XNAS:UFCS United Fire Group Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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 March 31, 2012

Commission File Number 001-34257
____________________________

 
UNITED FIRE GROUP, INC.
(Exact name of registrant as specified in its charter)
____________________________
 
 
 
Iowa
 
45-2302834
 
 
 
 
(State of Incorporation)
 
(IRS Employer Identification No.)
 
 

118 Second Avenue, S.E., Cedar Rapids, Iowa 52407
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (319) 399-5700

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES R NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES R NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o 
 
Accelerated filer R 
 
Non-accelerated filer o 
 
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO R

As of May 7, 2012, 25,508,614 shares of common stock were outstanding.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



United Fire Group, Inc.
Index to Quarterly Report on Form 10-Q
March 31, 2012
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 4. Mine Safety Disclosures
 
 
 
 
 
 
 
 



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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A “Risk Factors.”



1


PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
 
United Fire Group, Inc.
Consolidated Balance Sheets
(In Thousands, Except Per Share Data and Number of Shares)
March 31,
2012
 
December 31, 2011
 
(unaudited)
 
 
ASSETS
 
 
 
Investments
 
 
 
Fixed maturities
 
 
 
Held-to-maturity, at amortized cost (fair value $4,148 in 2012 and $4,161 in 2011)
$
4,072

 
$
4,143

Available-for-sale, at fair value (amortized cost $2,661,561 in 2012 and $2,562,786 in 2011)
2,791,622

 
2,697,248

Equity securities, at fair value (amortized cost $70,059 in 2012 and $68,559 in 2011)
176,057

 
159,451

Trading securities, at fair value (amortized cost $15,015 in 2012 and $13,429 in 2011)
15,230

 
13,454

Mortgage loans
4,781

 
4,829

Policy loans
7,168

 
7,209

Other long-term investments
22,154

 
20,574

Short-term investments
1,100

 
1,100

 
$
3,022,184

 
$
2,908,008

 
 
 
 
Cash and cash equivalents
$
74,000

 
$
144,527

Accrued investment income
32,563

 
32,219

Premiums receivable (net of allowance for doubtful accounts of $700 in 2012 and $825 in 2011)
186,908

 
172,348

Deferred policy acquisition costs
105,231

 
106,654

Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $36,040 in 2012 and $35,248 in 2011)
44,888

 
45,644

Reinsurance receivables and recoverables
150,520

 
128,574

Prepaid reinsurance premiums
3,541

 
6,191

Income taxes receivable
22,816

 
26,742

Goodwill and intangible assets
30,166

 
30,801

Other assets
14,525

 
17,216

TOTAL ASSETS
$
3,687,342

 
$
3,618,924

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Future policy benefits and losses, claims and loss settlement expenses
 
 
 
Property and casualty insurance
$
954,860

 
$
945,051

Life insurance
1,493,772

 
1,476,281

Unearned premiums
304,219

 
288,991

Accrued expenses and other liabilities
143,288

 
138,210

Deferred income taxes
19,234

 
13,624

Debt
45,000

 
45,000

Trust preferred securities
7,579

 
15,626

TOTAL LIABILITIES
$
2,967,952

 
$
2,922,783

Stockholders’ Equity
 
 
 
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,507,809 and 25,505,350 shares issued and outstanding in 2012 and 2011, respectively
$
26

 
$
25

Additional paid-in capital
213,492

 
213,045

Retained earnings
415,843

 
400,485

Accumulated other comprehensive income, net of tax
90,029

 
82,586

TOTAL STOCKHOLDERS’ EQUITY
$
719,390

 
$
696,141

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
3,687,342

 
$
3,618,924

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


2


United Fire Group, Inc.
Consolidated Statements of Income and Comprehensive Income (Unaudited)

 
Three Months Ended March 31,
(In Thousands, Except Per Share Data and Number of Shares)
2012
 
2011
 
 
 
 
Revenues
 
 
 
Net premiums earned
$
161,503

 
$
114,204

Investment income, net of investment expenses
29,146

 
27,063

Net realized investment gains
2,794

 
2,653

Other income
256

 
156

 
$
193,699

 
$
144,076

 
 
 
 
Benefits, Losses and Expenses
 
 
 
Losses and loss settlement expenses
$
91,484

 
$
76,182

Future policy benefits
10,138

 
8,182

Amortization of deferred policy acquisition costs
34,551

 
26,046

Other underwriting expenses
21,994

 
16,057

Interest on policyholders’ accounts
10,656

 
10,670

 
$
168,823

 
$
137,137

 
 
 
 
