10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended June 30, 2010
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 |
(State of Incorporation)
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(IRS Employer Identification No.) |
118 Second Avenue, S.E., Cedar Rapids, Iowa 52407
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (319) 399-5700
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). YES
o NO
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definition of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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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
As of July 26, 2010, 26,321,219 shares of common stock were outstanding.
United Fire & Casualty Company and Subsidiaries
Index to Quarterly Report on Form 10-Q
June 30, 2010
FORWARD-LOOKING INFORMATION
It is important to note that our actual results could differ materially from those projected in our
forward-looking statements. Information concerning factors that could cause actual results to
differ materially from those in the forward-looking statements is contained in Part I, Item 2
Managements Discussion and Analysis of Financial Condition and Results of Operations and Part
II, Item 1A Risk Factors.
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
United Fire & Casualty Company and Subsidiaries
Consolidated Balance Sheets
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June 30, |
|
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December 31, |
|
(In Thousands, Except Per Share Data and Number of Shares) |
|
2010 |
|
|
2009 |
|
|
|
(unaudited) |
|
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|
|
|
ASSETS |
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|
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Investments |
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|
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Fixed maturities (including $72,956, at fair value, of securities loaned in 2010) |
|
|
|
|
|
|
|
|
Held-to-maturity, at amortized cost (fair value $8,103 in 2010 and $9,720 in 2009) |
|
$ |
8,017 |
|
|
$ |
9,605 |
|
Available-for-sale, at fair value (amortized cost $2,169,436 in 2010 and $2,075,733 in
2009) |
|
|
2,283,526 |
|
|
|
2,158,391 |
|
Equity securities, at fair value (cost $51,490 in 2010 and $53,306 in 2009) |
|
|
123,996 |
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|
132,718 |
|
Trading securities, at fair value (amortized cost $9,461 in 2010 and $11,724 in 2009) |
|
|
9,454 |
|
|
|
12,613 |
|
Mortgage loans |
|
|
7,067 |
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|
|
7,328 |
|
Policy loans |
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|
7,504 |
|
|
|
7,947 |
|
Other long-term investments |
|
|
17,145 |
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|
15,880 |
|
Short-term investments |
|
|
1,100 |
|
|
|
7,359 |
|
|
|
|
|
|
|
|
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$ |
2,457,809 |
|
|
$ |
2,351,841 |
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|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
156,839 |
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|
$ |
190,852 |
|
Accrued investment income |
|
|
29,458 |
|
|
|
28,697 |
|
Securities lending collateral |
|
|
75,013 |
|
|
|
|
|
Premiums receivable |
|
|
144,371 |
|
|
|
127,456 |
|
Deferred policy acquisition costs |
|
|
88,222 |
|
|
|
92,505 |
|
Property and equipment (primarily land and buildings, at cost, less accumulated
depreciation of $32,100 in 2010 and $30,812 in 2009) |
|
|
21,815 |
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|
|
22,278 |
|
Reinsurance receivables and recoverables |
|
|
48,310 |
|
|
|
40,936 |
|
Prepaid reinsurance premiums |
|
|
1,759 |
|
|
|
1,673 |
|
Income taxes receivable |
|
|
16,733 |
|
|
|
28,197 |
|
Other assets |
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|
16,250 |
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|
|
18,109 |
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|
|
|
|
|
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|
TOTAL ASSETS |
|
$ |
3,056,579 |
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$ |
2,902,544 |
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|
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Liabilities |
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Future policy benefits and losses, claims and loss settlement expenses |
|
|
|
|
|
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Property and casualty insurance |
|
$ |
601,527 |
|
|
$ |
606,045 |
|
Life insurance |
|
|
1,354,009 |
|
|
|
1,321,600 |
|
Unearned premiums |
|
|
222,891 |
|
|
|
206,010 |
|
Securities lending payable |
|
|
75,013 |
|
|
|
|
|
Accrued expenses and other liabilities |
|
|
79,489 |
|
|
|
84,934 |
|
Deferred income taxes |
|
|
17,715 |
|
|
|
11,220 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
$ |
2,350,644 |
|
|
$ |
2,229,809 |
|
|
|
|
|
|
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|
Stockholders Equity |
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|
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|
Common stock, $3.33 1/3 par value; authorized 75,000,000 shares; 26,321,219 and
26,533,040 shares issued and outstanding in 2010 and 2009, respectively |
|
$ |
87,737 |
|
|
$ |
88,443 |
|
Additional paid-in capital |
|
|
137,322 |
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|
|
139,403 |
|
Retained earnings |
|
|
411,118 |
|
|
|
384,242 |
|
Accumulated other comprehensive income, net of tax |
|
|
69,758 |
|
|
|
60,647 |
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS EQUITY |
|
$ |
705,935 |
|
|
$ |
672,735 |
|
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|
|
|
|
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|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
3,056,579 |
|
|
$ |
2,902,544 |
|
|
|
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|
|
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|
The Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.
3
United Fire & Casualty Company and Subsidiaries
Consolidated Statements of Income (Unaudited)
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(In Thousands, Except Per Share Data |
|
Three Months Ended June 30, |
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|
Six Months Ended June 30, |
|
and Number of Shares) |
|
2010 |
|
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2009 |
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2010 |
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2009 |
|
|
Revenues |
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|
|
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|
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Net premiums earned |
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$ |
117,082 |
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$ |
119,671 |
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|
$ |
231,390 |
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|
$ |
237,992 |
|
Investment income, net of investment expenses |
|
|
28,291 |
|
|
|
27,359 |
|
|
|
56,259 |
|
|
|
50,630 |
|
Realized investment gains (losses) |
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
Other-than-temporary impairment charges |
|
|
(117 |
) |
|
|
(13,583 |
) |
|
|
(459 |
) |
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|
(18,139 |
) |
All other realized gains |
|
|
2,463 |
|
|
|
430 |
|
|
|
5,531 |
|
|
|
1,498 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total realized investment gains (losses) |
|
|
2,346 |
|
|
|
(13,153 |
) |
|
|
5,072 |
|
|
|
(16,641 |
) |
Other income |
|
|
295 |
|
|
|
169 |
|
|
|
418 |
|
|
|
328 |
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|
|
|
|
|
|
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|
|
|
|
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|
|
$ |
148,014 |
|
|
$ |
134,046 |
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|
$ |
293,139 |
|
|
$ |
272,309 |
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Benefits, Losses and Expenses |
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|
|
|
|
|
|
|
|
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|
|
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Losses and loss settlement expenses |
|
$ |
72,757 |
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|
$ |
90,558 |
|
|
$ |
141,120 |
|
|
$ |
176,636 |
|
Future policy benefits |
|
|
7,375 |
|
|
|
5,874 |
|
|
|
13,765 |
|
|
|
9,262 |
|
Amortization of deferred policy acquisition
costs |
|
|
28,057 |
|
|
|
28,795 |
|
|
|
54,573 |
|
|
|
58,201 |
|
Other underwriting expenses |
|
|
8,587 |
|
|
|
9,782 |
|
|
|
17,371 |
|
|
|
17,910 |
|
Interest on policyholders accounts |
|
|
10,647 |
|
|
|
10,397 |
|
|
|
21,448 |
|
|
|
20,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
127,423 |
|
|
$ |
145,406 |
|
|
$ |
248,277 |
|
|
$ |
282,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
20,591 |
|
|
$ |
(11,360 |
) |
|
$ |
44,862 |
|
|
$ |
(9,869 |
) |
Federal income tax expense (benefit) |
|
|
5,197 |
|
|
|
(6,026 |
) |
|
|
10,076 |
|
|
|
(7,805 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
15,394 |
|
|
$ |
(5,334 |
) |
|
$ |
34,786 |
|
|
$ |
(2,064 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
26,356,353 |
|
|
|
26,591,677 |
|
|
|
26,395,593 |
|
|
|
26,602,518 |
|
Basic earnings (loss) per common share |
|
$ |
0.58 |
|
|
$ |
(0.20 |
) |
|
$ |
1.32 |
|
|
$ |
(0.08 |
) |
Diluted earnings (loss) per common share |
|
$ |
0.58 |
|
|
$ |
(0.20 |
) |
|
$ |
1.32 |
|
|
$ |
(0.08 |
) |
Cash dividends declared per common share |
|
$ |
0.15 |
|
|
$ |
0.15 |
|
|
$ |
0.30 |
|
|
$ |
0.30 |
|
The Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.
4
United Fire & Casualty Company and Subsidiaries
Consolidated Statement of Stockholders Equity (Unaudited)
|
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|
Six |
|
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|
Months Ended |
|
(In Thousands, Except Per Share Data and Number of Shares) |
|
June 30, 2010 |
|
|
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|
Common stock |
|
|
|
|
Balance, beginning of y ear |
|
$ |
88,443 |
|
Shares repurchased (213,076 shares) |
|
|
(710 |
) |
Shares issued for stock-based awards (1,255 shares) |
|
|
4 |
|
|
|
|
|
Balance, end of period |
|
$ |
87,737 |
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
Balance, beginning of year |
|
$ |
139,403 |
|
Compensation expense and related tax benefit for stock-based
award grants |
|
|
879 |
|
Shares repurchased |
|
|
(2,979 |
) |
Shares issued for stock-based awards |
|
|
19 |
|
|
|
|
|
Balance, end of period |
|
$ |
137,322 |
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
|
|
Balance, beginning of year |
|
$ |
384,242 |
|
Net income |
|
|
34,786 |
|
Dividends on common stock ($0.30 per share) |
|
|
(7,910 |
) |
|
|
|
|
Balance, end of period |
|
$ |
411,118 |
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, net of tax |
|
|
|
|
Balance, beginning of year |
|
$ |
60,647 |
|
Change in net unrealized appreciation (1) |
|
|
8,417 |
|
Change in underfunded status of employee benefit plans |
|
|
694 |
|
|
|
|
|
Balance, end of period |
|
$ |
69,758 |
|
|
|
|
|
|
|
|
|
|
Summary of changes |
|
|
|
|
Balance, beginning of year |
|
$ |
672,735 |
|
Net income |
|
|
34,786 |
|
All other changes in stockholders equity accounts |
|
|
(1,586 |
) |
|
|
|
|
Balance, end of period |
|
$ |
705,935 |
|
|
|
|
|
|
|
|
(1) |
|
The change in net unrealized appreciation is net of reclassification adjustments. |
The Notes to Unaudited Consolidated Financial Statements are an integral part of these
statements.
5
United Fire & Casualty Company and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
|
|
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|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
(In Thousands) |
|
2010 |
|
|
2009 |
|
Cash Flows From Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
34,786 |
|
|
$ |
(2,064 |
) |
Adjustments to reconcile net income to net cash provided by operating
activities |
|
|
|
|
|
|
|
|
Net accretion of bond premium |
|
|
1,891 |
|
|
|
1,548 |
|
Depreciation and amortization |
|
|
1,455 |
|
|
|
1,805 |
|
Stock-based compensation expense |
|
|
878 |
|
|
|
1,267 |
|
Realized investment (gains) losses |
|
|
(5,072 |
) |
|
|
16,641 |
|
Net cash flows from trading investments |
|
|
2,379 |
|
|
|
(2,352 |
) |
Deferred income tax expense (benefit) |
|
|
2,976 |
|
|
|
(9,673 |
) |
Changes in: |
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
(761 |
) |
|
|
(1,012 |
) |
Premiums receivable |
|
|
(16,915 |
) |
|
|
(19,685 |
) |
Deferred policy acquisition costs |
|
|
(7,294 |
) |
|
|
(3,992 |
) |
Reinsurance receivables |
|
|
(7,374 |
) |
|
|
7,225 |
|
Prepaid reinsurance premiums |
|
|
(86 |
) |
|
|
(295 |
) |
Income taxes receivable |
|
|
11,464 |
|
|
|
10,341 |
|
Other assets |
|
|
1,859 |
|
|
|
(541 |
) |
Future policy benefits and losses, claims and loss settlement expenses |
|
|
12,659 |
|
|
|
15,274 |
|
Unearned premiums |
|
|
16,881 |
|
|
|
16,565 |
|
Accrued expenses and other liabilities |
|
|
(4,377 |
) |
|
|
4,746 |
|
Deferred income taxes |
|
|
(1,388 |
) |
|
|
|
|
Other, net |
|
|
(494 |
) |
|
|
953 |
|
|
|
|
|
|
|
|
Total adjustments |
|
$ |
8,681 |
|
|
$ |
38,815 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
43,467 |
|
|
$ |
36,751 |
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities |
|
|
|
|
|
|
|
|
Proceeds from sale of available-for-sale investments |
|
$ |
3,402 |
|
|
$ |
8,360 |
|
Proceeds from call and maturity of held-to-maturity investments |
|
|
1,603 |
|
|
|
2,675 |
|
Proceeds from call and maturity of available-for-sale investments |
|
|
192,888 |
|
|
|
177,632 |
|
Proceeds from short-term and other investments |
|
|
3,200 |
|
|
|
17,925 |
|
Purchase of available-for-sale investments |
|
|
(277,962 |
) |
|
|
(251,479 |
) |
Purchase of short-term and other investments |
|
|
(3,308 |
) |
|
|
(7,534 |
) |
Change in securities lending collateral |
|
|
(75,013 |
) |
|
|
(69,845 |
) |
Net purchases and sales of property and equipment |
|
|
(960 |
) |
|
|
(4,662 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
$ |
(156,150 |
) |
|
$ |
(126,928 |
) |
|
|
|
|
|
|
|
Cash Flows From Financing Activities |
|
|
|
|
|
|
|
|
Policyholders account balances |
|
|
|
|
|
|
|
|
Deposits to investment and universal life contracts |
|
$ |
70,669 |
|
|
$ |
163,857 |
|
Withdrawals from investment and universal life contracts |
|
|
(55,437 |
) |
|
|
(91,610 |
) |
Change in securities lending payable |
|
|
75,013 |
|
|
|
69,845 |
|
Payment of cash dividends |
|
|
(7,910 |
) |
|
|
(7,982 |
) |
Repurchase of common stock |
|
|
(3,689 |
) |
|
|
(538 |
) |
Issuance of common stock |
|
|
23 |
|
|
|
19 |
|
Tax benefit from issuance of common stock |
|
|
1 |
|
|
|
(23 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
$ |
78,670 |
|
|
$ |
133,568 |
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
$ |
(34,013 |
) |
|
$ |
43,391 |
|
Cash and Cash Equivalents at Beginning of Period |
|
|
190,852 |
|
|
|
109,582 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
156,839 |
|
|
$ |
152,973 |
|
|
|
|
|
|
|
|
The Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.
