XNAS:UFCS United Fire Group Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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 August 6, 2012, 25,435,181 shares of common stock were outstanding.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



United Fire Group, Inc.
Index to Quarterly Report on Form 10-Q
June 30, 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 Amounts)
June 30,
2012
 
December 31, 2011
 
(unaudited)
 
 
ASSETS
 
 
 
Investments
 
 
 
Fixed maturities
 
 
 
Held-to-maturity, at amortized cost (fair value $3,927 in 2012 and $4,161 in 2011)
$
3,864

 
$
4,143

Available-for-sale, at fair value (amortized cost $2,657,938 in 2012 and $2,562,786 in 2011)
2,800,624

 
2,697,248

Equity securities, at fair value (amortized cost $68,663 in 2012 and $68,559 in 2011)
174,359

 
159,451

Trading securities, at fair value (amortized cost $14,263 in 2012 and $13,429 in 2011)
14,249

 
13,454

Mortgage loans
4,732

 
4,829

Policy loans
7,393

 
7,209

Other long-term investments
24,399

 
20,574

Short-term investments
1,100

 
1,100

    Total investments
$
3,030,720

 
$
2,908,008

 
 
 
 
Cash and cash equivalents
$
101,978

 
$
144,527

Accrued investment income
32,750

 
32,219

Premiums receivable (net of allowance for doubtful accounts of $728 in 2012 and $825 in 2011)
211,205

 
172,348

Deferred policy acquisition costs
107,058

 
106,654

Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $34,510 in 2012 and $35,248 in 2011)
44,098

 
45,644

Reinsurance receivables and recoverables
152,898

 
128,574

Prepaid reinsurance premiums
3,315

 
6,191

Income taxes receivable
14,454

 
26,742

Goodwill and intangible assets
29,530

 
30,801

Other assets
13,257

 
17,216

TOTAL ASSETS
$
3,741,263

 
$
3,618,924

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Future policy benefits and losses, claims and loss settlement expenses
 
 
 
Property and casualty insurance
$
960,291

 
$
945,051

Life insurance
1,504,178

 
1,476,281

Unearned premiums
330,297

 
288,991

Accrued expenses and other liabilities
140,883

 
138,210

Deferred income taxes
25,252

 
13,624

Debt
45,000

 
45,000

Trust preferred securities

 
15,626

TOTAL LIABILITIES
$
3,005,901

 
$
2,922,783

Stockholders’ Equity
 
 
 
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,432,681 and 25,505,350 shares issued and outstanding in 2012 and 2011, respectively
$
25

 
$
25

Additional paid-in capital
212,171

 
213,045

Retained earnings
426,744

 
400,485

Accumulated other comprehensive income, net of tax
96,422

 
82,586

TOTAL STOCKHOLDERS’ EQUITY
$
735,362

 
$
696,141

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
3,741,263

 
$
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 June 30,
 
Six Months Ended June 30,
(In Thousands, Except Per Share Amounts)
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
Net premiums earned
$
170,090

 
$
152,210

 
$
331,593

 
$
266,414

Investment income, net of investment expenses
28,749

 
27,741

 
57,895

 
54,804

Net realized investment gains
 
 
 
 
 
 
 
Other-than-temporary impairment charges
(4
)
 

 
(4
)
 

All other net realized gains
568

 
1,124

 
3,362

 
3,777

Net realized investment gains
564

 
1,124

 
3,358

 
3,777

Other income
243

 
729

 
499

 
885

        Total revenues
$
199,646

 
$
181,804

 
$
393,345

 
$
325,880

 
 
 
 
 
 
 
 
Benefits, Losses and Expenses
 
 
 
 
 
 
 
Losses and loss settlement expenses
$
106,766

 
$
135,811

 
$
198,250

 
$
211,993

Future policy benefits
8,356

 
7,880

 
18,494

 
16,062

Amortization of deferred policy acquisition costs
34,179

 
43,732

 
68,730

 
69,778

Other underwriting expenses
20,541

 
14,720

 
42,535

 
30,777

Interest on policyholders’ accounts
10,627

 
10,657

 
21,283

 
21,327

        Total expenses
$
180,469

 
$
212,800

 
$
349,292

 
$
349,937

 
 