Income before income taxes
$
24,876

 
$
6,939

Federal income tax expense
5,692

 
1,129

Net income
$
19,184

 
$
5,810

 
 
 
 
Other comprehensive income
 
 
 
Change in net unrealized appreciation on investments
13,603

 
1,500

Adjustment for net realized gains included in income
(2,794
)
 
(2,653
)
Adjustment for costs included in employee benefit expense
643

 
554

 
$
11,452

 
$
(599
)
Income tax effect of components of other comprehensive income
(4,009
)
 
209

 
$
7,443

 
$
(390
)
Comprehensive income
$
26,627

 
$
5,420

 
 
 
 
Weighted average common shares outstanding
25,505,962

 
26,195,552

Basic earnings per common share
0.75

 
0.22

Diluted earnings per common share
0.75

 
0.22

Cash dividends declared per common share
0.15

 
0.15

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



3


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

(In Thousands, Except Per Share Data)
Three Months Ended March 31, 2012
 
 
Common stock
 
Balance, beginning of year
$
25

Shares repurchased

Shares issued for stock-based awards (97,000 shares)
1

Balance, end of period
$
26

 
 
Additional paid-in capital
 
Balance, beginning of year
$
213,045

Compensation expense and related tax benefit for stock-based award grants
405

Shares repurchased

Shares issued for stock-based awards
42

Balance, end of period
$
213,492

 
 
Retained earnings
 
Balance, beginning of year
$
400,485

Net income
19,184

Dividends on common stock ($0.15 per share)
(3,826
)
Balance, end of period
$
415,843

 
 
Accumulated other comprehensive income, net of tax
 
Balance, beginning of year
$
82,586

Change in net unrealized appreciation (1)
7,025

Change in underfunded status of employee benefit plans (2)
418

Balance, end of period
$
90,029

 
 
Summary of changes
 
Balance, beginning of year
$
696,141

Net income
19,184

All other changes in stockholders’ equity accounts
4,065

Balance, end of period
$
719,390

(1)
The change in net unrealized appreciation is net of reclassification adjustments and income taxes.
(2)
The recognition of the underfunded status of employee benefit plans is net of income taxes.
The Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.



4


United Fire Group, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
Three Months Ended March 31,
 
2012
 
2011
Cash Flows From Operating Activities
 
 
 
Net income
$
19,184

 
$
5,810

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Net accretion of bond premium
3,520

 
1,705

Depreciation and amortization
2,285

 
706

Stock-based compensation expense
396

 
489

Net realized investment gains
(2,794
)
 
(2,653
)
Net cash flows from trading investments
(1,343
)
 
(205
)
Deferred income tax expense
5,011

 
117

Changes in:
 
 
 
Accrued investment income
(344
)
 
400

Premiums receivable
(14,560
)
 
(8,447
)
Deferred policy acquisition costs
1,526

 
(1,719
)
Reinsurance receivables
(23,199
)
 
830

Prepaid reinsurance premiums
2,650

 
(135
)
Income taxes receivable
3,926

 
1,018

Other assets
2,691

 
6,355

Future policy benefits and losses, claims and loss settlement expenses
20,596

 
7,146

Unearned premiums
15,228

 
9,090

Accrued expenses and other liabilities
5,721

 
11,507

Deferred income taxes
(3,409
)
 
2

Other, net
(1,200
)
 
(747
)
Total adjustments
$
16,701

 
$
25,459

Net cash provided by operating activities
$
35,885

 
$
31,269

Cash Flows From Investing Activities
 
 
 
Proceeds from sale of available-for-sale investments
$
3,000

 
$
4,847

Proceeds from call and maturity of held-to-maturity investments
75

 
486

Proceeds from call and maturity of available-for-sale investments
149,285

 
197,447

Proceeds from short-term and other investments
2,590

 
1,548

Purchase of available-for-sale investments
(252,345
)
 
(154,923
)
Purchase of short-term and other investments
(2,950
)
 
(454
)
Net purchases and sales of property and equipment
(893
)
 
(100
)
Acquisition of property and casualty company, net of cash acquired

 
(172,620
)
Net cash used in investing activities
$
(101,238
)
 
$
(123,769
)
Cash Flows From Financing Activities
 
 
 
Policyholders’ account balances
 
 
 
Deposits to investment and universal life contracts
$
40,390

 
$
31,242

Withdrawals from investment and universal life contracts
(33,743
)
 
(28,984
)
Borrowings of short-term debt

 
79,900

Repayment of trust preferred securities
(8,047
)
 

