Form 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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þ |
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Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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for the fiscal year ended December 31, 2009
OR
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the transition period from ______ to ______
Commission File Number 001-34257
UNITED FIRE & CASUALTY COMPANY
(Exact name of registrant as specified in its charter)
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Iowa
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42-0644327 |
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(State of Incorporation)
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(IRS Employer Identification No.) |
118 Second Avenue SE
PO Box 73909
Cedar Rapids, Iowa 52407-3909
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (319) 399-5700
Securities Registered Pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered |
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Common Stock, $3.33 1/3 par value
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The NASDAQ Stock Market LLC |
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. YES o NO þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. YES o NO þ
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 website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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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
The aggregate market value of voting stock held by nonaffiliates of the registrant as of June 30,
2009, was approximately $344.9 million. For purposes of this calculation, all directors and
executive officers of the registrant are considered affiliates. As of February 23, 2010, 26,381,564
shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference certain information from the registrants
definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, for its annual stockholders
meeting to be held on May 19, 2010.
FORM 10-K TABLE OF CONTENTS
United Fire & Casualty Company Form 10-K | 2009
PART I.
FORWARD-LOOKING INFORMATION
It is important to note that our actual results could differ materially from those projected in the
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 1A,
Risk Factors, and Part II, Item 7, Managements Discussion and Analysis of Financial Condition
and Results of Operations.
GENERAL DESCRIPTION
The terms United Fire, United Fire Group, 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. We are engaged in the business of writing property and casualty insurance and
life insurance and selling annuities. United Fire & Casualty Company was incorporated in Iowa in
January 1946. Our principal executive office is located at 118 Second Avenue SE, P.O. Box 73909,
Cedar Rapids, Iowa 52407-3909. Telephone: 319-399-5700.
Employees
As of December 31, 2009, we employed 659 full-time employees and 14 part-time employees. We are not
a party to any collective bargaining agreement.
Reportable Segments
We report our operations in two business segments: property and casualty insurance and life
insurance. A table reflecting revenues, net income and assets attributable to our operating
segments is included in Part II, Item 8, Note 11, Segment Information. All intercompany balances
have been eliminated in consolidation.
Our property and casualty insurance segment includes United Fire & Casualty Company and the
following companies, which are wholly owned by United Fire & Casualty Company, directly or
indirectly: Addison Insurance Company, an Illinois property and casualty insurer; Lafayette
Insurance Company, a Louisiana property and casualty insurer; United Fire & Indemnity Company, a
Texas property and casualty insurer; American Indemnity Financial Corporation, a Delaware holding
company; and Texas General Indemnity Company, a Colorado property and casualty insurer. United Fire
Lloyds, a Texas property and casualty insurer, is an affiliate of and operationally and financially
controlled by United Fire & Indemnity Company.
Most of our property and casualty insurance subsidiaries are members of an intercompany reinsurance
pooling arrangement. Pooling arrangements permit the participating companies to rely on the
capacity of the entire pools capital and surplus, rather than being limited to policy exposures of
a size commensurate with each participants own surplus level. Under such arrangements, the members
share substantially all of the insurance business that is written, and allocate the combined
premiums, losses and expenses based on percentages defined in the arrangement.
Our life insurance segment consists of United Life Insurance Company, an Iowa life insurer and
wholly owned subsidiary of United Fire & Casualty Company.
1
United Fire & Casualty Company Form 10-K | 2009
Available Information
United Fire Group provides free and timely access to all company reports filed with the Securities
and Exchange Commission (SEC) in the Investor Relations section of our website at
www.unitedfiregroup.com. Select SEC Filings to view the list of filings, which includes:
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Annual reports (Form 10-K) |
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Quarterly reports (Form 10-Q) |
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Current reports (Form 8-K) |
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Beneficial ownership reports (Forms 3, 4 and 5) |
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Amendments to reports filed or furnished pursuant to Section 13(a), 15(d) or 16(a) of
the Exchange Act. |
Such reports are made available as soon as reasonably practicable after they are filed with or
furnished to the SEC.
Our Code of Ethics is also available at www.unitedfiregroup.com in the Investor Relations section.
To view it, select Corporate Governance and then Code of Ethics.
Free paper copies of any materials that we file with the SEC can also be obtained by writing to
Investor Relations, United Fire Group, P.O. Box 73909, Cedar Rapids, Iowa 52407-3909 or by visiting
the SEC Public Reference Room, 450 Fifth Street NW, Washington, DC 20549. For information about the
Public Reference Room, call the SEC at 1-800-SEC-0330.
The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements,
and other information regarding issuers that file electronically with the SEC.
GEOGRAPHIC DISTRIBUTION
We market our products through our home office in Cedar Rapids, Iowa, and two regional locations:
Westminster, Colorado, a suburb of Denver, and Galveston, Texas.
We are licensed as a property and casualty insurer in 43 states, primarily in the Midwest, West and
South, plus the District of Columbia. We have 813 independent agencies representing us and our
property and casualty insurance subsidiaries. The following table depicts the top five states for
direct premiums written for our property and casualty insurance operations in 2009.
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Direct |
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% to Total Direct |
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(In Thousands) |
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Premiums Written |
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Premiums Written |
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Texas |
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$ |
69,900 |
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15.4 |
% |
Iowa |
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69,515 |
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15.3 |
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Louisiana |
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41,743 |
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9.2 |
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Missouri |
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41,185 |
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9.1 |
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Colorado |
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33,938 |
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7.5 |
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Direct Premiums Written (1) |
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$ |
256,281 |
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56.5 |
% |
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(1) |
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The Statutory Financial Measures section of Part II, Item 7 defines data prepared in
accordance with statutory accounting practices, which is a comprehensive basis of accounting
other than U.S. GAAP. |
2
United Fire & Casualty Company Form 10-K | 2009
Our life insurance subsidiary is licensed in 28 states, primarily in the Midwest and West, and
is represented by 933 independent agencies. The following table depicts the top five states for
direct statutory premium volume for our life insurance operations in 2009.
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% to Total |
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Direct Statutory |
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Direct Statutory |
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(In Thousands) |
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Premium Volume |
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Premium Volume |
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Iowa |
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$ |
94,658 |
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36.8 |
% |
Nebraska |
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33,103 |
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12.9 |
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Minnesota |
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23,128 |
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9.0 |
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Wisconsin |
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21,548 |
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8.4 |
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Illinois |
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17,720 |
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6.9 |
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Direct Statutory Premium Volume |
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$ |
190,157 |
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74.0 |
% |
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We staff our regional offices with underwriting, claims and marketing representatives and
administrative technicians, all of whom provide support and assistance to the independent agencies.
Also, home office staff technicians and specialists provide support to the subsidiaries, regional
offices and independent agencies. We use management reports to monitor subsidiary and regional
offices for overall results and conformity to our business policies.
COMPETITION
Property and Casualty Insurance Segment
The property and casualty industry is highly competitive. We compete with numerous property and
casualty insurance companies in the regional and national market, many of which are substantially
larger and have considerably greater financial and other resources.
In addition, because our products are marketed exclusively through independent insurance agencies,
most of which represent more than one company, we face competition within each agency. Our
competitors include companies that market their products through agents, as well as companies that
sell insurance directly to their customers.
Since we rely solely on independent agencies, we offer a competitive commissions program, as well
as a rewarding profit-sharing plan, as incentives for agents to place high-quality property and
casualty insurance business with us. We estimate property and casualty agencies will receive
profit-sharing payments of $5.7 million in 2010, based on business produced by the agencies in
2009.
Our competitive advantages include our commitment to:
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Disciplined underwriting we empower our underwriters with the knowledge and tools
needed to make good decisions for our company |
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Exceptional customer service our customers always have the option to speak with a
real person |
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Superior loss control services our loss control representatives make multiple visits
to businesses and jobsites to ensure safety, rather than just one visit |
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Fair and ethical claims handling we view claims as an opportunity to prove to our
customers that they have chosen the right insurance company |
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Effective and efficient use technology we use technology to provide enhanced service,
reinforcing the personal relationships we have with our customers, not replacing them. |
3
United Fire & Casualty Company Form 10-K | 2009
In 2009, for the second consecutive year, United Fire was recognized for the way we do business and
the services we provide, being named a Top 10 Ease of Doing Business Performer in Deep Customer
Connections Inc.s (DCC) seventh annual Ease of Doing Business (EDB) survey. Over 8,700 independent
agents and brokers assessed the performance of more than 250 property and casualty carriers as part
of the survey. They rated the importance of 11 factors, ranging from underwriting responsiveness
and handling claims promptly to acting with the agencys needs in mind. DCC specializes in helping
property and casualty carriers achieve profitable growth by making it easy for their agents to work
with them. DCCs EDB Index® is an industry benchmark of carriers EDB performance.
Life Insurance Segment
We also encounter significant competition in all lines of our life and fixed annuity business from
other life insurance companies and other providers of financial services. Since our products are
marketed exclusively through independent life insurance agencies that typically represent more than
one company, we face competition within our agencies. Competitors include companies that market
their products through agents, as well as companies that sell directly to their customers.
To attract and maintain relationships with our independent life insurance agencies, we offer
competitive commission rates and other sales incentives. Our life insurance segment achieves a
competitive advantage by offering products that are simple and straightforward, by providing
outstanding customer service, by being accessible to our agents and customers, and by using
technology in a variety of ways to assist our agents and improve the delivery of service to our
policyholders.
OPERATING SEGMENTS
Incorporated by reference from Note 11, Segment Information contained in Part II, Item 8,
Financial Statements and Supplementary Data. Additionally, for a detailed discussion of our
operating results by segment, refer to the Results of Operations section in Part II, Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations.
REINSURANCE
Incorporated by reference from Note 5, Reinsurance contained in Part II, Item 8, Financial
Statements and Supplementary Data.
RESERVES
Property and Casualty Insurance Segment
Property insurance indemnifies an insured with an interest in physical property for loss of, or
damage to, such property or the loss of its income-producing abilities. Casualty insurance
primarily covers liability for damage to property of, or injury to, a person or entity other than
the insured. In most cases casualty insurance also obligates the insurance company to provide a
defense for the insured in litigation arising out of events covered by the policy.
Reserves for losses and loss settlement expenses (loss reserves) are managements best estimates
at a given point in time of what we expect to pay for claims that have been reported and those that
have been incurred but not reported (IBNR), based on facts, circumstances and historical trends
then known.
4
United Fire & Casualty Company Form 10-K | 2009
The determination of reserves, particularly those relating to liability lines of insurance,
reflects significant judgment factors. If, during the course of our regular monitoring of reserves,
we determine that coverages previously written are incurring higher than expected losses, we will
take action that may include, among others, increasing the related reserves. Any adjustments we
make to reserves are reflected in operating results in the year in which we make those adjustments.
As required by state law, we engage an independent actuary, Regnier Consulting Group, Inc., to
render
an opinion as to the adequacy of the statutory reserves we establish annually. The actuarial
opinion is filed in those states where we are licensed. On a quarterly basis, Regnier Consulting
Group, Inc. reviews our direct loss and loss settlement reserves for adequacy.
We do not discount loss reserves based on the time value of money. However, we consider inflation
in the reserving process by reviewing cost trends, loss settlement expenses, historical reserving
results and likely future economic conditions. There are no material differences between our
statutory reserves and those established under U.S. generally accepted accounting principles
(GAAP). Refer to the Critical Accounting Estimates section in Part II, Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations, for a more detailed
discussion of our loss reserves.
The table on the following page illustrates the change in our estimate of reserves for loss and
loss settlement expenses for our property and casualty companies for the years 1999 through 2008.
The first section shows the amount of the liability, as originally reported, at the end of each
calendar year in our Consolidated Financial Statements. These reserves represent the estimated
amount of losses and loss settlement expenses for losses arising in that year and all prior years
that are unpaid at the end of each year, including an estimate for our IBNR losses, net of
applicable ceded reinsurance. The second section displays the cumulative amount of net losses and
loss settlement expenses paid for each year with respect to that liability. The third section shows
the reestimated amount of the previously recorded liability based on experience as of the end of
each succeeding year. The estimate is increased or decreased as more information becomes known
about the losses for individual years. The last section compares the latest reestimated amount with
the original estimate. Conditions and trends that have affected development of loss reserves in the
past may not necessarily exist in the future. Accordingly, it would not be appropriate to
extrapolate future redundancies or deficiencies based on this table.
5
United Fire & Casualty Company Form 10-K | 2009
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(In Thousands) |
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Years Ended December 31 |
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1999 |
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2000 |
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2001 |
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2002 |
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2003 |
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2004 |
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2005 |
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2006 |
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2007 |
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2008 |
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2009 |
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Gross liability for loss and loss
settlement expenses |
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$ |
338,243 |
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$ |
358,032 |
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$ |
363,819 |
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$ |
392,649 |
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$ |
427,049 |
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$ |
464,889 |
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$ |
620,100 |
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$ |
518,886 |
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$ |
496,083 |
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$ |
586,109 |
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$ |
606,045 |
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Ceded loss and loss settlement
expenses |
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27,606 |
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37,526 |
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36,909 |
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35,760 |
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27,309 |
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28,609 |
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60,137 |
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40,560 |
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38,800 |
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52,508 |
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33,754 |
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Net liability for loss and loss
settlement expenses |
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$ |
310,637 |
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$ |
320,506 |
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$ |
326,910 |
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$ |
356,889 |
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$ |
399,740 |
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$ |
436,280 |
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$ |
559,963 |
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$ |
478,326 |
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$ |
457,283 |
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$ |
533,601 |
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$ |
572,291 |
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Cumulative net paid as of: |
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One year later |
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$ |
97,021 |
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$ |
110,516 |
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$ |
112,546 |
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$ |
107,271 |
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$ |
100,895 |
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$ |
110,016 |
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$ |
230,455 |
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$ |
148,593 |
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$ |
140,149 |
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$ |
195,524 |
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Two years later |
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154,886 |
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166,097 |
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172,538 |
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172,158 |
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167,384 |
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166,592 |
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321,110 |
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235,975 |
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265,361 |
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Three years later |
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189,730 |
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204,792 |
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215,002 |
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214,307 |
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203,861 |
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213,144 |
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380,294 |
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332,768 |
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Four years later |
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213,190 |
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230,889 |
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240,973 |
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237,150 |
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231,278 |
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242,579 |
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456,919 |
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Five years later |
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231,838 |
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245,677 |
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252,969 |
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253,026 |
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250,787 |
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264,015 |
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Six years later |
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241,540 |
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252,153 |
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264,311 |
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265,304 |
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263,631 |
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Seven years later |
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245,145 |
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259,621 |
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273,153 |
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273,066 |
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Eight years later |
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249,302 |
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264,713 |
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277,868 |
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Nine years later |
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253,274 |
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266,912 |
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Ten years later |
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254,674 |
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Net liability reestimated as of: |
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End of year |
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$ |
310,637 |
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$ |
320,506 |
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$ |
326,910 |
|
|
$ |
356,889 |
|
|
$ |
399,740 |
|
|
$ |
436,280 |
|
|
$ |
559,963 |
|
|
$ |
478,326 |
|
|
$ |
457,283 |
|
|
$ |
533,601 |
|
|
$ |
572,291 |
|
One year later |
|
|
273,706 |
|
|
|
273,469 |
|
|
|
315,854 |
|
|
|
344,590 |
|
|
|
361,153 |
|
|
|
358,796 |
|
|
|
534,998 |
|
|
|
433,125 |
|
|
|
457,831 |
|
|
|
559,816 |
|
|
|
|
|
Two years later |
|
|
261,217 |
|
|
|
290,872 |
|
|
|
323,354 |
|
|
|
340,502 |
|
|
|
331,693 |
|
|
|
330,137 |
|
|
|
508,774 |
|
|
|
453,474 |
|
|
|
502,177 |
|
|
|
|
|
|
|
|
|
Three years later |
|
|
273,921 |
|
|
|
300,011 |
|
|
|
321,168 |
|
|
|
324,582 |
|
|
|
317,187 |
|
|
|
319,335 |
|
|
|
538,451 |
|
|
|
497,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later |
|
|
279,740 |
|
|
|
302,884 |
|
|
|
318,125 |
|
|
|
313,745 |
|
|
|
309,146 |
|
|
|
326,340 |
|
|
|
574,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later |
|
|
279,653 |
|
|
|
298,428 |
|
|
|
309,033 |
|
|
|
308,304 |
|
|
|
316,227 |
|
|
|
327,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later |
|
|
280,983 |
|
|
|
296,296 |
|
|
|
307,790 |
|
|
|
312,188 |
|
|
|
314,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later |
|
|
279,892 |
|
|
|
293,579 |
|
|
|
311,367 |
|
|
|
314,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later |
|
|
276,815 |
|
|
|
297,844 |
|
|
|
312,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later |
|
|
281,346 |
|
|
|
297,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later |
|
|
280,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net redundancy (deficiency) |
|
$ |
30,536 |
|
|
$ |
23,484 |
|
|
$ |
14,477 |
|
|
$ |
42,209 |
|
|
$ |
85,218 |
|
|
$ |
108,654 |
|
|
$ |
(14,521 |
) |
|
$ |
(19,303 |
) |
|
$ |
(44,894 |
) |
|
$ |
(26,215 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reestimated liability |
|
$ |
280,101 |
|
|
$ |
297,022 |
|
|
$ |
312,433 |
|
|
$ |
314,680 |
|
|
$ |
314,522 |
|
|
$ |
327,626 |
|
|
$ |
574,484 |
|
|
$ |
497,629 |
|
|
$ |
502,177 |
|
|
$ |
559,816 |
|
|
|
|
|
Reestimated ceded loss and loss
settlement expenses |
|
|
26,609 |
|
|
|
34,039 |
|
|
|
42,733 |
|
|
|
43,419 |
|
|
|
38,639 |
|
|
|
38,503 |
|
|
|
90,660 |
|
|
|
58,230 |
|
|
|
51,700 |
|
|
|
49,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross reestimated liability |
|
$ |
306,710 |
|
|
$ |
331,061 |
|
|
$ |
355,166 |
|
|
$ |
358,099 |
|
|
$ |
353,161 |
|
|
$ |
366,129 |
|
|
$ |
665,144 |
|
|
$ |
555,859 |
|
|
$ |
553,877 |
|
|
$ |
609,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross redundancy (deficiency) |
|
$ |
31,533 |
|
|
$ |
26,971 |
|
|
$ |
8,653 |
|
|
$ |
34,550 |
|
|
$ |
73,888 |
|
|
$ |
98,760 |
|
|
$ |
(45,044 |
) |
|
$ |
(36,973 |
) |
|
$ |
(57,794 |
) |
|
$ |
(23,240 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
United Fire & Casualty Company Form 10-K | 2009
Life Insurance Segment
We calculate the policy reserves reported in our Consolidated Financial Statements in accordance
with GAAP. For our fixed annuities and universal life policies, we establish a benefit reserve at
the time of policy issuance in an amount equal to the deposits received. Subsequently, we adjust
the benefit reserve for any additional deposits, interest credited and partial or complete
withdrawals as well as insurance and other expense charges. We base policy reserves for other life
products on the projected contractual benefits and expenses and interest rates appropriate to those
products. We base reserves for accident and health products, which are a minor portion of our
reserves, on appropriate morbidity tables for the age and duration of the insured.
We determine reserves for statutory purposes based upon mortality rates and interest rates
specified by Iowa state law. Our life insurance subsidiarys reserves meet or exceed the minimum
statutory requirements. Griffith, Ballard & Company, an independent actuary, assists us in
developing and analyzing our reserves on both a GAAP and statutory basis.
For further discussion of our life insurance segments reserves, see Critical Accounting
Estimates contained in Part II, Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations.
INVESTMENTS
Incorporated by reference from Part II, Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations under the headings Investments and Critical Accounting
Estimates; Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk; and
Note 1, Significant Accounting Policies under the headings Investments and Securities
Lending, Note 2, Summary of Investments, and Note 3, Fair Value of Financial Instruments,
contained in Part II, Item 8, Financial Statements and Supplementary Data.
REGULATION
We are not aware of any currently proposed or recently enacted state or federal regulation that
would have a material impact on our operations.
State Regulation
We are subject to extensive regulation, primarily at the state level. The method, extent and
substance of such regulation varies by state, but generally has its source in statutes that
establish standards and requirements for conducting the business of insurance and that delegate
regulatory authority to a state regulatory agency. In general, such regulation is intended for the
protection of those who purchase or use our insurance products, and not our stockholders. These
rules have a substantial effect on our business and relate to a wide variety of matters including
insurance company licensing and examination; agent and adjuster licensing; price setting; trade
practices; policy forms; accounting methods; the nature and amount of investments; claims
practices; participation in shared markets and guaranty funds; reserve adequacy; insurer solvency;
transactions with affiliates; the payment of dividends; underwriting standards; and the collection,
remittance and reporting of certain taxes and fees. We discuss below the state laws and regulations
that have the most significant effect on our insurance operations and financial reporting are
discussed below. We cannot predict whether any specific state or federal measures will be adopted
to change the nature or scope of the regulation of the insurance business or what effect any
particular measures might have on us.
7
United Fire & Casualty Company Form 10-K | 2009
Insurance Holding Company Regulation
We are regulated as an insurance holding company system in the states of domicile of our property
and casualty companies and life insurance subsidiary: Iowa (United Fire and United Life Insurance
Company), Illinois (Addison Insurance Company), Louisiana (Lafayette Insurance Company), Texas
(United Fire & Indemnity Company and United Fire Lloyds), and Colorado (Texas General Indemnity
Company). These regulations require that we annually furnish financial and other information about
the operations of the individual companies within our holding
company system. Generally, the insurance codes of these states provide that notice to the state
insurance commissioner is required before finalizing any transaction affecting the ownership or
control of an insurer and before finalizing certain material transactions between an insurer and
any person or entity in its holding company group. In addition, some of those transactions cannot
be finalized without the commissioners prior approval.
Stockholder Dividends
Our dividend-paying capacity, and that of our subsidiaries, is regulated by the laws of the
applicable state of domicile. Under these laws, insurance companies must provide advance
informational notice to the domicile state insurance regulatory authority prior to payment of any
dividend or distribution to its stockholders. Prior approval from the state insurance regulatory
authority must be obtained before payment of an extraordinary dividend as defined under the states
insurance code. In all cases, we may pay ordinary dividends only from our earned surplus. Refer to
the Market Information section of Part II, Item 5, Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities, for additional information about
the dividends we paid during 2009.
Price Regulation
Nearly all states have insurance laws requiring personal property and casualty insurers to file
rate schedules, policy or coverage forms, and other information within the states regulatory
authority. In many cases, rate schedules, policy forms, or both, must be approved prior to use.
While laws vary from state to state, their objectives are generally the same: an insurance rate
cannot be excessive, inadequate or unfairly discriminatory. The speed with which we can change our
rates in response to competition or in response to increasing costs depends, in part, on the
willingness of state regulators to allow adequate rates for the business that we write.
Investment Regulation
Insurance companies are subject to various state regulations that require investment portfolio
diversification and that limit the amount of investment in certain asset categories. Failure to
comply with these rules leads to the treatment of nonconforming investments as nonadmitted assets
for purposes of measuring statutory surplus. Further, in some instances, these rules require us to
sell nonconforming investments.
Exiting Geographic Markets; Canceling and Nonrenewing Policies
Most states regulate our ability to exit a market. For example, states limit, to varying degrees,
our ability to cancel and nonrenew policies. Some states prohibit us from withdrawing one or more
types of insurance business from the state, except with state regulatory approval. Regulations that
limit policy cancellation and nonrenewal may restrict our ability to exit unprofitable markets.
Insurance Guaranty Associations
Each state has insurance guaranty association laws. Membership in a states insurance guaranty
association is generally mandatory for insurers wishing to do business in the states. Under these
laws, associations may assess their members for certain obligations that insolvent insurance
companies have to their policyholders and claimants. Typically, states assess each solvent member
in an amount related to that members proportionate share of business written by all members within
the state. Most state guaranty associations allow solvent insurers to recoup the assessments they
are charged through future rate increases, surcharges or premium tax credits. However, there is no
assurance that we will ultimately recover these assessments. We cannot predict the amount and
timing of any future assessments or refunds under these laws.
8
United Fire & Casualty Company Form 10-K | 2009
Shared Market and Joint Underwriting Plans
State insurance regulations require insurers to participate in assigned risk plans, reinsurance
facilities and joint underwriting associations. These are mechanisms that generally provide
applicants with various basic types of insurance coverage not otherwise available to them in
voluntary markets. Such mechanisms are most commonly instituted for automobile and workers
compensation insurance, but many states also mandate participation in Fair Access to Insurance
Requirements (FAIR) Plans or Windstorm Plans, which provide basic property coverage.
Participation is based upon the amount of a companys voluntary market share in a particular state
for the classes of insurance involved. Policies written through these mechanisms may require
different underwriting standards and pose greater risk than those written through our voluntary
application process.
Statutory Accounting
For public reporting, insurance companies prepare financial statements in accordance with GAAP.
However, state laws require us to calculate and report certain data according to statutory
accounting rules as defined in the National Association of Insurance Commissioners (NAIC)
Accounting Practices and Procedures Manual. While not a substitute for any GAAP measure of
performance, statutory data frequently is used by industry analysts and other recognized reporting
sources to facilitate comparisons of the performance of insurance companies.
Insurance Reserves
State insurance laws require that insurance companies analyze the adequacy of their reserves
annually. Our appointed actuaries must submit an opinion that our reserves are adequate for policy
claims-paying obligations and related expenses.
Financial Solvency Ratios
The NAIC annually calculates 13 financial ratios to assist state insurance regulators in monitoring
the financial condition of insurance companies. A usual range of results for each of these ratios
is used by insurance regulators as a benchmark. Departure from the usual range on four or more of
the ratios could lead to inquiries from individual state insurance departments as to certain
aspects of a companys business. In addition to the financial ratios, states also require us to
calculate a minimum capital requirement for each of our insurance companies based on individual
company insurance risk factors. These risk-based capital results are used by state insurance
regulators to identify companies that require regulatory attention or the initiation of regulatory
action. At December 31, 2009, all of our insurance companies had capital well in excess of the
required levels.
Federal Regulation
Although the federal government and its regulatory agencies generally do not directly regulate the
business of insurance, federal initiatives often have an impact. Some of the current and proposed
federal measures that may significantly affect our business are discussed below.
Corporate Governance Reform
In response to the recent financial crisis, Congress has proposed several
legislative initiatives designed to strengthen corporate governance at public
companies. These proposals contain several provisions that, if adopted, would
affect the operation of all public companies and would require, among other
things: (i) an annual nonbinding stockholder vote on executive compensation;
(ii) the establishment of a risk management committee of the board of
directors, composed entirely of independent directors, tasked with the periodic
review of a companys risk management policies; (iii) that the chairman of the
board of directors be an independent director; (iv) that all members of the
compensation committee be independent; and (v) that all members of the board of
directors be elected annually by majority vote of the stockholders.
9
United Fire & Casualty Company Form 10-K | 2009
FINANCIAL STRENGTH RATING
Our financial strength, as measured by statutory accounting principles, is regularly reviewed by an
independent rating agency that assigns a rating based upon criteria such as results of operations,
capital resources and minimum policyholders surplus requirements.
Our family of property and casualty insurers has received a group rating of A (Excellent) with a
stable outlook from A.M. Best Company (A.M. Best). Within the group, all of our property and
casualty insurers have an A (Excellent) rating, except one insurance subsidiary that is in a
runoff status, which A.M. Best has designated as NR-3 (Rating Procedure Inapplicable). Our life
insurance subsidiary has received an A- (Excellent) rating with a stable outlook from A.M.
Best. According to A.M. Best, companies rated A and A- have an excellent ability to meet their
ongoing obligations to policyholders.
An insurers financial strength rating is one of the primary factors evaluated by those in the
market to purchase insurance. A poor rating indicates that there is an increased likelihood that
the insurer could become insolvent and therefore not able to fulfill its obligations under the
insurance policies it issues. This rating can also affect an insurers level of premium writings,
the lines of business it can write and, for insurers like us that are also public registrants, the
market value of its securities.
RISK FACTORS
We provide the following discussion of risks and uncertainties relevant to our business. These are
factors that we believe could cause our actual results to differ materially from expected and
historical results. We could also be adversely affected by other factors in addition to those
listed here. We have set forth additional information concerning factors that could cause actual
results to differ materially from those in the forward-looking statements in Part II, Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations.
Risks Relating to Our Business
|
|
The incidence, frequency and severity of catastrophe losses are unpredictable and may
adversely affect the results of our operations, liquidity and financial condition. |
Our property and casualty insurance operations expose us to claims arising from catastrophic events
affecting multiple policyholders, which can be caused by various natural and man-made disasters,
including, but not limited to, hurricanes, tornadoes, windstorms, hailstorms, fires, explosions,
earthquakes, tropical storms and terrorist acts. Property damage resulting from catastrophes is the
greatest risk of loss we face in the ordinary course of our business. We have exposure for
catastrophe losses under both our commercial insurance policies and our personal insurance
policies. In addition, our automobile and inland marine business exposes us to losses arising from
floods and other perils.
Longer-term weather trends may be changing and new types of catastrophe losses may be developing
due to climate change, a phenomenon that has been associated with extreme weather events linked to
rising temperatures, including effects on global weather patterns, greenhouse gases, sea, land and
air temperature, sea levels, rain and snow. The emerging science regarding climate change and its
connection to extreme weather events is far from conclusive. If a connection to increased extreme
weather events related to climate change is ultimately proven true, this could increase the
frequency and severity of catastrophe losses we experience in both coastal and non-coastal areas.
10
United Fire & Casualty Company Form 10-K | 2009
Because the occurrence and severity of catastrophes are inherently unpredictable and may vary
significantly from year to year, historical results of operations may not be indicative of future
results of operations. In addition, as with catastrophe losses generally, it can take a long time
for us to determine our ultimate losses associated with a particular catastrophic event. As our
claims experience for a particular catastrophe develops, we may be required to
adjust our reserves to reflect our revised estimates of the total cost of claims. Catastrophes may
also negatively affect our ability to write new business. Increases in the value and geographic
concentration of insured property could impact claims severity for future catastrophic events. In
addition, severity may be impacted after catastrophic events as the demand for resources such as
building materials and labor to repair damaged structures may inflate costs, and the amount of
salvage value received for damaged property may decline.
|
|
Our reserves for property and casualty insurance losses and costs related to settlement of
property and casualty losses and our life reserves for future policy benefits may be
inadequate, which would have an unfavorable impact on our financial results. |
Our reserves for claims and future policy benefits may prove to be inadequate, which may result in
future charges to earnings and/or a downgrade of our financial strength rating or the financial
strength ratings of our insurance company subsidiaries.
We establish property and casualty loss reserves based on assumptions and estimates of damages and
liabilities incurred. On a quarterly basis, Regnier Consulting Group, Inc., the independent actuary
for our property and casualty segment, estimates property and casualty product reserves based on
many assumptions to validate the reasonableness of our claims reserves.
Our property and casualty loss reserves are only estimates; we determine the amount of these loss
reserves based on our best estimate and judgment of the losses and costs we will incur on existing
insurance policies. Because of the uncertainties that surround estimating loss reserves, we cannot
precisely determine the ultimate amounts of benefits and claims that we will pay or the timing of
payment of benefits and claims. For a detailed discussion of our reserving process and the factors
we consider in estimating reserves, refer to the Critical Accounting Estimates section in Part II,
Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.
Actual losses and loss settlement expenses paid might exceed our reserves. If our loss reserves are
insufficient, or if we believe our loss reserves are insufficient to cover our actual loss and loss
settlement expenses, we will have to increase our loss reserves and incur charges to our earnings,
which could indicate that premium levels were insufficient. These charges may be material.
Griffith, Ballard & Company, the independent actuary for our life insurance segment, calculates
life product reserves based on our assumptions, including estimated premiums we will receive over
the assumed life of the policy, the timing of the event covered by the insurance policy and the
amount of benefits or claims to be paid. As such, deviations from one or more of these assumptions
could result in a material adverse impact on our Consolidated Financial Statements.
|
|
The cyclical nature of the property and casualty insurance business may affect our
financial performance. |
The financial results of companies in the property and casualty insurance industry historically
have been cyclical in nature, characterized by periods of severe price competition and excess
underwriting capacity (commonly referred to as soft markets), followed by periods of high premium
rates and shortages of underwriting capacity (commonly referred to as hard markets). We expect
these cycles to continue. Premium rates for property and casualty insurance are influenced by
factors that are outside of our control, including market and competitive conditions and regulatory
issues. Soft market conditions could require us to reduce premiums, limit premium increases, or
discontinue offering one or more of our insurance products in one or more states, resulting in a
reduction in our premiums written and in our profit margins and revenues. The demand for property
and casualty insurance can also vary significantly, rising as the overall level of economic
activity increases and falling as that activity decreases. Fluctuations in demand and competition
could produce underwriting results that would have a negative impact on the results of our
operations and financial condition.
11
United Fire & Casualty Company Form 10-K | 2009
|
|
We are subject to interest rate fluctuations and declines in the value of investments held
in our investment portfolio due to various market factors that could negatively affect our
profitability. |
We are subject to the negative effects of interest rate fluctuations and to declines in the value
of our investment portfolio due to changes in market valuations and changes in credit quality
related to individual investments. Some of our interest-sensitive products, principally our fixed
annuities, expose us to the risk that changes in interest rates will reduce our spread, which is
the difference between the rates we are required to pay under these contracts and the rate of
return we are able to earn on our investments intended to support our obligations under these
contracts.
During periods when the interest rates paid on interest-sensitive insurance products are rising, we
may not be able to reinvest our invested assets to achieve the higher rate of return necessary to
compensate for the higher interest rates we must pay to keep these products competitive in the
marketplace. Consequently, we may have to accept a lower spread and therefore lower profitability,
or face a decline in sales of these products and a loss of related assets.
During periods of declining interest rates, we may be unable to achieve similar rates of return on
our reinvested or maturing assets. Moreover, this risk may be exacerbated by borrowers prepaying
fixed income securities, commercial mortgages, and mortgage-backed securities held in our
investment portfolio in order to refinance at lower rates. Because we are only entitled to reset
the interest rates on our annuities at limited, pre-established intervals, and because many of our
annuity contracts have guaranteed interest rates, the profitability of these products could
decrease or even become negative.
Due to the reinvestment risk described above, a decline in market interest rates available on
investments could also reduce our return from investments of capital that do not support particular
policy obligations, which could also have a material adverse effect on our results of operations.
The adverse effect on us from fluctuations in interest rates may be exacerbated because we
currently maintain, and intend to continue to maintain, a large portion (92.7 percent at December
31, 2009) of our investment portfolio in fixed income securities, particularly corporate bonds,
including our portfolio of trading securities. The fair value of these investments generally
increases or decreases in an inverse relationship with changes in interest rates. We classify the
majority (99.0 percent, at December 31, 2009) of our fixed income securities as available-for-sale,
including our portfolio of trading securities. We report the value of those investments at their
current fair value. Accordingly, fluctuations in interest rates may result in fluctuations in the
valuation of our fixed income investments, which would affect our stockholders equity.
Fluctuations in interest rates may cause increased surrenders and withdrawals from our life
insurance and annuity products. In periods of rising interest rates, surrenders and withdrawals of
life insurance policies and annuity contracts, along with policy loans, may increase as
policyholders seek to buy products with perceived higher returns. These surrenders and withdrawals
may also require us to accelerate the amortization of deferred policy acquisition costs (DAC),
which would increase our expenses in the current period.
The fair value of securities in our investment portfolio may also fluctuate depending on general
economic and market conditions or events relating to a particular issuer of securities. Changes in
the fair value of securities in our investment portfolio could result in realized or unrealized
investment losses, thereby affecting our stockholders equity.
We are exposed to the chance that issuers of bonds that we hold will not be able to pay principal
or interest when it is due. Defaults and other impairments may cause write-downs in the value of
the bonds we hold. Pervasive deterioration in the credit quality of issuers, changes in interest
rate levels and changes in interest rate spreads between types of investments could significantly
affect the value of our invested assets and our earnings.
12
United Fire & Casualty Company Form 10-K | 2009
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Financial disruption or a prolonged economic downturn may materially and adversely affect
our business operations. |
Worldwide financial markets have recently experienced extraordinary disruption and volatility,
resulting in heightened credit risk, reduced valuation of investments and decreased economic
activity. Moreover, many companies are experiencing reduced liquidity and uncertainty as to their
ability to raise capital. In the event that these conditions persist or result in a prolonged economic downturn, our results of operations,
financial position and/or liquidity could be materially and adversely affected. In addition, as a
result of recent financial events, we may face increased regulation. Many of the other risk factors
discussed in this section identify risks that result from, or are exacerbated by, financial
economic downturn. These include risks related to our investment portfolio, reinsurance
arrangements, other credit exposures, emerging claims and coverage issues, the competitive
environment, regulatory developments and the impact of rating agency actions.
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The effects of emerging claim and coverage issues and class action litigation on our
business are uncertain. |
As industry practices and legal, judicial, social and other environmental conditions change,
unexpected and unintended issues related to claims and coverage may emerge. These issues may
adversely affect our business by either extending coverage beyond our underwriting intent or by
increasing the number and/or size of claims. Examples of these issues include:
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Judicial expansion of policy coverage and the impact of new theories of liability. |
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An increase of plaintiffs targeting property and casualty insurers, including us, in
purported class action litigation regarding claims handling and other practices. |
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An increase in the variety, number and size of claims relating to liability losses,
which often present complex coverage and damage valuation questions. |
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Adverse changes in loss cost trends, including inflationary pressure in medical cost
and auto and home repair costs. |
In addition, we have been the target of a number of class action lawsuits arising from Hurricane
Katrina relating to allegations of improper claims settlement practices, misrepresentations in the
scope of coverage and other matters. It is difficult to predict both the ultimate outcome of these
lawsuits, and the impact, if any, they will have on our business and financial condition. However,
rulings adverse to us in pending litigation arising from Hurricane Katrina could have a material
adverse effect on our financial position, as well as on our results of operations.
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We are exposed to credit risk in certain areas of our operations. |
In addition to exposure to credit risk related to our investment portfolio and reinsurance
recovery, we are exposed to credit risk in several other areas of our business operations,
including credit risk relating to policyholders, independent agents and brokers.
In accordance with industry practice, when policyholders purchase insurance policies from us
through independent agents and brokers, the premiums relating to those policies are often paid to
the agents and brokers for payment to us. In most jurisdictions, the premiums will be deemed to
have been paid to us whether or not actually received by us. Consequently, we assume a degree of
credit risk associated with the amounts due from independent agents and brokers.
We are exposed to credit risk through our surety insurance operations, where we guarantee to a
third party that our bonded principal will satisfy certain performance obligations (e.g., a
construction contract) or certain financial obligations. If our policyholder defaults, we may
suffer losses and be unable to be reimbursed by our policyholder.
To a large degree, the credit risk we face is a function of the economy; accordingly, we face a
greater risk during a period of economic downturn. While we attempt to manage these risks through
underwriting and investment guidelines, collateral requirements and other oversight mechanisms, our
efforts may not be successful. For example, collateral obtained may subsequently have little or no
value. As a result, our exposure to credit risk could materially and adversely affect our results
of operation and financial condition.
13
United Fire & Casualty Company Form 10-K | 2009
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We are subject to comprehensive laws and regulations that pose particular risks to our
ability to earn profits. |
We are subject to extensive supervision and regulation by the states in which we operate. Our
ability to comply with these laws and regulations and obtain necessary and timely regulatory action
is, and will continue to be, critical to our success and ability to earn profits.
Examples of regulations that pose particular risks to our ability to earn profits include the
following:
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Required licensing. We, and our insurance company subsidiaries, operate under licenses
issued by various state insurance agencies. If a regulatory authority were to revoke an
existing license or deny or delay granting a new license, our ability to continue to sell
insurance or to enter or offer new insurance products in that market would be substantially
impaired. |
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Regulation of insurance rates and approval of policy forms. The insurance laws of most
states in which we operate require insurance companies to file insurance premium rate
schedules and policy forms for review and approval. When our loss ratio compares favorably
to that of the industry, state regulatory authorities may resist or delay our efforts to
raise premium rates in the future, even if the property and casualty industry generally is
not experiencing regulatory resistance to premium rate increases. If premium rate increases
we deem necessary are not approved, we may not be able to respond to market developments
and increased costs in that state. State regulatory authorities may even impose premium
rate rollbacks or require us to pay premium refunds to policyholders, affecting our
profitability. If insurance policy forms we seek to use are not approved by a state
insurance agency, our ability to offer new products and grow our business in that state
could be substantially impaired. |
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Restrictions on cancellation, nonrenewal or withdrawal. Many states have laws and
regulations restricting an insurance companys ability to cease or significantly reduce its
sales of certain types of insurance in that state, except pursuant to a plan that is
approved by the state insurance department. These laws and regulations could limit our
ability to exit or reduce our business in unprofitable markets or discontinue unprofitable
products. For example, the State of Louisiana has a law prohibiting the nonrenewal of
homeowners policies written for longer than three years except under certain circumstances,
such as for nonpayment of premium or fraud committed by the insured. |
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Risk-based capital and capital adequacy requirements. We, and our insurance company
subsidiaries and affiliate, are subject to risk-based capital requirements (RBC
requirements) that require us to report our results of risk-based capital calculations to
state insurance departments and the NAIC. Any failure to meet applicable RBC requirements
or minimum statutory capital requirements could subject us or our subsidiaries and
affiliate to further examination or corrective action by state regulators, including
limitations on our writing of additional business, state supervision or liquidation. |
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Transactions between insurance companies and their affiliates. Transactions between us,
our subsidiary insurance companies and our affiliate generally must be disclosed to, and in
some cases approved by, state insurance agencies. State insurance agencies may refuse to
approve or delay their approval of a transaction, which may impact our ability to innovate
or operate efficiently. |
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Required participation in guaranty funds and assigned risk pools. Certain states have
enacted laws that require a property and casualty insurer conducting business in that state
to participate in assigned risk plans, reinsurance facilities, and joint underwriting
associations where participating insurers are required to provide coverage for assigned
risks. The number of risks assigned to us by these plans is based on our share of total
written premium in the voluntary insurance market for that state. Pricing is controlled by
the plan, often restricting our ability to charge the premium rate we might otherwise
charge. Wherever possible, we utilize a designated servicing carrier to fulfill our
obligations under these plans. Designated servicing carriers charge us fee to issue
policies, adjust and settle claims and handle administrative reporting on our behalf. In
these markets, we may be compelled to underwrite significant amounts of business at lower
than desired premium rates, possibly leading to an unacceptable return on equity. While
these facilities are generally designed so that the ultimate cost is borne by
policyholders, the exposure to assessments and our ability to recoup these assessments
through adequate premium rate increases may not offset each other in
our financial statements. Moreover, even if they do offset each other, they may not offset
each other in our financial statements for the same fiscal period, due to the ultimate
timing of the assessments and recoupments or premium rate increases. Additionally, certain
states require insurers to participate in guaranty funds for impaired or insolvent insurance
companies. These state funds periodically assess losses against all insurance companies
doing business in the state. Our operating results and financial condition could be
adversely affected by any of these factors. |
14
United Fire & Casualty Company Form 10-K | 2009
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Restrictions on the amount, type, nature, quality and concentration of investments. The
various states in which we operate have certain restrictions on the amount, type, nature,
quality and concentration of our investments. Generally speaking, these regulations require
us to be conservative in the nature and quality of our investments and restrict our ability
to invest in riskier, but often higher yield investments. These restrictions may make it
more difficult for us to obtain our desired investment results. |
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State and federal tax laws. Under current federal and state income tax law, our life
insurance and annuity products receive favorable tax treatment. This favorable treatment
may give these products a competitive advantage over other noninsurance products. Congress,
from time to time, considers legislation that would reduce or eliminate the favorable
policyholder tax treatment currently applicable to life insurance and annuities. Congress
also considers proposals to reduce the taxation of certain products or investments that may
compete with life insurance and annuities. Legislation that increases the taxation on
insurance products or reduces the taxation on competing products could lessen the advantage
or create a disadvantage for certain of our products, making them less competitive. Such
proposals, if adopted, could have a material adverse effect on our financial position or
ability to sell such products and could result in the surrender of some existing contracts
and policies. |
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Periodic financial and market conduct examinations. We are subject to periodic
financial and market conduct examinations by the insurance departments in the various
states in which we operate. Generally, it is only those states in which we have a company
incorporated that perform such examinations. Occasionally, however, we are examined by
states in which we do not have a company incorporated. The costs of these examinations are
borne by us and in any given year may contribute to our administrative expenses. |
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Terrorism Risk Insurance. The Terrorism Risk Insurance Act of 2002 and its successor,
the Terrorism Risk Insurance Extension Act of 2005 (collectively, the Terrorism Acts)
require the federal government and the insurance industry to share in insured losses up to
$100 billion per year resulting from future terrorist attacks within the United States. For
further information about the Terrorism Acts, and their effect on our operations, refer to
the information in the Results of Operations section in Part II, Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations. |
Compliance with these state laws and regulations requires us to incur administrative costs that
decrease our profits. These laws and regulations may also prevent or limit our ability to
underwrite and price risks accurately, obtain timely premium rate increases necessary to cover
increased costs, discontinue unprofitable relationships or exit unprofitable markets and otherwise
continue to operate our business profitably. In addition, our failure to comply with these laws and
regulations could result in actions by state or federal regulators, including the imposition of
fines and penalties or, in an extreme case, revocation of our ability to do business in one or more
states. Finally, we could face individual, group and class action lawsuits by our policyholders and
others for alleged violations of certain state laws and regulations. Each of these regulatory risks
could have a negative effect on our profitability.
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Unauthorized data access and other security breaches could have an adverse impact on our
business and reputation. |
Security breaches and other improper accessing of data in our facilities, networks or databases, or
those of our vendors, could result in loss or theft of data and information or systems
interruptions that may expose us to liability and have an adverse impact on our business. Moreover,
any compromise of the security of our data could harm our reputation and business. There can be no
assurances that we will be able to implement security measures adequate to prevent every security
breach.
15
United Fire & Casualty Company Form 10-K | 2009
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A reduction in our financial strength ratings could adversely affect our business and
financial condition. |
Third-party rating agencies assess and rate the claims-paying ability of insurers and reinsurers
based on criteria established by the agencies. Our property and casualty insurers have been
assigned a financial strength rating of A (Excellent) from A.M. Best since 1994 (except for one
insurance subsidiary that is in a runoff status, which A.M. Best has designated as NR-3 (Rating
Procedure Inapplicable)). Our life insurance subsidiary has been assigned a financial strength
rating of A- (Excellent) from A.M. Best since 1998. Our property and casualty companies are rated
on a group basis. Financial strength ratings are used by policyholders, insurers, reinsurers and
insurance and reinsurance intermediaries as an important means of assessing the financial strength
of insurers and reinsurers. These ratings are not evaluations directed to potential purchasers of
our common stock and are not recommendations to buy, sell or hold our common stock. These ratings
are subject to change at any time and could be revised downward or revoked at the sole discretion
of the rating agency. Downgrades in our financial strength ratings could adversely affect our
ability to access the capital markets or could lead to increased borrowing costs in the future.
Perceptions of our company by investors, producers, other businesses and consumers could also be
significantly impaired.
We believe that the ratings assigned by A.M. Best are an important factor in marketing our
products. Our ability to retain our existing business and to attract new business in our insurance
operations depends largely on our ratings by this agency. Our failure to maintain our ratings, or
any other adverse development with respect to our ratings, could cause our current and future
independent agents and policyholders to choose to transact their business with more highly rated
competitors. If A.M. Best downgrades our ratings or publicly indicates that our ratings are under
review, it is likely that we will not be able to compete as effectively with our competitors and
our ability to sell insurance policies could decline. If that happens, our premium revenue and
earnings would decrease. For example, many of our agencies and policyholders have guidelines that
require us to have an A.M. Best financial strength rating of A- or higher. A reduction of our
A.M. Best ratings below A- would prevent us from issuing policies to a majority of our current
policyholders or other potential policyholders with similar ratings requirements. In addition, a
ratings downgrade for our property and casualty insurers by A.M. Best below A would constitute an
event of default under our credit facility.
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Market conditions may affect our access to and the cost of reinsurance and our reinsurers
may not pay losses in a timely manner, or at all. |
As part of our overall risk and capacity management strategy, we purchase reinsurance for
significant amounts of the risk that we and our insurance company subsidiaries and affiliate
underwrite. The availability and cost of reinsurance is subject to market conditions that are
beyond our control. The availability and cost of the reinsurance we purchase may affect the level
of our business and profitability. Although we purposely work with several reinsurance
intermediaries and reinsurers, we may be unable to maintain our current reinsurance facilities or
obtain other reinsurance facilities in adequate amounts and at favorable premium rates. Moreover,
there may be a situation in which we have more than two catastrophic events within one policy year.
Because our current catastrophe reinsurance program only allows for one automatic reinstatement at
an additional reinstatement premium, we would be required to obtain a new catastrophe reinsurance
policy to maintain our current level of catastrophe reinsurance coverage. Such coverage may be
difficult to obtain, particularly if it is necessary to do so during hurricane season following the
second catastrophe. If we are unable to renew our expiring facilities or to obtain new reinsurance
facilities, either our net exposure to risk will increase or, if we are unwilling to bear an
increase in net risk exposures, we will have to reduce the amount of risk we underwrite.
Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred, it
does not relieve us of our liability to our policyholders. Our ability to collect reinsurance
recoverables may be subject to uncertainty. Our losses must meet the qualifying conditions of the
reinsurance contract. Reinsurers must also have the financial capacity and willingness to make
payments under the terms of a reinsurance treaty or contract. Particularly, following a major
catastrophic event, our inability to collect a material recovery from a reinsurer on a timely
basis, or at all, could have a material adverse effect on our liquidity, operating results and
financial condition.
