Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended June 30, 2009
Commission File Number 001-34257
UNITED FIRE & CASUALTY COMPANY
(Exact name of registrant as specified in its charter)
|
|
|
Iowa
(State of Incorporation)
|
|
42-0644327
(IRS Employer Identification No.) |
118 Second Avenue, S.E., Cedar Rapids, Iowa 52407
(Address of principal executive offices) (Zip Code)
Registrants 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 þ 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 o 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 þ
|
|
Accelerated filer o
|
|
Non-accelerated filer o
|
|
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
YES o NO þ
As of July 28, 2009, 26,591,951 shares of common stock were outstanding.
United Fire & Casualty Company and Subsidiaries
Index to Quarterly Report on Form 10-Q
June 30, 2009
FORWARD-LOOKING INFORMATION
It is important to note that our actual results could differ materially from those projected in our
forward-looking statements. Information concerning factors that could cause actual results to
differ materially from those in the forward-looking statements is contained in Part I, Item 2
Managements Discussion and Analysis of Financial Condition and Results of Operations and Part
II, Item 1A Risk Factors.
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
United Fire & Casualty Company and Subsidiaries
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In Thousands, Except Per Share Data and Number of Shares) |
|
2009 |
|
|
2008 |
|
|
|
(unaudited) |
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
Held-to-maturity, at amortized cost (fair value $12,541 in 2009 and $15,146
in 2008) |
|
$ |
12,513 |
|
|
$ |
15,177 |
|
Available-for-sale, at fair value (amortized cost $1,998,786 in 2009 and
$1,942,466 in 2008) |
|
|
2,028,801 |
|
|
|
1,898,569 |
|
Equity securities, at fair value (cost $55,449 in 2009 and $66,246 in 2008) |
|
|
107,674 |
|
|
|
120,985 |
|
Trading securities, at fair value (amortized cost $11,091 in 2009 and $8,713 in 2008) |
|
|
11,247 |
|
|
|
8,055 |
|
Mortgage loans |
|
|
7,579 |
|
|
|
7,821 |
|
Policy loans |
|
|
7,705 |
|
|
|
7,808 |
|
Other long-term investments |
|
|
13,686 |
|
|
|
11,216 |
|
Short-term investments |
|
|
13,715 |
|
|
|
26,142 |
|
|
|
|
|
|
|
|
|
|
$ |
2,202,920 |
|
|
$ |
2,095,773 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
152,973 |
|
|
$ |
109,582 |
|
Accrued investment income |
|
|
28,861 |
|
|
|
27,849 |
|
Premiums receivable |
|
|
153,980 |
|
|
|
134,295 |
|
Deferred policy acquisition costs |
|
|
121,587 |
|
|
|
158,265 |
|
Property and equipment (primarily land and buildings, at cost, less accumulated
depreciation of $29,283 in 2009 and $27,994 in 2008) |
|
|
18,081 |
|
|
|
15,275 |
|
Reinsurance receivables and recoverables |
|
|
53,050 |
|
|
|
60,275 |
|
Prepaid reinsurance premiums |
|
|
1,854 |
|
|
|
1,559 |
|
Income taxes receivable |
|
|
16,633 |
|
|
|
26,974 |
|
Deferred income taxes |
|
|
6,723 |
|
|
|
8,297 |
|
Other assets |
|
|
49,527 |
|
|
|
48,986 |
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
2,806,189 |
|
|
$ |
2,687,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Future policy benefits and losses, claims and loss settlement expenses |
|
|
|
|
|
|
|
|
Property and casualty insurance |
|
$ |
592,853 |
|
|
$ |
586,109 |
|
Life insurance |
|
|
1,248,442 |
|
|
|
1,167,665 |
|
Unearned premiums |
|
|
233,531 |
|
|
|
216,966 |
|
Accrued expenses and other liabilities |
|
|
78,180 |
|
|
|
74,649 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
$ |
2,153,006 |
|
|
$ |
2,045,389 |
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $3.33 1/3 par value; authorized 75,000,000 shares; 26,591,951 and
26,624,086 shares issued and outstanding in 2009 and 2008, respectively |
|
$ |
88,640 |
|
|
$ |
88,747 |
|
Additional paid-in capital |
|
|
139,343 |
|
|
|
138,511 |
|
Retained earnings |
|
|
400,588 |
|
|
|
410,634 |
|
Accumulated other comprehensive income, net of tax |
|
|
24,612 |
|
|
|
3,849 |
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS EQUITY |
|
$ |
653,183 |
|
|
$ |
641,741 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
2,806,189 |
|
|
$ |
2,687,130 |
|
|
|
|
|
|
|
|
The Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.
3
United Fire & Casualty Company and Subsidiaries
Consolidated Statements of Income (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(In Thousands, Except Per Share Data and Number of Shares) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
119,671 |
|
|
$ |
123,274 |
|
|
$ |
237,992 |
|
|
$ |
246,217 |
|
Investment income, net of investment expenses |
|
|
27,359 |
|
|
|
27,844 |
|
|
|
50,630 |
|
|
|
55,899 |
|
Realized investment gains (losses) |
|
|
(13,153 |
) |
|
|
944 |
|
|
|
(16,641 |
) |
|
|
(210 |
) |
Other income |
|
|
169 |
|
|
|
184 |
|
|
|
328 |
|
|
|
383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
134,046 |
|
|
$ |
152,246 |
|
|
$ |
272,309 |
|
|
$ |
302,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, Losses and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss settlement expenses |
|
$ |
90,558 |
|
|
$ |
100,707 |
|
|
$ |
176,636 |
|
|
$ |
168,189 |
|
Future policy benefits |
|
|
5,874 |
|
|
|
5,360 |
|
|
|
9,262 |
|
|
|
11,206 |
|
Amortization of deferred policy acquisition costs |
|
|
28,795 |
|
|
|
32,029 |
|
|
|
58,201 |
|
|
|
64,555 |
|
Other underwriting expenses |
|
|
9,970 |
|
|
|
5,568 |
|
|
|
18,456 |
|
|
|
12,488 |
|
Disaster
charges and other related expenses, net of recoveries |
|
|
(188 |
) |
|
|
3,753 |
|
|
|
(546 |
) |
|
|
3,753 |
|
Interest on policyholders accounts |
|
|
10,397 |
|
|
|
10,217 |
|
|
|
20,169 |
|
|
|
20,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
145,406 |
|
|
$ |
157,634 |
|
|
$ |
282,178 |
|
|
$ |
280,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
(11,360 |
) |
|
$ |
(5,388 |
) |
|
$ |
(9,869 |
) |
|
$ |
21,435 |
|
Federal income tax expense (benefit) |
|
|
(6,026 |
) |
|
|
(3,865 |
) |
|
|
(7,805 |
) |
|
|
2,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
(5,334 |
) |
|
$ |
(1,523 |
) |
|
$ |
(2,064 |
) |
|
$ |
18,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
26,591,777 |
|
|
|
27,153,114 |
|
|
|
26,602,518 |
|
|
|
27,171,955 |
|
Basic earnings (loss) per common share |
|
$ |
(0.20 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.08 |
) |
|
$ |
0.68 |
|
Diluted earnings (loss) per common share |
|
$ |
(0.20 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.08 |
) |
|
$ |
0.68 |
|
Cash dividends declared per common share |
|
$ |
0.15 |
|
|
$ |
0.15 |
|
|
$ |
0.30 |
|
|
$ |
0.30 |
|
The Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.
4
United Fire & Casualty Company and Subsidiaries
Consolidated Statements of Stockholders Equity (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
(In Thousands Except Number of Shares) |
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
88,747 |
|
|
$ |
90,653 |
|
Shares repurchased (33,300 in 2009 and 174,564 in 2008) |
|
|
(111 |
) |
|
|
(582 |
) |
Shares issued for stock-based awards (1,165 in 2009 and 7,120 in
2008) |
|
|
4 |
|
|
|
24 |
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
88,640 |
|
|
$ |
90,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
138,511 |
|
|
$ |
149,511 |
|
Compensation expense and related tax benefit for stock-based award
grants |
|
|
1,244 |
|
|
|
861 |
|
Shares repurchased |
|
|
(427 |
) |
|
|
(4,648 |
) |
Shares issued for stock-based awards |
|
|
15 |
|
|
|
111 |
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
139,343 |
|
|
$ |
145,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
410,634 |
|
|
$ |
439,860 |
|
Net income (loss) |
|
|
(2,064 |
) |
|
|
18,604 |
|
Dividends on common stock ($0.15 per share in 2009 and 2008) |
|
|
(7,982 |
) |
|
|
(8,163 |
) |
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
400,588 |
|
|
$ |
450,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
3,849 |
|
|
$ |
71,473 |
|
Change in net unrealized appreciation (1) |
|
|
19,973 |
|
|
|
(31,704 |
) |
Change in underfunded status of employee benefit plans (2) |
|
|
790 |
|
|
|
425 |
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
24,612 |
|
|
$ |
40,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of changes |
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
641,741 |
|
|
$ |
751,497 |
|
Net income (loss) |
|
|
(2,064 |
) |
|
|
18,604 |
|
All other changes in stockholders equity accounts |
|
|
13,506 |
|
|
|
(43,676 |
) |
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
653,183 |
|
|
$ |
726,425 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The change in net unrealized appreciation is net of reclassification adjustments and
income taxes. |
|
(2) |
|
The recognition of the underfunded status of employee benefit plans is net of income taxes. |
The Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.
5
United Fire & Casualty Company and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
Cash Flows From Operating Activities |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(2,064 |
) |
|
$ |
18,604 |
|
Adjustments to reconcile net income to net cash provided by operating
activities |
|
|
|
|
|
|
|
|
Net bond premium accretion |
|
|
1,548 |
|
|
|
1,389 |
|
Depreciation and amortization |
|
|
1,805 |
|
|
|
1,718 |
|
Stock-based compensation expense |
|
|
1,267 |
|
|
|
824 |
|
Realized investment losses |
|
|
16,641 |
|
|
|
210 |
|
Net cash flows from trading investments |
|
|
(2,352 |
) |
|
|
1,384 |
|
Deferred income tax benefit |
|
|
(9,673 |
) |
|
|
(2,165 |
) |
Changes in: |
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
(1,012 |
) |
|
|
355 |
|
Premiums receivable |
|
|
(19,685 |
) |
|
|
(36,474 |
) |
Deferred policy acquisition costs |
|
|
(3,992 |
) |
|
|
(923 |
) |
Reinsurance receivables |
|
|
7,225 |
|
|
|
(3,065 |
) |
Prepaid reinsurance premiums |
|
|
(295 |
) |
|
|
627 |
|
Income taxes receivable (payable) |
|
|
10,341 |
|
|
|
(5,396 |
) |
Other assets |
|
|
(541 |
) |
|
|
(30,801 |
) |
Future policy benefits and losses, claims and loss settlement expenses |
|
|
15,274 |
|
|
|
47,043 |
|
Unearned premiums |
|
|
16,565 |
|
|
|
15,235 |
|
Accrued expenses and other liabilities |
|
|
4,746 |
|
|
|
5,655 |
|
Deferred income taxes |
|
|
|
|
|
|
(548 |
) |
Other, net |
|
|
953 |
|
|
|
2,249 |
|
|
|
|
|
|
|
|
Total adjustments |
|
$ |
38,815 |
|
|
$ |
(2,683 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
36,751 |
|
|
$ |
15,921 |
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities |
|
|
|
|
|
|
|
|
Proceeds from sale of available-for-sale investments |
|
$ |
8,360 |
|
|
$ |
920 |
|
Proceeds from call and maturity of held-to-maturity investments |
|
|
2,675 |
|
|
|
9,550 |
|
Proceeds from call and maturity of available-for-sale investments |
|
|
177,632 |
|
|
|
233,587 |
|
Proceeds from short-term and other investments |
|
|
17,925 |
|
|
|
54,840 |
|
Purchase of available-for-sale investments |
|
|
(251,479 |
) |
|
|
(352,123 |
) |
Purchase of short-term and other investments |
|
|
(7,534 |
) |
|
|
(50,263 |
) |
Net purchases and sales of property and equipment |
|
|
(4,662 |
) |
|
|
(401 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
$ |
(57,083 |
) |
|
$ |
(103,890 |
) |
|
|
|
|
|
|
|
Cash Flows From Financing Activities |
|
|
|
|
|
|
|
|
Policyholders account balances |
|
|
|
|
|
|
|
|
Deposits to investment and universal life contracts |
|
$ |
163,857 |
|
|
$ |
88,928 |
|
Withdrawals from investment and universal life contracts |
|
|
(91,610 |
) |
|
|
(102,970 |
) |
Payment of cash dividends |
|
|
(7,982 |
) |
|
|
(8,163 |
) |
Repurchase of common stock |
|
|
(538 |
) |
|
|
(5,229 |
) |
Issuance of common stock |
|
|
19 |
|
|
|
118 |
|
Tax benefit (expense) from issuance of common stock |
|
|
(23 |
) |
|
|
37 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) by financing activities |
|
$ |
63,723 |
|
|
$ |
(27,279 |
) |
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
$ |
43,391 |
|
|
$ |
(115,248 |
) |
Cash and Cash Equivalents at Beginning of Period |
|
|
109,582 |
|
|
|
252,565 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
152,973 |
|
|
$ |
137,317 |
|
|
|
|
|
|
|
|
The Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.
6
United Fire & Casualty Company and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
The terms United Fire, we, us, or our refer to United Fire & Casualty Company or United
Fire & Casualty Company and its consolidated subsidiaries and affiliate, as the context requires.
In the opinion of the management of United Fire, 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. 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, 2008. The review report of Ernst & Young LLP as of and for the three- and six-month
periods ended June 30, 2009, accompanies the unaudited Consolidated Financial Statements included
in Item 1 of Part I.
We maintain our records in conformity with the accounting practices prescribed or permitted by the
insurance departments of the states in which we are domiciled. To the extent that certain of these
practices differ from U.S. generally accepted accounting principles (GAAP), we have made
adjustments to present the accompanying unaudited Consolidated Financial Statements in conformity
with GAAP.
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, and future policy benefits
and losses, claims and loss settlement expenses.
Certain prior year amounts have been reclassified to conform to the current year presentation.
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. We
made payments for income taxes of $1.8 million for the six-month period ended June 30, 2009,
compared to $13.8 million for the six-month period ended June 30, 2008. We made no significant
payments of interest for the six-month periods ended June 30, 2009 and 2008, other than interest
credited to policyholders accounts.
