1,401,982	100.0	%	$	1,635,695	100.0	%	$	3,037,677	100.0	%

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

At September 30, 2013 and December 31, 2012, we classified $2.8 billion, or 99.6 percent and 99.5 percent, respectively, of our fixed maturities portfolio as available-for-sale. We classify our remaining fixed maturities as held-to-maturity or trading. We record held-to-maturity securities at amortized cost. We record available-for-sale at fair value, with any changes in fair value recognized in accumulated other comprehensive income. We record trading

Table of Contents

securities, primarily convertible redeemable preferred debt securities, at fair value, with any changes in fair value recognized in earnings.

As of September 30, 2013 and December 31, 2012, we did not have direct exposure to investments in subprime mortgages or other credit enhancement vehicles.

Credit Quality

The following table shows the composition of fixed maturity securities held in our available-for-sale, held-to-maturity and trading security portfolios, by credit rating at September 30, 2013 and December 31, 2012. Information contained in the table is generally based upon the issue credit ratings provided by Moody's, unless the rating is unavailable, in which case we obtain it from Standard & Poor's.



(In Thousands)	September 30, 2013				December 31, 2012
Rating	Carrying Value		% of Total		Carrying Value		% of Total
AAA	$	698,350	25.1	%	$	481,754	17.1	%
AA	547,876		19.7		646,516		22.9
A	606,254		21.8		632,962		22.4
Baa/BBB	860,142		31.0		998,818		35.4
Other/Not Rated	67,539		2.4		63,036		2.2
	$	2,780,161	100.0	%	$	2,823,086	100.0	%

Duration

Our investment portfolio is invested primarily in fixed maturity securities whose fair value is susceptible to market risk, specifically interest rate changes. Duration is a measurement used to quantify our inherent interest rate risk and analyze our ability to match our invested assets to our reserve liabilities. If our invested assets and reserve liabilities have similar durations, then any change in interest rates will have an equal effect on these accounts. The primary purpose for matching invested assets and reserve liabilities is liquidity. With appropriate matching, our investments will mature when cash is needed, preventing the need to liquidate other assets prematurely. Mismatches in the duration of assets and liabilities can cause significant fluctuations in our results of operations.

Group

The weighted average effective duration of our portfolio of fixed maturity securities, at September 30, 2013, is 4.8 years compared to 4.0 years at December 31, 2012.

Property and Casualty Insurance Segment

The weighted average effective duration of our portfolio of fixed maturity securities, at September 30, 2013, is 4.7 years compared to 4.0 years at December 31, 2012.

Life Insurance Segment

The weighted average effective duration of our portfolio of fixed maturity securities, at September 30, 2013, is 4.8 years compared to 4.0 years at December 31, 2012.

Investment Results

We invest the premiums received from our policyholders and annuitants in order to generate investment income, which is an important component of our revenues and profitability. The amount of investment income that we are able to generate is affected by many factors, some of which are beyond our control. Some of these factors are volatility in the financial markets, economic growth, inflation, interest rates, world political conditions, terrorist attacks or threats of terrorism, adverse events affecting other companies in our industry or the industries in which we invest and other unpredictable national or world events. Our net investment income decreased by 4.8 percent and by

Table of Contents

4.4 percent in the three- and nine-month periods ended September 30, 2013, compared with the same periods of 2012. The decrease in the nine months ended September 30, 2013 is primarily due to historically low yields that reduce our investment income and margin on earnings. We are maintaining our investment philosophy of purchasing investments rated investment grade or better.

Our net realized investment gains were $1.2 million and $7.3 million during the three- and nine-month periods ended September 30, 2013, respectively, as compared with $1.3 million and $4.7 million in the same periods of 2012. Net realized investment gains included other-than-temporary impairment ("OTTI") charges of $0.1 million and less than $0.1 million in the nine-month periods ended September 30, 2013 and 2012, respectively.

We continually monitor the difference between our cost basis and the estimated fair value of our investments. Our accounting policy for impairment recognition requires OTTI charges to be recorded when we determine that it is more likely than not that we will be unable to collect all amounts due according to the contractual terms of the fixed maturity security or that the anticipated recovery in fair value of the equity security will not occur in a reasonable amount of time. Impairment charges on investments are recorded based on the fair value of the investments at the measurement date. Factors considered in evaluating whether a decline in value is other-than-temporary include: the length of time and the extent to which fair value has been less than cost; the financial condition and near-term prospects of the issuer; our intention to hold the investment; and the likelihood that we will be required to sell the investment.