16
United Fire & Casualty Company Form 10-K | 2009
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Our geographic concentration in both our property and casualty insurance and life insurance
segments ties our performance to the business, economic and regulatory conditions of certain
states. |
The following states provided 56.5 percent of the direct premium volume for the property and
casualty insurance segment in 2009: Texas (15.4 percent), Iowa (15.3 percent), Louisiana (9.2
percent), Missouri (9.1 percent) and Colorado (7.5 percent). The following states provided 74.0
percent of the direct statutory premium volume for the life insurance segment in 2009: Iowa (36.8
percent), Nebraska (12.9 percent), Minnesota (9.0 percent), Wisconsin (8.4 percent) and Illinois
(6.9 percent). Our revenues and profitability are subject to the prevailing regulatory, legal,
economic, political, demographic, competitive, weather and other conditions in the principal states
in which we do business. Changes in any of these conditions could make it less attractive for us to
do business in such states and would have a more pronounced effect on us compared to companies that
are more geographically diversified. In addition, our exposure to severe losses from localized
natural perils, such as hurricanes or hailstorms, is increased in those areas where we have written
a significant amount of property insurance policies.
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We face significant competitive pressures in our business that could cause demand for our
products to fall and reduce our revenue and profitability. |
The insurance industry is highly competitive. In our property and casualty insurance business and
in our life insurance business, we compete, and will continue to compete, with many major U.S. and
non-U.S. insurers and smaller regional companies, as well as mutual companies, specialty insurance
companies, underwriting agencies, and diversified financial services companies. Some of our
competitors have far greater financial and marketing resources than we do. Our premium revenue and
our profitability could decline if we lose business to competitors offering similar or better
products at or below our prices. Our profitability could also be affected by the entry of new
competitors into the market and the development of new products by new and existing competitors.
We price our insurance products based on estimated profit margins, and we would not be able to
significantly reduce our current estimated profit margins in the near future. Some of our
competitors may be larger and have more capital than we do, and may be able to withstand
significant reductions in their profit margins. If our competitors decide to target our
policyholder base by offering lower-priced insurance, we may not be able to respond competitively,
which could reduce our revenue and our profitability.
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Our business depends on the uninterrupted operations of our facilities, systems and
business functions. |
Our business depends on our employees ability to perform necessary business functions, such as
processing new and renewal policies and claims. We increasingly rely on technology and systems to
accomplish these business functions in an efficient and uninterrupted fashion. Our inability to
access our facilities or a failure of technology, telecommunications or other systems could
significantly impair our ability to perform such functions on a timely basis or affect the accuracy
of transactions. If sustained or repeated, such a business interruption or system failure could
result in a deterioration of our ability to write and process new and renewal business, serve our
agents and policyholders, pay claims in a timely manner, collect receivables or perform other
necessary business functions.
The continued threat of terrorism, both within the U. S. and abroad, and ongoing military and other
actions and heightened security measures in response to these types of threats, may cause
significant volatility and losses from declines in the equity markets and from interest rate
changes in the U. S., Europe and elsewhere, and result in loss of life, property damage,
disruptions to commerce and reduced economic activity. Some of the assets in our investment
portfolio may be adversely affected by declines in the equity markets and reduced economic activity
caused by the continued threat of terrorism. We seek to mitigate the potential impact of terrorism
on our commercial mortgage portfolio by limiting geographical concentrations in key metropolitan
areas and by requiring terrorism insurance to the extent that it is commercially available.
17
United Fire & Casualty Company Form 10-K | 2009
In the event that a natural disaster or a terrorist act occurs, our company and employees could be
directly adversely affected, depending on the nature of the event. We have an emergency
preparedness plan that consists of the information and procedures required to enable rapid recovery
from an occurrence, such as natural disaster or business disruption, which could potentially
disable us for an extended period of time. This plan was tested during 2008, both by the Midwest
flooding that affected our corporate headquarters in Cedar Rapids, Iowa, and by Hurricane Ike that
affected our Gulf Coast regional office in Galveston, Texas.
Risks Relating to our Common Stock
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As an insurance company, our ability to pay dividends is restricted by state law. |
We are an insurance company domiciled in the State of Iowa and, as a result, we are subject to Iowa
insurance laws restricting our ability to pay dividends to our stockholders, including laws
establishing minimum solvency and liquidity standards and laws that prohibit us from paying
dividends except from the earned profits arising from our business. Our ability to pay dividends
also depends upon the statutory capital and surplus levels and earnings of our subsidiary insurance
companies and the ability of our subsidiary insurance companies to pay dividends to us. Payments of
dividends by our subsidiary insurance companies are restricted by state insurance laws similar to
those laws that restrict our payment of dividends. As a result of these restrictions, at times we
may not be able to pay dividends on our common stock, or we may be required to seek prior approval
from the applicable regulatory authority before we can pay any such dividends. In addition, the
payment of dividends by us is within the discretion of our Board of Directors and will depend on
numerous factors, including our financial condition, our capital requirements and other factors
that our Board of Directors considers relevant.
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The price of our common stock may be volatile. |
The trading price of our common stock may fluctuate substantially due to a variety of factors, some
of which are beyond our control and may not be related to our operating performance. These
fluctuations could be significant and could cause a loss in the amount invested in our shares of
common stock. Factors that could cause fluctuations include, but are not limited to, the following:
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Variations in our actual or anticipated operating results or changes in the
expectations of financial market analysts with respect to our results. |
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Investor perceptions of the insurance industry in general and our company in particular. |
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Market conditions in the insurance industry and any significant volatility in the market. |
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Major catastrophic events. |
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Departure of our key personnel. |
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Certain provisions of our organizational documents, as well as applicable insurance laws, could impede an attempt to
replace or remove our management, prevent the sale of our company or prevent or frustrate any attempt by stockholders
to change the direction of our company, each of which could diminish the value of our common stock. |
Our articles of incorporation and bylaws, as well as applicable laws governing corporations and
insurance companies, contain provisions that could impede an attempt to replace or remove our
management or prevent the sale of our company that, in either case, stockholders might consider
being in their best interests. For example:
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Our Board of Directors is divided into three classes. At any annual meeting of our
stockholders, our stockholders have the right to appoint approximately one-third of the
directors on our Board of Directors. Consequently, it will take at least two annual
stockholder meetings to effect a change in control of our Board of Directors. |
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Our articles of incorporation limit the rights of stockholders to call special
stockholder meetings. |
18
United Fire & Casualty Company Form 10-K | 2009
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Our articles of incorporation set the minimum number of directors constituting the entire
Board of Directors at nine and the maximum at 15, and they require approval of holders of
two-thirds of all outstanding shares to amend these provisions. |
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Our articles of incorporation require the affirmative vote of two-thirds of all
outstanding shares to approve any plan of merger, consolidation, or sale or exchange of
all, or substantially all, of our assets. |
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Our Board of Directors may fill vacancies on the Board of Directors. |
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Our Board of Directors has the authority, without further approval of our stockholders,
to issue shares of preferred stock having such rights, preferences and privileges as the
Board of Directors may determine. |
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Section 490.1110 of the Iowa Business Corporation Act imposes restrictions on mergers
and other business combinations between us and any holder of 10.0 percent or more of our
common stock. |
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Section 490.624A of the Iowa Business Corporation Act authorizes the terms and
conditions of stock rights or options issued by us to include restrictions or conditions
that preclude or limit the exercise, transfer, or receipt of such rights or options by a
person, or group of persons, owning or offering to acquire a specified number or percentage
of the outstanding common shares or other securities of the corporation. |
Further, the insurance laws of Iowa and the states in which our subsidiary insurance companies are
domiciled prohibit any person from acquiring direct or indirect control of us or our insurance
company subsidiaries, generally defined as owning or having the power to vote 10.0 percent or more
of our outstanding voting stock, without the prior written approval of state regulators.
These provisions of our articles of incorporation and bylaws, and these state laws governing
corporations and insurance companies, may discourage potential acquisition proposals. These
provisions and state laws may also delay, deter or prevent a change of control of our company, in
particular through unsolicited transactions that some or all of our stockholders might consider to
be desirable. As a result, efforts by our stockholders to change the direction or our companys
management may be unsuccessful, and the existence of such provisions may adversely affect market
prices for our common stock if they are viewed as discouraging takeover attempts.
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ITEM 1B. |
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UNRESOLVED STAFF COMMENTS |
None.
19
United Fire & Casualty Company Form 10-K | 2009
We own three buildings: a five-story office building, a two-story office building and an
eight-story office building in which a portion of the first floor (approximately 5.7 percent of the
buildings square footage) is leased to tenants, and related parking facilities in Cedar Rapids,
Iowa, that we use as our corporate headquarters. All three buildings are connected by a skywalk
system. The first floors and basements of our three owned buildings in Cedar Rapids, Iowa underwent
extensive reconstruction due to flooding that occurred in June 2008. We completed renovation of
these buildings during 2009.
In November 2009, we completed the construction of a 250-space parking ramp, which is located
adjacent to our corporate headquarters, for use by the company. The parking ramp replaced a paved
parking lot of which we own approximately 70 percent of the land, while the remaining portion of
the land will continue to be leased from the owner.
Our regional locations in Westminster, Colorado, and Galveston, Texas, and our claims office in
Metairie, Louisiana, conduct operations in leased office space. While our employees were displaced
from our Galveston, Texas office due to Hurricane Ike, which occurred in September 2008, we
temporarily leased office space in a suburb of Houston, Texas for our Gulf Coast Regional Office to
conduct business. This lease expired on September 30, 2009.
The following table shows a brief description of our owned and leased office space. We believe our
current facilities are adequate to meet our needs with additional space available for future
expansion, if necessary, at each of our leased and owned facilities.
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Lease |
Location |
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Utilized by |
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Owned or Leased |
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Expiration Date |
Corporate Headquarters |
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Cedar Rapids, Iowa (118 Second Avenue SE)
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Corporate Administration,
Property and Casualty Segment
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Owned
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N/A |
Cedar Rapids, Iowa (119 Second Avenue SE)
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Corporate Administration,
Life Insurance Segment
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Owned
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N/A |
Cedar Rapids, Iowa (109 Second Street SE)
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Property and Casualty Segment
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Owned
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N/A |
Denver Regional Office Westminster, Colorado
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Property and Casualty Segment
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Leased
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June 30, 2015 |
Gulf Coast Regional Office Galveston, Texas
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Property and Casualty Segment
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Leased
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November 30, 2014 |
Gulf Coast Regional Office Temporary office
in a suburb of Houston, Texas
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Property and Casualty Segment
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Leased
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September 30, 2009 |
New Orleans Claims Office Metairie, Louisiana
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Property and Casualty Segment
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Leased
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September 30, 2012 |
20
United Fire & Casualty Company Form 10-K | 2009
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ITEM 3. |
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LEGAL PROCEEDINGS |
Incorporated by reference from Note 1, Significant Accounting Policies under the heading
Contingent Liabilities contained in Part II, Item 8, Financial Statements and Supplementary
Data.
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ITEM 4. |
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
There were no matters submitted to a vote of the stockholders during the fourth quarter of 2009.
PART II
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ITEM 5. |
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MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES |
Common Stock Holders
United Fires common stock is traded on The NASDAQ Stock Market LLC (NASDAQ) under the symbol
UFCS. On February 1, 2010, there were 894 holders of record of United Fire common stock. The
number of record holders does not reflect stockholders who beneficially own common stock in nominee
or street name, but does include participants in our employee stock ownership plan.
See Security Ownership of Certain Beneficial Owners, Security Ownership of Management and
Securities Authorized for Issuance under Equity Compensation Plans, in Part III, Item 12 of this
Form 10-K, which incorporates by reference our definitive Proxy Statement for our annual meeting of
stockholders to be held on May 19, 2010. The Proxy Statement will be filed with the SEC within 120
days after the end of our fiscal year (the 2010 Proxy Statement) and is incorporated herein by
reference.
Dividends
Our practice has been to pay quarterly cash dividends, which we have paid every quarter since March
1968. The table in the following section shows the quarterly cash dividends declared in 2009 and
2008. Payments of any future dividends and the amounts of such dividends, however, will depend upon
factors such as net income, financial condition, capital requirements, and general business
conditions.
State law permits the payment of dividends only from statutory accumulated earned profits arising
from business operations. Furthermore, under Iowa law we may pay dividends only if after giving
effect to the payment we are either able to pay our debts as they become due in the normal course
of business or our total assets would be equal to or more than the sum of our total liabilities.
Our subsidiaries are also subject to similar state law restrictions on dividends. Additional
information about these restrictions is incorporated by reference from Note 7, Statutory
Reporting, Capital Requirements and Dividends and Retained Earnings Restrictions contained in Part
II, Item 8, Financial Statements and Supplementary Data.
21
United Fire & Casualty Company Form 10-K | 2009
Market Information
The following table sets forth the high and low trading price for our common stock for the calendar
periods indicated. These quotations reflect interdealer prices without retail markups, markdowns,
or commissions and may not necessarily represent actual transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Price |
|
|
Cash Dividends |
|
|
|
High |
|
|
Low |
|
|
Declared |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended: |
|
|
|
|
|
|
|
|
|
|
|
|
March 31 |
|
$ |
31.31 |
|
|
$ |
15.72 |
|
|
$ |
0.15 |
|
June 30 |
|
|
24.75 |
|
|
|
16.47 |
|
|
|
0.15 |
|
September 30 |
|
|
21.66 |
|
|
|
16.39 |
|
|
|
0.15 |
|
December 31 |
|
|
21.30 |
|
|
|
16.50 |
|
|
|
0.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended: |
|
|
|
|
|
|
|
|
|
|
|
|
March 31 |
|
$ |
39.27 |
|
|
$ |
27.86 |
|
|
$ |
0.15 |
|
June 30 |
|
|
39.19 |
|
|
|
26.93 |
|
|
|
0.15 |
|
September 30 |
|
|
36.07 |
|
|
|
25.25 |
|
|
|
0.15 |
|
December 31 |
|
|
31.60 |
|
|
|
13.09 |
|
|
|
0.15 |
|
Issuer Purchases of Equity Securities
Under our share repurchase program, first 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 share price, economic and general market conditions, and corporate and regulatory
requirements. We will generally consider repurchasing company stock on the open market if (i) the
trading price on NASDAQ drops below 130 percent of its book value, (ii) sufficient excess capital
is available to purchase the stock, and (iii) we are optimistic about future market trends and the
performance of our company. Our share repurchase program may be modified or discontinued at any
time. At its meeting in August 2009, the board of directors extended our share repurchase program
for an additional two years. It is currently set to expire in August 2011.
The following table provides information with respect to purchases of shares of common stock made
by or on our behalf or by any affiliated purchaser, as defined in Rule 10b-18(a)(3) under the
Securities Exchange Act of 1934, during the three-month period ended December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Shares |
|
|
Maximum Number of |
|
|
|
Total |
|
|
|
|
|
|
Purchased as a Part of |
|
|
Shares that may be |
|
|
|
Number of |
|
|
Average Price |
|
|
Publicly Announced |
|
|
Purchased Under the |
|
Period |
|
Shares Purchased |
|
|
Paid per Share |
|
|
Plans or Programs |
|
|
Plans or Programs |
|
10/1/09-10/31/09 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
575,575 |
|
11/1/09-11/30/09 |
|
|
59,421 |
|
|
|
16.88 |
|
|
|
59,421 |
|
|
|
516,154 |
|
12/1/09-12/31/09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
516,154 |
|
22
United Fire & Casualty Company Form 10-K | 2009
United Fire & Casualty Company Common Stock Performance Graph
The following graph compares the cumulative total stockholder return on our common stock for the
last five fiscal years with the cumulative total return of the Russell 2000 Index, the SNL
Insurance Company Index and the SNL Property & Casualty Insurance Index, assuming an investment of
$100 in each of the above at their closing prices on December 31, 2004, and reinvestment of
dividends.
The following table shows the data used in the Total Return Performance graph above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ending |
|
Index |
|
12/31/04 |
|
|
12/31/05 |
|
|
12/31/06 |
|
|
12/31/07 |
|
|
12/31/08 |
|
|
12/31/09 |
|
United Fire & Casualty Company |
|
$ |
100.00 |
|
|
$ |
121.48 |
|
|
$ |
107.53 |
|
|
$ |
90.14 |
|
|
$ |
98.24 |
|
|
$ |
59.58 |
|
Russell 2000 |
|
|
100.00 |
|
|
|
104.55 |
|
|
|
123.76 |
|
|
|
121.82 |
|
|
|
80.66 |
|
|
|
102.58 |
|
SNL Insurance P&C |
|
|
100.00 |
|
|
|
109.31 |
|
|
|
127.42 |
|
|
|
137.59 |
|
|
|
106.50 |
|
|
|
115.13 |
|
SNL Insurance |
|
|
100.00 |
|
|
|
116.98 |
|
|
|
128.56 |
|
|
|
129.37 |
|
|
|
69.07 |
|
|
|
79.18 |
|
23
United Fire & Casualty Company Form 10-K | 2009
|
|
|
ITEM 6. |
|
SELECTED FINANCIAL DATA |
The following table sets forth certain selected financial data from our Consolidated Financial
Statements. We derived the financial data from the Consolidated Financial Statements of United Fire
and its subsidiaries and affiliate. The data should be read in conjunction with Part II, Item 7
Managements Discussion and Analysis of Financial Condition and Results of Operations and Part
II, Item 8 Financial Statements and Supplementary Data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands, Except Per Share Data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Consolidated Balance S heet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and investments |
|
$ |
2,542,693 |
|
|
$ |
2,205,355 |
|
|
$ |
2,399,141 |
|
|
$ |
2,388,387 |
|
|
$ |
2,254,421 |
|
Total assets |
|
|
2,902,544 |
|
|
|
2,687,130 |
|
|
|
2,760,554 |
|
|
|
2,776,067 |
|
|
|
2,721,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future policy benefits and losses, claims and
loss settlement expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance (1) |
|
|
606,045 |
|
|
|
586,109 |
|
|
|
496,083 |
|
|
|
518,886 |
|
|
|
620,100 |
|
Life insurance |
|
|
1,321,600 |
|
|
|
1,167,665 |
|
|
|
1,184,977 |
|
|
|
1,233,342 |
|
|
|
1,285,635 |
|
Unearned premiums |
|
|
206,010 |
|
|
|
216,966 |
|
|
|
224,530 |
|
|
|
231,377 |
|
|
|
222,267 |
|
Total liabilities |
|
|
2,229,809 |
|
|
|
2,045,389 |
|
|
|
2,009,057 |
|
|
|
2,095,259 |
|
|
|
2,221,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains, after tax (2) |
|
|
82,491 |
|
|
|
25,543 |
|
|
|
85,579 |
|
|
|
93,519 |
|
|
|
86,440 |
|
Repurchase of United Fire common stock |
|
|
1,545 |
|
|
|
14,817 |
|
|
|
16,078 |
|
|
|
|
|
|
|
|
|
Total stockholders equity (3) |
|
|
672,735 |
|
|
|
641,741 |
|
|
|
751,497 |
|
|
|
680,808 |
|
|
|
500,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per share |
|
|
25.35 |
|
|
|
24.10 |
|
|
|
27.63 |
|
|
|
24.62 |
|
|
|
21.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written (4) |
|
|
467,427 |
|
|
|
496,897 |
|
|
|
501,849 |
|
|
|
509,669 |
|
|
|
487,627 |
|
Net premiums earned |
|
|
478,498 |
|
|
|
503,375 |
|
|
|
505,763 |
|
|
|
503,122 |
|
|
|
495,516 |
|
Investment income, net of investment expenses (5) |
|
|
106,075 |
|
|
|
107,577 |
|
|
|
122,439 |
|
|
|
121,981 |
|
|
|
118,847 |
|
Realized investment gains (losses) (6) |
|
|
(13,179 |
) |
|
|
(10,383 |
) |
|
|
9,670 |
|
|
|
9,965 |
|
|
|
4,540 |
|
Other income |
|
|
799 |
|
|
|
880 |
|
|
|
654 |
|
|
|
532 |
|
|
|
702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues |
|
|
572,193 |
|
|
|
601,449 |
|
|
|
638,526 |
|
|
|
635,600 |
|
|
|
619,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss settlement expenses (7) |
|
|
382,494 |
|
|
|
406,640 |
|
|
|
260,714 |
|
|
|
292,789 |
|
|
|
392,228 |
|
Amortization of deferred policy acquistion costs |
|
|
114,893 |
|
|
|
129,158 |
|
|
|
136,805 |
|
|
|
126,898 |
|
|
|
115,473 |
|
Other underwriting expenses (8) |
|
|
39,298 |
|
|
|
28,252 |
|
|
|
22,918 |
|
|
|
21,525 |
|
|
|
32,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (9) |
|
|
(10,441 |
) |
|
|
(13,064 |
) |
|
|
111,392 |
|
|
|
88,085 |
|
|
|
9,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty Insurance Segment Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written (4) |
|
|
424,827 |
|
|
|
459,571 |
|
|
|
470,402 |
|
|
|
476,402 |
|
|
|
453,683 |
|
Net premiums earned |
|
|
435,677 |
|
|
|
465,581 |
|
|
|
473,134 |
|
|
|
467,031 |
|
|
|
456,147 |
|
Net income (loss) |
|
|
(17,677 |
) |
|
|
(15,156 |
) |
|
|
98,225 |
|
|
|
73,970 |
|
|
|
(4,598 |
) |
Combined ratio (4) |
|
|
115.2 |
% |
|
|
113.9 |
% |
|
|
81.3 |
% |
|
|
87.9 |
% |
|
|
111.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance Segment Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
|
42,821 |
|
|
|
37,794 |
|
|
|
32,629 |
|
|
|
36,091 |
|
|
|
39,369 |
|
Net income |
|
|
7,236 |
|
|
|
2,092 |
|
|
|
13,167 |
|
|
|
14,115 |
|
|
|
13,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends and accretions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,106 |
|
Basic earnings (loss) per common share (10) |
|
|
(0.39 |
) |
|
|
(0.48 |
) |
|
|
4.04 |
|
|
|
3.37 |
|
|
|
0.22 |
|
Diluted earnings (loss) per common share |
|
|
(0.39 |
) |
|
|
(0.48 |
) |
|
|
4.03 |
|
|
|
3.36 |
|
|
|
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Supplemental Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share |
|
|
0.60 |
|
|
|
0.60 |
|
|
|
0.555 |
|
|
|
0.495 |
|
|
|
0.48 |
|
24
United Fire & Casualty Company Form 10-K | 2009
|
|
|
(1) |
|
Property and casualty reserves may be affected by both internal and external events, such as
changes in claims handling procedures, judicial or legislative actions, inflation, and
catastrophes. The fluctuations in our reserves over the past five years primarily relate to
the hurricanes (Katrina, Rita, Ike and Gustav) we experienced in 2005 and 2008, and the
litigation that has resulted from Hurricane Katrina. For further discussion of Hurricane
Katrina, refer to our Results of Operations contained in Part II, Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations and Note 1,
Significant Accounting Policies under the heading Contingent Liabilities contained in Part
II, Item 8, Financial Statements and Supplementary Data. |
|
(2) |
|
Net unrealized gains, after tax were impacted in 2008 due to the volatility in the financial
markets. The severe downturn in the financial markets resulted in a significant decrease to
our net unrealized appreciation in 2008, while in 2009 our unrealized appreciation returned to
levels similar to prior years. It is widely believed that the economic downturn we faced in
recent years appears to be over, however the economic indicators illustrate that the recovery
will be a long, slow process. |
|
(3) |
|
In recent years our stockholders equity has fluctuated due to the impact the economic
conditions and financial market volatility have had on our net unrealized gains, underwriting
loss and net investment income, which are components of our net income (loss). Additionally,
we recognized in equity, for 2006 through 2009, the net change in the underfunded status of
our employee benefit plans. |
|
(4) |
|
Please refer to the Statutory Financial Measures section of Part II, Item 7 for further
explanation of this measure. |
|
(5) |
|
The decline in 2009 and 2008 was due to lower market interest rates earned on our investment
portfolio, which affected our short-term investments and cash and cash equivalents; agency
bonds that were called during 2009, the proceeds of which we reinvested at a lower interest
rate than was previously available in prior years; the reduction or discontinuation of
dividend payments by some of our equity securities that previously had paid regular dividends;
and the changes in the value of certain investments in limited liability partnerships. |
|
(6) |
|
Realized investment gains and losses are fundamental to our results of operations over the
long term, and the occurrence and timing of realized gains and losses may cause our earnings
to fluctuate substantially. GAAP requires us to recognize gains and losses from certain
changes in fair values of securities without the actual sale of those securities. The realized
investment losses in 2009 and 2008 were primarily due to pre-tax other-than-temporary
investment (OTTI) charges incurred on our fixed maturity securities and equity securities.
We recorded OTTI charges of $18.3 million in 2009 and $9.9 million in 2008. The OTTI charges
that occurred in 2009 and 2008 represent 0.8 percent and 0.5 percent of our investment
portfolio, respectively. |
|
(7) |
|
Loss and loss settlement expenses include reserve changes that may occur for both the
property and casualty segment and the life insurance segment. The fluctuations in this line
are primarily caused by the property and casualty segment. |
|
(8) |
|
Two factors caused most of the fluctuation in other underwriting expenses: the level of
deferrable underwriting expenses, which correlates to our level of written premiums, and
changes in the expense for our employee benefit plans. |
|
(9) |
|
Our net losses in 2009 and 2008 were due to lower revenues from premiums earned, a decrease
in net investment income, realized losses, higher expenses from losses, and other underwriting
expenses. Our lower level of income in 2005 was primarily due to the level of losses
experienced due to Hurricane Katrina. For further discussion of net income (loss) refer to our
Results of Operations contained in Part II, Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations. |
|
(10) |
|
Our basic earnings (loss) per common share is calculated by dividing our net income (loss) by
weighted average common shares outstanding at the end of the period. |
25
United Fire & Casualty Company Form 10-K | 2009
|
|
|
ITEM 7. |
|
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 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 expect(s), anticipate(s), intend(s), plan(s),
believe(s), continue(s), seek(s), estimate(s), goal(s), target(s), forecast(s),
project(s), predict(s), should, could, may, will continue, might, hope, can and
other words and terms of similar meaning or expression in connection with a discussion of future
operating, financial performance or financial condition, are intended to identify 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. Among the factors
that could cause our actual outcomes and results to differ are:
|
|
|
The adequacy of our loss and loss settlement reserves established for Hurricane Katrina, which are
based on management estimates. |
|
|
|
|
The resolution of regulatory issues and litigation pertaining to and arising out of Hurricane
Katrina. |
|
|
|
|
The frequency and severity of claims, including those related to catastrophe losses, and the impact
those claims have on our loss reserve adequacy. |
|
|
|
|
Developments in the domestic and global financial markets that could affect our investment portfolio
and financing plans. |
|
|
|
|
The valuation of invested assets.
|
|
|
|
|
The calculation and recovery of deferred policy acquisition costs (DAC). |
|
|
|
|
The valuation of pension and other postretirement benefit obligations. |
|
|
|
|
The absolute and relative performance of our products or services. |
|
|
|
|
Our relationship with our agents. |
|
|
|
|
Our relationship with our reinsurers. |
|
|
|
|
The financial strength rating of our reinsurers. |
|
|
|
|
The increased costs and risk associated with the security of our data. |
|
|
|
|
Changes in industry trends and significant industry developments. |
|
|
|
|
Additional government and NASDAQ policies or regulations relating to corporate governance, and the
cost to comply. |
These are representative of the risks, uncertainties and assumptions that could cause actual
outcomes and results to differ materially from what is expressed in forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak
only as of the date of this report or as of the date they are made. Except as required under the
federal securities laws and the rules and regulations of the 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.
Additional information concerning factors that could cause actual results to
differ materially from those in the forward-looking statements is contained in
Part I, Item 1A Risk Factors of this document.
26
United Fire & Casualty Company Form 10-K | 2009
INTRODUCTION
The purpose of Managements Discussion and Analysis is to provide an understanding of our results
of operations and consolidated financial position. Our Managements Discussion and Analysis should
be read in conjunction with Part II, Item 6, Selected Financial Data and Part II, Item 8,
Financial Statements and Supplementary Data.
We begin Managements Discussion and Analysis with an overview of our company and our financial
highlights and then follow with detailed discussions on our results of operations; investments;
liquidity; capital resources; enterprise risk management; and critical accounting estimates. When
we provide information on a statutory basis, we label it as such; otherwise all other data is
presented in accordance with GAAP.
OVERVIEW
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 business is generated in Texas, Iowa,
Louisiana, Missouri and Colorado. Approximately three-fourths of our life insurance business is
generated in Iowa, Nebraska, Minnesota, Wisconsin, and Illinois.
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 each of our
segments profits based upon operating and investment results. Segment profit or loss described in
the following sections of Managements Discussion and Analysis is reported on a pre-tax basis.
Additional segment information is presented in Part II, Item 8, Note 11 Segment Information to
the Consolidated Financial Statements.
Our revenue is primarily composed of premiums and investment income. Major categories of expenses
include losses and loss settlement expenses, changes in reserves for future policy benefits,
operating expenses and interest on policyholders accounts. Through disciplined underwriting and
strong agency relationships, we have traditionally emphasized writing good business at an adequate
price, preferring quality to volume. Our goal of consistent profitability is supported by these
business strategies.
Our premium written is cyclical in nature and is influenced by many factors, including price
competition, economic conditions, interest rates, weather-related events and other catastrophes
including natural disasters (e.g., hurricanes and tornados) and man-made disasters, state
regulations, court decisions and changes in the law.
Over the past three years, our commercial lines of business have accounted for over 90.0 percent of premium revenue. We
anticipate that our current composition of commercial lines and personal lines business will not change materially during
the coming year.
27
United Fire & Casualty Company Form 10-K | 2009
FINANCIAL HIGHLIGHTS
Consolidated Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change |
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Years ended December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
vs. 2008 |
|
|
vs. 2007 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
478,498 |
|
|
$ |
503,375 |
|
|
$ |
505,763 |
|
|
|
-4.9 |
% |
|
|
-0.5 |
% |
Investment income, net |
|
|
106,075 |
|
|
|
107,577 |
|
|
|
122,439 |
|
|
|
-1.4 |
|
|
|
-12.1 |
|
Realized investment gains (losses) |
|
|
(13,179 |
) |
|
|
(10,383 |
) |
|
|
9,670 |
|
|
|
-26.9 |
|
|
|
-207.4 |
|
Other income |
|
|
799 |
|
|
|
880 |
|
|
|
654 |
|
|
|
-9.2 |
|
|
|
34.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
572,193 |
|
|
$ |
601,449 |
|
|
$ |
638,526 |
|
|
|
-4.9 |
% |
|
|
-5.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, Losses and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss settlement expenses |
|
$ |
382,494 |
|
|
$ |
406,640 |
|
|
$ |
260,714 |
|
|
|
-5.9 |
% |
|
|
56.0 |
% |
Increase in liability for future policy benefits |
|
|
23,897 |
|
|
|
23,156 |
|
|
|
15,666 |
|
|
|
3.2 |
|
|
|
47.8 |
|
Amortization of deferred policy acquisition costs |
|
|
114,893 |
|
|
|
129,158 |
|
|
|
136,805 |
|
|
|
-11.0 |
|
|
|
-5.6 |
|
Other underwriting expenses |
|
|
39,298 |
|
|
|
28,252 |
|
|
|
22,918 |
|
|
|
39.1 |
|
|
|
23.3 |
|
Disaster charges and other related expenses,
net of recoveries |
|
|
(1,335 |
) |
|
|
7,202 |
|
|
|
|
|
|
|
-118.5 |
|
|
|
N/A |
|
Interest on policy holders accounts |
|
|
41,652 |
|
|
|
40,177 |
|
|
|
43,089 |
|
|
|
3.7 |
|
|
|
-6.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Benefits, Losses and Expenses |
|
$ |
600,899 |
|
|
$ |
634,585 |
|
|
$ |
479,192 |
|
|
|
-5.3 |
% |
|
|
32.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(28,706 |
) |
|
|
(33,136 |
) |
|
|
159,334 |
|
|
|
13.4 |
|
|
|
-120.8 |
|
Federal income tax expense (benefit) |
|
|
(18,265 |
) |
|
|
(20,072 |
) |
|
|
47,942 |
|
|
|
9.0 |
|
|
|
-141.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
(10,441 |
) |
|
$ |
(13,064 |
) |
|
$ |
111,392 |
|
|
|
20.1 |
% |
|
|
-111.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
$ |
(0.39 |
) |
|
$ |
(0.48 |
) |
|
$ |
4.04 |
|
|
|
18.8 |
% |
|
|
-111.9 |
% |
Diluted earnings (loss) per share |
|
$ |
(0.39 |
) |
|
$ |
(0.48 |
) |
|
$ |
4.03 |
|
|
|
18.8 |
|
|
|
-111.9 |
|
The following is a summary of our financial performance over the last three years and the
factors that have affected our performance.
Consolidated Results of Operations
|
|
|
Net income declined from $111.4 million in 2007 to net losses of $13.1 million in 2008
and $10.4 million in 2009, as a result of (i) year over year reductions in net premiums
earned due to continued competition and the weak economy and (ii) an increase in loss and loss settlement expenses
that stemmed from an increase in our case reserves on prior year losses, which was
partially due to an increase in late reported claims and an increase in IBNR reserves. |
|
|
|
Our premium writings decreased 5.9 percent for 2009, due
to continued competition and the weak economy,
which has led to a decline in both the residential housing market (especially in our
western states) and in government-funded projects. This reduced the volume of business of
the commercial and residential contractors that we insure and bond. Also contributing to
the reduction in net premiums written was the nonrenewal of accounts that no longer meet
our underwriting or pricing guidelines. As pricing in the industry continues to decrease,
we avoid accounts that have become too underpriced for the risk. |
|
|
|
Annuity deposits increased to $176.2 million for 2009, from $161.1 million and $161.5 in
2008 and 2007, respectively. Annuity deposits are not recorded as a component of net
premiums written or net premiums earned; however, they do generate investment income. |
28
United Fire & Casualty Company Form 10-K | 2009
|
|
|
During 2009, our other liability line had a significant increase in IBNR reserves, due to trends toward larger jury awards in this line and continuing
construction defect claims and loss expenses. |
|
|
|
Though the insurance industry experienced low levels of catastrophe losses in 2009
compared with 2008, we had an average historical level of catastrophe loss activity. Our
catastrophes losses in 2009 totaled $22.4 million compared to $76.1 million in 2008.
Hurricane activity was nearly nonexistent, but we had an active season of Midwestern
storms. Catastrophe losses, without Hurricane Katrina, contributed 5.1 percent to our 2009
combined ratio, which is in-line with our historic annual average. In 2007, we experienced
lower than average catastrophe losses, which totaled $14.1 million. |
|
|
|
Adverse development from Hurricane Katrina resulted in losses of $38.0 million in 2009
compared to $26.6 million (including a $10.8 million judgment, net of reinsurance) for 2008
and $6.3 million for 2007. We appealed this judgment in 2008, which we lost in 2009. |
|
|
|
Our combined ratio was 115.2 percent for 2009, indicating an underwriting loss, compared
to 113.9 percent and 81.3 percent for 2008 and 2007, respectively. In 2009, we incurred
additional loss and loss settlement expenses related to Hurricane Katrina claims
litigation, while our premium writings were affected by the struggling economy and the
competitiveness of the market. An increase of 1.9 percentage points in our expense ratio
contributed to our combined ratio, as we were not able to defer underwriting expenses
(primarily agent commissions and employee salaries) at the same level in 2009 as we were
able to in 2008 due to lower net premiums written. |
Consolidated Financial Condition
|
|
|
Our annuity sales and a reduction in withdrawals contributed to a net cash inflow
related to our annuity business of $96.0 million in 2009 compared to net cash outflows of
$73.0 million and $92.8 million in 2008 and 2007, respectively. The reduction in annuity
withdrawals is indicative of the change in economic conditions and the inclination of
consumers to choose products with less risk and guaranteed returns. |
|
|
|
For 2009, we repurchased 92,721 shares of our common stock at an average cost of $16.61.
As of December 31, 2009, 516,154 shares of common stock remained authorized for repurchase
under our share repurchase program, which expires in August 2011. |
|
|
|
The carrying value of our investment portfolio fluctuated due to the volatility in the
financial markets, ending 2009 with net unrealized gains, after tax, of $82.5 million
compared to $25.5 million and $85.6 million for the years ended 2008 and 2007,
respectively. |
|
|
|
Our financial strength continued, as our stockholders equity increased in 2009 to
$672.7 million from $641.7 million in 2008. Our equity in 2007 was $751.5 million, which
was primarily the result of record earnings in that year. |
|
|
|
Despite our results in 2009, our book value per share increased by $1.25 to $25.35 from
$24.10 in 2008. Book value per share in 2007 was $27.63. The change in 2009 is attributable
to an increase in our net unrealized gains, after tax, which reflects the rising market
values of our equity security holdings and an increase in the fair value of our fixed
maturity securities as interest rates decreased. |
29
United Fire & Casualty Company Form 10-K | 2009
Commentary on the Economy
The weak economy has significantly affected our business in 2009 and 2008 as follows:
|
|
|
Premium writings decreased in both the residential housing market in our western states
and in government-funded projects, which reduced the volume of business of the commercial
and residential contractors that we insure and bond. |
|
|
|
Our policy retention rate in both the personal and commercial lines of business was
approximately 80.0 percent in 2009, which was a slight decrease from 2008, as our
underwriters continue to focus on writing good business at an adequate price, preferring
quality to volume. Despite continued competition, particularly on medium and large
commercial accounts, we have been able to renew a select number of accounts at a higher
rate/premium level in 2009 compared to 2008. |
|
|
|
The insurance marketplace remained competitive in our commercial lines of business in
2009. We experienced a modest decrease (less than 1 percent) in commercial lines premium
level in the fourth quarter of 2009, reflecting a continuation of a trend of gradual decreases in premium level for some
lines of business dating back to 2004. On personal lines business, we averaged low- to
mid-single-digit percentage increases in premium level for our homeowner and personal
automobile lines of business in 2009. |
|
|
|
Unprecedented volatility in the financial markets caused our portfolio values to
fluctuate with 2009 experiencing an improvement over 2008. |
|
|
|
Investment income has been impacted by lower market interest rates, a decline in the
value of our other long-term investments, and the reduction or discontinuation of dividend
payments by some of our equity securities that previously had paid regular dividends. |
|
|
|
Other-than-temporary impairment (OTTI) charges
totaled $18.3 million for 2009
compared to $9.9 million and $.1 million in 2008 and 2007, respectively. |
It is widely believed that the economic downtown we faced in recent years appears to be over,
however the economic indicators illustrate that the recovery will be a long, slow process. We are
encouraged that as the economy improves, the market may be more conducive to better premium rate
levels as well as more opportunities to write good business, but may or may not affect the trend in
claims, specifically in our other liability line of business. As the economy recovers, it is also
possible that interest rates may increase, which will increase net investment income, but could
result in lower values of our fixed maturity securities. A combination of these trends may affect
our net income going forward, but we cannot predict the timing or related impact, if any.
30
United Fire & Casualty Company Form 10-K | 2009
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
Property and Casualty Insurance Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property & Casualty Segment Results of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change |
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Years ended December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
vs. 2008 |
|
|
vs. 2007 |
|
Net premiums written (1) |
|
$ |
424,827 |
|
|
$ |
459,571 |
|
|
$ |
470,402 |
|
|
|
-7.6 |
% |
|
|
-2.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
435,677 |
|
|
$ |
465,581 |
|
|
$ |
473,134 |
|
|
|
-6.4 |
|
|
|
-1.6 |
|
Loss and loss settlement expenses |
|
|
365,721 |
|
|
|
393,349 |
|
|
|
245,845 |
|
|
|
-7.0 |
|
|
|
60.0 |
|
Amortization of deferred policy acquisition costs |
|
|
105,606 |
|
|
|
117,590 |
|
|
|
123,420 |
|
|
|
-10.2 |
|
|
|
-4.7 |
|
Other underwriting expenses |
|
|
30,553 |
|
|
|
19,146 |
|
|
|
15,378 |
|
|
|
59.6 |
|
|
|
24.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income (loss) |
|
$ |
(66,203 |
) |
|
$ |
(64,504 |
) |
|
$ |
88,491 |
|
|
|
-2.6 |
% |
|
|
-172.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net |
|
|
31,542 |
|
|
|
33,452 |
|
|
|
43,363 |
|
|
|
-5.7 |
% |
|
|
-22.9 |
% |
Realized investment gains (losses) |
|
|
(6,815 |
) |
|
|
1,879 |
|
|
|
7,099 |
|
|
|
-462.7 |
|
|
|
-73.5 |
|
Other income (loss) |
|
|
194 |
|
|
|
(55 |
) |
|
|
59 |
|
|
|
N/A |
|
|
|
N/A |
|
Disaster charges and other related expenses,
net of recoveries |
|
|
(1,335 |
) |
|
|
7,202 |
|
|
|
|
|
|
|
-118.5 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
(39,947 |
) |
|
$ |
(36,430 |
) |
|
$ |
139,012 |
|
|
|
-9.7 |
% |
|
|
-126.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Statutory Financial Measures section of this report defines data prepared in
accordance with statutory accounting practices, which is a comprehensive basis of accounting other
than U.S. GAAP. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) in Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Years ended December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
vs. 2008 |
|
|
vs. 2007 |
|
GAAP combined ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio (without catastrophes and Hurricane
Katrina development) |
|
|
70.1 |
% |
|
|
65.9 |
% |
|
|
49.0 |
% |
|
|
6.4 |
% |
|
|
34.5 |
% |
Hurricane Katrina litigation effect on net loss ratio |
|
|
8.7 |
|
|
|
2.3 |
|
|
|
1.3 |
|
|
|
278.3 |
|
|
|
76.9 |
|
Other catastrophes effect on net loss ratio |
|
|
5.1 |
|
|
|
16.3 |
|
|
|
1.7 |
|
|
|
-68.7 |
|
|
|
858.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio |
|
|
83.9 |
% |
|
|
84.5 |
% |
|
|
52.0 |
% |
|
|
-0.7 |
% |
|
|
62.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense ratio (1) |
|
|
31.3 |
|
|
|
29.4 |
|
|
|
29.3 |
|
|
|
6.5 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio (2) |
|
|
115.2 |
% |
|
|
113.9 |
% |
|
|
81.3 |
% |
|
|
1.1 |
% |
|
|
40.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory combined ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio (without catastrophes and Hurricane
Katrina development) |
|
|
70.1 |
% |
|
|
66.0 |
% |
|
|
49.4 |
% |
|
|
6.2 |
% |
|
|
33.6 |
% |
Hurricane Katrina litigation effect on net loss ratio |
|
|
8.7 |
|
|
|
2.3 |
|
|
|
1.3 |
|
|
|
278.3 |
|
|
|
76.9 |
|
Other catastrophes effect on net loss ratio |
|
|
5.1 |
|
|
|
16.3 |
|
|
|
1.7 |
|
|
|
-68.7 |
|
|
|
858.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio |
|
|
83.9 |
% |
|
|
84.6 |
% |
|
|
52.4 |
% |
|
|
-0.8 |
% |
|
|
61.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense ratio (1) |
|
|
30.3 |
|
|
|
28.8 |
|
|
|
29.7 |
|
|
|
5.2 |
|
|
|
-3.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio (2) |
|
|
114.2 |
% |
|
|
113.4 |
% |
|
|
82.1 |
% |
|
|
0.7 |
% |
|
|
38.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry statutory combined ratio: (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio |
|
|
59.9 |
% |
|
|
65.2 |
% |
|
|
55.8 |
% |
|
|
-8.1 |
% |
|
|
16.8 |
% |
Expense ratio (1) |
|
|
40.7 |
|
|
|
39.9 |
|
|
|
39.7 |
|
|
|
2.0 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio (2) |
|
|
100.6 |
% |
|
|
105.1 |
% |
|
|
95.5 |
% |
|
|
-4.3 |
% |
|
|
10.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio (without catastrophes) (2) |
|
|
97.4 |
% |
|
|
100.0 |
% |
|
|
94.0 |
% |
|
|
-2.6 |
% |
|
|
6.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes policyholder dividends. |
|
(2) |
|
The Statutory Financial Measures section of this report defines data prepared in accordance
with statutory accounting practices, which is a comprehensive basis of accounting other than U.S.
GAAP. |
|
(3) |
|
A.M. Best Company estimate. |
31
United Fire & Casualty Company Form 10-K | 2009
Our property and casualty insurance segment reported a pre-tax loss of $39.9 million and $36.4
million in 2009 and 2008, respectively, compared to pre-tax income of $139.0 million in 2007. The
deterioration in our 2009 results, compared to 2008, was due in part to a decline in our net
premiums written, which directly affects net premiums earned. Our premium writings have been
affected by continued competition and the weak economy, which has led to a decline both in the residential housing market in
our western states and in government-funded projects. This reduced the volume of business of the
commercial and residential contractors that we insure and bond. Additionally, we incurred OTTI
charges of $9.8 million, $38.0 million in adverse development from Hurricane Katrina and an
increase in IBNR reserves in 2009, all of which impacted our pre-tax earnings.
The deterioration in our 2008 results, as compared to 2007 was due to the significant number of
catastrophe losses we experienced in 2008. The financial impact from these catastrophes was largely
realized on our commercial property line of business. Also contributing to the decline was an
increase in the severity of non-catastrophe losses and the impact of competitive market conditions
on pricing.
Premiums
The following table shows our premiums written and earned for 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change |
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Years ended December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
vs. 2008 |
|
|
vs. 2007 |
|
Direct premiums written |
|
$ |
454,046 |
|
|
$ |
484,038 |
|
|
$ |
494,541 |
|
|
|
-6.2 |
% |
|
|
-2.1 |
% |
Assumed premiums written |
|
|
7,820 |
|
|
|
12,660 |
|
|
|
16,907 |
|
|
|
-38.2 |
% |
|
|
-25.1 |
% |
Ceded premiums written |
|
|
(37,039 |
) |
|
|
(37,127 |
) |
|
|
(41,046 |
) |
|
|
-0.2 |
% |
|
|
-9.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written (1 ) |
|
|
424,827 |
|
|
|
459,571 |
|
|
|
470,402 |
|
|
|
-7.6 |
% |
|
|
-2.3 |
% |
Net premiums earned |
|
|
435,677 |
|
|
|
465,581 |
|
|
|
473,134 |
|
|
|
-6.4 |
% |
|
|
-1.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Statutory Financial Measures section of this report defines data prepared in
accordance with statutory accounting practices, which is a comprehensive basis of accounting other
than U.S. GAAP. |
Net Premiums Written
Direct premiums written is the total policy premiums, net of cancellations, associated with
policies issued and underwritten by our property and casualty insurance segment. Assumed premiums
written is the total premiums associated with the insurance risk transferred to us by other
insurance and reinsurance companies pursuant to reinsurance contracts. Ceded premiums written is
the portion of direct premiums written that we cede to our reinsurers under our reinsurance
contracts. Net premiums earned are recognized over the life of a policy and differ from net
premiums written, which are recognized on the effective date of the policy.
Direct Premiums Written
Direct
premiums written decreased in 2009 due to continued competition and the weak economy, as explained in the
previous section. Also contributing to the reduction in direct premiums written in 2009, was the
nonrenewal of accounts that no longer meet our underwriting or pricing guidelines. As pricing in
the industry continues to decrease, we avoid accounts that have become too underpriced for the
risk.
The insurance marketplace remained competitive in our commercial lines of business in 2009. We
experienced a less than 1.0 percent decrease in our commercial
lines premium level in the fourth quarter of 2009, reflecting a
continuation of a trend of gradual decreases in premium level for some lines of business dating
back to the third quarter of 2004. In our personal lines business, we averaged low- to
mid-single-digit percentage increases in premium level for our homeowner and personal auto lines of
business in late 2009.
32
United Fire & Casualty Company Form 10-K | 2009
Our policy retention rate in both the personal and commercial lines of business was approximately
80.0 percent in 2009, which was a slight decrease from 2008, as our underwriters continue to focus
on writing good business at an adequate price, preferring quality to volume. Despite continued
competition, particularly on medium and large commercial accounts, we were able to renew a select
number of accounts at a higher rate/premium level in 2009 as compared to 2008.
In 2008, we continued to experience the effects of soft market conditions within the insurance
industry. These conditions led to downward pressure on premium rates, particularly for mid-size to
large commercial accounts. At the same time, we experienced an unexpected increase in loss severity
during 2008 compared to prior years, while frequency of reported losses remained relatively stable
between years, particularly in accounts under $100,000.
Assumed Premiums Written
We experienced a decrease in assumed premiums written in 2009, as we terminated one of our assumed
reinsurance contracts and lowered participation on another contract. In 2008, the decrease in
assumed premiums written was due to the lower level of active assumed contracts we had as compared
to prior years. Also contributing to the decline in premiums written for 2009, 2008 and 2007 was
some of our assumed business that had been in run-off since late 2006, which concluded in early
2009. In 2010, we entered into three new assumed contracts, which we anticipate will increase our
assumed premiums written.
Ceded Premiums Written
Direct and assumed premiums written are reduced by the ceded premiums that we pay to reinsurers.
Pricing of ceded reinsurance did not increase materially in 2009, 2008 or 2007. The reduction in
ceded premiums written in 2009, 2008 and 2007 was due to the lower level of direct premiums written
in each of those years as well as our reduced exposure in Southern Louisiana, which also had an
effect on the premiums we pay for our property catastrophe reinsurance treaty.