Income Taxes
For the six-month period ended June 30, 2009, we reported a federal income tax benefit of $7.8
million, compared to federal income tax expense of $2.8 million at an effective tax rate of 13.2
percent for the six-month period ended June 30, 2008. Our effective tax rate differs from the
federal statutory rate of 35.0 percent due principally to the effect of tax-exempt municipal bond
interest income and non-taxable dividend income. In 2008, an adjustment to the valuation allowance
on our deferred tax assets contributed to a further reduction in our effective tax rate.
We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. We are
no longer subject to U.S. federal income tax examination by tax authorities for years before 2004
and state income tax examination for years before 2003. There are no ongoing examinations of income
tax returns by federal or state tax authorities.
7
Contingent Liabilities
We have been named as a defendant in various lawsuits, including actions seeking certification from
the court to proceed as a class action suit and actions filed by individual policyholders, relating
to disputes arising from damages that occurred as a result of Hurricane Katrina in 2005. As of June
30, 2009, there were in excess of 300 individual policyholder cases pending, and an additional 11
class action cases pending. These cases have been filed in Louisiana state courts and federal
district courts and involve, among other claims, disputes as to the amount of reimbursable claims
in particular cases, as well as the scope of insurance coverage under homeowners and commercial
property policies due to flooding, civil authority actions, loss of use and business interruption.
Certain of these cases also claim a breach of duty of good faith or violations of Louisiana
insurance claims-handling laws or regulations and involve claims for punitive or exemplary damages.
Other cases claim that under Louisianas so-called Valued Policy Law, the insurers must pay the
total insured value of a home that is totally destroyed if any portion of such damage was caused by
a covered peril, even if the principal cause of the loss was an excluded peril. Other cases
challenge the scope or enforceability of the water damage exclusion in the policies.
Several actions pending against various insurers, including us, were consolidated for purposes of
pretrial discovery and motion practice under the caption In re Katrina Canal Breaches Consolidated
Litigation, Civil Action No. 05-4182 in the United States District Court, Eastern District of
Louisiana. The Federal trial court recently ruled that certification of policyholder claims as a
class would be inappropriate, but this decision may be appealed. Lafayette Insurance Company, as a
Louisiana domiciled insurance company, is subject to jurisdiction in state court, and this ruling
will not be determinative of class certification decisions in those state court suits seeking class
certification.
In light of an April 8, 2008 Louisiana Supreme Court decision finding that flood damage was clearly
excluded from coverage, state and federal courts have been reviewing the pending lawsuits seeking
class certification and other pending lawsuits in order to expedite pre-trial discovery and to move
the cases towards trial.
In June 2008, a commercial policyholder was awarded approximately $21.0 million in additional
Hurricane Katrina damages by a Federal Court jury sitting in New Orleans. The claims associated
with this litigation represent what we consider to be our single largest exposure as a result of
that hurricane. In response to this verdict, we recorded an incurred loss, net of excess of loss of
reinsurance, of $10.8 million in 2008. However, we have filed an appeal of this verdict, as we
believe that the award includes damages that were attributable to flooding (and thus excluded from
coverage) and that there were other errors at trial prejudicial to us. According to Louisiana law
we were required to place $29.0 million on deposit with the State of Louisiana for this case while
we pursue an appeal. This appeal remains pending as of June 30, 2009.
In July 2008, Lafayette Insurance Company participated in a hearing in St Bernard Parish, Louisiana
after which the court entered an order certifying a class defined as all Lafayette Insurance
Company personal lines policyholders within an eight parish area in and around New Orleans who
sustained wind damage as a result of Hurricane Katrina and whose claim was at least partially
denied or misadjusted. We have appealed this order as we feel it is not supported by the evidence.
We expect the appeal process to take many additional months.
We intend to continue to defend the cases related to losses incurred as a consequence of Hurricane
Katrina. We have established our loss and loss settlement expense reserves on the assumption that
the application of the Valued Policy Law will not result in our having to pay damages for perils
not otherwise covered. We believe that, in the aggregate, these reserves should be adequate.
However, our evaluation of these claims and the adequacy of recorded reserves may change if we
encounter adverse developments in the further defense of these claims.
We consider all of our other litigation pending as of June 30, 2009 to be ordinary, routine, and
incidental to our business.
8
Securities Lending
We participate in a securities lending program, which generates net investment income and discounts
other investment fees we are charged, by lending certain investments to other institutions for
short periods of time. Borrowers of these securities must deposit and maintain, at all times,
collateral in the form of cash or U.S. Treasury securities with the Northern Trust Corporation
(Northern Trust), the third-party custodian, equal to at least 102% of the market value of the
securities loaned plus accrued interest. If a borrower fails to return the borrowed security,
Northern Trust will use the collateral to purchase the same or similar security as a replacement
for the borrowed security that was not returned by the borrower. However, we would receive the
collateral in place of the borrowed security if Northern Trust is unable to purchase the same or
similar security.
All collateral is held by Northern Trust. We have the right to access the collateral only if the
institution borrowing our securities is in default under the lending agreement. Therefore, we do
not recognize the receipt of the collateral held by Northern Trust or the obligation to return the
collateral at the conclusion of the lending agreement in our Consolidated Financial Statements. We
also maintain effective control of the loaned securities and have the right and ability to redeem
the securities loaned on short notice. Therefore, we continue to classify these securities as
invested assets in our Consolidated Financial Statements. At June 30, 2009, we had securities
totaling $67.9 million on loan under the program.
Recently Issued Accounting Standards
Adopted Accounting Standards
SFAS No. 141(R), Business Combinations
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 141(R), Business Combinations, a replacement of SFAS No. 141,
Business Combinations. SFAS No. 141(R) provides revised guidance on how an acquirer recognizes
and measures in its financial statements the identifiable assets acquired, the liabilities assumed
and any noncontrolling interest in the acquiree. In addition, SFAS No. 141(R) provides revised
guidance on the recognition and measurement of goodwill, as well as guidance specific to the
recognition, classification, and measurement of assets and liabilities related to insurance and
reinsurance contracts acquired in a business combination. We will apply the provisions of SFAS No.
141(R) prospectively to business combinations occurring on or after January 1, 2009. The adoption
of SFAS No. 141(R) did not have any impact on the amounts reported in our Consolidated Financial
Statements.
SFAS No. 165, Subsequent Events
In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which establishes general standards
of accounting for and disclosure of events that occur after the balance sheet date but before
financial statements are issued. SFAS No. 165 is effective for interim or annual periods ending
after June 15, 2009. We evaluated all events or transactions that occurred after June 30, 2009
through July 31, 2009, the date on which our interim Consolidated Financial Statements are filed,
for potential recognition and/or disclosure in our Consolidated Financial Statements. We did not
identify any material subsequent events during this period.
9
FSP SFAS No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly
In April 2009, the FASB issued FASB Staff Position (FSP) SFAS No. 157-4, Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly. Under FSP SFAS No. 157-4, transactions or quoted
prices may not accurately reflect fair value if an entity determines that there has been a
significant decrease in the volume and level of activity for the asset or the liability in relation
to the normal market activity for the asset or liability (or similar assets or liabilities). In
addition, if there is evidence that the transaction for the asset or liability is not orderly, the
entity shall place little, if any weight on that transaction price as an indicator of fair value.
FSP SFAS No. 157-4 is effective for periods ending after June 15, 2009. The adoption of FSP SFAS
No. 157-4 did not have any impact on the amounts reported in our Consolidated Financial Statements.
FSP SFAS No. 115-2 and SFAS No. 124-2, Recognition and Presentation of Other-Than-Temporary
Impairments
In April 2009, the FASB issued FSP SFAS No. 115-2 and SFAS No. 124-2, Recognition and Presentation
of Other-Than-Temporary Impairments (FSP SFAS No. 115-2). FSP SFAS No. 115-2 provides new
guidance on the recognition and presentation of other-than-temporary impairments (OTTI) for fixed
maturity securities that are classified as available-for-sale and held-to-maturity and replaces the
current requirement that an entity have the positive intent and ability to hold an impaired
security until recovery of its amortized cost basis in order to conclude an impairment was not
other-than-temporary with the requirement that management not intend to sell the impaired security
and that it is more likely than not it will not be required to sell the impaired security before
the recovery of its amortized cost basis. If management concludes a security is
other-than-temporarily impaired, FSP SFAS No. 115-2 requires that the difference between the fair
value and the amortized cost of the security be presented as an OTTI realized loss with an offset
for any noncredit-related loss component of the OTTI realized loss to be recognized in accumulated
other comprehensive income. Accordingly, only the credit loss component will have an impact on
earnings for the reporting period.
We have analyzed all fixed maturity securities held in our investment portfolio at June 30, 2009,
that were deemed to be other-than-temporarily impaired in the current (or prior) period to
determine whether any portion of the OTTI realized loss should be reclassified and reported as a
component of accumulated other comprehensive income. Our analysis indicated that, in all instances,
the recognition of the OTTI realized loss was the result of the deterioration in credit quality of
the issuer of the underlying security, which corresponded to the bankruptcy of the issuer for the
majority of securities. As such, the amount of OTTI realized loss recorded for these securities was
properly recognized in current (or prior) period earnings.
FSP SFAS No. 115-2 also requires extensive disclosures for both fixed maturity securities and
equity securities on an interim and annual basis to provide further disaggregated information as
well as information about how the credit loss component of the OTTI realized loss was determined
along with a roll forward of such amount for each reporting period. FSP SFAS No. 115-2 is effective
for interim and annual periods ending after June 15, 2009. The adoption of FSP SFAS No. 115-2 did
not have any impact on our financial position or results of operations.
FSP SFAS No. 107-1 and APB No. 28-1, Interim Disclosures about Fair Value of Financial
Instruments
In April 2009, the FASB issued FSP SFAS No. 107-1 and Accounting Principles Board (APB) No. 28-1,
Interim Disclosures about Fair Value of Financial Instruments (FSP SFAS No. 107-1). FSP SFAS
No. 107-1 amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to require
fair value of financial instrument disclosure in interim financial statements and amends APB No.
28, Interim Financial Reporting, to require those disclosures in all interim financial
statements. The provisions of FSP SFAS No. 107-1 are effective for interim periods ending after
June 15, 2009. The adoption of FSP SFAS No. 107-1 did not have any impact on our financial position
or results of operations.
10
Pending Accounting Standards
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162.
SFAS No. 168 will become the source of authoritative GAAP recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date
of SFAS No. 168, the Codification will supersede all then-existing non-SEC accounting and reporting
standards. All other nongrandfathered non-SEC accounting literature not included in the
Codification will become nonauthoritative. SFAS No. 168 is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. We do not expect the
adoption of SFAS No. 168 to have any impact on our Consolidated Financial Statements.
FSP SFAS No. 132(R)-1, Employers Disclosures about Postretirement Benefit Plan Assets
In December 2008, the FASB issued FSP SFAS No. 132(R)-1, Employers Disclosures about
Postretirement Benefit Plan Assets. FSP SFAS No. 132(R)-1 requires an employer to provide certain
disclosures about the assets held by its defined benefit pension or other postretirement plans. The
required disclosures include the investment policies and strategies of the plans, the fair value of
the major categories of plan assets, the inputs and valuation techniques used to develop fair value
measurements and a description of significant concentrations of risk in plan assets. FSP SFAS No.
132(R)-1 is effective for fiscal years ending after December 15, 2009. We do not expect the
adoption of SFAS No. 132(R)-1 to have a material impact on our Consolidated Financial Statements.