Payment of cash dividends
(3,826
)
 
(3,929
)
Issuance of common stock
43

 

Tax impact from issuance of common stock
9

 
(14
)
Net cash (used in) provided by financing activities
$
(5,174
)
 
$
78,215

Net Change in Cash and Cash Equivalents
$
(70,527
)
 
$
(14,285
)
Cash and Cash Equivalents at Beginning of Period
144,527

 
180,057

Cash and Cash Equivalents at End of Period
$
74,000

 
$
165,772

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


5



United Fire Group, Inc.
Notes to Unaudited Consolidated Financial Statements

NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Business
The terms “United Fire,” “we,” “us,” or “our” refer to United Fire Group, Inc., and its consolidated subsidiaries and affiliates, as the context requires. We are engaged in the business of writing property and casualty insurance and life insurance and selling annuities through a network of independent agencies. We report our operations in two business segments: property and casualty insurance and life insurance. We are licensed as a property and casualty insurer in 43 states plus the District of Columbia and as a life insurer in 35 states.
Basis of Presentation
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. Certain financial information that is included in our Annual Report on Form 10-K, including certain financial statement footnote disclosures, are not required by the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting and have been condensed or omitted.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The financial statement categories that are most dependent on management estimates and assumptions include: investments; deferred policy acquisition costs; reinsurance receivables and recoverables (for net realizable value); goodwill and intangible assets (for recoverability); 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.
Certain prior year amounts have been reclassified to conform to the current year presentation.
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. All significant intercompany transactions have been eliminated in consolidation. The results reported for the interim periods are not necessarily indicative of the results of operations that may be expected for the year. The unaudited Consolidated Financial Statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011. The review report of Ernst & Young LLP as of and for the three-month period ended March 31, 2012, accompanies the unaudited Consolidated Financial Statements included in Part I, Item 1 “Financial Statements.”
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash, money market accounts, and non-negotiable certificates of deposit with original maturities of three months or less.
For the three-month period ended March 31, 2012, we made payments for income taxes totaling $0.2 million, compared to no income tax payments for the same period of 2011. We received no tax refunds in either period. On April 6, 2012 we received a federal tax refund of $15.5 million. The refund resulted from the utilization of our 2009


6


net operating losses and net capital losses in the carryback period.
For the three-month period ended March 31, 2012, we made interest payments totaling $0.4 million, compared to no payments for interest for the same period of 2011. These payments exclude interest credited to policyholders’ accounts.
Deferred Policy Acquisition Costs
The costs associated with underwriting new business – primarily commissions, premium taxes and variable underwriting and policy issue expenses associated with successful acquisition efforts – are deferred and amortized over the terms of the underlying policies. The table below shows the reconciliation of the components of our deferred policy acquisition costs asset, including the related amortization recognized for the three-month period ended March 31, 2012.
(In Thousands)
Property & Casualty
 
Life Insurance
 
Total
Deferred policy acquisition costs at December 31, 2011
$
60,668

 
$
45,986

 
$
106,654

Amortization of value of business acquired
(1,674
)
 

 
(1,674
)
Current deferred costs
31,279

 
1,745

 
33,024

Current amortization
(30,739
)
 
(2,138
)
 
(32,877
)
Ending unamortized deferred policy acquisition costs
$
59,534

 
$
45,593

 
$
105,127

Change in "shadow" deferred policy acquisition costs

 
104

 
104

Recorded deferred policy acquisition costs at March 31, 2012
$
59,534

 
$
45,697

 
$
105,231


In October 2010, the Financial Accounting Standards Board ("FASB") issued updated accounting guidance to address the diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts. This guidance modifies the definition of acquisition costs to specify that a cost must be incremental and directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred. Acquisition costs that are not eligible for deferral are to be charged to expense in the period incurred. If application of this guidance would result in the capitalization of acquisition costs that had not previously been capitalized by a reporting entity, the entity may elect not to capitalize those costs.
Effective January 1, 2012, we adopted the updated accounting guidance and elected to do so on a prospective basis. As a result of the change, the amount of underwriting expenses eligible for deferral has decreased. After consideration of our normal recoverability assessment, which we refer to as a premium deficiency charge, and the amortization pattern of our deferred policy acquisition costs, we recognized approximately $4.2 million of additional expense on a pretax basis, in the three-month period ended March 31, 2012 than we would have recognized had the rules remained the same. The impact of the adoption on the Consolidated Statements of Income and Comprehensive Income for the three-month period ended March 31, 2012 was an increase to other underwriting expenses of $6.5 million, a decrease to amortization of deferred policy acquisition recoverability of $2.3 million and a decrease to net income of $2.7 million. The decrease to net income represents $0.11 per share.