Catastrophe Losses
Catastrophes losses are inherent risks of the property and casualty insurance business. These
catastrophic events and natural disasters include, without limitation, hurricanes, tornadoes,
earthquakes, hailstorms, wildfires, high winds and winter storms. Such events result in insured
losses that may be a material factor in our results of operations and consolidated financial
position. Additionally, since the level of insured losses that may occur in any one year cannot be
accurately predicted, these losses contribute to fluctuations in our year-to-year results of
operations and consolidated financial position. Some types of catastrophes are more likely to occur
at certain times within the year than others, which adds an element of seasonality to our property
and casualty insurance claims. The occurrence and severity of catastrophic events are difficult to
accurately predict in any year. However, some geographic locations are more susceptible to these
events than others. We have endeavored to control our direct insurance exposures in certain regions
that are prone to naturally occurring catastrophic events through a combination of geographic
diversification, restrictions on the amount and location of new business production in such
regions, and reinsurance. The process of estimating and establishing reserves for catastrophe
losses is inherently uncertain and the actual ultimate cost of a claim, net of reinsurance
recoveries, may vary materially from the estimated amount reserved.
Hurricane Katrina
Hurricane Katrina made landfall in New Orleans, Louisiana, on August 29, 2005, causing an estimated
$80 billion in damages. Over 95.0 percent of our policyholders in the New Orleans area suffered
damage from Hurricane Katrina, with over 11,000 claims reported; we have concluded 96.7 percent of
those claims. Our loss and loss settlement expenses inception to date (net of reinsurance)
attributable to Hurricane Katrina totaled $288.9 million as of December 31, 2009, of which $38.0
million was incurred in 2009. The loss and loss settlement expenses incurred in 2009 includes an
IBNR reserve increase for Hurricane Katrina claims litigation of $16.2 million, primarily due to
the continuing unfavorable legal environment related to Hurricane Katrina in Louisiana. In 2009, we
continued to settle unresolved litigation related to Hurricane Katrina, concluding approximately 50
percent of the claims that
were in litigation as of December 31, 2008. Our 2009 combined ratio was impacted 8.7 percent by
Hurricane Katrina loss development.
33
United Fire & Casualty Company Form 10-K | 2009
In 2008 and 2007, adverse development from Hurricane Katrina resulted in losses of $26.6 million
(including a $10.8 million judgment, net of reinsurance, that was under appeal in 2008, which we
lost on appeal in 2009) and $6.3 million, respectively.
Since the occurrence of Hurricane Katrina in 2005, we have focused on reducing our risk exposure in
Southern Louisiana by decreasing the number of insured properties, raising rates and purchasing
additional reinsurance coverage. As of December 31, 2009, our current exposure level in Southern
Louisiana is satisfactory, however, we will continue to monitor the situation closely and make
additional adjustments as needed.
In January 2010, we ceased renewing policies or writing new business in the state of Louisiana
through Lafayette Insurance Company. As a result, policyholders will be unable to litigate most
issues in the Louisiana state court system, where we have experienced results that are inconsistent
and unpredictable. We will continue to provide personal and commercial insurance coverage in
Louisiana under United Fire & Casualty Company and our subsidiary, United Fire & Indemnity Company.
Policyholders under these policies will be required to litigate in Federal courts, instead of
Louisiana courts. All current Lafayette Insurance Company policyholders in Louisiana will be
offered the opportunity to renew their policy in 2010 under United Fire & Indemnity Company, unless
the policyholder has not paid their premium or the policy is being nonrenewed for a specific
underwriting reason, such as failure to comply with loss control recommendations.
Other Catastrophes
In 2009, our pre-tax catastrophe losses without adverse development from Hurricane Katrina were
$22.4 million. In comparison our 2008 and 2007 pre-tax catastrophe losses were $76.1 million and
$14.1 million, respectively. In 2008 and 2007, the portion of these losses attributable to adverse
development from Hurricane Katrina was $15.8 million (which excludes the $10.8 million judgment,
net of reinsurance) for 2008 and $6.3 million, respectively. Our 2009 losses were the result of 26
new catastrophes, with our largest single loss coming from a Midwest storm that caused wind and
hail damage and resulted in pre-tax losses totaling $3.6 million. In 2008, we experienced our
second highest year for catastrophe losses in the past decade, with losses from 34 new catastrophe
events. Our largest losses during 2008 were related to Hurricane Ike ($20.2 million) and Hurricane
Gustav ($15.8 million).
Catastrophe Reinsurance
Our 2009 core and catastrophe reinsurance programs remained relatively unchanged from our 2008
programs. Neither terms and conditions nor pricing were materially different. In 2009, we did not
utilize our property catastrophe excess of loss treaty. In 2008, we exceeded our catastrophe
retention of $20.0 million with Hurricane Ike, and recorded $2.4 million in ceded losses
recoverable from that catastrophe.
Our planned reduction in Southern Louisiana that began after Hurricane Katrina has reduced our
estimated 100-year maximum probable loss by over 58.0 percent as of December 31, 2009. To maintain
profitability of our remaining Southern Louisiana business, we have employed portfolio optimizing
techniques (i.e., proximity to the coast, type of construction, the reduction of geographic risk
concentration and higher deductibles) to reduce the impact of any one future catastrophe. As an
example of the effectiveness of our risk-reduction efforts, we estimate that we incurred $12.8
million less in losses related to Hurricane Gustav in 2008 than we would have if we had not
undertaken these measures.
In evaluating our catastrophe reinsurance coverage for 2005, we utilized two industry accepted
models to estimate our exposure, and then purchased catastrophe reinsurance coverage that exceeded
the estimated level. Hurricane Katrina resulted in a level of damage that the models, the industry,
and we could not foresee. Consequently, we did not give consideration for such an event, which
resulted in a level of reinsurance coverage that did not adequately protect us from the devastation
of Hurricane Katrina. In addition to strengthening our underwriting guidelines and reducing our
exposure in Southern Louisiana after Hurricane Katrina, we also evaluated and modified our
catastrophe reinsurance coverage to lessen the impact of future catastrophes by increasing our
property catastrophe reinsurance limits from $125.0 million in 2005 to $200.0 million beginning in
2007.
34
United Fire & Casualty Company Form 10-K | 2009
We use many reinsurers, both domestic and foreign, which helps us to avoid concentrations of credit
risk associated with our reinsurance. All reinsurers must meet the following minimum criteria:
capital and surplus of at least $250.0 million and an A.M. Best rating of at least A- or an S&P
rating of at least A-. If a reinsurer is rated by both rating agencies, then both ratings must be
at least an A-. The table below represents the primary reinsurers we utilize and their financial
strength ratings as of December 31, 2009.
|
|
|
|
|
|
|
|
|
Name of Reinsurer |
|
AM Best |
|
|
S&P Rating |
|
Arch Re |
|
A |
|
A |
FM Global |
|
A+ |
|
|
Hannover Re (1) (2) |
|
A |
|
AA- |
Lloyds Syndicates |
|
A |
|
A+ |
Odyssey Re (2) |
|
A |
|
A- |
Paris Re (2) |
|
A- |
|
A+ |
Partner Re (1) (2) |
|
A+ |
|
AA- |
Platinum Re (1) |
|
A |
|
A |
QBE Insurance Ltd (1) |
|
A |
|
A+ |
R&V Versicherung AG (2) |
|
N/A |
|
A+ |
Renaissance |
|
A+ |
|
AA- |
Tokio Millennium |
|
A+ |
|
AA |
|
|
|
(1) |
|
Primary insurers participating on the property and casualty excess of loss programs. |
|
(2) |
|
Primary insurers participating on the surety excess of loss program. |
For 2010, the pricing for our core reinsurance program, which excludes our property
catastrophe treaty, decreased 6.6 percent due to market conditions and a small reduction in coastal
exposure in Southern Louisiana. Some of the key changes to our 2010 core program include:
incorporating the umbrella coverage into our casualty excess of loss treaty, which prior to 2010
was a separate treaty; increasing the property excess of loss treaty to $15.0 million from $12.0
million; increasing our casualty per occurrence limit from $20.0 million to $40.0 million;
expanding some of our aggregate limits; and renewing the $2.0 million stated retention limit on our
casualty and property excess of loss treaties.
Refer to Part II, Item 8, Note 5, Reinsurance for further discussion of our reinsurance programs.
Terrorism Coverage
The Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA) was signed into law on
December 27, 2007. TRIPRA coverage includes most direct commercial lines of business, including
coverage for losses from nuclear, biological and chemical exposures if coverage was afforded by an
insurer, with exclusions for commercial automobile insurance, burglary and theft insurance, surety,
professional liability insurance and farm owners multiple peril insurance. Under TRIPRA, each
insurer has a deductible amount, which is 20.0 percent of the prior years direct commercial lines
earned premiums for the applicable lines of business, and retention of 15.0 percent above the
deductible. No insurer that has met its deductible shall be liable for the payment of any portion
of that amount that exceeds the annual $100.0 trillion aggregate loss cap specified in TRIPRA.
TRIPRA provides marketplace stability. As a result, coverage for terrorist events in both the
insurance and reinsurance markets is often available. The amount of aggregate losses necessary for
an act of terrorism to be certified by the U.S. Secretary of Treasury, the Secretary of State and
the Attorney General was $100.0 million for 2009 and remains the same for 2010. Our TRIPRA
deductible was $64.8 million for 2009 and our TRIPRA deductible will be $60.2 million for 2010. Our
core and catastrophe reinsurance treaties provide limited coverage for terrorism exposure excluding
nuclear, biological and chemical related claims.
35
United Fire & Casualty Company Form 10-K | 2009
Non-Catastrophe Losses and Reserve Development
Workers compensation and other liability are considered to be long-tail lines of business due to
the length of time that may elapse before claims are finally settled. Therefore, we may not know
our final development on individual claims for many years. Our estimates for losses, particularly
in these long-tail lines, are dependent upon many factors, such as the legal environment, inflation
and medical costs. We consider all of these factors, as well as others, in estimating our loss
reserves. As conditions or trends with respect to these factors change, we change our estimate for
loss reserves accordingly. Refer to Critical Accounting Estimates in this section for a more
detailed discussion of our property and casualty segments loss and loss settlement expenses and
reserves.
2009 Results
In 2009, we increased our case reserves on prior year losses partially due to an increase in late
reported claims. In addition, we have focused on establishing reserves for reported claims more
quickly. In the fourth quarter 2009, we increased IBNR reserves for claims that occurred in prior
years. Our other liability line had a significant increase in IBNR reserves, due
to trends toward larger jury awards in this line and continuing construction defect claims and loss
expenses. Overall, claims frequency decreased, which is a trend
we have seen for several quarters. Claims severity has flattened for a majority of lines, with a
slight increase in certain liability lines, specifically automobile and other liability as compared
to 2008.
Overall, we experienced a net deficiency in our prior year reserves of $26.2 million for 2009. The
primary components of this deficiency was the deterioration in our other liability lines of
business, which resulted in a deficiency in these lines of $21.8 million, and adverse development
from Hurricane Katrina claims and litigation totaling $38.0 million, which resulted in a deficiency
in the fire and allied lines of business of $16.9 million.
2008 Results
Late in 2008, we began a corporate-wide audit of our reported large claim losses to analyze the
increase in severity that we experienced in 2008. While we were satisfied with the results of the
audit, our review resulted in the modification of certain underwriting guidelines. Examples of such
modifications include an increase in the number of commercial accounts serviced by our loss control
unit, the development of a new safety class for insureds, a decline in certain classes of
commercial business that are no longer profitable and the introduction of some pricing increases.
We also increased our case reserves on prior year losses, which resulted in a net deficiency of $.5
million for 2008. The primary cause of our net deficiency in 2008 was the $26.6 million in adverse
development for Hurricane Katrina. The Hurricane Katrina-related losses contributed to a deficiency
in the fire and allied lines of business of $12.2 million.
Also contributing to our net deficiency in prior year reserves was an increase in general liability
losses, which includes both other and products liability lines. Claims for construction defect
losses are included in the products liability line of business. Incurred losses from construction
defect claims for prior years were $7.7 million in 2008. These losses contributed to a deficiency
in the other liability and products liability lines of business totaling $5.8 million.
Other changes in loss development included prior year reserve redundancies in the following lines
of business: commercial auto liability ($3.2 million), workers compensation ($7.2 million) and
assumed reinsurance ($5.2 million).
36
United Fire & Casualty Company Form 10-K | 2009
2007 Results
In 2007, we incurred losses and loss settlement expenses of $245.8 million, of which $291.0 million
were from claims that occurred in 2007. We had favorable development from prior years claims of
$45.2 million. The redundancy was realized in each of our lines of business, with the exception of
homeowners, which was attributable to adverse development from Hurricane Katrina.
Reserve Development
The following table illustrates the primary components of the net redundancy (deficiency) we
experienced in our reserves for 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Years ended December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Savings from: |
|
|
|
|
|
|
|
|
|
|
|
|
Salvage and subrogation |
|
$ |
5,968 |
|
|
$ |
7,099 |
|
|
$ |
11,637 |
|
Estimated alternative dispute resolution |
|
|
12,957 |
|
|
|
7,352 |
|
|
|
8,847 |
|
Workers compensation medical bill review |
|
|
3,516 |
|
|
|
3,477 |
|
|
|
4,113 |
|
Other |
|
|
(10,680 |
) |
|
|
8,152 |
|
|
|
29,322 |
|
|
|
|
|
|
|
|
|
|
|
Net redundancy excluding Hurricane Katrina |
|
|
11,761 |
|
|
|
26,080 |
|
|
|
53,919 |
|
Adverse development from Hurricane Katrina |
|
|
(37,976 |
) |
|
|
(26,628 |
) |
|
|
(8,718 |
) |
|
|
|
|
|
|
|
|
|
|
Net redundancy (deficiency) |
|
$ |
(26,215 |
) |
|
$ |
(548) |
|
|
$ |
45,201 |
|
|
|
|
|
|
|
|
|
|
|
Salvage is the sale of damaged goods, for which the insured has been indemnified and for which
the insured has transferred title to the insurance company. Salvage reduces the cost incurred for
property losses. Subrogation also reduces the costs incurred for a loss by seeking payment from
other parties involved in the loss and/or from the other parties insurance company. Alternative
dispute resolution facilitates settlements and reduces defense and legal costs through processes
such as mediation and arbitration. Workers compensation medical bill review is a system designed
to detect duplicate billings, unrelated and unauthorized charges and coding discrepancies. It also
ensures that we are billed for medical services according to the fee schedule designated by each
state in which we have claims.
Our
other redundancy (deficiency) is attributable
to both the payment of claims in amounts other than the amounts reserved and changes in
reserves due to additional information on individual claims that we received after the reserves
for those claims had been established. The additional information we consider is unique to each claim.
Such information may include facts that reveal we have no coverage obligation for a particular claim,
changes in applicable laws that reduce or increase our liability or coverage exposure on a particular claim,
facts that implicate other parties as being liable on a particular claim and favorable or unfavorable court
rulings that changes our liability for a particular claim. Also, additional information relating to severity is unique
to each claim. For example, we may learn during the course of a claim that bodily injuries may be less or more
severe than originally believed or that damage to a structure is merely cosmetic instead of structural.
37
United Fire & Casualty Company Form 10-K | 2009
Net Loss Ratios by Line
The following table depicts our net loss ratio for 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Net Losses |
|
|
|
|
|
|
|
|
|
|
Net Losses |
|
|
|
|
|
|
|
|
|
|
Net Losses |
|
|
|
|
|
|
|
|
|
|
and Loss |
|
|
|
|
|
|
|
|
|
|
and Loss |
|
|
|
|
|
|
|
|
|
|
and Loss |
|
|
|
|
|
|
Net |
|
|
Settlement |
|
|
|
|
|
|
Net |
|
|
Settlement |
|
|
|
|
|
|
Net |
|
|
Settlement |
|
|
Net |
|
|
|
Premiums |
|
|
Expenses |
|
|
Net Loss |
|
|
Premiums |
|
|
Expenses |
|
|
Net Loss |
|
|
Premiums |
|
|
Expenses |
|
|
Loss |
|
(In Thousands) |
|
Earned |
|
|
Incurred |
|
|
Ratio |
|
|
Earned |
|
|
Incurred |
|
|
Ratio |
|
|
Earned |
|
|
Incurred |
|
|
Ratio |
|
Commercial lines: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liability |
|
$ |
119,587 |
|
|
$ |
119,200 |
|
|
|
99.7 |
% |
|
$ |
134,429 |
|
|
$ |
93,000 |
|
|
|
69.2 |
% |
|
$ |
136,704 |
|
|
$ |
55,354 |
|
|
|
40.5 |
% |
Fire and allied lines |
|
|
102,265 |
|
|
|
100,436 |
|
|
|
98.2 |
|
|
|
109,217 |
|
|
|
134,060 |
|
|
|
122.7 |
|
|
|
117,494 |
|
|
|
65,773 |
|
|
|
56.0 |
|
Automobile |
|
|
97,948 |
|
|
|
75,123 |
|
|
|
76.7 |
|
|
|
101,229 |
|
|
|
72,384 |
|
|
|
71.5 |
|
|
|
99,004 |
|
|
|
63,509 |
|
|
|
64.1 |
|
Workers compensation |
|
|
51,992 |
|
|
|
41,283 |
|
|
|
79.4 |
|
|
|
52,792 |
|
|
|
41,434 |
|
|
|
78.5 |
|
|
|
48,359 |
|
|
|
32,408 |
|
|
|
67.0 |
|
Fidelity and surety |
|
|
21,354 |
|
|
|
1,838 |
|
|
|
8.6 |
|
|
|
22,244 |
|
|
|
4,105 |
|
|
|
18.5 |
|
|
|
21,848 |
|
|
|
2,121 |
|
|
|
9.7 |
|
Miscellaneous |
|
|
854 |
|
|
|
214 |
|
|
|
25.1 |
|
|
|
858 |
|
|
|
438 |
|
|
|
51.0 |
|
|
|
851 |
|
|
|
413 |
|
|
|
48.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial lines |
|
$ |
394,000 |
|
|
$ |
338,094 |
|
|
|
85.8 |
% |
|
$ |
420,769 |
|
|
$ |
345,421 |
|
|
|
82.1 |
% |
|
$ |
424,260 |
|
|
$ |
219,578 |
|
|
|
51.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal lines: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fire and allied lines |
|
$ |
22,317 |
|
|
$ |
12,254 |
|
|
|
54.9 |
% |
|
$ |
21,353 |
|
|
$ |
34,195 |
|
|
|
160.1 |
% |
|
$ |
21,117 |
|
|
$ |
12,434 |
|
|
|
58.9 |
% |
Automobile |
|
|
13,053 |
|
|
|
10,725 |
|
|
|
82.2 |
|
|
|
12,603 |
|
|
|
11,701 |
|
|
|
92.8 |
|
|
|
13,764 |
|
|
|
8,561 |
|
|
|
62.2 |
|
Miscellaneous |
|
|
365 |
|
|
|
662 |
|
|
|
181.4 |
|
|
|
326 |
|
|
|
472 |
|
|
|
N/A |
|
|
|
311 |
|
|
|
353 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal lines |
|
$ |
35,735 |
|
|
$ |
23,641 |
|
|
|
66.2 |
% |
|
$ |
34,282 |
|
|
$ |
46,368 |
|
|
|
135.3 |
% |
|
$ |
35,192 |
|
|
$ |
21,348 |
|
|
|
60.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance assumed |
|
$ |
5,942 |
|
|
$ |
3,986 |
|
|
|
67.1 |
% |
|
$ |
10,530 |
|
|
$ |
1,560 |
|
|
|
14.8 |
% |
|
$ |
13,682 |
|
|
$ |
4,919 |
|
|
|
36.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
435,677 |
|
|
$ |
365,721 |
|
|
|
83.9 |
% |
|
$ |
465,581 |
|
|
$ |
393,349 |
|
|
|
84.5 |
% |
|
$ |
473,134 |
|
|
$ |
245,845 |
|
|
|
52.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
United Fire & Casualty Company Form 10-K | 2009
Commercial Lines
The net loss ratio in our commercial lines of business was 85.8 percent in 2009, 82.1 percent in
2008 and 51.8 percent in 2007. Several factors contributed to the deterioration of our loss ratio
in 2009 and 2008.
Our other liability losses and loss settlement expenses incurred increased to $119.2 million in
2009, compared to $93.0 million in 2008 and $55.4 million in 2007. In 2009, the deterioration was
attributable to an increase in IBNR reserves and a slight increase in severity from trends such as
larger jury awards and continuing construction defect claims and loss settlement expenses. Incurred
losses from construction defect claims totaled $6.0 million in 2009 as compared to $11.0 million
and $5.4 million in 2008 and 2007, respectively.
Our profitability in the commercial lines of business has been impacted by competition, in each of
the three years. In 2009 we experienced a modest decrease in premium level, reflecting the
continuation of a trend of gradual decreases in premium level for some lines of business dating
back to the third quarter of 2004.
An additional factor in the deterioration of our 2008 loss ratio was the significant impact
catastrophe losses had on the commercial lines of business. The pre-tax impact totaled $54.5
million, which was an increase of $41.8 million over 2007 catastrophes. In 2008, we experienced our
second highest year for catastrophe losses in the past decade. A portion of these losses was
attributable to a $10.8 million judgment, net of reinsurance, for Hurricane Katrina litigation that
was under appeal in 2008, which we lost on appeal in 2009.
Commercial Fire and Allied Lines
Commercial fire and allied lines include fire, allied lines, commercial multiple peril and inland
marine. The insurance covers losses to an insureds property, including its contents, from weather,
fire, theft or other causes. We provide this coverage through a variety of business policies. The
net loss ratio for our commercial fire and allied lines was 98.2 percent in 2009, 122.7 percent in
2008 and 56.0 percent in 2007. The improvement in these lines for 2009 as compared to 2008 was
primarily due to a decrease in loss and loss settlement expenses in this line due to lower
catastrophe losses and a leveling off of severity. Without considering catastrophe losses,
frequency has not changed significantly over the past three years.
The deterioration in 2008 was primarily driven by catastrophe losses, which increased by nearly
$50.6 million in 2008 over 2007. Net losses from Hurricanes Gustav and Ike contributed $3.6 million and
$19.0 million, respectively, to the commercial lines property losses in 2008. We also had an
increase in commercial fire losses, with incurred losses from these claims increasing from $20.3
million in 2007 to $27.3 million in 2008. The number of claims reported decreased slightly, but the
severity of commercial fire losses increased.
We continue to take measures to address our increase in incurred losses in the commercial fire and
allied lines of business by implementing a number of underwriting initiatives that we anticipate
will improve our loss experience. Our 2009 underwriting initiatives included:
|
|
|
Continued expansion of the loss control function in our Gulf Coast and Denver regions.
Our service account program, which provides at least annual loss control visits, was
implemented for larger and/or more complex accounts. |
|
|
|
Continued expansion of the use of pre-surveys prior to quoting larger new business
accounts. |
|
|
|
Change in our underwriting guidelines to address issues noted in large loss audits. |
|
|
|
Reducing our risk exposure in Southern Louisiana by decreasing the number of insured
properties and increasing our premium rates. |
|
|
|
Implementation of CATography Underwriter, a new property underwriting tool that
integrates hazard data for many perils, catastrophe modeling, interactive color-coded
exposure mapping, and aerial photography into an intuitive dashboard screen, providing a
complete overview of the risk landscape at a geocode or street address level. |
39
United Fire & Casualty Company Form 10-K | 2009
Premiums earned in these lines have decreased from $117.5 million in 2007 to $109.2 million in 2008
to $102.3 million in 2009. Our premium writings have been affected by continued
competition and the weak economy, which has
led to a decline in both the residential housing market in our western states and in
government-funded projects. This reduced the volume of business of the commercial and residential
contractors that we insure. Also contributing to the reduction in direct premiums written is the
nonrenewal of accounts that no longer meet our underwriting or pricing guidelines. As pricing in
the industry continues to decrease, we avoid accounts that have become too underpriced for the
risk.
In addition, since the occurrence of Hurricane Katrina in 2005, we have focused on reducing our
risk exposure in Southern Louisiana by, among other things, decreasing the number of insured
properties and raising rates, which has lead to a decline in premiums earned over the past three
years.
Other Liability
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.
We reported a net loss ratio in this line of 99.7 percent in 2009, 69.2 percent in 2008 and 40.5
percent in 2007.
The other liability line experienced a lower level of premiums earned in 2009, as compared to 2008,
due to the effect competition and the weak economy had on residential and commercial construction. Our other
liability losses and loss settlement expenses incurred increased to $119.2 million in 2009,
compared to $93.0 million in 2008 and $55.4 million in 2007. For 2009, the deterioration was
attributable to an increase in IBNR reserves and a slight increase in severity from trends such as
larger jury awards and increases in construction defect claims and loss settlement expenses.
Incurred losses from construction defect claims totaled $6.0 million in 2009 as compared to $11.0 million
and $5.4 million in 2008 and 2007, respectively.
Construction Defect Losses
Losses from construction defect claims decreased in 2009 to $6.0 million compared to $11.0 million
and $5.4 million in 2008 and 2007, respectively. At December 31, 2009, we established $15.2 million
in construction defect loss and loss settlement expense reserves, excluding IBNR reserves, which
consisted of 234 claims, compared with $16.0 million, excluding IBNR reserves, consisting of 243
claims, at December 31, 2008.
Construction defect claims generally relate to allegedly defective work performed in the
construction of structures such as apartments, condominiums, single family dwellings or other
housing, as well as the sale of defective building materials. Such claims seek recovery due to
damage caused by alleged deficient construction techniques or workmanship. The reporting of such
claims can be quite delayed due to an extended statute of limitations, sometimes up to ten years.
Court decisions have expanded insurers exposure to construction defect claims as well. Defense
costs are also a part of the insured expenses covered by liability policies and can be significant,
sometimes greater than the cost of the actual paid claims.
A majority of our exposure to construction defect claims has been in Colorado and surrounding
states. We historically have insured small-to-medium sized contractors in this geographic area. In
an effort to limit the number of future claims from multi-unit buildings, we have implemented new
policy exclusions limiting sub-contractor coverage on any building project with more than 12 units
or on single family homes in any subdivision where the contractor is working on more than 15 homes.
We have changed our underwriting guidelines to add a professional liability exclusion when a
contractor prepares its own design work or blue prints. In 2009, we implemented the multi-family
exclusion and tract home building limitation form in additional regions.
Other Liability Losses Other Than Construction Defect
Within our other liability lines of business (other than construction defect), frequency increased
slightly in 2009 as compared to 2008, with losses incurred on 4,936 claims in 2009 compared to
4,817 in 2008 and 4,523 in 2007. In 2009, our average direct losses incurred per other liability
claim (other than construction defect) were $23,699 per claim compared to $28,727 per claim in 2008
and $16,444 per claim in 2007.
40
United Fire & Casualty Company Form 10-K | 2009
Because of the long-tail nature of liability claims, significant periods of time, ranging up to
several years, may elapse between the occurrence of the loss, the reporting of the loss to us and
the settlement of the claim. In both 2009 and 2008, over 37.0 percent of our other liability losses
incurred (other than construction defect) resulted from losses that occurred in prior years. For
2009, the prior years that were most significantly impacted were 1997 and 2004 through 2008. For
2008, the prior years that were most significantly impacted were 2001 and 2003 through 2007.
The deterioration in the net loss ratio in 2007 was primarily related to an increase in severity as
compared to the prior year. We had several large liability losses in 2007, but did not detect a
trend related to the cause or geographic locations of the losses.
In recent years, we began to use our loss control department more extensively in an attempt to
return this line of business to a higher level of profitability. For example, our loss control
department has representatives make multiple annual visits to businesses and jobsites to ensure
safety, rather than just one. We are also nonrenewing accounts that no longer meet our underwriting
or pricing guidelines. As pricing in the industry continues to decrease, we avoid accounts that
have become too underpriced for the risk.
Commercial Automobile
Our commercial automobile insurance covers physical damage to an insureds vehicle, as well as
liabilities to third parties. Automobile physical damage insurance covers loss or damage to
vehicles from collision, vandalism, fire, theft, flood or other causes. Automobile liability
insurance covers bodily injury, damage to property resulting from automobile accidents caused by
the insured, uninsured or underinsured motorists and the legal costs of defending the insured
against lawsuits. Generally, our company policy is to write standard automobile insurance. Our net
loss ratio in commercial automobile was 76.7 percent in 2009, 71.5 percent in 2008 and 64.1 percent
in 2007.
In 2009, our premium writings were
affected by continued competition and the weak economy, which contributed to the $3.3
million decrease in premiums earned as compared to 2008. In 2009, we experienced a slight decrease
in our policy counts, which resulted in a decrease in premiums earned, compared to 2008, when an
increase in policy counts resulted in an increase in premiums earned. Losses and loss settlement
expenses increased in each of the past three years, rising from $63.5 million in 2007 to $72.4
million in 2008 and $75.1 million in 2009. We attribute the increase in 2009 to a slight increase in
claims severity, while the increase in 2008 was attributable to the growth of the number of
policies that we had written.
Workers Compensation
Our net loss ratio in the workers compensation line of business was 79.4 percent in 2009, 78.5
percent in 2008 and 67.0 percent in 2007. We consider our workers compensation business to be a
companion product; we rarely write
stand-alone workers compensation policies. Our workers compensation insurance covers primarily
small- to mid-size accounts.
In 2009, both the nonrenewal of accounts that no longer meet our underwriting or pricing guidelines
and avoiding accounts that have become too underpriced for the risk have contributed to the
reduction in premiums earned in this line. In 2008 and 2007, we wrote more workers compensation
business, as we worked to retain business with current policyholders that required workers
compensation insurance coverage.
We believe that our underwriting expertise, loss control service and medical review programs will
enable us to be profitable in the workers compensation line of business. The challenges faced by
workers compensation insurance providers to attain profitability include the regulatory climates
in some states that make it difficult to obtain appropriate premium rate increases and inflationary
medical costs. Despite these pricing issues, we continue to believe that we can improve
profitability in the workers compensation line of business. Consequently, we have introduced
predictive modeling analytics into our workers compensation underwriting process. In addition, we
are going to increase our utilization of our loss control unit in the analysis of current risks,
with the intent of increasing the quality of our workers compensation book of business.
41
United Fire & Casualty Company Form 10-K | 2009
The deterioration in the loss and loss settlement expenses in 2009 and 2008 is reflective of the
increased premium writings we undertook in recent years and the risk associated with this long-tail
line. The improvement in results in 2007 was due to lower severity, a slight decrease in our
frequency and improvements in our medical review programs.
Fidelity and Surety
Our surety products guarantee performance and payment by our bonded principals. Our contract bonds
protect owners from failure to perform on the part of our principals. In addition, our surety bonds
protect material suppliers and subcontractors from nonpayment by our contractors. When surety
losses occur, our loss is determined by estimating the cost to complete the remaining work and to
pay the contractors unpaid bills, offset by contract funds due to the contractor, reinsurance and
the value of any collateral to which we may have access. The net loss ratio in this line was 8.6
percent in 2009, 18.5 percent in 2008 and 9.7 percent in 2007.
Beginning in 2008, a downturn in general economic conditions decreased demand for our surety
products, as construction activity declined. This contributed to flat growth in premiums earned in
2008 and the slight decline in 2009.
The improvement in our loss and loss settlement expense for 2009 was the result of a slight
decrease in claims frequency and related loss settlement expenses. The increase in the loss ratio
in 2008 was due to an increase in loss settlement expenses. Since 2007, there have been no new
claims that exceeded our $1.5 million reinsurance retention level.
Personal Lines
Our personal lines consist primarily of fire and allied lines (including homeowners) and automobile
lines. The net loss ratio was 66.2 percent in 2009, 135.3 percent in 2008 and 60.7 percent in 2007.
In late 2009, we averaged low- to mid-single-digit percentage increases in premium level for our
homeowner and personal auto lines of business. In 2008 and 2007, premium pricing decreased only in
our personal auto line of business. In 2009, policy counts for homeowners, automobile and umbrella
increased, as compared to 2008 where policy counts decreased in fire and allied lines (including
homeowners) and automobile. In 2008, the premium reduction we experienced in the homeowners lines
of business due to loss of business was more than offset by the significant increases in premium
pricing in hurricane-exposed regions.
The deterioration in 2008 was primarily the result of catastrophe losses totaling $21.6 million,
compared to $1.4 million in 2007, as we experienced a significant level of catastrophe losses as
compared to the prior year.
Assumed Reinsurance
Our assumed reinsurance line of business loss ratio was 67.1 percent in 2009, compared to 14.8
percent and 36.0 percent in 2008 and 2007, respectively. The deterioration in 2009 was due to
losses on current contracts related to Hurricanes Gustav and Ike, as well as environmental and
asbestos losses on runoff business.
In 2009, we terminated one of our assumed reinsurance contracts and lowered participation on
another. In 2008, the decrease in assumed premiums earned was due to the lower level of active
assumed contracts we had as compared to prior years. In 2010, we entered into three new assumed
contracts, which we anticipate will increase our assumed premiums writings.
42
United Fire & Casualty Company Form 10-K | 2009
In 2009, loss and loss settlement expenses were $4.0 million compared to $1.6 million in 2008; $.9
million of the 2009 losses were attributable to Hurricanes Gustav and Ike. The remaining losses
incurred were primarily from business that was in runoff. The favorable loss experience in 2008 is
attributable to a low level of catastrophe losses as well as favorable claims development on runoff
business. In 2007, the improvement in losses and loss settlement expenses incurred resulted from a
number of older runoff businesses where we were able to reduce reserves to zero. We continue to
have exposure, primarily with respect to environmental and asbestos coverage related to the runoff
of some business, as well as exposure to catastrophe losses for the small number of assumed
reinsurance contracts that we have continued to underwrite.
Other Underwriting Expenses
Our underwriting expense ratios, which are a percentage of other underwriting expenses over
premiums earned, were 31.3 percent, 29.4 percent and 29.3 percent for 2009, 2008 and 2007,
respectively. In 2009 we were unable to defer underwriting expenses (primarily agent commissions
and employee salaries) at the same level as we were able to in 2008, due to lower premium writings
resulting from continued competition and the weak economy, thus leading to the increase in our expense ratio.
In 2008, our commission expense decreased due to lower profit-sharing commissions payable to our
agents. This decrease was offset by an increase in the ratio of fixed underwriting expenses to
premiums earned.
Life Insurance Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance Segment Results of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change |
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Years ended December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
vs. 2008 |
|
|
vs. 2007 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written (1) |
|
$ |
42,600 |
|
|
$ |
37,326 |
|
|
$ |
31,447 |
|
|
|
14.1 |
% |
|
|
18.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
42,821 |
|
|
$ |
37,794 |
|
|
$ |
32,629 |
|
|
|
13.3 |
% |
|
|
15.8 |
% |
Investment income, net |
|
|
74,533 |
|
|
|
74,125 |
|
|
|
79,076 |
|
|
|
0.6 |
|
|
|
-6.3 |
|
Realized investment gains (losses) |
|
|
(6,364 |
) |
|
|
(12,262 |
) |
|
|
2,571 |
|
|
|
48.1 |
|
|
|
-576.9 |
|
Other income |
|
|
605 |
|
|
|
935 |
|
|
|
595 |
|
|
|
-35.3 |
|
|
|
57.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
111,595 |
|
|
$ |
100,592 |
|
|
$ |
114,871 |
|
|
|
10.9 |
% |
|
|
-12.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, Losses and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss settlement expenses |
|
$ |
16,773 |
|
|
$ |
13,291 |
|
|
$ |
14,869 |
|
|
|
26.2 |
% |
|
|
-10.6 |
% |
Increase in liability for future policy benefits |
|
|
23,897 |
|
|
|
23,156 |
|
|
|
15,666 |
|
|
|
3.2 |
|
|
|
47.8 |
|
Amortization of deferred policy acquisition costs |
|
|
9,287 |
|
|
|
11,568 |
|
|
|
13,385 |
|
|
|
-19.7 |
|
|
|
-13.6 |
|
Other underwriting expenses |
|
|
8,745 |
|
|
|
9,106 |
|
|
|
7,540 |
|
|
|
-4.0 |
|
|
|
20.8 |
|
Interest on policyholders accounts |
|
|
41,652 |
|
|
|
40,177 |
|
|
|
43,089 |
|
|
|
3.7 |
|
|
|
-6.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Benefits, Losses and Expenses |
|
$ |
100,354 |
|
|
$ |
97,298 |
|
|
$ |
94,549 |
|
|
|
3.1 |
% |
|
|
2.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes |
|
$ |
11,241 |
|
|
$ |
3,294 |
|
|
$ |
20,322 |
|
|
|
241.3 |
% |
|
|
-83.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Statutory Financial Measures section of this report defines data prepared in
accordance with statutory accounting practices, which is a comprehensive basis of accounting other
than U.S. GAAP. |
Our life insurance segment produced pre-tax income of $11.2 million in 2009, compared to $3.3
million in 2008 and $20.3 million in 2007. In both 2009 and 2008, our pre-tax income was lower due
to realized investment losses we experienced from OTTI charges in our portfolio of fixed maturity
and equity securities. In 2009, 2008 and 2007, OTTI charges recorded totaled $8.5 million, $8.9
million and $.1 million, respectively.
Net premiums earned increased in 2009 as compared to 2008 as well as in 2008 as compared to 2007.
The increase in net premium earned in both 2009 and 2008 is attributable to increased sales of
single premium whole life products and to our increased marketing efforts.
43
United Fire & Casualty Company Form 10-K | 2009
Net investment income in both 2009 and 2008 was lower than in 2007, which is a reflection of lower
market interest rates. Consolidated investment results are discussed in more detail later in this
section under the caption Investments.
United Life Insurance Company underwrites all of our life insurance business. Our principal life
insurance products are deferred and immediate annuities, universal life products and traditional
life (primarily single premium whole life insurance) products. We also underwrite and market other
traditional products, including term life insurance and whole life insurance. Deferred and
immediate annuities (84.1 percent), traditional life products (9.9 percent), universal life
products (5.2 percent), and other life products (0.8 percent) comprised our 2009 life insurance
premium revenues, as determined on the basis of statutory accounting practices. We do not write
variable annuities or variable insurance products.
The fixed annuity deposits that we collect are not reported as net premiums written or earned under
GAAP. Instead, we invest annuity deposits and record them as a liability against future policy
benefits. The revenue that is generated from fixed annuity products consists of policy surrender
charges and investment income. The difference between the yield we earn on our investment portfolio
and the interest we credit on our fixed annuities is known as the investment spread. The investment
spread is a major driver of the profitability for all of our annuity products.
Our annuity deposits increased 9.4 percent in 2009 compared to a decrease of 0.2 percent in 2008
and an increase of 11.1 percent in 2007. Annuity deposit levels increased from 2008 to 2009,
primarily due to consumers choosing products with less risk and guaranteed returns.
In 2009, we experienced an increase in interest on policyholders accounts, which is reflective of
the increase in annuity deposits and the lowest level of surrenders and withdrawals experienced
since 2005. In both 2008 and 2007, interest on policyholders accounts decreased, as surrenders and
withdrawals exceeded deposits, due to our annuitants seeking alternative options for their money.
The decrease in amortization of DAC in 2009 was due to modest changes in amortization schedules
implemented for the universal life and deferred annuity lines, as compared to more significant
changes in 2008. The 2008 changes were implemented because of lower than expected investment
returns, reflecting large realized capital losses, as well as an adjustment in anticipated lapse
rates, based upon recent experience. The impact of the changes each year resulted in a decrease of
$3.1 million in DAC amortization charges in 2009 as compared to 2008. Offsetting this decrease was
an increase in regular amortization charges in the traditional life line due to the growth of the
business, increasing amortization charges by $.8 million in 2009 as compared to 2008.
Refer to Critical Accounting Estimates in this section for a more detailed discussion of our life
segments deferred policy acquisition costs.
Federal Income Taxes
We reported a federal income tax benefit of $18.3 million and $20.1 million in 2009 and 2008,
respectively, resulting from a taxable loss in our property and casualty insurance operations. Our
effective federal income tax rate was 30.1 percent for 2007. Our effective federal tax rate varied
from the generally applicable federal income tax expense rate of 35.0 percent, due primarily to our
portfolio of tax-exempt securities.
As of December 31, 2009, we have a net operating loss (NOL) carryforward of $17.2 million, all of
which is due to our purchase of American Indemnity Financial Corporation in 1999. Such net
operating losses are currently available to offset future taxable income of our property and
casualty companies. NOLs totaling $.8 million and $5.5 million expire in 2010 and 2011,
respectively.
Due to our determination that we may not be able to fully realize the benefits of American
Indemnity Financial Corporations NOLs, we have recorded a valuation allowance against the NOLs. At
December 31, 2009, this valuation allowance totaled $5.6 million and remained unchanged from
December 31, 2007. The valuation allowance was reduced by $.5 million in 2007 due to utilization of
the NOLs. Based on a yearly review we determine whether the benefit of the NOLs can be realized,
and, if so, the decrease in the valuation allowance is recorded as a reduction to current federal
income tax expense. In future years, decreases to the valuation allowance, if applicable, will
continue to be recognized as a reduction to current federal income tax expense.
44
United Fire & Casualty Company Form 10-K | 2009
INVESTMENTS
Investment Environment
During both 2009 and 2008, we saw extraordinary volatility and deterioration in the financial
markets. This deterioration impacted our investment income results for
2009. It is widely believed that the economic downtown we faced in recent years appears to be over,
however the economic indicators illustrate that the recovery will be a long, slow process. We will
carefully watch the national and global economies and financial markets and monitor and modify our
investment portfolio to reflect changes in market conditions in order to match our liabilities and
maximize our investment return.
Investment Philosophy
We invest the property and casualty insurance segments assets to meet our liquidity needs and
maximize our after-tax returns while maintaining appropriate risk diversification. We invest the
life insurance segments assets primarily in investment-grade fixed maturities in order to meet our
liquidity needs, maximize our investment return and achieve a matching of assets to liabilities.
We comply with state insurance laws that prescribe the kind, quality and concentration of
investments that may be made by insurance companies. We determine the mix of our investment
portfolio based upon these state laws, our liquidity needs, our tax position and general market
conditions. We also consider the timing of our obligations, so we have cash available to pay our
obligations when they become due. We make any necessary modifications to our investment portfolio
as changing conditions warrant. We manage all but a small portion of our investment portfolio
internally.
With respect to our fixed maturity securities, our general investment philosophy is to purchase
financial instruments with the expectation that we will hold them to their maturity. However, close
management of our available-for-sale portfolio is considered necessary to maintain an approximate
matching of assets to liabilities and to adjust the portfolio to respond to changing financial
market conditions and tax considerations.
Investment Portfolio
Our invested assets at December 31, 2009 totaled $2.352 billion, compared to $2.095 billion at
December 31, 2008. At December 31, 2009, fixed maturity securities comprised 92.3 percent of our
investment portfolio, while equity securities accounted for 5.6 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.
Composition
We develop our investment strategies based on a number of factors, including estimated duration of
reserve liabilities, short- and long-term liquidity needs, projected tax status, general economic
conditions, expected rates of inflation and regulatory requirements. We manage our portfolio based
on investment guidelines approved by management, which comply with applicable statutory
regulations.
45
United Fire & Casualty Company Form 10-K | 2009
The composition of our investment portfolio at December 31, 2009, is presented in the following
table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property & Casualty |
|
|
Life |
|
|
|
|
|
|
Insurance Segment |
|
|
Insurance Segment |
|
|
Total |
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
(In Thousands) |
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
Fixed maturities(1) |
|
$ |
766,274 |
|
|
|
83.6 |
% |
|
$ |
1,401,722 |
|
|
|
97.5 |
% |
|
$ |
2,167,996 |
|
|
|
92.3 |
% |
Equity securities |
|
|
117,741 |
|
|
|
12.9 |
|
|
|
14,977 |
|
|
|
1.0 |
|
|
|
132,718 |
|
|
|
5.6 |
|
Trading securities |
|
|
12,613 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
12,613 |
|
|
|
0.5 |
|
Mortgage loans |
|
|
|
|
|
|
|
|
|
|
7,328 |
|
|
|
0.5 |
|
|
|
7,328 |
|
|
|
0.3 |
|
Policy loans |
|
|
|
|
|
|
|
|
|
|
7,947 |
|
|
|
0.6 |
|
|
|
7,947 |
|
|
|
0.3 |
|
Other long-term investments |
|
|
13,344 |
|
|
|
1.5 |
|
|
|
2,536 |
|
|
|
0.2 |
|
|
|
15,880 |
|
|
|
0.7 |
|
Short-term investments |
|
|
5,083 |
|
|
|
0.6 |
|
|
|
2,276 |
|
|
|
0.2 |
|
|
|
7,359 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
915,055 |
|
|
|
100.0 |
% |
|
$ |
1,436,786 |
|
|
|
100.0 |
% |
|
$ |
2,351,841 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Available-for-sale fixed maturities are carried at fair value. Held-to-maturity fixed
maturities are carried at amortized cost. |
At December 31, 2009, $2,158.4 million, or 99.6 percent, of our fixed maturities were
classified as available-for-sale, compared with $1,898.6 million, or 99.2 percent, at December 31,
2008. We classify our remaining fixed maturities as held-to-maturity or trading. We record
held-to-maturity securities at amortized cost. We record trading securities, primarily convertible
redeemable preferred debt securities, at fair value, with any changes in fair value recognized in
earnings.
Credit Quality
The following table is a breakdown of our fixed maturity securities for our available-for-sale,
held-to-maturity and trading security portfolios, by credit rating, at December 31, 2009 and 2008,
respectively. Information contained in the table is based upon issue credit ratings provided by
Moodys unless the rating is unavailable, and then it is obtained from Standard & Poors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
December 31, 2009 |
|
|
December 31, 2008 |
|
Rating |
|
Carrying Value |
|
|
% of Total |
|
|
Carrying Value |
|
|
% of Total |
|
AAA |
|
$ |
207,199 |
|
|
|
9.5 |
% |
|
$ |
254,753 |
|
|
|
13.3 |
% |
AA |
|
|
397,380 |
|
|
|
18.2 |
|
|
|
390,726 |
|
|
|
20.3 |
|
A |
|
|
562,795 |
|
|
|
25.8 |
|
|
|
534,074 |
|
|
|
27.8 |
|
Baa/BBB |
|
|
869,465 |
|
|
|
39.9 |
|
|
|
623,527 |
|
|
|
32.4 |
|
Other/Not Rated |
|
|
143,770 |
|
|
|
6.6 |
|
|
|
118,721 |
|
|
|
6.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,180,609 |
|
|
|
100.0 |
% |
|
$ |
1,921,801 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our total carrying value of AAA rated fixed maturity securities decreased in 2009 as
compared to 2008 because AAA agency bonds that we owned were called during 2009. Both our AA
and Baa/BBB fixed maturity securities increased due to purchases in 2009, as we sought a higher
yield in our fixed maturity portfolio. Downgrades in corporate bonds and other securities during
2009 also shifted the composition of our investment portfolio, increasing our A and Other/Not
Rated fixed maturity securities and contributing to the increase of our Baa/BBB fixed maturity
securities.
The securities in our fixed maturity portfolio at December 31, 2009, continued to be affected by
downgrades of our municipal bond holdings that occurred during 2008 and 2009.
46
United Fire & Casualty Company Form 10-K | 2009
Third-Party Guarantees
We base our investment decisions on the credit characteristics of individual securities; however,
within our municipal bond portfolio are a number of securities whose ratings were enhanced by
third-party insurance for the payment of principal and interest in the event of an issuer default.
A downgrade in the credit ratings of the insurers of these securities in 2009 and 2008 has resulted
in a corresponding downgrade in the ratings of the securities. Of the insured municipal securities
in our investment portfolio, 95.1 percent and 95.3 percent were rated single A or above, and 70.0
percent and 68.9 percent were rated AA or above at December 31, 2009 and 2008, respectively,
without the benefit of insurance. Due to the underlying financial strength of the issuers of the
securities, we believe that the loss of insurance would not have a material impact on our
operations, financial position, or liquidity.
We reviewed our investment portfolio pertaining to securities guaranteed by third parties, with
both direct and indirect exposure. We have no direct exposure in any of the guarantors that
guarantee our investments. Our largest indirect exposure with a single guarantor totaled $129.7
million or 31.5 percent of our insured municipal securities for December 31, 2009 as compared to
$133.5 million or 31.7 percent for December 31, 2008. Our five largest indirect exposures to
financial guarantors accounted for 79.6 percent and 79.0 percent of our insured municipal
securities at December 31, 2009 and 2008, respectively.
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 portfolios, at December 31, 2009 is 6.0 years compared to 6.3 years at December 31, 2008.
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 portfolios, at December 31, 2009 is 7.3
years compared to 7.7 years at December 31, 2008.
47
United Fire & Casualty Company Form 10-K | 2009
The amortized cost and fair value of held-to-maturity, available-for-sale and trading securities at
December 31, 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. Mortgage-backed securities and
collateralized mortgage obligations may be subject to prepayment risk and are therefore not
categorized by contractual maturity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-To-Maturity |
|
|
Available-For-Sale |
|
|
Trading |
|
(In Thousands) |
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
December 31, 2009 |
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
Due in one year or less |
|
$ |
255 |
|
|
$ |
259 |
|
|
$ |
15,325 |
|
|
$ |
15,631 |
|
|
$ |
|
|
|
$ |
|
|
Due after one year through five years |
|
|
6,636 |
|
|
|
6,613 |
|
|
|
114,234 |
|
|
|
120,008 |
|
|
|
5,657 |
|
|
|
6,101 |
|
Due after five years through 10 years |
|
|
655 |
|
|
|
694 |
|
|
|
525,760 |
|
|
|
548,873 |
|
|
|
|
|
|
|
|
|
Due after 10 years |
|
|
|
|
|
|
|
|
|
|
70,428 |
|
|
|
74,210 |
|
|
|
6,067 |
|
|
|
6,512 |
|
Mortgage-backed securities |
|
|
4 |
|
|
|
4 |
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,550 |
|
|
$ |
7,570 |
|
|
$ |
725,749 |
|
|
$ |
758,724 |
|
|
$ |
11,724 |
|
|
$ |
12,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance Segment
For our life insurance segment, the weighted average duration of our fixed maturity
available-for-sale, held-to-maturity and trading portfolios, at December 31, 2009 and 2008 is 4.3
years.