6
United Fire & Casualty Company and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
The terms United Fire, we, us, or our refer to United Fire & Casualty Company or United
Fire & Casualty Company and its consolidated subsidiaries and affiliate, as the context requires.
In the opinion of the management of United Fire, the accompanying unaudited Consolidated Financial
Statements contain all adjustments (consisting of normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows for the periods
presented. The results reported for the interim periods are not necessarily indicative of the
results of operations that may be expected for the year. The unaudited Consolidated Financial
Statements should be read in conjunction with our Annual Report on Form 10-K for the year ended
December 31, 2009. The review report of Ernst & Young LLP as of and for the three- and six-month
periods ended June 30, 2010, accompanies the unaudited Consolidated Financial Statements included
in Item 1 of Part I.
We maintain our records in conformity with the accounting practices prescribed or permitted by the
insurance departments of the states in which we are domiciled. To the extent that certain of these
practices differ from U.S. generally accepted accounting principles (GAAP), we have made
adjustments to present the accompanying unaudited Consolidated Financial Statements in conformity
with GAAP.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates. The financial statement categories that are most dependent on management estimates
and assumptions include investments, deferred policy acquisition costs, and future policy benefits
and losses, claims and loss settlement expenses.
In the preparation of the accompanying unaudited Consolidated Financial Statements, we have
evaluated all material subsequent events or transactions that occurred after the balance sheet date
through the date on which the financial statements were issued for potential recognition or
disclosure in our unaudited Consolidated Financial Statements.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash, money market accounts
and non-negotiable certificates of deposit with original maturities of three months or less. We
made payments for income taxes of $10.5 million and $1.8 million for the six-month periods ended
June 30, 2010 and 2009, respectively. We received tax refunds totaling $13.5 million and $10.3
million in the six-month periods ended June 30, 2010 and 2009, respectively, due to overpayment of
prior year tax and operating loss carrybacks. We made no significant payments of interest for the
six-month periods ended June 30, 2010 and 2009, other than for interest credited to policyholders
accounts.
Income Taxes
We reported a federal income tax expense of $10.1 million (at an effective tax rate of 22.5
percent) and a federal income tax benefit of $7.8 million for the six-month periods ended June 30,
2010 and 2009, respectively. Our effective tax rate is less than the federal statutory rate of 35.0
percent due principally to the effect of tax-exempt municipal bond interest income and non-taxable
dividend income.
7
We have recognized no liability for unrecognized tax benefits for the six-month periods ended June
30, 2010 and 2009. 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 in the U.S. federal jurisdiction and various state jurisdictions. We are
no longer subject to U.S. federal or state income tax examination for years before 2004. There are
no ongoing examinations of income tax returns by federal or state tax authorities except for the
State of Illinois examinations of 2007 and 2008 tax years, which are currently ongoing.
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 June
30, 2010, there were approximately 130 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 in that case that certification of
policyholder claims as a class would be inappropriate. This ruling has been appealed by the
plaintiff policyholders. Federal court rulings in that case are not binding on state courts, which
do not have to follow the federal court ruling on class certification.
Following an April 2008 Louisiana Supreme Court decision finding that flood damage was clearly
excluded from coverage, both state and federal courts have been reviewing 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 six-month period ended June 30, 2010, we concluded approximately 85
of the 215 lawsuits that were pending at December 31, 2009.
In July 2008, Lafayette Insurance Company participated in a hearing in St Bernard Parish, Louisiana
after which the court entered an order certifying a class defined as all Lafayette Insurance
Company personal lines policyholders within an eight parish area in and around New Orleans who
sustained wind damage as a result of Hurricane Katrina and whose claims 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 sought review of this decision by the Louisiana Supreme Court and
in May 2010 we were notified that the Court had agreed to review the case. The case is currently in
the briefing stage. We have reserved each case included in this class action based on the estimated
exposure attributable to our policy. However, if we do not obtain relief in our appeal, we will
review recorded reserves and adjust them if we believe adjustment to be necessary.
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.
8
We consider all of our other litigation pending as of June 30, 2010 to be ordinary, routine, and
incidental to our business.
Securities Lending
We participate in a securities lending program administered by The Northern Trust Company
(Northern Trust). The program generates investment income and we receive discounts from Northern
Trust on unrelated investment fees. Pursuant to the lending agreement, Northern Trust, as our
agent, loans certain of our fixed maturity securities to other institutions for short periods of
time. Borrowers of these securities must deposit collateral, generally in the form of cash, with
Northern Trust that is equal to at least 102% of the market value of the loaned securities, plus
accrued interest. Northern Trust marks the loaned securities to market daily 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. If Northern Trust is unable to purchase equivalent securities, we would receive
the deposited collateral in place of the borrowed securities.
Under the accounting guidance for secured borrowing transactions, the collateral deposited by the
borrower and our obligation to return that collateral to the borrower is reported in the
accompanying Consolidated Balance Sheets as an asset (securities lending collateral) and a
corresponding liability (securities lending payable) at June 30, 2010. There were no securities
on loan under the program at December 31, 2009. At June 30, 2010, we had securities totaling $73.0
million on loan under the program. At June 30, 2010, collateral received and managed by our agent
having a fair value of $75.0 million had been reinvested in short-term highly liquid investments.
Recently Issued Accounting Standards
Adopted Accounting Standards
Fair Value Measurements
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 for assets and liabilities 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. Refer to Note
3 for the information required to be disclosed upon our adoption of the guidance effective January
1, 2010. We are currently evaluating the impact the adoption of the guidance effective January 1,
2011 will have on the disclosures made in our Consolidated Financial Statements.
9
NOTE 2. SUMMARY OF INVESTMENTS
Fair Value of Investments
A reconciliation of the amortized cost (cost for equity securities) to fair value of investments in
held-to-maturity and available-for-sale fixed maturity and equity securities as of June 30, 2010
and December 31, 2009, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands) |
|
|
|
Cost or |
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
|
|
June 30, 2010 |
|
Amortized Cost |
|
|
Appreciation |
|
|
Depreciation |
|
|
Fair Value |
|
HELD-TO-MATURITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
$ |
318 |
|
|
$ |
6 |
|
|
$ |
|
|
|
$ |
324 |
|
Mortgage-backed securities |
|
|
487 |
|
|
|
67 |
|
|
|
|
|
|
|
554 |
|
States, municipalities and political
subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligations |
|
|
1,355 |
|
|
|
18 |
|
|
|
|
|
|
|
1,373 |
|
Special revenue |
|
|
5,857 |
|
|
|
135 |
|
|
|
140 |
|
|
|
5,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Held-to-Maturity Fixed Maturities |
|
$ |
8,017 |
|
|
$ |
226 |
|
|
$ |
140 |
|
|
$ |
8,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government and government-
sponsored enterprises |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
$ |
17,502 |
|
|
$ |
2,263 |
|
|
$ |
|
|
|
$ |
19,765 |
|
Mortgage-backed securities |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
US Treasury |
|
|
42,683 |
|
|
|
1,037 |
|
|
|
|
|
|
|
43,720 |
|
Agency |
|
|
103,868 |
|
|
|
252 |
|
|
|
29 |
|
|
|
104,091 |
|
States, municipalities and political
subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligations |
|
|
370,429 |
|
|
|
24,960 |
|
|
|
113 |
|
|
|
395,276 |
|
Special revenue |
|
|
220,513 |
|
|
|
11,954 |
|
|
|
485 |
|
|
|
231,982 |
|
Foreign bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian |
|
|
73,123 |
|
|
|
5,047 |
|
|
|
|
|
|
|
78,170 |
|
Other foreign |
|
|
88,710 |
|
|
|
4,549 |
|
|
|
45 |
|
|
|
93,214 |
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
|
212,476 |
|
|
|
14,081 |
|
|
|
404 |
|
|
|
226,153 |
|
Natural gas |
|
|
60,919 |
|
|
|
3,497 |
|
|
|
|
|
|
|
64,416 |
|
Other |
|
|
3,450 |
|
|
|
277 |
|
|
|
|
|
|
|
3,727 |
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank, trust and insurance companies |
|
|
268,671 |
|
|
|
12,002 |
|
|
|
5,085 |
|
|
|
275,588 |
|
Transportation |
|
|
27,934 |
|
|
|
1,451 |
|
|
|
5 |
|
|
|
29,380 |
|
Energy |
|
|
133,611 |
|
|
|
6,189 |
|
|
|
436 |
|
|
|
139,364 |
|
Technology |
|
|
122,988 |
|
|
|
7,205 |
|
|
|
22 |
|
|
|
130,171 |
|
Basic industry |
|
|
122,004 |
|
|
|
6,026 |
|
|
|
196 |
|
|
|
127,834 |
|
Credit cyclicals |
|
|
61,378 |
|
|
|
3,867 |
|
|
|
|
|
|
|
65,245 |
|
Other |
|
|
239,175 |
|
|
|
16,749 |
|
|
|
496 |
|
|
|
255,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-For-Sale Fixed Maturities |
|
$ |
2,169,436 |
|
|
$ |
121,406 |
|
|
$ |
7,316 |
|
|
$ |
2,283,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
$ |
6,319 |
|
|
$ |
3,513 |
|
|
$ |
47 |
|
|
$ |
9,785 |
|
Natural gas |
|
|
838 |
|
|
|
782 |
|
|
|
|
|
|
|
1,620 |
|
Bank, trust and insurance companies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks |
|
|
6,478 |
|
|
|
28,752 |
|
|
|
153 |
|
|
|
35,077 |
|
Insurance |
|
|
3,129 |
|
|
|
9,048 |
|
|
|
124 |
|
|
|
12,053 |
|
Other |
|
|
1,505 |
|
|
|
628 |
|
|
|
|
|
|
|
2,133 |
|
All other common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy |
|
|
4,903 |
|
|
|
3,460 |
|
|
|
28 |
|
|
|
8,335 |
|
Technology |
|
|
8,100 |
|
|
|
5,371 |
|
|
|
265 |
|
|
|
13,206 |
|
Basic industry |
|
|
7,019 |
|
|
|
4,735 |
|
|
|
28 |
|
|
|
11,726 |
|
Credit cyclicals |
|
|
116 |
|
|
|
549 |
|
|
|
|
|
|
|
665 |
|
Other |
|
|
11,621 |
|
|
|
16,734 |
|
|
|
141 |
|
|
|
28,214 |
|
Nonredeemable preferred stocks |
|
|
1,462 |
|
|
|
|
|
|
|
280 |
|
|
|
1,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Equity Securities |
|
$ |
51,490 |
|
|
$ |
73,572 |
|
|
$ |
1,066 |
|
|
$ |
123,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Securities |
|
$ |
2,220,926 |
|
|
$ |
194,978 |
|
|
$ |
8,382 |
|
|
$ |
2,407,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands) |
|
|
|
Cost or |
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
|
|
December 31, 2009 |
|
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 and government-
sponsored enterprises |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Maturities
The amortized cost and fair value of held-to-maturity, available-for-sale and trading securities at
June 30, 2010, 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 |
|
(Dollars in Thousands) |
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
June 30, 2010 |
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
Due in one year or less |
|
$ |
556 |
|
|
$ |
563 |
|
|
$ |
209,044 |
|
|
$ |
214,061 |
|
|
$ |
2,815 |
|
|
$ |
2,748 |
|
Due after one year through five
years |
|
|
6,337 |
|
|
|
6,310 |
|
|
|
1,085,130 |
|
|
|
1,150,011 |
|
|
|
459 |
|
|
|
494 |
|
Due after five years through 10
years |
|
|
319 |
|
|
|
352 |
|
|
|
759,337 |
|
|
|
797,673 |
|
|
|
|
|
|
|
|
|
Due after 10 years |
|
|
|
|
|
|
|
|
|
|
98,421 |
|
|
|
102,014 |
|
|
|
6,187 |
|
|
|
6,212 |
|
Mortgage-backed securities |
|
|
487 |
|
|
|
554 |
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
|
318 |
|
|
|
324 |
|
|
|
17,502 |
|
|
|
19,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,017 |
|
|
$ |
8,103 |
|
|
$ |
2,169,436 |
|
|
$ |
2,283,526 |
|
|
$ |
9,461 |
|
|
$ |
9,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized Investment Gains and Losses
We determine the cost of investments sold by the specific identification method. A summary of
realized investment gains (losses) resulting from investment sales, calls and other-than-temporary
impairment (OTTI) charges, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(In Thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Realized investment gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
373 |
|
|
$ |
(2,222 |
) |
|
$ |
862 |
|
|
$ |
(5,497 |
) |
Equity securities |
|
|
2,565 |
|
|
|
(11,472 |
) |
|
|
4,909 |
|
|
|
(11,982 |
) |
Trading securities |
|
|
(592 |
) |
|
|
541 |
|
|
|
(684 |
) |
|
|
838 |
|
Other long-term investments |
|
|
|
|
|
|
|
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized investment gains
(losses) |
|
$ |
2,346 |
|
|
$ |
(13,153 |
) |
|
$ |
5,072 |
|
|
$ |
(16,641 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six-month periods ended June 30, 2010 and 2009, the proceeds and gross realized gains
and losses on the sale of available-for-sale securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(In Thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Proceeds from sales |
|
$ |
2,800 |
|
|
$ |
311 |
|
|
$ |
3,402 |
|
|
$ |
8,360 |
|
Gross realized gains |
|
|
1,513 |
|
|
|
|
|
|
|
1,915 |
|
|
|
|
|
Gross realized
losses |
|
|
|
|
|
|
346 |
|
|
|
|
|
|
|
426 |
|
There were no sales of held-to-maturity securities during the three-month or six-month periods
ended June 30, 2010 and 2009.
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 $9.5 million and $12.6 million at June 30, 2010 and December
31, 2009, respectively.
12
The realized gains (losses) attributable to the change in fair value during the reporting period of
trading securities held at June 30, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(In Thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Trading |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains |
|
$ |
|
|
|
$ |
541 |
|
|
$ |
|
|
|
$ |
815 |
|
Realized losses |
|
|
609 |
|
|
|
|
|
|
|
896 |
|
|
|
|
|
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 June 30, 2010, our remaining potential contractual
obligation was $12.2 million.