11
NOTE 2. SUMMARY OF INVESTMENTS
A reconciliation of the amortized cost (cost for equity securities) to fair value of investments in
held-to-maturity and available-for-sale fixed maturity and equity securities as of June 30, 2009
and December 31, 2008, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands) |
|
|
|
Cost or |
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
|
|
June 30, 2009 |
|
Amortized Cost |
|
|
Appreciation |
|
|
Depreciation |
|
|
Fair Value |
|
HELD-TO-MATURITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
$ |
1,427 |
|
|
$ |
45 |
|
|
$ |
|
|
|
$ |
1,472 |
|
Mortgage-backed securities |
|
|
575 |
|
|
|
59 |
|
|
|
|
|
|
|
634 |
|
States, municipalities and political
subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligations |
|
|
1,803 |
|
|
|
29 |
|
|
|
13 |
|
|
|
1,819 |
|
Special revenue |
|
|
8,708 |
|
|
|
164 |
|
|
|
256 |
|
|
|
8,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Held-to-Maturity Fixed Maturities |
|
$ |
12,513 |
|
|
$ |
297 |
|
|
$ |
269 |
|
|
$ |
12,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
$ |
17,368 |
|
|
$ |
1,526 |
|
|
$ |
|
|
|
$ |
18,894 |
|
Mortgage-backed securities |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
US Treasury |
|
|
28,215 |
|
|
|
734 |
|
|
|
55 |
|
|
|
28,894 |
|
Agency |
|
|
30,024 |
|
|
|
127 |
|
|
|
112 |
|
|
|
30,039 |
|
States, municipalities and political
subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligations |
|
|
372,926 |
|
|
|
13,588 |
|
|
|
680 |
|
|
|
385,834 |
|
Special revenue |
|
|
222,025 |
|
|
|
5,521 |
|
|
|
1,862 |
|
|
|
225,684 |
|
Foreign bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian |
|
|
40,114 |
|
|
|
1,614 |
|
|
|
607 |
|
|
|
41,121 |
|
Other foreign |
|
|
59,926 |
|
|
|
1,775 |
|
|
|
517 |
|
|
|
61,184 |
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
|
229,390 |
|
|
|
6,762 |
|
|
|
1,655 |
|
|
|
234,497 |
|
Natural gas |
|
|
55,061 |
|
|
|
1,810 |
|
|
|
2 |
|
|
|
56,869 |
|
Other |
|
|
3,913 |
|
|
|
175 |
|
|
|
11 |
|
|
|
4,077 |
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank, trust and insurance companies |
|
|
298,093 |
|
|
|
4,803 |
|
|
|
16,889 |
|
|
|
286,007 |
|
Transportation |
|
|
30,497 |
|
|
|
1,113 |
|
|
|
88 |
|
|
|
31,522 |
|
Energy |
|
|
128,404 |
|
|
|
3,565 |
|
|
|
464 |
|
|
|
131,505 |
|
Technology |
|
|
87,526 |
|
|
|
3,526 |
|
|
|
626 |
|
|
|
90,426 |
|
Basic industry |
|
|
96,371 |
|
|
|
2,112 |
|
|
|
1,373 |
|
|
|
97,110 |
|
Credit cyclicals |
|
|
65,857 |
|
|
|
1,702 |
|
|
|
784 |
|
|
|
66,775 |
|
Other |
|
|
233,074 |
|
|
|
8,707 |
|
|
|
3,420 |
|
|
|
238,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-For-Sale Fixed Maturities |
|
$ |
1,998,786 |
|
|
$ |
59,160 |
|
|
$ |
29,145 |
|
|
$ |
2,028,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
$ |
6,646 |
|
|
$ |
2,655 |
|
|
$ |
494 |
|
|
$ |
8,807 |
|
Natural gas |
|
|
838 |
|
|
|
547 |
|
|
|
|
|
|
|
1,385 |
|
Other |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Bank, trust and insurance companies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks |
|
|
6,684 |
|
|
|
21,464 |
|
|
|
325 |
|
|
|
27,823 |
|
Insurance |
|
|
3,129 |
|
|
|
7,340 |
|
|
|
159 |
|
|
|
10,310 |
|
Other |
|
|
139 |
|
|
|
360 |
|
|
|
|
|
|
|
499 |
|
All other common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation |
|
|
189 |
|
|
|
1,150 |
|
|
|
107 |
|
|
|
1,232 |
|
Energy |
|
|
4,903 |
|
|
|
3,598 |
|
|
|
57 |
|
|
|
8,444 |
|
Technology |
|
|
9,110 |
|
|
|
3,703 |
|
|
|
1,257 |
|
|
|
11,556 |
|
Basic industry |
|
|
7,156 |
|
|
|
2,756 |
|
|
|
324 |
|
|
|
9,588 |
|
Credit cyclicals |
|
|
2,680 |
|
|
|
312 |
|
|
|
|
|
|
|
2,992 |
|
Other |
|
|
12,512 |
|
|
|
12,047 |
|
|
|
253 |
|
|
|
24,306 |
|
Nonredeemable preferred stocks |
|
|
1,461 |
|
|
|
|
|
|
|
731 |
|
|
|
730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Equity Securities |
|
$ |
55,449 |
|
|
$ |
55,932 |
|
|
$ |
3,707 |
|
|
$ |
107,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Securities |
|
$ |
2,054,235 |
|
|
$ |
115,092 |
|
|
$ |
32,852 |
|
|
$ |
2,136,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands) |
|
|
|
Cost or |
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
|
|
December 31, 2008 |
|
Amortized Cost |
|
|
Appreciation |
|
|
Depreciation |
|
|
Fair Value |
|
HELD-TO-MATURITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
$ |
1,900 |
|
|
$ |
51 |
|
|
$ |
|
|
|
$ |
1,951 |
|
Mortgage-backed securities |
|
|
641 |
|
|
|
58 |
|
|
|
|
|
|
|
699 |
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligations |
|
|
2,281 |
|
|
|
35 |
|
|
|
|
|
|
|
2,316 |
|
Special revenue |
|
|
9,290 |
|
|
|
208 |
|
|
|
270 |
|
|
|
9,228 |
|
All other corporate bonds |
|
|
1,065 |
|
|
|
|
|
|
|
113 |
|
|
|
952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Held-to-Maturity Fixed Maturities |
|
$ |
15,177 |
|
|
$ |
352 |
|
|
$ |
383 |
|
|
$ |
15,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
$ |
17,368 |
|
|
$ |
1,023 |
|
|
$ |
|
|
|
$ |
18,391 |
|
Mortgage-backed securities |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
US Treasury |
|
|
25,333 |
|
|
|
1,258 |
|
|
|
|
|
|
|
26,591 |
|
Agency |
|
|
99,814 |
|
|
|
269 |
|
|
|
233 |
|
|
|
99,850 |
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligations |
|
|
367,370 |
|
|
|
10,122 |
|
|
|
821 |
|
|
|
376,671 |
|
Special revenue |
|
|
225,069 |
|
|
|
4,538 |
|
|
|
2,491 |
|
|
|
227,116 |
|
Foreign bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian |
|
|
33,046 |
|
|
|
349 |
|
|
|
2,245 |
|
|
|
31,150 |
|
Other foreign |
|
|
47,363 |
|
|
|
525 |
|
|
|
1,335 |
|
|
|
46,553 |
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
|
201,847 |
|
|
|
1,386 |
|
|
|
6,798 |
|
|
|
196,435 |
|
Natural gas |
|
|
54,327 |
|
|
|
587 |
|
|
|
731 |
|
|
|
54,183 |
|
Other |
|
|
4,213 |
|
|
|
484 |
|
|
|
2 |
|
|
|
4,695 |
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank, trust and insurance companies |
|
|
318,964 |
|
|
|
1,209 |
|
|
|
28,818 |
|
|
|
291,355 |
|
Transportation |
|
|
29,291 |
|
|
|
205 |
|
|
|
486 |
|
|
|
29,010 |
|
Energy |
|
|
90,211 |
|
|
|
1,017 |
|
|
|
2,362 |
|
|
|
88,866 |
|
Technology |
|
|
73,707 |
|
|
|
1,205 |
|
|
|
2,388 |
|
|
|
72,524 |
|
Basic industry |
|
|
85,517 |
|
|
|
519 |
|
|
|
3,519 |
|
|
|
82,517 |
|
Credit cyclicals |
|
|
56,979 |
|
|
|
368 |
|
|
|
5,394 |
|
|
|
51,953 |
|
Other |
|
|
212,044 |
|
|
|
2,861 |
|
|
|
14,199 |
|
|
|
200,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-For-Sale Fixed Maturities |
|
$ |
1,942,466 |
|
|
$ |
27,925 |
|
|
$ |
71,822 |
|
|
$ |
1,898,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
$ |
7,681 |
|
|
$ |
2,501 |
|
|
$ |
376 |
|
|
$ |
9,806 |
|
Natural gas |
|
|
838 |
|
|
|
552 |
|
|
|
|
|
|
|
1,390 |
|
Other |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
4 |
|
Bank, trust and insurance companies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks |
|
|
7,166 |
|
|
|
28,274 |
|
|
|
|
|
|
|
35,440 |
|
Insurance |
|
|
4,234 |
|
|
|
9,802 |
|
|
|
35 |
|
|
|
14,001 |
|
Other |
|
|
139 |
|
|
|
335 |
|
|
|
|
|
|
|
474 |
|
All other common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation |
|
|
189 |
|
|
|
1,185 |
|
|
|
|
|
|
|
1,374 |
|
Energy |
|
|
5,057 |
|
|
|
3,640 |
|
|
|
1,067 |
|
|
|
7,630 |
|
Technology |
|
|
8,706 |
|
|
|
2,991 |
|
|
|
750 |
|
|
|
10,947 |
|
Basic industry |
|
|
11,674 |
|
|
|
1,775 |
|
|
|
3,055 |
|
|
|
10,394 |
|
Credit cyclicals |
|
|
5,959 |
|
|
|
388 |
|
|
|
2,372 |
|
|
|
3,975 |
|
Other |
|
|
13,140 |
|
|
|
13,671 |
|
|
|
1,946 |
|
|
|
24,865 |
|
Nonredeemable preferred stocks |
|
|
1,461 |
|
|
|
|
|
|
|
776 |
|
|
|
685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Equity Securities |
|
$ |
66,246 |
|
|
$ |
65,116 |
|
|
$ |
10,377 |
|
|
$ |
120,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Securities |
|
$ |
2,008,712 |
|
|
$ |
93,041 |
|
|
$ |
82,199 |
|
|
$ |
2,019,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
The amortized cost and fair value of held-to-maturity, available-for-sale and trading
securities at June 30, 2009, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-To-Maturity |
|
|
Available-For-Sale |
|
|
Trading |
|
(Dollars in Thousands) |
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
June 30, 2009 |
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
Due in one year or less |
|
$ |
641 |
|
|
$ |
647 |
|
|
$ |
185,545 |
|
|
$ |
187,018 |
|
|
$ |
|
|
|
$ |
|
|
Due after one year through five years |
|
|
4,894 |
|
|
|
5,013 |
|
|
|
1,006,778 |
|
|
|
1,027,497 |
|
|
|
4,482 |
|
|
|
4,741 |
|
Due after five years through 10 years |
|
|
4,976 |
|
|
|
4,775 |
|
|
|
636,434 |
|
|
|
639,940 |
|
|
|
|
|
|
|
|
|
Due after 10 years |
|
|
|
|
|
|
|
|
|
|
152,659 |
|
|
|
155,450 |
|
|
|
6,609 |
|
|
|
6,506 |
|
Mortgage-backed securities |
|
|
575 |
|
|
|
634 |
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
|
1,427 |
|
|
|
1,472 |
|
|
|
17,368 |
|
|
|
18,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,513 |
|
|
$ |
12,541 |
|
|
$ |
1,998,786 |
|
|
$ |
2,028,801 |
|
|
$ |
11,091 |
|
|
$ |
11,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of available-for-sale securities for the three-months ended June 30, 2009
and 2008, were $.3 million and $.9 million, respectively. Proceeds from sales of available-for-sale
securities for the six-months ended June 30, 2009 and 2008, were $8.4 million and $.9 million,
respectively. There were no gross gains for the three-and six-months ended June 30, 2009 and 2008.
Gross losses for the three-months ended June 30, 2009 and 2008, were $.3 million and $.1 million,
respectively. Gross losses for the six-months ended June 30, 2009 and 2008, were $.4 million and
$.1 million, respectively.
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 realized investment gains and losses. Our portfolio of
trading securities had a fair value of $11.2 million at June 30, 2009 and $8.1 million at December
31, 2008. In both the three- and six-months ended June 30, 2009 and 2008, we had no additional
gross gains or losses attributable to the change in fair value of trading securities still held at
June 30, 2009 and 2008.
There were no sales of held-to-maturity securities during the three- and six-months ended June 30,
2009 and 2008.
The cost of investments sold is determined by the specific identification method. A summary of net
realized investment gains (losses) resulting from sales, calls and other-than-temporary
impairments, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net realized investment gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
(2,222 |
) |
|
$ |
(260 |
) |
|
$ |
(5,500 |
) |
|
$ |
(1,523 |
) |
Equity securities |
|
|
(11,472 |
) |
|
|
89 |
|
|
|
(11,982 |
) |
|
|
691 |
|
Trading securities |
|
|
541 |
|
|
|
1,115 |
|
|
|
838 |
|
|
|
622 |
|
Short-term investments |
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized investment gains (losses) |
|
$ |
(13,153 |
) |
|
$ |
944 |
|
|
$ |
(16,641 |
) |
|
$ |
(210 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
14
A summary of net changes in unrealized investment appreciation, less applicable income taxes,
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
Net changes in unrealized investment appreciation |
|
|
|
|
|
|
|
|
Available-for-sale fixed maturities and
equity securities |
|
$ |
71,398 |
|
|
$ |
(62,486 |
) |
Deferred policy acquisition costs |
|
|
(40,670 |
) |
|
|
13,697 |
|
Income tax effect |
|
|
(10,755 |
) |
|
|
17,085 |
|
|
|
|
|
|
|
|
Change in net unrealized appreciation |
|
$ |
19,973 |
|
|
$ |
(31,704 |
) |
|
|
|
|
|
|
|
We continually monitor the difference between our cost basis and the estimated fair value of
our investments. Our accounting policy for impairment recognition requires that
other-than-temporary impairment charges be recorded when we determine that it is more likely than
not that we will be unable to recover the entire amortized cost 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; and we have no intent to
sell or requirement to sell the investment.
The following pages present a summary of fixed maturity and equity securities that were in an
unrealized loss position at June 30, 2009 and December 31, 2008.
We believe the deterioration in value of 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 not more likely than not we will be required to sell the securities until such time
as the value recovers or the securities mature.
We attribute the deterioration in value of our equity security portfolio to the current economic
conditions that resulted in market volatility in the first six months of 2009 and not to an
explicit matter impacting the financial position of the underlying companies in which we are
invested. We have evaluated the unrealized losses reported for all of our equity securities at June
30, 2009, and have concluded that the duration and severity of these losses do not warrant the
recognition of an other-than-temporary impairment charge at June 30, 2009. Specifically, the
unrealized losses reported for individual securities that have been in an unrealized loss position
for greater than 12 months has fluctuated significantly during 2009. Our largest unrealized loss
greater than 12 months on an individual security at June 30, 2009 was $.2 million. 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 other-than-temporary impairment recognition.