The impact of the new accounting rules on our results for the full year will be influenced by a number of factors including: the volume of premiums written; our assessment of successful acquisition efforts; the profitability of our lines of property and casualty business, which impacts the level of premium deficiency charge recorded; and the normal amortization pattern of these deferred policy acquisition costs, which is generally over one year. The greatest impact will be experienced in the most current quarter as the recorded deferred policy acquisitions costs would amortize to expense in succeeding quarters to offset a portion of the initial impact when assessed on an annual basis. Accordingly, the impact of the new accounting rules on our results reported for the three-month period ended March 31, 2012 should not be considered to be representative of the impact for the full year.



7


Income Taxes
Deferred tax assets and liabilities are established based on differences between the financial statement bases of assets and liabilities and the tax bases of those same assets and liabilities, using the currently enacted statutory tax rates. Deferred income tax expense is measured by the year-to-year change in the net deferred tax asset or liability, except for certain changes in deferred tax amounts that affect stockholders’ equity and do not impact federal income tax expense.
We reported a federal income tax expense of $5.7 million and $1.1 million for the three-month periods ended March 31, 2012 and 2011, respectively. Our effective tax rate is different than the federal statutory rate of 35.0 percent due principally to the effect of tax-exempt municipal bond interest income and non-taxable dividend income.
We have recognized no liability for unrecognized tax benefits at March 31, 2012 or December 31, 2011. In addition, we have not accrued for interest and penalties related to unrecognized tax benefits. However, if interest and penalties would need to be accrued related to unrecognized tax benefits, such amounts would be recognized as a component of federal income tax expense.
We file a consolidated federal income tax return. We also file income tax returns in various state jurisdictions. We are no longer subject to federal or state income tax examination for years before 2006. There is an ongoing examination of income tax returns by the State of Florida of the 2008 through 2010 tax years.
Recently Issued Accounting Standards
Adopted Accounting Standards

Comprehensive Income

In June and December 2011, the FASB issued guidance amending the presentation of comprehensive income and its components. Under the new guidance, a reporting entity has the option to present comprehensive income in a single continuous statement or in two separate but consecutive statements. This new guidance is to be applied retrospectively. We adopted the new guidance in the first quarter of 2012 by electing to report comprehensive income in a single continuous statement as shown in the accompanying Consolidated Statements of Income and Comprehensive Income. The new guidance affects presentation only and therefore had no impact on our results of operations or financial position.
Fair Value Measurements
In May 2011, the FASB issued updated accounting guidance that changes the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between GAAP and International Financial Reporting Standards. The guidance also expands the disclosures for fair value measurements that are estimated using significant unobservable (i.e., Level 3) inputs. We adopted the updated guidance on a prospective basis effective January 1, 2012. The adoption did not have any impact on our financial position or results of operations. The additional disclosures required have been provided in "Note 3. Fair Value of Financial Instruments".
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 March 31, 2012 and December 31, 2011, is as follows:


8


March 31, 2012
(Dollars in Thousands)
Type of Investment
Cost or Amortized Cost
 
Gross Unrealized Appreciation
 
Gross Unrealized Depreciation
 
Fair Value
HELD-TO-MATURITY
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
States, municipalities and political subdivisions
$
3,729