Unrealized Appreciation and Depreciation
A summary of changes in net unrealized investment appreciation is as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
(In Thousands) |
|
2010 |
|
|
2009 |
|
Change in net unrealized investment appreciation |
|
|
|
|
|
|
|
|
Available-for-sale fixed maturities and equity
securities |
|
$ |
24,526 |
|
|
$ |
71,398 |
|
Deferred policy acquisition costs |
|
|
(11,576 |
) |
|
|
(40,670 |
) |
Income tax effect |
|
|
(4,533 |
) |
|
|
(10,755 |
) |
|
|
|
|
|
|
|
Total change in net unrealized appreciation, net of tax |
|
$ |
8,417 |
|
|
$ |
19,973 |
|
|
|
|
|
|
|
|
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 June 30, 2010 and December 31, 2009. It is possible that we
could recognize OTTI charges in future periods on securities held at June 30, 2010, 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 that the fair value recovers or the securities mature.
We have evaluated the unrealized losses reported for all of our equity securities at June 30, 2010,
and have concluded that the duration and severity of these losses do not warrant the recognition of
an OTTI charge at June 30,
2010. Our largest unrealized loss greater than 12 months on an individual equity security at June
30, 2010 was $.2 million. We have no intention to sell any of these securities prior to a recovery
in value, but will continue to monitor the fair value reported for these securities as part of our
overall process to evaluate investments for OTTI recognition.
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
(Dollars in Thousands) |
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
June 30, 2010 |
|
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 |
|
|
$ |
700 |
|
|
$ |
140 |
|
|
$ |
700 |
|
|
$ |
140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Held-to-Maturity Fixed Maturities |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
1 |
|
|
$ |
700 |
|
|
$ |
140 |
|
|
$ |
700 |
|
|
$ |
140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government and government-sponsored enterprises |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
9,971 |
|
|
|
29 |
|
|
|
9,971 |
|
|
|
29 |
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligations |
|
|
1 |
|
|
|
491 |
|
|
|
38 |
|
|
|
4 |
|
|
|
3,032 |
|
|
|
75 |
|
|
|
3,523 |
|
|
|
113 |
|
Special revenue |
|
|
4 |
|
|
|
3,990 |
|
|
|
141 |
|
|
|
9 |
|
|
|
9,143 |
|
|
|
344 |
|
|
|
13,133 |
|
|
|
485 |
|
Foreign bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other foreign |
|
|
1 |
|
|
|
3,199 |
|
|
|
11 |
|
|
|
1 |
|
|
|
1,394 |
|
|
|
34 |
|
|
|
4,593 |
|
|
|
45 |
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
|
1 |
|
|
|
1,300 |
|
|
|
100 |
|
|
|
3 |
|
|
|
7,179 |
|
|
|
304 |
|
|
|
8,479 |
|
|
|
404 |
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank, trust and insurance
companies |
|
|
5 |
|
|
|
8,875 |
|
|
|
76 |
|
|
|
39 |
|
|
|
48,066 |
|
|
|
5,009 |
|
|
|
56,941 |
|
|
|
5,085 |
|
Transportation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
2,001 |
|
|
|
5 |
|
|
|
2,001 |
|
|
|
5 |
|
Energy |
|
|
6 |
|
|
|
12,097 |
|
|
|
383 |
|
|
|
1 |
|
|
|
2,119 |
|
|
|
53 |
|
|
|
14,216 |
|
|
|
436 |
|
Technology |
|
|
1 |
|
|
|
999 |
|
|
|
1 |
|
|
|
1 |
|
|
|
3,035 |
|
|
|
21 |
|
|
|
4,034 |
|
|
|
22 |
|
Basic industry |
|
|
1 |
|
|
|
1,047 |
|
|
|
1 |
|
|
|
3 |
|
|
|
5,591 |
|
|
|
195 |
|
|
|
6,638 |
|
|
|
196 |
|
Other |
|
|
2 |
|
|
|
7,794 |
|
|
|
279 |
|
|
|
5 |
|
|
|
7,151 |
|
|
|
217 |
|
|
|
14,945 |
|
|
|
496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-For-Sale Fixed Maturities |
|
|
22 |
|
|
$ |
39,792 |
|
|
$ |
1,030 |
|
|
|
69 |
|
|
$ |
98,682 |
|
|
$ |
6,286 |
|
|
$ |
138,474 |
|
|
$ |
7,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
|
3 |
|
|
$ |
299 |
|
|
$ |
9 |
|
|
|
5 |
|
|
$ |
412 |
|
|
$ |
38 |
|
|
$ |
711 |
|
|
$ |
47 |
|
Bank, trust and insurance companies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
403 |
|
|
|
153 |
|
|
|
403 |
|
|
|
153 |
|
Insurance |
|
|
1 |
|
|
|
247 |
|
|
|
41 |
|
|
|
4 |
|
|
|
430 |
|
|
|
83 |
|
|
|
677 |
|
|
|
124 |
|
All other common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy |
|
|
2 |
|
|
|
184 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
184 |
|
|
|
28 |
|
Technology |
|
|
7 |
|
|
|
953 |
|
|
|
30 |
|
|
|
3 |
|
|
|
861 |
|
|
|
235 |
|
|
|
1,814 |
|
|
|
265 |
|
Basic industry |
|
|
2 |
|
|
|
123 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123 |
|
|
|
28 |
|
Other |
|
|
8 |
|
|
|
2,442 |
|
|
|
126 |
|
|
|
3 |
|
|
|
264 |
|
|
|
15 |
|
|
|
2,706 |
|
|
|
141 |
|
Nonredeemable preferred stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
1,182 |
|
|
|
280 |
|
|
|
1,182 |
|
|
|
280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Equity Securities |
|
|
23 |
|
|
$ |
4,248 |
|
|
$ |
262 |
|
|
|
23 |
|
|
$ |
3,552 |
|
|
$ |
804 |
|
|
$ |
7,800 |
|
|
$ |
1,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Securities |
|
|
45 |
|
|
$ |
44,040 |
|
|
$ |
1,292 |
|
|
|
92 |
|
|
$ |
102,234 |
|
|
$ |
7,090 |
|
|
$ |
146,274 |
|
|
$ |
8,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
45 |
|
|
$ |
44,040 |
|
|
$ |
1,292 |
|
|
|
93 |
|
|
$ |
102,934 |
|
|
$ |
7,230 |
|
|
$ |
146,974 |
|
|
$ |
8,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and government-
sponsored enterprises |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
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.
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 June 30,
2010 and December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
(In Thousands) |
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity fixed maturities |
|
$ |
8,103 |
|
|
$ |
8,017 |
|
|
$ |
9,720 |
|
|
$ |
9,605 |
|
Available-for-sale fixed
maturities |
|
|
2,283,526 |
|
|
|
2,283,526 |
|
|
|
2,158,391 |
|
|
|
2,158,391 |
|
Trading securities |
|
|
9,454 |
|
|
|
9,454 |
|
|
|
12,613 |
|
|
|
12,613 |
|
Equity securities |
|
|
123,996 |
|
|
|
123,996 |
|
|
|
132,718 |
|
|
|
132,718 |
|
M ortgage loans |
|
|
7,962 |
|
|
|
7,067 |
|
|
|
8,229 |
|
|
|
7,328 |
|
Policy loans |
|
|
7,504 |
|
|
|
7,504 |
|
|
|
7,947 |
|
|
|
7,947 |
|
Other long-term investments |
|
|
17,145 |
|
|
|
17,145 |
|
|
|
15,880 |
|
|
|
15,880 |
|
Short-term investments |
|
|
1,100 |
|
|
|
1,100 |
|
|
|
7,359 |
|
|
|
7,359 |
|
Cash and cash equivalents |
|
|
156,839 |
|
|
|
156,839 |
|
|
|
190,852 |
|
|
|
190,852 |
|
Accrued investment income |
|
|
29,458 |
|
|
|
29,458 |
|
|
|
28,697 |
|
|
|
28,697 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity (accumulations) |
|
$ |
996,028 |
|
|
$ |
929,562 |
|
|
$ |
1,087,457 |
|
|
$ |
914,003 |
|
Annuity (benefit payments) |
|
|
84,598 |
|
|
|
82,786 |
|
|
|
85,336 |
|
|
|
77,025 |
|
16
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
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.
Transfers between levels, if any, are recorded as of the beginning of the period.
To determine the fair value of the majority of our investments, we utilize prices obtained from
independent, nationally recognized pricing services. We obtain one price for each security. When
the pricing services cannot provide a determination of fair value for a specific security, we
obtain non-binding price quotes from broker-dealers 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 June 30, 2010, 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.
17
The following tables present the categorization for
our financial instruments measured at fair value on
a recurring basis in our Consolidated Balance
Sheets at June 30, 2010 and December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
Fair Value Measurements |
|
Description |
|
June 30, 2010 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
AVAILABLE-FO R-SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government and government-
sponsored enterprises |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
$ |
19,765 |
|
|
$ |
|
|
|
$ |
19,765 |
|
|
$ |
|
|
Mortgage-backed securities |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
US Treasury |
|
|
43,720 |
|
|
|
|
|
|
|
43,720 |
|
|
|
|
|
Agency |
|
|
104,091 |
|
|
|
|
|
|
|
104,091 |
|
|
|
|
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligations |
|
|
395,276 |
|
|
|
|
|
|
|
395,276 |
|
|
|
|
|
Special revenue |
|
|
231,982 |
|
|
|
|
|
|
|
230,926 |
|
|
|
1,056 |
|
Foreign bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian |
|
|
78,170 |
|
|
|
|
|
|
|
78,170 |
|
|
|
|
|
Other |
|
|
93,214 |
|
|
|
|
|
|
|
91,820 |
|
|
|
1,394 |
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
|
226,153 |
|
|
|
|
|
|
|
226,118 |
|
|
|
35 |
|
Natural gas |
|
|
64,416 |
|
|
|
|
|
|
|
64,416 |
|
|
|
|
|
Other |
|
|
3,727 |
|
|
|
|
|
|
|
3,727 |
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks, trusts and insurance companies |
|
|
275,588 |
|
|
|
|
|
|
|
263,437 |
|
|
|
12,151 |
|
Transportation |
|
|
29,380 |
|
|
|
|
|
|
|
29,380 |
|
|
|
|
|
Energy |
|
|
139,364 |
|
|
|
|
|
|
|
139,364 |
|
|
|
|
|
Technology |
|
|
130,171 |
|
|
|
|
|
|
|
130,171 |
|
|
|
|
|
Basic industry |
|
|
127,834 |
|
|
|
|
|
|
|
123,028 |
|
|
|
4,806 |
|
Credit cyclicals |
|
|
65,245 |
|
|
|
|
|
|
|
62,595 |
|
|
|
2,650 |
|
Other |
|
|
255,428 |
|
|
|
|
|
|
|
249,314 |
|
|
|
6,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-For-Sale Fixed Maturities |
|
$ |
2,283,526 |
|
|
$ |
|
|
|
$ |
2,255,320 |
|
|
$ |
28,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
$ |
9,785 |
|
|
$ |
9,785 |
|
|
$ |
|
|
|
$ |
|
|
Natural gas |
|
|
1,620 |
|
|
|
1,620 |
|
|
|
|
|
|
|
|
|
Banks, trusts and insurance companies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks |
|
|
35,077 |
|
|
|
35,077 |
|
|
|
|
|
|
|
|
|
Insurance |
|
|
12,053 |
|
|
|
12,053 |
|
|
|
|
|
|
|
|
|
Other |
|
|
2,133 |
|
|
|
2,133 |
|
|
|
|
|
|
|
|
|
All other common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy |
|
|
8,335 |
|
|
|
8,335 |
|
|
|
|
|
|
|
|
|
Technology |
|
|
13,206 |
|
|
|
13,178 |
|
|
|
28 |
|
|
|
|
|
Basic industry |
|
|
11,726 |
|
|
|
11,726 |
|
|
|
|
|
|
|
|
|
Credit cyclicals |
|
|
665 |
|
|
|
665 |
|
|
|
|
|
|
|
|
|
Other |
|
|
28,214 |
|
|
|
27,950 |
|
|
|
264 |
|
|
|
|
|
Nonredeemable preferred stocks |
|
|
1,182 |
|
|
|
953 |
|
|
|
229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Equity Securities |
|
$ |
123,996 |
|
|
$ |
123,475 |
|
|
$ |
521 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Securities |
|
$ |
2,407,522 |
|
|
$ |
123,475 |
|
|
$ |
2,255,841 |
|
|
$ |
28,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRADING |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign bonds |
|
$ |
2,444 |
|
|
$ |
|
|
|
$ |
2,444 |
|
|
$ |
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy |
|
|
2,492 |
|
|
|
|
|
|
|
2,492 |
|
|
|
|
|
Technology |
|
|
2,822 |
|
|
|
|
|
|
|
2,822 |
|
|
|
|
|
Other |
|
|
320 |
|
|
|
|
|
|
|
320 |
|
|
|
|
|
Redeemable Preferred Stock |
|
|
1,376 |
|
|
|
1,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Trading Securities |
|
$ |
9,454 |
|
|
$ |
1,376 |
|
|
$ |
8,078 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term Investments |
|
$ |
1,100 |
|
|
$ |
1,100 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Accounts |
|
$ |
36,773 |
|
|
$ |
36,773 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,454,849 |
|
|
$ |
162,724 |
|
|
$ |
2,263,919 |
|
|
$ |
28,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
Fair Value Measurements |
|
Description |
|
December 31, 2009 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
AVAILABLE-FOR-SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government and government-
sponsored enterprises |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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 |
|
$ |
2,407,244 |
|
|
$ |
231,210 |
|
|
$ |
2,145,321 |
|
|
$ |
30,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
The fair value of securities that are categorized as Level 1 is based on quoted market prices
that are readily and regularly available.
The fair value of securities that are categorized as Level 2 is determined by management after
reviewing market prices obtained from independent pricing services and brokers. Such estimated fair
values do not necessarily represent the values for which these securities could have been sold at
the reporting date. Our independent pricing services and brokers obtain prices from reputable
pricing vendors in the marketplace. They continually monitor and review the external pricing
sources, while actively participating to resolve any pricing issues that may arise.