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
(Dollars in Thousands) |
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
June 30, 2009 |
|
Number |
|
|
Fair |
|
|
Unrealized |
|
|
Number |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
Type of Investment |
|
of Issues |
|
|
Value |
|
|
Depreciation |
|
|
of Issues |
|
|
Value |
|
|
Depreciation |
|
|
Value |
|
|
Depreciation |
|
HELD-TO-MATURITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligations |
|
|
1 |
|
|
|
291 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
291 |
|
|
|
13 |
|
Special revenue |
|
|
1 |
|
|
|
1,918 |
|
|
|
45 |
|
|
|
1 |
|
|
|
767 |
|
|
|
211 |
|
|
|
2,685 |
|
|
|
256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Held-to-Maturity Fixed Maturities |
|
|
2 |
|
|
|
2,209 |
|
|
|
58 |
|
|
|
1 |
|
|
|
767 |
|
|
|
211 |
|
|
|
2,976 |
|
|
|
269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury |
|
|
2 |
|
|
|
3,429 |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,429 |
|
|
|
55 |
|
Agency |
|
|
4 |
|
|
|
12,888 |
|
|
|
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,888 |
|
|
|
112 |
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligations |
|
|
15 |
|
|
|
12,192 |
|
|
|
105 |
|
|
|
16 |
|
|
|
12,951 |
|
|
|
575 |
|
|
|
25,143 |
|
|
|
680 |
|
Special revenue |
|
|
21 |
|
|
|
22,964 |
|
|
|
817 |
|
|
|
23 |
|
|
|
21,512 |
|
|
|
1,045 |
|
|
|
44,476 |
|
|
|
1,862 |
|
Foreign bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
7,221 |
|
|
|
607 |
|
|
|
7,221 |
|
|
|
607 |
|
Other foreign |
|
|
4 |
|
|
|
11,179 |
|
|
|
517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,179 |
|
|
|
517 |
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
|
13 |
|
|
|
35,102 |
|
|
|
976 |
|
|
|
6 |
|
|
|
22,868 |
|
|
|
679 |
|
|
|
57,970 |
|
|
|
1,655 |
|
Natural gas |
|
|
1 |
|
|
|
995 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
995 |
|
|
|
2 |
|
Other |
|
|
2 |
|
|
|
928 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
928 |
|
|
|
11 |
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank, trust and insurance |
|
|
23 |
|
|
|
64,118 |
|
|
|
5,340 |
|
|
|
37 |
|
|
|
102,070 |
|
|
|
11,549 |
|
|
|
166,188 |
|
|
|
16,889 |
|
Transportation |
|
|
1 |
|
|
|
1,251 |
|
|
|
39 |
|
|
|
1 |
|
|
|
1,970 |
|
|
|
49 |
|
|
|
3,221 |
|
|
|
88 |
|
Energy |
|
|
3 |
|
|
|
8,758 |
|
|
|
230 |
|
|
|
4 |
|
|
|
11,726 |
|
|
|
234 |
|
|
|
20,484 |
|
|
|
464 |
|
Technology |
|
|
2 |
|
|
|
6,271 |
|
|
|
7 |
|
|
|
3 |
|
|
|
6,247 |
|
|
|
619 |
|
|
|
12,518 |
|
|
|
626 |
|
Basic industry |
|
|
8 |
|
|
|
23,659 |
|
|
|
1,100 |
|
|
|
4 |
|
|
|
12,734 |
|
|
|
273 |
|
|
|
36,393 |
|
|
|
1,373 |
|
Credit cyclicals |
|
|
3 |
|
|
|
11,542 |
|
|
|
532 |
|
|
|
3 |
|
|
|
7,476 |
|
|
|
252 |
|
|
|
19,018 |
|
|
|
784 |
|
Other |
|
|
5 |
|
|
|
11,573 |
|
|
|
432 |
|
|
|
8 |
|
|
|
31,249 |
|
|
|
2,988 |
|
|
|
42,822 |
|
|
|
3,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-For-Sale Fixed Maturities |
|
|
107 |
|
|
|
226,849 |
|
|
|
10,275 |
|
|
|
107 |
|
|
|
238,024 |
|
|
|
18,870 |
|
|
|
464,873 |
|
|
|
29,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
|
10 |
|
|
|
2,025 |
|
|
|
411 |
|
|
|
5 |
|
|
|
368 |
|
|
|
83 |
|
|
|
2,393 |
|
|
|
494 |
|
Bank, trust and insurance companies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks |
|
|
2 |
|
|
|
624 |
|
|
|
183 |
|
|
|
1 |
|
|
|
150 |
|
|
|
142 |
|
|
|
774 |
|
|
|
325 |
|
Insurance |
|
|
3 |
|
|
|
521 |
|
|
|
118 |
|
|
|
2 |
|
|
|
122 |
|
|
|
41 |
|
|
|
643 |
|
|
|
159 |
|
All other common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation |
|
|
15 |
|
|
|
44 |
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44 |
|
|
|
107 |
|
Energy |
|
|
2 |
|
|
|
155 |
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155 |
|
|
|
57 |
|
Technology |
|
|
49 |
|
|
|
2,681 |
|
|
|
993 |
|
|
|
8 |
|
|
|
354 |
|
|
|
264 |
|
|
|
3,035 |
|
|
|
1,257 |
|
Basic industry |
|
|
6 |
|
|
|
1,652 |
|
|
|
324 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1,652 |
|
|
|
324 |
|
Other |
|
|
6 |
|
|
|
2,512 |
|
|
|
169 |
|
|
|
16 |
|
|
|
241 |
|
|
|
84 |
|
|
|
2,753 |
|
|
|
253 |
|
Nonredeemable preferred stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
730 |
|
|
|
731 |
|
|
|
730 |
|
|
|
731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Equity Securities |
|
|
93 |
|
|
|
10,214 |
|
|
|
2,362 |
|
|
|
38 |
|
|
|
1,965 |
|
|
|
1,345 |
|
|
|
12,179 |
|
|
|
3,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Securities |
|
|
200 |
|
|
|
237,063 |
|
|
|
12,637 |
|
|
|
145 |
|
|
|
239,989 |
|
|
|
20,215 |
|
|
|
477,052 |
|
|
|
32,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
202 |
|
|
|
239,272 |
|
|
|
12,695 |
|
|
|
146 |
|
|
|
240,756 |
|
|
|
20,426 |
|
|
|
480,028 |
|
|
|
33,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
(Dollars in Thousands) |
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
December 31, 2008 |
|
Number |
|
|
Fair |
|
|
Unrealized |
|
|
Number |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
Type of Investment |
|
of Issues |
|
|
Value |
|
|
Depreciation |
|
|
of Issues |
|
|
Value |
|
|
Depreciation |
|
|
Value |
|
|
Depreciation |
|
HELD-TO-MATURITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
704 |
|
|
|
270 |
|
|
|
704 |
|
|
|
270 |
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
6 |
|
|
|
952 |
|
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
952 |
|
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Held-to-Maturity Fixed Maturities |
|
|
6 |
|
|
|
952 |
|
|
|
113 |
|
|
|
1 |
|
|
|
704 |
|
|
|
270 |
|
|
|
1,656 |
|
|
|
383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
|
3 |
|
|
|
11,906 |
|
|
|
178 |
|
|
|
1 |
|
|
|
8,072 |
|
|
|
55 |
|
|
|
19,978 |
|
|
|
233 |
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligations |
|
|
32 |
|
|
|
27,912 |
|
|
|
539 |
|
|
|
10 |
|
|
|
7,432 |
|
|
|
282 |
|
|
|
35,344 |
|
|
|
821 |
|
Special revenue |
|
|
43 |
|
|
|
46,904 |
|
|
|
1,338 |
|
|
|
15 |
|
|
|
14,581 |
|
|
|
1,153 |
|
|
|
61,485 |
|
|
|
2,491 |
|
Foreign bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian |
|
|
9 |
|
|
|
26,402 |
|
|
|
1,315 |
|
|
|
1 |
|
|
|
2,797 |
|
|
|
930 |
|
|
|
29,199 |
|
|
|
2,245 |
|
Other foreign |
|
|
9 |
|
|
|
30,076 |
|
|
|
1,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,076 |
|
|
|
1,335 |
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
|
33 |
|
|
|
112,462 |
|
|
|
4,375 |
|
|
|
6 |
|
|
|
24,123 |
|
|
|
2,423 |
|
|
|
136,585 |
|
|
|
6,798 |
|
Natural gas |
|
|
8 |
|
|
|
25,533 |
|
|
|
731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,533 |
|
|
|
731 |
|
Other |
|
|
1 |
|
|
|
356 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
356 |
|
|
|
2 |
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank, trust and insurance |
|
|
47 |
|
|
|
149,356 |
|
|
|
11,378 |
|
|
|
28 |
|
|
|
78,755 |
|
|
|
17,440 |
|
|
|
228,111 |
|
|
|
28,818 |
|
Transportation |
|
|
7 |
|
|
|
18,823 |
|
|
|
486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,823 |
|
|
|
486 |
|
Energy |
|
|
16 |
|
|
|
47,647 |
|
|
|
2,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,647 |
|
|
|
2,362 |
|
Technology |
|
|
12 |
|
|
|
39,420 |
|
|
|
1,344 |
|
|
|
1 |
|
|
|
3,790 |
|
|
|
1,044 |
|
|
|
43,210 |
|
|
|
2,388 |
|
Basic industry |
|
|
19 |
|
|
|
51,424 |
|
|
|
3,494 |
|
|
|
1 |
|
|
|
975 |
|
|
|
25 |
|
|
|
52,399 |
|
|
|
3,519 |
|
Credit cyclicals |
|
|
10 |
|
|
|
41,770 |
|
|
|
4,691 |
|
|
|
1 |
|
|
|
3,030 |
|
|
|
703 |
|
|
|
44,800 |
|
|
|
5,394 |
|
Other |
|
|
30 |
|
|
|
96,310 |
|
|
|
6,026 |
|
|
|
8 |
|
|
|
19,120 |
|
|
|
8,173 |
|
|
|
115,430 |
|
|
|
14,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-For-Sale Fixed Maturities |
|
|
279 |
|
|
|
726,301 |
|
|
|
39,594 |
|
|
|
72 |
|
|
|
162,675 |
|
|
|
32,228 |
|
|
|
888,976 |
|
|
|
71,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
|
1 |
|
|
|
535 |
|
|
|
100 |
|
|
|
2 |
|
|
|
382 |
|
|
|
276 |
|
|
|
917 |
|
|
|
376 |
|
Banks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
422 |
|
|
|
35 |
|
|
|
422 |
|
|
|
35 |
|
All other common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy |
|
|
2 |
|
|
|
2,328 |
|
|
|
1,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,328 |
|
|
|
1,067 |
|
Technology |
|
|
5 |
|
|
|
3,836 |
|
|
|
750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,836 |
|
|
|
750 |
|
Basic industry |
|
|
4 |
|
|
|
4,481 |
|
|
|
3,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,481 |
|
|
|
3,055 |
|
Credit cyclicals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
3,471 |
|
|
|
2,372 |
|
|
|
3,471 |
|
|
|
2,372 |
|
Other |
|
|
5 |
|
|
|
752 |
|
|
|
1,556 |
|
|
|
2 |
|
|
|
1,207 |
|
|
|
390 |
|
|
|
1,959 |
|
|
|
1,946 |
|
Nonredeemable preferred stocks |
|
|
1 |
|
|
|
514 |
|
|
|
717 |
|
|
|
1 |
|
|
|
171 |
|
|
|
59 |
|
|
|
685 |
|
|
|
776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Equity Securities |
|
|
18 |
|
|
|
12,446 |
|
|
|
7,245 |
|
|
|
8 |
|
|
|
5,653 |
|
|
|
3,132 |
|
|
|
18,099 |
|
|
|
10,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Securities |
|
|
297 |
|
|
|
738,747 |
|
|
|
46,839 |
|
|
|
80 |
|
|
|
168,328 |
|
|
|
35,360 |
|
|
|
907,075 |
|
|
|
82,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
303 |
|
|
|
739,699 |
|
|
|
46,952 |
|
|
|
81 |
|
|
|
169,032 |
|
|
|
35,630 |
|
|
|
908,731 |
|
|
|
82,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
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 particular asset or liability shown.
In most cases, we use quoted market prices to determine the fair value of fixed maturities, equity
securities, trading securities and short-term investments. Where quoted market prices do not exist,
we base 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 managements own assumptions about the assumptions a market participant
would use in pricing the financial instrument.
We base the estimated fair value of mortgage loans on discounted cash flows, utilizing the market
rate of interest for similar loans in effect at the valuation date.
The estimated fair value of policy loans is equivalent to carrying 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 interest-sensitive
policies.
Our other long-term investments consist primarily of holdings in limited liability partnership
funds that are valued by the various fund managers and are recorded on the equity method of
accounting. In managements opinion, these values represent fair value at June 30, 2009 and
December 31, 2008.
For cash and cash equivalents and accrued investment income, carrying value is a reasonable
estimate of fair value, due to its short-term nature.
We calculate the fair value of the liabilities for all annuity products based upon the estimated
value of the business, using current market rates and forecast assumptions and risk-adjusted
discount rates, in accordance with the provisions of SFAS No. 157, Fair Value Measurements, when
relevant observable market data does not exist.
A summary of the carrying value and estimated fair value of our financial instruments at June 30,
2009 and December 31, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31 |
|
June 30, 2009 |
|
|
December 31, 2008 |
|
(In Thousands) |
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity fixed maturities |
|
$ |
12,541 |
|
|
$ |
12,513 |
|
|
$ |
15,146 |
|
|
$ |
15,177 |
|
Available-for-sale fixed maturities |
|
|
2,028,801 |
|
|
|
2,028,801 |
|
|
|
1,898,569 |
|
|
|
1,898,569 |
|
Trading securities |
|
|
11,247 |
|
|
|
11,247 |
|
|
|
8,055 |
|
|
|
8,055 |
|
Equity securities |
|
|
107,674 |
|
|
|
107,674 |
|
|
|
120,985 |
|
|
|
120,985 |
|
Mortgage loans |
|
|
8,360 |
|
|
|
7,579 |
|
|
|
8,719 |
|
|
|
7,821 |
|
Policy loans |
|
|
7,705 |
|
|
|
7,705 |
|
|
|
7,808 |
|
|
|
7,808 |
|
Other long-term investments |
|
|
13,686 |
|
|
|
13,686 |
|
|
|
11,216 |
|
|
|
11,216 |
|
Short-term investments |
|
|
13,715 |
|
|
|
13,715 |
|
|
|
26,142 |
|
|
|
26,142 |
|
Cash and cash equivalents |
|
|
152,973 |
|
|
|
152,973 |
|
|
|
109,582 |
|
|
|
109,582 |
|
Accrued investment income |
|
|
28,861 |
|
|
|
28,861 |
|
|
|
27,849 |
|
|
|
27,849 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy Reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity (accumulations) |
|
$ |
837,376 |
|
|
$ |
857,924 |
|
|
$ |
748,506 |
|
|
$ |
786,063 |
|
Annuity (benefit payments) |
|
|
71,488 |
|
|
|
73,430 |
|
|
|
69,976 |
|
|
|
73,094 |
|
18
SFAS No. 157, as amended, establishes 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 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 (Level 1) and the lowest priority
to unobservable inputs (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 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.
Level 2: Valuations are based on quoted prices, 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 managements own assumptions about the assumptions a market participant
would use in pricing the financial instrument.
In determining whether a security should be categorized as a Level 2 or Level 3, we also consider
whether there has been a decrease in the volume and level of activity for a specific security by
analyzing the following indicators:
|
|
|
Trading volume in the secondary market; |
|
|
|
Level of credit spreads over historical levels; |
|
|
|
Price consensus among market participants and sources. |
We review the 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.
As depicted in the Level 3 disclosure table on the following page, reclassification of securities
to/from the Level 3 category are reported as transfers in/out as of the beginning of the period
in which the reclassification occurred.
For all levels, we obtain or calculate only one quote or price per instrument. To determine the
fair value of our financial instruments, we utilize independent pricing services and brokers and,
in some instances, internal pricing methods, all of which provide a single quote or price for each
financial instrument.
The following table presents the categorization for our financial instruments measured at fair
value on a recurring basis in our Consolidated Balance Sheet at June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thouands) |
|
|
|
|
|
Fair Value Measurements |
|
Description |
|
June 30, 2009 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale fixed maturities |
|
$ |
2,028,801 |
|
|
$ |
|
|
|
$ |
2,019,496 |
|
|
$ |
9,305 |
|
Equity securities |
|
|
107,674 |
|
|
|
106,799 |
|
|
|
875 |
|
|
|
|
|
Trading securities |
|
|
11,247 |
|
|
|
1,810 |
|
|
|
9,437 |
|
|
|
|
|
Short-term investments |
|
|
13,715 |
|
|
|
1,200 |
|
|
|
12,515 |
|
|
|
|
|
Money market accounts |
|
|
118,342 |
|
|
|
118,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,279,779 |
|
|
$ |
228,151 |
|
|
$ |
2,042,323 |
|
|
$ |
9,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of securities that are categorized as Level 1 is based on quoted market prices
that are readily and regularly available.