 
 
 
 
 
 
Income (loss) before income taxes
$
19,177

 
$
(30,996
)
 
$
44,053

 
$
(24,057
)
Federal income tax expense (benefit)
4,461

 
(13,082
)
 
10,153

 
(11,953
)
Net income (loss)
$
14,716

 
$
(17,914
)
 
$
33,900

 
$
(12,104
)
 
 
 
 
 
 
 
 
Other comprehensive income
 
 
 
 
 
 
 
Change in net unrealized appreciation on investments
8,667

 
21,439

 
22,270

 
22,939

Adjustment for net realized gains included in income
(564
)
 
(1,124
)
 
(3,358
)
 
(3,777
)
Adjustment for employee benefit costs included in expense
1,732

 
732

 
2,375

 
1,286

 
$
9,835

 
$
21,047

 
$
21,287

 
$
20,448

Income tax effect of components of other comprehensive income
(3,442
)
 
(7,366
)
 
(7,451
)
 
(7,157
)
 
$
6,393

 
$
13,681

 
$
13,836

 
$
13,291

Comprehensive income (loss)
$
21,109

 
$
(4,233
)
 
$
47,736

 
$
1,187

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
25,476,220

 
26,101,842

 
25,491,091

 
26,148,438

Basic earnings (loss) per common share
$
0.58

 
$
(0.69
)
 
$
1.33

 
$
(0.46
)
Diluted earnings (loss) per common share
0.58

 
(0.69
)
 
1.33

 
(0.46
)
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.



3


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

(In Thousands, Except Per Share Data)
Six Months Ended June 30, 2012
 
 
Common stock
 
Balance, beginning of year
$
25

Shares repurchased (101,901 shares)
(1
)
Shares issued for stock-based awards (29,232 shares)
1

Balance, end of period
$
25

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

Compensation expense and related tax benefit for stock-based award grants
859

Shares repurchased
(2,133
)
Shares issued for stock-based awards
400

Balance, end of period
$
212,171

 
 
Retained earnings
 
Balance, beginning of year
$
400,485

Net income
33,900

Dividends on common stock ($0.30 per share)
(7,641
)
Balance, end of period
$
426,744

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

Change in net unrealized investment appreciation (1)
12,292

Change in liability for underfunded employee benefit plans
1,544

Balance, end of period
$
96,422

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

Net income
33,900

All other changes in stockholders’ equity accounts
5,321

Balance, end of period
$
735,362

(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.



4


United Fire Group, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
Six Months Ended June 30,
 
2012
 
2011
Cash Flows From Operating Activities
 
 
 
Net income (loss)
$
33,900

 
$
(12,104
)
Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Net accretion of bond premium
7,127

 
3,768

Depreciation and amortization
3,671

 
1,708

Stock-based compensation expense
916

 
939

Net realized investment gains
(3,358
)
 
(3,777
)
Net cash flows from trading investments
(748
)
 
(2,104
)
Deferred income tax expense (benefit)
6,626

 
(7,571
)
Changes in:
 
 
 
Accrued investment income
(531
)
 
507

Premiums receivable
(38,857
)
 
(29,226
)
Deferred policy acquisition costs
(4,520
)
 
(6,373
)
Reinsurance receivables
(24,324
)
 
(5,883
)
Prepaid reinsurance premiums
2,876

 
(602
)
Income taxes receivable
12,288

 
(4,029
)
Other assets
3,959

 
(806
)
Future policy benefits and losses, claims and loss settlement expenses
34,345

 
52,813

Unearned premiums
41,306

 
29,542

Accrued expenses and other liabilities
5,048

 
25,493

Deferred income taxes
(2,448
)
 
(1,019
)
Other, net
(2,131
)
 
(486
)
Total adjustments
$
41,245

 
$
52,894

Net cash provided by operating activities
$
75,145

 
$
40,790

Cash Flows From Investing Activities
 
 
 