The amortized cost and fair value of held-to-maturity, available-for-sale and trading securities at
December 31, 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. Mortgage-backed securities and
collateralized mortgage obligations may be subject to prepayment risk and are therefore not
categorized by contractual maturity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-To-Maturity |
|
|
Available-For-Sale |
|
(In Thousands) |
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
December 31, 2009 |
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
Due in one year or less |
|
$ |
|
|
|
$ |
|
|
|
$ |
141,733 |
|
|
$ |
143,860 |
|
Due after one year through five years |
|
|
570 |
|
|
|
571 |
|
|
|
943,980 |
|
|
|
991,351 |
|
Due after five years through 10 years |
|
|
|
|
|
|
|
|
|
|
181,616 |
|
|
|
181,752 |
|
Due after 10 years |
|
|
|
|
|
|
|
|
|
|
65,203 |
|
|
|
63,752 |
|
Mortgage-backed securities |
|
|
530 |
|
|
|
603 |
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
|
955 |
|
|
|
976 |
|
|
|
17,452 |
|
|
|
18,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,055 |
|
|
$ |
2,150 |
|
|
$ |
1,349,984 |
|
|
$ |
1,399,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
We invest the premiums received from our policyholders and annuitants in order to generate
investment income, which is an important component of our revenues and profitability. The ability
to increase investment income is affected by factors that are beyond our control and which may
adversely impact investment income. These factors include: volatility in the financial markets,
economic growth, inflation, interest rates, world political conditions, terrorism attacks or
threats, adverse events affecting other companies in our industry or the industries in which we
invest and other unpredictable national or world events.
48
United Fire & Casualty Company Form 10-K | 2009
Our investment results are summarized in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change |
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
As of and for the years ended December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
vs. 2008 |
|
|
vs. 2007 |
|
|
Investment income, net |
|
$ |
106,075 |
|
|
$ |
107,577 |
|
|
$ |
122,439 |
|
|
|
-1.4 |
% |
|
|
-12.1 |
% |
Realized investment gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment charges |
|
$ |
(18,307 |
) |
|
$ |
(9,904 |
) |
|
$ |
(105 |
) |
|
|
-84.8 |
% |
|
|
N/A |
|
Other realized investment gains (losses) |
|
|
5,128 |
|
|
|
(479 |
) |
|
|
9,775 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized investment gains (losses) |
|
$ |
(13,179 |
) |
|
$ |
(10,383 |
) |
|
$ |
9,670 |
|
|
|
-26.9 |
% |
|
|
-207.4 |
% |
|
Net unrealized gains, after tax |
|
$ |
82,491 |
|
|
$ |
25,543 |
|
|
$ |
85,579 |
|
|
|
222.9 |
% |
|
|
-70.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2009, our net investment income (pre-tax) declined $1.5 million to $106.1 million as
compared to the same period in 2008. The decline was due to the following factors: lower market
interest rates earned on our investment portfolio, which also affected the returns on our
short-term investments and cash and cash equivalents; agency bonds that were called during 2009,
the proceeds of which we reinvested at lower interest rates than the called bonds carried; and the
reduction or discontinuation of dividend payments by some of our equity securities that previously
had paid regular dividends.
Also contributing to the decline were changes in the value of certain investments in limited
liability partnerships, which we account for under the equity method of accounting. Our largest
investment is in a partnership fund that invests in U.S. subregional banks. We continue to hold our
investments in limited liability partnerships, as it is anticipated that the performance of these
holdings will improve as the industry recovers.
In 2008, our net investment income declined $14.9 million to $107.6 million. This decrease is
attributable to lower market interest rates in 2008 than in 2007; mostly on our short-term and
fixed maturity securities, which dropped an average of 203 basis points in 2008. This decrease is
also attributable to the net cash outflows from our annuity business, which decreased our invested
assets by $73.0 million in 2008 and $92.8 million in 2007. Further contributing to this decline was
a loss in investment income of $4.5 million due to the performance of our investments in certain
limited liability partnership holdings.
The following table summarizes the components of net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Investment income |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on fixed maturities |
|
$ |
106,023 |
|
|
$ |
100,755 |
|
|
$ |
103,632 |
|
Dividends on equity securities |
|
|
3,950 |
|
|
|
5,749 |
|
|
|
6,190 |
|
Loss on other long-term investments (1) |
|
|
(1,133 |
) |
|
|
(4,442 |
) |
|
|
(954 |
) |
Interest on mortgage loans |
|
|
587 |
|
|
|
851 |
|
|
|
1,712 |
|
Interest on short-term investments |
|
|
558 |
|
|
|
3,127 |
|
|
|
2,634 |
|
Interest on cash and cash equivalents |
|
|
1,094 |
|
|
|
4,710 |
|
|
|
12,327 |
|
Other |
|
|
1,253 |
|
|
|
1,588 |
|
|
|
1,208 |
|
|
|
|
|
|
|
|
|
|
|
Total investment income |
|
$ |
112,332 |
|
|
$ |
112,338 |
|
|
$ |
126,749 |
|
Less investment expenses |
|
|
6,257 |
|
|
|
4,761 |
|
|
|
4,310 |
|
|
|
|
|
|
|
|
|
|
|
Investment income, net |
|
$ |
106,075 |
|
|
$ |
107,577 |
|
|
$ |
122,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes an adjustment for the changes in value of our holdings in limited liability
partnership funds, which are accounted for under the equity method of accounting. |
In 2009, 94.4 percent of our gross investment income originated from interest on fixed
maturities, compared to 89.7 and 81.8 percent in 2008 and 2007, respectively.
49
United Fire & Casualty Company Form 10-K | 2009
The following table details our yield on average invested assets for 2009, 2008 and 2007, which is
based on our invested assets (including money market accounts) at the beginning and end of the year
divided by net investment income (after the deduction of investment expenses and excluding realized
gains and losses).
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
Average |
|
|
Investment |
|
|
Annualized Yield on |
|
Years ended December 31 |
|
Invested Assets |
|
|
Income, Net |
|
|
Average Invested Assets |
|
2009 |
|
$ |
2,307,260 |
|
|
$ |
106,075 |
|
|
|
4.6 |
% |
2008 |
|
|
2,211,780 |
|
|
|
107,577 |
|
|
|
4.9 |
% |
2007 |
|
|
2,219,510 |
|
|
|
122,439 |
|
|
|
5.5 |
% |
Securities Lending
We participate in a securities lending program administered by The Northern Trust Company
(Northern Trust), which generates investment income and provides discounts on other investment
fees we are charged by Northern Trust. Pursuant to the lending agreement, certain of our fixed
maturity securities are loaned to other institutions for short periods of time. Borrowers of these
securities must deposit collateral, which is generally in the form of cash, with Northern Trust, as
our agent, that is equal to at least 102% of the market value of the loaned securities plus accrued
interest. The value of the loaned securities is marked to market daily by Northern Trust at an
aggregate level per borrower. As the market value of the loaned securities fluctuates, the borrower
either deposits additional collateral or Northern Trust refunds collateral to the borrower in order
to maintain the collateral level at 102%. We retain the right to terminate the loan at any time,
whereupon the borrower must return the loaned securities to Northern Trust. If the borrower
defaults and does not return the securities, Northern Trust will use the deposited collateral to
purchase equivalent securities for us. However, we would receive the deposited collateral in place
of the borrowed securities if Northern Trust is unable to purchase equivalent securities. Our
participation in the securities lending program generated investment income of $139,000 in 2009 and
$89,000 in 2008. There were no securities on loan under the program at December 31, 2009 and 2008.
We resumed our participation in the securities lending program in January 2010.
Realized Investment Gains and Losses
In 2009, we reported realized investment losses of $13.2 million, compared to losses of $10.4
million and gains of $9.7 million in 2008 and 2007, respectively. The following table summarizes
the components of our realized investment gains or losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Realized investment gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
(4,117 |
) |
|
$ |
(11,728 |
) |
|
$ |
2,078 |
|
Equity securities |
|
|
(11,362 |
) |
|
|
1,427 |
|
|
|
6,020 |
|
Trading securities |
|
|
1,965 |
|
|
|
(82 |
) |
|
|
1,572 |
|
Other long-term investments |
|
|
332 |
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized investment gains (losses) |
|
$ |
(13,179 |
) |
|
$ |
(10,383 |
) |
|
$ |
9,670 |
|
|
|
|
|
|
|
|
|
|
|
The realized investment losses in 2009 and 2008 were primarily due to pre-tax OTTI charges on
our fixed maturity securities and equity securities. We recorded $18.3 million in investment
write-downs in 2009 compared to $9.9 million and $.1 million in 2008 and 2007, respectively. The
write-downs that occurred in 2009 and 2008 represent 0.8 percent and 0.5 percent of our investment
portfolio, respectively. In 2007, our realized investment gains were due primarily to cash received
as a result of transactions that impacted companies whose securities we held.
50
United Fire & Casualty Company Form 10-K | 2009
The following table summarizes the composition of our OTTI charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Other-than-temporary-impairment charges (pre-tax) |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
5,759 |
|
|
$ |
8,597 |
|
|
$ |
105 |
|
Equity securities |
|
|
12,548 |
|
|
|
1,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary-impairment charges |
|
$ |
18,307 |
|
|
$ |
9,904 |
|
|
$ |
105 |
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized Gains and Losses
As of December 31, 2009, net unrealized gains, after tax, totaled $82.5 million, compared to $25.5
million and $85.6 million as of December 31, 2008 and 2007, respectively. In 2009, an improvement
in the equity markets and a decrease in market interest rates led to an increase in the carrying
value of our fixed maturity and equity securities, which improved our net unrealized gains. In 2008 and 2007, depressed bond and stock prices,
particularly for our holdings of investments in financial institutions, contributed to the decrease
in net unrealized gains. We have and will continue to closely monitor market conditions and
evaluate the long-term impact of the market volatility experienced in recent years on all of our
investment holdings.
Changes in unrealized gains on available-for-sale securities do not affect net income (loss) and
earnings (loss) per share but do impact comprehensive income (loss), stockholders equity and book
value per share. We believe that our unrealized losses on available-for-sale securities at December
31, 2009 are temporary based upon both our current analysis of the issuers of the securities that
we hold and on current market conditions. It is possible that we could recognize impairment losses
in future periods on securities that we own at December 31, 2009, if future events and information
cause us to determine that a decline in value is other-than-temporary. However, we endeavor to
invest in high quality assets to provide protection from future credit quality issues and
corresponding impairment write-downs.
The following table summarizes the change in our net unrealized appreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net changes in unrealized investment appreciation |
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale fixed maturity securities |
|
$ |
126,555 |
|
|
$ |
(70,516 |
) |
|
$ |
5,547 |
|
Equity securities |
|
|
24,673 |
|
|
|
(58,130 |
) |
|
|
(13,985 |
) |
Short-term investments |
|
|
|
|
|
|
|
|
|
|
56 |
|
Deferred policy acquistion costs |
|
|
(63,425 |
) |
|
|
36,284 |
|
|
|
(3,831 |
) |
Income tax effect |
|
|
(30,855 |
) |
|
|
32,326 |
|
|
|
4,273 |
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized appreciation |
|
$ |
56,948 |
|
|
$ |
(60,036 |
) |
|
$ |
(7,940 |
) |
|
|
|
|
|
|
|
|
|
|
Refer to Critical Accounting Estimates in this section for a detailed
discussion of our policy for recording OTTI charges.
51
United Fire & Casualty Company Form 10-K | 2009
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity measures our ability to generate sufficient cash flows to meet our short- and long-term
cash obligations. Our cash inflows are primarily a result of premiums, annuity deposits,
reinsurance recoveries, sales or maturities of investments, and investment income. Historically, we
have generated substantial cash inflows from operations. It is our policy to invest the cash
generated from operations in securities with maturities that 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 for property and casualty
claims; payment of policyholder benefits under life insurance contracts; annuity withdrawals;
payment of commissions, premium taxes, income taxes, operating expenses, dividends; 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.
In the insurance industry there generally is a time delay between when premiums are collected and
when insurance claims or policyholder benefits are paid. During periods of positive operating cash
flows, we are able to invest a portion of our operating cash flows to fund future insurance claims
and policyholder benefit payments. During periods of negative operating cash flows, such as during
a decline in premium revenues, we may need to sell investments to fund payments to claimants and
policyholders. Additionally, if we experience several significant catastrophes over a relatively
short period of time, or if we experience an extraordinary catastrophe, it is possible that
investments may have to be sold before their maturity dates to fund payments, which could either
result in investment gains or losses.
Our cash flows from operations were sufficient to meet our liquidity needs in 2009, 2008 and 2007.
We invest funds required for short-term cash needs primarily in money market accounts, which are
classified as cash equivalents. At December 31, 2009, our cash and cash equivalents included $96.2
million related to these money market accounts, compared with $70.7 million at December 31, 2008.
If our operating and investing cash flows are not sufficient to support our operations, we may also
borrow up to $50.0 million on a bank line of credit. Under the terms of our credit agreement,
interest on outstanding notes is payable at the lenders prevailing prime rate, minus 1.0 percent.
We did not utilize our line of credit during 2009 or 2008, other than to secure letters of credit
utilized in our reinsurance operations. As of December 31, 2009, none of our line of credit was
allocated for that purpose compared to $.2 million as of December 31, 2008.
The following table displays a summary of cash sources and uses in 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Summary |
|
Years Ended December 31, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
100,408 |
|
|
$ |
43,904 |
|
|
$ |
105,780 |
|
Investing activities |
|
|
(130,089 |
) |
|
|
(107,255 |
) |
|
|
(16,332 |
) |
Financing activities |
|
|
110,950 |
|
|
|
(79,632 |
) |
|
|
(91,928 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
81,269 |
|
|
$ |
(142,983 |
) |
|
$ |
(2,480 |
) |
|
|
|
|
|
|
|
|
|
|
52
United Fire & Casualty Company Form 10-K | 2009
Operating Activities
Net cash flows provided by operating activities totaled $100.4 million in 2009, compared to $43.9
million in 2008 and $105.8 million in 2007, respectively. Significant sources of operating cash
flows are derived from underwriting operations and net investment income. Cash flows for 2009
reflect an increase in loss payments; a reduction in other assets of $29.0 million for the
conclusion of certain litigation related to Hurricane Katrina; and a reduction in reinsurance
recoveries due to the collection of payments during the year and the improvement in our catastrophe
experience in 2009 as compared to 2008.
Net cash flows in 2008 were reduced primarily due to the increase in claims incurred, (including
the impact of higher catastrophe losses). In addition, in 2008 we were required to make a cash
deposit of $29.0 million in connection with certain litigation related to Hurricane Katrina.
Investing Activities
Net cash flows used in investment activities totaled $130.1 million in 2009, compared to $107.3
million in 2008 and $16.3 million in 2007. The availability of more cash from financing activities
in 2009, primarily due to the higher level of annuity deposits, allowed us to invest at a level
similar to 2008.
In 2009, we continued to purchase a higher level of corporate fixed maturities rather than other
investment vehicles such as short-term investments, which were less profitable due to the lower
market interest rates. In 2008, we substantially increased our purchases of corporate fixed
maturity securities, as the interest rates on these securities increased during 2008.
Financing Activities
Net cash flows provided by financing activities totaled $111.0 million in 2009, compared to net
cash used of $79.6 million and $91.9 million in 2008 and 2007, respectively. Net cash flows from
financing activities improved significantly in 2009, primarily due to the life insurance segments
annuity and universal life contract deposits exceeding withdrawals. We began to experience a
slowdown in the amount of withdrawals in 2008, which is indicative of the change in economic
conditions and the inclination of consumers to choose products with less risk and guaranteed
returns. This slowdown continued into 2009, with 2009 experiencing the largest reduction of
withdrawals since 2005.
Net cash flows from financing activities were impacted by a combination of factors in 2008 and
2007. Cash outflows associated with our life insurance segments annuity portfolio had increased
from historical levels in connection with the increased level of surrenders and withdrawals
experienced in recent years. Net cash used in these activities totaled $48.8 million and $61.7
million for 2008 and 2007, respectively. The increase in withdrawals is described in the earlier
Life Insurance Segment section.
During 2009, 2008 and 2007, pursuant to authorization by our Board of Directors, we repurchased
92,721, 580,792 and 497,500 shares of common stock respectively, which used cash totaling $1.5
million in 2009, $14.8 million in 2008 and $16.1 million in 2007. Dividend payments to our common
stockholders totaled $16.0 million in 2009, compared with $16.2 million in 2008 and $15.3 million
in 2007.
CAPITAL RESOURCES
Stockholders Equity
Stockholders equity increased from $641.7 million at December 31, 2008, to $672.7 million at
December 31, 2009, an increase of 4.8 percent. The increase in stockholders equity between years
is primarily due to an increase in net unrealized appreciation on investments of $56.9 million,
after-tax. This was somewhat offset by a net loss of $10.4 million; dividends paid of $16.0
million; repurchase of common stock of $1.5 million; and the change in
underfunded status of our employee benefit plans of $.2 million, net of tax. The book value per
share of our common stock was $25.35 at December 31, 2009, compared with $24.10 at December 31,
2008.
53
United Fire & Casualty Company Form 10-K | 2009
Contractual Obligations and Commitments
The following table shows our contractual obligations and commitments, including our estimated
payments due by period, at December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period |
|
(In Thousands) |
|
|
|
|
|
Less Than |
|
|
One to |
|
|
Three to |
|
|
More Than |
|
Contractual Obligations |
|
Total |
|
|
One Year |
|
|
Three Years |
|
|
Five Years |
|
|
Five Years |
|
Future policy benefit reserves (1) |
|
$ |
1,866,277 |
|
|
$ |
200,388 |
|
|
$ |
419,028 |
|
|
$ |
402,799 |
|
|
$ |
844,062 |
|
Loss and loss settlement expense reserves |
|
|
606,045 |
|
|
|
221,304 |
|
|
|
193,244 |
|
|
|
90,907 |
|
|
|
100,590 |
|
Operating leases |
|
|
16,623 |
|
|
|
4,077 |
|
|
|
6,733 |
|
|
|
4,801 |
|
|
|
1,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,488,945 |
|
|
$ |
425,769 |
|
|
$ |
619,005 |
|
|
$ |
498,507 |
|
|
$ |
945,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This projection of our obligation for future policy benefits considers only actual
future cash outflows. The future policy benefit reserves presented on the consolidated balance
sheet is the net present value of the benefits to be paid, less the net present value of future net
premiums. |
Future Policy Benefits
Future payments to be made to policyholders and beneficiaries must be actuarially estimated and are
not determinable from the contract. The projected payments are based on our current assumptions for
mortality, morbidity and policy lapse, but are not discounted with respect to interest.
Additionally, the projected payments are based on the assumption that the holders of our annuities
and life insurance policies will withdraw their account balances from our company upon the
expiration of their contracts. Policies must remain in-force for the policyholder or beneficiary to
receive the benefit under the policy. Depending on the terms of a particular policy, future
premiums from the policyholder may be required for the policy to remain in-force. The future policy
benefit reserves for the life insurance segment reported on the Consolidated Balance Sheets are
generally based on the historical assumptions for mortality and policy lapse rates and are on a
discounted basis. Accordingly, the amounts presented above for future policy benefit reserves
significantly exceeds the amount of future policy benefit reserves reported on our Consolidated
Balance Sheets at December 31, 2009.
Loss and Loss Settlement Expense Reserves
The amounts presented are estimates of the dollar amounts and time periods in which we expect to
pay out our gross loss and loss settlement expense reserves. These amounts are estimates based upon
historical payment patterns and may not represent actual future payments because the timing of
future payments may vary from the stated contractual obligation. Refer to Critical Accounting
Estimates: Loss and Loss Settlement Expenses Property and Casualty Insurance Segment in this
section for further discussion.
Operating Leases
Our operating lease obligations are for the rental of office space, vehicles, computer equipment
and office equipment.
Off-Balance Sheet Arrangements
Pursuant to an agreement with one of our limited liability partnership
holdings, we are contractually committed to make capital contributions up to
$15.0 million, upon request by the partnership, through December 31, 2017. As
of December 31, 2009, our remaining potential contractual obligation was $13.1
million.
54
United Fire & Casualty Company Form 10-K | 2009
ENTERPRISE RISK MANAGEMENT
Enterprise risk management (ERM) is a methodology that helps an organization assess and manage
its overall exposure to risk. ERM begins as a capital preservation process that helps insurers
identify, quantify and manage risks from all sources that exist throughout the corporation,
including risks arising from investments, underwriting, and operations. ERM considers the
accumulation and diversification of risk and utilizes a companys past experience to help evaluate
future business plans and manage risk.
We employ a multi-disciplinary approach to risk identification and evaluation from claims to
underwriting to financial to investments. Members of our ERM committee include our Chief Executive
Officer, Chief Financial Officer, Executive Vice President, Vice President of Claims, Vice
President of Corporate Underwriting, Chief Investment Officer and Vice President/Chief Operating
Officer of our life insurance subsidiary (United Life Insurance Company), as well as United Life
Insurance Companys independent actuary. During 2009, this committee met on a quarterly basis with
two members of our Board of Directors to oversee our risk management process and to implement risk
management strategies. At the November 2009 meeting of our Board of Directors, the directors
established a Risk Management Committee consisting of four directors. Going forward, this committee
will meet on a quarterly basis and will continue meeting jointly with the ERM committee.
During its meetings, the ERM committee discusses the risks that our company faces, as well as the
controls that are in place to mitigate those risks. These are not new ideas management has
actively and successfully managed risks throughout our companys history. Collectively, the
committee has identified two broad categories of risk faced by our company insurance risk and
operational risk. Types of insurance risks generally include, but are not limited to, those risks
associated with catastrophes, geographical concentrations of property insured, business mix,
underwriting practices, loss reserving practices, policy pricing, and the actions of our
competitors. Types of operational risks we face generally include, but are not limited to, those
risks associated with business continuity planning, information technology, executive succession
planning, regulatory and legal compliance, diversification and quality of investments and the
application of accounting policies and procedures.
ERM issues are discussed both during our quarterly meetings of the Board of Directors and at our
semi-annual managers meetings. At these meetings, directors and managers are updated on ERM issues
and the ongoing efforts of the ERM committee. The work of our ERM committee has led to the
development of new tools designed to aid in the evaluation and mitigation of underwriting risks.
In 2009, we established a Business Continuity group that enables us to be better prepared in the
event of another disaster similar to the floods we experienced in 2008. The Business Continuity
group evaluated our risks that are specific to natural perils such as flooding, while our ERM
Committee evaluated other risks we have such as cyber events, and directors and officers liability.
One of the most significant risks in our business is our exposure to catastrophic events. Although
catastrophes are inherently unpredictable, we use various analyses and methods, including computer
modeling techniques, to analyze catastrophic events and the risks associated with them. We use
these analyses and methods to make underwriting and reinsurance decisions designed to manage our
exposure to losses associated with catastrophic events.
As part of our risk management process, we use third-party proprietary computer modeling of
windstorm/hail, hurricane and earthquake events, to aid in estimating the likelihood that the loss
from a single event occurring in a one-year timeframe will equal or exceed a particular amount.
Catastrophe modeling requires a significant amount of judgment and a number of assumptions and
relies upon inputs based on experience, science, engineering and history. We utilize various tools
and techniques to evaluate our catastrophe exposures including utilizing multiple catastrophe
models, analysis of realistic disaster scenarios, evaluation of total insured values and exposure
aggregates. Such models may fail to account for risks that are outside of the range of normal
probability or that are otherwise unforeseeable. Consequently, catastrophe modeling estimates are
subject to significant uncertainty. In addition, more than one such event could occur in any
period.
55
United Fire & Casualty Company Form 10-K | 2009
There are no industry-standard methodologies or assumptions for projecting catastrophe exposure.
Accordingly, catastrophe estimates provided by different insurers may not be comparable.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are defined as those that are representative of significant judgments
and uncertainties and that potentially may result in materially different results under different
assumptions and conditions. We base our discussion and analysis of our results of operations and
financial condition on the amounts reported in our Consolidated Financial Statements, which we have
prepared in accordance with GAAP. As we prepare these Consolidated Financial Statements, we must
make estimates and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses for the reporting period. We evaluate our estimates on an
ongoing basis. We base our estimates on historical experience and on other assumptions that we
believe to be reasonable under the circumstances. Actual results could differ from those estimates.
We believe that our most critical accounting estimates are as follows.
Investment Valuation
Upon acquisition, we classify investments in marketable securities as held-to-maturity,
available-for-sale, or trading. We record investments in held-to-maturity fixed maturities at
amortized cost. We record available-for-sale fixed maturity securities, trading securities and
equity securities at fair value. Other long-term investments are recorded on the equity method of
accounting. We record mortgage loans at amortized cost and policy loans at the outstanding loan
amount due from policyholders.
In general, investment securities are exposed to various risks, such as interest rate risk, credit
risk, and overall market volatility risk. Therefore, it is reasonably possible that changes in the
fair value of our investment securities reported at fair value will occur in the near term and such
changes could materially affect the amounts reported in the Consolidated Financial Statements.
Also, it is reasonably possible that changes in the carrying values of our limited liability
partnerships could occur in the future and such changes could materially affect our results of
operations and financial condition on the amounts reported in our Consolidated Financial
Statements.
Determining Fair Value
We value our available-for-sale fixed maturities, trading securities, equity securities, short-term
investments and money market accounts at fair value in accordance with the applicable FASB guidance
on fair value measurements and disclosures. We exclude unrealized appreciation or depreciation on
investments carried at fair value, with the exception of trading securities, from net income and
report it, net of applicable deferred income taxes, as a component of accumulated other
comprehensive income in stockholders equity.
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.
To determine the fair value of the majority of our investments, we utilize prices obtained from
independent, nationally recognized pricing services. We obtain one price for each security. When
the pricing services cannot provide a determination of fair value for a specific security, we
obtain non-binding price quotes from broker-dealers that we have had several years experience with and who have demonstrated knowledge of the subject
security. We request and utilize one broker quote per security.
56
United Fire & Casualty Company Form 10-K | 2009
We validate the prices obtained from pricing services and brokers prior to their use for reporting
purposes by evaluating their reasonableness on a monthly basis. Our validation process includes a
review for unusual fluctuations. In our opinion, the pricing obtained at December 31, 2009, was
reasonable.
In order to determine the proper classification in the fair value hierarchy for each security where
the price is obtained from an independent pricing service, we obtain and evaluate the vendors
pricing procedures and inputs used to price the security, which include unadjusted quoted market
prices for identical securities, such as a New York Stock Exchange closing price and quoted prices
for identical securities in markets that are not active. For fixed maturity securities, an
evaluation of interest rates and yield curves observable at commonly quoted intervals, volatility,
prepayment speeds, and credit risks and default rates may also be performed. We have determined
that these processes and inputs result in fair values and classifications consistent with the
applicable FASB guidance on fair value measurements.
We review our fair value hierarchy categorizations on a quarterly basis, at which time the
classification of certain financial instruments may change if the input observations have changed.
The following table presents the categorization for our financial instruments measured at fair
value on a recurring basis in our Consolidated Balance Sheets at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
Fair Value Measurements |
|
Description |
|
December 31, 2009 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Assets of December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale fixed maturities |
|
$ |
2,158,391 |
|
|
$ |
|
|
|
$ |
2,127,932 |
|
|
$ |
30,459 |
|
Equity securities |
|
|
132,718 |
|
|
|
132,428 |
|
|
|
290 |
|
|
|
|
|
Trading securities |
|
|
12,613 |
|
|
|
1,519 |
|
|
|
11,094 |
|
|
|
|
|
Short-term investments |
|
|
7,359 |
|
|
|
1,100 |
|
|
|
6,005 |
|
|
|
254 |
|
Money market accounts |
|
|
96,163 |
|
|
|
96,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of December 31, 2009 |
|
$ |
2,407,244 |
|
|
$ |
231,210 |
|
|
$ |
2,145,321 |
|
|
$ |
30,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of securities that are categorized as Level 1 is based on quoted market prices
that are readily and regularly available.
The fair value of securities that are categorized as Level 2 is determined by management in
reliance 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.
57
United Fire & Casualty Company Form 10-K | 2009
The following table provides a summary of the changes in fair value of our Level 3 securities
for 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
Equity |
|
|
Short-term |
|
|
|
|
(In Thousands) |
|
fixed maturities |
|
|
securities |
|
|
investments |
|
|
Total |
|
Balance at
January 1, 2009 |
|
$ |
6,254 |
|
|
$ |
1,851 |
|
|
$ |
|
|
|
$ |
8,105 |
|
Realized gains (1) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
Unrealized gains (1) |
|
|
331 |
|
|
|
|
|
|
|
|
|
|
|
331 |
|
Purchases and disposals |
|
|
65 |
|
|
|
|
|
|
|
254 |
|
|
|
319 |
|
Transfers in |
|
|
26,010 |
|
|
|
|
|
|
|
|
|
|
|
26,010 |
|
Transfers out |
|
|
(2,200 |
) |
|
|
(1,851 |
) |
|
|
|
|
|
|
(4,051 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
30,459 |
|
|
$ |
|
|
|
$ |
254 |
|
|
$ |
30,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Realized gains are recorded as a component of current operations whereas unrealized
gains are recorded as a component of comprehensive income. |
The amount reported in the previous table as transfers in consisted of $22.7 million in
available-for-sale fixed maturities that were primarily private placement securities that had no
observable price available at December 31, 2009, and $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. The $4.1 million in transfers out resulted from available-for-sale
fixed maturities and equity securities that previously had no observable price at December 31,
2008, but for which observable prices were available at December 31, 2009.
The
following table presents the composition of our Level 3 securities at
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level |
|
|
% of Total |
|
|
Total from |
|
|
% of |
|
(In Thousands) |
|
Three |
|
|
Fair Value |
|
|
Balance Sheet |
|
|
Level Three |
|
Available-For-Sale Fixed Maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligation |
|
$ |
|
|
|
|
|
% |
|
$ |
18,952 |
|
|
|
|
% |
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
All other government: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury |
|
|
|
|
|
|
|
|
|
|
35,650 |
|
|
|
|
|
Agency |
|
|
|
|
|
|
|
|
|
|
70,625 |
|
|
|
|
|
States, municipalities and political
subdivisions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligations |
|
|
|
|
|
|
|
|
|
|
390,378 |
|
|
|
|
|
Special revenue |
|
|
1,110 |
|
|
|
3.6 |
|
|
|
227,362 |
|
|
|
0.5 |
|
All foreign bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian |
|
|
|
|
|
|
|
|
|
|
58,826 |
|
|
|
|
|
Other foreign |
|
|
1,394 |
|
|
|
4.6 |
|
|
|
82,414 |
|
|
|
1.7 |
|
Public utilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
|
70 |
|
|
|
0.2 |
|
|
|
224,004 |
|
|
|
|
|
Natural gas |
|
|
|
|
|
|
|
|
|
|
57,806 |
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
3,778 |
|
|
|
|
|
Corporate bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank, trust, and insurance |
|
|
14,028 |
|
|
|
46.1 |
|
|
|
289,209 |
|
|
|
4.8 |
|
Transportation |
|
|
|
|
|
|
|
|
|
|
32,187 |
|
|
|
|
|
Energy |
|
|
|
|
|
|
|
|
|
|
152,339 |
|
|
|
|
|
Technology |
|
|
|
|
|
|
|
|
|
|
89,172 |
|
|
|
|
|
Basic industry |
|
|
4,806 |
|
|
|
15.7 |
|
|
|
109,567 |
|
|
|
4.4 |
|
Credit cyclicals |
|
|
2,848 |
|
|
|
9.4 |
|
|
|
72,585 |
|
|
|
3.9 |
|
Other |
|
|
6,203 |
|
|
|
20.4 |
|
|
|
243,535 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-For-Sale Fixed Maturities |
|
$ |
30,459 |
|
|
|
100.0 |
% |
|
$ |
2,158,391 |
|
|
|
1.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term Investments |
|
$ |
254 |
|
|
|
100.0 |
% |
|
$ |
7,359 |
|
|
|
3.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
58
United Fire & Casualty Company Form 10-K | 2009
For further discussion on fair value measurements and disclosures refer to Note 3. Fair Value
of Financial Instruments contained in Part II, Item 8, Financial Statements and Supplementary
Data.
Other-Than-Temporary Impairment Charges
We continually monitor the difference between our cost basis and the estimated fair value of our
investments. Our accounting policy for impairment recognition requires OTTI charges to be recorded
when we determine that it is more likely than not that we will be unable to collect all amounts due
according to the contractual terms of the fixed maturity security or that the anticipated recovery
in fair value of the equity security will not occur in a reasonable amount of time. Impairment
charges on investments are recorded based on the fair value of the investments at the measurement
date. Factors considered in evaluating whether a decline in value is other-than-temporary include:
the length of time and the extent to which fair value has been less than cost; the financial
condition and near-term prospects of the issuer; our intention to hold the investment; and the
likelihood that we will be required to sell the investment. As of December 31, 2009, we had a
number of securities where fair value was less than our cost. The total unrealized depreciation on
these securities totaled $14.7 million at December 31, 2009, compared with $82.6 million at
December 31, 2008. At December 31, 2009, the largest unrealized loss, after tax, on any single
fixed maturity or equity security was $1.7 million. Our rationale for not recording OTTI charges on
these securities is discussed in Part II, Item 8, Note 2, Summary of Investments.
Deferred Policy Acquisition Costs Property and Casualty Insurance Segment
We record an asset for DAC, such as commissions, premium taxes and other variable costs incurred in
connection with the writing of our property and casualty lines of business.
The following table summarizes DAC for December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
Deferred policy acquisition costs at beginning of the year |
|
$ |
52,222 |
|
|
$ |
58,291 |
|
Current deferred costs |
|
|
98,946 |
|
|
|
111,521 |
|
Current amortization |
|
|
(105,606 |
) |
|
|
(117,590 |
) |
|
|
|
|
|
|
|
Deferred policy acquistion costs at end of year |
|
$ |
45,562 |
|
|
$ |
52,222 |
|
|
|
|
|
|
|
|
This asset is amortized over the life of the policies written, generally one year. We assess
the recoverability of DAC on a quarterly basis by line of business. This assessment is performed by
comparing recorded unearned premium to the sum of unamortized DAC and estimates of expected losses
and loss settlement expenses. If the sum of these costs exceeds the amount of recorded unearned
premium, (i.e., the line of business is expected to generate an operating loss) the excess is
recognized as an offset against the asset established for DAC. This offset is referred to as a
premium deficiency charge. If the amount of the premium deficiency charge is greater than the
unamortized deferred policy acquisition cost asset, a liability will be recorded for the excess.
To calculate the premium deficiency charge, we estimate expected losses and loss settlement
expenses by using an assumed loss and loss settlement expense ratio which approximates that of the
recent past. This is the only assumption we utilize in our calculation. Changes in this assumption
can have a significant impact on the amount of premium deficiency charge calculated. We do not
consider anticipated investment income in determining the recoverability of deferred costs.
59
United Fire & Casualty Company Form 10-K | 2009
The following table illustrates the hypothetical impact on the premium deficiency charge recorded
at December 31, 2009 of reasonably likely changes in the assumed loss and loss settlement expense
ratio utilized for purposes of this calculation. The entire impact of these changes would be
recognized through income as other underwriting
expenses. The base amount indicated below is the actual premium deficiency charge recorded as of
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sensitivity Analysis Impact of Changes in Assumed
Loss and Loss Settlement Expense Ratios
(In Thousands) |
|
-10% |
|
|
-5% |
|
|
Base |
|
|
+5% |
|
|
+10% |
|
Premium deficiency charge estimated |
|
|
2,951 |
|
|
|
3,747 |
|
|
|
3,014 |
|
|
|
8,272 |
|
|
|
14,477 |
|
Actual future results could differ materially from our current estimates, requiring
adjustments to the recorded deferred policy acquisition cost asset. Such adjustments are recorded
through operations in the period the adjustments are identified. Due to changes in the estimated
recoverability of DAC, the premium deficiency charge calculated at December 31, 2009 increased $1.8
million from the premium deficiency charge calculated at December 31, 2008 and $1.2 million from
the charge calculated at December 31, 2007. An increase in the premium deficiency charge results in
the deferral of comparatively less underwriting costs period over period, resulting in a relatively
smaller deferred acquisition cost asset. The changes in the estimated recoverability of DAC are
attributable to deterioration in our underwriting experience in the past two years.
Deferred Policy Acquisition Costs Life Insurance Segment
Costs that vary with and relate to the acquisition of life insurance and annuity business are
deferred and recorded as DAC asset. Such costs consist principally of commissions and policy issue
expenses.
The following table summarizes DAC for December 31, 2009 and 2008. The majority of the DAC asset
relates to our universal life and annuity contracts, hereafter referred to as non-traditional
business.
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
Deferred policy acquisition costs at beginning of the year |
|
$ |
106,043 |
|
|
$ |
70,707 |
|
Current deferred costs |
|
|
13,612 |
|
|
|
10,620 |
|
Current amortization |
|
|
(9,287 |
) |
|
|
(11,568 |
) |
|
|
|
|
|
|
|
Ending unamortized deferred policy acquisition costs |
|
$ |
110,368 |
|
|
$ |
69,759 |
|
Change in shadow deferred policy acquistion costs |
|
|
(63,425 |
) |
|
|
36,284 |
|
|
|
|
|
|
|
|
Deferred policy acquistion costs at end of year |
|
$ |
46,943 |
|
|
$ |
106,043 |
|
|
|
|
|
|
|
|
We defer and amortize policy acquisition costs, with interest, on traditional life insurance
policies, over the anticipated premium-paying period in proportion to the present value of expected
gross premium. The present value of expected premiums is based upon the premium requirement of each
policy and assumptions for mortality, morbidity, persistency and investment returns at policy
issuance. These assumptions are not revised after policy issuance unless the deferred acquisition
cost balance is deemed to be unrecoverable from future expected profits. Absent a premium
deficiency, variability in amortization after policy issuance is caused only by variability in
premium volumes.
We defer policy acquisition costs related to non-traditional business and amortize these costs in
proportion to the present value of estimated expected gross profits. The components of gross profit
include investment spread, mortality and expense margins and surrender charges. Of these factors,
we anticipate that investment returns, expenses and persistency are reasonably likely to
significantly impact the rate of deferred acquisition cost amortization.
We periodically review estimates of expected profitability and evaluate the need to unlock or
revise the amortization of the deferred policy acquisition cost asset. The primary assumptions
utilized when estimating future profitability relate to interest rate spread, mortality experience
and policy lapse experience. The table below illustrates the impact that a reasonably likely change
in our assumptions used to estimate expected gross profits would have on the deferred policy
acquisition cost asset for our non-traditional business recorded as of December
31, 2009. The entire impact of the changes illustrated would be recognized through operations as an
increase or decrease to amortization expense.
60
United Fire & Casualty Company Form 10-K | 2009
|
|
|
|
|
|
|
|
|
Sensitivity Analysis Impact of changes in assumptions
(In Thousands) |
|
|
|
|
|
|
|
|
Changes in assumptions |
|
-10% |
|
|
+10% |
|
Interest rate spread assumption |
|
$ |
(1,725 |
) |
|
$ |
1,592 |
|
Mortality experience assumption |
|
|
2,503 |
|
|
|
(2,694 |
) |
Policy lapse experience assumption |
|
|
2,397 |
|
|
|
(2,247 |
) |
A material change in these assumptions could have a negative or positive effect on our reported
deferred policy acquisition cost asset, earnings and stockholders equity.
The DAC in connection with our non-traditional business are adjusted with respect to estimated
expected gross profits as a result of changes in the net unrealized gains or losses on
available-for-sale fixed maturity securities allocated to support the block of fixed annuities and
universal life policies. That is, because we carry available-for-sale fixed maturity securities at
fair value, we make an adjustment to DAC equal to the change in amortization that would have been
recorded if we had sold such securities at their stated fair value and reinvested the proceeds at
current yields. We include the change in this adjustment, which is called shadow DAC, net of tax,
as a component of accumulated other comprehensive income. At December 31, 2009, shadow DAC
decreased our DAC asset by $35.1 million, compared with shadow DAC that increased our DAC asset
by $28.3 million at December 31, 2008.
Loss and Loss Settlement Expenses Property and Casualty Insurance Segment
Reserves for losses and loss settlement expenses are reported using our best estimate of ultimate
liability for claims that occurred prior to the end of any given accounting period but have not yet
been paid. Before credit for reinsurance recoverables, these reserves were $606.0 million and
$586.1 million at December 31, 2009 and 2008, respectively. We purchase reinsurance to mitigate the
impact of large losses and catastrophic events. Loss and loss settlement reserves ceded to
reinsurers were $33.8 million for 2009 and $52.5 million for 2008. Our reserves by line of business
as of December 31, 2009, were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement |
|
|
|
|
(In Thousands) |
|
Case Basis |
|
|
IBNR |
|
|
Expense |
|
|
Total Reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial lines: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fire and allied lines |
|
$ |
41,761 |
|
|
$ |
22,464 |
|
|
$ |
5,131 |
|
|
$ |
69,356 |
|
Other liability |
|
|
114,455 |
|
|
|
47,612 |
|
|
|
91,786 |
|
|
|
253,853 |
|
Automobile |
|
|
65,499 |
|
|
|
13,356 |
|
|
|
14,791 |
|
|
|
93,646 |
|
Workers compensation |
|
|
107,789 |
|
|
|
5,840 |
|
|
|
18,035 |
|
|
|
131,664 |
|
Fidelity and surety |
|
|
5,094 |
|
|
|
370 |
|
|
|
977 |
|
|
|
6,441 |
|
Miscellaneous |
|
|
421 |
|
|
|
113 |
|
|
|
67 |
|
|
|
601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial lines |
|
$ |
335,019 |
|
|
$ |
89,755 |
|
|
$ |
130,787 |
|
|
$ |
555,561 |
|
Personal lines: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile |
|
$ |
6,964 |
|
|
$ |
388 |
|
|
$ |
1,145 |
|
|
$ |
8,497 |
|
Fire and allied lines |
|
|
9,766 |
|
|
|
3,988 |
|
|
|
1,531 |
|
|
|
15,285 |
|
Miscellaneous |
|
|
1,063 |
|
|
|
96 |
|
|
|
99 |
|
|
|
1,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal lines |
|
$ |
17,793 |
|
|
$ |
4,472 |
|
|
$ |
2,775 |
|
|
$ |
25,040 |
|
Reinsurance |
|
|
7,331 |
|
|
|
18,000 |
|
|
|
113 |
|
|
|
25,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
360,143 |
|
|
$ |
112,227 |
|
|
$ |
133,675 |
|
|
$ |
606,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
United Fire & Casualty Company Form 10-K | 2009
Case-Basis Reserves
For each of our lines of business, with respect to reported claims, we establish reserves on a
case-by-case basis. Our experienced claims personnel estimate these case-based reserves using
adjusting guidelines established by management. Our goal is to set the case-based reserves at the
ultimate expected loss amount as soon as possible after information about the claim becomes
available.
Estimating case reserves is subjective and complex and requires us to make estimates about the
future payout of claims, which is inherently uncertain. When we establish and adjust reserves, we
do so based on our knowledge of the circumstances and facts of the claim. Upon notice of a claim,
we establish a factor reserve based on the claim information reported to us at that time.
Subsequently, we conduct an investigation of each reported claim, which allows us to more fully
understand the factors contributing to the loss and our potential exposure. This investigation may
extend over a long period of time. As our investigation of a claim develops, and as our claims
personnel identify trends in claims activity, we may refine and adjust our estimates of case
reserves. To evaluate and refine our overall reserving process, we track and monitor all claims
until they are settled and paid in full, with all salvage and subrogation claims being resolved.
Most of our insurance policies are written on an occurrence basis which provides coverage if a loss
occurs in the policy period, even if the insured reports the loss many years later. For example,
some general liability claims are reported 10 years or more after the policy period, and the
workers compensation coverage provided by our policies pays unlimited medical benefits for the
duration of the claimants injury up to the lifetime of the claimant. In addition, final settlement
of certain claims can be delayed for years or decades due to litigation or other reasons. Reserves
for these claims require us to estimate future costs, including the effect of judicial actions,
litigation trends and medical cost inflation, among others. Reserve development can occur over time
as conditions and circumstances change in years after the policy was issued.
Our loss reserves include amounts related to both short-tail and long-tail lines of business.
Tail refers to the time period between the occurrence of a loss and the ultimate settlement of
the claim. A short-tail insurance product is one where ultimate losses are known and settled
comparatively quickly; ultimate losses under a long-tail insurance product are sometimes not known
and settled for many years. The longer the time span between the incidence of a loss and the
settlement of the claim, the more the ultimate settlement amount can vary from the reserves
initially established. Accordingly, long-tail insurance products can have significant implications
on the reserving process.
Our short-tail lines of business include fire and allied lines, homeowners, commercial property,
auto physical damage and inland marine. The amounts of the case-based reserves that we establish
for claims in these lines depend upon various factors, such as individual claim facts (including
type of coverage and severity of loss), company historical loss experience and trends in general
economic conditions (including changes in replacement costs, medical costs and inflation).
For short-tail lines of business, the estimation of case-basis loss reserves is less complex than
for long-tail lines because claims are generally reported and settled shortly after the loss occurs
and because the claims relate to tangible property. Because of the relatively short time from claim
occurrence to settlement, actual losses typically do not vary greatly from reserve estimates.
Our long-tail lines of business include workers compensation and other liability. In addition,
certain product lines such as personal and commercial auto, commercial multi-peril and surety
include some long-tail coverages and some short-tail coverages. For many liability claims,
significant periods of time, ranging up to several years, may elapse between the occurrence of the
loss, the reporting of the loss to us and the settlement of the claim. As a result, loss experience
in the more recent accident years for the long-tail liability classes has limited statistical
credibility in our reserving process because a relatively small proportion of losses in these
accident years are reported claims and an even smaller proportion are paid losses. In addition,
long-tail liability claims are more susceptible to litigation and can be significantly affected by
changing contract interpretations and the legal environment. Consequently, the estimation of loss
reserves for long-tail classes is more complex and subject to a higher degree of variability than
for short-tail classes.
62
United Fire & Casualty Company Form 10-K | 2009
The amounts of the case-based reserves that we establish for claims in long-tail lines depends upon
various factors, including individual claim facts (including type of coverage, severity of loss and
underlying policy limits), company historical loss experience, changes in underwriting practice,
legislative enactments, judicial decisions, legal developments in the awarding of damages, changes
in political attitudes and trends in general economic conditions, including inflation. As with the
short-tail lines of business, we review and make changes to long-tail case-based reserves based on
our review of continually evolving facts as they become available to us during the claims
settlement process. Our adjustments to case-based reserves are reflected in the financial
statements in the period that new information arises about the claim. Examples of facts that become
known that could cause us to change our case-based reserves include, but are not limited to:
evidence that loss severity is different than previously assessed, new claimants who have presented
claims and the assessment that no coverage exists.
IBNR Reserves
IBNR reserves are estimated liabilities, which we establish because claims are not always reported
promptly upon occurrence and because the assessment of existing known claims may change over time
with the development of new facts, circumstances and conditions, which may include litigation.
For both our short-tail and long-tail lines of business, we establish our reserves for IBNR claims
by applying a factor to our current pool of in-force premium, as well as evaluating our IBNR to
exposure units. This factor has been developed through a historical analysis of company experience
as to what level of IBNR reserve should be established to achieve an adequate IBNR reserve relative
to our existing loss exposure base. Unique circumstances or trends which are evident as of the end
of a given period may require us to refine our IBNR reserve calculation. This methodology for
establishing our IBNR reserve has consistently resulted in aggregate reserve levels that management
believes are reasonable in comparison to the reserve estimates prepared by Regnier Consulting
Group, Inc., an independent actuary which we utilize in our reserving process.
For our short-tail lines of business, IBNR reserves constitute a small portion of the overall
reserves. This is because claims are generally reported and settled shortly after the loss occurs.
In our long-tail lines of business, IBNR reserves constitute a relatively higher proportion of
total reserves, because, for many liability claims, significant periods of time may elapse between
the initial occurrence of the loss, the reporting of the loss to us and the ultimate settlement of
the claim.
Loss Settlement Expense Reserves
Loss settlement expense reserves include amounts ultimately allocable to individual claims, as well
as amounts required for the general overhead of the claims handling operation that are not
specifically allocable to individual claims. We do not establish loss settlement expense reserves
on a claim-by-claim basis. Instead, we examine the ratio of loss settlement expenses paid to losses
paid over the most recent three-year period, by line. We use these factors and apply them to open
reserves, including IBNR reserves. We develop these factors annually, each December and use them
throughout the year, unless development patterns or emerging trends warrant adjustments to the
factors.
Generally, the loss settlement expense reserves for long-tail lines are a greater portion of the
overall reserves, as there are often substantial legal fees and other costs associated with the
complex liability claims that are associated with long-tail lines. Because short-tail lines settle
much more quickly and the costs are easier to determine, loss settlement expense reserves for
short-tail claims constitute a smaller portion of the total reserves.
Reinsurance Reserves
The estimation of assumed and ceded reinsurance loss and loss settlement expense reserves is
subject to the same factors as the estimation of loss and loss settlement expense reserves. In
addition to those factors, which give rise to inherent uncertainties in establishing loss and loss
settlement expense reserves, there exists a delay in our receipt of reported claims for assumed
business due to the procedure of having claims first reported through one or more intermediary
insurers or reinsurers.