19
The fair value of securities that are categorized as Level 2 is determined by management, relying
in part on market values 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.
The securities categorized as Level 3 include holdings in certain private placement fixed maturity
and equity securities and certain impaired securities for which there is not an active market. The
fair value of our Level 3 impaired securities was determined primarily based upon managements
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 managements 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 a security does not have a market at the balance sheet date, management
will estimate the securitys 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 June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
(In Thousands) |
|
fixed maturities |
|
|
Equity securities |
|
|
Total |
|
Balance at March 31, 2009 |
|
$ |
12,176 |
|
|
$ |
|
|
|
$ |
12,176 |
|
Unrealized gains (1) |
|
|
1,122 |
|
|
|
270 |
|
|
|
1,392 |
|
Amortization |
|
|
(3 |
) |
|
|
|
|
|
|
(3 |
) |
Purchases and disposals |
|
|
(3,059 |
) |
|
|
|
|
|
|
(3,059 |
) |
Transfers in/out |
|
|
(931 |
) |
|
|
(270 |
) |
|
|
(1,201 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009 |
|
$ |
9,305 |
|
|
$ |
|
|
|
$ |
9,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Unrealized gains are recorded as a component of comprehensive income (loss). |
The amount reported in the previous table as available-for-sale fixed maturities purchases
and disposals includes $3.0 million of available-for-sale fixed maturities that were reclassified
to other long-term investments due to bankruptcy reorganization.
The following table provides a summary of the changes in fair value of our Level 3 securities for
the six-month period ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
(In Thousands) |
|
fixed maturities |
|
|
Equity securities |
|
|
Total |
|
Balance at December 31, 2008 |
|
$ |
6,254 |
|
|
$ |
1,851 |
|
|
$ |
8,105 |
|
Unrealized gains (losses) (1) |
|
|
389 |
|
|
|
(4 |
) |
|
|
385 |
|
Purchases and disposals |
|
|
(3,552 |
) |
|
|
|
|
|
|
(3,552 |
) |
Transfers in/out |
|
|
6,214 |
|
|
|
(1,847 |
) |
|
|
4,367 |
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009 |
|
$ |
9,305 |
|
|
$ |
|
|
|
$ |
9,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Unrealized gains (losses) are recorded as a component of comprehensive income (loss). |
The amount reported in the previous table as available-for-sale fixed
maturities transfers in/out includes the transfer in of a private placement
security we hold of $4.8 million, which had no observable price available at
June 30, 2009, and the transfer in of $3.3 million of available-for-sale fixed
maturities that were subsequently reclassified, as a disposal, to other
long-term investments due to bankruptcy reorganization.
20
NOTE 4. EMPLOYEE BENEFITS
Our pension and postretirement benefit expense for the three- and six-month periods ended June 30,
2009 and 2008 are displayed in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Pension expense |
|
$ |
1,967 |
|
|
$ |
807 |
|
|
$ |
2,724 |
|
|
$ |
1,514 |
|
Other postretirement benefit expense |
|
|
687 |
|
|
|
413 |
|
|
|
1,257 |
|
|
|
863 |
|
We previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008
that we expected to contribute $4.0 million to our pension plan in 2009. For the six-month period
ended June 30, 2009, we have contributed $2.0 million to the pension plan. We do not anticipate
that the total contribution in 2009, will vary significantly from the expected contribution.
NOTE 5. STOCK-BASED COMPENSATION
Nonqualified Employee Stock Award Plan
The United Fire & Casualty Company 2008 Stock Plan (the Plan) authorizes the issuance of
restricted stock awards, stock appreciation rights, incentive stock options, and nonqualified stock
options for up to 1,900,000 shares of United Fire common stock to employees, with 927,125
authorized shares available for future issuance at June 30, 2009. The Plan is administered by the
Board of Directors who has the authority to determine which employees will receive awards under the
Plan, 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
Plan. Pursuant to the Plan, the Board of Directors may, in its sole discretion, grant awards to
employees of United Fire or any of its affiliated companies who are in positions of substantial
responsibility with United Fire.
Option awards granted pursuant to the Plan are granted to buy shares of United Fires 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 stock awards granted pursuant to the Plan 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. Restricted stock
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 Plan is displayed in the following table.
|
|
|
|
|
|
|
|
|
|
|
Six |
|
|
|
|
|
|
Months Ended |
|
|
Inception |
|
Authorized Shares Available for Future Award Grants |
|
June 30, 2009 |
|
|
to Date |
|
Beginning balance |
|
|
1,021,025 |
|
|
|
1,000,000 |
|
Additional authorization from 2008 Stock Plan |
|
|
|
|
|
|
900,000 |
|
Number of awards granted |
|
|
(103,500 |
) |
|
|
(1,024,975 |
) |
Number of awards forfeited or expired |
|
|
9,600 |
|
|
|
52,100 |
|
|
Ending balance |
|
|
927,125 |
|
|
|
927,125 |
|
Number of option awards exercised |
|
|
600 |
|
|
|
167,042 |
|
Number of restricted stock awards vested |
|
|
|
|
|
|
|
|
21
Nonqualified Nonemployee Director Stock Option and Restricted Stock Plan
We have a nonemployee director stock option and restricted stock plan that authorizes United Fire
to grant restricted stock and nonqualified stock options to purchase 150,000 shares of United
Fires common stock, with 70,003 options available for future issuance at June 30, 2009. The Board
of Directors has the authority to determine which nonemployee directors receive awards under the
plan, 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 plan.
The activity in our nonemployee director stock option and restricted stock plan is displayed in the
following table.
|
|
|
|
|
|
|
|
|
|
|
Six |
|
|
|
|
|
|
Months Ended |
|
|
Inception |
|
Authorized Shares Available for Future Award Grants |
|
June 30, 2009 |
|
|
to Date |
|
Beginning balance |
|
|
70,003 |
|
|
|
150,000 |
|
Number of awards granted |
|
|
|
|
|
|
(86,000 |
) |
Number of awards forfeited or expired |
|
|
|
|
|
|
6,003 |
|
|
Ending balance |
|
|
70,003 |
|
|
|
70,003 |
|
Number of awards exercised |
|
|
|
|
|
|
|
|
Stock-Based Compensation Expense
For each of the three-month periods ended June 30, 2009 and 2008, we recognized stock-based
compensation expense of $.4 million. For the six-month periods ended June 30, 2009 and 2008, we
recognized stock-based compensation expense of $1.3 million and $.8 million, respectively. As of
June 30, 2009, we have $4.6 million in stock-based compensation expense that has yet to be
recognized through our results of operations. This compensation is expected to be recognized over a
term of five years, except with respect to awards that are accelerated by the Board of Directors,
in which case any remaining compensation expense will be recognized in the period in which the
awards are accelerated.
22
NOTE 6. SEGMENT INFORMATION
We have two reportable business segments in our operations: property and casualty insurance and
life insurance. All of our property and casualty offices are aggregated, as they target a similar
customer base, market the same products, and use the same marketing strategies. All of our
insurance is sold domestically; we have no revenues allocable to foreign operations.
Our management evaluates the two segments on the basis of both statutory accounting practices
prescribed 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, 2008.
The following analyses for the three-month periods ended June 30, 2009 and 2008 have been
reconciled to the amounts reported in our unaudited Consolidated Financial Statements to adjust for
inter-segment eliminations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty |
|
|
|
|
|
|
|
(In Thousands) |
|
Insurance |
|
|
Life Insurance |
|
|
Total |
|
Three Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
109,458 |
|
|
$ |
10,290 |
|
|
$ |
119,748 |
|
Investment income, net of investment expenses |
|
|
9,125 |
|
|
|
18,277 |
|
|
|
27,402 |
|
Realized investment gains (losses) |
|
|
(7,631 |
) |
|
|
(5,522 |
) |
|
|
(13,153 |
) |
Other income |
|
|
17 |
|
|
|
152 |
|
|
|
169 |
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
110,969 |
|
|
$ |
23,197 |
|
|
$ |
134,166 |
|
|
|
|
|
|
|
|
|
|
|
Inter-segment Eliminations |
|
|
(43 |
) |
|
|
(77 |
) |
|
|
(120 |
) |
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
110,926 |
|
|
$ |
23,120 |
|
|
$ |
134,046 |
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
(3,783 |
) |
|
$ |
(1,551 |
) |
|
$ |
(5,334 |
) |
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
1,319,141 |
|
|
$ |
1,487,048 |
|
|
$ |
2,806,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three M onths Ended June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
115,014 |
|
|
$ |
8,333 |
|
|
$ |
123,347 |
|
Investment income, net of investment expenses |
|
|
9,311 |
|
|
|
18,565 |
|
|
|
27,876 |
|
Realized investment gains (losses) |
|
|
1,205 |
|
|
|
(261 |
) |
|
|
944 |
|
Other income (loss) |
|
|
(18 |
) |
|
|
202 |
|
|
|
184 |
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
125,512 |
|
|
$ |
26,839 |
|
|
$ |
152,351 |
|
|
|
|
|
|
|
|
|
|
|
Inter-segment Eliminations |
|
|
(43 |
) |
|
|
(62 |
) |
|
|
(105 |
) |
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
125,469 |
|
|
$ |
26,777 |
|
|
$ |
152,246 |
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
(4,158 |
) |
|
$ |
2,635 |
|
|
$ |
(1,523 |
) |
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
1,331,166 |
|
|
$ |
1,437,992 |
|
|
$ |
2,769,158 |
|
|
|
|
|
|
|
|
|
|
|
23
The following analyses for the six-month periods ended June 30, 2009 and 2008 have been
reconciled to the amounts reported in our unaudited Consolidated Financial Statements to adjust for
inter-segment eliminations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and |
|
|
|
|
|
|
|
(In Thousands) |
|
Casualty Insurance |
|
|
Life Insurance |
|
|
Total |
|
Six Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
218,672 |
|
|
$ |
19,475 |
|
|
$ |
238,147 |
|
Investment income, net of investment expenses |
|
|
15,216 |
|
|
|
35,500 |
|
|
|
50,716 |
|
Realized investment gains (losses) |
|
|
(8,348 |
) |
|
|
(8,293 |
) |
|
|
(16,641 |
) |
Other income |
|
|
45 |
|
|
|
283 |
|
|
|
328 |
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
225,585 |
|
|
$ |
46,965 |
|
|
$ |
272,550 |
|
|
|
|
|
|
|
|
|
|
|
Inter-segment Eliminations |
|
|
(86 |
) |
|
|
(155 |
) |
|
|
(241 |
) |
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
225,499 |
|
|
$ |
46,810 |
|
|
$ |
272,309 |
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
(1,919 |
) |
|
$ |
(145 |
) |
|
$ |
(2,064 |
) |
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
1,319,141 |
|
|
$ |
1,487,048 |
|
|
$ |
2,806,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
228,366 |
|
|
$ |
17,985 |
|
|
$ |
246,351 |
|
Investment income, net of investment expenses |
|
|
18,144 |
|
|
|
37,808 |
|
|
|
55,952 |
|
Realized investment gains (losses) |
|
|
1,332 |
|
|
|
(1,542 |
) |
|
|
(210 |
) |
Other income (loss) |
|
|
(29 |
) |
|
|
412 |
|
|
|
383 |
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
247,813 |
|
|
$ |
54,663 |
|
|
$ |
302,476 |
|
|
|
|
|
|
|
|
|
|
|
Inter-segment Eliminations |
|
|
(84 |
) |
|
|
(103 |
) |
|
|
(187 |
) |
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
247,729 |
|
|
$ |
54,560 |
|
|
$ |
302,289 |
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
14,368 |
|
|
$ |
4,236 |
|
|
$ |
18,604 |
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
1,331,166 |
|
|
$ |
1,437,992 |
|
|
$ |
2,769,158 |
|
|
|
|
|
|
|
|
|
|
|
24
NOTE 7. EARNINGS PER COMMON SHARE
Basic earnings or loss per share is computed by dividing net income or loss by the weighted-average
number of common shares outstanding during the reporting period. Diluted earnings per share
calculates the effect of 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 stock options outstanding using the treasury stock
method. Under this method, we assume the exercise of all of the outstanding awards whose exercise
price is less than the weighted-average fair market value of our common stock during the period.
This method also assumes that the proceeds from the hypothetical award exercises are used to
repurchase shares of our common stock at the weighted-average fair market value of the stock during
the period. The net of the assumed awards exercised and assumed common shares repurchased represent
the number of dilutive common shares, which we add to the denominator of the earnings per share
calculation.
The components of basic and diluted earnings (loss) per share are displayed in the following tables
for the three-month periods ended June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
(In Thousands Except Per Share Data) |
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
Net income (loss) |
|
$ |
(5,334 |
) |
|
$ |
(5,334 |
) |
|
$ |
(1,523 |
) |
|
$ |
(1,523 |
) |
Weighted-average common shares outstanding |
|
|
26,592 |
|
|
|
26,592 |
|
|
|
27,153 |
|
|
|
27,153 |
|
Add dilutive effect of restricted stock awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add dilutive effect of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares for EPS calculation |
|
|
26,592 |
|
|
|
26,592 |
|
|
|
27,153 |
|
|
|
27,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share |
|
$ |
(0.20 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards excluded from diluted EPS calculation(1) |
|
|
|
|
|
|
924 |
|
|
|
|
|
|
|
834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Outstanding awards were 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 are displayed in the following tables
for the six-month periods ended June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
(In Thousands Except Per Share Data) |
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
Net income (loss) |
|
$ |
(2,064 |
) |
|
$ |
(2,064 |
) |
|
$ |
18,604 |
|
|
$ |
18,604 |
|
Weighted-average common shares outstanding |
|
|
26,603 |
|
|
|
26,603 |
|
|
|
27,172 |
|
|
|
27,172 |
|
Add dilutive effect of restricted stock awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19 |
|
Add dilutive effect of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares for EPS calculation |
|
|
26,603 |
|
|
|
26,603 |
|
|
|
27,172 |
|
|
|
27,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share |
|
$ |
(0.08 |
) |
|
$ |
(0.08 |
) |
|
$ |
0.68 |
|
|
$ |
0.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards excluded from diluted EPS calculation(1) |
|
|
|
|
|
|
924 |
|
|
|
|
|
|
|
815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Outstanding awards were excluded from the diluted earnings per share calculation
because the effect of including them would have been anti-dilutive. |
25
NOTE 8. COMPREHENSIVE INCOME
Comprehensive income includes all changes in equity during a period except those resulting from
investments by shareholders and dividends to shareholders. The primary components of our
comprehensive income (loss) are net income and the change in net unrealized appreciation on
available-for-sale securities, as adjusted for amounts that have been reclassified as realized
investment gains and losses.