Changes in unrealized gains and losses on available-for-sale securities do not affect net income and earnings per share but do impact comprehensive income, stockholders' equity and book value per share. We believe that any unrealized losses on our available-for-sale securities at September 30, 2013 are temporary based upon our current analysis of the issuers of the securities that we hold and current market events. It is possible that we could recognize impairment charges in future periods on securities that we own at September 30, 2013 if future events and information cause us to determine that a decline in value is other-than-temporary. However, we endeavor to invest in high quality assets to provide protection from future credit quality issues and corresponding other-than-temporary impairment write-downs.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity measures our ability to generate sufficient cash flows to meet our short- and long-term cash obligations. Our cash inflows are primarily a result of the receipt of premiums, annuity deposits, reinsurance recoveries, sales or maturities of investments, and investment income. Cash provided from these sources is used to fund the payment of losses and loss settlement expenses, policyholder benefits under life insurance contracts, annuity withdrawals, the purchase of investments, operating expenses, dividends, pension plan contributions, and in recent years, common stock repurchases.

We monitor our capital adequacy to support our business on a regular basis. The future capital requirements of our business will depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. Our ability to underwrite is largely dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. In particular, we require (1) sufficient capital to maintain our financial strength ratings, as issued by various rating agencies, at a level considered necessary by management to enable our insurance company subsidiaries to compete and (2) sufficient capital to enable our insurance company subsidiaries to meet the capital adequacy tests performed by statutory agencies in the United States.

Cash outflows may be variable because of the uncertainty regarding settlement dates for losses. In addition, the timing and amount of individual catastrophe losses are inherently unpredictable and could increase our liquidity requirements. The timing and amount of reinsurance recoveries may be affected by reinsurer solvency and reinsurance coverage disputes.

Historically, we have generated substantial cash inflows from operations. It is our policy to invest the cash generated from operations in securities with maturities that, in the aggregate, correlate to the anticipated timing of payments for losses and loss settlement expenses and future policyholder benefits of the underlying insurance policies, and annuity withdrawals. The majority of our assets are invested in available-for-sale fixed maturity securities.

Table of Contents

The following table displays a summary of cash sources and uses in 2013 and 2012.



Cash Flow Summary	Nine Months Ended September 30,
(In Thousands)	2013			2012
Cash provided by (used in)
Operating activities	$	118,027		$	125,346
Investing activities	(80,334		)	(115,919		)
Financing activities	(58,468		)	(71,388		)
Net decrease in cash and cash equivalents	$	(20,775	)	$	(61,961	)

Operating Activities

Net cash flows provided by operating activities totaled $118.0 million and $125.3 million for the nine-month periods ended September 30, 2013 and 2012, respectively. The decrease reflects a higher level of property and casualty loss payments in the three-month period ended September 30, 2013, which was partially offset by a higher level of property and casualty premiums collected.

Our cash flows from operations were sufficient to meet our liquidity needs for the nine-month periods ended September 30, 2013 and 2012.

Investing Activities

Cash in excess of operating requirements is generally invested in fixed maturity securities and equity securities. Fixed maturities provide regular interest payments and allow us to match the duration of our liabilities. Equity securities provide dividend income, potential dividend income growth and potential appreciation. For further discussion of our investments, including our philosophy and our strategy for our portfolio, see the “Investment Portfolio” section contained in this item.

In addition to investment income, possible sales of investments and proceeds from calls or maturities of fixed maturity securities also can provide liquidity. During the next five years, $1.2 billion, or 43.0 percent of our fixed maturity portfolio will mature.

We invest funds required for short-term cash needs primarily in money market accounts, which are classified as cash equivalents. At September 30, 2013, our cash and cash equivalents included $26.7 million related to these money market accounts, compared to $45.6 million at December 31, 2012.

Net cash flows used in investing activities totaled $80.3 million and $115.9 million for the nine-month periods ended September 30, 2013 and 2012, respectively. For the nine-month period ended September 30, 2013, we had cash inflows from scheduled and unscheduled investment maturities, redemptions, prepayments, and sales of investments of $396.7 million, compared to $451.7 million for the same period of 2012.

Our cash outflows for investment purchases were $472.4 million for nine-month period ended September 30, 2013, compared to $566.3 million for the same period of 2012. In 2013, we continued to purchase a higher level of fixed maturity securities, which are more profitable than other categories of investments when market interest rates are low.

Financing Activities

Net cash flows used in financing activities were $58.5 million for the nine-month period ended September 30, 2013 compared to net cash flows used in financing activities of $71.4 million for the nine-month period ended September 30, 2012. The increase was primarily due to net annuity withdrawals in the nine-month period ended September 30, 2013, compared to net annuity deposits in the same period of 2012.