63
United Fire & Casualty Company Form 10-K | 2009
Key Assumptions
In establishing an estimate of loss and loss settlement reserves, management uses a number of key
assumptions. They are as follows:
|
|
|
To the best of our knowledge, there are no new latent trends that would impact our case-basis
reserves; |
|
|
|
|
Our case-basis reserves reflect the most up-to-date information available about the unique
circumstances of each claim; |
|
|
|
|
No new judicial decisions or regulatory actions will increase our case-basis obligations; |
|
|
|
|
The historical patterns of claim frequency and claim severity utilized within our IBNR reserve
calculation, without considering unusual events, are consistent and will continue to be consistent; and |
|
|
|
|
The companys historical ratio of loss settlement expenses (LAE) paid to losses paid is consistent
and will continue to be consistent. |
Our key assumptions are subject to change as actual claims occur and as we gain additional
information about the variables that underlie our assumptions. Accordingly, management reviews and
updates these assumptions periodically to ensure that the assumptions continue to be valid. If
necessary, management makes changes not only in the estimates derived from the use of these
assumptions, but also in the assumptions themselves. Due to the inherent uncertainty in the loss
reserving process, management believes that there is a reasonable chance that modification to key
assumptions could individually, or in aggregate, result in reserve levels that are misstated either
above or below the actual amount for which the related claims will eventually settle.
As an example, if our reserve for loss and loss settlement expenses of $606.0 million as of
December 31, 2009, is 10 percent inadequate, we would experience a reduction in future earnings of
up to $6.1 million, pre-tax. This reduction could be recorded in one year or multiple years,
depending on when we identify the deficiency. The deficiency would also affect our financial
position in that our equity would be reduced by an amount equivalent to the reduction in net
income. Any deficiency is recognized in the reserve for loss and loss settlement expenses and,
accordingly, it usually does not have a material effect on our liquidity because the claims have
not been paid. Conversely, if our estimates of ultimate unpaid loss and loss settlement expense
liabilities prove to be redundant, our future earnings and financial position would be improved.
We are unable to reasonably quantify the impact of changes in our key assumptions utilized to
establish individual case-basis reserves on our total reported reserve because the impact of these
changes would be unique to each specific case-basis reserve established. However, based on
historical experience, we believe that aggregate case-basis reserve volatility levels of five
percent and ten percent can be attributed to the ultimate development of our case-basis reserves.
The table below details the impact of this development volatility on our reported case-basis
reserves. The impact to pre-tax earnings would be a decrease if the reserves were to be adjusted
upwards. The impact to pre-tax earnings would be an increase if the reserves were to be adjusted
downwards.
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
Change in level of case-basis reserve development |
|
5% |
|
|
10% |
|
Impact on reported case-basis reserves |
|
$ |
16,415 |
|
|
$ |
32,829 |
|
Due to the formula-based nature of our IBNR and loss settlement expense reserve calculations,
changes in the key assumptions utilized to generate these reserves can result in a quantifiable
impact on our reported results. It is not possible to isolate and measure the potential impact of
just one of these factors, and future loss trends could be partially impacted by all factors
concurrently. Nevertheless, it is meaningful to view the sensitivity of the reserves to potential
changes in these variables. To demonstrate the sensitivity of reserves to changes in significant
assumptions, the following example is presented. The amounts reflect the pre-tax impact on earnings
from a hypothetical percentage change in the calculation of IBNR and loss settlement expense
reserves. The impact to pre-tax earnings would be a decrease if the reserves were to be adjusted
upwards. The impact to pre-tax earnings would be an increase if the reserves were to be adjusted
downwards. We believe that the changes presented are reasonably likely based upon an analysis of
our historical IBNR and loss settlement expense reserve experience.
64
United Fire & Casualty Company Form 10-K | 2009
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
Change in claim frequency and claim severity assumptions |
|
5% |
|
|
10% |
|
Impact due to change in IBNR reserving assumptions |
|
$ |
5,595 |
|
|
$ |
11,190 |
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
Change in LAE paid to losses paid ratio |
|
1% |
|
|
2% |
|
Impact due to change in LAE reserving assumptions |
|
$ |
1,321 |
|
|
$ |
2,642 |
|
In 2009, we did not change the key assumptions on which we based our reserving calculations.
In estimating our 2009 loss and loss settlement expense reserves, we did not anticipate future
events or conditions that were inconsistent with past development patterns.
Certain of our lines of business are subject to the potential for greater loss and loss settlement
expense development than others. These lines with greater potential for development are discussed
below.
Other Liability Reserves
Other liability is considered a long-tail line of business, as it can take a relatively long period
of time to settle claims from prior accident years. This is partly due to the lag time between the
date when a loss or event occurs that triggers coverage and the date when the claim is actually
reported. Defense costs are also a part of the insured expenses covered by liability policies and
can be significant, sometimes greater than the cost of the actual paid claims. For the majority of
our products, defense costs are outside of the policy limit, meaning that the amounts paid for
defense costs are not subtracted from the available policy limit.
Factors that can cause reserve uncertainty in estimating reserves in this line include: reporting
lag; the number of parties involved in the underlying tort action; whether the event triggering
coverage is confined to only one time period or is spread over multiple time periods; the potential
dollars involved (in the individual claim actions); whether such claims were reasonably foreseeable
and intended to be covered at the time the contracts were written (i.e., coverage disputes); and
the potential for mass claim actions.
Claims with longer reporting lags may result in greater inherent risk. This is especially true for
alleged claims with a latency feature, particularly where courts have ruled that coverage is spread
over multiple policy years, hence involving multiple defendants (and their insurers and reinsurers)
and multiple policies (thereby increasing the potential dollars involved and the underlying
settlement complexity). Claims with long latencies also increase the potential lag between writing
a policy in a certain market and the recognition that such policy has potential mass tort and/or
latent claim exposure.
Our reserve for other liability claims at December 31, 2009, is $253.9 million and consists of
5,363 claims, compared with $214.7 million, consisting of 4,878 claims at December 31, 2008. Of the
$253.9 million total reserve for other liability claims, $71.9 million is identified as defense
costs and $19.9 million is identified as general overhead required in the settlement of claims. If
our reserve for other liability loss and loss settlement expenses is overstated or understated by
10 percent, the potential impact to our Consolidated Financial Statements would be approximately
$25.4 million, before federal income taxes.
Included in the other liability line of business are gross reserves for construction defect losses
and settlement expenses. Construction defect is a liability allegation relating to defective work
performed in the construction of structures such as commercial buildings, apartments, condominiums,
single family dwellings or other housing, as well as the sale of defective building materials.
These claims seek recovery due to damage caused by alleged deficient construction techniques or
workmanship. At December 31, 2009, we established $15.2 million in construction defect loss and
loss settlement expense reserves, excluding IBNR reserves, which consisted of 234 claims, compared
with $16.0 million, excluding IBNR reserves, consisting of 243 claims, at December 31, 2008. The
reporting of such claims can be delayed, as the statute of limitations can be up to 10 years. Also,
recent court decisions have expanded insurers exposure to construction defect claims. As a result,
claims may be reported more
than 10 years after a project has been completed, as litigation can proceed for several years
before an insurance company is identified as a potential contributor. Claims have also emerged from
parties claiming additional insured status on policies issued to other parties, such as contractors
seeking coverage from a subcontractors policy.
65
United Fire & Casualty Company Form 10-K | 2009
In addition to these issues, other variables also contribute to a high degree of uncertainty in
establishing reserves for construction defect claims. These variables include: whether coverage
exists; when losses occur; the size of each loss; expectations for future interpretive rulings
concerning contract provisions; and the extent to which the assertion of these claims will expand
geographically. In recent years, we have implemented various underwriting measures that we
anticipate will mitigate the amount of construction defect losses experienced. These initiatives
include increased care regarding additional insured endorsements and stricter underwriting
guidelines on the writing of residential contractors and an increased utilization of loss control.
Asbestos and Environmental Reserves
Included in the other liability and assumed reinsurance lines of business are gross reserves for
asbestos and other environmental losses and loss settlement expenses. At December 31, 2009 and
2008, we had $3.8 million in direct and assumed asbestos and environmental loss reserves. In
addition, we had ceded asbestos and environmental loss reserves of $.5 million and $.6 million at
December 31, 2009 and 2008, respectively. The estimation of loss reserves for environmental claims
and claims related to long-term exposure to asbestos and other substances is one of the most
difficult aspects of establishing reserves, especially given the inherent uncertainties surrounding
such claims. Although we record our best estimate of loss and loss settlement expense reserves, the
ultimate amounts paid upon settlement of such claims may be more or less than the amount of the
reserves, because of the significant uncertainties involved and the likelihood that these
uncertainties will not be resolved for many years.
Workers Compensation Reserves
Like the other liability line of business, workers compensation losses and loss settlement expense
reserves are based upon variables that create imprecision in estimating the ultimate reserve.
Estimates for workers compensation are particularly sensitive to assumptions about medical cost
inflation, which has been steadily increasing over the past few years. Other variables that we
consider and that contribute to the uncertainty in establishing reserves for workers compensation
claims include: the state legislative and regulatory environments; trends in jury awards; and
mortality rates. Because of these variables, the process of reserving for the ultimate loss and
loss settlement expense requires the use of informed judgment and is inherently uncertain.
Consequently, actual loss and loss settlement expense reserves may deviate from our estimates. Such
deviations may be significant. Our reserve for workers compensation claims at December 31, 2009,
is $131.7 million and consists of 3,416 claims, compared with $126.6 million, consisting of 3,386
claims, at December 31, 2008. If our reserve for workers compensation loss and loss settlement
expenses is overstated or understated by 10 percent, the potential impact to our Consolidated
Financial Statements would be approximately $13.2 million, before federal income taxes.
Reserve Development
In establishing reserves, managements goal is to ensure that our net reserves for losses and loss
settlement expenses are adequate to cover all costs, while sustaining minimal variation from the
time reserves for losses and loss settlement expenses are initially estimated until losses and loss
settlement expenses are concluded. Changes in our estimates of losses and loss settlement expenses
over time, also referred to as development, will occur and may be material. Favorable development
is recognized and reported in the Consolidated Financial Statements when we decrease our previous
estimate of ultimate losses and loss settlement expenses, which results in an increase to net
income in the period recognized. Adverse development is recognized and reported in the Consolidated
Financial Statements when we increase our previous estimate of ultimate losses and loss settlement
expenses, which results in a decrease to net income.
In two of the past ten years, our development has resulted in deficiencies in our net reserves for
prior accident years totaling $26.2 million and $.5 million for 2009 and 2008, respectively. In
2007, our development resulted in a redundancy of $45.2 million. Our reserves have been negatively
impacted by an increase in our prior accident year
loss reserves due to adverse development from Hurricane Katrina claims and litigation totaling
$38.0 million, $26.6 million and $8.7 million in 2009, 2008 and 2007, respectively. Also
contributing to our deficiency in 2009 and 2008 was the deterioration in our other liability lines
of business which includes claims for construction defects.
66
United Fire & Casualty Company Form 10-K | 2009
Generally, we base reserves for each claim on the estimated ultimate exposure for that claim,
determined from a pessimistic point of view. We believe that in determining reserves, it is
appropriate and reasonable to establish a best estimate within a range of reasonable estimates,
especially when we are reserving for claims for bodily injury, disabilities and similar claims, for
which settlements and verdicts can vary widely. Our reserving philosophy may result in favorable
development in future years that will decrease loss and loss settlement expenses for prior year
claims in the year of adjustment. While we realize that this philosophy, coupled with what we
believe to be aggressive and successful claims management and loss settlement practices, has
resulted in year-to-year redundancies in reserves, we believe our approach is better than
experiencing year-to-year uncertainty as to the adequacy of our reserves.
The factors contributing to our year-to-year redundancy include the following:
|
|
|
Establishing reserves that are appropriate and reasonable, but assuming a pessimistic view
of potential outcomes. |
|
|
|
|
Using claims negotiation to control the size of settlements. |
|
|
|
|
Assuming that we have liability for all claims, even though the issue of liability may, in
some cases, be resolved in our favor. |
|
|
|
|
Promoting claims management services to encourage return-to-work programs, case management
by nurses for serious injuries and management of medical provider services and billings. |
|
|
|
|
Using programs and services to help prevent fraud and to assist in favorably resolving
cases. |
Based upon our comparison of carried reserves to actual claims experience over the last several
years, we believe that using company historical premium and claims data to establish reserves for
losses and loss settlement expenses results in adequate and reasonable reserves. Based upon this
comparison, we believe that our total recorded loss reserves at December 31, 2009, are unlikely to
vary by more than 10 percent of the recorded amounts, either positively or negatively.
Historically, our reserves have had an average variance of less than 10 percent of recorded
amounts, with our reserves booked as of December 31, 2008, generating a deficiency of 4.9 percent
in 2009. Our reserves booked as of December 31, 2007, generated a reserve deficiency of 0.1 percent
in 2008. These deficiencies are discussed in detail in the under the heading Reserve Development
in the Property and Casualty Insurance Segment of the Results of Operations section in this
item.
The following table details the pre-tax impact on our property and casualty insurance segments
financial results and financial condition of reasonably likely changes in our reserve development.
Our lines of business that have historically been most susceptible to significant volatility in
reserve development have been shown separately and utilize hypothetical levels of volatility of
five percent and ten percent. Our other, less volatile, lines have been aggregated and utilize
hypothetical levels of volatility of three percent and five percent.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hypothetical Reserve Development Volatility Levels |
|
-10% |
|
|
-5% |
|
|
+5% |
|
|
+10% |
|
Impact on loss and loss settlement expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liability |
|
$ |
(25,385 |
) |
|
$ |
(12,693 |
) |
|
$ |
12,693 |
|
|
$ |
25,385 |
|
Workers compensation |
|
|
(13,166 |
) |
|
|
(6,583 |
) |
|
|
6,583 |
|
|
|
13,166 |
|
Automobile |
|
|
(10,214 |
) |
|
|
(5,107 |
) |
|
|
5,107 |
|
|
|
10,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hypothetical Reserve Development Volatility Levels |
|
-5% |
|
|
-3% |
|
|
+3% |
|
|
+5% |
|
Impact on loss and loss settlement expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other lines |
|
$ |
(5,919 |
) |
|
$ |
(3,552 |
) |
|
$ |
3,552 |
|
|
$ |
5,919 |
|
67
United Fire & Casualty Company Form 10-K | 2009
Independent Actuary
We engage an independent actuarial firm to render opinions as to the reasonableness of the
statutory reserves we establish. There was no material differences between our statutory reserves
and those established under GAAP. During 2009 and 2008, we engaged the services of Regnier
Consulting Group, Inc. as our independent actuarial firm for the property and casualty insurance
segment. We anticipate that this engagement will continue in 2010.
It is managements policy to utilize staff adjusters to develop our estimate of case-basis loss
reserves. IBNR and loss settlement expense reserves are established through various formulae that
utilize pertinent, recent company historical data. The calculations are supplemented with knowledge
of current trends and events that could result in adjustments to the level of IBNR and loss
settlement expense reserves. In addition, management consults with Regnier Consulting Group, Inc.
throughout the year as deemed necessary. Management annually compares our estimate of total
reserves to point estimates prepared by Regnier Consulting Group, Inc. by line of business to
ensure that our estimates are within the actuarys acceptable range. Regnier Consulting Group, Inc.
performs an extensive review of loss and loss settlement expense reserves at each year end using
generally accepted actuarial guidelines to ensure that the recorded reserves appear reasonable. If
the carried reserves were deemed unreasonable, we would adjust reserves. In 2009 and 2008, after
considering the actuarys range of reasonable point estimates, management believed that carried
reserves were reasonable and therefore did not adjust the recorded amount.
Regnier Consulting Group, Inc. uses four projection methods in their actuarial analysis of our loss
reserves and uses the paid-to-paid projection method in their analysis of our loss settlement
expense reserves. Based on the results of the projection methods, the actuaries select an actuarial
central estimate of the reserves. They then compare their estimate to our carried reserves to
evaluate the reasonableness of the carried reserves. The four methods utilized by Regnier
Consulting Group, Inc. are: paid loss development; reported loss development; expected loss
emergence based on paid losses; and expected loss emergence based on reported losses.
Based on the results of the projection methods, a reasonable range of net reserves from $500.9
million to $615.1 million has been calculated. Our net reserves for losses and loss settlement
expenses as of December 31, 2009 were $572.3 million.
We do not view the result of a single projection method as superior over the results of a
combination of projection methods. That is, our actuary has not selected one method to determine
the reserves. The results of Regnier Consulting Group, Inc.s use of various methods, in
conjunction with their actuarial judgment, leads to the actuarially-determined estimate of the
reserves. The impact of reasonably likely changes in the reserving variables is implicitly
considered in Regnier Consulting Group, Inc.s use of several reserving methods.
Future Policy Benefits and Losses, Claims and Loss Settlement Expenses Life Insurance Segment
We establish reserves for amounts that are payable under traditional insurance policies, including
traditional life insurance, disability income, and income annuities. Reserves are calculated as the
present value of future benefits expected to be paid, reduced by the present value of future
expected premiums. Our estimates use methods and underlying assumptions that are in accordance with
GAAP and applicable actuarial standards. The key assumptions that we utilize in establishing
reserves are mortality, morbidity, policy lapse, renewal, retirement, investment returns,
inflation, and expenses. Future investment return assumptions are determined based upon prevailing
investment yields as well as estimated reinvestment yields. Mortality, morbidity and policy lapse
assumptions are based on our experience. Expense assumptions include the estimated effects of
inflation and expenses to be incurred beyond the premium-paying period. These assumptions are
established at the time the policy is issued, are consistent with assumptions for determining DAC
amortization for these contracts, and are generally not changed during the policy coverage period.
However, if actual experience emerges in a manner that is significantly adverse relative to the
original assumptions, adjustments to reserves (or DAC) may be required resulting in a charge to
earnings which could have a material adverse effect on our operating results and financial
condition.
68
United Fire & Casualty Company Form 10-K | 2009
We periodically review the adequacy of these reserves and recoverability of DAC for these contracts
on an aggregate basis using actual experience. In the event that actual experience is significantly
adverse compared to the
original assumptions, any remaining unamortized DAC balance must be expensed to the extent not
recoverable and the establishment of a premium deficiency reserve may be required. The effects of
changes in reserve estimates are reported in the results of operations in the period in which the
changes are determined. We have not made any changes in methods or assumptions for estimated
reserves in the past three years. We anticipate that mortality, investment and reinvestment yields,
and policy terminations are the factors that would be most likely to require adjustment to these
reserves or related DAC. Assumptions are established when the policy is issued. If actual
experience is less favorable than assumptions, we may need to increase our reserves, resulting in a
charge to policyholder benefits and claims.
Liabilities for future policy benefits for disability claims are estimated using the present value
of benefits method and experience assumptions as to claim terminations, expenses and interest.
Other policyholder reserves include claims that have been reported but not settled and claims
incurred but not reported on life and disability income insurance. We use our own historical
experience and other assumptions such as any known or anticipated developments or trends to
establish reserves for these unsettled or unreported claims. The effects of changes in our
estimated reserves are included in the results of operations in the period in which the changes
occur.
Our reserves for universal life and deferred annuity contracts are based upon the policyholders
current account value. Acquisition expenses are amortized in relation to expected gross profits
forecast based upon current best estimates of anticipated premium income, investment earnings,
benefits and expenses.
Annually, we review our estimates of reserves and deferred policy acquisition cost assets and
compare them with actual experience. Differences between actual experience and the assumptions that
we used in the pricing of policies, guarantees and riders and in the establishment of the related
reserves result in variances in profit and could result in changes in net income. The effects of
the changes in such estimated reserves are included in the results of operations in the period in
which the changes occur.
69
United Fire & Casualty Company Form 10-K | 2009
The following table reflects the estimated pre-tax impact to DAC, net of unearned revenue
liabilities to our universal life and fixed annuity products that could occur in a twelve-month
period on account of an unlocking adjustment due to reasonably likely changes in significant
assumptions. Changes in assumptions of the same magnitude in the opposite direction would have an
impact of a similar magnitude but opposite direction of the examples provided.
|
|
|
|
|
Critical Accounting |
|
|
|
Potential One-Time Effect on DAC Asset, Net of |
Estimate |
|
Determination Methodology |
|
Unearned Revenue Liabilities |
|
|
|
|
|
Mortality Experience
|
|
Based on our mortality experience and
consideration is given to industry
experience and trends
|
|
A 10.0% increase in expected mortality experience for
all future years would result in a reduction in DAC,
net of unearned revenue liabilities and an increase in
current period amortization expense of $2.7 million. |
|
|
|
|
|
Surrender Rates
|
|
Based on our surrender experience and
consideration is given to industry
experience and trends
|
|
A 10% increase in expected surrender rates for all
future y ears would result in a reduction in DAC, net
of unearned revenue liabilities and an increase in
current period amortization expense of $2.2 million. |
|
|
|
|
|
Interest Sp reads
|
|
Based on our expected future investment
returns and expected future crediting rates
applied to policy holder account balances;
future crediting rates include constraints
imposed by policy guarantees
|
|
A 10 basis point reduction in future interest rate
spreads would result in a reduction in DAC, net of
unearned revenue liabilities and an increase in current
period amortization expense of $1.7 million. |
|
|
|
|
|
Maintenance Expenses
|
|
Based on our experience using an internal
expense allocation methodology
|
|
A 10% increase in future maintenance expenses would
result in a reduction in DAC, net of unearned revenue
liabilities and an increase in current period
amortization expense of $5 million. |
Independent Actuary
We engage an independent actuarial firm to render opinions as to the reasonableness of the
statutory reserves we establish. Statutory reserves are established using considerably more
conservative assumptions regarding future investment earnings and contractual benefit payments,
than are used for GAAP reserves. During 2009 and 2008, we engaged the services of Griffith, Ballard
and Company as our independent actuarial firm for the life insurance segment. We anticipate that
this engagement will continue in 2010.
PENDING ACCOUNTING STANDARDS
Incorporated by reference from Note 1 Significant Accounting Policies under the heading Pending
Accounting Standards, contained in Part II, Item 8 Financial Statements and Supplementary Data.
STATUTORY FINANCIAL MEASURES
United Fire and its subsidiaries are required to file financial statements based on statutory
accounting principles in each of the states where our insurance companies are domiciled and
licensed to conduct business.
The following definitions of key statutory measures are provided for our readers convenience.
United Fire is not required to reconcile data prepared under statutory accounting principles to
those prepared under U.S. GAAP because Regulation G excludes data prepared under a system of
regulation of a government or governmental authority or self-regulatory organization that is
applicable to the registrant.
Management analyzes financial data and statements that are required to be reconciled to data
prepared in accordance with statutory accounting principles, and those reconciliations are
presented as required.
70
United Fire & Casualty Company Form 10-K | 2009
Premiums written is a measure of our overall business volume. Net premiums written comprise direct
and assumed premiums written, less ceded premiums written. 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. Ceded premiums
written is the portion of direct premiums written that we cede to our reinsurers under our
reinsurance contracts. Premiums written is an important measure of business production for the
period under review.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net premiums written |
|
$ |
467,427 |
|
|
$ |
496,897 |
|
|
$ |
501,849 |
|
Net change in unearned premium |
|
|
10,956 |
|
|
|
7,564 |
|
|
|
6,847 |
|
Net change in prepaid reinsurance premium |
|
|
115 |
|
|
|
(1,086 |
) |
|
|
(2,933 |
) |
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
478,498 |
|
|
$ |
503,375 |
|
|
$ |
505,763 |
|
|
|
|
|
|
|
|
|
|
|
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 net loss ratio) and the underwriting expense ratio (the expense ratio).
When prepared in accordance with U.S. GAAP, the net loss ratio is calculated by dividing the sum of
losses and loss settlement expenses by net premiums earned. The expense ratio is calculated by
dividing nondeferred underwriting expenses and amortization of DAC by net premiums earned.
When prepared in accordance with statutory accounting principles, the net loss ratio is calculated
by dividing the sum of losses and loss settlement expenses by net premium earned and the expense
ratio is calculated by dividing underwriting expenses by net premiums written.
NON-GAAP FINANCIAL MEASURES
We believe that disclosure of certain Non-GAAP financial measures enhances investor understanding
of our financial performance. The following Non-GAAP financial measure is utilized in this filing:
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
ISO catastrophes |
|
$ |
58,757 |
|
|
$ |
84,102 |
|
|
$ |
13,639 |
|
Less Hurricane Katrina loss development (1) |
|
|
(37,976 |
) |
|
|
(10,790 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ISO catastrophes without Hurricane Katrina |
|
$ |
20,781 |
|
|
$ |
73,312 |
|
|
$ |
13,639 |
|
Non-ISO catastrophes |
|
|
1,616 |
|
|
|
2,754 |
|
|
|
433 |
|
|
|
|
|
|
|
|
|
|
|
Total catastrophes |
|
$ |
22,397 |
|
|
$ |
76,066 |
|
|
$ |
14,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This number reflects the reserves established for Hurricane Katrina litigation and
does not include other Hurricane Katrina loss development. |
71
United Fire & Casualty Company Form 10-K | 2009
|
|
|
ITEM 7A. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our consolidated balance sheet includes financial instruments whose fair values are subject to
market risk. Market risk is the potential for loss due to a decrease in the value of securities
resulting from uncontrollable fluctuations such as: interest rate risk, equity price risk, foreign
exchange risk, credit risk, inflation, or world political conditions. Our primary market risk
exposure is to changes in interest rates. Interest rate risk is the price sensitivity of a fixed
maturity security or portfolio to changes in interest rates. We also have limited exposure to
equity price risk and foreign exchange risk.
Interest Rate Risk
We invest in interest rate sensitive securities, primarily fixed maturity securities. While it is
generally our intent to hold our fixed maturity securities to maturity, we have classified a
majority of our fixed maturity portfolio as available-for-sale. Our available-for-sale fixed
maturity securities are carried at fair value on the balance sheet with unrealized gains or losses
reported net of tax in accumulated other comprehensive income.
Increases and decreases in prevailing interest rates generally translate into decreases and
increases in the fair value of our fixed maturity securities. Additionally, fair values of interest
rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment
options, relative values of alternative investments, the liquidity of the instrument and other
general market conditions.
Market Risk and Duration
The active management of market risk is integral to our operations. We analyze potential changes in
the value of our investment portfolio due to the market risk factors noted above within the overall
context of asset and liability management. A technique we use in the management of our investment
and reserve portfolio is the calculation of duration. Our actuaries estimate the payout pattern of
our reserve liabilities to determine their duration, which is the present value of the weighted
average payments expressed in years. We then establish a target duration for our investment
portfolio so that at any given time the estimated cash generated by the investment portfolio will
match the estimated cash flowing out of the reserve portfolio. We structure the investment
portfolio to meet the target duration to achieve the required cash flow, based on liquidity and
market risk factors.
Duration relates primarily to our life insurance segment because the long-term nature of these
reserve liabilities increases the importance of projecting estimated cash flows over an extended
time frame. At December 31, 2009, our life insurance segment had $914.0 million in deferred annuity
liabilities that were specifically allocated to fixed maturities. We manage the life insurance
segment investments by focusing on matching the duration of the investments to that of the deferred
annuity obligations. The duration for the investment portfolio must take into consideration
interest rate risk. This is accomplished through the use of sensitivity analysis, which measures
the price sensitivity of the fixed maturities to changes in interest rates. The alternative
valuations of the investment portfolio, given the various hypothetical interest rate changes
utilized by the sensitivity analysis, allow management to revalue the potential cash flow from the
investment portfolio under varying market interest rate scenarios. Duration can then be
recalculated at the differing levels of projected cash flows.
Impact of Interest Rate Changes
The amounts set forth in the following tables detail the material impact of hypothetical interest
rate changes on the fair value of certain core fixed maturity investments held at December 31, 2009
and 2008. The sensitivity analysis measures the change in fair values arising from immediate
changes in selected interest rate scenarios. We employed hypothetical parallel shifts in the yield
curve of plus or minus 100 and 200 basis points in the simulations. Additionally, based upon the
yield curve shifts, we employ estimates of prepayment speeds for mortgage-related products and the
likelihood of call or put options being exercised within the simulations. According to this
analysis, at current levels of interest rates, the duration of the investments supporting the
deferred annuity liabilities is 0.13 years shorter than the projected duration of the liabilities.
If interest rates increase by 100 basis points, the projected duration of the liabilities would be
0.19 years shorter than the duration of the investments supporting the liabilities.
72
United Fire & Casualty Company Form 10-K | 2009
The selection of a 100-basis-point increase in interest rates should not be construed as a
prediction by our management of future market events, but rather as an illustration of the
potential impact of an event.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
-200 Basis |
|
|
-100 Basis |
|
|
|
|
|
|
+100 Basis |
|
|
+200 Basis |
|
(In Thousands) |
|
Points |
|
|
Points |
|
|
Base |
|
|
Points |
|
|
Points |
|
HELD-TO-MATURITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
$ |
981 |
|
|
$ |
979 |
|
|
$ |
976 |
|
|
$ |
972 |
|
|
$ |
966 |
|
Mortgage-backed securities |
|
|
625 |
|
|
|
617 |
|
|
|
607 |
|
|
|
596 |
|
|
|
582 |
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligations |
|
|
1,521 |
|
|
|
1,513 |
|
|
|
1,495 |
|
|
|
1,454 |
|
|
|
1,412 |
|
Special revenue |
|
|
7,018 |
|
|
|
6,831 |
|
|
|
6,642 |
|
|
|
6,430 |
|
|
|
6,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Held-to-Maturity Fixed Maturities |
|
$ |
10,145 |
|
|
$ |
9,940 |
|
|
$ |
9,720 |
|
|
$ |
9,452 |
|
|
$ |
9,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
$ |
20,967 |
|
|
$ |
20,006 |
|
|
$ |
18,952 |
|
|
$ |
17,895 |
|
|
$ |
16,877 |
|
Mortgage-backed securities |
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
US Treasury |
|
|
37,446 |
|
|
|
36,531 |
|
|
|
35,650 |
|
|
|
34,806 |
|
|
|
33,993 |
|
Agency |
|
|
72,621 |
|
|
|
72,262 |
|
|
|
70,625 |
|
|
|
66,681 |
|
|
|
62,095 |
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligations |
|
|
438,949 |
|
|
|
415,235 |
|
|
|
390,378 |
|
|
|
365,631 |
|
|
|
342,414 |
|
Special revenue |
|
|
254,712 |
|
|
|
241,178 |
|
|
|
227,362 |
|
|
|
213,532 |
|
|
|
200,584 |
|
Foreign bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian |
|
|
62,555 |
|
|
|
60,664 |
|
|
|
58,826 |
|
|
|
57,056 |
|
|
|
55,359 |
|
Other |
|
|
87,265 |
|
|
|
84,788 |
|
|
|
82,414 |
|
|
|
80,137 |
|
|
|
77,955 |
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
|
236,852 |
|
|
|
230,288 |
|
|
|
224,004 |
|
|
|
217,882 |
|
|
|
211,870 |
|
Natural gas |
|
|
60,775 |
|
|
|
59,258 |
|
|
|
57,806 |
|
|
|
56,416 |
|
|
|
55,084 |
|
Other |
|
|
4,216 |
|
|
|
3,989 |
|
|
|
3,778 |
|
|
|
3,581 |
|
|
|
3,398 |
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks, trusts and insurance companies |
|
|
306,419 |
|
|
|
297,703 |
|
|
|
289,209 |
|
|
|
280,924 |
|
|
|
272,999 |
|
Transportation |
|
|
33,495 |
|
|
|
32,828 |
|
|
|
32,187 |
|
|
|
31,570 |
|
|
|
30,977 |
|
Energy |
|
|
160,027 |
|
|
|
156,110 |
|
|
|
152,339 |
|
|
|
148,706 |
|
|
|
145,208 |
|
Technology |
|
|
94,532 |
|
|
|
91,807 |
|
|
|
89,172 |
|
|
|
86,607 |
|
|
|
84,141 |
|
Basic industry |
|
|
115,732 |
|
|
|
112,597 |
|
|
|
109,567 |
|
|
|
106,600 |
|
|
|
103,704 |
|
Credit cyclicals |
|
|
75,894 |
|
|
|
74,209 |
|
|
|
72,585 |
|
|
|
71,018 |
|
|
|
69,438 |
|
Other |
|
|
258,085 |
|
|
|
250,618 |
|
|
|
243,535 |
|
|
|
236,806 |
|
|
|
230,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-For-Sale Fixed Maturities |
|
$ |
2,320,544 |
|
|
$ |
2,240,073 |
|
|
$ |
2,158,391 |
|
|
$ |
2,075,850 |
|
|
$ |
1,996,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRADING |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign bonds |
|
$ |
2,788 |
|
|
$ |
2,738 |
|
|
$ |
2,689 |
|
|
$ |
2,642 |
|
|
$ |
2,595 |
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
|
1,460 |
|
|
|
1,460 |
|
|
|
1,460 |
|
|
|
1,460 |
|
|
|
1,460 |
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy |
|
|
2,379 |
|
|
|
2,345 |
|
|
|
2,310 |
|
|
|
2,278 |
|
|
|
2,245 |
|
Technology |
|
|
4,669 |
|
|
|
4,515 |
|
|
|
4,314 |
|
|
|
4,102 |
|
|
|
3,906 |
|
Other |
|
|
678 |
|
|
|
597 |
|
|
|
532 |
|
|
|
477 |
|
|
|
432 |
|
Redeemable preferred stock |
|
|
1,308 |
|
|
|
1,308 |
|
|
|
1,308 |
|
|
|
1,308 |
|
|
|
1,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Trading Fixed Maturities |
|
$ |
13,282 |
|
|
$ |
12,963 |
|
|
$ |
12,613 |
|
|
$ |
12,267 |
|
|
$ |
11,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturity Securities |
|
$ |
2,343,971 |
|
|
$ |
2,262,976 |
|
|
$ |
2,180,724 |
|
|
$ |
2,097,569 |
|
|
$ |
2,017,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
United Fire & Casualty Company Form 10-K | 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
-200 Basis |
|
|
-100 Basis |
|
|
|
|
|
|
+100 Basis |
|
|
+200 Basis |
|
(In Thousands) |
|
Points |
|
|
Points |
|
|
Base |
|
|
Points |
|
|
Points |
|
HELD-TO-MATURITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
$ |
1,951 |
|
|
$ |
1,951 |
|
|
$ |
1,951 |
|
|
$ |
1,944 |
|
|
$ |
1,936 |
|
Mortgage-backed securities |
|
|
705 |
|
|
|
705 |
|
|
|
699 |
|
|
|
692 |
|
|
|
688 |
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligations |
|
|
2,278 |
|
|
|
2,278 |
|
|
|
2,316 |
|
|
|
2,286 |
|
|
|
2,231 |
|
Special revenue |
|
|
9,568 |
|
|
|
9,392 |
|
|
|
9,228 |
|
|
|
8,931 |
|
|
|
8,636 |
|
All other corporate bonds |
|
|
984 |
|
|
|
977 |
|
|
|
952 |
|
|
|
927 |
|
|
|
904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Held-to-Maturity Fixed Maturities |
|
$ |
15,486 |
|
|
$ |
15,303 |
|
|
$ |
15,146 |
|
|
$ |
14,780 |
|
|
$ |
14,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
$ |
20,588 |
|
|
$ |
19,568 |
|
|
$ |
18,391 |
|
|
$ |
17,257 |
|
|
$ |
16,117 |
|
Mortgage-backed securities |
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
US Treasury |
|
|
27,228 |
|
|
|
27,126 |
|
|
|
26,591 |
|
|
|
26,031 |
|
|
|
25,491 |
|
Agency |
|
|
100,177 |
|
|
|
97,927 |
|
|
|
99,850 |
|
|
|
97,679 |
|
|
|
93,142 |
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligations |
|
|
426,684 |
|
|
|
402,753 |
|
|
|
376,671 |
|
|
|
348,481 |
|
|
|
320,961 |
|
Special revenue |
|
|
254,614 |
|
|
|
239,932 |
|
|
|
227,116 |
|
|
|
210,976 |
|
|
|
194,739 |
|
Foreign bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian |
|
|
32,925 |
|
|
|
32,415 |
|
|
|
31,150 |
|
|
|
29,797 |
|
|
|
28,494 |
|
Other |
|
|
48,636 |
|
|
|
48,027 |
|
|
|
46,553 |
|
|
|
45,081 |
|
|
|
43,676 |
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
|
205,274 |
|
|
|
202,201 |
|
|
|
196,435 |
|
|
|
190,069 |
|
|
|
183,939 |
|
Natural gas |
|
|
57,131 |
|
|
|
56,141 |
|
|
|
54,183 |
|
|
|
52,283 |
|
|
|
50,485 |
|
Other |
|
|
5,388 |
|
|
|
5,043 |
|
|
|
4,695 |
|
|
|
4,371 |
|
|
|
4,074 |
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks, trusts and insurance companies |
|
|
309,021 |
|
|
|
302,100 |
|
|
|
291,355 |
|
|
|
280,290 |
|
|
|
269,766 |
|
Transportation |
|
|
29,806 |
|
|
|
29,605 |
|
|
|
29,010 |
|
|
|
28,384 |
|
|
|
27,787 |
|
Energy |
|
|
91,030 |
|
|
|
90,764 |
|
|
|
88,866 |
|
|
|
86,890 |
|
|
|
84,984 |
|
Technology |
|
|
75,624 |
|
|
|
74,590 |
|
|
|
72,524 |
|
|
|
70,450 |
|
|
|
68,484 |
|
Basic industry |
|
|
85,789 |
|
|
|
84,897 |
|
|
|
82,517 |
|
|
|
80,133 |
|
|
|
77,853 |
|
Credit cyclicals |
|
|
54,570 |
|
|
|
53,824 |
|
|
|
51,953 |
|
|
|
50,105 |
|
|
|
48,340 |
|
Other |
|
|
211,441 |
|
|
|
207,804 |
|
|
|
200,706 |
|
|
|
193,801 |
|
|
|
187,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-For-Sale Fixed Maturities |
|
$ |
2,035,929 |
|
|
$ |
1,974,720 |
|
|
$ |
1,898,569 |
|
|
$ |
1,812,081 |
|
|
$ |
1,725,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRADING |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign bonds |
|
$ |
2,093 |
|
|
$ |
2,093 |
|
|
$ |
2,089 |
|
|
$ |
2,077 |
|
|
$ |
2,066 |
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy |
|
|
1,117 |
|
|
|
1,116 |
|
|
|
1,103 |
|
|
|
1,088 |
|
|
|
1,073 |
|
Technology |
|
|
2,473 |
|
|
|
2,461 |
|
|
|
2,420 |
|
|
|
2,377 |
|
|
|
2,335 |
|
Other |
|
|
1,309 |
|
|
|
1,228 |
|
|
|
1,225 |
|
|
|
1,218 |
|
|
|
1,211 |
|
Redeemable preferred stock |
|
|
1,233 |
|
|
|
1,233 |
|
|
|
1,218 |
|
|
|
1,198 |
|
|
|
1,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Trading Fixed Maturities |
|
$ |
8,225 |
|
|
$ |
8,131 |
|
|
$ |
8,055 |
|
|
$ |
7,958 |
|
|
$ |
7,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturity Securities |
|
$ |
2,059,640 |
|
|
$ |
1,998,154 |
|
|
$ |
1,921,770 |
|
|
$ |
1,834,819 |
|
|
$ |
1,747,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
United Fire & Casualty Company Form 10-K | 2009
To the extent actual results differ from the assumptions utilized; our duration and interest
rate measures could be significantly affected. As a result, these calculations may not fully
capture the impact of nonparallel changes in the relationship between short-term and long-term
interest rates.
Equity Price Risk
Equity price risk is the potential loss arising from changes in the fair value of equity
securities. Our exposure to this risk relates to our equity securities portfolio and covered call
options that we write from time to time to generate additional portfolio income. The carrying
values of our equity securities are based on quoted market prices as of the balance sheet date.
Market prices of equity securities, in general, are subject to fluctuations that could cause the
amount to be realized upon the sale of the securities to differ significantly from the current
reported value. The fluctuations may result from perceived changes in the underlying economic
characteristics of the issuer of securities, the relative price of alternative investments, general
market conditions and supply and demand imbalances for a particular security.
Impact of Price Change
The following table details the effect on fair value for a positive and negative 10 percent price
change on our equity portfolio for December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
-10% |
|
|
Base |
|
|
+10% |
|
Estimated fair value of equity
securities at: |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
$ |
119,446 |
|
|
$ |
132,718 |
|
|
$ |
145,990 |
|
December 31, 2008 |
|
|
108,887 |
|
|
|
120,985 |
|
|
|
133,084 |
|
Foreign Currency Exchange Rate Risk
Foreign currency exchange rate risk arises from the possibility that changes in foreign currency
exchange rates will affect the fair value of financial instruments. We have limited foreign
currency exchange rate risk in our transactions with foreign reinsurers relating to the settlement
of amounts due to or from foreign reinsurers in the normal course of business. We consider this
risk to be immaterial to our operations.
Credit Risk
We base our investment decisions on the credit characteristics of individual securities; however,
within our municipal bond portfolio are a number of securities whose ratings were enhanced by
third-party insurance for the payment of principal and interest in the event of an issuer default.
A downgrade in the credit ratings of the insurers of these securities in 2009 and 2008 has resulted
in a corresponding downgrade in the ratings of the securities. Of the insured municipal securities
in our investment portfolio, 95.1 percent and 95.3 percent were rated single A or above, and 70.0
percent and 68.9 percent were rated AA or above at December 31, 2009 and 2008, respectively,
without the benefit of insurance. Due to the underlying financial strength of the issuers of the
securities, we believe that the loss of insurance would not have a material impact on our
operations, financial position, or liquidity.
We reviewed our investment portfolio pertaining to securities guaranteed by third parties, with
both direct and indirect exposure. We have no direct exposure in any of the guarantors that
guarantee our investments. Our largest indirect exposure with a single guarantor totaled $129.7
million or 31.5 percent of our insured municipal securities for December 31, 2009 as compared to
$133.5 million or 31.7 percent for December 31, 2008. Our five largest indirect exposures to
financial guarantors accounted for 79.6 percent and 79.0 percent of our insured municipal
securities at December 31, 2009 and 2008, respectively.
75
United Fire & Casualty Company Form 10-K | 2009
|
|
|
ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Consolidated Balance Sheets
December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
(In Thousands, Except Per Share Data and Number of Shares) |
|
2009 |
|
|
2008 |
|
ASSETS |
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
Held-to-maturity, at amortized cost (fair value $9,720 in 2009 and $15,146 in 2008) |
|
$ |
9,605 |
|
|
$ |
15,177 |
|
Available-for-sale, at fair value (amortized cost $2,075,733 in 2009 and $1,942,466 in 2008) |
|
|
2,158,391 |
|
|
|
1,898,569 |
|
Equity securities, at fair value (cost $53,306 in 2009 and $66,246 in 2008) |
|
|
132,718 |
|
|
|
120,985 |
|
Trading securities, at fair value (amortized cost $11,724 in 2009 and $8,713 in 2008) |
|
|
12,613 |
|
|
|
8,055 |
|
Mortgage loans |
|
|
7,328 |
|
|
|
7,821 |
|
Policy loans |
|
|
7,947 |
|
|
|
7,808 |
|
Other long-term investments |
|
|
15,880 |
|
|
|
11,216 |
|
Short-term investments |
|
|
7,359 |
|
|
|
26,142 |
|
|
|
|
|
|
|
|
|
|
$ |
2,351,841 |
|
|
$ |
2,095,773 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
190,852 |
|
|
$ |
109,582 |
|
Accrued investment income |
|
|
28,697 |
|
|
|
27,849 |
|
Premiums receivable (net of allowance for doubtful accounts of $688 in 2009 and $655 in 2008) |
|
|
127,456 |
|
|
|
134,295 |
|
Deferred policy acquisition costs |
|
|
92,505 |
|
|
|
158,265 |
|
Property and equipment (primarily land and buildings, at cost, less accumulated
depreciation of $30,812 in 2009 and $27,994 in 2008) |
|
|
22,278 |
|
|
|
15,275 |
|
Reinsurance receivables and recoverables |
|
|
40,936 |
|
|
|
60,275 |
|
Prepaid reinsurance premiums |
|
|
1,673 |
|
|
|
1,559 |
|
Income taxes receivable |
|
|
28,197 |
|
|
|
26,974 |
|
Deferred income taxes |
|
|
|
|
|
|
8,297 |
|
Other assets |
|
|
18,109 |
|
|
|
48,986 |
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
2,902,544 |
|
|
$ |
2,687,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Future policy benefits and losses, claims and loss settlement expenses: |
|
|
|
|
|
|
|
|
Property and casualty insurance |
|
$ |
606,045 |
|
|
$ |
586,109 |
|
Life insurance |
|
|
1,321,600 |
|
|
|
1,167,665 |
|
Unearned premiums |
|
|
206,010 |
|
|
|
216,966 |
|
Accrued expenses and other liabilities |
|
|
84,934 |
|
|
|
74,649 |
|
Deferred income taxes |
|
|
11,220 |
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
$ |
2,229,809 |
|
|
$ |
2,045,389 |
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
Common stock, $3.33 1/3 par value; authorized 75,000,000 shares; 26,533,040 and
26,624,086 shares issued and outstanding in 2009 and 2008, respectively |
|
$ |
88,443 |
|
|
$ |
88,747 |
|
Additional paid-in capital |
|
|
139,403 |
|
|
|
138,511 |
|
Retained earnings |
|
|
384,242 |
|
|
|
410,634 |
|
Accumulated other comprehensive income, net of tax |
|
|
60,647 |
|
|
|
3,849 |
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS EQUITY |
|
$ |
672,735 |
|
|
$ |
641,741 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
2,902,544 |
|
|
$ |
2,687,130 |
|
|
|
|
|
|
|
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
76
United Fire & Casualty Company Form 10-K | 2009
Consolidated Statements of Income
Years Ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands, Except Per Share Data and Number of Shares) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
478,498 |
|
|
$ |
503,375 |
|
|
$ |
505,763 |
|
Investment income, net of investment expenses |
|
|
106,075 |
|
|
|
107,577 |
|
|
|
122,439 |
|
Realized investment gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment charges |
|
|
(18,307 |
) |
|
|
(9,904 |
) |
|
|
(105 |
) |
All other realized gains (losses) |
|
|
5,128 |
|
|
|
(479 |
) |
|
|
9,775 |
|
|
|
|
|
|
|
|
|
|
|
Total realized investment gains (losses) |
|
|
(13,179 |
) |
|
|
(10,383 |
) |
|
|
9,670 |
|
Other income |
|
|
799 |
|
|
|
880 |
|
|
|
654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
572,193 |
|
|
$ |
601,449 |
|
|
$ |
638,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, Losses and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss settlement expenses |
|
$ |
382,494 |
|
|
$ |
406,640 |
|
|
$ |
260,714 |
|
Increase in liability for future policy benefits |
|
|
23,897 |
|
|
|
23,156 |
|
|
|
15,666 |
|
Amortization of deferred policy acquisition costs |
|
|
114,893 |
|
|
|
129,158 |
|
|
|
136,805 |
|
Other underwriting expenses |
|
|
39,298 |
|
|
|
28,252 |
|
|
|
22,918 |
|
Disaster charges and other related expenses, net of
recoveries |
|
|
(1,335 |
) |
|
|
7,202 |
|
|
|
|
|
Interest on policyholders accounts |
|
|
41,652 |
|
|
|
40,177 |
|
|
|
43,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
600,899 |
|
|
$ |
634,585 |
|
|
$ |
479,192 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
(28,706 |
) |
|
$ |
(33,136 |
) |
|
$ |
159,334 |
|
Federal income tax expense (benefit) |
|
|
(18,265 |
) |
|
|
(20,072 |
) |
|
|
47,942 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(10,441 |
) |
|
$ |
(13,064 |
) |
|
$ |
111,392 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
26,590,458 |
|
|
|
26,959,875 |
|
|
|
27,568,742 |
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
$ |
(0.39 |
) |
|
$ |
(0.48 |
) |
|
$ |
4.04 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share |
|
$ |
(0.39 |
) |
|
$ |
(0.48 |
) |
|
$ |
4.03 |
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share |
|
$ |
0.60 |
|
|
$ |
0.60 |
|
|
$ |
0.56 |
|
|
|
|
|
|
|
|
|
|
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
77
United Fire & Casualty Company Form 10-K | 2009
Consolidated Statements of Stockholders Equity
Years Ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands, Except Per Share Data and Number of Shares) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
88,747 |
|
|
$ |
90,653 |
|
|
$ |
92,163 |
|
Shares repurchased (92,721 in 2009, 580,792 in 2008
and 497,500 in 2007) |
|
|
(309 |
) |
|
|
(1,936 |
) |
|
|
(1,658 |
) |
Shares issued for stock-based awards (1,675 in 2009,
8,990 in 2008 and 44,395 in 2007) |
|
|
5 |
|
|
|
30 |
|
|
|
148 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
88,443 |
|
|
$ |
88,747 |
|
|
$ |
90,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
138,511 |
|
|
$ |
149,511 |
|
|
$ |
161,533 |
|
Compensation expense and related tax benefit for
stock-based award grants |
|
|
2,107 |
|
|
|
1,744 |
|
|
|
1,710 |
|
Shares repurchased |
|
|
(1,236 |
) |
|
|
(12,881 |
) |
|
|
(14,420 |
) |
Shares issued for stock-based awards |
|
|
21 |
|
|
|
137 |
|
|
|
688 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
139,403 |
|
|
$ |
138,511 |
|
|
$ |
149,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
410,634 |
|
|
$ |
439,860 |
|
|
$ |
343,761 |
|
Net income (loss) |
|
|
(10,441 |
) |
|
|
(13,064 |
) |
|
|
111,392 |
|
Dividends on common stock ($0.60 per share in 2009 and
2008, $0.555 per share in 2007) |
|
|
(15,951 |
) |
|
|
(16,162 |
) |
|
|
(15,293 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
384,242 |
|
|
$ |
410,634 |
|
|
$ |
439,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
3,849 |
|
|
$ |
71,473 |
|
|
$ |
83,351 |
|
Change in net unrealized appreciation (1) |
|
|
56,948 |
|
|
|
(60,036 |
) |
|
|
(7,940 |
) |
Change in underfunded status of employee benefit
plans (2) |
|
|
(150 |
) |
|
|
(7,588 |
) |
|
|
(3,938 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
60,647 |
|
|
$ |
3,849 |
|
|
$ |
71,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of changes |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
641,741 |
|
|
$ |
751,497 |
|
|
$ |
680,808 |
|
Net income (loss) |
|
|
(10,441 |
) |
|
|
(13,064 |
) |
|
|
111,392 |
|
All other changes in stockholders equity accounts |
|
|
41,435 |
|
|
|
(96,692 |
) |
|
|
(40,703 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
672,735 |
|
|
$ |
641,741 |
|
|
$ |
751,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(10,441 |
) |
|
$ |
(13,064 |
) |
|
$ |
111,392 |
|
Change in net unrealized appreciation (1) |
|
|
56,948 |
|
|
|
(60,036 |
) |
|
|
(7,940 |
) |
Change in underfunded status of employee benefit
plans (2) |
|
|
(150 |
) |
|
|
(7,588 |
) |
|
|
(3,938 |
) |
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) for the year |
|
$ |
46,357 |
|
|
$ |
(80,688 |
) |
|
$ |
99,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 Consolidated Financial Statements are an integral part of these statements.