The table below displays our comprehensive income (loss) and the related tax effects for the
three-month periods ended June 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
Net income (loss) |
|
$ |
(5,334 |
) |
|
$ |
(1,523 |
) |
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Change in net unrealized appreciation on investments |
|
|
27,259 |
|
|
|
(34,509 |
) |
Adjustment for net realized (gains) losses included in income |
|
|
13,153 |
|
|
|
(944 |
) |
Adjustment for costs included in employee benefit expense |
|
|
899 |
|
|
|
360 |
|
|
|
|
|
|
|
|
Other comprehensive income (loss), before tax |
|
|
41,311 |
|
|
|
(35,093 |
) |
Income tax effect |
|
|
(14,458 |
) |
|
|
12,285 |
|
|
|
|
|
|
|
|
Other comprehensive income (loss), after tax |
|
|
26,853 |
|
|
|
(22,808 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
21,519 |
|
|
$ |
(24,331 |
) |
|
|
|
|
|
|
|
The table below displays our comprehensive income (loss) and the related tax effects for the
six-month periods ended June 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
Net income |
|
$ |
(2,064 |
) |
|
$ |
18,604 |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Change in net unrealized appreciation on investments |
|
|
14,087 |
|
|
|
(48,999 |
) |
Adjustment for net realized losses included in income |
|
|
16,641 |
|
|
|
210 |
|
Adjustment for costs included in employee benefit expense |
|
|
1,215 |
|
|
|
655 |
|
|
|
|
|
|
|
|
Other comprehensive income (loss), before tax |
|
|
31,943 |
|
|
|
(48,134 |
) |
Income tax effect |
|
|
(11,180 |
) |
|
|
16,855 |
|
|
|
|
|
|
|
|
Other comprehensive income (loss), after tax |
|
|
20,763 |
|
|
|
(31,279 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
18,699 |
|
|
$ |
(12,675 |
) |
|
|
|
|
|
|
|
26
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders of
United Fire & Casualty Company
We have reviewed the consolidated balance sheet of United Fire & Casualty Company as of June 30,
2009, and the related consolidated statements of income for the three-month and six-month periods
ended June 30, 2009 and 2008, and the consolidated statements of stockholders equity and cash
flows for the six-month periods ended June 30, 2009 and 2008. These financial statements are the
responsibility of the Companys 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, 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
interim 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 & Casualty Company
as of December 31, 2008, and the related consolidated statements of income, stockholders equity,
and cash flows for the year then ended, not presented herein, and in our report dated March 2,
2009, we expressed an unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying consolidated balance sheet as of December
31, 2008, 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
July 31, 2009
27
|
|
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
FORWARD-LOOKING STATEMENTS
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 (the Exchange
Act) for forward-looking statements. The forward-looking statements are not historical facts and
involve risks and uncertainties that could cause actual results to differ materially from those
expected and/or projected. Such forward-looking statements are based on current expectations,
estimates, forecasts and projections about our company, the industry in which we operate, and
beliefs and assumptions made by management. Words such as expects, anticipates, intends,
plans, believes, continues, seeks, estimates, predicts, should, could, may, will
continue, might, hope, can and variations of such words and similar expressions are intended
to identify such forward-looking statements. These statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is expressed in such
forward-looking statements. Information concerning factors that could cause actual results to
differ materially from those in the forward-looking statements is contained in Part II Item 1A
Risk Factors of this document. Among other factors that could cause our actual outcomes and
results to differ are:
|
|
The impact of the current unprecedented volatility in the financial markets, including the duration
of the credit crisis and the effectiveness of governmental solutions. |
|
|
|
The adequacy of our loss reserves established for Hurricane Katrina, which are based on management
estimates. |
|
|
|
Additional government and Nasdaq Stock Market LLC policies relating to corporate governance, and the
cost to comply. |
|
|
|
Changing rates of inflation. |
|
|
|
The valuation of invested assets. |
|
|
|
The valuation of pension and other postretirement benefit obligations. |
|
|
|
The calculation and recovery of deferred policy acquisition costs. |
|
|
|
The ability to maintain and safeguard the security of our data. |
|
|
|
The resolution of regulatory issues and litigation pertaining to and arising out of Hurricane
Katrina. |
|
|
|
Our relationship with our reinsurers. |
|
|
|
Our relationship with our agents. |
|
|
|
The pricing of our products. |
|
|
|
The adequacy of the reinsurance coverage that we purchase. |
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
(the 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.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are defined as those that are reflective of significant judgments and
uncertainties and that potentially may result in materially different results under different
assumptions and conditions. Our discussion and analysis of our results of operations and financial
condition is based upon our Consolidated Financial Statements, which we have prepared in accordance
with GAAP. As we prepare these financial statements, we must make estimates and assumptions that
affect the reported amounts of assets and liabilities and the 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. 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 estimates
are: the valuation of investments; the valuation of reserves for losses, claims, and loss
settlement expenses; the valuation of reserves for future policy benefits; and the calculation of
the deferred policy acquisition costs asset. These critical accounting estimates are more fully
described in our Managements 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, 2008.
28
OVERVIEW AND OUTLOOK
Our Business
We operate property and casualty and life insurance businesses, marketing our products through
independent agents. Although we maintain a broad geographic presence that includes most of the
United States, more than half of our property and casualty premiums were written in Iowa, Texas,
Missouri, Louisiana and Colorado for the six-month period ended June 30, 2009. More than
three-fourths of our life insurance premiums were written in Iowa, Nebraska, Minnesota, Wisconsin
and Illinois for the six-month period ended June 30, 2009.
We conduct our operations through two distinct segments: property and casualty insurance and life
insurance. We manage these segments separately because they generally do not share the same
customer base, and they each have different pricing and expense structures. We evaluate segment
profit or loss based upon operating and investment results. Segment profit or loss described in the
following sections of the Managements Discussion and Analysis is reported on a pre-tax basis.
Financial Overview
The insurance market remained challenging in the second quarter of 2009; however our total
stockholders equity increased by $11.4 million or 1.8 percent from December 31, 2008. The increase
was the result of a modest improvement in the fixed income markets, which led to an increase in our
unrealized investment gains. Book value per share increased from $24.10 at December 31, 2008 to
$24.56 at June 30, 2009.
In the first half of 2009, our property and casualty results deteriorated due primarily to a
decrease in earned premiums and an increase in loss settlement expenses. The decline in our earned
premiums was not unexpected in the current market cycle and economic downturn. The increase in our
loss settlement expenses was due to an increase in products liability and construction defect
claims. This is somewhat reflective of the type of business we write (e.g., construction and
manufacturing), as products liability and construction defect claims tend to result in costly
insurance settlements. To manage litigation and other settlement expenses, our underwriting
department is taking steps to ensure proper pricing and adequate loss control on accounts, while
our claims department is closely monitoring costs related to outside attorneys.
In addition to the year over year increase in loss settlement expenses, we experienced a trend of
increasing costs due to Hurricane Katrina claims. We continue to settle lawsuits related to
Hurricane Katrina, but the legal environment in New Orleans has become increasingly challenging. To
address the increasing uncertainty associated with claims being litigated in the Louisiana courts,
we increased our reserves for losses that occurred in prior years by $12.4 million for the
six-month period ended June 30, 2009.
Despite the state of the insurance and investment markets, our core book of business performed
reasonably well in the second quarter of 2009; our claims frequency decreased from the first
quarter of 2009, while claims severity slowly increased from the prior quarter. The frequency of
our non-catastrophe losses in the second quarter of 2009 was comparable to the same period of 2008.
We also experienced a reduction in catastrophe losses, without the effect of Hurricane Katrina
litigation, during the three-month period ended June 30, 2009, which totaled $7.1 million as
compared to $13.4 million for the same period of 2008.
In the six-month period ended June 30, 2009, the investment market continued to be challenging,
with other-than-temporary investment write-downs totaling $18.1 million. A portion of the
write-downs related to fixed maturity
securities resulted from information that became public subsequent to the end of the second
quarter. In the future, there remains a potential for additional investment write-downs on certain
holdings if the economic downturn persists.
29
Net investment income decreased $.5 million or 1.7 percent and $5.3 million or 9.4 percent for the
three- and six-month periods ended June 30, 2009, respectively, as compared to the same periods in
2008. This decrease was due to lower market interest rates earned on our investment portfolio and
agency bonds called during 2009, the proceeds of which we reinvested at a lower interest rate than
was previously available. Also contributing to the decrease were changes in the fair value of
certain investments in limited liability partnerships, which we account for under the equity method
of accounting, with our portion of the partnerships earnings recorded in investment income. Our
largest investment is in a partnership fund that invests in U.S. subregional banks.
In the life segment, quarter and year-to-date results were negatively impacted by the
other-than-temporary investment write-downs. However, annuity and life insurance business generated
pre-tax income of $3.2 million for the quarter compared to $4.3 million in the second quarter of
2008. Year-to-date, the annuity and life insurance business generated pre-tax income of $8.1
million; the same amount as recorded year-to-date through June 2008.
RESULTS OF OPERATIONS
Consolidated Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
|
% |
|
|
2009 |
|
|
2008 |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
119,671 |
|
|
$ |
123,274 |
|
|
|
-2.9 |
% |
|
$ |
237,992 |
|
|
$ |
246,217 |
|
|
|
-3.3 |
% |
Investment income, net of
investment expenses |
|
|
27,359 |
|
|
|
27,844 |
|
|
|
-1.7 |
|
|
|
50,630 |
|
|
|
55,899 |
|
|
|
-9.4 |
|
Realized investment gains (losses) |
|
|
(13,153 |
) |
|
|
944 |
|
|
|
N/A |
|
|
|
(16,641 |
) |
|
|
(210 |
) |
|
|
N/A |
|
Other income |
|
|
169 |
|
|
|
184 |
|
|
|
-8.2 |
|
|
|
328 |
|
|
|
383 |
|
|
|
-14.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
134,046 |
|
|
$ |
152,246 |
|
|
|
-12.0 |
% |
|
$ |
272,309 |
|
|
$ |
302,289 |
|
|
|
-9.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, Losses and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss settlement expenses |
|
$ |
90,558 |
|
|
$ |
100,707 |
|
|
|
-10.1 |
% |
|
$ |
176,636 |
|
|
$ |
168,189 |
|
|
|
5.0 |
% |
Future policy benefits |
|
|
5,874 |
|
|
|
5,360 |
|
|
|
9.6 |
|
|
|
9,262 |
|
|
|
11,206 |
|
|
|
-17.3 |
|
Amortization of deferred policy
acquisition costs |
|
|
28,795 |
|
|
|
32,029 |
|
|
|
-10.1 |
|
|
|
58,201 |
|
|
|
64,555 |
|
|
|
-9.8 |
|
Other underwriting expenses |
|
|
9,970 |
|
|
|
5,568 |
|
|
|
79.1 |
|
|
|
18,456 |
|
|
|
12,488 |
|
|
|
47.8 |
|
Disaster charges and other related
expenses, net of recoveries |
|
|
(188 |
) |
|
|
3,753 |
|
|
|
-105.0 |
|
|
|
(546 |
) |
|
|
3,753 |
|
|
|
-114.5 |
|
Interest on policyholders accounts |
|
|
10,397 |
|
|
|
10,217 |
|
|
|
1.8 |
|
|
|
20,169 |
|
|
|
20,663 |
|
|
|
-2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
145,406 |
|
|
$ |
157,634 |
|
|
|
-7.8 |
% |
|
$ |
282,178 |
|
|
$ |
280,854 |
|
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
(11,360 |
) |
|
$ |
(5,388 |
) |
|
|
-110.8 |
|
|
$ |
(9,869 |
) |
|
$ |
21,435 |
|
|
|
-146.0 |
|
Federal income tax expense (benefit) |
|
|
(6,026 |
) |
|
|
(3,865 |
) |
|
|
-55.9 |
|
|
|
(7,805 |
) |
|
|
2,831 |
|
|
|
-375.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
(5,334 |
) |
|
$ |
(1,523 |
) |
|
|
-250.2 |
% |
|
$ |
(2,064 |
) |
|
$ |
18,604 |
|
|
|
-111.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Property and Casualty Insurance Segment Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net premiums written (1) |
|
$ |
120,413 |
|
|
$ |
121,069 |
|
|
$ |
235,062 |
|
|
$ |
244,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
109,458 |
|
|
$ |
115,014 |
|
|
$ |
218,672 |
|
|
$ |
228,366 |
|
Losses and loss settlement expenses |
|
|
(86,394 |
) |
|
|
(98,126 |
) |
|
|
(168,673 |
) |
|
|
(161,739 |
) |
Amortization of deferred policy acquisition costs |
|
|
(26,244 |
) |
|
|
(29,071 |
) |
|
|
(53,142 |
) |
|
|
(58,722 |
) |
Other underwriting expenses |
|
|
(7,475 |
) |
|
|
(3,987 |
) |
|
|
(13,926 |
) |
|
|
(8,632 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting loss |
|
$ |
(10,655 |
) |
|
$ |
(16,170 |
) |
|
$ |
(17,069 |
) |
|
$ |
(727 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of underwriting expenses |
|
|
9,082 |
|
|
|
9,268 |
|
|
|
15,130 |
|
|
|
18,060 |
|
Realized investment gains (losses) |
|
|
(7,631 |
) |
|
|
1,205 |
|
|
|
(8,348 |
) |
|
|
1,332 |
|
Other income (loss) |
|
|
17 |
|
|
|
(18 |
) |
|
|
45 |
|
|
|
(29 |
) |
Disaster charges and other related expenses,
net of recoveries |
|
|
188 |
|
|
|
(3,753 |
) |
|
|
546 |
|
|
|
(3,753 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
(8,999 |
) |
|
$ |
(9,468 |
) |
|
$ |
(9,696 |
) |
|
$ |
14,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio |
|
|
78.9 |
% |
|
|
85.3 |
% |
|
|
77.1 |
% |
|
|
70.8 |
% |
Expense ratio (2) |
|
|
30.8 |
|
|
|
28.8 |
|
|
|
30.7 |
|
|
|
29.5 |
|
|
|
|
|
|
Combined ratio (1) |
|
|
109.7 |
% |
|
|
114.1 |
% |
|
|
107.8 |
% |
|
|
100.3 |
% |
Combined ratio (without catastrophes) (1) |
|
|
103.2 |
|
|
|
102.4 |
|
|
|
103.2 |
|
|
|
93.1 |
|
|
|
|
(1) |
|
Please refer to the Statutory and Other Non-GAAP Financial Measures section of this
report for further explanation of this measure. |
|
(2) |
|
The GAAP expense ratio does not include disaster charges and other related expenses, net of
recoveries. |
Net premiums earned decreased by $5.6 million or 4.8 percent and $9.7 million or 4.2 percent
for the three- and six-month periods ended June 30, 2009, due primarily to continuing competition
in the insurance market, as well as the nonrenewal of business that did not meet our underwriting
guidelines. Our premium writings have also been affected by the downturn in the economy,
specifically related to our surety business and the residential contracting business in our western
states.