$
56


$


$
3,785

Mortgage-backed securities
305


19




324

Collateralized mortgage obligations
38


1




39

Total Held-to-Maturity Fixed Maturities
$
4,072


$
76


$


$
4,148

AVAILABLE-FOR-SALE







Fixed maturities







Bonds







U.S. Treasury
$
42,067


$
1,173


$
26


$
43,214

U.S. government agency
78,383


358


604


78,137

States, municipalities and political subdivisions
699,745


56,614


658


755,701

Foreign bonds
225,686


9,857


306


235,237

Public utilities
250,079


14,592


559


264,112

Corporate bonds







Energy
188,677


7,053


253


195,477

Industrials
323,822


12,014


736


335,100

Consumer goods and services
195,916


8,605


286


204,235

Health care
112,081


6,514




118,595

Technology, media and telecommunications
118,364


5,460


371


123,453

Financial services
287,327


9,113


1,988


294,452

Mortgage-backed securities
31,869


1,080


5


32,944

Collateralized mortgage obligations
101,826


3,641


627


104,840

Asset-backed securities
5,341


453


55


5,739

Redeemable preferred stocks
378


8




386

Total Available-For-Sale Fixed Maturities
$
2,661,561


$
136,535


$
6,474


$
2,791,622

Equity securities







Common stocks







Public utilities
$
7,231


$
7,059


$
141


$
14,149

Energy
5,094


7,247




12,341

Industrials
13,030


20,582


102


33,510

Consumer goods and services
10,373


8,239


87


18,525

Health care
8,212


9,316


157


17,371

Technology, media and telecommunications
5,367


5,242


77


10,532

Financial services
17,118


49,146


175


66,089

Nonredeemable preferred stocks
3,634


118


212


3,540

Total Available-for-Sale Equity Securities
$
70,059


$
106,949


$
951


$
176,057

Total Available-for-Sale Securities
$
2,731,620


$
243,484


$
7,425


$
2,967,679




9


December 31, 2011
(Dollars in Thousands)
Type of Investment
Cost or Amortized Cost
 
Gross Unrealized Appreciation
 
Gross Unrealized Depreciation
 
Fair Value
HELD-TO-MATURITY
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
States, municipalities and political subdivisions
$
3,739


$
52


$
61


$
3,730

Mortgage-backed securities
356


25




381

Collateralized mortgage obligations
48


2




50

Total Held-to-Maturity Fixed Maturities
$
4,143


$
79


$
61


$
4,161

AVAILABLE-FOR-SALE







Fixed maturities







Bonds







U.S. Treasury
$
42,530


$
1,421


$


$
43,951

U.S. government agency
95,813


582




96,395

States, municipalities and political subdivisions
687,039


61,076


8


748,107

Foreign bonds
206,872


8,766


823


214,815

Public utilities
254,822


15,562


313


270,071

Corporate bonds








Energy
189,902


7,567


277


197,192

Industrials
285,696


10,631


650


295,677

Consumer goods and services
203,948


8,872


646


212,174

Health care
109,219


6,497


45


115,671

Technology, media and telecommunications
108,315


4,951


318


112,948

Financial services
258,526


9,075


2,300


265,301

Mortgage-backed securities
34,353


1,041


4


35,390

Collateralized mortgage obligations
79,545


3,490


184


82,851

Asset-backed securities
5,801


495




6,296

Redeemable preferred stocks
405


4




409

Total Available-For-Sale Fixed Maturities
$
2,562,786


$
140,030


$
5,568


$
2,697,248

Equity securities







Common stocks







Public utilities
$
7,231


$
7,602


$
98


$
14,735

Energy
5,094


7,116




12,210

Industrials
12,678


16,153


275


28,556

Consumer goods and services
10,750


7,982


168


18,564

Health care
8,212


8,008


232


15,988

Technology, media and telecommunications
5,368


4,796


146


10,018

Financial services
15,592


41,041


543


56,090

Nonredeemable preferred stocks
3,634


40


384


3,290

Total Available-for-Sale Equity Securities
$
68,559


$
92,738


$
1,846


$
159,451

Total Available-for-Sale Securities
$
2,631,345


$
232,768


$
7,414


$
2,856,699




10


Maturities
The amortized cost and fair value of held-to-maturity, available-for-sale and trading securities at March 31, 2012, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset-backed securities, mortgage-backed securities and collateralized mortgage obligations may be subject to prepayment risk and are therefore not categorized by contractual maturity.
(In Thousands)
Held-To-Maturity
 
Available-For-Sale
 
Trading
March 31, 2012
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
396

 
$
397

 
$
263,128

 
$
267,824

 
$
1,891

 
$
1,920

Due after one year through five years
3,333

 
3,388

 
1,045,934

 
1,103,107

 
6,708

 
6,649

Due after five years through 10 years

 

 
1,052,661

 
1,114,410

 
1,864

 
1,808

Due after 10 years

 

 
160,802

 
162,758

 
4,552

 
4,853

Asset-backed securities

 

 
5,341

 
5,739

 

 

Mortgage-backed securities
305

 
324

 
31,869

 
32,944

 

 

Collateralized mortgage obligations
38

 
39

 
101,826

 
104,840

 

 

 
$
4,072

 
$
4,148

 
$
2,661,561

 
$
2,791,622

 
$
15,015

 
$
15,230

Net Realized Investment Gains and Losses
Net realized gains (losses) on disposition of investments are computed using the specific identification method and are included in the computation of net income. A summary of net realized investment gains (losses) resulting from investment sales and calls is as follows:
 
Three Months Ended March 31,
(In Thousands)
2012
 
2011
Net realized investment gains (losses)
 
 
 
Fixed maturities
$
1,531

 
$
1,386

Equity securities
701

 
1,116

Trading securities
562

 
316

Other long-term investments

 
(165
)
Total net realized investment gains
$
2,794

 
$
2,653

The proceeds and gross realized gains and losses on the sale of available-for-sale securities are as follows:
 
Three Months Ended March 31,
(In Thousands)
2012
 
2011
Proceeds from sales
$
3,000

 
$
4,847

Gross realized gains
470

 
90

Gross realized losses
25

 
516

There were no sales of held-to-maturity securities during the three-month periods ended March 31, 2012 and 2011.