For the six-month period ended June 30, 2010, the change in our securities categorized as Level 1
and Level 2, shown in the foregoing tables, is the result of investment purchases made during the
period. This change is reflected in the amount of funds held in our money markets at June 30, 2010
as compared to December 31, 2009, as we primarily used these funds to purchase fixed maturity
securities. Also contributing to the change was an increase in the unrealized appreciation on
available-for-sale securities since December 31, 2009. There were no significant transfers of
securities in or out of Level 1 or Level 2 during the period.
The securities that may be categorized as Level 3 include holdings in certain private placement
fixed maturity and equity securities and certain securities that were determined to be
other-than-temporarily impaired in a prior period and for which an active market does not currently
exist.
The fair value of our Level 3 private placement securities is determined by management in reliance
on pricing received from our independent pricing services and brokers consistent with the
estimation of fair value for Level 2 securities.
The fair value of our Level 3 impaired securities was determined primarily based upon managements
assumptions regarding the timing and amount of future cash inflows. If a security has been written
down or the issuer is in bankruptcy, management relies in part on outside opinions from rating
agencies, our lien position on the security, general economic conditions and managements expertise
to determine fair value. We have the ability and the positive intent to hold securities until such
time that we are able to recover all or a portion of our original investment. If a security does
not have a market at the balance sheet date, management will estimate the securitys fair value
based on other securities in the market. Management will continue to monitor securities after the
balance sheet date to confirm that their estimated fair value is reasonable.
The following table provides a summary of the changes in fair value of our Level 3 securities for
the three-month period ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
municipalities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and political |
|
|
Foreign |
|
|
Public |
|
|
Corporate |
|
|
|
|
(In Thousands) |
|
subdivisions |
|
|
bonds |
|
|
utilities |
|
|
bonds |
|
|
Total |
|
Balance at March 31, 2010 |
|
$ |
1,110 |
|
|
$ |
1,394 |
|
|
$ |
35 |
|
|
$ |
25,813 |
|
|
$ |
28,352 |
|
Realized gains (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47 |
|
|
|
47 |
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposals |
|
|
(54 |
) |
|
|
|
|
|
|
|
|
|
|
(139 |
) |
|
|
(193 |
) |
Transfers in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers out
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010 |
|
$ |
1,056 |
|
|
$ |
1,394 |
|
|
$ |
35 |
|
|
$ |
25,721 |
|
|
$ |
28,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 disposals, included $.2 million of corporate
bonds where an unobservable price was not available at June 30, 2010.
20
The following table provides a summary of the changes in fair value of our Level 3 securities for
the six-month period ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
municipalities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and political |
|
|
Foreign |
|
|
Public |
|
|
Corporate |
|
|
Short-term |
|
|
|
|
(In Thousands) |
|
subdivisions |
|
|
bonds |
|
|
utilities |
|
|
bonds |
|
|
investments |
|
|
Total |
|
Balance at December 31, 2009 |
|
$ |
1,110 |
|
|
$ |
1,394 |
|
|
$ |
70 |
|
|
$ |
27,885 |
|
|
$ |
254 |
|
|
$ |
30,713 |
|
Realized gains (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) (1) |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
104 |
|
|
|
|
|
|
|
102 |
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposals |
|
|
(54 |
) |
|
|
|
|
|
|
(33 |
) |
|
|
(2,522 |
) |
|
|
|
|
|
|
(2,609 |
) |
Transfers in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
254 |
|
|
|
|
|
|
|
254 |
|
Transfers out |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(254 |
) |
|
|
(254 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010 |
|
$ |
1,056 |
|
|
$ |
1,394 |
|
|
$ |
35 |
|
|
$ |
25,721 |
|
|
$ |
|
|
|
$ |
28,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Realized gains are recorded as a component of current operations whereas unrealized
gains (losses) are recorded as a component of comprehensive income. |
The amount reported in the previous table as disposals under the column corporate bonds,
included $2.1 million of corporate bonds that were disposed of due to issuer debt restructuring.
The securities disposed of included $.3 million of securities previously classified as short-term
investments that were transferred to corporate bonds as a result of this debt restructuring.
NOTE 4. EMPLOYEE BENEFITS
Our pension and postretirement benefit expense for the three- and six-month periods ended June 30,
2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(In Thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Pension expense |
|
$ |
1,182 |
|
|
$ |
1,967 |
|
|
$ |
2,544 |
|
|
$ |
2,724 |
|
Other
postretirement
benefit expense |
|
|
628 |
|
|
|
687 |
|
|
|
1,257 |
|
|
|
1,257 |
|
We previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009
that we expected to contribute $3.0 million to the pension plan in 2010. For the six-month period
ended June 30, 2010, we contributed $1.8 million to the pension plan. We anticipate that the total
contribution for the 2010 plan year will not vary significantly from the expected contribution.
NOTE 5. STOCK-BASED COMPENSATION
Nonqualified Employee Stock Award Plan
The United Fire & Casualty Company 2008 Stock Plan (the 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 820,805
authorized shares available for future issuance at June 30, 2010. The 2008 Stock Plan is
administered by the Board of Directors, which determines those employees that 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.
21
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.
|
|
|
|
|
|
|
|
|
|
|
Six |
|
|
|
|
|
|
Months Ended |
|
|
Inception |
|
Authorized Shares Available for Future Award Grants |
|
June 30, 2010 |
|
|
to Date |
|
Beginning balance |
|
|
919,525 |
|
|
|
1,900,000 |
|
Number of awards granted |
|
|
(114,070 |
) |
|
|
(1,139,045 |
) |
Number of awards forfeited or expired |
|
|
15,350 |
|
|
|
59,850 |
|
|
|
|
|
|
|
|
Ending balance |
|
|
820,805 |
|
|
|
820,805 |
|
Number of option awards exercised |
|
|
250 |
|
|
|
167,292 |
|
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 37,003 options available for future issuance at June 30, 2010. The Board
of Directors has the authority to determine which
nonemployee directors receive awards under the plan, when options and restricted stock shall be
granted, the option price, the option expiration date, the date of grant, the vesting schedule of
options or whether the options shall be immediately vested, the terms and conditions of options and
restricted stock (other than those terms and conditions set forth in the plan) and the number of
shares of common stock to be issued pursuant to an option agreement or restricted stock agreement.
The Board of Directors may also take any action it deems necessary and appropriate for the
administration of the plan.
The activity in our nonemployee director stock option and restricted stock plan is displayed in the
following table.
|
|
|
|
|
|
|
|
|
|
|
Six |
|
|
|
|
|
|
Months Ended |
|
|
Inception |
|
Authorized Shares Available for Future Award Grants |
|
June 30, 2010 |
|
|
to Date |
|
Beginning balance |
|
|
70,003 |
|
|
|
150,000 |
|
Number of awards granted |
|
|
(33,000 |
) |
|
|
(119,000 |
) |
Number of awards forfeited or expired |
|
|
|
|
|
|
6,003 |
|
|
|
|
|
|
|
|
Ending balance |
|
|
37,003 |
|
|
|
37,003 |
|
Number of awards exercised |
|
|
|
|
|
|
|
|
22
Stock-Based Compensation Expense
For each of the three-month periods ended June 30, 2010 and 2009, we recognized stock-based
compensation expense of $.4 million. For the six-month periods ended June 30, 2010 and 2009, we
recognized stock-based compensation expense of $.9 million, and $1.3 million respectively. As of
June 30, 2010, we had $4.1 million in stock-based compensation expense that has yet to be
recognized through our results of operations. We expect this compensation to be recognized over the
remainder of 2010 and subsequent years according to the following table, except with respect to
awards that are accelerated by the Board of Directors, in which case we will recognize any
remaining compensation expense in the period in which the awards are accelerated.
|
|
|
|
|
(In Thousands) |
|
|
|
|
2010 |
|
$ |
855 |
|
2011 |
|
|
1,399 |
|
2012 |
|
|
990 |
|
2013 |
|
|
548 |
|
2014 |
|
|
314 |
|
2015 |
|
|
32 |
|
|
|
|
|
Total |
|
$ |
4,138 |
|
|
|
|
|
23
NOTE 6. SEGMENT INFORMATION
We have two reportable business segments in our operations: property and casualty insurance and
life insurance. The property and casualty insurance segment has 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. Because all of our insurance is sold domestically, we have no revenues
allocable to foreign operations.
We evaluate the two segments on the basis of both statutory accounting practices prescribed by our
states of domicile and GAAP. We analyze results based on profitability (i.e., loss ratios),
investment results, expenses, and return on equity. The basis we use to determine and analyze
segments and to measure segment profit or loss have not changed from that reported in our Annual
Report on Form 10-K for the year ended December 31, 2009.
The following tables for the three-month periods ended June 30, 2010 and 2009 have been reconciled
to the amounts reported in our unaudited Consolidated Financial Statements to adjust for
intersegment eliminations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and |
|
|
|
|
|
|
|
(In Thousands) |
|
Casualty Insurance |
|
|
Life Insurance |
|
|
Total |
|
Three Months Ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
105,396 |
|
|
$ |
11,766 |
|
|
$ |
117,162 |
|
Investment income, net of investment expenses |
|
|
9,049 |
|
|
|
19,288 |
|
|
|
28,337 |
|
Realized investment gains (losses) |
|
|
(721 |
) |
|
|
3,067 |
|
|
|
2,346 |
|
Other income |
|
|
75 |
|
|
|
220 |
|
|
|
295 |
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
113,799 |
|
|
$ |
34,341 |
|
|
$ |
148,140 |
|
|
|
|
|
|
|
|
|
|
|
Intersegment eliminations |
|
|
(46 |
) |
|
|
(80 |
) |
|
|
(126 |
) |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
113,753 |
|
|
$ |
34,261 |
|
|
$ |
148,014 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
11,424 |
|
|
$ |
3,970 |
|
|
$ |
15,394 |
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
1,344,024 |
|
|
$ |
1,712,555 |
|
|
$ |
3,056,579 |
|
|
|
|
|
|
|
|
|
|
|
Invested assets |
|
$ |
956,108 |
|
|
$ |
1,501,701 |
|
|
$ |
2,457,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
109,458 |
|
|
$ |
10,290 |
|
|
$ |
119,748 |
|
Investment income, net of investment expenses |
|
|
9,125 |
|
|
|
18,277 |
|
|
|
27,402 |
|
Realized investment losses |
|
|
(7,631 |
) |
|
|
(5,522 |
) |
|
|
(13,153 |
) |
Other income |
|
|
17 |
|
|
|
152 |
|
|
|
169 |
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
110,969 |
|
|
$ |
23,197 |
|
|
$ |
134,166 |
|
|
|
|
|
|
|
|
|
|
|
Intersegment eliminations |
|
|
(43 |
) |
|
|
(77 |
) |
|
|
(120 |
) |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
110,926 |
|
|
$ |
23,120 |
|
|
$ |
134,046 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
(3,783 |
) |
|
$ |
(1,551 |
) |
|
$ |
(5,334 |
) |
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
1,319,141 |
|
|
$ |
1,556,893 |
|
|
$ |
2,876,034 |
|
|
|
|
|
|
|
|
|
|
|
Invested assets |
|
$ |
874,078 |
|
|
$ |
1,328,842 |
|
|
$ |
2,202,920 |
|
|
|
|
|
|
|
|
|
|
|
24
The following tables for the six-month periods ended June 30, 2010 and 2009 have been
reconciled to the amounts reported in our unaudited Consolidated Financial Statements to adjust for
intersegment eliminations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and |
|
|
|
|
|
|
|
(In Thousands) |
|
Casualty Insurance |
|
|
Life Insurance |
|
|
Total |
|
Six Months Ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
207,375 |
|
|
$ |
24,174 |
|
|
$ |
231,549 |
|
Investment income, net of investment expenses |
|
|
17,731 |
|
|
|
38,619 |
|
|
|
56,350 |
|
Realized investment gains |
|
|
1,455 |
|
|
|
3,617 |
|
|
|
5,072 |
|
Other income |
|
|
17 |
|
|
|
401 |
|
|
|
418 |
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
226,578 |
|
|
$ |
66,811 |
|
|
$ |
293,389 |
|
|
|
|
|
|
|
|
|
|
|
Intersegment eliminations |
|
|
(91 |
) |
|
|
(159 |
) |
|
|
(250 |
) |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
226,487 |
|
|
$ |
66,652 |
|
|
$ |
293,139 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
27,500 |
|
|
$ |
7,286 |
|
|
$ |
34,786 |
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
1,344,024 |
|
|
$ |
1,712,555 |
|
|
$ |
3,056,579 |
|
|
|
|
|
|
|
|
|
|
|
Invested assets |
|
$ |
956,108 |
|
|
$ |
1,501,701 |
|
|
$ |
2,457,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
218,672 |
|
|
$ |
19,475 |
|
|
$ |
238,147 |
|
Investment income, net of investment expenses |
|
|
15,216 |
|
|
|
35,500 |
|
|
|
50,716 |
|
Realized investment losses |
|
|
(8,348 |
) |
|
|
(8,293 |
) |
|
|
(16,641 |
) |
Other income |
|
|
45 |
|
|
|
283 |
|
|
|
328 |
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
225,585 |
|
|
$ |
46,965 |
|
|
$ |
272,550 |
|
|
|
|
|
|
|
|
|
|
|
Intersegment eliminations |
|
|
(86 |
) |
|
|
(155 |
) |
|
|
(241 |
) |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
225,499 |
|
|
$ |
46,810 |
|
|
$ |
272,309 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,919 |
) |
|
$ |
(145 |
) |
|
$ |
(2,064 |
) |
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
1,319,141 |
|
|
$ |
1,556,893 |
|
|
$ |
2,876,034 |
|
|
|
|
|
|
|
|
|
|
|
Invested assets |
|
$ |
874,078 |
|
|
$ |
1,328,842 |
|
|
$ |
2,202,920 |
|
|
|
|
|
|
|
|
|
|
|
NOTE 7. EARNINGS PER COMMON SHARE
Basic earnings per share is computed by dividing net income by the weighted-average number of
common shares outstanding during the reporting period. Diluted earnings per share gives effect to
all dilutive common shares outstanding during the reporting period. The dilutive shares we consider
in our diluted earnings per share calculation relate to our outstanding stock options and
restricted stock awards.