78
United Fire & Casualty Company Form 10-K | 2009
Consolidated Statements of Cash Flows
Years Ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Cash Flows From Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(10,441 |
) |
|
$ |
(13,064 |
) |
|
$ |
111,392 |
|
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net accretion of bond premium (discount) |
|
$ |
2,951 |
|
|
$ |
3,069 |
|
|
$ |
(506 |
) |
Depreciation and amortization |
|
|
3,533 |
|
|
|
3,616 |
|
|
|
3,573 |
|
Stock-based compensation expense |
|
|
2,084 |
|
|
|
1,780 |
|
|
|
1,377 |
|
Realized investment (gains) losses |
|
|
13,179 |
|
|
|
10,383 |
|
|
|
(9,670 |
) |
Net cash flows from trading investments |
|
|
(2,492 |
) |
|
|
1,866 |
|
|
|
2,066 |
|
Deferred income tax expense (benefit) |
|
|
(10,858 |
) |
|
|
(11,752 |
) |
|
|
2,429 |
|
Changes in: |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
(848 |
) |
|
|
582 |
|
|
|
(48 |
) |
Premiums receivable |
|
|
6,839 |
|
|
|
(13,236 |
) |
|
|
5,630 |
|
Deferred policy acquisition costs |
|
|
2,804 |
|
|
|
7,017 |
|
|
|
2,932 |
|
Reinsurance receivables |
|
|
19,339 |
|
|
|
(14,800 |
) |
|
|
8,068 |
|
Prepaid reinsurance premiums |
|
|
(114 |
) |
|
|
1,086 |
|
|
|
2,933 |
|
Income taxes receivable/payable |
|
|
(1,223 |
) |
|
|
(19,535 |
) |
|
|
2,916 |
|
Other assets |
|
|
1,851 |
|
|
|
(3,388 |
) |
|
|
(1,864 |
) |
Funds on deposit for Hurricane Katrina litigation |
|
|
29,026 |
|
|
|
(29,026 |
) |
|
|
|
|
Future policy benefits and losses, claims and loss settlement expenses |
|
|
45,474 |
|
|
|
121,498 |
|
|
|
(9,442 |
) |
Unearned premiums |
|
|
(10,956 |
) |
|
|
(7,564 |
) |
|
|
(6,847 |
) |
Accrued expenses and other liabilities |
|
|
10,054 |
|
|
|
(961 |
) |
|
|
(9,812 |
) |
Deferred income taxes |
|
|
(275 |
) |
|
|
338 |
|
|
|
(467 |
) |
Other, net |
|
|
482 |
|
|
|
5,995 |
|
|
|
1,120 |
|
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
$ |
110,850 |
|
|
$ |
56,968 |
|
|
$ |
(5,612 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
100,409 |
|
|
$ |
43,904 |
|
|
$ |
105,780 |
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of available-for-sale investments |
|
$ |
13,432 |
|
|
$ |
6,724 |
|
|
$ |
3,689 |
|
Proceeds from call and maturity of held-to-maturity investments |
|
|
5,600 |
|
|
|
12,262 |
|
|
|
17,520 |
|
Proceeds from call and maturity of available-for-sale investments |
|
|
348,581 |
|
|
|
358,248 |
|
|
|
326,345 |
|
Proceeds from short-term and other investments |
|
|
31,937 |
|
|
|
127,516 |
|
|
|
60,454 |
|
Purchase of available-for-sale investments |
|
|
(502,392 |
) |
|
|
(534,668 |
) |
|
|
(318,725 |
) |
Purchase of short-term and other investments |
|
|
(16,672 |
) |
|
|
(67,766 |
) |
|
|
(103,967 |
) |
Net purchases and sales of property and equipment |
|
|
(10,575 |
) |
|
|
(9,571 |
) |
|
|
(1,648 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
$ |
(130,089 |
) |
|
$ |
(107,255 |
) |
|
$ |
(16,332 |
) |
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders account balances: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits to investment and universal life contracts |
|
$ |
264,994 |
|
|
$ |
210,939 |
|
|
$ |
217,691 |
|
Withdrawals from investment and universal life contracts |
|
|
(136,597 |
) |
|
|
(259,723 |
) |
|
|
(279,417 |
) |
Payment of cash dividends |
|
|
(15,951 |
) |
|
|
(16,162 |
) |
|
|
(15,293 |
) |
Issuance of common stock |
|
|
26 |
|
|
|
167 |
|
|
|
836 |
|
Repurchase of common stock |
|
|
(1,545 |
) |
|
|
(14,817 |
) |
|
|
(16,078 |
) |
Tax benefit (expense) from issuance of common stock |
|
|
23 |
|
|
|
(36 |
) |
|
|
333 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
$ |
110,950 |
|
|
$ |
(79,632 |
) |
|
$ |
(91,928 |
) |
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
$ |
81,270 |
|
|
$ |
(142,983 |
) |
|
$ |
(2,480 |
) |
Cash and cash equivalents at beginning of year |
|
|
109,582 |
|
|
|
252,565 |
|
|
|
255,045 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
190,852 |
|
|
$ |
109,582 |
|
|
$ |
252,565 |
|
|
|
|
|
|
|
|
|
|
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
79
United Fire & Casualty Company Form 10-K | 2009
|
|
|
|
|
Index of Notes to Consolidated Financial Statements |
|
Page |
|
Note 1. Significant Accounting Policies |
|
|
81 |
|
Note 2. Summary of Investments |
|
|
88 |
|
Note 3. Fair Value of Financial Instruments |
|
|
95 |
|
Note 4. Short-Term Borrowings |
|
|
100 |
|
Note 5. Reinsurance |
|
|
100 |
|
Note 6. Reserves for Loss and Loss Settlement Expenses |
|
|
102 |
|
Note 7. Statutory Reporting, Capital Requirements, and Dividends and Retained Earnings Restrictions |
|
|
103 |
|
Note 8. Federal Income Tax |
|
|
104 |
|
Note 9. Employee Benefits |
|
|
105 |
|
Note 10. Stock Option Plans |
|
|
112 |
|
Note 11. Segment Information |
|
|
114 |
|
Note 12. Quarterly Supplementary Financial Information (Unaudited) |
|
|
118 |
|
Note 13. Earnings and Dividends Per Common Share |
|
|
118 |
|
Note 14. Comprehensive Income (Loss) |
|
|
119 |
|
Note 15. Lease Commitments |
|
|
119 |
|
80
United Fire & Casualty Company Form 10-K | 2009
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations, Principles of Consolidation and Basis of Reporting
The Consolidated Financial Statements have been prepared on the basis of GAAP, which differ in some
respects from those followed in preparing our statutory reports to insurance regulatory
authorities. Our stand-alone financial statements submitted to insurance regulatory authorities are
presented on the basis of accounting practices prescribed or permitted by the insurance departments
of the states in which we are domiciled (statutory accounting practices).
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, 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. Actual results could differ
from those estimates. The financial statement categories that are most dependent on management
estimates and assumptions include investments, DAC and future policy benefits and losses, claims
and loss settlement expenses.
We are engaged in the business of writing property and casualty insurance and life insurance and
selling annuities.
The accompanying Consolidated Financial Statements include United Fire & Casualty Company (United
Fire) and its wholly owned subsidiaries: United Life Insurance Company, Lafayette Insurance
Company, Addison Insurance Company, American Indemnity Financial Corporation, United Fire &
Indemnity Company and Texas General Indemnity Company. United Fire Lloyds, an affiliate of United
Fire & Indemnity Company, has also been included in consolidation. All intercompany balances have
been eliminated in consolidation.
United Fire Lloyds is organized as a Texas Lloyds plan, which is an aggregation of underwriters
who, under a common name, engage in the business of insurance through a corporate attorney-in-fact.
United Fire Lloyds is financially and operationally controlled by United Fire & Indemnity Company,
its corporate attorney-in-fact, pursuant to three types of agreements: trust agreements between
United Fire & Indemnity Company and certain individuals who agree to serve as trustees; articles of
agreement among the trustees who agree to act as underwriters to establish how the Lloyds plan will
be operated; and powers of attorney from each of the underwriters appointing a corporate
attorney-in-fact, who is authorized to operate the Lloyds plan. Because United Fire & Indemnity
Company can name the trustees, the Lloyds plan is perpetual, subject only to United Fire &
Indemnity Companys desire to terminate it.
United Fire & Indemnity Company provides all of the statutory capital necessary for the formation
of the Lloyds plan by contributing capital to each of the trustees. The trust agreements require
the trustees to become underwriters of the Lloyds plan, to contribute the capital to the Lloyds
plan, to sign the articles of agreement and to appoint the attorney-in-fact. The trust agreements
also require the trustees to pay to United Fire & Indemnity Company all of the profits and benefits
received by the trustees as underwriters of the Lloyds plan, which means that United Fire &
Indemnity Company has the right to receive 100 percent of the gains and profits from the Lloyds
plan. The trustees serve at the pleasure of United Fire & Indemnity Company, which may remove a
trustee and replace that trustee at any time. Termination of a trustee must be accompanied by the
resignation of the trustee as an underwriter, so that the trustee can obtain the capital
contribution from the Lloyds plan to reimburse United Fire & Indemnity Company. By retaining the
ability to terminate trustees, United Fire & Indemnity Company possesses the ability to name and
remove the underwriters.
81
United Fire & Casualty Company Form 10-K | 2009
Property and Casualty Insurance Business
Premiums are reported in income on a daily pro rata basis over the terms of the respective
policies. Unearned premium reserves are established for the portion of premiums written applicable
to the unexpired term of policies in-force.
Certain costs of underwriting new business, principally commissions, premium taxes and variable
underwriting and policy issue expenses, have been deferred. Such costs are being amortized as
premium revenue is being recognized. Policy acquisition costs deferred in 2009, 2008 and 2007 were
$98,946,000, $111,521,000 and $123,362,000, respectively. Amortization of DAC in 2009, 2008 and
2007 totaled $105,606,000, $117,590,000 and $123,420,000, respectively. The method followed in
computing DAC limits the amount of such deferred costs to their estimated realizable value, which
gives effect to the premium to be earned, losses and expenses to be incurred and certain other
costs expected to be incurred as the premium is earned.
To establish loss and loss settlement expense reserves, we make estimates and assumptions about the
future development of claims. Actual results could differ materially from those estimates, which
are subjective, complex and inherently uncertain. When we establish and adjust reserves, we do so
given our knowledge at that time of the circumstances and facts of known claims. To the extent that
we have overestimated or underestimated our loss and loss settlement expense reserves, we adjust
the reserves in the period in which such adjustment is determined.
Life Insurance Business
Our whole life and term insurance (traditional business) premiums are reported as earned when due
and benefits and expenses are associated with premium income in order to result in the recognition
of profits over the lives of the related contracts. On universal life and annuity policies
(non-traditional business), income and expenses are reported when charged and credited to
policyholder account balances in order to result in the recognition of profits over the lives of
the related contracts. We accomplish this by means of a provision for future policy benefits and
the deferral and subsequent amortization of policy acquisition costs.
The costs of acquiring new life business, principally commissions, certain variable underwriting,
agency and policy issue expenses, have been deferred. These costs are amortized to income over the
premium-paying period of the related traditional policies in proportion to the ratio of the
expected annual premium revenue to the expected total premium revenue and over the anticipated
terms of non-traditional policies in proportion to the ratio of the expected annual gross profits
to the expected total gross profits. Policy acquisition costs deferred in 2009, 2008 and 2007 were
$13,612,000, $10,620,000 and $10,511,000, respectively. Amortization of DAC in 2009, 2008 and 2007
totaled $9,287,000, $11,568,000 and $13,385,000, respectively. The expected premium revenue and
gross profits are based upon the same mortality and withdrawal assumptions used in determining
future policy benefits. For non-traditional policies, changes in the amount or timing of expected
gross profits result in adjustments to the cumulative amortization of these costs. The effect on
the amortization of DAC for revisions to estimated gross profits is reported in earnings in the
period such estimated gross profits are revised.
The effect on DAC that results from the assumed realization of unrealized gains (losses) is
recognized with an offset to unrealized investment appreciation (depreciation) as of the balance
sheet dates. In 2009, pre-tax adjustments decreased DAC by $63,425,000. In 2008, pre-tax
adjustments increased DAC by $36,284,000.
Liabilities for future policy benefits for traditional products are computed by the net level
premium method, using interest assumptions ranging from 4.5 percent to 6.0 percent and withdrawal,
mortality and morbidity assumptions appropriate at the time the policies were issued. Liabilities
for non-traditional business are stated at policyholder account values before surrender charges.
Liabilities for traditional immediate annuities are based primarily upon future anticipated cash
flows using statutory mortality and interest rates, which produce results that are not materially
different from GAAP. Liabilities for deferred annuities are carried at the account value.
82
United Fire & Casualty Company Form 10-K | 2009
Investments
Investments in held-to-maturity fixed maturities are recorded at amortized cost. We have the
ability and positive intent to hold these investments until maturity. Available-for-sale fixed
maturities, trading securities and equity securities are recorded at fair value. Other long-term
investments are recorded on the equity method of accounting. Mortgage loans are recorded at cost.
Policy loans are recorded at the outstanding loan amount due from policyholders. Included in
investments at December 31, 2009 and 2008, are securities on deposit with, or available to, various
regulatory authorities as required by law, with fair values of $1,464,406,000 and $1,270,181,000,
respectively.
Realized gains or losses on disposition of investments are included in the computation of net
income. Cost of investments sold is determined by the specific identification method. Changes in
unrealized appreciation and depreciation, with respect to available-for-sale fixed maturities and
equity securities, are reported as a separate component of accumulated other comprehensive income,
less applicable income taxes.
In 2009, 2008 and 2007, we wrote-down certain holdings in our investment portfolio as a result of
other-than-temporary impairment (OTTI) charges and recorded a pre-tax realized loss of
$18,307,000, $9,904,000 and $105,000, respectively. None of the OTTI charges were considered to
have a noncredit related loss component. We continue to review all of our investment holdings for
appropriate valuation on an ongoing basis. Refer to Note 2 Summary of Investments for a
discussion of our accounting policy for impairment recognition.
Reinsurance
Premiums earned and losses and loss settlement expenses incurred are reported net of reinsurance
ceded. Ceded insurance business is accounted for on a basis consistent with the original policies
issued and the terms of the reinsurance contracts. Refer to Note 5 Reinsurance for a discussion
of our reinsurance operations.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash, nonnegotiable
certificates of deposit with original maturities of twelve months or less and money market
accounts.
We made payments for income taxes of $4,324,000, $13,817,000 and $50,513,000 during 2009, 2008 and
2007, respectively. In addition, we received refunds totaling $10,256,000, $2,904,000 and
$7,783,000 in 2009, 2008 and 2007, respectively, due to the carryback of losses. There were no
significant payments of interest in 2009, 2008 and 2007, other than payments to policyholders
accounts related to non-traditional life insurance business.
Property, Equipment and Depreciation
Property and equipment is carried at cost less accumulated depreciation. Depreciation is computed
primarily by the straight-line method over the estimated useful lives of the underlying assets.
Depreciation expense totaled $3,473,000, $3,556,000 and $3,513,000 for 2009, 2008 and 2007,
respectively.
83
United Fire & Casualty Company Form 10-K | 2009
Amortization of Intangibles
Our intangibles are composed entirely of agency relationships, which are being amortized by the
straight-line method over periods of up to 10 years. We regularly review the carrying value of our
intangibles for impairment in the recoverability of the underlying asset, with any impairment being
charged to operations in the period that the impairment was recognized. We did not recognize an
impairment write-down to the carrying value of our intangibles in 2009, 2008 or 2007.
Amortization expense totaled $60,000 for each of the three years ended December 31, 2009, 2008 and
2007.
Income Taxes
We file a consolidated federal income tax return. Deferred tax assets and liabilities are
established based on differences between the financial statement bases of assets and liabilities
and the tax bases of those same assets and liabilities, using the currently enacted statutory tax
rates. Deferred income tax expense is measured by the year-to-year change in the net deferred tax
asset or liability, except for certain changes in deferred tax amounts that affect stockholders
equity and do not impact income tax expense.
We have recognized no liability for unrecognized tax benefits at December 31, 2009 or 2008 or at
any time during 2009 or 2008. In addition, we have not accrued for interest and penalties related
to unrecognized tax benefits. However, if interest and penalties would need to be accrued related
to unrecognized tax benefits, such amounts would be recognized as a component of federal income tax
expense.
We file income tax returns under U.S. federal 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 2004. There are no ongoing examinations of income tax
returns by federal or state tax authorities.
Contingent Liabilities
Legal Proceedings
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
December 31, 2009, there were approximately 215 individual policyholder cases pending, and an
additional seven 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. In August 2009, the Federal trial court ruled that certification of policyholder claims
as a class would be inappropriate. This ruling has been appealed by the plaintiff policyholders.
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.
84
United Fire & Casualty Company Form 10-K | 2009
In light of an April 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 the twelve months ended December 31, 2009 we resolved approximately 200
of the lawsuits, which were pending at December 31, 2008.
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 were at least partially
denied or allegedly misadjusted. We appealed this order as we feel it was not supported by the
evidence. On October 14, 2009, we were notified that our appeal to the Louisiana Fourth Circuit
Court of Appeals was denied. We are seeking review of this decision at the Louisiana Supreme Court.
Our petition for review remains pending at December 31, 2009. We have reserved each case based on
the estimated exposure attributable to our policy. However, in the event that our request for
relief is denied, we may increase reserves.
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 are 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 December 31, 2009 to be ordinary, routine,
and incidental to our business.
Stock-Based Compensation
For our nonqualified stock options, we utilize the Black-Scholes option pricing method to establish
the fair value of options granted under our stock award plans. Our determination of the fair value
of stock-based payment awards on the date of grant using this option-pricing model is affected by
our stock price, as well as assumptions regarding a number of complex and subjective variables,
which include the expected volatility in our stock price, the expected dividends to be paid over
the term of the awards, the risk-free interest rate and actual and projected employee stock award
exercise activity. Any changes in these assumptions may materially affect the estimated fair value
of the award. For our restricted stock awards, we utilize the fair value of our common stock on the
date of grant to determine the fair value of the award.
For 2009, 2008 and 2007, we recognized stock-based compensation expense of $2,084,000, $1,780,000
and $1,377,000, respectively. As of December 31, 2009, we have $3,739,000 in stock-based
compensation expense that has yet to be recognized through our results of operations. This
compensation will 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 would be
recognized in the period in which the awards are accelerated.
85
United Fire & Casualty Company Form 10-K | 2009
Securities Lending
We participate in a securities lending program administered by The Northern Trust Company
(Northern Trust), which generates investment income and provides discounts on other investment
fees we are charged by Northern Trust. Pursuant to the lending agreement, certain of our fixed
maturity securities are loaned to other institutions for short periods of time. Borrowers of these
securities must deposit collateral, which is generally in the form of cash, with Northern Trust, as
our agent, that is equal to at least 102% of the market value of the loaned securities plus accrued
interest. The value of the loaned securities is marked to market daily by Northern Trust at an
aggregate level per borrower. As the market value of the loaned securities fluctuates, the borrower
either deposits additional collateral or Northern Trust refunds collateral to the borrower in order
to maintain the collateral level at 102%. We retain the right to terminate the loan at any time,
whereupon the borrower must return the loaned securities to Northern Trust. If the borrower
defaults and does not return the securities, Northern Trust will use the deposited collateral to
purchase equivalent securities for us. However, we would receive the deposited collateral in place
of the borrowed securities if Northern Trust is unable to purchase equivalent securities. Our
participation in the securities lending program generated investment income of $139,000 in 2009 and
$89,000 in 2008. There were no securities on loan under the program at December 31, 2009 and 2008.
We resumed our participation in the securities lending program in January 2010.
Adopted Accounting Standards
Business Combinations
In December 2007, the FASB issued revised guidance on accounting for business combinations, which
addresses the manner in which 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, the revised guidance provides instruction on the recognition and measurement
of goodwill, as well as instruction 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 revised guidance prospectively to business combinations occurring on
or after January 1, 2009. The adoption of the revised guidance did not have any impact on the
amounts reported in our Consolidated Financial Statements.
Subsequent Events
In February 2010, the FASB updated the accounting guidance on evaluating subsequent events. The
updated guidance continues to require an entity to evaluate subsequent events through the date the
entitys financial statements are issued, however, the entity is no longer required to disclose the
date through which subsequent events were evaluated. The updated guidance was effective upon
issuance. We did not identify any material subsequent events for reporting in the Consolidated
Financial Statements.
Fair Value Measurements
In April 2009, the FASB issued interpretative guidance on determining fair value when the volume
and level of activity for the asset or liability have significantly decreased and identifying
transactions are not orderly. Under the guidance, 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. The guidance is effective for
interim or annual periods ending after June 15, 2009. The adoption of the guidance did not have any
impact on the amounts reported in our Consolidated Financial Statements.
86
United Fire & Casualty Company Form 10-K | 2009
Other-Than-Temporary Impairment of Investments
In April 2009, the FASB issued accounting guidance on the recognition and presentation of OTTI
charges for fixed maturity securities that are classified as available-for-sale and
held-to-maturity. The guidance 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. The guidance adds 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, the guidance requires that the
difference between the fair value and the amortized cost of the security be presented as an OTTI
charge with an offset for any noncredit-related loss component of the OTTI charge to be recognized
in accumulated other comprehensive income. Accordingly, only the credit loss component will have an
impact on earnings for the reporting period.
The guidance 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 charge was determined along with a roll
forward of such amount for each reporting period. The guidance is effective for interim and annual
periods ending after June 15, 2009. The adoption of the guidance did not have any impact on our
consolidated financial position or results of operations.
Employers Disclosures about Postretirement Benefit Plan Assets
In December 2008, the FASB issued accounting guidance that requires an employer to provide certain
disclosures about the assets held by its defined benefit pension or other postretirement benefit
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. The guidance is effective for fiscal years ending after December 15, 2009. The adoption of
the guidance did not have any impact on our consolidated financial position or results of
operations.
Pending Accounting Standards
In January 2010, the FASB issued revised accounting guidance that clarifies and provides additional
disclosure requirements related to recurring and non-recurring fair value measurements. The
guidance requires separate disclosures for the amounts of significant transfers in and out of Level
1 and Level 2 fair value measurements along with an explanation for the transfers. Additionally, a
separate disclosure is required for purchases, sales, issuances and settlements on a gross basis
for Level 3 fair value measurements. The guidance also provides additional clarification for both
the level of disaggregation reported for each class of assets or liabilities and disclosures of
inputs and valuation techniques used to measure fair value for both recurring and non-recurring
fair value measurements, categorized as Level 2 or Level 3. The new disclosures and clarifications
of existing disclosures are effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in
the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal
years beginning after December 15, 2010. Our adoption of the guidance effective January 1, 2010,
will not have a material impact on our consolidated financial position or results of operations.
However, we are currently evaluating the impact the adoption of the guidance will have on the
disclosures made in our Consolidated Financial Statements.
87
United Fire & Casualty Company Form 10-K | 2009
NOTE 2. SUMMARY OF INVESTMENTS
Fair Value of Investments
A reconciliation of the amortized cost (cost for equity securities) to fair value of investments in
held-to-maturity and available-for-sale fixed maturity and equity securities as of December
31, 2009 and 2008, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Cost or |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
Type of Investment |
|
Amortized Cost |
|
|
Appreciation |
|
|
Depreciation |
|
|
Fair Value |
|
HELD-TO-MATURITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
$ |
955 |
|
|
$ |
21 |
|
|
$ |
|
|
|
$ |
976 |
|
Mortgage-backed securities |
|
|
534 |
|
|
|
73 |
|
|
|
|
|
|
|
607 |
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligations |
|
|
1,478 |
|
|
|
21 |
|
|
|
5 |
|
|
|
1,494 |
|
Special revenue |
|
|
6,638 |
|
|
|
163 |
|
|
|
158 |
|
|
|
6,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Held-to-Maturity Fixed Maturities |
|
$ |
9,605 |
|
|
$ |
278 |
|
|
$ |
163 |
|
|
$ |
9,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
$ |
17,452 |
|
|
$ |
1,500 |
|
|
$ |
|
|
|
$ |
18,952 |
|
Mortgage-backed securities |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
US Treasury |
|
|
35,278 |
|
|
|
564 |
|
|
|
192 |
|
|
|
35,650 |
|
Agency |
|
|
71,667 |
|
|
|
6 |
|
|
|
1,048 |
|
|
|
70,625 |
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligations |
|
|
371,098 |
|
|
|
19,408 |
|
|
|
128 |
|
|
|
390,378 |
|
Special revenue |
|
|
219,991 |
|
|
|
8,605 |
|
|
|
1,234 |
|
|
|
227,362 |
|
Foreign bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian |
|
|
55,979 |
|
|
|
2,847 |
|
|
|
|
|
|
|
58,826 |
|
Other |
|
|
79,115 |
|
|
|
3,571 |
|
|
|
272 |
|
|
|
82,414 |
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
|
212,699 |
|
|
|
11,603 |
|
|
|
298 |
|
|
|
224,004 |
|
Natural gas |
|
|
54,936 |
|
|
|
2,870 |
|
|
|
|
|
|
|
57,806 |
|
Other |
|
|
3,597 |
|
|
|
181 |
|
|
|
|
|
|
|
3,778 |
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks, trusts and insurance companies |
|
|
287,409 |
|
|
|
10,061 |
|
|
|
8,261 |
|
|
|
289,209 |
|
Transportation |
|
|
30,427 |
|
|
|
1,775 |
|
|
|
15 |
|
|
|
32,187 |
|
Energy |
|
|
145,933 |
|
|
|
6,653 |
|
|
|
247 |
|
|
|
152,339 |
|
Technology |
|
|
84,123 |
|
|
|
5,180 |
|
|
|
131 |
|
|
|
89,172 |
|
Basic industry |
|
|
105,631 |
|
|
|
4,266 |
|
|
|
330 |
|
|
|
109,567 |
|
Credit cyclicals |
|
|
69,686 |
|
|
|
2,912 |
|
|
|
13 |
|
|
|
72,585 |
|
Other |
|
|
230,710 |
|
|
|
13,874 |
|
|
|
1,049 |
|
|
|
243,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-For-Sale Fixed Maturities |
|
$ |
2,075,733 |
|
|
$ |
95,876 |
|
|
$ |
13,218 |
|
|
$ |
2,158,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
$ |
6,646 |
|
|
$ |
3,649 |
|
|
$ |
262 |
|
|
$ |
10,033 |
|
Natural gas |
|
|
838 |
|
|
|
846 |
|
|
|
|
|
|
|
1,684 |
|
Banks, trusts and insurance companies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks |
|
|
6,517 |
|
|
|
29,503 |
|
|
|
131 |
|
|
|
35,889 |
|
Insurance |
|
|
3,129 |
|
|
|
8,634 |
|
|
|
111 |
|
|
|
11,652 |
|
Other |
|
|
1,505 |
|
|
|
437 |
|
|
|
|
|
|
|
1,942 |
|
All other common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation |
|
|
38 |
|
|
|
1,555 |
|
|
|
|
|
|
|
1,593 |
|
Energy |
|
|
4,903 |
|
|
|
4,650 |
|
|
|
24 |
|
|
|
9,529 |
|
Technology |
|
|
8,100 |
|
|
|
5,995 |
|
|
|
185 |
|
|
|
13,910 |
|
Basic industry |
|
|
7,156 |
|
|
|
6,403 |
|
|
|
110 |
|
|
|
13,449 |
|
Credit cyclicals |
|
|
1,402 |
|
|
|
1,774 |
|
|
|
|
|
|
|
3,176 |
|
Other |
|
|
11,611 |
|
|
|
17,241 |
|
|
|
20 |
|
|
|
28,832 |
|
Nonredeemable preferred stocks |
|
|
1,461 |
|
|
|
|
|
|
|
432 |
|
|
|
1,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Equity Securities |
|
$ |
53,306 |
|
|
$ |
80,687 |
|
|
$ |
1,275 |
|
|
$ |
132,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Securities |
|
$ |
2,129,039 |
|
|
$ |
176,563 |
|
|
$ |
14,493 |
|
|
$ |
2,291,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
United Fire & Casualty Company Form 10-K | 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
December 31, 2008 |
|
Cost or |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
Type of Investment |
|
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 |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks, trusts 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 |
|
Banks, trusts 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
United Fire & Casualty Company Form 10-K | 2009
Maturities
The amortized cost and fair value of held-to-maturity, available-for-sale and trading securities at
December 31, 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. Mortgage-backed securities and
collateralized mortgage obligations may be subject to prepayment risk and are therefore not
categorized by contractual maturity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-To-Maturity |
|
|
Available-For-Sale |
|
|
Trading |
|
(In Thousands) |
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
December 31, 2009 |
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
Due in one year or less |
|
$ |
255 |
|
|
$ |
259 |
|
|
$ |
157,058 |
|
|
$ |
159,491 |
|
|
$ |
|
|
|
$ |
|
|
Due after one year through five years |
|
|
7,206 |
|
|
|
7,184 |
|
|
|
1,058,214 |
|
|
|
1,111,359 |
|
|
|
5,657 |
|
|
|
6,101 |
|
Due after five years through 10 years |
|
|
655 |
|
|
|
694 |
|
|
|
707,376 |
|
|
|
730,625 |
|
|
|
|
|
|
|
|
|
Due after 10 years |
|
|
|
|
|
|
|
|
|
|
135,631 |
|
|
|
137,962 |
|
|
|
6,067 |
|
|
|
6,512 |
|
Mortgage-backed securities |
|
|
534 |
|
|
|
607 |
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
|
955 |
|
|
|
976 |
|
|
|
17,452 |
|
|
|
18,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,605 |
|
|
$ |
9,720 |
|
|
$ |
2,075,733 |
|
|
$ |
2,158,391 |
|
|
$ |
11,724 |
|
|
$ |
12,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized Investment Gains and Losses
The proceeds and gross realized gains and losses on the sale of available-for-sale securities for
the years ended December 31, 2009, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Proceeds from sales |
|
$ |
13,432 |
|
|
$ |
6,724 |
|
|
$ |
3,689 |
|
Gross realized gains |
|
|
2,009 |
|
|
|
151 |
|
|
|
929 |
|
Gross realized losses |
|
|
(890 |
) |
|
|
(74 |
) |
|
|
|
|
There were no sales of held-to-maturity securities in 2009, 2008 and 2007.
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 $12,613,000 and $8,055,000 at December 31, 2009 and 2008,
respectively.
The realized gains (losses) attributable to the change in fair value of trading securities still
held at December 31, 2009, 2008 and 2007 were $1,547,000, $(1,528,000) and $(480,000),
respectively.
90
United Fire & Casualty Company Form 10-K | 2009
A summary of realized investment gains (losses) and a summary of net changes in unrealized
investment appreciation, less applicable income taxes, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Realized investment gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
(4,117 |
) |
|
$ |
(11,728 |
) |
|
$ |
2,078 |
|
Equity securities |
|
|
(11,362 |
) |
|
|
1,427 |
|
|
|
6,020 |
|
Trading securities |
|
|
1,965 |
|
|
|
(82 |
) |
|
|
1,572 |
|
Other long-term investments |
|
|
332 |
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized investment gains (losses) |
|
$ |
(13,179 |
) |
|
$ |
(10,383 |
) |
|
$ |
9,670 |
|
|
|
|
|
|
|
|
|
|
|
Net changes in unrealized investment appreciation |
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale fixed maturities and equity securities |
|
$ |
151,228 |
|
|
$ |
(128,646 |
) |
|
$ |
(8,382 |
) |
Deferred policy acquisition costs |
|
|
(63,425 |
) |
|
|
36,284 |
|
|
|
(3,831 |
) |
Income tax effect |
|
|
(30,855 |
) |
|
|
32,326 |
|
|
|
4,273 |
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized appreciation, net of tax |
|
$ |
56,948 |
|
|
$ |
(60,036 |
) |
|
$ |
(7,940 |
) |
|
|
|
|
|
|
|
|
|
|
Net Investment Income
Net investment income for the years ended December 31, 2009, 2008 and 2007, is composed of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Investment income |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on fixed maturities |
|
$ |
106,023 |
|
|
$ |
100,755 |
|
|
$ |
103,632 |
|
Dividends on equity securities |
|
|
3,950 |
|
|
|
5,749 |
|
|
|
6,190 |
|
Loss on other long-term investments (1) |
|
|
(1,133 |
) |
|
|
(4,442 |
) |
|
|
(954 |
) |
Interest on mortgage loans |
|
|
587 |
|
|
|
851 |
|
|
|
1,712 |
|
Interest on short-term investments |
|
|
558 |
|
|
|
3,127 |
|
|
|
2,634 |
|
Interest on cash and cash equivalents |
|
|
1,094 |
|
|
|
4,710 |
|
|
|
12,327 |
|
Other |
|
|
1,253 |
|
|
|
1,588 |
|
|
|
1,208 |
|
|
|
|
|
|
|
|
|
|
|
Total investment income |
|
$ |
112,332 |
|
|
$ |
112,338 |
|
|
$ |
126,749 |
|
Less investment expenses |
|
|
6,257 |
|
|
|
4,761 |
|
|
|
4,310 |
|
|
|
|
|
|
|
|
|
|
|
Investment income, net |
|
$ |
106,075 |
|
|
$ |
107,577 |
|
|
$ |
122,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes an adjustment for the changes in value of our holdings in limited liability
partnership funds, which are accounted for under the equity method of accounting. |
Off-Balance Sheet Arrangements
Pursuant to an agreement with one of our limited liability partnership holdings, we are
contractually committed to make capital contributions up to $15.0 million, upon request by the
partnership, through December 31, 2017. As of December 31, 2009, our remaining potential
contractual obligation was $13.1 million.
91
United Fire & Casualty Company Form 10-K | 2009
Unrealized Depreciation
We continually monitor the difference between our cost basis and the estimated fair value of
our investments. Our accounting policy for impairment recognition requires OTTI charges to be
recorded when we determine that it is more likely than not that we will be unable to collect all
amounts due according to the contractual terms of the fixed maturity security or that the
anticipated recovery in fair value of the equity security will not occur in a reasonable amount of
time. Impairment charges on investments are recorded based on the fair value of the investments at
the measurement date. Factors considered in evaluating whether a decline in value is
other-than-temporary include: the length of time and the extent to which fair value has been less
than cost; the financial condition and near-term prospects of the issuer; our intention to hold the
investment; and the likelihood that we will be required to sell the investment.
The tables on the following pages present a summary of fixed maturity and equity securities that
were in an unrealized loss position at December 31, 2009 and 2008. It is possible that we could
recognize OTTI charges in future periods on securities that we held at December 31, 2009, if future
events or information cause us to determine that a decline in fair value is other-than-temporary.
We believe the unrealized depreciation 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 more likely than not that we will not be required to sell the
securities until such time as the value recovers or the securities mature.
We have evaluated the unrealized losses reported for all of our equity securities at December 31,
2009, and have concluded that the duration and severity of these losses do not warrant the
recognition of an OTTI charge at December 31, 2009. Specifically, the unrealized losses reported
for individual securities that have been in an unrealized loss position for greater than twelve
months has fluctuated significantly during 2009. Our largest unrealized loss greater than twelve
months on an individual equity security at December 31, 2009 was $180,000. We have no intention to
sell any of these securities prior to a recovery in value, but will continue to monitor the fair
value reported for these securities as part of our overall process to evaluate investments for OTTI
recognition.
92
United Fire & Casualty Company Form 10-K | 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
December 31, 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 |
|
|
$ |
300 |
|
|
$ |
5 |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
300 |
|
|
$ |
5 |
|
Special revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
679 |
|
|
|
158 |
|
|
|
679 |
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Held-to-Maturity Fixed Maturities |
|
|
1 |
|
|
$ |
300 |
|
|
$ |
5 |
|
|
|
1 |
|
|
$ |
679 |
|
|
$ |
158 |
|
|
$ |
979 |
|
|
$ |
163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury |
|
|
5 |
|
|
$ |
11,772 |
|
|
$ |
192 |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
11,772 |
|
|
$ |
192 |
|
Agency |
|
|
5 |
|
|
|
24,755 |
|
|
|
246 |
|
|
|
10 |
|
|
|
42,198 |
|
|
|
802 |
|
|
|
66,953 |
|
|
|
1,048 |
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligations |
|
|
2 |
|
|
|
966 |
|
|
|
23 |
|
|
|
3 |
|
|
|
2,118 |
|
|
|
105 |
|
|
|
3,084 |
|
|
|
128 |
|
Special revenue |
|
|
21 |
|
|
|
22,892 |
|
|
|
463 |
|
|
|
10 |
|
|
|
9,401 |
|
|
|
771 |
|
|
|
32,293 |
|
|
|
1,234 |
|
Foreign bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
2 |
|
|
|
1,329 |
|
|
|
19 |
|
|
|
4 |
|
|
|
10,492 |
|
|
|
253 |
|
|
|
11,821 |
|
|
|
272 |
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
|
1 |
|
|
|
4,958 |
|
|
|
99 |
|
|
|
6 |
|
|
|
7,761 |
|
|
|
199 |
|
|
|
12,719 |
|
|
|
298 |
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks, trusts and insurance companies |
|
|
13 |
|
|
|
20,789 |
|
|
|
813 |
|
|
|
46 |
|
|
|
70,871 |
|
|
|
7,448 |
|
|
|
91,660 |
|
|
|
8,261 |
|
Transportation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
1,997 |
|
|
|
15 |
|
|
|
1,997 |
|
|
|
15 |
|
Energy |
|
|
1 |
|
|
|
3,189 |
|
|
|
37 |
|
|
|
5 |
|
|
|
9,710 |
|
|
|
210 |
|
|
|
12,899 |
|
|
|
247 |
|
Technology |
|
|
4 |
|
|
|
8,263 |
|
|
|
65 |
|
|
|
1 |
|
|
|
952 |
|
|
|
66 |
|
|
|
9,215 |
|
|
|
131 |
|
Basic industry |
|
|
6 |
|
|
|
15,843 |
|
|
|
136 |
|
|
|
2 |
|
|
|
4,806 |
|
|
|
194 |
|
|
|
20,649 |
|
|
|
330 |
|
Credit cyclicals |
|
|
3 |
|
|
|
5,217 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,217 |
|
|
|
13 |
|
Other |
|
|
1 |
|
|
|
3,270 |
|
|
|
72 |
|
|
|
7 |
|
|
|
16,892 |
|
|
|
977 |
|
|
|
20,162 |
|
|
|
1,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-For-Sale Fixed Maturities |
|
|
64 |
|
|
$ |
123,243 |
|
|
$ |
2,178 |
|
|
|
95 |
|
|
$ |
177,198 |
|
|
$ |
11,040 |
|
|
$ |
300,441 |
|
|
$ |
13,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
12 |
|
|
$ |
2,074 |
|
|
$ |
262 |
|
|
$ |
2,074 |
|
|
$ |
262 |
|
Banks, trusts and insurance companies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
425 |
|
|
|
131 |
|
|
|
425 |
|
|
|
131 |
|
Insurance |
|
|
2 |
|
|
|
299 |
|
|
|
46 |
|
|
|
3 |
|
|
|
391 |
|
|
|
65 |
|
|
|
690 |
|
|
|
111 |
|
All other common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
188 |
|
|
|
24 |
|
|
|
188 |
|
|
|
24 |
|
Technology |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
2,235 |
|
|
|
185 |
|
|
|
2,235 |
|
|
|
185 |
|
Basic industry |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
151 |
|
|
|
110 |
|
|
|
151 |
|
|
|
110 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
258 |
|
|
|
20 |
|
|
|
258 |
|
|
|
20 |
|
Nonredeemable preferred stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
1,030 |
|
|
|
432 |
|
|
|
1,030 |
|
|
|
432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Equity Securities |
|
|
2 |
|
|
$ |
299 |
|
|
$ |
46 |
|
|
|
33 |
|
|
$ |
6,752 |
|
|
$ |
1,229 |
|
|
$ |
7,051 |
|
|
$ |
1,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Securities |
|
|
66 |
|
|
$ |
123,542 |
|
|
$ |
2,224 |
|
|
|
128 |
|
|
$ |
183,950 |
|
|
$ |
12,269 |
|
|
$ |
307,492 |
|
|
$ |
14,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
67 |
|
|
$ |
123,842 |
|
|
$ |
2,229 |
|
|
|
129 |
|
|
$ |
184,629 |
|
|
$ |
12,427 |
|
|
$ |
308,471 |
|
|
$ |
14,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
United Fire & Casualty Company Form 10-K | 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
(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 |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks, trusts and insurance companie |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
United Fire & Casualty Company Form 10-K | 2009
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 December 31, 2009 and
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, when relevant observable market data does not exist.
A summary of the carrying value and estimated fair value of our financial instruments at December
31, 2009 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31 |
|
2009 |
|
|
2008 |
|
(In Thousands) |
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity fixed maturities |
|
$ |
9,720 |
|
|
$ |
9,605 |
|
|
$ |
15,146 |
|
|
$ |
15,177 |
|
Available-for-sale fixed maturities |
|
|
2,158,391 |
|
|
|
2,158,391 |
|
|
|
1,898,569 |
|
|
|
1,898,569 |
|
Trading securities |
|
|
12,613 |
|
|
|
12,613 |
|
|
|
8,055 |
|
|
|
8,055 |
|
Equity securities |
|
|
132,718 |
|
|
|
132,718 |
|
|
|
120,985 |
|
|
|
120,985 |
|
Mortgage loans |
|
|
8,229 |
|
|
|
7,328 |
|
|
|
8,719 |
|
|
|
7,821 |
|
Policy loans |
|
|
7,947 |
|
|
|
7,947 |
|
|
|
7,808 |
|
|
|
7,808 |
|
Other long-term investments |
|
|
15,880 |
|
|
|
15,880 |
|
|
|
11,216 |
|
|
|
11,216 |
|
Short-term investments |
|
|
7,359 |
|
|
|
7,359 |
|
|
|
26,142 |
|
|
|
26,142 |
|
Cash and cash equivalents |
|
|
190,852 |
|
|
|
190,852 |
|
|
|
109,582 |
|
|
|
109,582 |
|
Accrued investment income |
|
|
28,697 |
|
|
|
28,697 |
|
|
|
27,849 |
|
|
|
27,849 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy Reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity (accumulations) (1) |
|
$ |
1,087,457 |
|
|
$ |
914,003 |
|
|
$ |
748,506 |
|
|
$ |
786,063 |
|
Annuity (benefit payments) |
|
|
85,336 |
|
|
|
77,025 |
|
|
|
69,976 |
|
|
|
73,094 |
|
|
|
|
(1) |
|
Annuity accumulations represent deferred annuity contracts which are currently earning interest. |
95
United Fire & Casualty Company Form 10-K | 2009
FASB guidance on fair value measurements includes the application of a fair value hierarchy
that requires us to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. Our financial instruments 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 financial instrument.
Financial instruments recorded at fair value are categorized in the fair value hierarchy as
follows:
Level 1: Valuations are based on unadjusted quoted prices in active markets for identical financial
instruments.
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.
To determine the fair value of the majority of our investments, we utilize prices obtained from
independent, nationally recognized pricing services. We obtain one price for each security. When
the pricing services cannot provide a determination of fair value for a specific security, we
obtain non-binding price quotes from broker-dealers that we have had several years experience with
and who have demonstrated knowledge of the subject security. We request and utilize one broker
quote per security.
We validate the prices obtained from pricing services and brokers prior to their use for reporting
purposes by evaluating their reasonableness on a monthly basis. Our validation process includes a
review for unusual fluctuations. In our opinion, the pricing obtained at December 31, 2009, was
reasonable.
In order to determine the proper classification in the fair value hierarchy for each security where
the price is obtained from an independent pricing service, we obtain and evaluate the vendors
pricing procedures and inputs used to price the security, which include unadjusted quoted market
prices for identical securities, such as a New York Stock Exchange closing price and quoted prices
for identical securities in markets that are not active. For fixed maturity securities, an
evaluation of interest rates and yield curves observable at commonly quoted intervals, volatility,
prepayment speeds, and credit risks and default rates may also be performed. We have determined
that these processes and inputs result in fair values and classifications consistent with the
applicable FASB guidance on fair value measurements.
We review our fair value hierarchy categorizations on a quarterly basis, at which time the
classification of certain financial instruments may change if the input observations have changed.