Our investment portfolio includes trading securities with embedded derivatives. These securities, which are primarily convertible redeemable preferred debt securities, are recorded at fair value. Income or loss, including the change in the fair value of these trading securities, is recognized currently in earnings as a component of net realized investment gains and losses. Our portfolio of trading securities had a fair value of $15.2 million and $13.5 million at March 31, 2012 and December 31, 2011, respectively.

Off-Balance Sheet Arrangements
Pursuant to an agreement with one of our limited liability partnership funds, we are contractually committed to make


11


capital contributions up to $15.0 million, upon request by the partnership, through December 31, 2017. Our remaining potential contractual obligation was $8.7 million at March 31, 2012.
Unrealized Appreciation and Depreciation
A summary of changes in net unrealized investment appreciation (depreciation) during the reporting period is as follows:
 
Three Months Ended March 31,
(In Thousands)
2012
 
2011
Change in net unrealized investment appreciation
 
 
 
Available-for-sale fixed maturities and equity securities
$
10,705

 
$
(5,083
)
Deferred policy acquisition costs
104

 
3,930

Income tax effect
(3,784
)
 
403

Total change in net unrealized investment appreciation, net of tax
$
7,025

 
$
(750
)
In the above table, the amount reported as changes in deferred policy acquisition costs for our life insurance segment represents the impact of fluctuations that occur in the interest rate environment from time to time.
We continually monitor the difference between our cost basis and the estimated fair value of our investments. Our accounting policy for impairment recognition requires other-than-temporary impairment ("OTTI") charges to be recorded when we determine that it is more likely than not that we will be unable to collect all amounts due according to the contractual terms of the fixed maturity security or that the anticipated recovery in fair value of the equity security will not occur in a reasonable amount of time. Impairment charges on investments are recorded based on the fair value of the investments at the measurement date. Factors considered in evaluating whether a decline in value is other-than-temporary include: the length of time and the extent to which fair value has been less than cost; the financial condition and near-term prospects of the issuer; our intention to hold the investment; and the likelihood that we will be required to sell the investment.
The tables on the following pages summarize our fixed maturity and equity securities that were in an unrealized loss position at March 31, 2012 and December 31, 2011. The securities are presented by the length of time they have been continuously in an unrealized loss position. It is possible that we could recognize OTTI charges in future periods on securities held at March 31, 2012, 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 securities in our fixed maturity portfolio is primarily attributable to changes in market interest rates and not the credit quality of the issuer. We have no intent to sell and it is more likely than not that we will not be required to sell these securities until such time as the fair value recovers to at least equal our cost basis or the securities mature.
We have evaluated the unrealized losses reported for all of our equity securities at March 31, 2012, and have concluded that the duration and severity of these losses do not warrant the recognition of an OTTI charge at March 31, 2012. Our largest unrealized loss greater than 12 months on an individual equity security at March 31, 2012 was $0.1 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.



12


(In Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2012
Less than 12 months
 
12 months or longer
 
Total
Type of Investment
Number
of Issues
 
Fair
Value
 
Gross Unrealized
Depreciation
 
Number
of Issues
 
Fair
Value
 
Gross Unrealized Depreciation
 
Fair
Value
 
Gross Unrealized Depreciation
AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
5

 
$
3,961

 
$
26

 

 
$

 
$

 
$
3,961

 
$
26

U.S. government agency
19

 
52,880

 
604

 

 

 

 
52,880

 
604

States, municipalities and political subdivisions
37

 
19,242

 
658

 

 

 

 
19,242

 
658

Foreign bonds
12

 
23,193

 
285

 
1

 
836

 
21

 
24,029

 
306

Public utilities
15

 
27,734

 
498

 
1

 
1,159

 
61

 
28,893

 
559

Corporate bonds
 
 
 
 
 
 
 
 
 
 
 
 


 


Energy
9

 
24,102

 
253

 

 

 