Table of Contents

Credit Facilities

In December 2011, United Fire entered into a credit agreement with a syndicate of financial institutions as lenders, KeyBank National Association as administrative agent, lead arranger, sole book runner, swingline lender, and letter of credit issuer, and Bankers Trust Company as syndication agent.

On June 4, 2013, United Fire & Casualty Company, United Fire Group, Inc. and the syndicated lenders entered into an Assignment, Joinder, Assumption, and Release Agreement (the "Joinder Agreement") transferring the obligations under the credit agreement from United Fire & Casualty Company to United Fire Group, Inc. Effective with the execution of the Joinder Agreement, United Fire & Casualty Company was released from any further obligations under the credit agreement. As of September 30, 2013, there were no balances outstanding under this credit agreement. For further discussion of our credit agreement, refer to Part I, Item 1, Note 8 "Debt" to the unaudited Consolidated Financial Statements.

Dividends

Dividends paid to stockholders totaled $12.9 million and $11.5 million in the nine-month periods ended September 30, 2013 and 2012, respectively. Our practice has been to pay quarterly cash dividends, which we have paid every quarter since March 1968.

Payments of any future dividends and the amounts of such dividends, however, will depend upon factors such as net income, financial condition, capital requirements, and general business conditions. We will only pay dividends if declared by our Board of Directors, out of funds legally available, and subject to any other restrictions that may be applicable to us.

As a holding company with no independent operations of its own, United Fire Group, Inc. relies on dividends received from its insurance company subsidiaries in order to pay dividends to its common stockholders. Dividends payable by our insurance subsidiaries are governed by the laws in the states in which they are domiciled. In all cases, these state laws permit the payment of dividends only from earned surplus arising from business operations. Furthermore, under state law our insurance company subsidiaries may pay dividends only if after giving effect to the payment they are able to pay their debts as they become due in the normal course of business or their total assets would be equal to or greater than the sum of their total liabilities. Based on these restrictions, at September 30, 2013, our insurance company subsidiaries are able to make a maximum of $37.8 million in dividend payments without prior regulatory approval. These restrictions will not have a material impact in meeting our cash obligations. In addition, United Fire Group, Inc. maintains the above mentioned credit agreement, which permits us to borrow up to an aggregate principal amount of $125.0 million.

Stockholders' Equity

Stockholders' equity increased 2.1 percent to $744.2 million at September 30, 2013, from $729.2 million at December 31, 2012. The increase was primarily attributable to net income of $49.6 million offset by a decrease in net unrealized investment gains of $28.5 million, net of tax, during the first nine months of 2013, and by stockholder dividends of $12.9 million. At September 30, 2013, the book value per share of our common stock was $29.30 compared to $28.90 at December 31, 2012.

Off-Balance Sheet Arrangements

Table of Contents

MEASUREMENT OF RESULTS

Our consolidated financial statements are prepared on the basis of GAAP. We also prepare financial statements for each of our insurance company subsidiaries based on statutory accounting principles and file them with insurance regulatory authorities in the states where they do business.

Management evaluates our operations by monitoring key measures of growth and profitability. We believe that disclosure of certain non-GAAP financial measures enhances investor understanding of our financial performance. The following section provides further explanation of the key measures management uses to evaluate our results.

Catastrophe losses is a commonly used non-GAAP financial measure that uses the designations of the Insurance Services Office (ISO) and are reported with loss and loss settlement expense amounts net of reinsurance recoverables, unless specified otherwise. According to the ISO, a catastrophe loss is defined as a single unpredictable incident or series of closely related incidents that result in $25.0 million or more in U.S. industry-wide direct insured losses to property and that affect a significant number of insureds and insurers (“ISO catastrophe”). In addition to ISO catastrophes, we also include as catastrophes those events (“non-ISO catastrophes”), which may include U.S. or international losses, that we believe are, or will be, material to our operations, either in amount or in number of claims made. Management, at times, may determine for comparison purposes that it is more meaningful to exclude extraordinary catastrophe losses and resulting litigation. The frequency and severity of catastrophic losses we experience in any year affect our results of operations and financial position. In analyzing the underwriting performance of our property and casualty insurance segment, we evaluate performance both including and excluding catastrophe losses. Portions of our catastrophe losses may be recoverable under our catastrophe reinsurance agreements. We include a discussion of the impact of catastrophes because we believe it is meaningful for investors to understand the variability in our periodic earnings.



	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2013		2012		2013		2012
ISO catastrophes	$	6,179	$	7,204	$	24,672	$	33,148
Non-ISO catastrophes ⁽¹⁾	2,275		1,289		2,514		1,398
Total catastrophes	$	8,454	$	8,493	$	27,186	$	34,546

(1) This number includes international assumed losses.

Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have exposure to market risk arising from potential losses in our investment portfolio due to adverse changes in interest rates and market prices. However, we have the ability to hold fixed maturity investments to maturity. Our investment guidelines define the overall framework for managing our market and other investment risks including accountability and controls. In addition, each of our subsidiaries has specific investment policies that delineate the investment limits and strategies that are appropriate given each entity's liquidity, surplus, product, and regulatory requirements. We respond to market risk by managing the character of investment purchases.

It is our philosophy that we do not utilize financial hedges or derivative financial instruments to manage risks, nor do we enter into any swap, forward or option contracts, but attempt to mitigate our exposure through active portfolio management. In addition, we place the majority of our investments in high-quality, liquid securities and limit the amount of credit exposure to any one issuer. At September 30, 2013, we did not have direct exposure to investments in sub-prime mortgages or other credit-enhancement exposures.

While our primary market risk exposure is to changes in interest rates, we do have limited exposure to changes in equity prices and limited exposure to foreign currency exchange rates.

There have been no material changes in our market risk or market risk factors from what we reported in our Annual Report on Form 10-K for the year ended December 31, 2012.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this report, were designed and functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Control Over Financial Reporting

Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated our internal control over financial reporting to determine whether any changes occurred during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on this evaluation, no such change in our internal control over financial reporting occurred during the fiscal quarter to which this report relates.

Table of Contents

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We consider all our litigation pending as of September 30, 2013 to be ordinary, routine, and incidental to our business.

ITEM 1A. RISK FACTORS

Our business is subject to a number of risks, including those identified in Part I, Item 1A "Risk Factors" in our 2012 Annual Report on Form 10-K filed with the SEC on March 4, 2013, that could have a material effect on our business, results of operations, financial condition, and/or liquidity and that could cause our operating results to vary significantly from period to period. The risks described in the above mentioned document are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial could also have a material effect on our business, results of operations, financial condition and/or liquidity.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Under our share repurchase program, first announced in August 2007, we may purchase United Fire common stock from time to time on the open market or through privately negotiated transactions. The amount and timing of any purchases will be at our discretion and will depend upon a number of factors, including the share price, general economic and market conditions, and corporate and regulatory requirements.

We are authorized to purchase 1,126,143 shares of common stock at September 30, 2013. Our share repurchase program is scheduled to end in August 2014.

The following table provides information with respect to purchases of shares of common stock made by or on our behalf or by any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, during the three-month period ended September 30, 2013.



				Total Number of Shares	Maximum Number of
	Total			Purchased as a Part of	Shares that may be
	Number of	Average Price		Publicly Announced	Purchased Under the
Period	Shares Purchased	Paid per Share		Plans or Programs	Plans or Programs
7/1/2013 - 7/31/2013	—	$	—	—	1,126,143
8/1/2013 - 8/31/2013	—	—		—	1,126,143
9/1/2013 - 9/30/2013	—	—		—	1,126,143

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

Table of Contents

ITEM 6. EXHIBITS



Exhibit number	Exhibit description	Filed herewith
11	Statement Re Computation of Per Share Earnings. All information required by Exhibit 11 is presented within Note 7 of the Notes to Unaudited Consolidated Financial Statements, in accordance with the FASB guidance on Earnings per Share	X
31.1	Certification of Randy A. Ramlo pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X
31.2	Certification of Dianne M. Lyons pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X
32.1	Certification of Randy A. Ramlo pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X
32.2	Certification of Dianne M. Lyons pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X
101.1	The following financial information from United Fire Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 formatted in XBRL: (i) Consolidated Balance Sheets at September 30, 2013 (unaudited) and December 31, 2012; (ii) Consolidated Statements of Income and Comprehensive Income (unaudited) for the three and nine months ended September 30, 2013 and 2012; (iii) Consolidated Statement of Stockholders’ Equity (unaudited) for the nine months ended September 30, 2013; (iv) Consolidated Statements of Cash Flows (unaudited) for the three and nine months ended September 30, 2013 and 2012; and (v) Notes to Unaudited Consolidated Financial Statements, tagged as a block of text	X

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



UNITED FIRE GROUP, INC.
(Registrant)

/s/ Randy A. Ramlo		/s/ Dianne M. Lyons
Randy A. Ramlo		Dianne M. Lyons
President, Chief Executive Officer,		Vice President, Chief Financial Officer and
Director and Principal Executive Officer		Principal Accounting Officer

November 5, 2013		November 5, 2013
(Date)		(Date)