Proceeds from sale of available-for-sale investments
$
13,412

 
$
21,367

Proceeds from call and maturity of held-to-maturity investments
285

 
709

Proceeds from call and maturity of available-for-sale investments
302,334

 
316,235

Proceeds from short-term and other investments
2,875

 
1,554

Purchase of available-for-sale investments
(414,828
)
 
(292,808
)
Purchase of short-term and other investments
(4,650
)
 
(1,706
)
Net purchases and sales of property and equipment
(857
)
 
3,486

Acquisition of property and casualty company, net of cash acquired

 
(172,619
)
Net cash used in investing activities
$
(101,429
)
 
$
(123,782
)
Cash Flows From Financing Activities
 
 
 
Policyholders’ account balances
 
 
 
Deposits to investment and universal life contracts
$
78,313

 
$
71,489

Withdrawals from investment and universal life contracts
(69,521
)
 
(57,263
)
Borrowings of short-term debt

 
79,900

Repayment of trust preferred securities
(15,626
)
 

Payment of cash dividends
(7,641
)
 
(7,840
)
Repurchase of common stock
(2,134
)
 
(6,082
)
Issuance of common stock
401

 
139

Tax impact from issuance of common stock
(57
)
 
6

Net cash (used in) provided by financing activities
$
(16,265
)
 
$
80,349

Net Change in Cash and Cash Equivalents
$
(42,549
)
 
$
(2,643
)
Cash and Cash Equivalents at Beginning of Period
144,527

 
180,057

Cash and Cash Equivalents at End of Period
$
101,978

 
$
177,414

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 36 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- and six-month periods ended June 30, 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 six-month periods ended June 30, 2012 and 2011, we made payments for income taxes totaling $8.9 million and $0.6 million, respectively. For the six-month period ended June 30, 2012, we received a federal tax refund of $15.5 million that resulted from the utilization of our 2009 net operating losses and net capital losses in the


6


carryback period. No tax refunds were received for the six-month period ended June 30, 2011.
For the six-month periods ended June 30, 2012 and 2011, we made interest payments totaling $0.8 million and $0.4 million, respectively. 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 following table shows the reconciliation of the components of our deferred policy acquisition costs asset, including the related amortization recognized for the six-month period ended June 30, 2012.
(In Thousands)
Property & Casualty
 
Life Insurance
 
Total
Recorded asset at December 31, 2011
$
60,668

 
$
45,986

 
$
106,654

Amortization of value of business acquired
(1,674
)
 

 
(1,674
)
Underwriting costs deferred
69,742

 
3,508

 
73,250

Amortization of deferred policy acquisition costs
(62,621
)
 
(4,435
)
 
(67,056
)
 
$
66,115

 
$
45,059

 
$
111,174

Change in "shadow" deferred policy acquisition costs

 
(4,116
)
 
(4,116
)
Recorded asset at June 30, 2012
$
66,115

 
$
40,943

 
$
107,058


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 elected to adopt the updated accounting guidance on a prospective basis. As a result of the adoption, 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 $8.1 million of pretax expense in the six-month period ended June 30, 2012 that we would not have recognized had the guidance remained the same. The impact of the adoption on the Consolidated Statements of Income and Comprehensive Income for the six-month period ended June 30, 2012 was an increase to other underwriting expenses of $13.9 million, a decrease to deferred policy acquisition cost amortization of $5.8 million and a decrease to net income of $5.3 million. This represents a reduction to net income of $0.21 per share.

The impact of the updated accounting guidance 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 updated accounting guidance on our results reported for the six-month period ended June 30, 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 $10.2 million and a federal income tax benefit of $12.0 million for the six-month periods ended June 30, 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 June 30, 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.
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 adoption of 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 changed 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 requires additional 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, and we have provided the additional disclosures required in "Note 3. Fair Value of Financial Instruments". The adoption of the new guidance did not have any impact on our financial position or results of operations.
NOTE 2. SUMMARY OF INVESTMENTS
Fair Value of Investments
A reconciliation of the amortized cost (cost for equity securities) to fair value of investments in held-to-maturity and available-for-sale fixed maturity and equity securities as of June 30, 2012 and December 31, 2011, is as follows:


8


June 30, 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
$
3,556

 
$
44

 
$

 
$
3,600

Mortgage-backed securities
280

 
18

 

 
298

Collateralized mortgage obligations
28

 
1

 

 
29

Total Held-to-Maturity Fixed Maturities
$
3,864

 
$
63

 
$

 
$
3,927

AVAILABLE-FOR-SALE

 

 

 

Fixed maturities

 

 

 

Bonds

 

 

 

U.S. Treasury
$
42,364

 
$
1,140

 
$

 
$
43,504

U.S. government agency
39,722

 
490

 

 
40,212

States, municipalities and political subdivisions
699,803

 
58,080

 
269

 
757,614

Foreign bonds
226,172

 
10,089

 
627

 
235,634

Public utilities
241,811

 
15,203

 
55

 
256,959

Corporate bonds

 

 

 

Energy
178,831

 
7,718

 
1

 
186,548

Industrials
307,282

 
12,987

 
484

 
319,785

Consumer goods and services
209,643

 
9,232

 
271

 
218,604

Health care
120,500

 
7,130

 
7

 
127,623

Technology, media and telecommunications
123,527

 
5,910

 
106

 
129,331

Financial services
299,318

 
10,538

 
1,746

 
308,110

Mortgage-backed securities
33,884

 
1,130

 
22

 
34,992

Collateralized mortgage obligations
129,515

 
6,644

 
301

 
135,858

Asset-backed securities
5,188

 
432

 
151

 
5,469

Redeemable preferred stocks
378

 
3

 

 
381

Total Available-For-Sale Fixed Maturities
$
2,657,938

 
$
146,726

 
$
4,040

 
$
2,800,624

Equity securities

 

 

 

Common stocks

 

 

 

Public utilities
$
7,231

 
$
7,952

 
$
172

 
$
15,011

Energy
5,094

 
6,679

 

 
11,773

Industrials
13,032

 
18,206

 
240

 
30,998

Consumer goods and services
10,394

 
7,701

 
134

 
17,961

Health care
8,212

 
10,018

 
187

 
18,043

Technology, media and telecommunications
5,367

 
5,822

 
134

 
11,055

Financial services
15,699

 
50,549

 
342

 
65,906

Nonredeemable preferred stocks
3,634

 
119

 
141

 
3,612

Total Available-for-Sale Equity Securities
$
68,663

 
$
107,046

 
$
1,350

 
$
174,359

Total Available-for-Sale Securities
$
2,726,601

 
$
253,772

 
$
5,390

 
$
2,974,983




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 June 30, 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
June 30, 2012
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
406

 
$
416

 
$
241,061

 
$
245,155

 
$
490

 
$
520

Due after one year through five years
3,150

 
3,184

 
1,051,843

 
1,107,127

 
7,376

 
7,171

Due after five years through 10 years

 

 
1,054,621

 
1,123,705

 
1,844

 
1,776

Due after 10 years

 

 
141,826

 
148,318

 
4,553

 
4,782

Asset-backed securities

 

 
5,188

 
5,469

 

 

Mortgage-backed securities
280

 
298

 
33,884

 
34,992

 

 

Collateralized mortgage obligations
28

 
29

 
129,515

 
135,858

 

 

 
$
3,864

 
$
3,927

 
$
2,657,938

 
$
2,800,624

 
$
14,263

 
$
14,249

Net Realized Investment Gains and Losses
Net realized gains (losses) on disposition of investments are computed using the specific identification method and recognized as a component of earnings for the current period. A summary of net realized investment gains (losses) resulting from investment sales and calls is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In Thousands)
2012
 
2011
 
2012
 
2011
Net realized investment gains (losses)
 
 
 
 
 
 
 
Fixed maturities
$
792

 
$
1,048

 
$
2,323

 
$
2,434

Equity securities
(4
)
 
218

 
697

 
1,334

Trading securities
(224
)
 
(38
)
 
338

 
278

Other long-term investments

 
(104
)
 

 
(269
)
Total net realized investment gains
$
564

 
$
1,124

 
$
3,358

 
$
3,777

The proceeds and gross realized gains and losses on the sale of available-for-sale securities are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In Thousands)
2012
 
2011
 
2012
 
2011
Proceeds from sales
$
10,412

 
$
16,520

 
$
13,412

 
$
21,367

Gross realized gains
8

 
261

 
478

 
351

Gross realized losses

 
172

 
25

 
688

There were no sales of held-to-maturity securities during the six-month periods ended June 30, 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 $14.2 million and $13.5 million at June 30, 2012 and December 31, 2011, respectively.