 
24,102

 
253

Industrials
16

 
35,852

 
633

 
1

 
2,897

 
103

 
38,749

 
736

Consumer goods and services
10

 
15,223

 
267

 
1

 
1,397

 
19

 
16,620

 
286

Technology, media and telecommunications
7

 
21,860

 
371

 

 

 

 
21,860

 
371

Financial services
16

 
42,725

 
571

 
22

 
22,202

 
1,417

 
64,927

 
1,988

Mortgage-backed securities
6

 
636

 
5

 

 

 

 
636

 
5

Collateralized mortgage obligations
18

 
32,649

 
627

 

 

 

 
32,649

 
627

Asset-backed securities
1

 
193

 
55

 

 

 

 
193

 
55

Total Available-For-Sale Fixed Maturities
171

 
$
300,250

 
$
4,853

 
26

 
$
28,491

 
$
1,621

 
$
328,741

 
$
6,474

Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Public utilities
3

 
$
167

 
$
141

 

 
$

 
$

 
$
167

 
$
141

Industrials
6

 
497

 
42

 
6

 
487

 
60

 
984

 
102

Consumer goods and services
11

 
687

 
83

 
1

 

 
4

 
687

 
87

Health care
2

 
488

 
36

 
4

 
473

 
121

 
961

 
157

Technology, media and telecommunications
9

 
596

 
66

 
1

 
8

 
11

 
604

 
77

Financial services
2

 
120

 
17

 
5

 
940

 
158

 
1,060

 
175

Nonredeemable preferred stocks
2

 
144

 
1

 
2

 
1,021

 
211

 
1,165

 
212

Total Available-for-Sale Equity Securities
35

 
$
2,699

 
$
386

 
19

 
$
2,929

 
$
565

 
$
5,628

 
$
951

Total Available-for-Sale Securities
206

 
$
302,949

 
$
5,239

 
45

 
$
31,420

 
2,186

 
$
334,369

 
$
7,425



13



(In Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
Less than 12 months
 
12 months or longer
 
Total
Type of Investment
Number
of Issues
 
Fair
Value
 
Gross Unrealized Depreciation
 
Number
of Issues
 
Fair
Value
 
Gross Unrealized Depreciation
 
Fair
Value
 
Gross Unrealized Depreciation
HELD-TO-MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
States, municipalities and political subdivisions

 
$

 
$

 
1

 
$
473

 
$
61

 
$
473

 
$
61

Total Held-to-Maturity Fixed Maturities

 
$

 
$

 
1

 
$
473

 
$
61

 
$
473

 
$
61

AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
States, municipalities and political subdivisions
6

 
3,555

 
6

 
1

 
619

 
2

 
4,174

 
8

Foreign bonds
13

 
18,001

 
488

 
6

 
14,123

 
335

 
32,124

 
823

Public utilities
6

 
9,579

 
160

 
1

 
1,068

 
153

 
10,647

 
313

Corporate bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
2

 
5,436

 
53

 
1

 
5,223

 
224

 
10,659

 
277

Industrials
9

 
25,664

 
359

 
3

 
8,135

 
291

 
33,799

 
650

Consumer goods and services
5

 
5,360

 
514

 
5

 
3,932

 
132

 
9,292

 
646

Health care
2

 
5,027

 
45

 

 

 

 
5,027

 
45

Technology, media and telecommunications
13

 
14,148

 
318

 

 

 

 
14,148

 
318

Financial services
23

 
20,073

 
292

 
26

 
28,892

 
2,008

 
48,965

 
2,300

Mortgage-backed securities
5

 
684

 
4

 

 

 

 
684

 
4

Collateralized mortgage obligations
7

 
4,466

 
141

 
3

 
5,209

 
43

 
9,675

 
184

Total Available-For-Sale Fixed Maturities
91

 
$
111,993

 
$
2,380

 
46

 
$
67,201

 
$
3,188

 
$
179,194

 
$
5,568

Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Public utilities
3

 
$
210

 
$
98

 