We determine the dilutive effect of our stock options outstanding using the treasury stock
method. Under this method, we assume the exercise of all of the outstanding stock options whose
exercise price is less than the weighted-average fair market value of our common stock during the
reporting period. This method also assumes that the proceeds from the hypothetical stock option
exercises are used to repurchase shares of our common stock at the weighted-average fair market
value of the stock during the reporting period. The net of the assumed stock 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.
25
The components of basic and diluted earnings (loss) per share were as follows for the three-month
periods ended June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
(In Thousands Except Per Share Data) |
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
Net income (loss) |
|
$ |
15,394 |
|
|
$ |
15,394 |
|
|
$ |
(5,334 |
) |
|
$ |
(5,334 |
) |
Weighted-average common shares outstanding |
|
|
26,356 |
|
|
|
26,356 |
|
|
|
26,592 |
|
|
|
26,592 |
|
Add dilutive effect of restricted stock awards |
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
|
|
Add dilutive effect of stock options |
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares for EPS calculation |
|
|
26,356 |
|
|
|
26,400 |
|
|
|
26,592 |
|
|
|
26,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share |
|
$ |
0.58 |
|
|
$ |
0.58 |
|
|
$ |
(0.20 |
) |
|
$ |
(0.20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards excluded from diluted EPS calculation(1) |
|
|
|
|
|
|
814 |
|
|
|
|
|
|
|
924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Outstanding awards were excluded from the diluted earnings per share calculation
because the effect of including them would have been anti-dilutive. |
The components of basic and diluted earnings (loss) per share were as follows for the
six-month periods ended June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
(In Thousands Except Per Share Data) |
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
Net income (loss) |
|
$ |
34,786 |
|
|
$ |
34,786 |
|
|
$ |
(2,064 |
) |
|
$ |
(2,064 |
) |
Weighted-average common shares outstanding |
|
|
26,396 |
|
|
|
26,396 |
|
|
|
26,603 |
|
|
|
26,603 |
|
Add dilutive effect of restricted stock awards |
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares for EPS calculation |
|
|
26,396 |
|
|
|
26,415 |
|
|
|
26,603 |
|
|
|
26,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share |
|
$ |
1.32 |
|
|
$ |
1.32 |
|
|
$ |
(0.08 |
) |
|
$ |
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards excluded from diluted EPS calculation(1) |
|
|
|
|
|
|
814 |
|
|
|
|
|
|
|
924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Outstanding awards were excluded from the diluted earnings per share calculation
because the effect of including them would have been anti-dilutive. |
NOTE 8. COMPREHENSIVE INCOME
Comprehensive income includes all changes in stockholders equity during the reporting period
except those resulting from investments by stockholders and dividends to stockholders.
The following table sets forth the components of our comprehensive income and the related tax
effects for the three-month periods ended June 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
(In Thousands) |
|
2010 |
|
|
2009 |
|
Net income (loss) |
|
$ |
15,394 |
|
|
$ |
(5,334 |
) |
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
Change in net unrealized appreciation on investments |
|
|
(3,455 |
) |
|
|
27,259 |
|
Adjustment for net realized (gains) losses included in income |
|
|
(2,346 |
) |
|
|
13,153 |
|
Adjustment for costs included in employee benefit expense |
|
|
453 |
|
|
|
899 |
|
|
|
|
|
|
|
|
Other comprehensive income (loss), before tax |
|
|
(5,348 |
) |
|
|
41,311 |
|
Income tax effect |
|
|
1,858 |
|
|
|
(14,458 |
) |
|
|
|
|
|
|
|
Other comprehensive income (loss), after tax |
|
|
(3,490 |
) |
|
|
26,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
11,904 |
|
|
$ |
21,519 |
|
|
|
|
|
|
|
|
26
The following table sets forth the components of our comprehensive income and the related tax
effects for the six-month periods ended June 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
(In Thousands) |
|
2010 |
|
|
2009 |
|
Net income (loss) |
|
$ |
34,786 |
|
|
$ |
(2,064 |
) |
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
Change in net unrealized appreciation on investments |
|
|
18,022 |
|
|
|
14,087 |
|
Adjustment for net realized (gains) losses included in income |
|
|
(5,072 |
) |
|
|
16,641 |
|
Adjustment for costs included in employee benefit expense |
|
|
1,068 |
|
|
|
1,215 |
|
|
|
|
|
|
|
|
Other comprehensive income, before tax |
|
|
14,018 |
|
|
|
31,943 |
|
Income tax effect |
|
|
(4,907 |
) |
|
|
(11,180 |
) |
|
|
|
|
|
|
|
Other comprehensive income, after tax |
|
|
9,111 |
|
|
|
20,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
43,897 |
|
|
$ |
18,699 |
|
|
|
|
|
|
|
|
27
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders of
United Fire & Casualty Company
We have reviewed the consolidated balance sheet of United Fire & Casualty Company as of June 30,
2010, and the related consolidated statements of income for the three-month and six-month periods
ended June 30, 2010 and 2009, the consolidated statements of cash flows for the six-month periods
ended June 30, 2010 and 2009, and the consolidated statement of stockholders equity for the
six-month period ended June 30, 2010. These financial statements are the responsibility of the
Companys management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight
Board (United States). A review of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the
interim consolidated financial statements referred to above for them to be in conformity with U.S.
generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of United Fire & Casualty Company
as of December 31, 2009, and the related consolidated statements of income, stockholders equity,
and cash flows for the year then ended, not presented herein, and in our report dated March 1,
2010, we expressed an unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying consolidated balance sheet as of December
31, 2009, is fairly stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
|
|
|
|
|
|
/s/ Ernst & Young LLP
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Ernst & Young LLP |
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Chicago, Illinois
July 30, 2010
28
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements about our operations, anticipated performance
and other similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor under the Securities Act of 1933 and the Securities Exchange Act of 1934 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
operations, 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. Information
concerning factors that could cause actual results to differ materially from those in the
forward-looking statements is contained in Part II Item 1A Risk Factors of this document. Among
the factors that could cause our actual outcomes and results to differ are:
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The adequacy of our loss and loss settlement reserves established for Hurricane Katrina, which are
based on management estimates. |
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The resolution of regulatory issues and litigation pertaining to and arising out of Hurricane
Katrina. |
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The frequency and severity of claims, including those related to catastrophe losses, and the impact
those claims have on our loss reserve adequacy. |
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Developments in the domestic and global financial markets that could affect our investment portfolio
and financing plans. |
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The valuation of invested assets.
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The calculation and recovery of deferred policy acquisition costs (DAC). |
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The valuation of pension and other postretirement benefit obligations. |
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The absolute and relative performance of our products or services. |
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Our relationship with our agents. |
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Our relationship with our reinsurers. |
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The financial strength rating of our reinsurers. |
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The increased costs and risk associated with the security of our data. |
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Changes in industry trends and significant industry developments. |
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Governmental actions, policies or regulations, including, but not limited to, domestic health care
reform, financial services regulatory reform, corporate governance, new laws or regulations or court
decisions interpreting existing laws and regulations or policy provisions. |
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NASDAQ policies or regulations relating to corporate governance, and the cost to comply. |
These are representative of the risks, uncertainties and assumptions that could cause actual
outcomes and results to differ materially from what is expressed in forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak
only as of the date of this report or as of the date they are made. Except as required under the
federal securities laws and the rules and regulations of the Securities and Exchange Commission, 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.
29
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are defined as those that are reflective of significant judgments and
uncertainties and that potentially may result in materially different results under different
assumptions and conditions. Our discussion and analysis of our results of operations and financial
condition is based upon our Consolidated Financial Statements, which we have prepared in accordance
with GAAP. As we prepare these financial statements, we must make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. We evaluate our estimates on an ongoing basis. We base our
estimates on historical experience and on other assumptions that we believe to be reasonable under
the circumstances. Actual results could differ from those estimates. Our critical accounting
estimates are: the valuation of investments; the valuation of reserves for losses, claims, and loss
settlement expenses; the valuation of reserves for future policy benefits; and the calculation of
the deferred policy acquisition costs asset. These critical accounting estimates are more fully
described in our Managements Discussion and Analysis of Results of Operations and Financial
Condition presented in our Annual Report on Form 10-K for the year ended December 31, 2009.
INTRODUCTION
The purpose of the 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 the consolidated financial statements and related notes included
in our Annual Report on Form 10-K for the year ended December 31, 2009. When we provide information
on a statutory basis, we label it as such; otherwise all other data is presented in accordance with
GAAP.
This discussion and analysis is presented in these sections:
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Consolidated Financial Highlights |
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Results of Operations for Property and Casualty Insurance, Life Insurance and Investment
Portfolio |
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Liquidity and Capital Resources |
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Statutory Financial Measures |
OUR BUSINESS
Founded in 1946, United Fire & Casualty Company provides insurance protection for individuals and
businesses through several regional companies. We are represented by over 800 independent property
and casualty insurance agencies and more than 975 independent life insurance agencies throughout
the country, predominantly in the Midwest, West and South.
We operate two business segments:
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property and casualty insurance, which includes commercial insurance, personal
insurance, surety bonds and assumed insurance |
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life insurance, which includes deferred and immediate annuities, universal life products
and traditional life (primarily single premium whole life insurance) products |
These business segments are managed separately, as they generally do not share the same customer
base, and they each have different products, pricing and expense structures.
30
For the six months ended June 30, 2010, property and casualty business accounted for nearly 90.0
percent of our net premiums earned, with approximately 91.0 percent from commercial lines. Life
insurance business made up approximately 10.0 percent of our net premiums earned, with over 62.0
percent from traditional life insurance products.
We do not expect the current composition of property and casualty insurance and life insurance to
change materially during 2010.
For the six months ended June 30, 2010, more than half of our property and casualty premiums were
written in Iowa, Texas, Missouri, Louisiana and Illinois; and over three-fourths of our life
insurance premiums were written in Iowa, Wisconsin, Illinois, Nebraska and Minnesota.
We evaluate segment profit or loss based upon operating and investment results. Segment profit or
loss described in the following sections of the Managements Discussion and Analysis is reported on
a pretax basis.
Our primary sources of revenue are 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.
The profitability of our company is influenced by many factors, including price competition,
economic conditions, interest rates, weather-related events and other catastrophes, such as natural
disasters (e.g., hurricanes and tornados) and manmade disasters, state regulations, court decisions
and changes in the law. Management believes that climate change will not have a material impact on
our profitability.
To manage these risks and uncertainties, we maintain a conservative approach to our business
operations, focusing on writing good business at an adequate price and preferring quality to
volume. Our goal is to achieve consistent profitability through disciplined underwriting, superior
loss control services, fair and ethical claims handling, exceptional customer service, efficient
and effective technology and strong agency relationships.
EXECUTIVE SUMMARY
United Fire Group had a profitable second quarter in 2010, posting a net income of $15.4 million,
compared with a net loss of $5.3 million in the second quarter of 2009.
Contributing to our favorable results for the second quarter and first six months of 2010 were
increased realized investment gains from a significant reduction in other-than-temporary impairment
(OTTI) charges and decreased losses and loss settlement expenses from improved noncatastrophe
claims experience.
Also, year-to-date losses related to Hurricane Katrina were significantly lower than last year, as
we continued to aggressively work to resolve remaining lawsuits related to this catastrophe.
Our property and casualty and life insurance business segments performed well in the second quarter
despite marketplace challenges.
In the property and casualty segment, net premiums written were down in both the three-month and
six-month periods ended June 30, 2010, as the weak economy continued to restrict our growth.
Pricing levels were flat in our commercial lines business, while personal lines pricing levels
increased slightly.
Offsetting the decline in our net premiums earned were lower levels of losses and loss settlement
expenses and underwriting expenses. Our combined ratio improved by 15.5 percentage points to 94.2
percent in the second quarter and by 14.8 percentage points to 93.0 percent in the first six months
of 2010, indicating an underwriting gain.
With sustained downward pressure on pricing, our underwriters continue to focus on writing good
business at an adequate price, preferring quality over volume. In the three-month and six-month
periods ended June 30, 2010, we were able to retain approximately 80 percent of our personal and
commercial lines book of business, which was in line with our retention goals.
31
In the life insurance segment, net premiums earned increased in the second quarter and first six
months of 2010, reflecting sales growth of our single premium whole life product. We are focusing
on increasing sales of our traditional life insurance products, especially single premium whole
life, to better balance our product mix. Annuity sales are down substantially in the second quarter
and first six months of 2010, as consumers are choosing to surrender their annuities and reinvest
the funds in products with greater risk and potentially greater returns.
The growth in annuity sales in 2009 contributed to the increase in our invested assets and as a
result an improvement in our investment results. This occurred in spite of historically low
interest rates and declining dividends from our equity portfolio. Net investment income, which is a
primary source of revenue, increased 3.4 percent in the second quarter of 2010 and 11.1 percent in
the first six months of 2010, as compared with the same periods of 2009.
We recorded realized investment gains of $2.3 million in the second quarter of 2010 and $5.1
million in the first six months of 2010, benefitting from significantly smaller OTTI charges in
2010 versus 2009.
Our stockholders equity rose by 4.9 percent to $705.9 million at June 30, 2010, from $672.7
million at December 31, 2009. Our book value increased by $1.47 per share to $26.82 per share as of
June 30, 2010, from $25.35 per share at December 31, 2009.