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


11


to make capital contributions up to $15.0 million, upon request by the partnership, through December 31, 2017. Our remaining potential contractual obligation was $7.4 million at June 30, 2012.
Unrealized Appreciation and Depreciation
A summary of changes in net unrealized investment appreciation (depreciation) during the reporting period is as follows:
 
Six Months Ended June 30,
(In Thousands)
2012
 
2011
Change in net unrealized investment appreciation
 
 
 
Available-for-sale fixed maturities and equity securities
$
23,028

 
$
19,419

Deferred policy acquisition costs
(4,116
)
 
(257
)
Income tax effect
(6,620
)
 
(6,707
)
Total change in net unrealized investment appreciation, net of tax
$
12,292

 
$
12,455

In the above table, the amount reported as changes in deferred policy acquisition costs pertains to our life insurance segment and 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 June 30, 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 June 30, 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 June 30, 2012, and have concluded that the duration and severity of these losses do not warrant the recognition of an OTTI charge at June 30, 2012. Our largest unrealized loss greater than 12 months on an individual equity security at June 30, 2012 was $0.2 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.



12


(In Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
States, municipalities and political subdivisions
36

 
$
21,466

 
$
269

 

 
$

 
$

 
$
21,466

 
$
269

Foreign bonds
14

 
23,083

 
488

 
2

 
3,982

 
139

 
27,065

 
627

Public utilities
1

 
989

 
11

 
1

 
1,117

 
44

 
2,106

 
55

Corporate bonds
 
 
 
 
 
 
 
 
 
 
 
 


 


Energy
1

 
2,526

 
1

 

 

 

 
2,526

 
1

Industrials
9

 
27,584

 
381

 
1

 
2,897

 
103

 
30,481

 
484

Consumer goods and services
12

 
17,088

 
252

 
1

 
1,379

 
19

 
18,467

 
271

Health care
1

 
1,715

 
7

 

 

 

 
1,715

 
7

Technology, media and telecommunications
3

 
10,589

 
47

 
1

 
2,135

 
59

 
12,724

 
106

Financial services
16

 
24,317

 
340

 
22

 
22,061

 
1,406

 
46,378

 
1,746

Mortgage-backed securities
6

 
5,034

 
22

 

 

 

 
5,034

 
22

Collateralized mortgage obligations
5

 
18,857

 
117

 
7

 
303

 
184

 
19,160

 
301

Asset-backed securities
1

 
96

 
151

 

 

 

 
96

 
151

Total Available-For-Sale Fixed Maturities
105

 
$
153,344

 
$
2,086

 
35

 
$
33,874

 
$
1,954

 
$
187,218

 
$
4,040

Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Public utilities
4

 
$
462

 
$
172

 

 
$

 
$

 
$
462

 
$
172

Industrials
9

 
876

 
123

 
6

 
504

 
117

 
1,380

 
240

Consumer goods and services
5

 
94

 
16

 
6

 
345

 
118

 
439

 
134

Health care
3

 
446

 
18

 
5

 
789

 
169

 
1,235

 
187

Technology, media and telecommunications
10

 
200

 
16

 
4

 
528

 
118

 
728

 
134

Financial services
4

 
663

 
125

 
7

 
1,018

 
217

 
1,681

 
342

Nonredeemable preferred stocks

 

 

 
3

 
1,135

 
141

 
1,135

 
141

Total Available-for-Sale Equity Securities
35

 
$
2,741

 
$
470

 
31

 
$
4,319

 
$
880

 
$
7,060

 
$
1,350

Total Available-for-Sale Securities
140

 
$
156,085

 
$
2,556

 
66

 
$
38,193

 
$
2,834

 
$
194,278

 
$
5,390



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