In the second quarter of 2009, we experienced flat premium levels in our commercial lines business
and an average of low single-digit percentage increases in rate levels in our personal lines
business. Our policy retention rate remained strong in both the personal and commercial lines of
business; however, all regions continued to experience downward pressure on renewal premiums for
medium and large accounts, as well as smaller accounts in some instances. In the second quarter, we
were successful in writing new business and we observed a stabilization of overall pricing levels
for new business during the quarter. Though the decreases in our premium levels were relatively
modest in the second quarter, premium levels have been decreasing gradually in some lines of
business since the third quarter of 2004. Approximately half of the rate filings approved for our
company in the three-month period ended June 30, 2009 were for low single-digit percentage rate
increases, rather than decreases, which may be an indication that the soft market cycle will
bottom out in 2009.
Losses and loss settlement expenses improved by 12.0 percent in the second quarter of 2009, as
catastrophe losses decreased by nearly half as compared to the second quarter of 2008. However,
year-to-date, losses and loss settlement expenses increased by 4.3 percent as compared to the same
period of 2008, driven by settlement expenses related to products liability and construction defect
claims. Overall, claims frequency decreased during the second quarter of 2009 from the first
quarter of 2009, while claims severity rose slightly during this same period.
Amortization of deferred policy acquisition costs decreased 9.7 percent in the three-month period
ended June 30, 2009 and 9.5 percent for the six-month period ended June 30, 2009 as compared to the
same periods in 2008. The decrease in premiums written and corresponding unearned premium resulted
in a reduction of the deferred acquisition costs asset and related amortization.
31
The deterioration in our property and casualty underwriting results led to an increase in other
underwriting expenses in the second quarter and year-to-date as we expensed more acquisition costs
in 2009 as compared to the same periods in 2008. The extent to which underwriting expenses are
deferred to future periods is dependent upon our loss ratio.
The following table displays our premiums earned, losses and loss settlement expenses and loss
ratio by line of business for the six-month periods ended June 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Losses & Loss |
|
|
|
|
|
|
|
|
|
|
Losses & Loss |
|
|
|
|
(In Thousands) |
|
Premiums |
|
|
Settlement |
|
|
Loss |
|
|
Premiums |
|
|
Settlement |
|
|
Loss |
|
Unaudited |
|
Earned |
|
|
Expenses Incurred |
|
|
Ratio |
|
|
Earned |
|
|
Expenses Incurred |
|
|
Ratio |
|
Commercial lines |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liability (1) |
|
$ |
61,637 |
|
|
$ |
49,221 |
|
|
|
79.9 |
% |
|
$ |
67,348 |
|
|
$ |
33,187 |
|
|
|
49.3 |
% |
Fire and allied lines (2) |
|
|
51,021 |
|
|
|
48,535 |
|
|
|
95.1 |
|
|
|
54,624 |
|
|
|
61,417 |
|
|
|
112.4 |
|
Automobile |
|
|
48,773 |
|
|
|
32,636 |
|
|
|
66.9 |
|
|
|
49,981 |
|
|
|
35,186 |
|
|
|
70.4 |
|
Workers compensation |
|
|
26,154 |
|
|
|
21,166 |
|
|
|
80.9 |
|
|
|
25,998 |
|
|
|
14,533 |
|
|
|
55.9 |
|
Fidelity and surety |
|
|
10,142 |
|
|
|
1,171 |
|
|
|
11.5 |
|
|
|
10,152 |
|
|
|
1,479 |
|
|
|
14.6 |
|
Miscellaneous |
|
|
425 |
|
|
|
118 |
|
|
|
27.8 |
|
|
|
421 |
|
|
|
(36 |
) |
|
|
(8.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial lines |
|
$ |
198,152 |
|
|
$ |
152,847 |
|
|
|
77.1 |
% |
|
$ |
208,524 |
|
|
$ |
145,766 |
|
|
|
69.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal lines |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fire and allied lines (3) |
|
$ |
10,787 |
|
|
$ |
8,479 |
|
|
|
78.6 |
% |
|
$ |
10,629 |
|
|
$ |
7,678 |
|
|
|
72.2 |
% |
Automobile |
|
|
6,269 |
|
|
|
4,922 |
|
|
|
78.5 |
|
|
|
6,303 |
|
|
|
5,322 |
|
|
|
84.4 |
|
Miscellaneous |
|
|
173 |
|
|
|
266 |
|
|
|
153.8 |
|
|
|
157 |
|
|
|
904 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal lines |
|
$ |
17,229 |
|
|
$ |
13,667 |
|
|
|
79.3 |
% |
|
$ |
17,089 |
|
|
$ |
13,904 |
|
|
|
81.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance assumed |
|
$ |
3,291 |
|
|
$ |
2,159 |
|
|
|
65.6 |
% |
|
$ |
2,753 |
|
|
$ |
2,069 |
|
|
|
75.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
218,672 |
|
|
$ |
168,673 |
|
|
|
77.1 |
% |
|
$ |
228,366 |
|
|
$ |
161,739 |
|
|
|
70.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other liability is business insurance covering bodily injury and property damage
arising from general business operations, accidents on the insureds premises and products
manufactured or sold. |
|
(2) |
|
Fire and allied lines includes fire, allied lines, commercial multiple peril and inland
marine. |
|
(3) |
|
Fire and allied lines includes fire, allied lines, homeowners and inland marine. |
Life Insurance Segment Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written (1) |
|
$ |
7,266 |
|
|
$ |
8,143 |
|
|
$ |
13,463 |
|
|
$ |
17,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
10,213 |
|
|
$ |
8,260 |
|
|
$ |
19,320 |
|
|
$ |
17,851 |
|
Investment income, net |
|
|
18,277 |
|
|
|
18,576 |
|
|
|
35,500 |
|
|
|
37,839 |
|
Realized investment losses |
|
|
(5,522 |
) |
|
|
(261 |
) |
|
|
(8,293 |
) |
|
|
(1,542 |
) |
Other income |
|
|
152 |
|
|
|
202 |
|
|
|
283 |
|
|
|
412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
23,120 |
|
|
$ |
26,777 |
|
|
$ |
46,810 |
|
|
$ |
54,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, Losses and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss settlement expenses |
|
$ |
4,164 |
|
|
$ |
2,581 |
|
|
$ |
7,963 |
|
|
$ |
6,450 |
|
Future policy benefits |
|
|
5,874 |
|
|
|
5,360 |
|
|
|
9,262 |
|
|
|
11,206 |
|
Amortization of deferred policy acquisition costs |
|
|
2,551 |
|
|
|
2,958 |
|
|
|
5,059 |
|
|
|
5,833 |
|
Other underwriting expenses |
|
|
2,495 |
|
|
|
1,581 |
|
|
|
4,530 |
|
|
|
3,856 |
|
Interest on policyholders accounts |
|
|
10,397 |
|
|
|
10,217 |
|
|
|
20,169 |
|
|
|
20,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Benefits, Losses and Expenses |
|
$ |
25,481 |
|
|
$ |
22,697 |
|
|
$ |
46,983 |
|
|
$ |
48,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes |
|
$ |
(2,361 |
) |
|
$ |
4,080 |
|
|
$ |
(173 |
) |
|
$ |
6,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Please refer to the Statutory and Other Non-GAAP Financial Measures
section of this report for further explanation of this measure. |
Net premiums earned increased 23.6 percent in the second-quarter and 8.2 percent year-to-date
2009 due to an increase in sales of our single premium immediate annuity and single premium whole
life products.
32
Deferred annuity deposits were $67.1 million in the second quarter of 2009, compared with $34.1
million in the same period of 2008. Year to date, deferred annuity deposits were $130.5 million in
2009, compared with $62.5 million in 2008. The significant increase in our annuity deposits in 2009
is due to increased sales, as more consumers choose to invest their money in products with
guaranteed rates of return. We expect our annuity sales to continue to increase throughout the
year. Deferred annuity deposits are not recorded as a component of net premiums written or net
premiums earned; however, the money is invested to generate investment income.
The increase in annuity sales and a reduction in withdrawals contributed to a net cash inflow
related to our annuity business of $37.2 million in the second quarter of 2009, compared with a net
cash outflow of $14.1 million in the second quarter of 2008. Year to date, net cash inflow was
$56.6 million in 2009, versus net cash outflow of $25.4 million in 2008. The reduction in annuity
withdrawals resulted from fewer annuities coming due for renewal in the first six months of 2009,
as compared with the same period in 2008. We expect this trend to continue throughout 2009.
Loss and loss settlement expenses rose 61.3 percent in the second quarter of 2009 and 23.5 percent
year-to-date 2009, compared to the same periods in 2008, due to an increase in policy benefits
incurred for our traditional life insurance products. The amount of policy benefits incurred may
fluctuate due to the unexpected nature of death benefits; however, these benefits have historically
tended to level out throughout the year. However, we do anticipate an increase in loss and loss
settlement expense in 2009 compared to 2008 due to increased sales of single premium whole life
insurance in recent years and a maturing block of older traditional products.
Though liability for future policy benefits increased slightly in the second quarter of 2009, it
decreased by 17.4 percent for the first six months of 2009 due to the reduction in claims from our
continuing run-off of credit life and credit accident and health business, which we ceased writing
in 2004.
On May 1, 2009, we introduced a new annuity product, the four-year Single Premium Deferred Annuity,
which offers all the benefits of our other annuities including a competitive and guaranteed rate
of return but with a shorter time commitment. This new product has already proven to be popular
among consumers in the economic downturn, and the potential for continued growth with this product
exists. In September, we plan to introduce two new whole life products that members of our agency
force requested to better meet the needs of their customers.
Investment Portfolio
Our invested assets at June 30, 2009 totaled $2,202.9 million, compared to $2,095.8 million at
December 31, 2008. At June 30, 2009, fixed maturity securities comprised 93.2 percent of our
investment portfolio, while equity securities accounted for 4.9 percent of the value of our
portfolio. Because the primary purpose of the investment portfolio is to fund future claims
payments, we utilize a conservative investment philosophy, investing in a diversified portfolio of
high quality, intermediate-term taxable corporate bonds, taxable U.S. government bonds and
tax-exempt U.S. municipal bonds.
Concentration
We develop our investment strategies based on a number of factors, including estimated duration of
reserve liabilities, short- and long-term liquidity needs, projected tax status, general economic
conditions, expected rates of inflation and regulatory requirements. We manage our portfolio based
on investment guidelines approved by management, which comply with applicable statutory
regulations.
33
The concentration of our investment portfolio at June 30, 2009 is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property & Casualty |
|
|
Life |
|
|
|
|
|
|
Insurance Segment |
|
|
Insurance Segment |
|
|
Total |
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
(Dollars in Thousands) |
|
|
|
|
|
of Total |
|
|
|
|
|
|
of Total |
|
|
|
|
|
|
of Total |
|
Fixed maturities(1) |
|
$ |
751,352 |
|
|
|
85.9 |
% |
|
$ |
1,289,962 |
|
|
|
97.0 |
% |
|
$ |
2,041,314 |
|
|
|
92.8 |
% |
Equity securities |
|
|
96,108 |
|
|
|
11.0 |
|
|
|
11,566 |
|
|
|
0.9 |
|
|
|
107,674 |
|
|
|
4.9 |
|
Trading securities |
|
|
11,247 |
|
|
|
1.3 |
|
|
|
|
|
|
|
0.0 |
|
|
|
11,247 |
|
|
|
0.5 |
|
Mortgage loans |
|
|
|
|
|
|
|
|
|
|
7,579 |
|
|
|
0.6 |
|
|
|
7,579 |
|
|
|
0.3 |
|
Policy loans |
|
|
|
|
|
|
|
|
|
|
7,705 |
|
|
|
0.6 |
|
|
|
7,705 |
|
|
|
0.3 |
|
Other long-term investments |
|
|
11,172 |
|
|
|
1.3 |
|
|
|
2,514 |
|
|
|
0.2 |
|
|
|
13,686 |
|
|
|
0.6 |
|
Short-term investments |
|
|
4,199 |
|
|
|
0.5 |
|
|
|
9,516 |
|
|
|
0.7 |
|
|
|
13,715 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
874,078 |
|
|
|
100.0 |
% |
|
$ |
1,328,842 |
|
|
|
100.0 |
% |
|
$ |
2,202,920 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Available-for-sale fixed maturities are carried at fair value. Held-to-maturity fixed
maturities are carried at amortized cost. |
At June 30, 2009, $2,028.8 million, or 99.4 percent of our fixed maturities portfolio, was
classified as available-for-sale, compared to $1,898.6 million, or 99.2 percent, at December 31,
2008. We classify our remaining fixed maturity securities as held-to-maturity securities (which are
reported at amortized cost) or trading securities. We record trading securities, primarily
convertible redeemable preferred debt securities, at fair value, with any changes in fair value
recognized in earnings. As of June 30, 2009 and December 31, 2008, we did not have exposure to
investments in sub-prime mortgages, derivative securities or other credit enhancement vehicles.
Quality
The following table displays a breakdown for all of our fixed maturity securities by credit rating,
at June 30, 2009 and December 31, 2008. Information contained in the table is based upon issue
credit ratings provided by Moodys. If credit ratings are unavailable from Moodys, we obtain them
from Standard & Poors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
June 30, 2009 |
|
|
December 31, 2008 |
|
Rating |
|
Carrying Value |
|
|
% of Total |
|
|
Carrying Value |
|
|
% of Total |
|
AAA |
|
$ |
176,108 |
|
|
|
8.6 |
% |
|
$ |
254,753 |
|
|
|
13.3 |
% |
AA |
|
|
375,869 |
|
|
|
18.3 |
|
|
|
390,726 |
|
|
|
20.3 |
|
A |
|
|
570,120 |
|
|
|
27.8 |
|
|
|
534,074 |
|
|
|
27.8 |
|
Baa/BBB |
|
|
793,987 |
|
|
|
38.7 |
|
|
|
623,527 |
|
|
|
32.4 |
|
Other/Not Rated |
|
|
136,477 |
|
|
|
6.6 |
|
|
|
118,721 |
|
|
|
6.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,052,561 |
|
|
|
100.0 |
% |
|
$ |
1,921,801 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our total carrying value of AAA rated fixed maturity securities decreased in the first six
months of 2009 as compared to year-end 2008 due to agency bonds that were called during 2009. AA
fixed maturity securities decreased while A and Baa/BBB fixed maturity securities increased, as
our investment portfolio shifted due to recent downgrades in corporate bonds and other securities.