After two difficult years for United Fire, our profits have finally begun to rebound.
|
CONSOLIDATED FINANCIAL HIGHLIGHTS |
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Three Months Ended June 30, |
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Six Months Ended June 30, |
|
(In Thousands) |
|
2010 |
|
|
2009 |
|
|
% |
|
|
2010 |
|
|
2009 |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Revenues |
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
117,082 |
|
|
$ |
119,671 |
|
|
|
(2.2 |
)% |
|
$ |
231,390 |
|
|
$ |
237,992 |
|
|
|
(2.8 |
)% |
Investment income, net of investment expenses |
|
|
28,291 |
|
|
|
27,359 |
|
|
|
3.4 |
|
|
|
56,259 |
|
|
|
50,630 |
|
|
|
11.1 |
|
Realized investment gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment charges |
|
|
(117 |
) |
|
|
(13,583 |
) |
|
|
99.1 |
|
|
|
(459 |
) |
|
|
(18,139 |
) |
|
|
97.5 |
|
All other realized gains |
|
|
2,463 |
|
|
|
430 |
|
|
|
472.8 |
|
|
|
5,531 |
|
|
|
1,498 |
|
|
|
269.2 |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total realized investment gains (losses) |
|
|
2,346 |
|
|
|
(13,153 |
) |
|
|
117.8 |
|
|
|
5,072 |
|
|
|
(16,641 |
) |
|
|
130.5 |
|
Other income |
|
|
295 |
|
|
|
169 |
|
|
|
74.6 |
|
|
|
418 |
|
|
|
328 |
|
|
|
27.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
148,014 |
|
|
$ |
134,046 |
|
|
|
10.4 |
% |
|
$ |
293,139 |
|
|
$ |
272,309 |
|
|
|
7.6 |
% |
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Benefits, Losses and Expenses |
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Losses and loss settlement expenses |
|
$ |
72,757 |
|
|
$ |
90,558 |
|
|
|
(19.7 |
)% |
|
$ |
141,120 |
|
|
$ |
176,636 |
|
|
|
(20.1 |
)% |
Increase in liability for future policy benefits |
|
|
7,375 |
|
|
|
5,874 |
|
|
|
25.6 |
|
|
|
13,765 |
|
|
|
9,262 |
|
|
|
48.6 |
|
Amortization of deferred policy acquisition
costs |
|
|
28,057 |
|
|
|
28,795 |
|
|
|
(2.6 |
) |
|
|
54,573 |
|
|
|
58,201 |
|
|
|
(6.2 |
) |
Other underwriting expenses |
|
|
8,587 |
|
|
|
9,782 |
|
|
|
(12.2 |
) |
|
|
17,371 |
|
|
|
17,910 |
|
|
|
(3.0 |
) |
Interest on policyholders accounts |
|
|
10,647 |
|
|
|
10,397 |
|
|
|
2.4 |
|
|
|
21,448 |
|
|
|
20,169 |
|
|
|
6.3 |
|
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
$ |
127,423 |
|
|
$ |
145,406 |
|
|
|
(12.4 |
)% |
|
$ |
248,277 |
|
|
$ |
282,178 |
|
|
|
(12.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Income (loss) before income taxes |
|
$ |
20,591 |
|
|
$ |
(11,360 |
) |
|
|
281.3 |
% |
|
$ |
44,862 |
|
|
$ |
(9,869 |
) |
|
|
554.6 |
|
Federal income tax expense (benefit) |
|
|
5,197 |
|
|
|
(6,026 |
) |
|
|
186.2 |
|
|
|
10,076 |
|
|
|
(7,805 |
) |
|
|
229.1 |
|
|
|
|
|
|
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|
Net Income (Loss) |
|
$ |
15,394 |
|
|
$ |
(5,334 |
) |
|
|
388.6 |
% |
|
$ |
34,786 |
|
|
$ |
(2,064 |
) |
|
|
NM |
% |
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32
The following is a summary of our financial performance for the three-month and six-month periods
ended June 30, 2010.
Consolidated Results of Operations
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Net income was $15.4 million in the second quarter of 2010, compared with net loss of
$5.3 million in the second quarter of 2009. The quarter-over-quarter improvement is largely
attributable to a significant reduction in OTTI charges in 2010, as our investment
portfolio began to recover from the financial crisis experienced by the economy. Also
contributing to the improvement for the quarter was a lower level of losses and loss
settlement expenses due to an improvement in severity and frequency in our noncatastrophe
claims. |
For the six months ended June 30, 2010, net income was $34.8 million versus a net loss of
$2.1 million in the six months ended June 30, 2009. The year-over-year improvement is due to
the significant reduction in OTTI charges in 2010 and the lower level of losses and loss
settlement expenses as a result of our noncatastrophe claims experience and a reduction in
Hurricane Katrina development.
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Net premiums written for the property and casualty segment decreased 2.8 percent in the
second quarter of 2010 and 4.6 percent in the first six months of 2010, as compared with
the same periods of 2009, due primarily to the weak economy, as some of our current and
prospective commercial policyholders are forced to reduce staff, cut vehicle fleets and, in
some cases, go out of business. |
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|
Annuity deposits decreased 71.1 percent in the second quarter of 2010 and 72.0 percent
in the first six months of 2010, as compared with the same periods of 2009. In the second
quarter and first half of 2010, annuity sales have decreased, as consumers who perceive a
recovering economy are choosing to surrender their annuities and reinvest the funds in
products with greater risk and potentially greater returns. Annuity deposits are not
recorded as a component of net premiums written or net premiums earned; however, we invest
the funds to generate investment income. |
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|
Our combined ratio improved to 94.2 percent in the second quarter of 2010, from 109.7
percent in the second quarter of 2009. In the six months ended June 30, 2010, our combined
ratio was 93.0 percent versus 107.8 percent for the six-month period ended June 30, 2009. |
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We experienced no adverse development from Hurricane Katrina claims litigation in the
second quarter of 2010, compared with $.5 million in the second quarter of 2009. For the
six months ended June 30, 2010, losses and loss settlement expenses related to Hurricane
Katrina were $5.4 million, versus $12.4 million in the first six months of 2009. |
Consolidated Financial Condition
|
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|
Net cash outflow related to our annuity business was $.5 million in the second quarter
of 2010 and $1.6 million in the first six months of 2010 versus a net cash inflow of $37.2
million in the second quarter of 2009 and $56.6 million in the first six months of 2009.
The net cash outflow is attributable to the decline in annuity deposits and annuitant
withdrawals as discussed previously.
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33
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|
In the second quarter of 2010, United Fire repurchased 46,800 shares of our common stock
for $.9 million at an average cost of $19.90 per share. In the first six months of 2010, we
repurchased 213,076 shares of our common stock for $3.7 million at an average cost of $17.31 per share. As of June 30,
2010, the book value per share of our common stock was $26.82 and we were authorized to
purchase an additional 303,078 shares of common stock under our share repurchase program,
which expires in August 2011. |
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|
Net unrealized investment gains totaled $90.9 million as of June 30, 2010, an increase
of $8.4 million or 10.2 percent since December 31, 2009. An increase in the value of our
fixed maturity portfolio was the primary factor for the rise in net unrealized investment
gains. However, this increase was somewhat offset by a decrease in the value of our equity
portfolio, as the equity markets experienced a decline in the second quarter of 2010. |
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|
Our stockholders equity increased to $705.9 million at June 30, 2010, from $672.7
million at December 31, 2009. |
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|
Book value increased by $1.47 per share to $26.82 per share as of June 30, 2010, from
$25.35 per share at December 31, 2009. The change in 2010 is attributable to a significant
increase in our net income, as well as the rise in our net unrealized investment gains, net
of tax. |
34
RESULTS OF OPERATIONS
Property and Casualty Insurance Segment Results
|
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|
|
|
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|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(In Thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net premiums written (1) |
|
$ |
117,099 |
|
|
$ |
120,413 |
|
|
$ |
224,223 |
|
|
$ |
235,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
105,396 |
|
|
$ |
109,458 |
|
|
$ |
207,375 |
|
|
$ |
218,672 |
|
Losses and loss settlement expenses |
|
|
(68,253 |
) |
|
|
(86,394 |
) |
|
|
(131,881 |
) |
|
|
(168,673 |
) |
Amortization of deferred policy acquisition costs |
|
|
(25,482 |
) |
|
|
(26,244 |
) |
|
|
(49,525 |
) |
|
|
(53,142 |
) |
Other underwriting expenses |
|
|
(5,574 |
) |
|
|
(7,287 |
) |
|
|
(11,505 |
) |
|
|
(13,380 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting gain (loss) (1) |
|
$ |
6,087 |
|
|
$ |
(10,467 |
) |
|
$ |
14,464 |
|
|
$ |
(16,523 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of underwriting expenses |
|
|
9,003 |
|
|
|
9,082 |
|
|
|
17,640 |
|
|
|
15,130 |
|
Realized investment gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment charges |
|
|
(117 |
) |
|
|
(7,847 |
) |
|
|
(153 |
) |
|
|
(9,657 |
) |
All other realized gains (losses) |
|
|
(604 |
) |
|
|
216 |
|
|
|
1,608 |
|
|
|
1,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized investment gains (losses) |
|
|
(721 |
) |
|
|
(7,631 |
) |
|
|
1,455 |
|
|
|
(8,348 |
) |
Other income |
|
|
75 |
|
|
|
17 |
|
|
|
17 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
14,444 |
|
|
$ |
(8,999 |
) |
|
$ |
33,576 |
|
|
$ |
(9,696 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio (without catastrophes) |
|
|
57.6 |
% |
|
|
71.9 |
% |
|
|
55.8 |
% |
|
|
66.8 |
% |
Hurricane Katrina litigation effect on net loss ratio |
|
|
|
|
|
|
0.5 |
|
|
|
2.6 |
|
|
|
5.7 |
|
Other catastrophes effect on net loss ratio |
|
|
7.2 |
|
|
|
6.5 |
|
|
|
5.2 |
% |
|
|
4.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio |
|
|
64.8 |
% |
|
|
78.9 |
% |
|
|
63.6 |
% |
|
|
77.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense ratio (2) (3) |
|
|
29.4 |
|
|
|
30.8 |
|
|
|
29.4 |
|
|
|
30.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
94.2 |
% |
|
|
109.7 |
% |
|
|
93.0 |
% |
|
|
107.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
|
(2) |
|
Includes policyholder dividends. |
|
(3) |
|
We have excluded disaster charges and other related expenses, net of recoveries, from the GAAP
expense ratio. These charges resulted from flood damage at our home office and hurricane damage at
our Gulf Coast regional office in 2008, totaling $7,051 in the second quarter of 2010 and $(16,376)
in the first six months of 2010, compared with $(188,200) in the second quarter of 2009 and
$(545,782) in the first six months of 2009. |
|
|
|
Net premiums written declined in the three-month and six-month periods ended June 30,
2010, as compared with the same periods of the prior year. This is due primarily to the
weak economy, as some of our current and prospective commercial policyholders are forced to
reduce staff, cut vehicle fleets and, in some cases, go out of business. Also limiting our
ability to grow are sustained soft-market conditions in the insurance industry, with
continued downward pressure on pricing. Our pricing levels were flat in our commercial
lines business, while our personal lines pricing levels increased slightly. To overcome
these market challenges, our underwriters continue to focus on writing good business at an
adequate price, preferring quality over volume. In the three-month and six-month periods
ended June 30, 2010, we were able to retain approximately 80 percent of our personal and
commercial lines book of business, which was in line with our retention goals. |
|
|
|
Losses and loss settlement expenses decreased 21.0 percent in the second quarter of 2010
and 21.8 percent in the first six months of 2010, as compared with the same periods in
2009. This is due to an improvement in our noncatastrophe claims experience and a reduction
in our Hurricane Katrina development:
|
35
|
|
|
Noncatastrophe claims experience our claims frequency decreased
slightly in the six months ended June 30, 2010, as compared with the same
prior-year period, which is a trend in the industry that we expect to level off. We also experienced a decrease in claims severity in
the first six months of 2010, as compared with the same period of 2009. |
|
|
|
Hurricane Katrina we experienced no adverse development from
Hurricane Katrina claims litigation in the second quarter of 2010, compared with
$.5 million in the second quarter of 2009. For the six months ended June 30, 2010,
losses and loss settlement expenses related to Hurricane Katrina were $5.4 million,
versus $12.4 million in the first six months of 2009. |
|
|
|
Amortization of deferred policy acquisition costs decreased 2.9 percent in the second
quarter of 2010 and 6.8 percent in the first six months of 2010, as compared with the same
periods in 2009. The decrease in net premiums written has resulted in a reduction of the
deferred acquisition costs asset and related amortization. |
|
|
|
GAAP combined ratio improved by 15.5 percentage points in the second quarter of 2010 and
14.8 percentage points in the first six months of 2010, as compared with the same
prior-year periods. This is due primarily to the aforementioned decrease in our losses and
loss settlement expenses. |
For a detailed discussion of our consolidated investment results, refer to the Investment
Portfolio section of this item.
The following tables display our premiums earned, losses and loss settlement expenses and loss
ratio by line of business for the three-month periods ended June 30, 2010 and 2009.
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
and Loss |
|
|
|
|
|
|
|
|
|
|
and Loss |
|
|
|
|
|
|
|
|
|
|
Settlement |
|
|
|
|
|
|
|
|
|
|
Settlement |
|
|
|
|
(In Thousands) |
|
Premiums |
|
|
Expenses |
|
|
Loss |
|
|
Premiums |
|
|
Expenses |
|
|
Loss |
|
Unaudited |
|
Earned |
|
|
Incurred |
|
|
Ratio |
|
|
Earned |
|
|
Incurred |
|
|
Ratio |
|
Commercial lines |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liability (1) |
|
$ |
28,507 |
|
|
$ |
13,104 |
|
|
|
46.0 |
% |
|
$ |
30,585 |
|
|
$ |
29,116 |
|
|
|
95.2 |
% |
Fire and allied lines
(2) |
|
|
24,460 |
|
|
|
19,482 |
|
|
|
79.6 |
|
|
|
25,621 |
|
|
|
21,462 |
|
|
|
83.8 |
|
Automobile |
|
|
23,216 |
|
|
|
16,653 |
|
|
|
71.7 |
|
|
|
24,387 |
|
|
|
17,426 |
|
|
|
71.5 |
|
Workers compensation |
|
|
11,628 |
|
|
|
7,505 |
|
|
|
64.5 |
|
|
|
12,943 |
|
|
|
9,390 |
|
|
|
72.5 |
|
Fidelity and surety |
|
|
4,297 |
|
|
|
2,273 |
|
|
|
52.9 |
|
|
|
4,729 |
|
|
|
898 |
|
|
|
19.0 |
|
Miscellaneous |
|
|
197 |
|
|
|
9 |
|
|
|
4.6 |
|
|
|
215 |
|
|
|
67 |
|
|
|
31.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial lines |
|
$ |
92,305 |
|
|
$ |
59,026 |
|
|
|
63.9 |
% |
|
$ |
98,480 |
|
|
$ |
78,359 |
|
|
|
79.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal lines |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fire and allied lines
(3) |
|
$ |
6,108 |
|
|
$ |
5,758 |
|
|
|
94.3 |
% |
|
$ |
5,448 |
|
|
$ |
4,671 |
|
|
|
85.7 |
% |
Automobile |
|
|
3,616 |
|
|
|
3,076 |
|
|
|
85.1 |
|
|
|
3,183 |
|
|
|
2,571 |
|
|
|
80.8 |
|
Miscellaneous |
|
|
116 |
|
|
|
(49 |
) |
|
|
N/A |
|
|
|
89 |
|
|
|
(28 |
) |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal lines |
|
$ |
9,840 |
|
|
$ |
8,785 |
|
|
|
89.3 |
% |
|
$ |
8,720 |
|
|
$ |
7,214 |
|
|
|
82.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance assumed |
|
$ |
3,251 |
|
|
$ |
442 |
|
|
|
13.6 |
% |
|
$ |
2,258 |
|
|
$ |
821 |
|
|
|
36.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
105,396 |
|
|
$ |
68,253 |
|
|
|
64.8 |
% |
|
$ |
109,458 |
|
|
$ |
86,394 |
|
|
|
78.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other liability is business insurance covering bodily injury and property
damage arising from general business operations, accidents on the insureds premises and products
manufactured or sold. |
|
(2) |
|
Fire and allied lines includes fire, allied lines, commercial multiple peril and inland
marine. |
|
(3) |
|
Fire and allied lines includes fire, allied lines, homeowners and inland marine. |
36
The following tables display our premiums earned, losses and loss settlement expenses and loss
ratio by line of business for the six-month periods ended June 30, 2010 and 2009.