96
United Fire & Casualty Company Form 10-K | 2009
The following tables present the categorization for our financial instruments measured at fair
value on a recurring basis in our Consolidated Balance Sheets at December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
Fair Value Measurements |
|
Description |
|
December 31, 2009 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
AVAILABLE-FOR-SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
$ |
18,952 |
|
|
$ |
|
|
|
$ |
18,952 |
|
|
$ |
|
|
Mortgage-backed securities |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
US Treasury |
|
|
35,650 |
|
|
|
|
|
|
|
35,650 |
|
|
|
|
|
Agency |
|
|
70,625 |
|
|
|
|
|
|
|
70,625 |
|
|
|
|
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligations |
|
|
390,378 |
|
|
|
|
|
|
|
390,378 |
|
|
|
|
|
Special revenue |
|
|
227,362 |
|
|
|
|
|
|
|
226,252 |
|
|
|
1,110 |
|
Foreign bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian |
|
|
58,826 |
|
|
|
|
|
|
|
58,826 |
|
|
|
|
|
Other |
|
|
82,414 |
|
|
|
|
|
|
|
81,020 |
|
|
|
1,394 |
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
|
224,004 |
|
|
|
|
|
|
|
223,934 |
|
|
|
70 |
|
Natural gas |
|
|
57,806 |
|
|
|
|
|
|
|
57,806 |
|
|
|
|
|
Other |
|
|
3,778 |
|
|
|
|
|
|
|
3,778 |
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks, trusts and insurance companies |
|
|
289,209 |
|
|
|
|
|
|
|
275,181 |
|
|
|
14,028 |
|
Transportation |
|
|
32,187 |
|
|
|
|
|
|
|
32,187 |
|
|
|
|
|
Energy |
|
|
152,339 |
|
|
|
|
|
|
|
152,339 |
|
|
|
|
|
Technology |
|
|
89,172 |
|
|
|
|
|
|
|
89,172 |
|
|
|
|
|
Basic industry |
|
|
109,567 |
|
|
|
|
|
|
|
104,761 |
|
|
|
4,806 |
|
Credit cyclicals |
|
|
72,585 |
|
|
|
|
|
|
|
69,737 |
|
|
|
2,848 |
|
Other |
|
|
243,535 |
|
|
|
|
|
|
|
237,332 |
|
|
|
6,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-For-Sale Fixed Maturities |
|
$ |
2,158,391 |
|
|
$ |
|
|
|
$ |
2,127,932 |
|
|
$ |
30,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
$ |
10,033 |
|
|
$ |
10,033 |
|
|
$ |
|
|
|
$ |
|
|
Natural gas |
|
|
1,684 |
|
|
|
1,684 |
|
|
|
|
|
|
|
|
|
Banks |
|
|
35,889 |
|
|
|
35,889 |
|
|
|
|
|
|
|
|
|
Insurance |
|
|
11,652 |
|
|
|
11,652 |
|
|
|
|
|
|
|
|
|
Other |
|
|
1,942 |
|
|
|
1,942 |
|
|
|
|
|
|
|
|
|
All other common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation |
|
|
1,593 |
|
|
|
1,593 |
|
|
|
|
|
|
|
|
|
Energy |
|
|
9,529 |
|
|
|
9,529 |
|
|
|
|
|
|
|
|
|
Technology |
|
|
13,910 |
|
|
|
13,879 |
|
|
|
31 |
|
|
|
|
|
Basic industry |
|
|
13,449 |
|
|
|
13,449 |
|
|
|
|
|
|
|
|
|
Credit cyclicals |
|
|
3,176 |
|
|
|
3,176 |
|
|
|
|
|
|
|
|
|
Other |
|
|
28,832 |
|
|
|
28,573 |
|
|
|
259 |
|
|
|
|
|
Nonredeemable preferred stocks |
|
|
1,029 |
|
|
|
1,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Equity Securities |
|
$ |
132,718 |
|
|
$ |
132,428 |
|
|
$ |
290 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Securities |
|
$ |
2,291,109 |
|
|
$ |
132,428 |
|
|
$ |
2,128,222 |
|
|
$ |
30,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRADING |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign bonds |
|
$ |
2,689 |
|
|
$ |
|
|
|
$ |
2,689 |
|
|
$ |
|
|
Public utilities |
|
|
1,460 |
|
|
|
|
|
|
|
1,460 |
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy |
|
|
2,310 |
|
|
|
|
|
|
|
2,310 |
|
|
|
|
|
Technology |
|
|
4,314 |
|
|
|
|
|
|
|
4,314 |
|
|
|
|
|
Other |
|
|
532 |
|
|
|
211 |
|
|
|
321 |
|
|
|
|
|
Redeemable Preferred Stock |
|
|
1,308 |
|
|
|
1,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Trading Fixed Maturities |
|
$ |
12,613 |
|
|
$ |
1,519 |
|
|
$ |
11,094 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term Investments |
|
$ |
7,359 |
|
|
$ |
1,100 |
|
|
$ |
6,005 |
|
|
$ |
254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Accounts |
|
$ |
96,163 |
|
|
$ |
96,163 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
2,407,244 |
|
|
$ |
231,210 |
|
|
$ |
2,145,321 |
|
|
$ |
30,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
United Fire & Casualty Company Form 10-K | 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
Fair Value Measurements |
|
Description |
|
December 31, 2008 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
AVAILABLE-FOR-SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
$ |
18,391 |
|
|
$ |
|
|
|
$ |
18,391 |
|
|
$ |
|
|
Mortgage-backed securities |
|
|
3 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
US Treasury |
|
|
26,591 |
|
|
|
|
|
|
|
26,591 |
|
|
|
|
|
Agency |
|
|
99,850 |
|
|
|
|
|
|
|
99,850 |
|
|
|
|
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligations |
|
|
376,671 |
|
|
|
|
|
|
|
376,671 |
|
|
|
|
|
Special revenue |
|
|
227,116 |
|
|
|
|
|
|
|
225,906 |
|
|
|
1,210 |
|
Foreign bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian |
|
|
31,150 |
|
|
|
|
|
|
|
31,150 |
|
|
|
|
|
Other |
|
|
46,553 |
|
|
|
|
|
|
|
46,253 |
|
|
|
300 |
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
|
196,435 |
|
|
|
|
|
|
|
196,435 |
|
|
|
|
|
Natural gas |
|
|
54,183 |
|
|
|
|
|
|
|
54,183 |
|
|
|
|
|
Other |
|
|
4,695 |
|
|
|
|
|
|
|
4,695 |
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks, trusts and insurance companies |
|
|
291,355 |
|
|
|
|
|
|
|
286,829 |
|
|
|
4,526 |
|
Transportation |
|
|
29,010 |
|
|
|
|
|
|
|
29,010 |
|
|
|
|
|
Energy |
|
|
88,866 |
|
|
|
|
|
|
|
88,866 |
|
|
|
|
|
Technology |
|
|
72,524 |
|
|
|
|
|
|
|
72,524 |
|
|
|
|
|
Basic industry |
|
|
82,517 |
|
|
|
|
|
|
|
82,517 |
|
|
|
|
|
Credit cyclicals |
|
|
51,953 |
|
|
|
|
|
|
|
51,735 |
|
|
|
218 |
|
Other |
|
|
200,706 |
|
|
|
|
|
|
|
200,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-For-Sale Fixed Maturities |
|
$ |
1,898,569 |
|
|
$ |
|
|
|
$ |
1,892,315 |
|
|
$ |
6,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
$ |
9,806 |
|
|
$ |
9,806 |
|
|
$ |
|
|
|
$ |
|
|
Natural gas |
|
|
1,390 |
|
|
|
1,390 |
|
|
|
|
|
|
|
|
|
Other |
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
Banks, trusts and insurance companies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks |
|
|
35,440 |
|
|
|
34,608 |
|
|
|
832 |
|
|
|
|
|
Insurance |
|
|
14,001 |
|
|
|
13,163 |
|
|
|
|
|
|
|
838 |
|
Other |
|
|
474 |
|
|
|
474 |
|
|
|
|
|
|
|
|
|
All other common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation |
|
|
1,374 |
|
|
|
1,374 |
|
|
|
|
|
|
|
|
|
Energy |
|
|
7,630 |
|
|
|
7,630 |
|
|
|
|
|
|
|
|
|
Technology |
|
|
10,947 |
|
|
|
10,945 |
|
|
|
2 |
|
|
|
|
|
Basic industry |
|
|
10,394 |
|
|
|
10,212 |
|
|
|
182 |
|
|
|
|
|
Credit cyclicals |
|
|
3,975 |
|
|
|
3,975 |
|
|
|
|
|
|
|
|
|
Other |
|
|
24,865 |
|
|
|
23,999 |
|
|
|
367 |
|
|
|
499 |
|
Nonredeemable preferred stocks |
|
|
685 |
|
|
|
|
|
|
|
171 |
|
|
|
514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Equity Securities |
|
$ |
120,985 |
|
|
$ |
117,580 |
|
|
$ |
1,554 |
|
|
$ |
1,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Securities |
|
$ |
2,019,554 |
|
|
$ |
117,580 |
|
|
$ |
1,893,869 |
|
|
$ |
8,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRADING |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign bonds |
|
$ |
2,089 |
|
|
$ |
|
|
|
$ |
2,089 |
|
|
$ |
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy |
|
|
1,103 |
|
|
|
|
|
|
|
1,103 |
|
|
|
|
|
Technology |
|
|
2,420 |
|
|
|
|
|
|
|
2,420 |
|
|
|
|
|
Other |
|
|
1,225 |
|
|
|
|
|
|
|
1,225 |
|
|
|
|
|
Redeemable Preferred Stock |
|
|
1,218 |
|
|
|
|
|
|
|
1,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Trading Fixed Maturities |
|
$ |
8,055 |
|
|
$ |
|
|
|
$ |
8,055 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term Investments |
|
$ |
26,142 |
|
|
$ |
26,142 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Accounts |
|
$ |
70,742 |
|
|
$ |
70,742 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
2,124,493 |
|
|
$ |
214,464 |
|
|
$ |
1,901,924 |
|
|
$ |
8,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
United Fire & Casualty Company Form 10-K | 2009
The fair value of securities that are categorized as Level 1 is based on quoted market prices that
are readily and regularly available.
The fair value of securities that are categorized as Level 2 is determined by management in
reliance 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
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
Equity |
|
|
Short-term |
|
|
|
|
(In Thousands) |
|
fixed maturities |
|
|
securities |
|
|
investments |
|
|
Total |
|
Balance at
January 1, 2009 |
|
$ |
6,254 |
|
|
$ |
1,851 |
|
|
$ |
|
|
|
$ |
8,105 |
|
Realized losses (1) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
Unrealized gains (1) |
|
|
331 |
|
|
|
|
|
|
|
|
|
|
|
331 |
|
Purchases and disposals |
|
|
65 |
|
|
|
|
|
|
|
254 |
|
|
|
319 |
|
Transfers in |
|
|
26,010 |
|
|
|
|
|
|
|
|
|
|
|
26,010 |
|
Transfers out |
|
|
(2,200 |
) |
|
|
(1,851 |
) |
|
|
|
|
|
|
(4,051 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
30,459 |
|
|
$ |
|
|
|
$ |
254 |
|
|
$ |
30,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Realized gains are recorded as a component of current operations whereas unrealized gains are
recorded as a component of comprehensive income. |
The amount reported in the previous table as transfers in consisted of $22,760,000 in
available-for-sale fixed maturities that were primarily private placement securities that had no
observable price available at December 31, 2009, and $3,250,000 of available-for-sale fixed
maturities that were subsequently reclassified, as a disposal, to other long-term investments due
to bankruptcy reorganization. The $4,051,000 in transfers out resulted from available-for-sale
fixed maturities and equity securities that previously had no observable market price at December
31, 2008, but for which observable prices were available at December 31, 2009.
99
United Fire & Casualty Company Form 10-K | 2009
The following table provides a summary of the changes in fair value of our Level 3 securities for
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
Equity |
|
|
|
|
(In Thousands) |
|
fixed maturities |
|
|
securities |
|
|
Total |
|
Balance at January 1, 2008 |
|
$ |
1,527 |
|
|
$ |
1,277 |
|
|
$ |
2,804 |
|
Realized losses (1) |
|
|
(8,473 |
) |
|
|
|
|
|
|
(8,473 |
) |
Unrealized gains (losses) (1) |
|
|
(113 |
) |
|
|
60 |
|
|
|
(53 |
) |
Amortization |
|
|
(37 |
) |
|
|
|
|
|
|
(37 |
) |
Purchases and disposals |
|
|
(96 |
) |
|
|
|
|
|
|
(96 |
) |
Transfers in |
|
|
13,446 |
|
|
|
514 |
|
|
|
13,960 |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
6,254 |
|
|
$ |
1,851 |
|
|
$ |
8,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Realized gains are recorded as a component of current operations whereas
unrealized gains are recorded as a component of comprehensive income. |
The amounts reported in the previous table as realized and unrealized losses and transfers in
relate primarily to the life insurance segments holdings of certain fixed maturity securities in
default, for which an OTTI charge of $8,473,000 was recorded in 2008.
NOTE 4. SHORT-TERM BORROWINGS
We maintain a $50,000,000 bank line of credit. Under the terms of the agreement, interest on
outstanding notes is payable at the lenders prevailing prime rate minus 1.0 percent. No
outstanding loan balances existed at December 31, 2009 and 2008, and we did not borrow against this
line of credit in 2009, 2008 or 2007.
NOTE 5. REINSURANCE
Property and Casualty Insurance Segment
Ceded and Assumed Reinsurance
Reinsurance is a contract by which one insurer, called the reinsurer, agrees to cover, under
certain defined circumstances, a portion of the losses incurred by a primary insurer if a claim is
made under a policy issued by the primary insurer. Our property and casualty insurance companies
follow the industry practice of reinsuring a portion of their exposure by ceding to reinsurers a
portion of the premium received and a portion of the risk under the policies written. We purchase
reinsurance to reduce the net liability on individual risks to predetermined limits and to protect
us against catastrophic losses from a single catastrophe, such as a hurricane or tornado. We do not
engage in any reinsurance transactions classified as finite risk reinsurance.
We account for premiums, written and earned, and losses incurred net of reinsurance ceded. The
ceding of insurance does not legally discharge us from primary liability under our policies, and we
must pay the loss if the reinsurer fails to meet its obligation. We periodically monitor the
financial condition of our reinsurers to confirm that they are financially stable. We believe that
all of our reinsurers are in an acceptable financial condition. At December 31, 2009, there were no
reinsurance balances for which collection is at risk that would result in a material impact on our
Consolidated Financial Statements.
We assume both property and casualty insurance from other insurance or reinsurance companies. Most
of the business we have assumed is property insurance, with an emphasis on catastrophe coverage.
The majority of our assumed reinsurance business expired on or before December 31, 2000. In 2006,
we made the decision to cancel one of our largest remaining assumed contracts. This decision was
made in response to the loss of available reinsurance protection, leaving us with a larger
percentage of the total exposure than we were comfortable with. We limit our exposure on our
remaining assumed reinsurance contracts through selective renewal. However, we still have exposure
related to the assumed reinsurance contracts that we have elected to continue writing and those
that are in runoff status.
100
United Fire & Casualty Company Form 10-K | 2009
Premiums, and loss and loss settlement expenses related to our ceded and assumed business is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Ceded Business: |
|
|
|
|
|
|
|
|
|
|
|
|
Ceded premiums written |
|
$ |
37,039 |
|
|
$ |
37,127 |
|
|
$ |
41,046 |
|
Ceded premiums earned |
|
|
36,925 |
|
|
|
38,212 |
|
|
|
43,979 |
|
Loss and loss settlement expenses ceded |
|
|
5,942 |
|
|
|
24,485 |
|
|
|
9,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed Business: |
|
|
|
|
|
|
|
|
|
|
|
|
Assumed premiums written |
|
$ |
7,820 |
|
|
$ |
12,660 |
|
|
$ |
16,907 |
|
Assumed premiums earned |
|
|
7,904 |
|
|
|
12,953 |
|
|
|
17,647 |
|
Loss and loss settlement expenses assumed |
|
|
5,818 |
|
|
|
4,122 |
|
|
|
8,211 |
|
Reinsurance Programs and Retentions
We have several programs that provide reinsurance coverage. This reinsurance coverage limits the
risk of loss that we retain by reinsuring direct risks in excess of our retention limits. The
following table provides a summary of our primary reinsurance treaties, which remained the same for
both 2009 and 2008. Retention amounts reflect the accumulated retentions and co-participation of
all layers within a treaty. For 2010, our umbrella excess of loss treaty will be included in the
casualty excess of loss treaty and will no longer be a separate treaty.
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 and 2008 Reinsurance Programs |
(Dollars in Thousands) |
|
Stated |
|
|
|
|
|
|
Type of Reinsurance Treaty |
|
Retention |
|
|
Limits |
|
|
Coverage |
Casualty excess of loss |
|
|
2,000 |
|
|
|
20,000 |
|
|
100% of $18,000 |
Property excess of loss |
|
|
2,000 |
|
|
|
12,000 |
|
|
100% of $10,000 |
Umbrella excess of loss |
|
|
1,000 |
|
|
|
10,000 |
|
|
100% of $9,000 |
Surety excess of loss |
|
|
1,500 |
|
|
|
22,500 |
|
|
88% of $21,000 |
Property catastrophe,
excess |
|
|
20,000 |
|
|
|
200,000 |
|
|
95% of $180,000 |
Boiler and machinery |
|
|
N/A |
|
|
|
50,000 |
|
|
100% of $50,000 |
In the event that we incur catastrophe losses and loss settlement expenses that exceed the coverage
limits of our reinsurance program, our property catastrophe treaty provides one guaranteed
reinstatement. In such an instance, we are required to pay the reinsurers a reinstatement premium
at 100 percent of the original premium, which will reinstate the full amount of reinsurance
available under the property catastrophe treaty.
Life Insurance Segment
Ceded and Assumed Reinsurance
United Life Insurance Company purchases reinsurance to limit the dollar amount of any one risk of
loss. On standard individual life cases where the insured is age 65 or younger, our retention is
$200,000. On standard individual life cases where the insured is age 66 or older, our retention is
$80,000. Our accidental death benefit rider on an individual policy is reinsured at 100 percent, up
to a maximum benefit of $250,000. Our group coverage, both life and accidental death and
dismemberment, is reinsured at 50 percent. Catastrophe excess reinsurance coverage applies when
three or more insureds die in a catastrophic accident. For catastrophe excess claims, we retain the
first $1,000,000 of ultimate net loss and the reinsurer agrees to indemnify us for the excess up to
a maximum of $5,000,000. We supplement this coverage when appropriate with known concentration
coverage. Known concentration coverage is typically tied to a specific event and time period, with
a threshold of a minimum number of lives involved in the event, minimum event deductible (stated
retention limit) and a maximum payout.
101
United Fire & Casualty Company Form 10-K | 2009
We began the assumption of credit life and accident and health insurance in 2002. We discontinued
this practice in 2004. We have an immaterial exposure related to our assumed reinsurance contracts
that are in a runoff status.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Ceded Business: |
|
|
|
|
|
|
|
|
|
|
|
|
Ceded insurance in-force |
|
$ |
910,775 |
|
|
$ |
836,784 |
|
|
$ |
737,561 |
|
Ceded premiums earned |
|
|
1,935 |
|
|
|
1,729 |
|
|
|
1,664 |
|
Loss and loss settlement expenses ceded |
|
|
809 |
|
|
|
1,588 |
|
|
|
813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed Business: |
|
|
|
|
|
|
|
|
|
|
|
|
Assumed insurance in-force |
|
$ |
120 |
|
|
$ |
322 |
|
|
$ |
1,458 |
|
Assumed premiums earned |
|
|
2 |
|
|
|
10 |
|
|
|
36 |
|
Loss and loss settlement expenses
assumed |
|
|
14 |
|
|
|
15 |
|
|
|
29 |
|
The ceding of insurance does not legally discharge United Life Insurance Company from primary
liability under its policies. United Life Insurance Company must pay the loss if the reinsurer
fails to meet its obligations. We periodically monitor the financial condition of our reinsurers to
confirm that they are financially stable. We believe that all of our reinsurers are in an
acceptable financial condition. Approximately 98.7 percent of ceded life insurance in-force as of
December 31, 2009, has been ceded to five reinsurers.
NOTE 6. RESERVES FOR LOSS AND LOSS SETTLEMENT EXPENSES
Because property and casualty insurance reserves are estimates of the unpaid portions of losses
that have occurred, including IBNR losses, the establishment of appropriate reserves, including
reserves for catastrophes, is an inherently uncertain and complex process. The ultimate cost of
losses and related loss settlement expenses may vary materially from recorded amounts, which are
based on managements best estimates. We regularly update our reserve estimates as new information
becomes available and as events unfold that may affect the resolution of unsettled claims. Changes
in prior year reserve estimates, which may be material, are reported in losses and loss settlement
expenses in the accompanying Consolidated Statements of Income in the period such changes are
determined.
The following table provides an analysis of changes in our property and casualty loss and loss
settlement expense reserves for 2009, 2008 and 2007 (net of reinsurance amounts). The deficiency in
2009 and 2008 was attributable to an increase we made in our prior accident year loss reserves due
to additional development from Hurricane Katrina. The additional development included a federal
court ruling and subsequent judgment, for which the awarded amount of $28,868,000 was paid in 2009,
and deterioration in our other liability lines of business, which includes claims for construction
defects.
The favorable development in 2007 resulted from a re-estimation of loss reserves recorded at
December 31 of the prior year. This reestimation is primarily attributable to both the payment of
claims in amounts less than the amounts reserved and from changes in loss reserves due to
additional information on individual claims that we received after the reserves for those claims
had been established. Another factor contributing to the redundancy recognized is the development
of reserves for IBNR loss and loss settlement expenses at a level significantly less than
anticipated at December 31 of the prior year. We attribute the favorable development in 2007 to the
fact that during preceding years, we had experienced abnormally low levels of noncatastrophe claims
frequency, due to improvements in our underwriting process.
102
United Fire & Casualty Company Form 10-K | 2009
We did not alter our reserving process during 2009.
Conditions and trends that have affected the reserve development for a given year may change.
Therefore, such development cannot be used to extrapolate future reserve redundancies or
deficiencies.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Gross liability for losses and loss settlement
expenses at beginning of year |
|
$ |
586,109 |
|
|
$ |
496,083 |
|
|
$ |
518,886 |
|
Ceded loss and loss settlement expenses |
|
|
(52,508 |
) |
|
|
(38,800 |
) |
|
|
(40,560 |
) |
|
|
|
|
|
|
|
|
|
|
Net liability for losses and loss settlement expenses at beginning of year |
|
$ |
533,601 |
|
|
$ |
457,283 |
|
|
$ |
478,326 |
|
|
|
|
|
|
|
|
|
|
|
Losses and loss settlement expenses incurred for
claims occurring during |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
$ |
339,506 |
|
|
$ |
392,801 |
|
|
$ |
291,046 |
|
Prior years |
|
|
26,215 |
|
|
|
548 |
|
|
|
(45,201 |
) |
|
|
|
|
|
|
|
|
|
|
Total incurred |
|
$ |
365,721 |
|
|
$ |
393,349 |
|
|
$ |
245,845 |
|
|
|
|
|
|
|
|
|
|
|
Losses and loss settlement expense payments for claims occurring during |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
$ |
131,507 |
|
|
$ |
176,882 |
|
|
$ |
118,295 |
|
Prior years |
|
|
195,524 |
|
|
|
140,149 |
|
|
|
148,593 |
|
|
|
|
|
|
|
|
|
|
|
Total paid |
|
$ |
327,031 |
|
|
$ |
317,031 |
|
|
$ |
266,888 |
|
|
|
|
|
|
|
|
|
|
|
Net liability for losses and loss settlement expenses at end of year |
|
$ |
572,291 |
|
|
$ |
533,601 |
|
|
$ |
457,283 |
|
Ceded loss and loss settlement expenses |
|
|
33,754 |
|
|
|
52,508 |
|
|
|
38,800 |
|
|
|
|
|
|
|
|
|
|
|
Gross liability for losses and loss settlement expenses at end of year |
|
$ |
606,045 |
|
|
$ |
586,109 |
|
|
$ |
496,083 |
|
|
|
|
|
|
|
|
|
|
|
We are not aware of any significant contingent liabilities related to environmental issues. Because
of the type of property coverage we write, we have potential exposure to environmental pollution,
mold and asbestos claims. Our underwriters are aware of these exposures and use riders or
endorsements to limit exposure.
NOTE 7. STATUTORY REPORTING, CAPITAL REQUIREMENTS AND DIVIDENDS AND RETAINED
EARNINGS RESTRICTIONS
Statutory capital and surplus in regards to policyholders at December 31, 2009, 2008 and 2007 and
net income (loss) for the years then ended are as follows:
|
|
|
|
|
|
|
|
|
|
|
Statutory |
|
|
Statutory |
|
(In Thousands) |
|
Capital and Surplus |
|
|
Net Income (Loss) |
|
2009 |
|
|
|
|
|
|
|
|
Property and casualty (1) |
|
$ |
556,265 |
|
|
$ |
(12,350 |
) |
Life, accident and health |
|
|
160,179 |
|
|
|
3,523 |
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
Property and casualty (1) |
|
$ |
553,058 |
|
|
$ |
(3,203 |
) |
Life, accident and health |
|
|
157,003 |
|
|
|
646 |
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
Property and casualty (1) |
|
$ |
648,451 |
|
|
$ |
105,083 |
|
Life, accident and health |
|
|
164,168 |
|
|
|
15,115 |
|
|
|
|
(1) |
|
Because United Fire & Casualty Company owns United Life Insurance Company, the
property and casualty statutory capital and surplus includes life, accident and health
statutory capital and surplus and therefore represents our total consolidated statutory
capital and surplus. |
103
United Fire & Casualty Company Form 10-K | 2009
All states require domiciled insurance companies to prepare statutory-basis financial statements in
conformity with the NAIC Accounting Practices and Procedures Manual, subject to any deviations
prescribed or permitted by the applicable insurance commissioner and/or director. Statutory
accounting practices primarily differ from GAAP in that policy acquisition and certain sales
inducement costs are charged to expense as incurred, life insurance reserves are established based
on different actuarial assumptions and the values reported for investments and deferred taxes are
established on a different basis.
Our property and casualty and life insurance subsidiaries are required to file financial statements
with state regulatory authorities. The accounting principles used to prepare these statutory-basis
financial statements follow prescribed or permitted accounting practices that differ from GAAP.
Prescribed statutory accounting principles include state laws, regulations and general
administrative rules issued by the state of domicile, as well as a variety of publications and
manuals of the NAIC. Permitted accounting practices encompass all accounting practices not
prescribed, but allowed by the state of domicile. No permitted accounting practices were used to
prepare our statutory-basis financial statements during 2009, 2008 and 2007.
We are directed by the state insurance departments solvency regulations to calculate a required
minimum level of statutory capital and surplus based on insurance risk factors. The risk-based
capital results are used by the NAIC and state insurance departments to identify companies that
merit regulatory attention or the initiation of regulatory action. At December 31, 2009, both
United Life Insurance Company and United Fire and its property and casualty subsidiaries and
affiliate had statutory capital and surplus in regards to policyholders well in excess of their
required levels.
The State of Iowa Insurance Department governs the amount of dividends that we may pay to
stockholders without prior approval by the department. Based on these restrictions, we are allowed
to make a maximum of $55,626,000 in dividend distributions to stockholders in 2010 without prior
approval. We paid dividends of $15,951,000, $16,162,000 and $15,293,000 in 2009, 2008 and 2007,
respectively. Dividend payments by the insurance subsidiaries to United Fire are subject to similar
restrictions in the states in which they are domiciled. In 2009, 2008 and 2007, United Fire
received $4,000,000 in dividends from United Life Insurance Company. Also, in 2007, United Fire
received an $8,000,000 dividend from American Indemnity Financial Corporation. These intercompany
dividend payments are eliminated in our Consolidated Financial Statements.
NOTE 8. FEDERAL INCOME TAX
Federal income tax expense (benefit) is composed of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Current |
|
$ |
(7,132 |
) |
|
$ |
(8,658 |
) |
|
$ |
45,980 |
|
Deferred |
|
|
(11,133 |
) |
|
|
(11,414 |
) |
|
|
1,962 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(18,265 |
) |
|
$ |
(20,072 |
) |
|
$ |
47,942 |
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of income tax expense (benefit) computed at the applicable federal tax rate of 35
percent to the amount recorded in the accompanying Consolidated Financial Statements is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Computed expected income tax expense
(benefit) |
|
$ |
(10,048 |
) |
|
$ |
(11,598 |
) |
|
$ |
55,766 |
|
Tax-exempt municipal bond interest income |
|
|
(7,411 |
) |
|
|
(6,954 |
) |
|
|
(6,138 |
) |
Nontaxable dividend income |
|
|
(788 |
) |
|
|
(1,219 |
) |
|
|
(1,289 |
) |
Valuation allowance reduction |
|
|
|
|
|
|
|
|
|
|
(548 |
) |
Other, net |
|
|
(18 |
) |
|
|
(301 |
) |
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
Federal income tax expense (benefit) |
|
$ |
(18,265 |
) |
|
$ |
(20,072 |
) |
|
$ |
47,942 |
|
|
|
|
|
|
|
|
|
|
|
104
United Fire & Casualty Company Form 10-K | 2009
The significant components of the net deferred tax liability (asset) at December 31, 2009 and 2008
are as follows:
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
December 31 |
|
2009 |
|
|
2008 |
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Net unrealized appreciation on investment securities |
|
$ |
56,715 |
|
|
$ |
3,785 |
|
Deferred policy acquisition costs |
|
|
28,276 |
|
|
|
52,041 |
|
Pension |
|
|
3,384 |
|
|
|
3,891 |
|
Net bond discount accretion and premium amortization |
|
|
2,755 |
|
|
|
2,342 |
|
Miscellaneous |
|
|
2,076 |
|
|
|
1,850 |
|
|
|
|
|
|
|
|
Gross deferred tax liability |
|
$ |
93,206 |
|
|
$ |
63,909 |
|
|
|
|
|
|
|
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Financial statement reserves in excess of income
tax reserves |
|
$ |
30,958 |
|
|
$ |
27,043 |
|
Unearned premium adjustment |
|
|
14,225 |
|
|
|
14,984 |
|
Net operating loss carry forwards |
|
|
5,647 |
|
|
|
5,647 |
|
Underfunded benefit plan obligation |
|
|
11,762 |
|
|
|
11,681 |
|
Postretirement benefits other than pensions |
|
|
6,802 |
|
|
|
6,121 |
|
Investment impairments |
|
|
9,829 |
|
|
|
4,603 |
|
Salvage and subrogation |
|
|
1,515 |
|
|
|
1,565 |
|
Stock options |
|
|
2,130 |
|
|
|
1,422 |
|
Miscellaneous |
|
|
4,765 |
|
|
|
4,787 |
|
|
|
|
|
|
|
|
Gross deferred tax asset |
|
$ |
87,633 |
|
|
$ |
77,853 |
|
Valuation allowance |
|
|
(5,647 |
) |
|
|
(5,647 |
) |
|
|
|
|
|
|
|
Deferred tax asset |
|
$ |
81,986 |
|
|
$ |
72,206 |
|
|
|
|
|
|
|
|
Net deferred tax liability (asset) |
|
$ |
11,220 |
|
|
$ |
(8,297 |
) |
|
|
|
|
|
|
|
As of December 31, 2009, we have a gross deferred tax asset for net operating loss carryforwards
totaling $17,215,000, all of which was acquired as part of our purchase of American Indemnity
Financial Corporation. Net operating loss carryforwards totaling $769,000 and $5,491,000 expire in
2010 and 2011, respectively, and can only be used to offset future income of our property and
casualty insurance segment. We are required to establish a valuation allowance for any portion of
the gross deferred tax asset that we believe may not be realized. At December 31, 2009, we recorded
a valuation allowance of $5,647,000. As we determine that the benefit of these net operating losses
can be realized, the related reduction in the deferred tax asset valuation allowance will be
recorded as a reduction to our federal income tax expense in the period of such determination.
NOTE 9. EMPLOYEE BENEFITS
We offer various benefits to our employees including a noncontributory defined benefit pension
plan, an employee/retiree health and dental benefit plan, a profit-sharing plan and an employee
stock ownership plan.
Pension and Other Postretirement Benefit Plans
We offer a noncontributory defined benefit pension plan (pension plan) in which all of our
employees are eligible to participate after they have completed one year of service, attained 21
years of age and have met the hourly service requirements. Retirement benefits under our pension
plan are based on the number of years of service and level of compensation. Our policy is to fund
the pension plan on a current basis to the extent that the contribution is deductible under
existing tax regulations. We estimate that we will contribute approximately $3,045,000 to the
pension plan in 2010.
105
United Fire & Casualty Company Form 10-K | 2009
We also offer a health and dental benefit plan (other retiree plan) to all of our eligible
employees and retirees, which is composed of two programs: (1) the self-funded retiree health and
dental benefit plan and (2) the self-funded employee health and dental benefit plan. The other
retiree plan provides health and dental benefits to our employees and retirees (and covered
dependents) who have met the service and participation requirements stipulated by the other retiree
plan. The other retiree plans contract administrators are responsible for making medical and
dental care benefit payments. Participants are required to submit claims for reimbursement or
payment to the claims administrator within twelve months after the end of the calendar year in
which the charges were incurred. An unfunded benefit obligation is reported for the other retiree
plan, which relates primarily to our postretirement benefit program.
Investment Policies and Strategies
Our investment policy and objective for the pension plan is to generate long-term capital growth
and income, by way of a diversified investment portfolio along with appropriate employer
contributions, which will allow us to provide for the pension plans benefit obligation.
The pension plans assets are invested in fixed maturity securities, equity securities, an annuity
and cash and cash equivalents:
|
|
|
Fixed maturity securities may include bonds and convertible securities. |
|
|
|
Equity securities may include various types of stock, such as large-cap, mid-cap and
small-cap stocks, international stocks and United Fire & Casualty Company common stock. |
|
|
|
The annuity is held by our subsidiary United Life Insurance Company. |
|
|
|
Cash and cash equivalents include money market funds. |
We have an internal investment/retirement committee, which includes our Chief Executive Officer,
Chief Investment Officer, and Executive Vice President, all of whom receive monthly information on
the value of the pension plan assets and their performance. Quarterly, the committee meets to
review and discuss the performance of the pension plans investments as well as the allocation of
investments within the pension plan.
As of December 31, 2009, we had six external investment managers that are allowed to exercise
investment discretion, subject to limitations, if any, established by the investment/retirement
committee. We utilize multiple investment managers in order to maximize the pension plans return
while minimizing risk. None of our investment managers uses leverage in managing the pension plan.
Annually, the investment/retirement committee meets with each investment manager to review the
investment managers goals, objectives and the performance of the assets they manage. The decision
to establish or terminate a relationship with an investment manager is at the discretion of our
investment/retirement committee.
We determine our expected long-term rate of return, which is an assumption as to the average rate
of earnings expected on the pension plan funds invested, or to be invested, to provide for the
settlement of benefits included in the projected pension benefit obligation. Investment securities,
in general, are exposed to various risks, such as fluctuating interest rates, credit standing of
the issuer of the security and overall market volatility. In addition, we consider historical
experience for comparable investments and the target allocations we have established for the
various asset categories. Annually, we perform an analysis of expected long-term rates of return
based on the composition and allocation of our pension plan assets and recent economic conditions.
We make use of an external actuarial firm to verify that our expected long-term rate of return is
reasonable.
106
United Fire & Casualty Company Form 10-K | 2009
The following is a summary of the pension plans actual and target asset allocations at December
31, 2009 and 2008 by asset category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target |
|
(In Thousands) |
|
2009 |
|
|
% of Total |
|
|
2008 |
|
|
% of Total |
|
|
Allocation |
|
Fixed maturity and equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Fire common stock 202,058 shares |
|
$ |
3,684 |
|
|
|
6.7 |
% |
|
$ |
6,278 |
|
|
|
13.0 |
% |
|
|
5-15 |
% |
Other fixed maturity and equity securities |
|
|
33,622 |
|
|
|
61.3 |
|
|
|
24,698 |
|
|
|
51.3 |
|
|
|
50-70 |
|
United Life annuity |
|
|
8,910 |
|
|
|
16.3 |
|
|
|
8,447 |
|
|
|
17.6 |
|
|
|
10-20 |
|
Cash and cash equivalents including
money market funds |
|
|
8,606 |
|
|
|
15.7 |
|
|
|
8,699 |
|
|
|
18.1 |
|
|
|
10-25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total plan assets |
|
$ |
54,822 |
|
|
|
100.0 |
% |
|
$ |
48,122 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The investment return expectations for the pension plan are used to develop the asset allocation
based on the specific needs of the pension plan. Accordingly, fixed maturity and equity securities
comprise the largest portion of the pension plan assets, as they yield the highest rate of return.
The pension plans annuity, which is the second largest category of pension plan assets and was
originally written by our life insurance subsidiary in 1976, provides a guaranteed rate of return.
The interest rate on the annuity is determined annually.
The availability of the pension plan assets held in cash and cash equivalents enables the pension
plan to mitigate market risk that is associated with other types of investments and allows the
pension plan to maintain liquidity both for the purpose of making future pension payments to
participants and their beneficiaries and for future investment opportunities.
The pension plans investment in United Fire common stock, accounted for 6.7 percent or $3,684,000
of its assets at December 31, 2009 and 13.0 percent or $6,278,000 of the pension plan assets at
December 31, 2008. We believe that even though market fluctuations impact the fair value of this
investment, the target allocation is reasonable and historically has generated investment income,
through dividend payments, for the pension plan.
Valuation of Investments
Fixed Maturity and Equity Securities
Investments in fixed maturity and equity securities are stated at fair value based upon quoted
market prices reported on recognized securities exchanges on the last business day of the year.
Purchases and sales of securities are recorded as of the trade date.
Annuity
The United Life annuity is credited with compound interest on the average fund balance for the
year. The interest rate is equivalent to the ratio of net investment income to mean assets of
United Life Insurance Company.
Cash and Cash Equivalents
Cash and cash equivalents primarily consist of insured cash and money market funds held with
various financial institutions. Interest is earned on a daily basis. The fair value of these funds
approximates their cost basis due to their short-term nature.
United Fire Common Stock
The investment in United Fire common stock is stated at fair value based upon the closing sales
price reported on a recognized securities exchange on the last business day of the year or, when no
sales are reported, the bid price on that date. Our common stock is actively traded. Dividends on
shares of United Fire common stock totaled $121,000 in both 2009 and 2008 and $109,000 in 2007.
107
United Fire & Casualty Company Form 10-K | 2009
Fair Value Measurement
The following table presents the categorization of the pension plans financial instruments
measured at fair value on a recurring basis at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thouands) |
|
|
|
|
|
Fair Value Measurements |
|
Description |
|
December 31, 2009 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
$ |
1,617 |
|
|
$ |
|
|
|
$ |
1,617 |
|
|
$ |
|
|
Redeemable preferred stock |
|
|
551 |
|
|
|
551 |
|
|
|
|
|
|
|
|
|
U.S. Treasury and agency |
|
|
2,992 |
|
|
|
2,992 |
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Fire & Casualty Company |
|
|
3,684 |
|
|
|
3,684 |
|
|
|
|
|
|
|
|
|
Unaffiliated |
|
|
28,462 |
|
|
|
28,462 |
|
|
|
|
|
|
|
|
|
Money market funds |
|
|
6,206 |
|
|
|
6,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
43,513 |
|
|
$ |
41,895 |
|
|
$ |
1,617 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of investments categorized as Level 1 is based on quoted market prices that are
readily and regularly available.
The fair value of fixed maturity securities categorized as Level 2 is determined by management
based on fair value information reported in the custodial statements, which is derived from recent
trading activity of the underlying security in the financial markets. These securities represent
various taxable bonds held by the pension plan.
Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires us to make various
estimates and assumptions that affect the reporting of net periodic benefit cost, plan assets for
all plans and plan obligations for all plans at the date of the financial statements. Actual
results could differ from these estimates. One significant estimate relates to the calculation of
plan obligations for all plans. We annually establish the discount rate, which is an estimate of
the interest rate at which plan benefits for all plans could be effectively settled, that is used
to determine the present value of the respective plans benefit obligations as of December 31. In
estimating the discount rate, we look to rates of return on high-quality, fixed-income investments
currently available and expected to be available during the period to maturity of the respective
plans benefit obligations.
Assumptions Used to Determine Benefit Obligations
The following actuarial assumptions were used to determine the reported plan benefit obligations at
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions as of |
|
Pension Benefits |
|
|
Other Retiree Benefits |
|
December 31 |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Discount rate |
|
|
6.00 |
% |
|
|
6.00 |
% |
|
|
5.75 |
% |
|
|
6.00 |
% |
Rate of compensation increase |
|
|
4.00 |
|
|
|
4.00 |
|
|
|
N/A |
|
|
|
N/A |
|
108
United Fire & Casualty Company Form 10-K | 2009
Assumptions Used to Determine Net Periodic Benefit Cost
The following actuarial assumptions were used at January 1 to determine our reported net periodic
benefit costs for the year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions as of |
|
Pension Benefits |
|
|
Other Retiree Benefits |
|
January 1 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Discount rate |
|
|
6.00 |
% |
|
|
5.75 |
% |
|
|
75 |
% |
|
|
6.00 |
% |
|
|
5.75 |
% |
|
|
75 |
% |
Expected long-term rate of return
on plan assets |
|
|
8.25 |
|
|
|
8.25 |
|
|
|
8.25 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Rate of compensation increase |
|
|
4.00 |
|
|
|
4.00 |
|
|
|
4.00 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Assumed Health Care Cost Trend Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care Benefits |
|
|
Dental Claims |
|
Years Ended December 31 |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Health care cost trend rates assumed for next year |
|
|
9.00 |
% |
|
|
9.00 |
% |
|
|
5.25 |
% |
|
|
5.25 |
% |
Rate to which the health care trend rate is
assumed to decline (ultimate trend rate) |
|
|
5.25 |
% |
|
|
5.25 |
% |
|
|
N/A |
|
|
|
N/A |
|
Year that the rate reaches the ultimate trend rate |
|
|
2014 |
|
|
|
2013 |
|
|
|
N/A |
|
|
|
N/A |
|
Assumed health care cost trend rates have a significant effect on the amounts reported for the
health care plans. A 1.0 percent change in assumed health care cost trend rates would have the
following effects.
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
1% Increase |
|
|
1% Decrease |
|
Effect on total of service and interest cost components of net periodic postretirement
health care benefit cost |
|
$ |
538 |
|
|
$ |
(426 |
) |
Effect on the health care component of the accumulated postretirement benefit obligation |
|
|
4,018 |
|
|
|
(3,250 |
) |
109
United Fire & Casualty Company Form 10-K | 2009
Benefit Obligation and Funded Status
The following table provides a reconciliation of benefit obligations, plan assets and funded status
of our plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
Pension Benefits |
|
|
Other Retiree Benefits |
|
Years Ended December 31 |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Reconciliation of benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
70,242 |
|
|
$ |
67,959 |
|
|
$ |
18,958 |
|
|
$ |
18,163 |
|
Service cost |
|
|
2,747 |
|
|
|
2,709 |
|
|
|
1,347 |
|
|
|
1,225 |
|
Interest cost |
|
|
4,218 |
|
|
|
3,872 |
|
|
|
1,222 |
|
|
|
1,086 |
|
Actuarial (gain) loss |
|
|
1,430 |
|
|
|
(2,238 |
) |
|
|
2,155 |
|
|
|
(970 |
) |
Benefit payments and adjustments |
|
|
(2,227 |
) |
|
|
(2,060 |
) |
|
|
(586 |
) |
|
|
(546 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year (1) |
|
$ |
76,410 |
|
|
$ |
70,242 |
|
|
$ |
23,096 |
|
|
$ |
18,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of fair value of plan assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
$ |
48,122 |
|
|
$ |
57,978 |
|
|
$ |
|
|
|
$ |
|
|
Actual return on plan assets |
|
|
4,927 |
|
|
|
(11,296 |
) |
|
|
|
|
|
|
|
|
Employer contributions |
|
|
4,000 |
|
|
|
3,500 |
|
|
|
586 |
|
|
|
546 |
|
Benefit payments and adjustments |
|
|
(2,227 |
) |
|
|
(2,060 |
) |
|
|
(586 |
) |
|
|
(546 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
$ |
54,822 |
|
|
$ |
48,122 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year |
|
$ |
(21,588 |
) |
|
$ |
(22,120 |
) |
|
$ |
(23,096 |
) |
|
$ |
(18,958 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the pension plan, the benefit obligation is the projected benefit obligation. For the
other retiree benefit plan, the benefit obligation is the accumulated postretirement benefit
obligation. |
Our accumulated pension benefit obligation was $63,431,000 and $58,227,000 at December 31, 2009 and
2008, respectively.
The following table displays the effect that our unrecognized prior service costs and actuarial
loss had on accumulated other comprehensive income (AOCI).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
Pension Benefits |
|
|
Other Retiree Benefits |
|
Years Ended December 31 |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Other amounts recognized in AOCI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized prior service cost |
|
|
29 |
|
|
|
103 |
|
|
|
(92 |
) |
|
|
(147 |
) |
Unrecognized actuarial loss |
|
|
30,212 |
|
|
|
32,118 |
|
|
|
3,457 |
|
|
|
1,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other amounts recognized
in AOCI |
|
$ |
30,241 |
|
|
$ |
32,221 |
|
|
$ |
3,365 |
|
|
$ |
1,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrecognized prior service cost and the unrecognized actuarial loss are being amortized on a
straight-line basis over an average period of approximately 10 years. This period represents the
average remaining employee service period until the date of full eligibility. We anticipate
amortization of prior service costs and net losses for our pension plan in 2010 to be $11,000 and
$2,181,000, respectively.
110
United Fire & Casualty Company Form 10-K | 2009
Net Periodic Benefit Cost
Components of net periodic benefit cost were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
Pension benefits |
|
|
Other Retiree Benefits |
|
Years Ended December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
2,747 |
|
|
$ |
2,709 |
|
|
$ |
2,555 |
|
|
$ |
1,347 |
|
|
$ |
1,225 |
|
|
$ |
919 |
|
Interest cost |
|
|
4,218 |
|
|
|
3,872 |
|
|
|
3,610 |
|
|
|
1,222 |
|
|
|
1,086 |
|
|
|
900 |
|
Expected return on plan assets |
|
|
(4,003 |
) |
|
|
(4,846 |
) |
|
|
(4,536 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service
cost |
|
|
74 |
|
|
|
107 |
|
|
|
108 |
|
|
|
(55 |
) |
|
|
(55 |
) |
|
|
(18 |
) |
Amortization of net loss |
|
|
2,411 |
|
|
|
1,185 |
|
|
|
1,090 |
|
|
|
|
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
5,447 |
|
|
$ |
3,027 |
|
|
$ |
2,827 |
|
|
$ |
2,514 |
|
|
$ |
2,280 |
|
|
$ |
1,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected Benefit Payments
The following table summarizes the expected benefits to be paid from our plans over the next 10
years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015-2019 |
|
Pension Benefits |
|
$ |
2,583 |
|
|
$ |
2,652 |
|
|
$ |
2,905 |
|
|
$ |
3,228 |
|
|
$ |
3,491 |
|
|
$ |
20,357 |
|
Other retiree benefits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding
Modernization Act
subsidy |
|
|
771 |
|
|
|
858 |
|
|
|
923 |
|
|
|
1,026 |
|
|
|
1,141 |
|
|
|
7,508 |
|
Expected
Modernization Act
subsidy |
|
|
(81 |
) |
|
|
(93 |
) |
|
|
(106 |
) |
|
|
(118 |
) |
|
|
(132 |
) |
|
|
(907 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other benefits |
|
$ |
690 |
|
|
$ |
765 |
|
|
$ |
817 |
|
|
$ |
908 |
|
|
$ |
1,009 |
|
|
$ |
6,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit-Sharing Plan and Employee Stock Ownership Plan
We have a profit-sharing plan in which employees who meet service requirements are eligible to
participate. The amount of our contribution is discretionary and is determined annually, but cannot
exceed the amount deductible for federal income tax purposes. Our contribution to the
profit-sharing plan for 2009, 2008 and 2007, was $927,000, $974,000 and $4,107,000, respectively.
We have an employee stock ownership plan (ESOP plan) for the benefit of
eligible employees and their beneficiaries. All employees are eligible to
participate in the ESOP plan upon completion of one year of service, meeting
the hourly requirements with United Fire and attaining 21 years of age.
Contributions to the ESOP plan are made at our discretion. These contributions
are based upon a percentage of the total payroll and are allocated to
participants on the basis of compensation. We make contributions in stock or
cash, which the trustee uses to acquire shares of United Fire stock to allocate
to participants accounts. As of December 31, 2009, 2008 and 2007, the ESOP
plan owned 241,741, 241,796 and 244,386 shares of United Fire common stock,
respectively. Shares owned by the ESOP plan are included in shares issued and
outstanding for purposes of calculating earnings per share and dividends paid
on the shares are charged to retained earnings. We made contributions to the
ESOP plan of $150,000 in both 2009 and 2008 and $275,000 in 2007.
111
United Fire & Casualty Company Form 10-K | 2009
NOTE 10. STOCK OPTION PLANS
Nonqualified Employee Stock Award Plan
The United Fire & Casualty Company 2008 Stock Plan (the 2008 Stock 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 919,525
authorized shares available for future issuance at December 31, 2009. The 2008 Stock Plan is
administered by the Board of Directors, which determines which employees will receive awards under
the 2008 Stock 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 2008 Stock Plan. Pursuant to the 2008 Stock 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 2008 Stock 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 2008 Stock 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 2008 Stock Plan is displayed in the following table.
|
|
|
|
|
|
|
|
|
|
|
Year-Ended |
|
|
Inception |
|
Authorized Shares Available for Future Award Grants |
|
December 31, 2009 |
|
|
to Date |
|
Beginning balance |
|
|
1,021,025 |
|
|
|
1,900,000 |
|
Number of awards granted |
|
|
(103,500 |
) |
|
|
(1,024,975 |
) |
Number of awards forfeited or expired |
|
|
2,000 |
|
|
|
44,500 |
|
|
|
|
|
|
|
|
Ending balance |
|
|
919,525 |
|
|
|
919,525 |
|
Number of option awards exercised |
|
|
600 |
|
|
|
167,042 |
|
Number of restricted stock awards vested |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 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.
112
United Fire & Casualty Company Form 10-K | 2009
The activity in our nonemployee director stock option and restricted stock plan is displayed in the
following table.
|
|
|
|
|
|
|
|
|
|
|
Year-Ended |
|
|
Inception |
|
Authorized Shares Available for Future Award Grants |
|
December 31, 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 |
|
|
400 |
|
|
|
400 |
|
|
|
|
|
|
|
|
Analysis of Award Activity
The analysis below details the activity of both of our stock option plans and the ad hoc options,
which were granted prior to the adoption of the other plans, for 2009. Information on options
outstanding at December 31, 2009, is also presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
Aggregate Intrinsic |
|
|
|
|
|
|
|
Average Exercise |
|
|
Remaining Life |
|
|
Value |
|
Options |
|
Shares |
|
|
Price |
|
|
(Yrs) |
|
|
(In Thousands) |
|
Outstanding at January 1, 2009 |
|
|
812,066 |
|
|
$ |
32.35 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
103,500 |
|
|
$ |
18.14 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,000 |
) |
|
$ |
14.29 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(2,000 |
) |
|
$ |
30.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
912,566 |
|
|
$ |
30.77 |
|
|
|
6.72 |
|
|
$ |
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2009 |
|
|
483,992 |
|
|
$ |
30.79 |
|
|
|
5.66 |
|
|
$ |
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic value is the difference between our share price on the last day of trading (December 31,
2009) and the price of the options when granted and represents the value that would have been
received by option holders had they exercised their options on December 31, 2009. These values
change based on the fair market value of our shares. The intrinsic value of options exercised
totaled $4,000, $125,000 and $774,000 in 2009, 2008 and 2007, respectively.
At December 31, 2009 we had 19,464 restricted stock awards outstanding, all of which were granted
in May 2008 at a fair value of $33.43 per share, which resulted in $634,000 of compensation expense
to be recognized over the next five years during the vesting period. The intrinsic value of the
restricted stock awards outstanding totaled $355,000 for 2009.
Assumptions
The weighted-average grant-date fair value of the options granted under the plan has been estimated
using the Black-Scholes option pricing model with the following weighted-average assumptions.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Risk-free interest rate |
|
|
2.72 |
% |
|
|
3.32 |
% |
|
|
4.60 |
% |
Expected option life (in years) |
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
Expected dividends |
|
$ |
0.60 |
|
|
$ |
0.60 |
|
|
$ |
0.495 |
|
Expected volatility |
|
|
54.88 |
% |
|
|
26.57 |
% |
|
|
28.28 |
% |
Weighted-average grant-date
fair value of options granted
during the year |
|
$ |
7.52 |
|
|
$ |
9.54 |
|
|
$ |
11.71 |
|
113
United Fire & Casualty Company Form 10-K | 2009
The following table summarizes information regarding the stock options outstanding and exercisable
at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
|
|
Range of Exercise |
|
Number |
|
|
Remaining |
|
|
Weighted-Average |
|
|
Number |
|
|
Weighted-Average |
|
Prices |
|
Outstanding |
|
|
Contractual Life (Yrs) |
|
|
Exercise Price |
|
|
Exercisable |
|
|
Exercise Price |
|
$15.01 21.00 |
|
|
159,350 |
|
|
|
7.09 |
|
|
$ |
17.53 |
|
|
|
55,850 |
|
|
$ |
16.39 |
|
21.01 28.00 |
|
|
82,700 |
|
|
|
4.19 |
|
|
|
22.80 |
|
|
|
82,600 |
|
|
|
22.80 |
|
28.01 35.00 |
|
|
345,766 |
|
|
|
7.17 |
|
|
|
33.06 |
|
|
|
156,692 |
|
|
|
32.57 |
|
35.01 41.00 |
|
|
324,750 |
|
|
|
6.71 |
|
|
|
36.85 |
|
|
|
188,850 |
|
|
|
37.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$15.01 41.00 |
|
|
912,566 |
|
|
|
6.72 |
|
|
$ |
30.77 |
|
|
|
483,992 |
|
|
$ |
30.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 11. SEGMENT INFORMATION
We have two reportable business segments in our operations: property and casualty insurance and
life insurance. The property and casualty insurance segment has three domestic locations from which
it conducts its business. All offices target a similar customer base, market the same products and
use the same marketing strategies and are therefore aggregated. The life insurance segment operates
from our home office. The accounting policies of the segments are the same as those described in
Note 1 to our Consolidated Financial Statements. We analyze results based on profitability (i.e.,
loss ratios), expenses and return on equity. Because all of our insurance is sold domestically, we
have no revenues allocable to foreign operations.