 
$

 
$

 
$
210

 
$
98

Industrials
7

 
975

 
155

 
8

 
577

 
120

 
1,552

 
275

Consumer goods and services
12

 
625

 
150

 
3

 
431

 
18

 
1,056

 
168

Health care
5

 
768

 
94

 
4

 
455

 
138

 
1,223

 
232

Technology, media and telecommunications
7

 
571

 
124

 
2

 
144

 
22

 
715

 
146

Financial services
16

 
1,876

 
319

 
6

 
746

 
224

 
2,622

 
543

Nonredeemable preferred stocks
3

 
1,171

 
31

 
2

 
878

 
353

 
2,049

 
384

Total Available-for-Sale Equity Securities
53

 
$
6,196

 
$
971

 
25

 
$
3,231

 
$
875

 
$
9,427

 
$
1,846

Total Available-for-Sale Securities
144

 
$
118,189

 
$
3,351

 
71

 
$
70,432

 
4,063

 
$
188,621

 
$
7,414

Total
144

 
$
118,189

 
$
3,351

 
72

 
$
70,905

 
$
4,124

 
$
189,094

 
$
7,475



14


NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS
We estimate the fair value of our financial instruments based on relevant market information or by discounting estimated future cash flows at estimated current market discount rates appropriate to the specific asset or liability.
In most cases, we use quoted market prices to determine the fair value of fixed maturities, equity securities, trading securities and short-term investments. When quoted market prices do not exist, we base fair values on pricing or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management’s own assumptions about the assumptions a market participant would use in pricing the financial instrument.
The fair value of our mortgage loans is determined by modeling performed by us based on the stated principal and coupon payments as per the loan agreement.  These cash flows are then discounted using an appropriate risk-adjusted discount rate to determine the security's fair value, which is a Level 3 fair value measurement.
The 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 non-traditional 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 management’s 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 the short-term nature of these financial instruments.

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

A summary of the carrying value and estimated fair value of our financial instruments at March 31, 2012 and December 31, 2011 is as follows:
 
March 31, 2012
 
December 31, 2011
(In Thousands)
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Assets
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
Held-to-maturity fixed maturities
$
4,148

 
$
4,072

 
$
4,161

 
$
4,143

Available-for-sale fixed maturities
2,791,622

 
2,791,622

 
2,697,248

 
2,697,248

Trading securities
15,230

 
15,230

 
13,454

 
13,454

Equity securities
176,057

 
176,057

 
159,451

 
159,451

Mortgage loans
5,312

 
4,781

 
5,219

 
4,829

Policy loans
7,168

 
7,168

 
7,209

 
7,209

Other long-term investments
22,154

 
22,154

 
20,574

 
20,574

Short-term investments
1,100

 
1,100

 
1,100

 
1,100

Cash and cash equivalents
74,000

 
74,000

 
144,527

 
144,527

Accrued investment income
32,563

 
32,563

 
32,219

 
32,219

Liabilities

 

 

 

Policy reserves

 

 

 

Annuity (accumulations) (1)
$
1,083,711

 
$
1,006,363

 
$
1,074,661

 
$
999,534

Annuity (benefit payments)
139,640

 
97,211

 
133,921

 
94,465



15


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


16


Current accounting guidance on fair value measurements includes the application of a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Our financial instruments that are recorded at fair value are categorized into a three-level hierarchy, which is based upon the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets (i.e., Level 1) and the lowest priority to unobservable inputs (i.e., Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the financial instrument.
Financial instruments recorded at fair value are categorized in the fair value hierarchy as follows:
Level 1: Valuations are based on unadjusted quoted prices in active markets for identical financial instruments that we have the ability to access.
Level 2: Valuations are based on quoted prices for similar financial instruments, other than quoted prices included in Level 1, in markets that are not active or on inputs that are observable either directly or indirectly for the full term of the financial instrument.
Level 3: Valuations are based on pricing or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management’s own assumptions about the assumptions a market participant would use in pricing the financial instrument.
Transfers between levels, if any, are recorded as of the beginning of the reporting period.
To determine the fair value of the majority of our investments, we utilize prices obtained from independent, nationally recognized pricing services. We obtain one price for each security. When the pricing services cannot provide a determination of fair value for a specific security, we obtain non-binding price quotes from broker-dealers with whom we have had several years experience and who have demonstrated knowledge of the subject security. We request and utilize one broker quote per security.
We validate the prices obtained from 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 March 31, 2012 was reasonable.
In order to determine the proper classification in the fair value hierarchy for each security where the price is obtained from an independent pricing service, we obtain and evaluate the vendors’ pricing procedures and inputs used to price the security, which include unadjusted quoted market prices for identical securities, such as a New York Stock Exchange closing price and quoted prices for identical securities in markets that are not active. For fixed maturity securities, an evaluation of interest rates and yield curves observable at commonly quoted intervals, volatility, prepayment speeds, credit risks and default rates may also be performed. We have determined that these processes and inputs result in fair values and classifications consistent with the applicable current accounting guidance on fair value measurements.
We review our fair value hierarchy categorizations on a quarterly basis at which time the classification of certain financial instruments may change if the input observations have changed.

The following tables present the categorization for our financial instruments measured at fair value on