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
and Loss |
|
|
|
|
|
|
|
|
|
|
and Loss |
|
|
|
|
|
|
|
|
|
|
Settlement |
|
|
|
|
|
|
|
|
|
|
Settlement |
|
|
|
|
(In Thousands) |
|
Premiums |
|
|
Expenses |
|
|
Loss |
|
|
Premiums |
|
|
Expenses |
|
|
Loss |
|
Unaudited |
|
Earned |
|
|
Incurred |
|
|
Ratio |
|
|
Earned |
|
|
Incurred |
|
|
Ratio |
|
Commercial lines |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liability |
|
$ |
56,721 |
|
|
$ |
31,945 |
|
|
|
56.3 |
% |
|
$ |
61,637 |
|
|
$ |
49,221 |
|
|
|
79.9 |
% |
Fire and allied lines |
|
|
48,844 |
|
|
|
39,281 |
|
|
|
80.4 |
|
|
|
51,021 |
|
|
|
48,535 |
|
|
|
95.1 |
|
Automobile |
|
|
46,226 |
|
|
|
30,483 |
|
|
|
65.9 |
|
|
|
48,773 |
|
|
|
32,636 |
|
|
|
66.9 |
|
Workers compensation |
|
|
22,846 |
|
|
|
11,783 |
|
|
|
51.6 |
|
|
|
26,154 |
|
|
|
21,166 |
|
|
|
80.9 |
|
Fidelity and surety |
|
|
8,976 |
|
|
|
2,482 |
|
|
|
27.7 |
|
|
|
10,142 |
|
|
|
1,171 |
|
|
|
11.5 |
|
Miscellaneous |
|
|
399 |
|
|
|
45 |
|
|
|
11.3 |
|
|
|
425 |
|
|
|
118 |
|
|
|
27.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial lines |
|
$ |
184,012 |
|
|
$ |
116,019 |
|
|
|
63.0 |
% |
|
$ |
198,152 |
|
|
$ |
152,847 |
|
|
|
77.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal lines |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fire and allied lines |
|
$ |
12,087 |
|
|
$ |
7,825 |
|
|
|
64.7 |
% |
|
$ |
10,787 |
|
|
$ |
8,479 |
|
|
|
78.6 |
% |
Automobile |
|
|
7,083 |
|
|
|
5,957 |
|
|
|
84.1 |
|
|
|
6,269 |
|
|
|
4,922 |
|
|
|
78.5 |
|
Miscellaneous |
|
|
203 |
|
|
|
(76 |
) |
|
|
(37.4 |
) |
|
|
173 |
|
|
|
266 |
|
|
|
153.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal lines |
|
$ |
19,373 |
|
|
$ |
13,706 |
|
|
|
70.7 |
% |
|
$ |
17,229 |
|
|
$ |
13,667 |
|
|
|
79.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance assumed |
|
$ |
3,990 |
|
|
$ |
2,156 |
|
|
|
54.0 |
% |
|
$ |
3,291 |
|
|
$ |
2,159 |
|
|
|
65.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
207,375 |
|
|
$ |
131,881 |
|
|
|
63.6 |
% |
|
$ |
218,672 |
|
|
$ |
168,673 |
|
|
|
77.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liability The loss ratio improved 49.2 percentage points to 46.0 percent in the
three months ended June 30, 2010, from 95.2 percent in the three months ended June 30,
2009. For the six months ended June 30, 2010, the loss ratio improved 23.6 percentage
points to 56.3 percent, from 79.9 percent in the six months ended June 30, 2009. The
decrease in our loss ratio in both periods is due to an improvement in the severity in our
noncatastrophe claims experience. |
|
|
|
Workers compensation The loss ratio improved 8.0 percentage points to 64.5 percent
in the three months ended June 30, 2010, from 72.5 percent in the three months ended June
30, 2009. For the six months ended June 30, 2010, the loss ratio improved 29.3 percentage
points to 51.6 percent, from 80.9 percent in the six months ended June 30, 2009. The
improvement in this line is due to the normal fluctuations that generally occur in the
workers compensation line of business. |
|
|
|
Fidelity and surety The loss ratio increased 33.9 percentage points to 52.9 in the
three months ended June 30, 2010, from 19.0 percent in the three months ended June 30,
2009. For the six months ended June 30, 2010, the loss ratio increased 16.2 percentage
points to 27.7 percent, from 11.5 percent in the six months ended June 30, 2009. This is
primarily the result of an increase in our losses and loss settlement expenses in the
fidelity and surety line of business, primarily from a large claim of $1.7 million incurred
in the second quarter of 2010. Also, contributing to the higher loss ratio was a decline in
the premiums earned. Because the size of this line is relatively small in relation to our other lines of
business, large fluctuations in the loss ratio may occur, which is indicative of the current
state of the economy. |
37
Life Insurance Segment Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(In Thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
11,686 |
|
|
$ |
10,213 |
|
|
$ |
24,015 |
|
|
$ |
19,320 |
|
Investment income, net |
|
|
19,288 |
|
|
|
18,277 |
|
|
|
38,619 |
|
|
|
35,500 |
|
Realized investment gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment charges |
|
|
|
|
|
|
(5,736 |
) |
|
|
(306 |
) |
|
|
(8,482 |
) |
All other realized gains |
|
|
3,067 |
|
|
|
214 |
|
|
|
3,923 |
|
|
|
189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized investment gains (losses) |
|
|
3,067 |
|
|
|
(5,522 |
) |
|
|
3,617 |
|
|
|
(8,293 |
) |
Other income |
|
|
220 |
|
|
|
152 |
|
|
|
401 |
|
|
|
283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
34,261 |
|
|
$ |
23,120 |
|
|
$ |
66,652 |
|
|
$ |
46,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, Losses and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss settlement expenses |
|
$ |
4,504 |
|
|
$ |
4,164 |
|
|
$ |
9,239 |
|
|
$ |
7,963 |
|
Increase in liability for future policy benefits |
|
|
7,375 |
|
|
|
5,874 |
|
|
|
13,765 |
|
|
|
9,262 |
|
Amortization of deferred policy acquisition costs |
|
|
2,575 |
|
|
|
2,551 |
|
|
|
5,048 |
|
|
|
5,059 |
|
Other underwriting expenses |
|
|
3,013 |
|
|
|
2,495 |
|
|
|
5,866 |
|
|
|
4,530 |
|
Interest on policyholders accounts |
|
|
10,647 |
|
|
|
10,397 |
|
|
|
21,448 |
|
|
|
20,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Benefits, Losses and Expenses |
|
$ |
28,114 |
|
|
$ |
25,481 |
|
|
$ |
55,366 |
|
|
$ |
46,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes |
|
$ |
6,147 |
|
|
$ |
(2,361 |
) |
|
$ |
11,286 |
|
|
$ |
(173 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
As part of our long-term strategy for profitability, we are emphasizing the marketing of our
traditional life insurance products, primarily single premium whole life, to our independent life
insurance agents to achieve a more balanced product mix. Sales growth of our single premium whole
life product is the primary reason for the following increases:
|
|
|
Net premiums earned increased 14.4 percent in the second quarter of 2010 and 24.3
percent in the first six months of 2010, as compared with the same periods of 2009. |
|
|
|
Increase in liability for future policy benefits increased 25.6 percent in the second
quarter of 2010 and 48.6 percent in the first six months of 2010, as compared with the same
periods of 2009. |
Our life insurance segment also experienced the following:
|
|
|
Losses and loss settlement expenses increased 8.2 percent in the second quarter of 2010
and 16.0 percent in the first six months of 2010, as compared with the same prior-year
periods, reflecting a rise in both annuity benefits and life insurance death benefits. |
|
|
|
Other underwriting expenses increased 20.8 percent in the second quarter of 2010 and
29.5 percent in the first six months of 2010, as compared with the same prior-year periods,
due largely to an increase in agent commissions that resulted from the improvement in
premiums written for our single premium whole life and universal life products. |
|
|
|
Annuity deposits decreased 71.1 percent in the second quarter of 2010 and 72.0 percent
in the first six months of 2010, as compared with the same periods of 2009. In 2009, we
experienced a significant increase in our annuity sales, as consumers in a troubled economy
sought products with guaranteed rates of return. In the second quarter and first half of
2010, annuity sales have decreased, as consumers who perceived a recovering economy chose
to surrender their annuities and reinvest the funds in products with greater risk and
potentially greater returns. Annuity deposits are not recorded as a component of net
premiums written or net premiums earned; however, we invest the funds to generate
investment income. |
38
|
|
|
Net cash outflow related to our annuity business was $.5 million in the second quarter
of 2010 and $1.6 million in the first six months of 2010, versus net cash inflow of $37.2
million in the second quarter of 2009 and $56.6 million in the first six months of 2009.
The net cash outflow is attributable to the decline in annuity deposits and annuitant
withdrawals. |
Investment Portfolio
Our invested assets totaled $2,457.8 million at June 30, 2010, compared with $2,351.8 million at
December 31, 2009. At June 30, 2010, 93.3 percent of the value of our investment portfolio was
fixed maturity securities and 5.0 percent was equity securities. Because the primary purpose of our
investment portfolio is to fund future claims payments, we follow a conservative investment
philosophy and invest 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 obligation, general
economic conditions, expected rates of inflation and regulatory requirements. We administer our
investment portfolio based on investment guidelines approved by management and the investment
committee of our Board of Directors that comply with applicable statutory regulations.
The composition of our investment portfolio at June 30, 2010 is presented at carrying value in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property & Casualty |
|
|
Life |
|
|
|
|
|
|
Insurance Segment |
|
|
Insurance Segment |
|
|
Total |
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
(Dollars in Thousands) |
|
|
|
|
|
of Total |
|
|
|
|
|
|
of Total |
|
|
|
|
|
|
of Total |
|
Fixed maturities (1) |
|
$ |
819,227 |
|
|
|
85.7 |
% |
|
$ |
1,472,316 |
|
|
|
98.0 |
% |
|
$ |
2,291,543 |
|
|
|
93.3 |
% |
Equity securities |
|
|
111,621 |
|
|
|
11.7 |
|
|
|
12,375 |
|
|
|
0.8 |
|
|
|
123,996 |
|
|
|
5.0 |
|
Trading securities |
|
|
9,454 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
9,454 |
|
|
|
0.4 |
|
Mortgage loans |
|
|
|
|
|
|
|
|
|
|
7,067 |
|
|
|
0.5 |
|
|
|
7,067 |
|
|
|
0.3 |
|
Policy loans |
|
|
|
|
|
|
|
|
|
|
7,504 |
|
|
|
0.5 |
|
|
|
7,504 |
|
|
|
0.3 |
|
Other long-term investments |
|
|
14,706 |
|
|
|
1.5 |
|
|
|
2,439 |
|
|
|
0.2 |
|
|
|
17,145 |
|
|
|
0.7 |
|
Short-term investments |
|
|
1,100 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
1,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
956,108 |
|
|
|
100.0 |
% |
|
$ |
1,501,701 |
|
|
|
100.0 |
% |
|
$ |
2,457,809 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Available-for-sale fixed maturities are carried at fair value. Held-to-maturity fixed
maturities are carried at amortized cost. |
39
The composition of our investment portfolio at December 31, 2009 is presented at carrying value in
the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property & Casualty |
|
|
Life |
|
|
|
|
|
|
Insurance Segment |
|
|
Insurance Segment |
|
|
Total |
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
(Dollars in Thousands) |
|
|
|
|
|
of Total |
|
|
|
|
|
|
of Total |
|
|
|
|
|
|
of Total |
|
Fixed maturities |
|
$ |
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 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2010, we classified $2,283.5 million, or 99.7 percent, of our fixed maturities
portfolio as available-for-sale, compared with $2,158.4 million, or 99.6 percent, at December 31,
2009. We classified our remaining fixed maturity securities as held-to-maturity securities (which
are reported at amortized cost) or trading securities. We recorded trading securities, primarily
convertible redeemable preferred debt securities, at fair value, with any changes in fair value
recognized in earnings. As of June 30, 2010 and December 31, 2009, we did not have direct exposure
to investments in subprime mortgages, derivative securities or other credit enhancement vehicles.