Property and Casualty Insurance Segment
We write both commercial and personal lines of property and casualty insurance. We focus on our
commercial lines, which represented 91.8 percent of our property and casualty insurance premiums
earned for 2009. Our personal lines represented 8.2 percent of our property and casualty insurance
premiums earned for 2009.
Products
Our primary commercial policies are tailored business packages that include the following
coverages: fire and allied lines, other liability, automobile, workers compensation and surety.
Our personal lines consist primarily of automobile and fire and allied lines coverage, including
homeowners.
Pricing
The pricing of our property and casualty insurance products are based on many factors including
state regulation and legislation, competition, business and economic conditions such as: inflation,
market rates of interest, expenses, the frequency and severity of claims, and the outcome of
judicial decisions. Additionally, many state regulators consider investment income when
establishing or approving rates, which can reduce the margin for profit that we include in the
rating formula.
Seasonality
Our property and casualty insurance segment experiences some seasonality with regard to premiums
written, which are generally highest in January and July and lowest during the fourth quarter.
Although we experience some seasonality in our premiums written, premiums are earned ratably over
the period of coverage. Losses and loss settlement expenses incurred tend to remain consistent
throughout the year, with the exception of when a catastrophe occurs. Catastrophes inherently are
unpredictable and can occur at any time during the year from man-made or natural disaster events
that include, but which are not limited to, hail, tornadoes, hurricanes and windstorms.
114
United Fire & Casualty Company Form 10-K | 2009
Disaster Charges and Other Related Expenses
In June 2008, our corporate headquarters was forced to close temporarily due to historic flooding
in Cedar Rapids, Iowa, that caused extensive damage to the first and lower levels of our buildings.
We recorded flood-related charges of $6,803,000, net of insurance, in 2008 and net insurance
recoveries of $1,468,000 in 2009. These charges primarily relate to costs incurred to clean up and
restore our Cedar Rapids, Iowa home office and contents. We have received insurance reimbursements
totaling $1,822,000 and $3,106,000, in 2009 and 2008, respectively, which offset all of the charges
incurred in 2009 and a portion of the charges incurred in 2008.
In September 2008, our New Orleans, Louisiana claims office in Metairie closed for three days due
to Hurricane Gustav and our Gulf Coast regional office in Galveston, Texas was temporarily closed
for three weeks due to Hurricane Ike. We recorded $133,000, net of insurance, and $399,000 of
hurricane-related expenses in 2009 and 2008, respectively, which primarily relates to costs
incurred to remove damaged contents from the affected areas and establish a temporary facility for
our Gulf Coast regional office. We have received insurance reimbursements totaling $275,000 in
2009, which offset a portion of the charges incurred in 2009. There were no such reimbursements
recorded in 2008.
We believe that any additional disaster charges and other related expenses incurred in 2010 would
be minimal and immaterial to our results of operations.
Life Insurance Segment
Products
United Life Insurance Company underwrites all of our life insurance business and sells annuities.
Our principal products are single premium annuities, universal life products and traditional life
(primarily single premium whole life insurance) products. We also underwrite and market other
traditional products, including term life insurance and whole life insurance. We do not write
variable annuities or variable insurance products.
Life insurance in-force, before ceded reinsurance, totaled $4,715,258,000 and $4,589,010,000 as of
December 31, 2009 and 2008, respectively. Traditional life insurance products represented 62.8
percent and 61.0 percent of our insurance in-force at December 31, 2009 and 2008, respectively.
Universal life insurance represented 34.3 percent and 35.8 percent of insurance in-force at
December 31, 2009 and 2008, respectively.
Pricing
Premiums for our life and health insurance products are based on assumptions with respect to
mortality, morbidity, investment yields, expenses, and lapses and are also affected by state laws
and regulations, as well as competition. Pricing assumptions are based on our experience, as well
as the industry in general, depending upon the factor being considered. The actual profit or loss
produced by a product will vary from the anticipated profit if the actual experience differs from
the assumptions used in pricing the product.
115
United Fire & Casualty Company Form 10-K | 2009
Premiums Earned by Segment
The following table set forth our net premiums earned by segment before intersegment eliminations.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Property and Casualty Insurance Segment |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
Fire and allied lines |
|
$ |
124,582 |
|
|
$ |
130,570 |
|
|
$ |
138,611 |
|
Other liability |
|
|
119,587 |
|
|
|
134,429 |
|
|
|
136,704 |
|
Automobile |
|
|
111,001 |
|
|
|
113,832 |
|
|
|
112,768 |
|
Workers compensation |
|
|
51,992 |
|
|
|
52,792 |
|
|
|
48,359 |
|
Fidelity and surety |
|
|
21,354 |
|
|
|
22,244 |
|
|
|
21,848 |
|
Reinsurance assumed |
|
|
5,942 |
|
|
|
10,530 |
|
|
|
13,682 |
|
Miscellaneous |
|
|
1,219 |
|
|
|
1,184 |
|
|
|
1,162 |
|
|
|
|
|
|
|
|
|
|
|
Total net premiums earned |
|
$ |
435,677 |
|
|
$ |
465,581 |
|
|
$ |
473,134 |
|
|
|
|
|
|
|
|
|
|
|
Life Insurance Segment |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary life (excluding Universal life) |
|
$ |
23,842 |
|
|
$ |
21,617 |
|
|
$ |
18,542 |
|
Universal life policy fees |
|
|
10,554 |
|
|
|
9,653 |
|
|
|
10,080 |
|
Accident and health |
|
|
1,634 |
|
|
|
1,790 |
|
|
|
2,090 |
|
Immediate annuities with life
contingencies |
|
|
6,755 |
|
|
|
4,505 |
|
|
|
1,325 |
|
Credit life |
|
|
140 |
|
|
|
271 |
|
|
|
604 |
|
Group life |
|
|
206 |
|
|
|
239 |
|
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
Total net premiums earned |
|
$ |
43,131 |
|
|
$ |
38,075 |
|
|
$ |
32,841 |
|
|
|
|
|
|
|
|
|
|
|
116
United Fire & Casualty Company Form 10-K | 2009
Total revenue by segment includes sales to external customers and intersegment sales that are
eliminated to arrive at the total revenues as reported in the accompanying Consolidated Statements
of Income. We account for intersegment sales on the same basis as sales to external customers. The
following table sets forth certain data for each of our business segments and is reconciled to our
Consolidated Financial Statements. Depreciation expense and property and equipment acquisitions for
2009, 2008 and 2007, are reported in the property and casualty insurance segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Property and Casualty Insurance Segment
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
435,677 |
|
|
$ |
465,581 |
|
|
$ |
473,134 |
|
Investment income, net of investment expenses |
|
|
31,715 |
|
|
|
33,618 |
|
|
|
43,507 |
|
Realized investment gains (losses) |
|
|
(6,815 |
) |
|
|
1,879 |
|
|
|
7,099 |
|
Other income (expense) |
|
|
194 |
|
|
|
(55 |
) |
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
Total reportable segment |
|
$ |
460,771 |
|
|
$ |
501,023 |
|
|
$ |
523,799 |
|
|
|
|
|
|
|
|
|
|
|
Incensement eliminations |
|
|
(173 |
) |
|
|
(166 |
) |
|
|
(144 |
) |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
460,598 |
|
|
$ |
500,857 |
|
|
$ |
523,655 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
460,771 |
|
|
$ |
501,023 |
|
|
$ |
523,799 |
|
Benefits, losses and expenses |
|
|
500,855 |
|
|
|
537,569 |
|
|
|
384,855 |
|
|
|
|
|
|
|
|
|
|
|
Total reportable segment |
|
$ |
(40,084 |
) |
|
$ |
(36,546 |
) |
|
$ |
138,944 |
|
|
|
|
|
|
|
|
|
|
|
Incensement eliminations |
|
|
137 |
|
|
|
116 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
(39,947 |
) |
|
$ |
(36,430 |
) |
|
$ |
139,012 |
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
(22,270 |
) |
|
|
(21,274 |
) |
|
|
40,787 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(17,677 |
) |
|
$ |
(15,156 |
) |
|
$ |
98,225 |
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Total reportable segment |
|
$ |
1,561,474 |
|
|
$ |
1,495,883 |
|
|
$ |
1,554,490 |
|
Incensement eliminations |
|
|
(237,165 |
) |
|
|
(185,116 |
) |
|
|
(230,373 |
) |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,324,309 |
|
|
$ |
1,310,767 |
|
|
$ |
1,324,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance Segment
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
43,131 |
|
|
$ |
38,075 |
|
|
$ |
32,841 |
|
Investment income, net of
investment expenses |
|
|
74,533 |
|
|
|
74,125 |
|
|
|
78,986 |
|
Realized investment gains (losses) |
|
|
(6,364 |
) |
|
|
(12,262 |
) |
|
|
2,571 |
|
Other income |
|
|
605 |
|
|
|
935 |
|
|
|
595 |
|
|
|
|
|
|
|
|
|
|
|
Total reportable segment |
|
$ |
111,905 |
|
|
$ |
100,873 |
|
|
$ |
114,993 |
|
|
|
|
|
|
|
|
|
|
|
Incensement eliminations |
|
|
(310 |
) |
|
|
(281 |
) |
|
|
(122 |
) |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
111,595 |
|
|
$ |
100,592 |
|
|
$ |
114,871 |
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
111,905 |
|
|
$ |
100,873 |
|
|
$ |
114,993 |
|
Benefits, losses and expenses |
|
|
100,528 |
|
|
|
97,464 |
|
|
|
94,699 |
|
|
|
|
|
|
|
|
|
|
|
Total reportable segment |
|
$ |
11,377 |
|
|
$ |
3,409 |
|
|
$ |
20,294 |
|
|
|
|
|
|
|
|
|
|
|
Incensement eliminations |
|
|
(136 |
) |
|
|
(115 |
) |
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
11,241 |
|
|
$ |
3,294 |
|
|
$ |
20,322 |
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
4,005 |
|
|
|
1,202 |
|
|
|
7,155 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,236 |
|
|
$ |
2,092 |
|
|
$ |
13,167 |
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
1,578,235 |
|
|
$ |
1,376,363 |
|
|
$ |
1,436,437 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated Totals |
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated revenues |
|
$ |
572,193 |
|
|
$ |
601,449 |
|
|
$ |
638,526 |
|
Total consolidated net income (loss) |
|
$ |
(10,441 |
) |
|
$ |
(13,064 |
) |
|
$ |
111,392 |
|
Total consolidated assets |
|
$ |
2,902,544 |
|
|
$ |
2,687,130 |
|
|
$ |
2,760,554 |
|
117
United Fire & Casualty Company Form 10-K | 2009
NOTE 12. QUARTERLY SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth our selected unaudited quarterly financial information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands Except Per Share Data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters |
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
Total |
|
Year ended December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
138,263 |
|
|
$ |
134,046 |
|
|
$ |
150,701 |
|
|
$ |
149,183 |
|
|
$ |
572,193 |
|
Income (loss) before income taxes |
|
|
1,491 |
|
|
|
(11,360 |
) |
|
|
(18,589 |
) |
|
|
(248 |
) |
|
|
(28,706 |
) |
Net income (loss) |
|
$ |
3,270 |
|
|
$ |
(5,334 |
) |
|
$ |
(10,156 |
) |
|
$ |
1,779 |
|
|
$ |
(10,441 |
) |
Basic earnings (loss) per share (1) |
|
$ |
0.12 |
|
|
$ |
(0.20 |
) |
|
$ |
(0.38 |
) |
|
$ |
0.07 |
|
|
$ |
(0.39 |
) |
Diluted earnings (loss) per share (1) |
|
|
0.12 |
|
|
|
(0.20 |
) |
|
|
(0.38 |
) |
|
|
0.07 |
|
|
|
(0.39 |
) |
Year ended December 31, 2008
Total revenues |
|
$ |
150,043 |
|
|
$ |
152,246 |
|
|
$ |
149,381 |
|
|
$ |
149,779 |
|
|
$ |
601,449 |
|
Income (loss) before income taxes |
|
|
26,823 |
|
|
|
(5,388 |
) |
|
|
(28,201 |
) |
|
|
(26,370 |
) |
|
|
(33,136 |
) |
Net income (loss) |
|
$ |
20,127 |
|
|
$ |
(1,523 |
) |
|
$ |
(16,826 |
) |
|
$ |
(14,842 |
) |
|
$ |
(13,064 |
) |
Basic earnings (loss) per share (1) |
|
$ |
0.74 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.63 |
) |
|
$ |
(0.56 |
) |
|
$ |
(0.48 |
) |
Diluted earnings (loss) per share (1) |
|
|
0.74 |
|
|
|
(0.06 |
) |
|
|
(0.63 |
) |
|
|
(0.56 |
) |
|
|
(0.48 |
) |
|
|
|
(1) |
|
The sum of the quarterly reported amounts may not equal the full year, as each is computed
independently. |
NOTE 13. EARNINGS AND DIVIDENDS PER COMMON SHARE
Basic earnings per share is computed by dividing net income by the weighted-average number of
common shares outstanding during the reporting period. Diluted earnings per share gives effect to
all dilutive common shares outstanding during the reporting period. The dilutive shares we consider
in our diluted earnings per share calculation relate to our outstanding stock options.
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 options whose exercise
price is less than the weighted-average fair market value of our stock during the reporting period.
This method also assumes that the proceeds from the hypothetical stock option exercises are used to
repurchase shares of common stock at the weighted-average fair market value of the stock during the
reporting period. The net of the assumed options 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 per share are displayed in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
(In Thousands Except Per Share Data) |
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
Net income (loss) |
|
$ |
(10,441 |
) |
|
$ |
(10,441 |
) |
|
$ |
(13,064 |
) |
|
$ |
(13,064 |
) |
|
$ |
111,392 |
|
|
$ |
111,392 |
|
Weighted-average common shares outstanding |
|
|
26,590 |
|
|
|
26,590 |
|
|
|
26,960 |
|
|
|
26,960 |
|
|
|
27,569 |
|
|
|
27,569 |
|
Add dilutive effect of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares for EPS calculation |
|
|
26,590 |
|
|
|
26,590 |
|
|
|
26,960 |
|
|
|
26,960 |
|
|
|
27,569 |
|
|
|
27,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share |
|
$ |
(0.39 |
) |
|
$ |
(0.39 |
) |
|
$ |
(0.48 |
) |
|
$ |
(0.48 |
) |
|
$ |
4.04 |
|
|
$ |
4.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards excluded from diluted EPS calculation (1) |
|
|
|
|
|
|
932 |
|
|
|
|
|
|
|
832 |
|
|
|
|
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Outstanding awards were excluded from the diluted earnings per share calculation because
the effect of including them would have been anti-dilutive. |
118
United Fire & Casualty Company Form 10-K | 2009
NOTE 14. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes changes in stockholders equity during a period except those
resulting from investments by and dividends to stockholders. The following table sets forth the
components of comprehensive income (loss) and the related tax effects for 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net income (loss) |
|
$ |
(10,441 |
) |
|
$ |
(13,064 |
) |
|
$ |
111,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized appreciation on investments |
|
|
74,624 |
|
|
|
(102,745 |
) |
|
|
(2,543 |
) |
Adjustment for net realized (gains) losses included in
income |
|
|
13,179 |
|
|
|
10,383 |
|
|
|
(9,670 |
) |
Change in unrecognized employee benefit costs |
|
|
(2,661 |
) |
|
|
(12,934 |
) |
|
|
(7,239 |
) |
Adjustment for costs included in employee benefit expense |
|
|
2,430 |
|
|
|
1,261 |
|
|
|
1,180 |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), before tax |
|
|
87,572 |
|
|
|
(104,035 |
) |
|
|
(18,272 |
) |
Income tax effect |
|
|
(30,774 |
) |
|
|
36,411 |
|
|
|
6,394 |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), after tax |
|
|
56,798 |
|
|
|
(67,624 |
) |
|
|
(11,878 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
46,357 |
|
|
$ |
(80,688 |
) |
|
$ |
99,514 |
|
|
|
|
|
|
|
|
|
|
|
NOTE 15. LEASE COMMITMENTS
At December 31, 2009, we were obligated under noncancelable operating lease agreements for office
space, vehicles, computer equipment and office equipment. Most of our leases include renewal
options, purchase options or both. These provisions may be exercised by us upon the expiration of
the related lease agreements. Rental expense under our operating lease agreements was $4,209,000,
$4,085,000 and $4,785,000 for 2009, 2008 and 2007, respectively. Our most significant lease
arrangement is for office space for our regional office in Galveston, Texas. This lease expires in
December 2014. The annual lease payments for this office space total approximately $2,100,000.
At December 31, 2009, our future minimum rental payments are as follows:
|
|
|
|
|
(In Thousands) |
|
|
|
2010 |
|
$ |
4,077 |
|
2011 |
|
|
3,847 |
|
2012 |
|
|
2,886 |
|
2013 |
|
|
2,563 |
|
2014 |
|
|
2,238 |
|
Thereafter |
|
|
1,012 |
|
|
|
|
|
Total |
|
$ |
16,623 |
|
|
|
|
|
119
United Fire & Casualty Company Form 10-K | 2009
Report of Independent Registered Public Accounting Firm on Financial Statements
Board of Directors and Stockholders
United Fire & Casualty Company
We have audited the accompanying consolidated balance sheets of United Fire & Casualty Company
(United Fire) as of December 31, 2009 and 2008, and the related consolidated statements of income,
stockholders equity, and cash flows for each of the three years in the period ended December 31,
2009. Our audits also included the financial statement schedules of United Fire listed in Item
15(a)(2). These financial statements and schedules are the responsibility of United Fires
management. Our responsibility is to express an opinion on these financial statements and schedules
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of United Fire & Casualty Company at December 31,
2009 and 2008, and the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2009, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement schedules, when
considered in relation to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of United Fires internal control over financial reporting
as of December 31, 2009, based on criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report,
dated March 1, 2010, expressed an unqualified opinion thereon.
|
|
|
|
|
|
Ernst & Young LLP |
|
|
|
|
|
Chicago, Illinois
March 1, 2010 |
|
|
120
United Fire & Casualty Company Form 10-K | 2009
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of United Fire & Casualty Company is responsible for establishing and maintaining
adequate internal control over financial reporting. United Fire & Casualty Companys internal
control over financial reporting is a process designed under the supervision of its Chief Executive
Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of its Consolidated Financial Statements for external
purposes in accordance with U.S. generally accepted accounting principles.
As of December 31, 2009, United Fire & Casualty Companys management assessed the effectiveness of
internal control over financial reporting based on the criteria for effective internal control over
financial reporting established in Internal Control Integrated Framework, issued by the
Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on the assessment,
United Fire & Casualty Companys management determined that effective internal control over
financial reporting is maintained as of December 31, 2009, based on those criteria.
Ernst & Young LLP, the independent registered public accounting firm that audited the Consolidated
Financial Statements of United Fire & Casualty Company included in this Annual Report on Form 10-K,
has audited the effectiveness of internal control over financial reporting as of December 31, 2009.
Their report, which expresses an unqualified opinion on the effectiveness of United Fire & Casualty
Companys internal control over financial reporting as of December 31, 2009, is included in this
item under the heading Report of Independent Registered Public Accounting Firm on Internal Control
Over Financial Reporting.
|
|
|
Dated: March 1, 2010
|
|
|
|
|
|
|
|
|
Randy A. Ramlo |
|
|
Chief Executive Officer |
|
|
|
|
|
|
|
|
Dianne M. Lyons |
|
|
Chief Financial Officer |
|
|
121
United Fire & Casualty Company Form 10-K | 2009
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial
Reporting
Board of Directors and Stockholders
United Fire & Casualty Company
We have audited the internal control over financial reporting of United Fire & Casualty Company
(United Fire) as of December 31, 2009, based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). United Fires management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Management Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on United Fires internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted accounting principles.
A companys internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, United Fire & Casualty Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balances sheets of United Fire & Casualty Company as of
December 31, 2009 and 2008 and the related consolidated statements of income, stockholders equity,
and cash flows for each of the three years in the period ended December 31, 2009 and our report
dated March 1, 2010 expressed an unqualified opinion thereon.
|
|
|
|
|
|
Ernst & Young LLP |
|
|
|
|
|
Chicago, Illinois |
|
|
March 1, 2010 |
|
|
122
United Fire & Casualty Company Form 10-K | 2009
|
|
|
ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
|
|
|
ITEM 9A. |
|
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 Rule 15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this
report. Based on that evaluation, the chief executive officer and chief financial officer concluded
that our disclosure controls and procedures as of the end of the period covered by this report were
designed and functioning effectively to provide reasonable assurance that the information required
to be disclosed by us in reports filed 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.
|
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING |
Managements annual report on internal control over financial reporting and the attestation report
of our independent registered public accounting firm are included in Item 8 under the headings
Managements Report on Internal Control over Financial Reporting and Report of Independent
Registered Public Accounting Firm on Internal Control over Financial Reporting, respectively and
incorporated herein by reference.
|
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING |
As required by Rule 15d-15(e) under the Securities Exchange Act of 1934, 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 our fourth fiscal quarter 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 our fourth fiscal quarter.
|
|
|
ITEM 9B. |
|
OTHER INFORMATION |
None.
123
United Fire & Casualty Company Form 10-K | 2009
PART III
|
|
|
ITEM 10. |
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
|
EXECUTIVE OFFICERS AND CERTAIN SIGNIFICANT EMPLOYEES AT UNITED FIRE |
The following table sets forth information as of December 31, 2009, concerning the following
executive officers and other significant employees.
|
|
|
|
|
|
|
Name |
|
Age |
|
Position |
Randy A. Ramlo (1)
|
|
|
48 |
|
|
President and Chief Executive Officer |
Michael T. Wilkins (1)
|
|
|
46 |
|
|
Executive Vice President, Corporate Administration |
Dianne M. Lyons (1)
|
|
|
46 |
|
|
Vice President and Chief Financial Officer |
Brian S. Berta
|
|
|
45 |
|
|
Vice President, Great Lakes regional office |
David E. Conner (1)
|
|
|
51 |
|
|
Vice President and Chief Claims Officer |
Barrie W. Ernst (1)
|
|
|
55 |
|
|
Vice President and Chief Investment Officer |
Kevin W. Helbing
|
|
|
44 |
|
|
Controller |
David L. Hellen
|
|
|
57 |
|
|
Vice President, Denver regional office |
Kent J. Hutchins (1)
|
|
|
51 |
|
|
Vice President and Chief Operating Officer, United Life Insurance Company |
Joseph B. Johnson
|
|
|
57 |
|
|
Vice President, Gulf Coast regional office |
David A. Lange
|
|
|
52 |
|
|
Corporate Secretary and Fidelity and Surety Claims Manager |
Janice A. Martin
|
|
|
48 |
|
|
Treasurer |
Scott A. Minkel
|
|
|
47 |
|
|
Vice President, Information Services |
Douglas A. Penn
|
|
|
60 |
|
|
Vice President, Midwest regional office |
Dennis J. Richmann
|
|
|
45 |
|
|
Vice President, Fidelity and Surety |
Neal R. Scharmer (1)
|
|
|
53 |
|
|
Vice President, General Counsel and Corporate Secretary |
Allen R. Sorensen
|
|
|
51 |
|
|
Vice President, Corporate Underwriting |
Colleen R. Sova
|
|
|
54 |
|
|
Vice President, e-Solutions |
Timothy G. Spain
|
|
|
58 |
|
|
Vice President, Human Resources |
A brief description of the business experience of these officers follows.
Randy A. Ramlo was appointed our President and Chief Executive Officer in May 2007. He previously
served us as Chief Operating Officer from May 2006 until May 2007, as Executive Vice President from
May 2004 until May 2007, and as Vice President, Fidelity and Surety, from November 2001 until May
2004. He also worked as an underwriting manager in our Great Lakes region. We have employed Mr.
Ramlo since 1984.
Michael T. Wilkins became our Executive Vice President, Corporate Administration, in May 2007. He
was our Senior Vice President, Corporate Administration, from May 2004 until May 2007, our Vice
President, Corporate Administration, from August 2002 until May 2004 and the resident Vice
President in our Lincoln regional office from 1998 until 2002. Prior to 1998, Mr. Wilkins held
various other positions within our company since joining us in 1985.
Dianne M. Lyons was appointed Chief Financial Officer in May 2006. She was appointed Vice President
in May 2003 and served as our Controller from 1999 until May 2006. Ms. Lyons has been employed by
us in the accounting department since 1983.
Brian S. Berta is Vice President of our Great Lakes region, a position he has held since May 2006.
Mr. Berta previously served as an underwriting manager in our Great Lakes region and has been
employed by us since 1993.
124
United Fire & Casualty Company Form 10-K | 2009
David E. Conner was appointed our Vice President and Chief Claims Officer, effective January 1,
2005. Mr. Conner has served in various capacities within the claims department, including claims
manager and Assistant Vice President, since joining us in 1998.
Barrie W. Ernst is our Vice President and Chief Investment Officer. He joined us in August 2002.
Previously, Mr. Ernst served as Senior Vice President of SCI Financial Group, Cedar Rapids, Iowa,
where he worked from 1980 to 2002. SCI Financial Group was a regional financial services firm
providing brokerage, insurance and related services to its clients.
Kevin W. Helbing joined us as our Controller in February 2008. Mr. Helbing was previously employed
by Marsh U.S.A. in Iowa City, Iowa, as Vice President, Treasury, from April 2007 until February
2008. From March 2001 until April 2007, Mr. Helbing was employed by Marsh Advantage America, first
as an accounting manager and then as Assistant Vice President and Controller. Marsh U.S.A. and
Marsh Advantage America design, manage and administer insurance and risk programs for businesses.
David L. Hellen serves as Vice President of our Denver regional office; a position he has held
since 1988. We have employed Mr. Hellen since 1975.
Kent J. Hutchins was named Vice President and Chief Operating Officer of our life insurance
subsidiary, United Life Insurance Company, in May 2007, after serving as its Vice President and
General Manager from August 2006 until May 2007. Mr. Hutchins was previously employed by Tricor
Lending and Financial Services in Prairie du Chien, Wisconsin. As an employee of Tricor, he was a
member of our life agency force for 25 years before joining United Life Insurance Company as a
marketing representative for the state of Wisconsin in June 2004.
Joseph B. Johnson was named Vice President of our Gulf Coast regional office in May 2007, after
having served as branch manager since August 2006. Mr. Johnson has over 25 years of experience in
the insurance industry. From August 2001 until August 2006, he served as Vice President of
Insurance Operations for Beacon Insurance Group in Wichita Falls, Texas.
David A. Lange has served as one of our Corporate Secretaries since 1997. Mr. Lange has also been a
Surety Claims Manager since he began his employment with us in 1987.
Janice A. Martin was named Treasurer in May 2008. Ms. Martin has served in various capacities since
joining us in 1988, including as Tax Accountant and as Tax Manager since January 2006.
Scott A. Minkel is our Vice President, Information Services, a position he has held since May 2007.
Mr. Minkel previously served in various capacities within the information services department since
joining us in 1984, including as Assistant Vice President, Director of Information Services and
programming manager.
Douglas A. Penn is Vice President of our Midwest regional office, a position he has held since May
2007. Since joining us in 1974, Mr. Penn has served in a variety of capacities, including as
underwriting manager, marketing representative and commercial underwriter.
Dennis J. Richmann was named our Vice President, Fidelity and Surety, in May 2006. He has been
employed by us in various capacities since joining us in August 1988, most recently as Surety Bond
Underwriting Manager.
Neal R. Scharmer was appointed our Vice President and General Counsel in May 2001 and Corporate
Secretary in May 2006. He joined us in 1995.
Allen R. Sorensen became our Vice President, Corporate Underwriting, in May 2006. Mr. Sorensen
began his career with us in June 1981 and has served us in various capacities, including
underwriting, product support and product automation.
Colleen R. Sova serves as Vice President in our e-Solutions department, a position she has held
since May 2007. Ms. Sova has previously served us in a variety of capacities since joining us in
1981, including as Assistant Vice President and Director of e-Solutions, Director of Claims
Administration, claims supervisor and claims adjuster.
Timothy G. Spain became our Vice President, Human Resources, in July 2006. Mr. Spain began his
employment with us in December 1994 as Training Director.
125
United Fire & Casualty Company Form 10-K | 2009
The information required by this Item regarding our directors and corporate governance matters is
included under the captions Proposal 1Election of Directors, Corporate Governance, and the
subheading Code of Ethics under Miscellaneous in our 2010 Proxy Statement, and is incorporated
herein by reference. The information required by this Item regarding compliance with Section 16(a)
of the Exchange Act is included under the heading Section 16(a) Beneficial Ownership Reporting
Compliance in our 2010 Proxy Statement and is incorporated herein by reference.
|
|
|
ITEM 11. |
|
EXECUTIVE COMPENSATION |
The information required under this Item regarding our executive compensation and our Compensation
Committee Report is included under the caption Executive Compensation in our 2010 Proxy Statement
and is incorporated herein by reference. The information required by this Item regarding
Compensation Committee interlocks and insider participation is included under the caption
Corporate Governance, subheading Compensation Committee Interlocks and Insider Participation
in our 2010 Proxy Statement and is incorporated herein by reference.
|
|
|
ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS
MATTERS
|
The information required under this Item is included under the captions Security Ownership of
Certain Beneficial Owners, Security Ownership of Management and Securities Authorized for
Issuance under Equity Compensation Plans in our 2010 Proxy Statement and is incorporated herein by
reference.
|
|
|
ITEM 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required under this Item is included under the caption Corporate Governance in
our 2010 Proxy Statement and is incorporated herein by reference.
|
|
|
ITEM 14. |
|
PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required under this Item is included under the caption Information About Our
Independent Registered Public Accounting Firm in our 2010 Proxy Statement and is incorporated
herein by reference.
126
United Fire & Casualty Company Form 10-K | 2009
PART IV
|
|
|
ITEM 15. |
|
EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
We have filed the following documents as part of this Annual Report on Form 10-K:
|
|
|
|
|
|
|
Page |
|
(a) 1. Financial Statements |
|
|
|
|
Consolidated Balance Sheets at December 31, 2009 and 2008 |
|
|
76 |
|
Consolidated Statements of Income for the three years ended December 31, 2009 |
|
|
77 |
|
Consolidated Statements of Stockholders Equity for the three years ended December 31, 2009 |
|
|
78 |
|
Consolidated Statements of Cash Flows for the three years ended December 31, 2009 |
|
|
79 |
|
Notes to Consolidated Financial Statements |
|
|
81 |
|
|
|
|
|
|
(a) 2. Financial Statement Schedules required to be filed by Item 8 of this Form: |
|
|
|
|
Schedule I. Summary of Investments Other than Investments in Related Parties |
|
|
128 |
|
Schedule III: Supplementary Insurance Information |
|
|
129 |
|
Schedule IV: Reinsurance Schedule |
|
|
130 |
|
Schedule V: Valuation and Qualifying Accounts |
|
|
131 |
|
Schedule VI: Supplemental Information Concerning Property and Casualty Insurance Operations |
|
|
132 |
|
All other schedules have been omitted as not required, not applicable, not deemed material or because the information is included the
Consolidated Financial Statements. |
|
|
|
|
(a) 3. See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K. |
|
|
|
|
127
United Fire & Casualty Company Form 10-K | 2009
Schedule I. Summary of Investments Other than Investments in Related Parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
Amounts at |
|
December 31, 2009 |
|
Cost or |
|
|
|
|
|
|
Which Shown in |
|
Type of Investment |
|
Amortized Cost |
|
|
Fair Value |
|
|
Balance Sheet |
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
United States Government and government
agencies and authorities |
|
$ |
125,888 |
|
|
$ |
126,812 |
|
|
$ |
126,718 |
|
States, municipalities and political
subdivisions |
|
|
599,205 |
|
|
|
625,877 |
|
|
|
625,856 |
|
Foreign governments |
|
|
137,541 |
|
|
|
143,929 |
|
|
|
143,929 |
|
Public utilities |
|
|
272,690 |
|
|
|
287,048 |
|
|
|
287,048 |
|
All other corporate bonds |
|
|
960,612 |
|
|
|
995,749 |
|
|
|
995,749 |
|
Redeemable preferred stock |
|
|
1,126 |
|
|
|
1,309 |
|
|
|
1,309 |
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
2,097,062 |
|
|
$ |
2,180,724 |
|
|
$ |
2,180,609 |
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities |
|
$ |
7,484 |
|
|
$ |
11,717 |
|
|
$ |
11,717 |
|
Banks, trusts and insurance companies |
|
|
11,151 |
|
|
|
49,483 |
|
|
|
49,483 |
|
Industrial, miscellaneous and all other |
|
|
33,210 |
|
|
|
70,489 |
|
|
|
70,489 |
|
Nonredeemable preferred stocks |
|
|
1,461 |
|
|
|
1,029 |
|
|
|
1,029 |
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
$ |
53,306 |
|
|
$ |
132,718 |
|
|
$ |
132,718 |
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans on real estate |
|
$ |
7,328 |
|
|
$ |
8,229 |
|
|
$ |
7,328 |
|
Policy loans |
|
|
7,947 |
|
|
|
7,947 |
|
|
|
7,947 |
|
Other long-term investments |
|
|
15,880 |
|
|
|
15,880 |
|
|
|
15,880 |
|
Short-term investments |
|
|
7,359 |
|
|
|
7,359 |
|
|
|
7,359 |
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
2,188,882 |
|
|
$ |
2,352,857 |
|
|
$ |
2,351,841 |
|
|
|
|
|
|
|
|
|
|
|
128
United Fire & Casualty Company Form 10-K | 2009
Schedule III. Supplementary Insurance Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future Policy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, |
|
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
Benefits, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims, |
|
|
of Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
Policy |
|
|
Losses, Claims |
|
|
|
|
|
|
Earned |
|
|
Investment |
|
|
Losses and |
|
|
Policy |
|
|
Other |
|
|
Interest on |
|
|
|
|
|
|
Acquisition |
|
|
and Loss |
|
|
Unearned |
|
|
Premium |
|
|
Income, |
|
|
Settlement |
|
|
Acquisition |
|
|
Underwriting |
|
|
Policy holders |
|
|
Premiums |
|
(In Thousands) |
|
Costs |
|
|
Expenses |
|
|
Premiums |
|
|
Revenue |
|
|
Net |
|
|
Expenses |
|
|
Costs |
|
|
Expenses |
|
|
Accounts |
|
|
Written (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty (3) |
|
$ |
45,562 |
|
|
$ |
606,045 |
|
|
$ |
205,703 |
|
|
$ |
435,677 |
|
|
$ |
31,542 |
|
|
$ |
365,721 |
|
|
$ |
105,606 |
|
|
$ |
30,553 |
|
|
$ |
|
|
|
$ |
424,827 |
|
Life, accident and health (1) |
|
|
46,943 |
|
|
|
1,321,600 |
|
|
|
307 |
|
|
|
42,821 |
|
|
|
74,533 |
|
|
|
40,670 |
|
|
|
9,287 |
|
|
|
8,745 |
|
|
|
41,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
92,505 |
|
|
$ |
1,927,645 |
|
|
$ |
206,010 |
|
|
$ |
478,498 |
|
|
$ |
106,075 |
|
|
$ |
406,391 |
|
|
$ |
114,893 |
|
|
$ |
39,298 |
|
|
$ |
41,652 |
|
|
$ |
424,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty (3) |
|
$ |
52,222 |
|
|
$ |
586,109 |
|
|
$ |
216,438 |
|
|
$ |
465,581 |
|
|
$ |
33,452 |
|
|
$ |
393,349 |
|
|
$ |
117,590 |
|
|
$ |
19,146 |
|
|
$ |
|
|
|
$ |
459,571 |
|
Life, accident and health (1) |
|
|
106,043 |
|
|
|
1,167,665 |
|
|
|
528 |
|
|
|
37,794 |
|
|
|
74,125 |
|
|
|
36,447 |
|
|
|
11,568 |
|
|
|
9,106 |
|
|
|
40,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
158,265 |
|
|
$ |
1,753,774 |
|
|
$ |
216,966 |
|
|
$ |
503,375 |
|
|
$ |
107,577 |
|
|
$ |
429,796 |
|
|
$ |
129,158 |
|
|
$ |
28,252 |
|
|
$ |
40,177 |
|
|
$ |
459,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty |
|
$ |
58,291 |
|
|
$ |
496,083 |
|
|
$ |
223,533 |
|
|
$ |
473,134 |
|
|
$ |
43,363 |
|
|
$ |
245,845 |
|
|
$ |
123,420 |
|
|
$ |
15,378 |
|
|
$ |
|
|
|
$ |
470,402 |
|
Life, accident and health (1) |
|
|
70,707 |
|
|
|
1,184,977 |
|
|
|
997 |
|
|
|
32,629 |
|
|
|
79,076 |
|
|
|
30,535 |
|
|
|
13,385 |
|
|
|
7,540 |
|
|
|
43,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
128,998 |
|
|
$ |
1,681,060 |
|
|
$ |
224,530 |
|
|
$ |
505,763 |
|
|
$ |
122,439 |
|
|
$ |
276,380 |
|
|
$ |
136,805 |
|
|
$ |
22,918 |
|
|
$ |
43,089 |
|
|
$ |
470,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Annuity deposits are included in future policy benefits, losses, claims and loss expenses. |
|
(2) |
|
Pursuant to Regulation S-X, premiums written does not apply to life insurance companies.
Please refer to the Statutory Financial Measures section of Part II, Item 7 for further
explanation of this measure. |
|
(3) |
|
Disaster charges and other related expenses incurred in 2009 and 2008 are not included in this
table. Please refer to the Consolidated Statements of Income for this amount. |
129
United Fire & Casualty Company Form 10-K | 2009
Schedule IV. Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of |
|
|
|
Gross |
|
|
Ceded to |
|
|
Assumed From |
|
|
|
|
|
|
Amount Assumed to |
|
(In Thousands) |
|
Amount |
|
|
Other Companies |
|
|
Other Companies |
|
|
Net Amount |
|
|
Net Earned |
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force |
|
$ |
4,715,138 |
|
|
$ |
910,775 |
|
|
$ |
120 |
|
|
$ |
3,804,483 |
|
|
|
|
|
Premiums earned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance |
|
$ |
464,698 |
|
|
$ |
36,925 |
|
|
$ |
7,904 |
|
|
$ |
435,677 |
|
|
|
1.81 |
% |
Life, accident and health insurance |
|
|
44,754 |
|
|
|
1,935 |
|
|
|
2 |
|
|
|
42,821 |
|
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
509,452 |
|
|
$ |
38,860 |
|
|
$ |
7,906 |
|
|
$ |
478,498 |
|
|
|
1.65 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force |
|
$ |
4,588,688 |
|
|
$ |
836,784 |
|
|
$ |
322 |
|
|
$ |
3,752,226 |
|
|
|
|
|
Premiums earned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance |
|
$ |
490,840 |
|
|
$ |
38,212 |
|
|
$ |
12,953 |
|
|
$ |
465,581 |
|
|
|
2.78 |
% |
Life, accident and health insurance |
|
|
39,513 |
|
|
|
1,729 |
|
|
|
10 |
|
|
|
37,794 |
|
|
|
0.03 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
530,353 |
|
|
$ |
39,941 |
|
|
$ |
12,963 |
|
|
$ |
503,375 |
|
|
|
2.58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force |
|
$ |
4,465,749 |
|
|
$ |
737,561 |
|
|
$ |
1,458 |
|
|
$ |
3,729,646 |
|
|
|
|
|
Premiums earned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance |
|
$ |
499,466 |
|
|
$ |
43,979 |
|
|
$ |
17,647 |
|
|
$ |
473,134 |
|
|
|
3.73 |
% |
Life, accident and health insurance |
|
|
34,257 |
|
|
|
1,664 |
|
|
|
36 |
|
|
|
32,629 |
|
|
|
0.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
533,723 |
|
|
$ |
45,643 |
|
|
$ |
17,683 |
|
|
$ |
505,763 |
|
|
|
3.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130
United Fire & Casualty Company Form 10-K | 2009
Schedule V. Valuation And Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
Balance at |
|
|
Charged to costs |
|
|
|
|
|
|
Balance at |
|
Description |
|
beginning of period |
|
|
and expenses |
|
|
Deductions |
|
|
end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for bad debts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009 |
|
$ |
655 |
|
|
$ |
33 |
|
|
$ |
|
|
|
$ |
688 |
|
Year ended December 31, 2008 |
|
|
631 |
|
|
|
24 |
|
|
|
|
|
|
|
655 |
|
Year ended December 31, 2007 |
|
|
393 |
|
|
|
238 |
|
|
|
|
|
|
|
631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset
valuation allowance (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009 |
|
$ |
5,647 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,647 |
|
Year ended December 31, 2008 |
|
|
5,647 |
|
|
|
|
|
|
|
|
|
|
|
5,647 |
|
Year ended December 31, 2007 |
|
|
6,195 |
|
|
|
|
|
|
|
548 |
|
|
|
5,647 |
|
|
|
|
(1) |
|
Recorded in connection with the purchase of American Indemnity Financial Corporation. |
131
United Fire & Casualty Company Form 10-K | 2009
Schedule VI. Supplemental Information Concerning Property and Casualty Insurance Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
Unpaid |
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
|
|
|
|
|
Affiliation with |
|
Deferred |
|
|
Claims and |
|
|
|
|
|
|
|
|
|
|
Realized |
|
|
|
|
|
|
Claims and |
|
|
of Deferred |
|
|
Paid Claims |
|
|
|
|
Registrant: United |
|
Policy |
|
|
Claim |
|
|
|
|
|
|
|
|
|
|
Investment |
|
|
Net |
|
|
Claim Adjustment Expenses |
|
|
Policy |
|
|
and Claim |
|
|
|
|
Fire and consolidated |
|
Acquisition |
|
|
Adjustment |
|
|
Unearned |
|
|
Earned |
|
|
Gains |
|
|
Investment |
|
|
Incurred Related to: |
|
|
Acquisition |
|
|
Adjustment |
|
|
Premiums |
|
property and casualty subsidiaries |
|
Costs |
|
|
Expenses |
|
|
Premiums |
|
|
Premiums |
|
|
(Losses) |
|
|
Income |
|
|
Current Year |
|
|
Prior Years |
|
|
Costs |
|
|
Expenses |
|
|
Written |
|
2009 |
|
$ |
45,562 |
|
|
$ |
606,045 |
|
|
$ |
205,703 |
|
|
$ |
435,677 |
|
|
$ |
(6,815 |
) |
|
$ |
31,542 |
|
|
$ |
339,507 |
|
|
$ |
26,215 |
|
|
$ |
105,606 |
|
|
$ |
327,032 |
|
|
$ |
424,827 |
|
2008 |
|
$ |
52,222 |
|
|
$ |
586,109 |
|
|
$ |
216,438 |
|
|
$ |
465,581 |
|
|
$ |
1,879 |
|
|
$ |
33,452 |
|
|
$ |
392,801 |
|
|
$ |
548 |
|
|
$ |
117,590 |
|
|
$ |
317,031 |
|
|
$ |
459,571 |
|
2007 |
|
$ |
58,291 |
|
|
$ |
496,083 |
|
|
$ |
223,533 |
|
|
$ |
473,134 |
|
|
$ |
7,099 |
|
|
$ |
43,363 |
|
|
$ |
291,046 |
|
|
$ |
(45,201 |
) |
|
$ |
123,420 |
|
|
$ |
266,888 |
|
|
$ |
470,402 |
|
132
United Fire & Casualty Company Form 10-K | 2009
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
UNITED FIRE & CASUALTY COMPANY
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By:
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/s/ Randy A. Ramlo
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Randy A. Ramlo, Chief Executive Officer, Director and Principal
Executive Officer |
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Date:
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03/01/10 |
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By:
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/s/ Dianne M. Lyons |
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Dianne M. Lyons, Vice President, Chief Financial Officer and Principal
Accounting Officer |
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Date:
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03/01/10 |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
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By
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/s/ Jack B. Evans
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By
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/s/ Christopher R. Drahozal
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Jack B. Evans, Chairman and Director
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Christopher R. Drahozal, Director |
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Date
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03/01/10
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Date
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03/01/10 |
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By
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/s/ Thomas W. Hanley
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By:
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/s/ Douglas M. Hultquist |
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Thomas W. Hanley, Director
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Douglas M. Hultquist, Director |
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Date
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03/01/10
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Date
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03/01/10 |
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By
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/s/ Casey D. Mahon
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By
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/s/ George D. Milligan |
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Casey D. Mahon, Director
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George D. Milligan, Director |
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Date
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03/01/10
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Date
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03/01/10 |
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By
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/s/ James W. Noyce
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By
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/s/ Mary K. Quass |
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James W. Noyce, Director
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Mary K. Quass, Director |
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Date
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03/01/10
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Date
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03/01/10 |
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By
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/s/ John A. Rife
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By
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/s/ Kyle D. Skogman |
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John A. Rife, Vice Chairman and Director
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Kyle D. Skogman, Director |
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Date
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03/01/10
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Date
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03/01/10 |
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By
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/s/ Frank S. Wilkinson Jr. |
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Frank S. Wilkinson Jr., Director |
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Date
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03/01/10 |
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133
United Fire & Casualty Company Form 10-K | 2009
Exhibit Index
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Incorporated by reference |
Exhibit |
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Filed |
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Period |
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|
Filing |
number |
|
Exhibit description |
|
herewith |
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Form |
|
ending |
|
Exhibit |
|
date |
|
3.1 |
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Fourth Restated Articles of Incorporation
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Amendment
#1 to S-3
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4.1 |
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04/04/02 |
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3.2 |
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First Amendment to Fourth Restated
Articles of Incorporation
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Amendment
#3 to S-3
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4.2 |
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05/03/02 |
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3.3 |
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Second Amendment to Fourth Restated
Articles of Incorporation
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10-Q
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06/30/05
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4.1 |
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07/29/05 |
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3.4 |
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Third Amendment to Fourth Restated
Articles of Incorporation
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8-K
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99.6 |
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05/21/08 |
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3.5 |
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Bylaws of United Fire & Casualty Company
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8-K
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99.2 |
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11/20/09 |
|
10.1 |
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United Fire & Casualty Company Employee
Stock Purchase Plan
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10-K
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12/31/07
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10.2 |
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02/27/08 |
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10.2 |
* |
|
United Fire & Casualty Company
Nonqualified Nonemployee Director Stock
Option and Restricted Stock Plan
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S-8
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4.1 |
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10/23/05 |
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10.3 |
* |
|
Description of employment arrangement
between United Fire & Casualty Company
and Randy A. Ramlo
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10-Q
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06/30/07
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10.1 |
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07/27/07 |
|
10.4 |
* |
|
United Fire & Casualty Annual Incentive
Plan (Amended October 19, 2007)
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10-Q
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09/30/07
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10.2 |
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10/25/07 |
|
10.5 |
* |
|
United Fire & Casualty Companys
Nonqualified Deferred Compensation Plan
|
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|
10-Q
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09/30/07
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10.3 |
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10/25/07 |
|
10.6 |
* |
|
Form of United Fire & Casualty Company
Nonqualified Employee Stock Option
Agreement
|
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|
|
10-K
|
|
12/31/07
|
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|
10.7 |
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02/27/08 |
|
10.7 |
* |
|
Form of United Fire & Casualty Company
Nonqualified Nonemployee Stock Option
and Restricted Stock Agreement
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|
|
10-K
|
|
12/31/07
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|
10.8 |
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02/27/08 |
|
10.8 |
* |
|
United Fire & Casualty Company 2008
Stock Plan
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S-8
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|
4.1 |
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05/21/08 |
|
10.9 |
* |
|
Form of Stock Award Agreement under
United Fire & Casualty Company 2008
Stock Plan
|
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|
8-K
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|
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|
99.2 |
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|
05/22/08 |
|
10.10 |
* |
|
Form of Non-Qualified Stock Option
Agreement for the Purchase of Stock
under United Fire & Casualty Company
2008 Stock Plan
|
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|
8-K
|
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|
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|
99.3 |
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|
05/22/08 |
|
10.11 |
* |
|
Form of Incentive Stock Option Agreement
for the Purchase of Stock under United
Fire & Casualty Company 2008 Stock Plan
|
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|
8-K
|
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|
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|
99.4 |
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|
05/22/08 |
|
10.12 |
* |
|
Amendment to Nonqualified Stock Option
Agreements for John A. Rife
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|
|
8-K/A
|
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|
|
99.1 |
|
|
02/24/09 |
|
11 |
|
|
Statement Re Computation of Per Share
Earnings. All information required by
Exhibit 11 is presented within Note 13
of the Notes to Consolidated Financial
Statements
|
|
X |
|
|
|
|
|
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|
134
United Fire & Casualty Company Form 10-K | 2009
|
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Incorporated by reference |
Exhibit |
|
|
|
Filed |
|
|
|
Period |
|
|
|
|
|
Filing |
number |
|
Exhibit description |
|
herewith |
|
Form |
|
ending |
|
Exhibit |
|
date |
|
12 |
|
|
Statement Re Computation of Ratios
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
Code of Ethics
|
|
|
|
10-K
|
|
12/31/06
|
|
|
3.4 |
|
|
03/01/07 |
|
21 |
|
|
Subsidiaries of the registrant
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
23.1 |
|
|
Consent of Ernst & Young LLP,
independent registered public accounting
firm
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
23.2 |
|
|
Consent of Griffith, Ballard & Company,
independent actuary
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
23.3 |
|
|
Consent of Regnier Consulting Group,
Inc., independent actuary
|
|
X |
|
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|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Indicates a management contract or compensatory plan or arrangement. |
135