In 2009 and 2010, a significant portion of our fixed maturity securities, which are rated as
other/not rated will mature.
Overall, the change in credit rating of our fixed maturity securities portfolio at June 30, 2009 as
compared to December 31, 2008, continued to be affected by downgrades of our municipal bond
holdings that occurred during 2008 and 2009. Municipal bonds can either be insured or uninsured.
Municipal bonds that are insured have a credit rating that is equal to either the credit rating of
the insuring company or the underlying security, whichever is greater. Municipal bonds that are
uninsured are rated using the credit rating of the underlying security. During both
2008 and 2009, the credit ratings of many of the insurance companies that insure municipal bonds
were downgraded because of the recent economic turmoil and financial market crisis.
34
Duration
Our investment portfolio is comprised primarily of 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 claims liabilities. If our invested assets and claims liabilities have similar durations, then
any change in interest rates will have an equal and opposite effect on our investments and claims
liabilities. Mismatches in the duration of assets and liabilities can cause significant
fluctuations in our results of operations. The primary purpose for matching invested assets and
claims liabilities is liquidity. With appropriate matching, our investments will mature when cash
is needed, preventing the need to liquidate other assets prematurely.
Group
The weighted average duration of our fixed maturity available-for-sale, held-to-maturity and
trading security portfolios, including convertible bonds, at both June 30, 2009 and December 31,
2008, is 6.3 years.
Property and Casualty Insurance Segment
For our property and casualty insurance segment, the weighted average duration of our fixed
maturity available-for-sale, held-to-maturity and trading security portfolios, including
convertible bonds, at June 30, 2009 is 7.6 years compared to 7.7 years at December 31, 2008.
Life Insurance Segment
For our life insurance segment, the weighted average duration of our fixed maturity
available-for-sale, held-to-maturity and trading security portfolios, at June 30, 2009 is 4.1 years
compared to 4.3 years at December 31, 2008.
Results
We recorded net investment income (before tax) of $27.4 million and $50.6 million for the three-
and six-month periods ended June 30, 2009, compared to $27.8 million and $55.9 million for the same
periods in 2008. The decline in each period was due to lower market interest rates earned on our
investment portfolio and agency bonds that were called during 2009, the proceeds of which we
reinvested at a lower interest rate than was previously available. Also contributing to the
decrease were changes in the fair value of certain investments in limited liability partnerships,
which we account for under the equity method of accounting, with our portion of the partnerships
earnings recorded in investment income. Our largest such investment is in a partnership fund that
invests in U.S. subregional banks.
Realized investment losses were $13.2 million in the three-month period ended June 30, 2009,
compared to realized investment gains of $.9 million in the same period of 2008. For the six-month
periods ended June 30, 2009 and 2008, we had realized investment losses of $16.6 million and $.2
million, respectively. The realized investment losses were primarily due to other-than-temporary
investment write-downs of fixed maturity securities and equity securities in the quarter and
year-to-date period of $13.6 million and $18.1 million, respectively. We recorded no write-downs
for the six-months ended June 30, 2008.
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 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 market 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 and are included in net realized investment gains
(losses). Factors considered in evaluating whether a decline in value is other-than-temporary
include: the length of time and the extent to which the fair value has been less than cost; the
financial conditions and near-term prospects of the issuer;
company specific news; credit ratings; the economic environment; and our intent and ability to
retain the investment for a period of time sufficient to allow for any anticipated recovery.
35
Changes in unrealized gains on available-for-sale securities do not affect net income (loss) and
earnings (loss) per common share but do impact comprehensive income (loss), stockholders equity
and book value per common share. We believe that our unrealized losses on available-for-sale
securities at June 30, 2009 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 future
impairment losses on some securities that we own at June 30, 2009 if future events and information,
cause us to determine that a decline in value is other-than-temporary. However, we invest in high
quality assets to provide protection from future credit quality issues and corresponding 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 sources of cash inflows are primarily a result of premiums, annuity deposits,
sales or maturities of investments, and investment income. Historically, we have generated
substantial cash inflows from operations because cash from premium payments is usually received in
advance of cash payments made to settle losses. When investing the cash generated from operations,
we invest in securities with maturities that correlate to the anticipated timing of payments for
losses and loss settlement expenses of the underlying insurance policies. The majority of our
assets are invested in available-for-sale fixed maturity securities.
Our cash outflows are a result of losses and loss settlement expenses, commissions, premium taxes,
income taxes, operating expenses, dividends, annuity withdrawals, and investment purchases. 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 following table displays a summary of cash sources and uses in 2009 and 2008.
|
|
|
|
|
|
|
|
|
Cash Flow Summary |
|
Six Months Ended June 30, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
Cash provided by (used in) |
|
|
|
|
|
|
|
|
Operating activities |
|
|
36,751 |
|
|
|
15,921 |
|
Investing activities |
|
|
(57,083 |
) |
|
|
(103,890 |
) |
Financing activities |
|
|
63,723 |
|
|
|
(27,279 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
43,391 |
|
|
|
(115,248 |
) |
|
|
|
|
|
|
|
The increase of $20.8 million in cash provided by operating activities during the six-month
period ended June 30, 2009 compared to the same period in 2008 is largely due to income tax refunds
received during the first six months of 2009 totaling $10.3 million and reinsurance recoveries
during 2009.
Net cash flows used in investing activities decreased by $46.8 million through June 30, 2009 as
compared to the same period in 2008. We had significant cash inflows from sales of investments and
from scheduled and unscheduled investment maturities, redemptions and prepayments, which totaled
$206.6 million for the six-month period ended June 30, 2009 and $298.9 million for the six-month
period ended June 30, 2008.
Year-to-date, cash provided by financing activities increased $91.0 million as compared to the
six-month period ended June 30, 2008 due to positive annuity and universal life cash flows of $72.2
million. Through June 30, 2008, we experienced negative annuity and universal life cash flows of
$14.0 million. We attribute the change in cash inflows between periods to increased annuity sales
as more consumers chose to invest their money in products with
guaranteed rates of return as well as a reduction in annuity withdrawals from fewer annuities
coming due for renewal in the first six months of 2009. We expect this trend to continue throughout
2009.
36
If our operating, investment and financing cash flows are not sufficient to support our operations,
we have additional short-term investments that we could use to generate cash. At June 30, 2009, our
consolidated invested assets included $13.7 million of short-term investments, which consist
primarily of fixed maturity securities that mature within one year. We may also borrow up to $50.0
million on our existing bank line of credit, which expires on July 9, 2010. We did not use our line
of credit in the first six months of 2009, other than to secure letters of credit used in our
reinsurance operations. As of June 30, 2009, $.2 million of the line of credit was allocated for
that purpose. We do not anticipate the need to draw on the line of credit in the foreseeable
future.
Stockholders Equity
Stockholders equity increased 1.8 percent from $641.7 million at December 31, 2008 to $653.2
million at June 30, 2009. The primary increase to stockholder equity was net unrealized
appreciation after-tax of $20.0 million. This was partially offset by a net loss of $2.1 million
and stockholder dividends of $8.0 million. At June 30, 2009, book value per common share was $24.56
compared to $24.10 at December 31, 2008.
STATUTORY AND OTHER NON-GAAP FINANCIAL MEASURES
We believe that disclosure of certain statutory and other non-GAAP financial measures enhances
investor understanding of our financial performance. The following such measures are utilized in
this report:
Premiums written is a measure of our overall business volume. Net premiums written comprise direct
and assumed premiums written, net of what we are charged for reinsurance policies. Direct premiums
written is the amount of premiums charged for policies issued during the period. Assumed premiums
written is consideration or payment we receive in exchange for insurance we provide to other
insurance companies. We report these premiums as revenue as they are earned over the underlying
policy period. We report premiums written applicable to the unexpired term of a policy as unearned
premium subject to reinsurance. We evaluate premiums written as a measure of business production
for the period under review.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net premiums written |
|
$ |
127,679 |
|
|
$ |
129,212 |
|
|
$ |
248,525 |
|
|
$ |
262,079 |
|
Net change in unearned premium |
|
|
(8,079 |
) |
|
|
(5,380 |
) |
|
|
(10,369 |
) |
|
|
(15,235 |
) |
Net change in prepaid reinsurance premium |
|
|
71 |
|
|
|
(558 |
) |
|
|
(164 |
) |
|
|
(627 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
119,671 |
|
|
$ |
123,274 |
|
|
$ |
237,992 |
|
|
$ |
246,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catastrophe losses utilize 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 a single unpredictable incident or
series of closely related incidents causing severe insured losses that cause $25.0 million or more
in industry-wide direct insured losses to property and that affect a significant number of insureds
and insurers (ISO catastrophes). We also include as catastrophes those events 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 unusual
catastrophe losses or litigation resulting from a catastrophe. 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 periodic earnings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
ISO catastrophes (1) |
|
$ |
6,637 |
|
|
$ |
12,605 |
|
|
$ |
8,706 |
|
|
$ |
15,621 |
|
Non-ISO catastrophes |
|
|
494 |
|
|
|
754 |
|
|
|
1,402 |
|
|
|
758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total catastrophes |
|
$ |
7,131 |
|
|
$ |
13,359 |
|
|
$ |
10,108 |
|
|
$ |
16,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This number does not include development of $.5 million in the three-month period
ended June 30, 2009, $12.4 million in the six-month period ended June 30, 2009 and $10.8 million
incurred in both the three- and six-month periods ended June 30, 2008 and in additional Hurricane
Katrina reserves resulting from claims litigation. |
37
Combined ratio is a commonly used financial measure of underwriting performance. A combined
ratio below 100 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 (referred
to as the loss ratio) and the underwriting expense ratio (the expense ratio). When prepared in
accordance with GAAP, the loss ratio is calculated by dividing the sum of losses and loss
settlement expenses by net premium earned. The expense ratio is calculated by dividing nondeferred
underwriting expenses and amortization of deferred policy acquisition costs by net premiums earned.
When prepared in accordance with statutory accounting principles, the loss ratio is calculated by
dividing the sum of losses and loss settlement expenses by net premium earned; the expense ratio is
calculated by dividing underwriting expenses by net premiums written.
Underwriting income (loss) is the gain or loss by an insurance company from the business of
insurance. Underwriting income is equal to net premiums earned less incurred losses, loss
settlement expenses, amortization of deferred policy acquisition costs, and other underwriting
expenses. We use this financial measure in evaluating the results of our operations and to analyze
the profitability of our property and casualty segment separately from our investment results.
|
|
ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We have exposure to market risk arising from potential losses 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 entitys liquidity, surplus, product, and regulatory requirements. We
respond to market risk by rebalancing our existing asset portfolio and by managing the character of
future investment purchases.
We do not utilize financial instrument 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 June
30, 2009, we did not have sub-prime mortgages, derivative securities, credit default swaps or other
credit-enhancement exposures.
While our primary market risk exposure is changes in interest rates, we do have 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 that reported in
our Annual Report on Form 10-K for the year ended December 31, 2008.
|
|
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,
evaluated the effectiveness of our disclosure controls and procedures (as defined in the Exchange
Act Rule 15d-15(e), 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 under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms. We believe that a controls
system, no matter how well designed and operated, cannot provide absolute assurance that the
objectives of the controls 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.
38
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.
PART II OTHER INFORMATION
|
|
ITEM 1. LEGAL PROCEEDINGS |
|
For a detailed discussion of legal proceedings of the Company, refer to Note 1Contingent
Liabilities in the Notes to Unaudited Consolidated Financial Statements of this Form 10-Q.
Our business is subject to a number of risks, including those identified in Part I, Item 1A of our
2008 Annual Report on Form 10-K filed with the SEC on March 2, 2009, 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, announced in August 2007, we may purchase 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
price, economic and general market conditions, and corporate and regulatory requirements. The share
repurchase program will be in effect for two years, but may be modified or discontinued at any
time. As of June 30, 2009, we had authorization from the Board of Directors to repurchase 575,575
shares of our common stock. Our share repurchase program will expire in August 2009 unless the
Board of Directors decides to extend the program. For the three-months ended June 30, 2009 we did
not repurchase any shares of our common stock. For the six months-ended June 30, 2009, we
repurchased a total of 33,300 shares of our common stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
39
|
|
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
|
At United Fires Annual Stockholders Meeting on May 20, 2009, the following proposals were adopted
by the margins indicated.
Proposal 1: Election of four Class C directors for a term of three years or until such time as
their respective successors has been elected.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
Proposal 1: |
|
|
|
Voted For |
|
|
Withheld Vote |
|
Christopher R. Drahozal |
|
Class C Director |
|
|
22,549,481 |
|
|
|
2,318,682 |
|
Jack B. Evans |
|
Class C Director |
|
|
23,520,396 |
|
|
|
1,347,768 |
|
Thomas W. Hanley |
|
Class C Director |
|
|
24,709,547 |
|
|
|
158,616 |
|
George D. Milligan |
|
Class C Director |
|
|
24,715,785 |
|
|
|
152,379 |
|
Proposal 2: Ratification of the appointment of our independent registered public accounting
firm, Ernst & Young LLP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
|
|
Proposal 2: |
|
Voted For |
|
|
Voted Against |
|
|
Abstaining |
|
Appointment of Ernst & Young LLP |
|
|
24,814,781 |
|
|
|
30,613 |
|
|
|
22,769 |
|
ITEM 5. OTHER INFORMATION
None.
|
|
|
|
|
|
|
Exhibit |
|
|
|
Filed |
number |
|
Exhibit description |
|
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
provisions of SFAS No. 128
|
|
X |
|
31.1 |
|
|
Certification of Randy A. Ramlo pursuant to Section
302 of the SarbanesOxley Act of 2002
|
|
X |
|
31.2 |
|
|
Certification of Dianne M. Lyons pursuant to Section
302 of the SarbanesOxley 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 SarbanesOxley 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 SarbanesOxley Act of 2002
|
|
X |
40
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 & CASUALTY COMPANY
(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 Principal Accounting Officer |
|
|
|
July 31, 2009
|
|
July 31, 2009 |
|
|
|
(Date)
|
|
(Date) |
41
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit |
|
|
|
Filed |
number |
|
Exhibit description |
|
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 provisions of SFAS No. 128
|
|
X |
|
31.1 |
|
|
Certification of Randy A. Ramlo pursuant to Section 302 of the SarbanesOxley Act of 2002
|
|
X |
|
31.2 |
|
|
Certification of Dianne M. Lyons pursuant to Section 302 of the SarbanesOxley 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 SarbanesOxley 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 SarbanesOxley Act of 2002
|
|
X |
42