Credit Quality
The following table displays a breakdown for all of our fixed maturity securities by credit rating
at June 30, 2010 and December 31, 2009. Information contained in the table is generally based upon
the issue credit ratings provided by Moodys. If credit ratings from Moodys were unavailable, we
obtained them from Standard & Poors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
June 30, 2010 |
|
|
December 31, 2009 |
|
Rating |
|
Carrying Value |
|
|
% of Total |
|
|
Carrying Value |
|
|
% of Total |
|
AAA |
|
$ |
293,569 |
|
|
|
12.8 |
% |
|
$ |
207,199 |
|
|
|
9.5 |
% |
AA |
|
|
441,367 |
|
|
|
19.2 |
|
|
|
397,380 |
|
|
|
18.2 |
|
A |
|
|
495,773 |
|
|
|
21.5 |
|
|
|
562,795 |
|
|
|
25.8 |
|
Baa/BBB |
|
|
945,516 |
|
|
|
41.1 |
|
|
|
869,465 |
|
|
|
39.9 |
|
Other/Not Rated |
|
|
124,772 |
|
|
|
5.4 |
|
|
|
143,770 |
|
|
|
6.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,300,997 |
|
|
|
100.0 |
% |
|
$ |
2,180,609 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The credit ratings of our fixed maturity securities portfolio at June 30, 2010, have not changed
significantly since December 31, 2009, however, the increase in our AAA fixed maturity securities
is reflective of the investment purchases we have made during 2010.
Duration
Our investment portfolio is composed primarily of fixed maturity securities whose fair values are
susceptible to market risk, specifically interest rate changes. Duration is a measurement we use to
quantify our inherent interest rate risk and analyze our ability to match our invested assets to
our claim 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 claim
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
claim liabilities is liquidity. With appropriate matching, our investments will mature when cash is
needed, preventing the need to liquidate other assets prematurely.
40
Group
The maximum weighted average duration of our fixed maturity available-for-sale, held-to-maturity
and trading security portfolios, including convertible bonds, was 5.4 years at June 30, 2010,
compared with 6.0 years at December 31, 2009.
Property and Casualty Insurance Segment
For our property and casualty insurance segment, the maximum weighted average duration of our fixed
maturity available-for-sale, held-to-maturity and trading security portfolios, including
convertible bonds, was 6.8 years at June 30, 2010, compared with 7.3 years at December 31, 2009.
Life Insurance Segment
For our life insurance segment, the maximum weighted average duration of our fixed maturity
available-for-sale, held-to-maturity and trading security portfolios, was 3.7 years at June 30,
2010, compared with 4.3 years at December 31, 2009.
Investment Results
Our net investment income increased 3.4 percent in the second quarter of 2010 and 11.1 percent in
the first six months of 2010, as compared with the same periods of 2009. The growth in annuity
sales last year contributed to the increase in our invested assets and net investment income, in
spite of historically low interest rates and declining dividends from our equity portfolio.
Realized investment gains were $2.3 million in the second quarter of 2010 and $5.1 million in the
first six months of 2010, compared with realized investment losses of $13.2 million in the second
quarter of 2009 and $16.6 million in the first six months of 2009. The recovery in our investment
portfolio is attributable to a significant reduction in OTTI charges, which totaled $.1 million in
the second quarter of 2010 and $.5 million in the first six months of 2010 versus $13.6 million in
the second quarter of 2009 and $18.1 million in the first six months of 2009. We incurred
substantial OTTI charges in 2009 as a result of the financial crisis experienced by the economy.
We continually monitor the difference between our cost basis and the estimated fair value of our
investments. Our accounting policy for impairment recognition requires OTTI charges to be recorded
when we determine that it is more likely than not that we will be unable to collect all amounts due
according to the contractual terms of the fixed maturity security or that the anticipated recovery
in fair value of the equity security will not occur in a reasonable amount of time. Impairment
charges on investments are recorded based on the fair value of the investments at the measurement
date. Factors considered in evaluating whether a decline in value is other-than-temporary include:
the length of time and the extent to which fair value has been less than cost; the financial
condition and near-term prospects of the issuer; our intention to hold the investment; and the
likelihood that we will be required to sell the investment.
Changes in unrealized gains on available-for-sale securities do not affect net income and earnings
per share but do impact comprehensive income, stockholders equity and book value per share. We
believe that any unrealized losses on our available-for-sale securities at June 30, 2010, are
temporary based upon our current analysis of the issuers of the securities that we hold and current
market events. It is possible that we could recognize OTTI charges in future periods on securities
that we own at June 30, 2010, 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.
41
LIQUIDITY AND CAPITAL RESOURCES
Liquidity measures our ability to generate sufficient cash flows to meet our short- and long-term
cash obligations. Our cash inflows are primarily a result of premiums, annuity deposits,
reinsurance recoveries, sales or maturities of investments, and investment income. Historically, we
have generated substantial cash inflows from operations because cash from premium payments is
usually received in advance of cash payments made to settle losses. When investing the cash
generated from operations, we invest in securities with maturities that correlate to the
anticipated timing of payments for losses and loss settlement expenses of the underlying insurance
policies. The majority of our assets are invested in available-for-sale fixed maturity securities.
Our cash outflows are a result of losses and loss settlement expenses, commissions, premium taxes,
income taxes, operating expenses, dividends, annuity withdrawals, and investment purchases. Cash
outflows may be variable because of the uncertainty regarding settlement dates for losses. In
addition, the timing and amount of individual catastrophe losses are inherently unpredictable and
could increase our liquidity requirements.
The following table displays a summary of cash sources and uses in 2010 and 2009.
|
|
|
|
|
|
|
|
|
Cash Flow Summary |
|
Six Months Ended June 30, |
|
(In Thousands) |
|
2010 |
|
|
2009 |
|
Cash provided provided by (used in) |
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
43,467 |
|
|
$ |
36,751 |
|
Investing activities |
|
|
(156,150 |
) |
|
|
(126,928 |
) |
Financing activities |
|
|
78,670 |
|
|
|
133,568 |
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
$ |
(34,013 |
) |
|
$ |
43,391 |
|
|
|
|
|
|
|
|
Net cash flows provided by operating activities totaled $43.5 million and $36.8 million for the
six-month periods ended June 30, 2010 and 2009, respectively. Our operating cash flows increased in
the six-month period ended June 30, 2010, as compared with the six-month period ended June 30,
2009, due to the lower level of claims payments in the first six months of 2010, as compared with
the same period of 2009. A decrease in net premiums written during 2010 somewhat offset our
positive operating cash flows, but also caused a corresponding lower level of commissions to be
paid during this time.
Net cash flows used in investing activities totaled $156.2 million and $126.9 million for the
six-month periods ended June 30, 2010 and 2009, respectively. In the six-month period ended June
30, 2010, we had cash inflows from sales of investments, scheduled and unscheduled investment
maturities, redemptions and prepayments that totaled $201.1 million, compared with $206.6 million
for the six-month period ended June 30, 2009. Our cash outflows for investment purchases totaled
$281.3 million for the six-month period ended June 30, 2010, compared with $259.0 million for the
six-month period ended June 30, 2009, as in 2010 we continued to purchase a higher level of fixed
maturity securities rather than other investment vehicles such as short-term investments, which
continue to be less profitable due to the lower market interest rates.
Net cash flows provided by financing activities totaled $78.7 million and $133.6 million for the
six-month periods ended June 30, 2010 and 2009, respectively. In the six-month period ended June
30, 2010, net cash inflows from our life insurance segments annuity and universal life deposits
totaled $15.2 million, compared with $72.2 million for the same period of 2009. Additionally, in
the six-month period ended June 30, 2010, our common stock repurchases totaled $3.7 million,
compared with $.5 million in the six-month period ended June 30, 2009.
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 use our line of credit during the first six months of 2010.
42
Stockholders Equity
Stockholders equity increased 4.9 percent to $705.9 million at June 30, 2010, from $672.7 million
at December 31, 2009. The increase in our stockholders equity was largely attributable to net
income of $34.8 million and net unrealized investment appreciation of $8.4 million, net of tax.
This was partially offset by stockholder dividends of $7.9 million and stock repurchases of $3.7
million. At June 30, 2010, book value per share was $26.82, compared with $25.35 at December 31,
2009.
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 June 30, 2010, our remaining potential contractual
obligation was $12.2 million.
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 or licensed
to conduct business. Management analyzes financial data and statements that are prepared in
accordance with statutory accounting principles rather than U.S. GAAP.
The following definitions of key statutory measures are provided for our readers convenience.
United Fire does not reconcile data prepared under statutory accounting principles to those
prepared under U.S. GAAP because Regulation G does not require reconciliation to U.S. GAAP of data
prepared under a system of regulation of a government or governmental authority or self-regulatory
organization that is applicable to the registrant.
Premiums written is a measure of our overall business volume. Net premiums written comprises 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(In Thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net premiums written |
|
$ |
128,749 |
|
|
$ |
127,679 |
|
|
$ |
248,185 |
|
|
$ |
248,525 |
|
Net change in unearned premium |
|
|
(11,695 |
) |
|
|
(8,079 |
) |
|
|
(16,881 |
) |
|
|
(10,369 |
) |
Net change in prepaid reinsurance premium |
|
|
28 |
|
|
|
71 |
|
|
|
86 |
|
|
|
(164 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
117,082 |
|
|
$ |
119,671 |
|
|
$ |
231,390 |
|
|
$ |
237,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
43
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.
Underwriting income (loss) is the gain or loss by an insurance company from the business of
insurance. Underwriting income is equal to net premiums earned less incurred losses and loss
settlement expenses, amortization of deferred policy acquisition costs, and other underwriting
expenses. We use this financial measure in evaluating the results of our operations and to analyze
the profitability of our property and casualty segment separately from our investment results.
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. 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 extraordinary catastrophe losses and
resulting litigation, such as Hurricane Katrina. The frequency and severity of catastrophic losses
we experience in any year affect our results of operations and financial position. In analyzing the
underwriting performance of our property and casualty insurance segment, we evaluate performance
both including and excluding catastrophe losses. Portions of our catastrophe losses may be
recoverable under our catastrophe reinsurance agreements. We include a discussion of the impact of
catastrophes because we believe it is meaningful for investors to understand the variability in
periodic earnings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(In Thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
ISO catastrophes |
|
$ |
7,545 |
|
|
$ |
7,135 |
|
|
$ |
15,924 |
|
|
$ |
21,148 |
|
Less Hurricane Katrina loss development |
|
|
|
|
|
|
(498 |
) |
|
|
(5,351 |
) |
|
|
(12,442 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
ISO catastrophes without Hurricane Katrina |
|
$ |
7,545 |
|
|
$ |
6,637 |
|
|
$ |
10,573 |
|
|
$ |
8,706 |
|
Non-ISO catastrophes |
|
|
25 |
|
|
|
494 |
|
|
|
153 |
|
|
|
1,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total catastrophes |
|
$ |
7,570 |
|
|
$ |
7,131 |
|
|
$ |
10,726 |
|
|
$ |
10,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure to market risk arising from potential losses in our investment portfolio due to
adverse changes in interest rates and market prices. However, we have the ability to hold fixed
maturity investments to maturity. Our investment guidelines define the overall framework for
managing our market and other investment risks, including accountability and controls. In addition,
each of our subsidiaries has specific investment policies that delineate the investment limits and
strategies that are appropriate given each entitys liquidity, surplus, product, and regulatory
requirements. We respond to market risk by managing the character of investment purchases.
We do not utilize financial instrument hedges or derivative financial instruments to manage risks,
nor do we enter into any swap, forward or option contracts, but attempt to mitigate our exposure
through active portfolio management. In addition, we place the majority of our investments in
high-quality, liquid securities and limit the amount of credit exposure to any one issuer. At June
30, 2010, we did not hold investments in sub-prime mortgages, derivative securities, credit default
swaps or other credit-enhancement exposures.
While our primary market risk exposure is changes in interest rates, we do have exposure to changes
in equity prices and limited exposure to foreign currency exchange rates.
44
There have been no material changes in our market risk or market risk factors from that reported in
our Annual Report on Form 10-K for the year ended December 31, 2009.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our disclosure controls and procedures (as defined in 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 Securities and Exchange Commissions 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.
Changes in Internal Control Over Financial Reporting
Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated
our internal control over financial reporting to determine whether any changes occurred during the
fiscal quarter to which this report relates that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting. Based on this evaluation, no
such change in our internal control over financial reporting occurred during the fiscal quarter to
which this report relates.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a detailed discussion of legal proceedings of the Company, refer to Note 1Legal Proceedings
in the Notes to Unaudited Consolidated Financial Statements of this Form 10-Q.
ITEM 1A. RISK FACTORS
Our business is subject to a number of risks, including those identified in Part I, Item 1A of our
2009 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2010,
that could have a material effect on our business, results of operations, financial condition,
and/or liquidity and that could cause our operating results to vary significantly from period to
period. The risks described in the above mentioned document are not the only risks we face.
Additional risks and uncertainties not currently known to us or that we currently deem to be
immaterial could also have a material effect on our business, results of operations, financial
condition and/or liquidity.
45
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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. 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 June 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
4/1/10 - 4/30/10 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
349,878 |
|
5/1/10 - 5/31/10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
349,878 |
|
6/1/10 - 6/30/10 |
|
|
46,800 |
|
|
|
19.90 |
|
|
|
46,800 |
|
|
|
303,078 |
|
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. (REMOVED AND RESERVED)
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
|
|
|
|
|
|
|
Exhibit |
|
|
|
Filed |
number |
|
Exhibit description |
|
herewith |
|
11 |
|
|
Statement Re Computation of Per Share Earnings. All
information required by Exhibit 11 is presented
within Note 7 of the Notes to Unaudited Consolidated
Financial Statements, in accordance with the FASB
guidance on Earnings per Share
|
|
X |
|
31.1 |
|
|
Certification of Randy A. Ramlo pursuant to Section
302 of the SarbanesOxley Act of 2002
|
|
X |
|
31.2 |
|
|
Certification of Dianne M. Lyons pursuant to Section
302 of the SarbanesOxley Act of 2002
|
|
X |
|
32.1 |
|
|
Certification of Randy A. Ramlo pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section
906 of the SarbanesOxley Act of 2002
|
|
X |
|
32.2 |
|
|
Certification of Dianne M. Lyons pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section
906 of the SarbanesOxley Act of 2002
|
|
X |
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
UNITED FIRE & CASUALTY COMPANY
(Registrant)
|
|
|
|
|
|
|
|
|
|
/s/ Randy A. Ramlo
Randy A. Ramlo
|
|
/s/ Dianne M. Lyons
Dianne M. Lyons
|
|
|
President, Chief Executive Officer,
|
|
Vice President, Chief Financial Officer and |
|
|
Director and Principal Executive Officer
|
|
Principal
Accounting Officer |
|
|
|
|
|
|
|
|
|
July 30, 2010
(Date)
|
|
|
47